Executives: Constantin Fest - Head of Investor Relations Stefan Oschmann - Chief Executive Officer Marcus Kuhnert - Chief Financial

Officer
Analysts: Matthew Weston - Credit Suisse Peter Verdult - Citi Sachin Jane - Bank of America Simon Baker - Exane BNP Paribas Vincent Meunier - Morgan Stanley Gunnar Romer - Deutsche Bank Richard Vosser - JPMorgan Florent Cespedes - Societe

Generale
Operator: Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Fourth Quarter Full-year Results 2016. As a reminder, all participants will be in a listen-only mode. 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, Vera.

A warm welcome from my side here in Darmstadt to this starts to this full-year 2016 Merck conference call. My name is Constantin Fest, I’m Head of Investor Relations at Merck, and I’m delighted to have with me here today Stefan Oschmann, our Group CEO as well as Marcus Kuhnert our CFO. In the next half hour, we would like to run you through the key slides of the presentation then we would be happy to take all of your questions as always. Please also keep in mind that we have roughly about one hour for this call as some of us will have to catch a plane for the upcoming road shows. With this, and without any further delay, I would like to directly hand over to Stefan to kick-off this presentation.

Stefan Oschmann: Thank you, Constantin and good afternoon or good morning to all of you and welcome everyone to our full-year earnings call. 2016, was a very dynamic year for Merck. Overall, we began to integrate our biggest ever acquisition Sigma-Aldrich, we did that very successfully and very fast. And at the same time, we delivered diligently on our tasks be it growth ambition, life science and healthcare or be it the rapidly leveraging for the development of our pipeline. Merck has now turned into a €15 billion revenue powerhouse and I can promise you we have a very full agenda to build in this and to develop Merck into an even stronger and more agile company.

For this year for 2017 specifically, we expect to see growing sales and ongoing progress in our former R&D pipeline. Therefore, EBITDA pre should be about stable, but we will certainly look into this call closely and later during this call. And I’m now on chart number six, in 2016, we reached sales of €15 billion, which is 17% above last year and which corresponds to 3% of organic sales. EBITDA pre came in at about €4.5 million some 24% above the year and EPS pre of 6.21 or 46% higher. And clearly key driver of this strong EBITDA pre growth was the integration Sigma at the end of 2015 and at the end of our submission payments for the co-promotion of Xalkori in the U.S.

But also the sound operational execution all of our business has contributed mitigated the quite visiblized in our R&D expenses. Marcus will give you a bit more detail later in the call. And now moving to slide number seven. When you look at Merck from a regional perspective you will see that our [Asia Pacific] (Ph) regions are fairly evenly balanced. North America accounts for 26% of our sales, and Europe and Asia Pacific for roughly one-third.

And this distribution is not so much different compared to 2015 with the exceptional North America, which has become more important to us due to the Sigma acquisition and the solid performance of Gonal-f fertility business. You will also note that our sales in Asia Pacific rose only slightly over 2015 and that has nothing to do with the overall economic environment but reflects the destocking in the display industry during the year. In fact, our healthcare and life science business and the organic growth of these businesses were in very healthy single-digit percentage. Moving on to slide number eight. At the AGM on April 28, we will propose a dividend of €1.20 per share.

This is fairly significant increase of 14% year-over-year translates into payout ratio of around 19% of EPS pre. The increase has to be seen on the one-hand in the context of our notably higher earnings or following the Sigma acquisition. On the other hand in light of our resulting strong commitment to deleverage as good as possible. Also in future dividends will develop in line with our sustainable earnings. Moving on to slide number 10.

And I will give you highlights of each one of our businesses. Healthcare delivered very well on its two major targets, on one-hand it now posted organic sales growth for the 22nd consecutive quarter. And on the other hand, our pipeline has steadily progressed in 2016. In fact, we have the first compounds in registration with the regulatory agencies. Avelumab and Merkel Cell carcinoma and also for metastatic Urothelial cancer and Cladribine tablets in Europe.

We have seen numerous space transitions in 2016 and the Pfizer lines is well on-track. For avelumab, we have nine Phase III trials by now and what the interesting tool we have 57 investigate initiated studies. But also when it incomes to the compounds in the earlier phases, 2017 will be a highly interesting year. Chart 11. For Life Science, the key challenge in 2016 was obviously on the one-hand to manage our customers buying demand and maintained ongoing renewal and innovation process for our product offering.

On the other hand, we could integrate our business acquisition in our history. And I think that our 2016 numbers speak for themselves and indicate that this was done successfully. And in 2017, we will build on this track record. Chart 12. Performance material, the performance material for the year 2016 turned out to be rather challenging as a result of the environment in the display industry.

In fact while the [indiscernible] itself was very well managed by the team pigment and integrated circuit materials performed very strongly in 2016 and mitigated the phase of earnings decline in Liquid Crystals. So therefore [indiscernible] overall, very decent performance in 2016 is certainly a good proof point for its four pillar business model and the result increased robustness of its sales and earnings. And with this, I hand over to our CFO Marcus Kuhnert, who will guide you through the financials.

Marcus Kuhnert: Thank you Stefan and good afternoon also from Life Science. We jump to slide number 14.

In 2016 as we have already seen net sales grew organically by more than 3% driven by healthcare and by life science where were able to more than offset the decline in performance materials. Currency developed slightly more favorably in the last quarter of the year than we had expected. The EBITDA pre came in at €4.49 billion for the year and this 24% increase was primarily driven by the acquisition of Sigma-Aldrich and the realization of the €105 million in cost synergies that we have already pointed to at the Capital Markets Day in October last year. In healthcare, especially the end of our Rebif commission expenses and several positive effects during the year, you may remember the disposal gain in the second quarter and the release of R&D termination provisions as well as our new royalty income streams in summer 2016, we are able to more than offset the notable increase in our R&D costs especially in the fourth quarter. On slide number 15, we have seen some selected key financials of the group and as we have just seen sales are rising by 17% with an over proportionate increase in EBITDA pre by 24%, which brings us basically back almost to the 30% EBITDA pre margin.

The earnings per share pre is at €6.21, which is a 28% rise over a prior and let me make a short [indiscernible] so about the number which is a little bit short compared to the market expectation to consensus. You may remember that the third quarter when did our latest guidance upgrade we notified you that we have in the course of the finalization of the purchase price allocation, we have had account mid double-digit million euro amount of additional depreciation, which is predominantly related to property, plant and equipment and actually brought also one of the driving sectors of our revised EPS guidance for the year 2016. And you need to bear in mind that depreciation on property, plant and equipment even when it comes from acquisition is not adjusted in the EPS pre number. So this has actually brought down a little bit our EPS pre number now to a level that obviously slightly below consensus. Other than that earnings per share pre benefitted from improved an improved financial results and we were able to generate a very healthy operating cash flow of more than €2.5 billion, which we have used predominantly for the reduction of our net financial debt.

If we look a little bit on the consumption of cash in 2016, broadly the accretion goes like this. So we have generated some €2.5 billion operating cash flow plus the more than €300 million from the divestiture of Kuvan, which brings us to some €2.9 billion, out of that we paid €600 million roughly dividend, some €800 million for CapEx and €160 million for the BioControl acquisition December and the remainder of roughly €1.1 billion actually is the reduction in net debt that you see one line below the operating cash flow here on the slide. Working capital and employees increased slightly, but more or less in line with the growth of the business. On slide number 16, we see the reconciliation from EBIT to EPS, so in the EBIT the disposal gain for Kuvan from the beginning of 2016 clearly left its mark and more than offset the impact from the higher acquisition and integration related costs. Financial result improved slightly in 2016 versus prior year and for 2017, you can expect our interest result to be in the range of €250 and €260 million.

Our Tax rate is within well-known range and our guidance for 2017 remains the same mainly a corridor between 23% and 25%. Obviously, we will need to see what impact of any future changes in the U.S. tax system will have on our tax position, but it’s too early today to enter into any type of speculations. Now I would like to enter into a little bit more detail view on the business at the P&L, since here we focus on the most recent development namely the fourth quarter. On slide number 17, we start with healthcare, healthcare’s net sales grew organically by more than 4%, which is in line with the growth rate in prior quarters and also with our statement that we believe, we will be able to fully compensate the rate of stake erosion with growth of our other franchisees.

What might be at a little bit out of trend in the fourth quarter is Rebif itself, which grew almost 1% organically and also endocrinology was up 20% organically. The explanations are in the case of Rebif, so you may have notice that we have been able again to increased prices in January 2017 by 5.5% in the U.S. and we have actually seen stocking by pharmacies at the end of Q4 2016. And our endocrinology sales that I have just mentioned benefited from the year-end reversal of a larger accrual for potential rebates. EBITDA fee came in slightly lower for this last year, which is largely due to increase in R&D costs.

They picked up quite noticeably in the fourth quarter versus run rate that you have seen in the first three quarters of 2016 and this is due to certain seasonal uptake that sometime [indiscernible] at the end and has strongly to do with rising activity and acceleration of measures toward year-end. In [indiscernible] we look on the full-year R&D number, you see roughly an increase of 186 million in our R&D spending, this is actually as indicated earlier in November at the lower end of the original projection of our R&D costs development. However, we also need to keep in mind that 2015 benefited also from a reverse of termination provisions and if we add that back and we are in the range of some €250 million increase year-on-year. On slide 18, Life Science. Life Science finished the year on a slightly soft note, which is 3.7% organic sales growth in Q4 and as we had expected the growth rate is somewhat lower due to the tougher comparables on the one hand and on top of that some customers have delayed their orders late in the year.

So this is shifted €15 million of sales into 2017 and we are actually expecting that the major part of this, we will be recovered in the first quarter. Sigma made a good contribution again and if you look on life science full-year organic growth and pro forma basis then we say that’s Sigma business grew and approximately at the single rate than the legacy Merck Millipore business, which is basically reflected in the organic growth numbers that we have reported this morning. Synergies came in as we discussed at our Capital Markets Day at €105 million and with very solid operating performance and continuously good execution on the synergy side, we made quite a jump in EBITDA pre profitability from 25% to more than 29% so very healthy level for the start into 2017. And page number 19, performance materials, you all know 2016 was a challenging year. However, on the positive side with a good proof points of our four pillar highly innovation driven business model and our ability actually to better mitigate sales and earnings fluctuation with the bigger diversity of our portfolio than in the past.

Of course shipment and integrated circuits has a strong contribution here that continued a strong performance in the first quarter and with organic sales up mid to high single-digits. Still the fourth quarter face overall declined organically minus 5.9%, and while the EBITDA pre margin held up very well throughout the year the level between 44% and 45%, the safe development clearly does not yet reflect the recovery in Liquid Crystals that we had expected when we last spoke in November. On top of it a bit more sluggish return on volumes also some customers from our point of view now use the inventory adjustment processes in the last month to recalibrate a little bit shares between the suppliers and their supplied strategies. So in Q4 specifically we saw sometimes also normalization of a very high market shares and we will keep this topic as the watch chart on our radar screen for 2017. Slide number 20 shows the balance sheet, this is not very spectacular in terms of changes versus last year, noticeably of course the reduction in financial debt.

So our equity ratio has increased now to a level of 37%, our [earnings] (Ph) from net debt to betide is down from 3.5 end of 2015 to 2.6 and other than that there were not too many changes, but might be a little bit surprising, only a slight decrease in intangible assets. Here I can tell you we have written down on a scheduled basis more than €1 billion of 2016 however the uptick in currencies brought up the asset values by the end of the year. Slide number 21 is the cash flow statement and here you can see the Q4 contribution to the €12.5 billion operating cash flow generation, which is close to €800 million strongly supported by the increase in profit after tax and also a very positive contribution from changes in networking capital. The investing cash flow is reflecting the BioControl acquisition on the one hand and slightly higher CapEx spend behind Sigma and the growth of our businesses, on the other hand the minus in financing cash flow indicates that we continue to pay down financial debt. With that, I would like to hand over to Stefan again to guide you through the outlook and guidance.

Stefan Oschmann: Thank you, Marcus. On Page 23, we are coming to the 2017 qualitative guidance and we will give quantitative guidance with our 1Q results in May. We expect slight to moderate organic net sales growth, this currencies and portfolio unchanged. EBITDA pre should be about stable, which comprises a small single-digit percentage variation around the 2016 level. The main drivers for this well-known just few things to highlight for your radar screen.

Firstly in Q2 and Q3 2016, we had several one-offs that lifted EBITDA pre by about 19 million, but will not recur. Secondly, you may have read in our annual report that we recently entered into an agreement in healthcare to spot royalty income stream and we see a lump sum payment as compensation for future annual payments. On a net basis EBITDA pre this year in the mid to high double-digits euro million. Thirdly, further you may regular any report this morning that we are in advance discussions through the divestment of our biosimilars activities. Until we see whether or not a succeed, the business remains part of Merck and still as discussed at our Capital Market Day in October, regular portfolio use are part of our daily business.

Moving to Page 24. On a per sector guidance or healthcare, we expect to see similar dynamics as in 2016 and hence slight to moderate net sales growth. With declining sales from Rebif despite the recent price increase in the U.S. We have good growth in our Asia-Pacific and LatAm markets and EBITDA is about sort of stable-ish. In Fertility, it seems as just a second competitor of the U.S.

has not returned to the market in 2017. The takeover of the commercialization rates for Glucophage from BMS in China should add in net about 100 million to 150 million in net sales versus last year. On the EBITDA pre, sales growth and higher royalty income based on Avonex royalty spot and not offset the unfavorable business, mix effects, as well as higher R&D costs and non-recurrence of 2016 benefits. In life science demand remains healthy throughout our businesses and we continue to expect net sales growth slightly in excess of market growth, which will be assumed to be around 4% per annum. This should drive EBITDA pre and the expected Sigma related synergies of 185 million will add to this.

For performance materials, we expect slight organic sales and EBITDA pre growth for 2017 driven by all four business pillars and by an improved environment the display industry compared to 2016. However, the earthquake in Taiwan in mid-February will [indiscernible] depth of Q1 2017 sales. We assumed that our market shares remain at the higher levels. However, we cannot guarantee that the adjustments in Q4 2016 will not continue in 2016. So we keep this topic on our radar screen.

Thank you very much once again. With this, we are happy to take your questions. Thank you.

Operator: Thank you. We will now begin our question-and-answer session.

[Operator Instructions]. The first question is from Matthew Weston, Credit Suisse.

Matthew Weston: Thank you very much. A small number of questions please. Firstly, on the bio specific antibody in development, can you just give us an update, how many patients do now have in the Phase I cohort expansion study? Can you tell us how many cohorts you have expanded and I guess most importantly when are we expecting to see significant data on the products? Secondly, on performance materials, you have highlighted the market and the impact of the Taiwan earthquake.

I guess you have the advantage of having already seen weeks of 2017 trading. So can you tell us what you have been seeing around market share shifts so far this year and if you can just expand as to why you think you are losing market share I think that will be very interesting. And then finally a quick financial one, there seem to be a significant spike in the healthcare underlying SG&A in 4Q, what drove that increase in spending? Thank you.

Marcus Kuhnert: Thank you, Matthew. Let me start with the bi-functional fusion protein, which we refer to as - in our own lingo as TRAP based on the fact that there are two molecule digit that give better track than fusion protein.

Recruitment is ramping up rapidly, we have about 300 patients involved in the BASKET trial with about 10 indications, you should expect more data from the Phase I dose escalation trial at peer scientific conferences in midyear potentially at ASCO. When it comes to Q1 numbers, we will report this with Q1.

Stefan Oschmann: I will take over the third question on the healthcare SG&A uptick in Q4, the reason for that being predominantly increased marketing and selling expenses to quick pay off for the upcoming launches of Avelumab, MCC and Cladribine.

Matthew Weston: Okay. Thank you very much.

Operator: Thank you. The next question is from Peter Verdult, Citi.

Peter Verdult: Thanks, it’s Peter Verdult from Citi. Just a few questions, maybe kick in for Stefan on the pipeline. Could you talk a little about portfolio prioritization mainly after many years, Merck finally seems in a position of having a pipeline as a pulse.

So when you think about avelumab, the TRAP, the BTK inhibitors the DNA [damager] (Ph) type of portfolio you amassed. Do you really have the capacity to fully invest in all these assets. So should we think more that partnership or at least smaller than definitely on the cards in 2017. Secondly, just you have mentioned that dates for TRAP or ASCO just as any other avelumab data more data we should expect this year, is it all for next year and then quick one on cladribine, I mean everyone in the markets is scratching their heads to working out what sort of revenue opportunity this could be. Are you willing to at least talk about what is cladribine could do assuming approval in Europe.

And then a quick one for Marcus also performance materials. Obviously you have expressed conservatism at the start of the year, given some of the impact that you are seeing, but just give me underlying demand trends are positive, the SA-VA launch coming and your recent comments about all that turning profitable this year. I just wanted to get a sense of your confidence of maintaining profitability level at current levels for the year? Thank you.

Stefan Oschmann: Okay. Thank you, Peter.

I will start with the portfolio prioritization question, and obviously the biosimilars divestiture should be seen in that context to initiated the biosimilars program at a time in our pipeline look much less attractive and is now maybe also facing situation where we had a major bio-fab that was running far below capacity. So in a way us getting into biosimilars was a plan B. And the fact that we are now focusing on our innovative pipeline, we ourselves interpret this as a sign of confidence. And prioritization, we have seen that we willing to partner, we did at avelumab and that was a deal that was broadly noted, at that time, it was the most, the biggest ever deal in the industry for a Phase I compound and we have been talking about the rationale or that. I started a couple of other companies for instance, Boehringer Ingelheim in the 1990s when they had a very, very good pipeline.

And where they clearly came to the conclusion that they could not launch - first of all develop and commercialize all these compounds on their own. And they did with other partnering and that was very successful. We indicated that we would be willing to entertain discussions about partnering of BTK. However, we have initiated to two Phase II trials and we believe that we will optimize the value of the compound after proof-of-concept. So to answer your question, yes we are willing to entertain partnering discussions but we will also feel in a position of strength to command and commercialize some of the compounds ourselves.

You also seen that we have done the Vertex deal, recently that fits very well with our internal pipeline. And so you will see a mixture of partnering in and partnering out going forward too. The second question was regarding avelumab data and TGF-Beta TRAP data at ASCO. I had just indicated that you should expect data on the dose escalation for the PL-1 TGF-beta at compound. We assume that there will be exciting data on avelumab too presented at ASCO.

But given the mechanics of scientific congress such as ASCO, I hope you understand that I can’t going into detail at this stage.

Marcus Kuhnert: Okay Peter. And I will take your PM question. So when looking on the outlook for 2017. What we are currently seeing is that the macroeconomics has somewhat returned back to normal.

That means specifically that the inventory levels have normalized, we see higher utilization rates at the panel producers basically back to pre-crisis levels. And we see also that the panel prices has come up significantly since I would say Q2, Q3 last year. That all-in-all translates to our assumption that we should be able to return on the growth path with PM in 2017. And what we have seen in 2016 is that we were able to keep margins stable and the face decline basically translated as an all to a corresponding absolute EBITDA decline but at relatively constant margins. So that means that when we are able to return on the growth path again, that will definitely deepen our EBITDA pre development and will help to keep our profitability at the high level.

Moreover, you have made also some points by yourself, so we think we continue to grow with all the materials, introduce a new technology mode, SA-VA from the second half of 2017 onwards, but we should not expect or should not be too bullish in terms of incremental sales related to SA-VA in 2017. And last but not least, I mean, we should also not forget that we had, at the moment, a very nice momentum track record in our Pigments and Integrated Circuits businesses. 2016 was a record year for both of these businesses in terms of growth and margin. And actually, we see no reason at the moment that that would break in this track record, so this would help us to keep profitability on a high level.

Stefan Oschmann: Let me add some information.

I didn’t answer your cladribine tablets related question. And you know the, as a matter of policy, [indiscernible] our peak sales assumptions, external observers mentioned this is between €200 million and €400 million for the EU, we expect an EMA decision in Q3 and obviously, peak sales depend very much on the label structure. We hope that this is going to be an attractive option [technical difficulty] and you are the efficacy data. We should note that that the treatment regime is quite attractive. That means that patients take something like 10 tablets now, take something like 10 tablets a year later and that is a four year treatment and you compare that to other treatment options.

We at least internally assume that this is something that could be highly attractive to patients.

Peter Verdult: Thank you.

Operator: Thank you. The next question is from Sachin Jane, Bank of America.

Sachin Jain: Hi, thanks for taking my questions.

A couple of ones and one big picture, just follow-up on the TGF-beta. Can you how many patients you have in the dose escalation portion that will see ASCO? I mean, could you remind us where you still remain confident in the potential filing on Phase I data in certain population. I think you spoken before obviously either a fraction of potential [indiscernible] to market. Secondly, on avelumab, the first-line lung cancer study, you have added a higher dosage third on [indiscernible]. Could you comment on what data has driven that so late after study starts and whether you believe avelumab is under dosed in other indications too? Thirdly, on the cladribine, where are you at ex-European filings? I think the prior comments should be potentially filings once you had initial review from Europe and regulatory you also had.

And the final question is a big picture, on the Pfizer collaboration. Just given the news in the media, could you outline what breakthroughs that you have in the contract around immuno-oncology? On the flip side, have you had any disruptions regarding expanding that collaboration, for example, the TGF-beta or other early stage assets? Thank you.

Marcus Kuhnert: Thank you Sachin, there is quite a few questions. Please, I’m trying to work through them and please chime in if there is anything that I didn’t address. So on avelumab, the non-small lung cancer first-line amendment, we observed a correlation in the JAVELIN solid tumor basket trial Phase I obviously, and we have subsequently added this arm in the first line trial, where we will test this hypothesis.

We assume in terms of - I was asked a question by EMEA representatives this morning in terms of what that means for timing. You are very well aware that there has been, after the BMS data there has been this discussion about how can we define a study that both captures PFS and OS. And we think that with this new timing that we are not disadvantaged. So then you have the question about TGF-beta traps. That’s theoretical question that is data driven.

If we see data as we hope, we will get, we will entertain such thoughts and such discussions of the regulatory agency. But I cannot make any valid statement right now on a TGF-beta TRAP filing based on Phase I data or not. Cladribine, your question regarding a cladribine filing in the U.S. We have started in Europe that was internal focus and that was driven by academic excellence and patient groups who approached us. And it is also driven by the specifics of the EU regulatory environment.

But we always said that we may eventually also looking to other potential jurisdictions such as the U.S., which is obviously the largest MS market as of today. And there are other markets such as Australia, Russia, Canada and so on and we will go step-by-step. Pfizer collaboration. This question about breakaway clause, that’s a question we have obviously considered when we design the contract, we are not going to disclose any specifics of the contract. But it’s very safe to assume that we were cognizant of this issue, or the potential for this issue when we designed the contract.

The TGF-beta TRAP compound, the PDL-1, TGF-beta TRAP compound is outside of the Pfizer agreement and we will discuss, whether we will further develop this fully internally or whether we will partner this at the right point of time. That’s too early right now. You can imagine that if this works according to our hopes, I would say expectations, our hopes is could be something very big and also some other scenarios are possible too. So again, too early to discuss.

Sachin Jain: Thank you very much.

Operator: Thank you. And the next question is from Simon Baker, Exane.

Simon Baker: Thanks very much for taking my questions. Three quick ones, if I may. Firstly on Rebif, the list price rise that you took in Jan 2017 is slightly higher than the 5% in January 2016.

So I just wondered if you could comment on trends on the level of rebate there. I’m not expecting you to give us the net price rise, but if you could give us a qualitative feel for how the markets evolving from a rebate perspective. Secondly, on the Atacicept I wonder if you could give us a little more color on the discoloration issues you are having with manufacturing of that drug, how long that would take to resolve in any potential delays of that could create for the development program? And thirdly, on CapEx, you are guiding to €850 million to €900 million this year that’s a little bit higher than 2016. I was wondering if that’s a good guide for steady-state CapEx going forward? Thanks so much.

Stefan Oschmann: Thank you.

So on Rebif, thank you, Simon, for pointing out that you don’t have the expectations that we disclosed net price effects. The price increase was, if I remember correctly, 5.5% gross and this is in line with the competitive landscape. Impossible for us to predict right now, how price levels in this markets are going to be, going forward we have no idea yet what the new administration is going to do. So I think it would be unprofessional to make any predictions at this stage. Our external observers will think that the market is becoming somewhat more volatile.

So the introduction of ocrelizumab, some patient warehousing, I don’t know what, so again, very difficult to speculate on this. On Atacicept, I give you the full story, so we have a 24-week data from being address through Phase IIb that confirm the potential for Atacicept as a candidate therapy for SLE, and we have been very encouraged by the data and the [indiscernible] activity patients, noting that the primary endpoint was formerly not met. We are aiming at discussions with the FDA regarding a potential Phase III study that should be around June this year. We currently also have a shortage of study drug supply, which is not related to any of the clinical findings, and we are focusing on adjusting the manufacturing process to bridge to the approved specifications. You are aware that the manufacturing adjustments aimed to address this out of spec coloration issue with the current supplies of Atacicept.

And I would suggest that Marcus address the CapEx question.

Marcus Kuhnert: Yes, so your question on CapEx, so the €900 million, let met me first elaborate very briefly on the increase versus 2015. Obviously, one point is that we have now 12 months of Sigma-Aldrich included, and there are some CapEx investments that will come on top from that. Moreover, we discovered that Sigma was a little bit underinvested in the past, so that means there were some, some effects, which where we had to catch up on CapEx on the Sigma side. Moreover, we see also investments in the one global headquarter project here at the Darmstadt site, so these were the main drivers behind the 2016 numbers.

In 2017 now, we will see predominately investments behind to further growth of the business. So we will have some investments in China in healthcare and life science for new productions. We are opening up new growth opportunities. So for example, with the investments in the Liquid Crystal windows production side and this you can also expect when we look at it bit more forward. So I would think beyond 2017, the CapEx spent can got even a little bit higher, but the major driver would then be actually capacity investments.

So that means it would be supported by the respective growth momentum of the businesses.

Simon Baker: Great. Thanks so much.

Operator: Thank you. The next question is from Vincent Meunier, Morgan Stanley.

Vincent Meunier: Hello. Thank you for taking my questions. The first one is on the biosimilars. Can you elaborate on the costs allocated to that business unit and the potential impact of the divestments on your targets for this year, if any? The second question on the royalty swap. Based on your guidance, if we assume €50 million or €80 million of lump sum that will represent 1.5% maybe of the group EBITDA pre in 2017.

And so, does it mean that excluding this item the EBITDA pre would have been slightly down? And also, what will be roughly the size of the royalty stream in the future and the product? I have also a question on Fertility. Gonal-f was down 1% organically in Q4. Is it a good proxy for the trend in 2017 and are you concerned that now competitors are fully back on track? Thank you.

Stefan Oschmann: So I start with the biosimilars question. In 2016, we expect about 130 million on biosimilars and that was mostly on R&D, but also some manufacturing work in a little bit of money on preparation of commercialization.

I carry on with Gonal-f and then will then hand over to Markus. Q4 Gonal-f was lower in the EU due to biosimilars and competition. I was mentioning that the U.S. situation has somewhat stabilized with one competitor coming back on the market the other competitor not coming back and we still continue to see strong growth of fertility in China. If we take all of these together, we should see definitely growth in 2017 being more muted than the high base in 2016.

Marcus Kuhnert: And so your question regarding swap of royalty stream. So, let me give you a little bit background on that. On February 6, 2017, we have entered into contractual agreement according to which we will receive a one-time payment for royalties as compensation for future royalty and license payment. The economic consequences are that we will receive a one-time cash inflow of €114 million in the exchange of three years licensing stream. And yes, with that you can, let’s say, make your own calculations basically what will be the net effect for - this actually translates to a net effect we have given you for 2017 and then you can also make up your mind what would be the net effect in 2018 and 2019 for the remaining two years where we don’t have the royalty spend.

On your question for the outlook in 2017, so at this point of time, we do not give a specific royalty outlook, but you can actually check in the annual report we have basically reviewed all of our royalty sources. Yes, so for example, the Avonex case, which you we will well aware, this gives you I think a very good guidance where 2017 may land.

Vincent Meunier: Thank you very much.

Operator: Thank you. The next question is from Gunnar Romer, Deutsche Bank.

Gunnar Romer: Gunnar Romer, Deutsche Bank, thanks for taking my questions. Just a quick follow-up on the market share normalization performance materials. I was wondering whether you can comment on what you have baked into your guidance for the current year. And then second question would be on the corporate costs. I think if I stripped out of the hedging effect you had, it’s about stable year-over-year in 2017 what you are guiding for.

Just wondering on the longer-term trends, and we have significant step up in this line over the past two years. Just help us understand how we should think about that line going forward, whether at all at some point, this line may come down. And then, lastly, on Rebif and the stocking effect in the fourth quarter, I was wondering whether you can potentially quantify how much that’s been roughly according to your estimates? Thank you.

Stefan Oschmann: Thank you. I will start with the performance materials assumptions.

We have also heard from couple of observers, we had questions about how come you expect to segregate from a negative growth situation in 2016 into a slight organic growth pattern in 2017. But we should note, first of all, and that is something that often gets forgotten is that our PMD, our display business is only, so to say, about 60% of our Performance Materials business and not all of our display materials is Liquid Crystals business. That’s important to note. We see positive micro trends in the display business compared to prior year. We see that a number of panels sold increases and we seen that panel pricing increases to and that should lead filter through [indiscernible].

We also see that new modes, such as SA-VA, are being introduced and put into mass production, as we speak, and we hope that this will have a small but measurable effect toward the end of 2017. And we should also be in a situation where we have more easy comparables compared to prior year. Our other businesses, Pigments and Integrated Circuits, we expect them to grow as solidly as they did in 2016. When it comes to market shares, that we have high market shares. We expect these market shares to continue to be high as being by far the market leader, but we had, among certain customers, we had on the past, actually not in 2016, but maybe early in 2016 and in 2015 for specific effective reasons we had extremely high market shares and we now assume that this will go back to a more natural level.

Hedging, Markus will take over hedging.

Marcus Kuhnert: So, Gunnar, on your second question on corporate costs, so you will have notice that the 2017 guidance for the corporate costs segment is a little bit lower, so on a positive sense, than the number that you have seen from 2016. Indeed, the current FX environment indicates even higher negative hedging effect in 2017 than what we hedging in 2016. So that means on a like-for-like basis, we will see a multiple decline in this low cost in 2017. If we look further down to road, it is difficult to make already concrete predictions.

What we said here internally, and that is basically also what we said in 2016 already that under no circumstances as the corporate costs should crack the 400 million bonds. We believe that looking forward to 2018, 2019, that we should have this is cost segment well under control, I would also not expect actually further increase over the 2017 year level. However, I would like to make one comment here, you know that next year we have our 350-year anniversary and we need to see, so we have the planning and we cannot yet say what will be the impact, so it might be that something of that will also be visible and segment corporate. But be assured we have close look on that cost position. The last question, Rebif stocking effect.

So you have seen in the numbers that North America organic sales growth was 11% for Rebif in the fourth quarter. And we have such two price increases in 2016, which add up to a total of around 9%, roughly. So when we grow 11% in the first quarter that would mention that the volume was slightly positive in North America. If we compare this with a run rate of the prior quarters, we always had the picture let’s say by and large 10% price up, volume minus is that we are more or less flat. And then you can make your own math what the stocking effect in Q4, which lifted us on 10%, 11% basis.

Okay?

Gunnar Romer: Thank you. That’s helpful. Maybe if I can, just a quick follow-up on the lump sum. Shall we expect that you book that, so I’m talking about the royalty here. Should we expect that you book that on a pro rata temporary basis, or would you see that impacting just one quarter? And how should we be thinking about it also then in terms of the beta to the cash flow statement, what you have factored in here?

Marcus Kuhnert: The cash in this of course, goes immediately into the cash flow statement.

You will see the impact as operating income in Q1 2017.

Gunnar Romer: Okay. And the delta between the P&L impact and the cash flow impact, is that just conservative planning or how should we think about the delta here, the €114 million?

Marcus Kuhnert: That delta is, Gunnar, remember we swapped and we got the one-time payment, and we swapped three years of license payments and year one was 2017. Obviously, the one-third of the license payments were not seen as regular license payment, but instead as a one-time cash in.

Gunnar Romer: Okay.

Got it.

Operator: Thank you. The next question is from Richard Vosser, JPMorgan.

Richard Vosser: Hi, Richard Vosser, JPMorgan, a couple of questions, please. Just on the R&D spend development in healthcare, perhaps you could give us maybe a little bit more color on the magnitude of the increase you are thinking about in 2017? And then on the Glucophage sales in China that you are now bringing in from Bristol Myers, you mentioned, the amount of €100 million to €150 million.

Just what sort of growth have we seen in that area in terms of the sales in the past in China and what we might think going forward? And just thinking about the profitability impact of those sales, is there anything you can do similarly to when you took over the Rebif marketing that might make that more profitable that we should think about this year? Thanks very much.

Stefan Oschmann: Richard, on the R&D spend, if you look back in 2016, we had actually expected to spend more in 2016 already if you look back at the guidance that we gave. We had talked about the reasons why this spend would occur later on. If I look into consensus, I read that market expectations for us is to be spending about €150 million to €200 million more compared prior year. What I would say it that does not seem entirely, totally illogical to make such an assumption.

I hope that answers your question. On Glucophage, plenty of positive events, late last year we have opened in factory in Nanto in China that makes Glucophage, so this is a local product right now with all the advantages and also essential medicines list. And so we don’t generally do not disclose individual country sales numbers. You can get it at out of the market data out of IMS. We expect until 2018, mid to high single-digit growth for our General Medicine portfolio in this indication on a global basis.

So it does have a significant impact on our overall revenue development.

Marcus Kuhnert: So Richard, I take over and your question on Glucophage in China. So the past growth of that business, we can derive as an approximation from the delta of the license income, of the commission income that we have recorded and so the growth of 2016 was roundabout 20%. And our EBIT does not mean will continue execute on that path going forward, but this gives you maybe a little bit a ballpark. we actually would not see the big impact on the bottom-line from that, because what we are effectively doing is that we are switching basically license income, so commission income, into a full P&L of cost we will see that the absolute sales that will be increasing, we will see absolute EBITDA pre coming now, but no big impact on the pure bottom-line.

However, please keep in mind, this will have a slightly negative effect on the margin. Simply due to the fact that when we have just licensing income you do not have any denominator, so sales were zero, you have just licensing income. Now we have a full P&L that means profitability in terms of margin, the relative number is slightly diluted. However, we believe, and that was the strategic rationale why we did it, that under our own roof, the long-term and prospect of the business will be better than, and I would like to hand over to Stefan now also for a comment.

Stefan Oschmann: You referred to the Rebif Pfizer example.

I would say we are facing a very different situation here. The co-promotion deal that we had with Pfizer on Rebif in the U.S. was characterized by the fact that they had been early on, and that was prior to us acquiring Serono, there had been a very high upfront payment being made by Pfizer to Serono. And then the characteristics of the deal, of the co-promotion deal were less favorable to us. So the ending of the co-promotion deal was a net positive for us.

And this case here we had simply licensed out the compound to BMS and we have now repatriated it, which means that we have to build up a sales force locally, which has happened and that means that you also see higher SG&A in this area.

Richard Vosser: Thank you.

Operator: Thank you. The next question is from Florent Cespedes, Societe Generale.

Florent Cespedes: Good afternoon, gentlemen.

Thank you for taking my question. Three quick ones. First on healthcare, just a quick one on Erbitux. How do you see the performance going forward? And is the Q4 a good proxy for the quarters to come or years to come? Then two questions on Life Science. First, could you elaborate a bit on the dynamic of the subdivisions? Is there any change of dynamic that you have observed recently? And the last one on Process Solutions on the delayed order, could you explain why the customer, or the delay occurred this year and not last year or is it really something that was a kind of one-off, or should we see this pretty much every year? Thank you.

Stefan Oschmann: So on the Erbitux in Q4. Erbitux is obviously a mature product in mid-term, it will be stable-ish at best because we are seeing eye on competition in the mid-term and possibly always a further narrowing of the patient base. Dynamics in the Life Science sector overall, we must say that 2016 has been a particularly good year for the life science business. If you look at our assumptions, the assumptions that we formulated when we acquired Sigma-Aldrich, market growth was significantly fast and mostly driven by Process Solutions, but also by Applied Solutions. For those of you who are not so familiar with our business, again we have three business units within life science, one is Process Solutions, that is buyer processes, the second one is Research Solutions, so that is research lab in academia.

And the third one is Applied Solutions, which is regulated and it is mostly quality control in pharma, but also in the food industry. And the two main growth drivers were growth Process Solutions and Applied Solutions, also there some affect of the launches that impact performance for instance, our next-generation lab order equipment, which we are rolling out as we are speaking now. We aim to continue to be profitability champion of this sector. You see in Process Solutions, we assume high single-digit growth. We have seen extreme growth in some areas in process solutions over last year that was an outline.

In the applied solutions, we assumed mid single-digit growth and in research solutions, we assumed low single-digit growth. Again, we don’t really know what policy of the Trump administration is going to be when it comes to an age. I think, which is very important for us. We have to watch that very, very closely. That is about growth dynamics within the life science sector, all-in-all, if you look at value generation of the Sigma-Aldrich acquisition, again, the higher than expected market growth, the continued performance at our organization, above market currency developments and the speed with which we have achieved synergies and also somewhat overachieving on synergies, all of that taken together means that we have really accelerated value creation versus our base case.

Marcus Kuhnert: Your remaining question on the order delay. I mean, it just happened in 2016. I would not make a trend out of that.

Florent Cespedes: Okay. Thank you very much.

Constantin Fest: With this, I would like to jump in here. I think we’re well over one hour now. As I said earlier, we need to catch a plane. And with this, I would like to hand over to Stefan for the closing words.

Stefan Oschmann: Again, thank you very much for dialing in.

2016 was a really good year for Merck. You have heard about our basic assumptions for 2017. Yes, we do invest into pharma, into healthcare, R&D. We believe that this is a sign of strength, and I’m looking forward to meeting many of you during the upcoming road shows. Thank you very much.

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