Executives: Constantin Fest – Head-Investor Relations Marcus Kuhnert – Chief Financial Officer Walter Galinat – Chief Executive

Officer
Analysts: Sachin Jain – Bank of America Vincent Meunier – Morgan Stanley Yung Tsai Chen – Credit Suisse Peter Spengler – DZ Bank Florent Cespedes – Societe Generale Simon Baker – Exane Wimal Kapadia – Bernstein Gunnar Romer – Deutsche Bank Daniel Wendorff – Commerzbank Stephen McGarry –

HSBC
Operator: Dear ladies and gentlemen welcome to the Merck Investor and Analyst Conference Call on the Third Quarter Results 2016. [Operator Instructions] May I now hand you over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead sir.

Constantin Fest: Many thanks, Jennifer and a very warm welcome from my side to this Q3 2016 Merck conference call. My name is Constantin Fest; I am Head of Investor Relations at Merck and I'm delighted to have with me here today Marcus Kuhnert, our Group CFO, as well as Mr.

Walter Galinat, CEO of the Merck Performance Materials business sector. In the next 20 to 30 minutes, we'd like to run you through the key slides of this presentation and then we'd be happy to take all of your questions. Please also keep in mind that we have roughly about one hour for this call. With this and without any further delay, I'd like to directly hand over now to Marcus to kick off this presentation. Marcus?

Marcus Kuhnert: Thank you, Constantin.

Good afternoon from Darmstadt and welcome also from my side to our earnings call for the third quarter, which was again a good quarter for us. On the operational side, our businesses developed pretty much in line with what we discussed with you already in August and also over the last couple of weeks. Healthcare adds another quarter to its series of 20 consecutive quarters of organic growth and also the pipeline continues to progress well. Life Science remains on track organically and in terms of Sigma's contribution, and Performance Materials saw another quarter of liquid crystal general destocking, but its profitability shows clearly that this was again well-managed. So here we are benefiting from a much more diversified business than we had in the past.

EBITDA pre progressed accordingly and was enhanced by the higher royalty income and roughly €40 million from the release of R&D project termination provisions in healthcare. I will give you some more details in a minute when we discuss our guidance. The guidance kept constant on the sales side, but we have lifted EBITDA pre guidance to a range between €4.45 billion and €4.6 billion expected for 2016. This translates into an EPS pre expectation between €6.15 and €6.40. If we go a little bit more in the composition of top-line growth, we have achieved a net organic net sales growth of 1% roughly, which is as the prior quarters driven by Life Science and Healthcare.

This is slightly lower than what you have seen so far, but there is actually no reason to worry when you consider that all of our three businesses are now meanwhile running against tougher prior-year comparables. This is particularly true for Life Science where you may remember that we have started our track record of 8% organic sales growth numbers in Q3 2015. So it's quite clear that, with the higher comparables, we are now a little bit down to a range between 5% and 6%, but we see still very intact trends, positive growth trends in our businesses. Performance Materials has just come out of the second consecutive full destocking quarter and in healthcare, we have seen some phasing shifts in some of our products in the third quarter, as well as the return of at least one of our competitors in the U.S. infertility.

This quarter, again, EBITDA pre exceeded the €1 billion mark and driven by solid demand in all of our businesses, as well as the contribution from Sigma, not only on the organic side, but also in terms of synergy realization. You will remember from the Capital Markets Day we are ahead of plan and we have not only upgraded our synergy guidance for the full-period so until 2018 by €20 million but we also said that the cost synergy realization is ahead of plan and we will make €15 million more in 2016. In Healthcare, the new royalty income stream discussed in August has contributed for the first time in the third quarter and we had already mentioned €40 million release in R&D project termination provisions. Going on the next slide, which shows the sales split here, it does not differ so much actually from the first half of 2016. The main effect coming from the consolidation of Sigma-Aldrich, which pushes up our North America sales share from 21% to now 26%; Europe and Asia account for roughly one-third each.

Asia-Pacific was stable year-on-year reflecting the destocking in liquid crystals during the quarter, as well as a high prior-year base, which could not fully compensated, or which could just compensated by good developments in other businesses, so here especially in Healthcare and the Life Sciences. On Slide Number 8, we see the decomposition of growth by region and if we look a little bit more into these details, North America maintained an organic growth trajectory from the previous quarters as we continue to benefit from a still favorable competitive situation. In fertility, even if it is not anymore as extreme as it was, especially in the second quarter 2016. Here just again a reminder that we do not expect obviously this accelerated growth momentum in 2017. One of the competitors is already back and we expect some tougher competition here because most probably they want also to or will try to regain marketshares.

In Europe, we saw a small organic sales decline as the good contribution from Life Science could not fully offset the organic decline from Rebif in Europe. Here we are suffering from ongoing volume declines and also, as a side note, in the last year, we have benefited from a tender in Russia. Also, Erbitux sales in Europe were lower this quarter due to ongoing competitive pressure and price declines. When we look a little bit more at the financial details, I'm jumping now to Slide Number 10, Q3 2016 overview – sales and earnings grew strongly; margin improved. The significant increase in EBITDA pre is, of course, very much driven by our acquisition of Sigma-Aldrich and the related good ramp-up of cost synergies, which we expect at the already mentioned €105 million for this year.

Alongside the benefit from our Rebif commission payment, which you know already we had two additional drivers this quarter, the new AVONEX royalty income that we discussed already in August and the release of approximately €40 million in R&D provisions, which are attributable predominantly to the termination of evofosfamide end of 2015. You can also see that we were able to significantly reduce our net financial debt over the quarter, so we have generated approximately €1 billion operating cash flow, which we have used for further deleveraging and have moved the net-debt-to-EBITDA ratio for the first time this year to a level below three. The status end of Q3 was at 2.7, so here we are on track to reach our target of levered below 2 in 2018. On the next slide, further down on the P&L, I would like to highlight only one further point. Alongside with the EBIT improvement, also the financial result improved significantly in the third quarter versus what we saw also still in the second quarter.

As you would expect, we have accounted higher interest expenses due to the higher debt levels after the Sigma-Aldrich acquisition, but this was fully compensated by some measures to optimize our financing structure. So here, for example, lower hedging costs on the one hand for financial hedges and also a positive impact from U.S. dollar financing and the single most important part was this quarter a positive effect from our long-term incentive program. However, our guidance for the interest result of a range between €270 million and €300 million remains unchanged for 2016 as does our tax rate guidance of 23% to 25% where we have again also in the third quarter been lending within this corridor at 24.4%. Now, as usual during the quarters, I would like to have a deeper dive, a short deep dive into the three business sector P&Ls.

Starting with healthcare, sales grew organically by 1.3% as already mentioned. A little bit slower growth momentum than in the last quarter. Tender effect in Rebif, some pricing effect and competition, competitive pressure for Erbitux in Europe and a slightly less beneficial environment for fertility; still 10% growth in fertility, but not the very high numbers that we have seen the first two quarters. Glucophage sales also were visibly lower due to phasing and a difficult macroenvironment in parts of our Middle East/Africa region. The business has certainly some kind of volatility, but the fundamental trends are still intact.

The R&D costs were flat year-on-year mainly due to the €40 million release of termination provisions, which are, as I already mentioned, primarily related to our evofosfamide. The cost for unwinding these programs turned out to be lower than initially expected. Also, without this, the R&D costs were still sequentially lower in the third quarter and there are various reasons for that ranging from rigorous cost management in our trials to shifts and changing we are making in our trials from external events, so you all are well aware of the NFCLC first-line trial with one of our competitors, which obviously has also some impact on our own trial design. A second case to mention is atacicept. So you have been educated about the most recent results on this and we are currently reviewing the further way forward together with regulators and scientific experts and we will decide then in due course, most probably beginning of 2017, how to proceed completely.

So, in Life Science, had again another very good quarter. Organic sales growth of 5.7% and as expected, the growth is slightly lower due to tougher comparables, but still the growth trends and the demand is intact. Process solutions was again the main growth driver with 10% growth and the sixth consecutive quarter in a row of process solutions in the double digits. Sigma made a very good contribution again. Profitability is in line what you would and also as I already said on the synergy side, we are nicely delivering and we are actually ahead of plan.

And with that being said, I am handing over now to Walter who will continue with the detail on Performance Materials.

Walter Galinat: Yes thank you Marcus and very warm welcome also from my side. I am very happy that I can give you today a little bit more insight into Performance Materials, obviously, with a special emphasis on the display business. I would also, at this point, like to emphasize again that Performance Materials is more than just the display business, so still this is about half of our total business, but we have also other market-leading businesses and results that you see on the following page would not have been possible without a good performance of those businesses. So on Page 15, you will see the P&L for Performance Materials.

Yes, it was still clearly dominated by the destocking in the display business so that we see an organic decline of 5.8%. On the other side, we see that we could maintain our EBITDA pre margin at a level of 44% and here comes in what I just said that, obviously, the other businesses are helping to stabilize the profitability. And if you look at also on the R&D side, for example, we have not saved here. Innovation is still key for us, so we manage our costs not on the account of innovation. So the good news is that the destocking now seems to come to an end.

We have clear indications from the market that the outlook looks more positive. So whether you take the inventory levels, whether you take the average selling price of the display units, so everything points in the right direction, as well as the high utilization rate in the industry. So we are carefully optimistic that things will change to the better. You should, however, not forget that we are at the beginning of the supply chain so we don't know really when we will see the full benefit of this development. On the next slide, quite I think an interesting picture on the development of the display market.

So when you look not so long ago, 14 years, in the year 2002, this market was still dominated by cathode ray tubes. So it's almost unbelievable. And then you see how things have developed and in particular how fast LCD really made its way into this business and we highlight for LCD in last year where you can see that in principle 100% of this of this market was dominated by LCD. It's a smaller share of OLEDs, but it was particularly 100% and what has completely disappeared is the CRT anyway, but also plasma technology. So we are still optimistic about liquid crystal business development.

There is a lot of benefits for consumers and for manufacturers since this is the kind of well-controlled business also from the production side. But, of course, and this is unchanged, we still are convinced that also OLED will make its way into this business. As usual, predictions are fluctuating, but we are sure that first the smaller OLED displays and then later the large size will also make an impact on the market. But we put the hurdle high and back with further innovation on the liquid crystal side. So the market may have a certain maturity, but this doesn't mean that you cannot innovate and a good example for this is the SABA technology that we are just about to introduce to the market.

So briefly said, there are two major advantages of this technology, one for the display maker on the cost side so you can reduce the production step by one, and save the cost of material, as well and on the other side, the consumer will have the benefit of, first of all, narrow bezel, which is the frame around the display technology, which is very nice. And on the other side, a higher transmission, which is essential for the very high resolutions screens of 4K and 8K. So next page is again regarding OLED. I mentioned already that we still are convinced this will make its way so you will see that it is expected that the OLED manufacturing capacity will increase over the next years by 35% on average per year and it is fair to assume that this capacity will also be used. So we are prepared for this.

We have recently invested in a purification plant for our OLED material and we continue to invest in R&D and application know-how. So we will be a full provider for evaporating material and printable materials as well. On the last page that I have prepared, I just want to give you a flavor that we are not running out of ideas what we can do and this deals only with what we call liquid crystal application beyond traditional display. Internally, we call this LC 2021. You'll see here six topics, which I don't want to elaborate.

Maybe just highlight three of this one is the light guiding for automotive where we see a big demand and hopefully very soon also in cars in mass production headlights that are modulated with the help of our liquid crystal. The second is the antenna systems, which is very useful for mobile applications, so in particular cars, of course. Also, here, we are close to introduce together with a partner a finished product so that we can test how this is received in the market. And last but not least, LC Windows, we talked about this several times already. At the moment, we are investing in a pilot production so that we are able to provide larger pieces of this Windows and also in larger quantity so that we can equip larger buildings with this as well and then see the breakthrough of this technology.

With this, I will give back to Marcus.

Marcus Kuhnert: Thank you, Walter and we will go quickly over the next two slides. So I think on the balance sheet, there’s not much spectacular to report. The balance sheet is reflecting Sigma-Aldrich on the asset side, as well as on the liability side. Most notably here for sure the nice reduction in financial debt, which reduces our net- debt-to-EBITDA ratio to a level of 2.7 as already said.

The cash flow statement shows the strong cash flow generation ability of the Company with an operating cash flow of €1.067 billion, which have basically used in order to reduce financial debt. What is also positive to mention is that changes in working capital, so here especially improvements in inventory and accounts receivable management have contributed significantly also to the cash flow generation in the third quarter. With that, I’m coming to the guidance on slide number 23. So net sales guidance unchanged. We expect net sales to end in 2016 in a range between €14.9 billion and €15.1 billion.

This includes expectations for FX headwinds around minus 3% to minus 5% and our expectations for the segment sales contribution. We lift, on the other hand, the EBITDA pre guidance from €4.25 billion to €4.4 billion now to the new level of €4.45 billion to €4.6 billion. This is an upgrade of €200 million compared to August and reflects two key factors in healthcare. First of all, the €40 million release of R&D termination provisions that benefited our Q3 earnings and secondly, that we are more efficient, obviously, in handling our pipeline projects and it turns out, over the last couple of months, that we have been too conservative in our cost planning at the beginning of the year. .: Last slide, on slide number 24, the business sector guidances.

The quantitative comments actually have not changed. So here all remains the same and that is also in line with what I said earlier that the overall fundamentals of the business basically have not changed so much compared to the last quarters. The upgrade is coming from healthcare. Here we believe we will see an EBITDA pre in the range of €2.1 billion to €2.2 billion amid lower R&D costs than initially expected. In Life Science, due to the sound business development and the shorter time period now until year-end, we feel comfortable to cut off the €20 million on the lower end of the corridor and expect now the EBITDA pre to be in between €16.40 and €16.70 and no change on Performance Materials, so here we continue to project an EBITDA pre in the range between €1.1 billion and €1.15 billion.

With that, I have come to the end of my presentation and we are now available for any further questions. Thank you very much.

Operator: Thank you [Operator Instructions] The first question is from Sachin Jain, Bank of America. Your line open, please go ahead.

Sachin Jain: Hi, Sachin Jain from Bank of America.

Three questions, please. Firstly, for Walter, I wonder if you could quantify, to the extent you can, the impact of SA-VA launch in 2017/2018. What should we think about for the sales and margin impact? I guess another way of asking the question is what has the launch of the new SAV historically done? Secondly, for Marcus on the R&D spend, maybe just clarify the comment as to how much of a better outlook for 2016 is phasing of Phase 3 trials you referenced along in atacicept versus efficiency. And it looks as if you are going to be coming in towards the bottom end of the €230 million increase, so as we think about 2017, how much of that is a – shifting to next year? Is this just a lower base that we should extrapolate going forward? And then the final question is on cladribine. Just very briefly have you had any feedback from the European regulators as yet? Thank you.

Walter Galinat: Okay, so then I may start with your first question regarding the SAVA. So the SA-VA did briefly make it to the market. At this point, we are pretty sure what we do not control is for which projects, that means for which final product our partners will use this technology. So at this moment, it is very difficult or impossible to quantify what the impact in the next few months will be, but experience tells us that when you have a technology with such a benefit, then it should also make a significant impact on the market. And one other thing is for sure that the average prices will also be higher for this new mode as it was also in the past.

Marcus Kuhnert: On your second question on R&D costs, so when I look first on 2016 currently, so with what I’ve already said what we have seen in the third quarter and what we expect for Q4, we believe that R&D costs in 2016 will be slightly above the 2015 level. It is yet difficult to predict how much ultimately at the end of the day we will be saving and how much will be or whether there will be at all any on top R&D spend in 2017. To share with you, we have this week our annual planning meetings where we are actually reviewing in detail our R&D activity map for next year and because we have this still in front of us, there is a good reason why we do not give any quantitative guidance today. What we can say, what we still believe is that 2017 will be above 2016 in terms of R&D spend. I just want to reiterate what we already told you at the Capital Markets Day that we have a rigorous approach that we try to execute directly and also in a cost-efficient way and that we want to keep our costs under any means under control.

So it will not be an outrageous explosion of cost next year, but you can expect 2017 R&D costs again to be higher than 2016. More quantitative guidance will follow, as you know us, in May next year and maybe some more information – already in March. Your third question, the topic on cladribine tablets. So we have submitted our marketing authorization application for cladribine tablets to the EMEA and they have actually accepted our documents and accepted them for radio on July 18 this year. So that means now the process has started.

We have since then received the questionnaire of the 120 days as expected and we are now in the process of answering the questions and actually proceeding along the process.

Sachin Jain: Just a follow-up on those questions. Was there anything in there that surprised you or any color you can give on the feedback you’ve had?

Marcus Kuhnert: No.

Sachin Jain: Fair enough. Thank you.

Operator: Thank you. The next question is from Vincent Meunier. Your line is open, please go ahead.

Vincent Meunier: Thank you for taking my questions. The first one is on atacicept in SOE.

After the result of the ADDRESS II Phase 2 trial, which did not meet primary endpoint, I noted that the Phase 3 has not started yet, so does it mean that you are talking about potentially a discontinuation of this project, or is this just a phasing? And in that case, what will be the impact typically for the BTK in SLE and maybe the impact in terms of R&D costs for 2017? The second question is on fertility. So there is a first competitor back on the markets. I understand the second one will not be back on the market before the end of the year. Can you elaborate on your growth expectation going forward and also is there any pricing implication from these competitors coming back on the market? Thank you.

Marcus Kuhnert: Yes.

First of all, on atacicept, the data, as you know, has been published in this ATI abstract where we have shown statistically significant treatment effect compared to placebo in a predefined – and it’s important to mention that it was a predefined – subpopulation in high disease activity patients. Although the primary endpoint was not met in the overall study population. We are encouraged by the clinical meaningful treatment effect of this HDA, so high disease activity patients, which actually account for some 50% of the overall lupus patients and you have asked also for the way forward. We are currently in consultations with the regulatory authorities and the scientific advisors to decide upon concrete next steps and that also includes the next steps in terms of timing. So we are currently – there are no concrete plans to discontinue the study.

We are in discussions, as I said, with the regulators and the scientific advisors. There is no impact on BTK and the planned BTK Phase 2 study in systemic lupus that you are well aware of is actually still planned to be started this year. In terms of fertility, we have seen, since beginning of the year actually, the absence of one competitor who will also not be back by the end of this year. End of the first quarter, the second competitor also due to supply issues left the market. This competitor is back I think since August and here we have seen now obviously a little bit tougher now market environment again because this competitor obviously tries to regain lost ground.

I can tell you that we have been the major winner in terms of marketshare over the last couple of months actually and we will also be fighting in order to keep at least a certain portion of this marketshare. When we look into 2017, it is very clear that we are starting the year on a very, very high comparable basis, which will mean that we will not expect to see the same or even close to the growth rate that we have actually enjoyed in 2016. All other things we have to observe further, so we can imagine that the pricing competition heats up a little bit, but other than that – so we also have some other areas of attention, so U.S. is one thing. China is running very well and in Europe, we need to protect ourselves from the biosimilars entry of Teva’s Avalide.

So this is also a case that we are taking seriously and which gives us some pressure next year.

Vincent Meunier: Can I have a follow-up question please? When you say that the competitor is trying to regain lost ground, does it mean that they are cutting their price to regain these shares, or they are making more SG&A effort and give more service to the physicians?

Marcus Kuhnert: Honestly, I do not want to comment too much on the competitor’s actions. You may think about the full spectrum of actions that you could do in order to regain marketshares and they have been off the market for quite a while so you can imagine that they are doing a lot in order to gain traction again.

Vincent Meunier: Thank you.

Operator: Thank you.

The next question is from Mr. Yung Tsai Chen [ph] Credit Suisse. Your line is open, please go ahead. Yung

Tsai Chen: Hi. Thanks for taking my questions.

Three, if I may. Firstly, on corporate costs, pre-exceptionals, this seems to be running high towards the top end of the overall guidance range. How realistic is it for us to assume that this cost goes down materially in future years? Secondly, how should we think about the mix shift away from the high-margin Rebif towards avelumab, which has shared economics? Can we expect margins to go up as Rebif, Erbitux and Gonal-f become a lower proportion of sales? And finally, can you expand on the challenging competitive environment you are seeing with Erbitux and which indications IO is potentially having the most negative impact in? Thanks a lot.

Marcus Kuhnert: Thank you. So, first of all, corporate costs.

So if we look a little bit on the development or the evolution of our corporate costs over the last couple of years, we see since 2014 an increase if you take out all this kind of hedging effects, which we told you a little bit the numbers, but ultimately which very much help us to manage our operating results. What we are seeing is an uptake in the segment corporate behind certain corporate initiatives, which will still run for a while, which is the branding campaign. However, here, we have the major part behind us. We have still some digital initiatives, which we will also see in 2017. We will have investments in our global headquarters, which will show some depreciation now going forward when we are making progress on this project and as I said, we have the inevitable hedging effect going forward.

So when we look on segment corporate, as I said, we will give an updated guidance next year, but, by and large, we would not expect a significant reduction here. However, I can assure that we will have the costs very much under review and we will also prevent segment corporate from growing further. But we should also not see a significant reduction. Second one, you are asking for the mix effect Rebif to avelumab. So, of course, Rebif is one of the most profitable products in our whole portfolio so that means that, by nature, in the next two years, we will see inevitably negative mix effect from the further Rebif decline, which we cannot compensate by other franchises, which are growing, predominantly in the emerging markets.

So that means we are able to compensate for the sales shortfall, which we demonstrate quarter by quarter, but we have some ongoing pressure on EBITDA and EBITDA margin simply from the mix effect. Of course, when we think about first pipeline sales coming, that will add top line and consequently also bottom line to our P&L where the major cost part actually has been spent already because these are the R&D spends we are currently talking about. So that, of course, will drive absolute EBITDA, as well as margins once we see from 2019 onwards the first meaningful sales from the pipeline. And last but not least, you referred to the Erbitux competitive environment in Europe. So we are actually facing some continuous competitive pressure, especially from Metenix, which means street fight.

It is competitive pressure at the point of sale. We have, for example, in the last year ramped up our capabilities of sales teams, educating them that it’s really more street fighting now than telling scientific stories. It’s much about execution and so we have made some progress here, but it is a quite tough battle. We believe going forward with Erbitux that this pressure will result in a forecast, which is at best stable-ish until 2018. So let’s say the next one to two years and we might be facing an additional topic in front of us mainly, I-ONC competition in the head and neck area.

Vincent Meunier: Excellent. Thank you.

Operator: Thank you. The next question is from Peter Spengler of DZ Bank. Your line is open, please go ahead.

Peter Spengler: Hi. Good afternoon. Thank you for taking my questions. I have three. First one is on Performance Materials.

I read in the report that the OLED sales did slow down in Q3 due to manufacturing problems of a client, so maybe you can elaborate on that? Second question is on Q4 in PM. You mentioned a normal supply/demand situation coming back. Does this mean organic growth in Q4? How about margins and how about your own Performance Materials inventory level? Last question is about the current status of the PPA of Sigma-Aldrich. Thank you.

Walter Galinat: Okay, so I will start with the first question.

The expectation for OLED was that we would have growth all over the year. We realize that, with one of our customers, the focus and the ramp-up has not been as fast as expected. So we still see a significant growth in OLED versus last year, but it has slowed down a little bit in the second half because we compare with a strong second half last year. All in all, we consider this a phasing problem or a phasing issue and not an issue in the technology itself. The second question was regarding expected growth.

As I outlined, the indicators for the market are positive. We do not know exactly when this will reach our sales of liquid crystal material to the market and we don’t know exactly what the impact in the fourth quarter will be. It is fair to assume that growth rates will become better in the foreseeable future.

Marcus Kuhnert: Your question on the purchase price allocation of Sigma-Aldrich, we are basically nearing completion. That means we will finalize the PPA by the end of this year.

What we see is that we have to slightly revise our expectations regarding depreciation. So that means we will see a little bit higher depreciation from the purchase price allocation, or accelerated depreciation – this is more precise – from the PPA in the first quarter and that is also the reason why the EBITDA pre improvement that we have given now as a guidance does not 100% translate into a respective EPS improvement. So we see a slight tick-up in depreciation in Q4, which is not sustainable and what we have just for one quarter.

Peter Spengler: Okay. Thank you very much.

Operator: Thank you. The next question is from Florent Cespedes of Societe Generale. Your line is open, please go ahead.

Florent Cespedes: Good afternoon. Thank you very much for taking my questions.

Three quick ones. First on healthcare, multiple sclerosis pipeline, are you looking to add an additional project in your pipeline to replace the one – the ATX – that you decided to discontinue and could you give us the reason why you have gave back the rights to Apitope? The second question is on Life Science. Could you elaborate on the research solutions competitive landscape, especially on the – as you flag in your report – the chemistry business in North America and what can be done to re-energize this business? And my last question is on Performance Materials. On the SAVA, when will you know that the SA-VA technology is successful? So in other words, when should we see the contribution from the ramp-up of this new technology? And last time we met, you talked about another technology, which was I think ULH technology. Is it discontinued or could you use it later? Thank you.

Marcus Kuhnert: Thank you, Florent and starting with your first question, so we have handed back or given back the rights to Apitope and this decision actually was in principle independent from the Phase 2a outcome. We actually decided to focus more on the other ongoing strategic projects that we have in NDD and in immunology and then – to your next question that there is no immediate project designed to replace this one. So actually given the most recent development, it will not be a surprise that we are now focusing full steam on cladribine for multiple sclerosis and of course, also to defend Rebif as long and as good as possible. And we are, by the way, also confident that this drug that we have given back is in the right hands with Apitope. For the second question, I am handing over to Walter on the PM part.

Walter Galinat: Okay. Regarding the PM part, first SAVA. As I mentioned in my presentation, it is very difficult to predict how fast and what impact this will make in the market. We know that one of our partners will introduce a model actually for public display very soon, so we will see how this will make it in the market, how successful it will be, but what other projects will come or at what time, this is beyond what we can say. We are convinced that the technical parameters are really interesting for any manufacturer, but, at the end, the customer has to decide.

It is true and you got it right in your memory that the ULH is another technology we are working on, but this will make it later to the market. So we focus now on SA-VA and ULH will come, but I am sure it will come. So that means, in the near term, we have two new modes that will make it to the market.

Marcus Kuhnert: On your last question, so in terms of the current environment and the research areas, so it is true that the research growth momentum has slowed down a little bit in the third quarter, but still please keep in mind that we said right from the beginning that research solution is the least growing segment within our overall portfolio in Life Science. So projected market growth is just in the low single digits.

We see at the moment actually not so much a competitive-driven decline, but rather actually an overall softness in the academic market and at that point of time, it is also true that within research solution the chemistry business has affected most of that, but we believe actually that this is – and that is due to some slower demand in Europe and also some larger orders last year – but we believe that this is nothing which will change somewhat the mid and long-term expectations of a low single digit top-line growth.

Florent Cespedes: Thank you very much.

Operator: Thank you. The next question is from Simon Baker of Exane. Your line is open, please go ahead.

Simon Baker: Great. Thanks for taking my questions. Firstly, on Performance Materials and moving away from display to look at IC materials. If we look at the performance of that business and what you’ve said qualitatively, we’ve seen very strong organic growth there. I’m guessing also we’ve seen pretty significant margin expansion there.

This was a business when it was aged at electronics with an EBITDA margin less than 30%. I’m assuming it’s now close to at least the division average. So I wonder if you could give us some color on how that margin has evolved, whether it’s cost savings, whether it was other synergies, or whether it’s simply operational leverage as the business has grown. And also if you could give us a little outlook for that business. I know you don’t normally like to give out guidance by individual product line, but given the trends within IC manufacturer, it looks like the growth is there to stay.

So I wonder if you could just give us some color on that for 2017 and beyond. And then secondly on healthcare, I notice from your pipeline slide in this presentation that the avelumab in Phase 3 for head and neck cancer is not on that chart despite the fact that you started the 600-patient study earlier this month. So I just wonder why that’s been omitted from the pipeline in the presentation. Thanks so much.

Walter Galinat: Okay.

So I start with the PM-related question on the semiconductor business. So the backbone of this business came with the acquisition of AZ and we can say that the integration and the synergies of integrating this business into Performance Materials has exceeded our expectations. And beyond financial synergies, we also see there are a lot of technological synergies where we benefit from with products that came either from SAF Hitech or which we had in the Merck portfolio. So we are extremely happy with this development and, yes, it is obvious that the underlying growth is solid. Processes will be needed in increasing numbers as will be storage chips.

So we are very, very bullish about the outlook of this business. So what also plays in our cuts is the miniaturization and the complexity of the new generation of semiconductors and there we are perfectly suited with our material to match the needs of the semiconductor makers. So, all in all, yes, we are very happy with the outlook of this business.

Marcus Kuhnert: Simon, your second question on the Phase 3 avelumab head and neck. So we generally only announce a trial once the first patient is dosed, so the publication rule here at Merck and as you can see on CD.gov, this trial has just started, that means still recruiting.

So actually you can expect a press release soon providing further details once we have the first patient here onboard.

Simon Baker: Great. Thanks so much.

Operator: Thank you. The next question is from Wimal Kapadia.

Your line is open. Please go ahead.

Wimal Kapadia: Hi. Wimal Kapadia from Bernstein. Just a quick follow-up to a comment you made earlier on fertility.

Could you give us an update on the impact from Teva generics on Gonal-f in Europe? So what are you seeing in the markets where their product has launched and what sort of discounts are Teva offering? And then second question, within Healthcare, Middle East and Africa have reported a decline in sales and you guys highlighted Glucophage as being under pressure. So was just trying to get a bit more detail on what macro trends show a decline in that region and should we expect a tough environment in the near term? A little more color would be helpful. Thanks.

Marcus Kuhnert: So, first of all, fertility in Europe. So we are seeing some uptake of Teva’s Avalide in Europe.

They have actually meanwhile implemented or launched the product in the big-five countries and some other smaller as well, so Czech Republic for example; most recently I think in September in Italy. We expect the market share of this biosimilar within the next one to two years somewhere in the single digits and we currently see the biggest impact actually happening in Germany. As I mentioned earlier during the call, this is, of course, an area very much of strong attention of us and because this is the launch which we take quite seriously. When we look on the price discount, what we are currently seeing is a price discount in the range between 20% to 30% compared to Gonal-f, so by and large. The second question on healthcare in the MEA region, so the macro topics are predominantly that there is a lot of tender business in that region and the government there is struggling with the low oil price.

So in general, it’s the difficulties in the payment behavior from the low oil price countries and that is the major macro trend that puts the whole region at the moment a little bit under pressure. Moreover, we must say we’ve seen also some phasing effects in MEA, which we expect to catch up during the first quarter going forward, but not completely. So, MEA, in 2016 at least, will not have an outstanding year, but we also believe that Q3 is the accumulation of some effects of some negative effect, which should become a little bit better in the first quarter.

Wimal Kapadia: Thanks, very much.

Operator: Thank you.

The next question is from Gunnar Romer, Deutsche Bank. Your line is open. Please go ahead.

Gunnar Romer: Gunnar Romer, Deutsche Bank. Thanks for taking my questions.

The first one on Healthcare again and the shift in revenues you just mentioned. Can you talk a little bit more on that, whether there is a specific product related or affected from those shifts? And secondly also on Healthcare, can you talk about your commitment to biosimilars also obviously in light of recent press reports? And then third question would be on Sigma-Aldrich, or on the Life Science business in general. We’ve seen a slowdown in organic growth as we expected. I was just wondering whether you can comment also on the growth trends at the legacy Sigma business as I would’ve expected somewhat higher contributions in the third quarter. Just curious whether we have to bear anything particular in mind with regard to the Q3 performance of that business.

Thank you.

Marcus Kuhnert: Gunnar, before I start answering, honestly, I did not get your first question. Healthcare shift in revenue, what do you mean?

Gunnar Romer: The timing you just alluded to in a previous answer I think it was related to the MEA region and was wondering whether there were specific products affected?

Marcus Kuhnert: Yes, one specific product is Glucophage and that was the reason why Glucophage had a weak third quarter. This is the main project which has been affected by that. On commitment to biosimilars, so actually we do not comment on any kind of market rumors.

You are well aware that we’ve just entered the beginning of the year into a Phase 3 study with a biosimilar for avelumab and I do not want to comment on these market rumors. And last but not least, when we look on the Sigma-Aldrich, so please keep in mind that Sigma, when you look on their portfolio, they are overrepresented in the research part. Just also lying out that we have seen a little bit softer academic market, especially in the third quarter. So that also means that Sigma is a little bit in a way overly exposed to this temporary weakness in research. Moreover, we also need to keep in mind that the third quarter is historically the weakest quarter of Sigma-Aldrich.

So when we look forward, I see actually no reason that the Sigma portfolio or the Sigma indirect organic growth should be much different from that of the legacy Millipore portfolio.

Gunnar Romer: That’s very helpful. Thank you. Maybe just a follow-up for Walter. I understand you have a commitment from one client for one model regarding the launch of SAVA.

I was just wondering whether you have explicit interest also from other clients at this stage or whether this is something where we still need confirmation in the coming months. Thank you.

Walter Galinat: So it is right that we have interest of several of our customers and potential partners, but it is usual in this business that you start with one where you have a particular intensive development cooperation with and then the others follow with a small time delay. So this is a very normal procedure, but there is more than one potential client for this technology.

Gunnar Romer: Thank you.

Marcus Kuhnert: Welcome.

Operator: Thank you. The next question is from Daniel Wendorff, Commerzbank. Your line is open. Please go ahead.

Daniel Wendorff: Thanks for taking my questions. Two if I may, starting off with Performance Materials. Given the current segment sales mix within Performance Materials and assuming that the demand for your liquid crystals normalizes following a normalization of the supply chain inventories, what is the growth and end margin we should be thinking of? What can we expect over a mid-term horizon there? Second question would be on Merck Millipore and the gross margin was really strong in the third quarter. Is that something we should be expecting going forward, or was that due to a special effect? Thank you.

Walter Galinat: So could you please repeat your question regarding PM? It seems I couldn’t completely follow.

Daniel Wendorff: Yes, no problem. So given the current segment sales mix within Performance Materials coming from the different segments and assuming that demand for liquid crystals now normalizes maybe in Q4, maybe in Q1 next year following the inventory correction in the supply chain, what is the growth rate of that Performance Materials business and the margin we should be expecting going forward?

Walter Galinat: Yes. Okay, so the growth rates should improve. I mentioned this before already, so I’m completely convinced that we will see better growth rates in the first half and also in the third quarter. Regarding the margin development and tendency, your conclusion is right.

How this will show up in the context of the total PM, we have to see, but we can be optimistic obviously that we can defend our high EBITDA pre margin.

Marcus Kuhnert: Your question on the increase in the gross margin, so the major effect actually is the inventory step-up that we have seen immediately after the first-time consolidation of Sigma-Aldrich that caused us roughly six months to digest, which burdened actually the gross margins in the first and in the second quarter. In the third quarter now this effect is fully digested and so we show now a gross margin net of this high inventory, which have gone in the cost of goods sold. Secondly, what’s also an effect to mention is, of course, that we still see positive price effects of positive pricing in our Life Science division, which also has a positive contribution to the gross margin going forward.

Daniel Wendorff: Thank you very much.

Very helpful.

Operator: Thank you. The next question is from Stephen McGarry, HSBC. Your line is open. Please go ahead.

Stephen McGarry: Okay. Thank you. Two quick questions. Firstly, if you look at the pension provisions from the end of last year to Q3, they obviously went up quite markedly. Possibly a lot of that is acquisition-related, but in an environment where we either have very low bond yields and in fact, negative bond yields, how can we expect those provisions to look going forward and how fast could we see them change? And then, secondly, a bigger picture question on your R&D spend and especially in immuno-oncology R&D spend.

Obviously, elsewhere in the industry, there’s an arms race in terms of spending in IO because we don’t know which products work in what indications, what combinations, combo with chemo and combo IOs and therefore, there is a sound race in terms of spending. Now by Merck allocating its capital with R&D very carefully, two questions arise. One is there’s a lot of Merck has either left behind or becomes a big player in smaller indications or, question number two are you prepared to join the arms race and if so when? Thanks.

Marcus Kuhnert: So maybe you will have to reformulate one of your questions. I’m not sure that I got it completely.

So I start with pension provisions. We have seen a remarkable increase in pension provisions. We have seen a remarkable increase in pension provisions from 31, December, 2015 to 30 September 2016 from €1.8 billion to €2.7 billion. This is just because of a decline in the overall interest rate environment, especially in the EURO. So we have come down from 2.4% end of last year now to a level of 1.3% and this decline in interest rate actually caused the pension liability to rise and also thus the pension provision.

Could you repeat your question on R&D spend?

Stephen McGarry: Yes, sure thing. Basically your R&D spend has been allocated very carefully, but obviously the need is in immuno-oncology. Your competitors are spending huge amounts of money. So is there a risk that by allocating relatively comparably smaller amounts of money to the IO development of avelumab and other products, you either get left behind or become a bet player, or does Merck have a plan to increase its R&D spend markedly? And just a follow-up on the pension provisions. Obviously, in this environment, is there a plan to basically fund that pension provision more aggressively anytime soon?

Marcus Kuhnert: Yes, okay.

So I will start with your last question first. So we have funded actually a major part of our pension provisions and we have currently a funding ratio in mid upper 40%s and we do not have any plans actually in the foreseeable future to refund, So with this mid-40%, we are basically in range with all of our taxes peer companies and given that we are highly indebted at the moment, there are no concrete plans over the next one to two years to increase the funding ratio On R&D spend increase, we have actually – so focus is a very important topic for a company of our size. That means we have three focal areas where we are investing in R&D spend, which is oncology, I-ONC and immunology and the major part of spend goes obviously still in our flagship project, which is avelumab. We have a collaboration with Pfizer, as you know. We are discussing with them diligently where do we fund, or better to say where do we co-fund because we have a 50%/50% R&D cost-sharing arrangement with them and of course, also here the rule applies.

We need to focus and that is what we are doing. So we have, at the moment, eight pivotal registration studies running and we are strongly focused on where we believe we can also make an impact plan at the end of the day for our patients.

Stephen McGarry: Okay. That’s great. Thanks.

Marcus Kuhnert: So, with that, thank you very much for your questions. We have come to the end of the Q&A. Thanks for dialing in and see you guys at roadshows or later in one quarter when we discuss the full-year results. Thank you very much and have a nice afternoon. Bye-bye.

Operator: Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.