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Executives

Alexander Rosar - Head of Investor Relations

Marijn E. Dekkers - Chairman of Management Board and Chief Executive Officer

Wolfgang Plischke - Member of Management Board and Chief Executive Officer of Bayer Healthcare

Liam Condon - Chairman of the Board of Management and Chief Executive Officer

Werner Baumann - Chief Financial Officer and Member of Management Board

Patrick W. Thomas - Chairman of Bayer Materialscience and Chief Executive of Bayer Materialscience AG

Analysts

Richard Vosser - JP Morgan Chase & Co, Research Division

Tim Race - Deutsche Bank AG, Research Division

Florent Cespedes - Exane BNP Paribas, Research Division

Amy L. Walker - Morgan Stanley, Research Division

Andrew S. Baum - Citigroup Inc, Research Division

Sachin Jain - BofA Merrill Lynch, Research Division

Jo Walton - Crédit Suisse AG, Research Division

Christian Faitz - Macquarie Research

Daniel Wendorff - Commerzbank AG, Research Division

Lutz Grueten - Commerzbank AG, Research Division

Whitney Ijem

Bayer AG (OTCPK:BAYRY) Q1 2013 Earnings Call April 25, 2013 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor Analyst Conference Call on the First Quarter 2013 Results. [Operator Instructions] I would now like to turn the conference over to Mr. Alexander Rosar, Head of Investor Relations at Bayer AG. Please go ahead, sir.

Alexander Rosar

Thank you, Cleo. Ladies and gentlemen, good afternoon and welcome, also on behalf of my colleagues, to our conference call. This afternoon, we'd like to review our first quarter figures with you. With me on the call are Marijn Dekkers, our CEO; and Werner Baumann, our CFO. HealthCare today is represented by Wolfgang Plischke; CropScience by Liam Condon; and Consumer Science by Patrick Thomas.

Marijn will start off with a brief summary of the development in the first quarter. We assume that you have all received and reviewed our stockholders' newsletter, the briefing document and the presentation slides, so we'll just run you through the main points.

Before handing over to Marijn, I'd like also to draw your attention to the Safe Harbor statement. Thank you, Marijn.

Marijn E. Dekkers

Thank you, Alexander. Ladies and gentlemen, good afternoon. It's my pleasure to discuss the highlights of the first quarter with you. First, our Life Sciences businesses got off to a good start in our anniversary year, 2013. HealthCare benefited from the continuing success of new product launches in Pharma, and also, we saw strong growth in Consumer Care. CropScience had profitable growth in a persistently favorable market environment. On the other hand, higher-than-expected cost pressures in MaterialScience resulted in a weaker performance than we had anticipated. In total, we grew group sales organically by 4%. Reported EBIT improved almost 9% due to lower special charges compared to last year. Adjusted EBITDA came in at the prior year level. Against this backdrop, and based on our expectations for the remainder of the year, we confirm our full year financial outlook for the group.

So let me now elaborate on some key figures for the first quarter. When talking about sales, I will concentrate on portfolio and currency-adjusted data. Our group sales advanced by 4% to EUR 10.3 billion. HealthCare and CropSciences contributed to the increase, while sales of MaterialScience remained at the prior year level. Reported EBIT rose by 9% to EUR 1.8 billion, mainly due to lower special charges. The special charges of EUR 45 million versus EUR 169 million in the prior year quarter resulted entirely from restructuring measures.

Adjusted EBITDA was level with the prior year period at EUR 2.5 billion. HealthCare improved its adjusted EBITDA, particularly due to the good business development at Pharma and Consumer Care. Adjusted EBITDA of CropSciences grew largely as a result of higher selling prices and higher volumes. Earnings of MaterialScience came in below the prior year period, held back by increased raw material prices, lower volumes and high cost for a maintenance shutdown. In the reconciliation, adjusted EBITDA was diminished mainly by expenses of EUR 36 million for stock-based compensation and by costs related to our 150th anniversary celebration.

Core earnings per share amounted to EUR 1.70, an increase of 2% over the prior year quarter. From a regional perspective, the strongest growth was generated in the U.S. and the emerging economies. In the U.S., business moved ahead by 8%, driven by all subgroups. The emerging economies, overall, saw business advance by 7%. These markets accounted for 34% of group sales. Particularly strong growth was again generated in Eastern Europe and emerging Asia, especially China.

Gross cash flow in the first quarter moved ahead by 13% to EUR 1.8 billion, mainly as the result of lower taxes. There was a largely seasonal increase of EUR 1.5 billion in cash tied up in working capital. Net cash flow advanced by 38% to EUR 327 million. As for higher investments of EUR 365 million, the operating free cash flow came in at minus EUR 38 million. Net financial debt rose since the start of the year from EUR 7.0 billion to EUR 7.5 billion mainly because of cash outflows for operating activities.

Now let's all -- let's move on to the performance of our subgroups. Sales of the HealthCare subgroup increased by 5% in the first quarter to EUR 4.4 billion. This positive development was primarily driven by our new Pharma products. Our Consumer Care division also experienced a strong quarter, so let me elaborate on these performances in more detail.

Sales in our Pharmaceuticals segment rose by 5% to EUR 2.6 billion. In regional terms, our business expanded mainly in China, Germany and the United States. Our new products, Xarelto, EYLEA and Stivarga, made a particularly strong contribution to the business expansion of Pharma in the quarter. Xarelto continued to post very gratifying sales gains, especially in Germany and France, following indication expansions. EYLEA's initial uptake in Japan and Australia is very encouraging. Stivarga contributed significantly to sales growth following its successful launch in the U.S. Combined sales of our new products amounted to EUR 244 million in the quarter. We are thus confidently reiterating our sales target of EUR 1 billion for these products in the full year 2013.

The performance of our established Pharma products was mixed in the quarter. On the positive side, sales of Glucobay once again climbed significantly by 20% as the result of the continuous expansion of distribution activities in China. Revenues from Mirena edged forward by 5% despite the strong prior quarter in the United States. The 4% growth in sales in Kogenate was largely the result of higher volumes.

On the negative side, sales of our YAZ line was down by 13%, hampered above all by generic competition in Western Europe. As expected, business with Betaferon receded by 7% due to lower volumes, particularly in the U.S. and Brazil. We also registered a decline of 4% in sales of Nexavar, mainly due to inventory reductions at specialized oncology centers in the United States.

Adjusted EBITDA of Pharma moved ahead by 12%. The increase in earnings was mainly driven by the strong sales gains for our new products and lower production cost resulting from an improved product mix. On the other hand, earnings were negatively impacted by higher expenses from marketing of our new products.

We remain optimistic for the future development of our Pharma business, not only based on the gratifying early launch performance of our new products but also because of the continued success of our innovation pipeline. In the first quarter, the FDA granted 2 priority reviews. First, the New Drug Application filed in December 2012 for radium-223 dichloride, under review for the treatment of patients with prostate cancer and bone metastases; and secondly, for riociguat in STEPH (sic) [CTEPH] and PAH.

In Japan, Stivarga was approved for the treatment of patients with unresectable advanced recurrent colorectal cancer. And Xarelto was recommended for approval in the EU for the prevention of atherothrombotic events after an ACS, an acute coronary syndrome. The final decision from the European Commission is expected in the first half of 2013.

So let's now move on to Consumer Health. Sales in the Consumer Health segment improved by 5% in the first quarter to EUR 1.9 billion. This positive development was mainly attributable to sales growth in the Consumer Care division, especially in the emerging markets. Sales in our Consumer Care division rose by 9%. Our cold medicine, Alka-Seltzer Plus saw pleasing growth in sales as a result of a strong cold season. Business with our Bepanthen and Canesten line benefited from higher volumes in Europe. Sales of Aleve and Aspirin advanced particularly in Latin America thanks to intensified marketing activities.

Sales of the Medical Care division fell by 2%. Diabetes Care sales declined slightly, particularly as a result of price and reimbursement pressure. Also, sales of our radiology and intervention business were slightly below the prior year period. Sales in the Animal Health division rose by 3%. Growth was mainly attributable to the launch of our Seresto flea and tick collar in the United States. Adjusted EBITDA of Consumer Health showed a slight increase of 1% resulting from sales growth, largely offset by higher marketing expenses in all divisions.

In summary, the performance of the HealthCare divisions resulted in adjusted EBITDA of EUR 1.3 billion for the subgroup as a whole, an improvement of 8% over the prior year. Currencies had a negative impact of EUR 34 million in the quarter.

Now let's move on to CropScience. Sales in the CropScience subgroup increased by 7% to EUR 2.8 billion despite a late start to the season in the Northern Hemisphere. Growth was particularly strong in North America, but the other regions also showed a positive development. Our business continues to be supported by the persistently high price levels for agricultural commodity.

The Crop Protection business posted sales growth of 11% and developed positively in all business units and regions. The steepest percentage increase occurred in SeedGrowth, largely as a result of higher product sales for application in corn and soybeans in the United States. The herbicides business also registered double-digit growth. The fungicides business expanded by 9%, benefiting particularly from sales of our Prosaro product family. Insecticide sales advanced by 5%, driven by the Belt family.

The Seeds business unit came in at the very strong level of the prior year quarter. The rise in sales of soybean seeds did not fully offset the decline in business with cotton seeds resulting from reduced cotton acreages. Sales of vegetable seeds increased slightly.

Sales of the Environmental Science business of CropScience decreased by 10% in the first quarter. This was primarily due to the long winter in the Northern Hemisphere, which held back demand from both professional users and consumers. Overall, adjusted EBITDA of CropScience moved ahead by 10%. This earnings growth was mainly the result of the higher volumes and higher selling prices.

Now let's move on to MaterialScience. MaterialScience posted sales of EUR 2.8 billion in the first quarter, matching the prior year period. An overall increase in selling prices compensated for a drop in volumes in Europe and North America. Sales of the Polyurethanes business unit rose by 4%, driven by higher selling prices in all product groups and regions. Volumes declined overall despite increases in Asia Pacific and Latin America, Africa, Middle East. This was mainly due to lower sales in Europe and a maintenance shutdown in North America.

Sales in the Polycarbonates business unit declined by 6% due to lower volumes in nearly all regions. We achieved slightly higher price levels in North America and Europe. Adjusted EBITDA of MaterialScience contracted by 27%. This decline was largely due to a sharp rise in raw material price. Earnings were also hampered by a drop in volumes and high cost for the maintenance shutdown in North America. Positive factors were selling price increases and savings from efficiency improvements.

In view of our first quarter results and the attractive perspectives we see for our Life Sciences businesses, we confirm our full year 2013 group guidance. We continue to expect sales for 2013 to increase by 4% to 5% after adjusting for currency and portfolio effects to approximately EUR 41 billion based on unchanged currency assumption. As before, we plan to increase EBITDA before special items by a mid-single-digit percentage and core earnings per share by a high single-digit percentage. We maintain our guidance for HealthCare and CropScience for the full year 2013 as published at the end of February.

In light of the business development in the first quarter, we have adjusted our full year earnings guidance for MaterialScience. In MaterialScience, we are now aiming for adjusted EBITDA to approximately match the prior year figure, whereas previously, we had predicted a further improvement. In the second quarter of 2013, we expect sales to exceed the first quarter and adjusted EBITDA to come in significantly above the level of Q1.

So ladies and gentlemen, overall, we are pleased with Bayer's solid start to 2013, which was driven by the strong performance of our Life Science business. We're, of course, especially pleased to see that our new Pharma products were the main driver of organic sales growth at HealthCare and that CropScience continued to grow profitably in the quarter.

This concludes my remarks, and we are now happy to take your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Mr.Vosser.

Richard Vosser - JP Morgan Chase & Co, Research Division

It's Richard Vosser from JPMorgan. A few HealthCare ones and then a CropScience one, please. Just on HealthCare or in Pharma, some of the sort of tail products had a slightly weaker performance this quarter. I'm just wondering if you could comment whether you think you need to allocate any more marketing spend behind those or whether there are other reasons for the slightly weaker performance. Obviously, I understand the performance of YAZ and Betaferon, but I'm thinking of other products in the tail we can't see. Second question, just on EYLEA. Obviously, a very, very strong performance. Could you give us some idea of the market shares you might have in Japan and Australia versus Lucentis and how you're doing in Europe and whether there was any stocking in the number for the European launches? And then onto the CropScience question. Just wondering how much of your sales from CropScience do you think have been shifted into Q2 as a result of the slow start to the season because of cold weather and hence whether we should be thinking of record second quarter margins in a similar way to the -- we've seen in Q1 this year.

Marijn E. Dekkers

Okay. Thank you, Richard. So Wolfgang, the question on the tail products and EYLEA.

Wolfgang Plischke

Yes. Thanks, Richard. The tail end product has -- this is driven by rather a technical effect because there are 2 products with a decline, Diane and Kinzal, which have been in the top 15 products before, and now they are in the tail-end product portfolio. And therefore, you see a stronger decrease of sales there. Second question to EYLEA, we are actually very pleased about the successes we had in the early launch of EYLEA on the basis of the countries we've launched already. In Japan and Australia, we are quite successful. We have reached a market share in Japan now of 48%, and in Australia, a market share of 42%. In Europe, we are also successful as expected. Obviously, in Europe, as you know, the progress will take a little bit more time because there are negotiations ongoing with reimbursement agencies. But the general feedback and the early successes we have now are based on great feedback we get from doctors and also patients.

Marijn E. Dekkers

Thank you, Wolfgang. Liam, the question on the cold weather, and has that shifted sales into Q2?

Liam Condon

Yes, as you noticed, particularly in the Northern Hemisphere in Europe and North America, we did experience very cold weather, and this season is for sure somewhat delayed. If you compare this to Q1 2012, this is quite a different picture because last year, the season was particularly early, so it's a very different pattern. It's too early to call the shot really what will happen now in the second quarter. It depends at the end of the day how the weather is going to pan out. We still have snow in Canada and large parts of North America, which is hampering seeding and planting. So it's a little bit too early to make the call on what the impact will be. And the overall season could be so much shorter than in 2012, but at the end of the day, we will know it by the end of quarter 2. Our working assumption at present is that we will have a normal quarter 2.

Operator

The next question is from Mr. Race.

Tim Race - Deutsche Bank AG, Research Division

It's Tim Race here from Deutsche Bank. A few Pharma-based questions first. First on EYLEA, just following on. In the number that you report, is there any stocking there? And just on the European countries, could you just point out which ones you've actually launched in so far? And then maybe if you could just discuss perhaps on EYLEA what selling point had actually helped you so much in Japan and Australia? What did they buy into in terms of profile, and how are Novartis potentially going to fight back? Then a question on Xarelto. You've seen obviously very strong growth. When we look at the U.S. sales, you recorded only EUR 22 million, and that's sort of flat quarter-on-quarter. Just wondered how we should be forecasting that recognition of revenue coming through and when you'll be reaching that 30% of revenues. And then maybe just a question on the reconciliation. How much of the EUR 109 million is recurring versus nonrecurring or one-off related to the 150-year anniversary? I'll leave the questions there and then get back in the queue.

Marijn E. Dekkers

Okay. Thank you, Tim. So the 2 Pharma questions, EYLEA and Xarelto. Wolfgang?

Wolfgang Plischke

Yes. Tim, EYLEA, there are practically no stocking effects for EYLEA. The countries in Europe, we have launched the product, for example, Switzerland, Germany, and we are making starts in various other countries. But negotiations, as I've said, with the government agencies are ongoing. The selling point is quite easy. I guess the market waited for an alternative choice in this very serious indication. And what we can see, I mentioned this already in my first answer, that the result we see in the actual treatment of patients, especially in Japan and Australia where we have gained this tremendous market share already, is very positive. Patients are very satisfied about the treatment, and doctors are. And this is further driving the success in these countries, and we hope to see this also in other countries where we will roll out this product.

Marijn E. Dekkers

Xarelto and growth in the U.S.?

Wolfgang Plischke

Xarelto, in the U.S., you have seen the fantastic growth in the U.S. You know that Johnson & Johnson has reported in the U.S. sales of $158 million, yes? In -- our proceeds regarding the U.S. market are EUR 22 million, yes, and this is more or less reflecting what we make through this cooperation with J&J. We are very satisfied about the progress we are making in the United States. I believe our partner, J&J, is doing a tremendous, excellent job. I want to just give you some market share figures on development we see in the United States. We have an overall market share now in retail of about 20% in the U.S., but much more important for the launch success of the product are the new brand prescription share in the overall oral anticoagulant market and also in a part of this market, in the cardiology segment. In the overall oral anticoagulant brand prescription, share is 31% for Xarelto. And just to mention the other competitors, dabigatran is at 6%, apixaban at 3%. In cardiology, we are also increasing steadily. We are at 38% share in this market, and more important, here is dabigatran [ph] and warfarin are losing share in this market.

Marijn E. Dekkers

Okay. Thank you, Wolfgang. Werner Baumann will answer the reconciliation question.

Werner Baumann

Yes. Tim, regarding the question on recon, for the first quarter, the 2 major components that we recorded in recon were one-off. The reclassification of our long-term incentive programs and the amount which exceeds the normalized expense, which is covered inside of our operating business, group, the OBG [ph] , everything that's just beyond 100% performance of these programs would be captured in reconciliation. In terms of whether that is recurring or not, it is very, very difficult to answer because it depends on the stock price and the stock development, because that drives the program. So if you want to look at it this way, it's a strong statement of the success we have had to see these expenses, even though it is still an expense, it shows up in reconciliation. But I have to say that also it is a technical change. It doesn't change anything in underlying performance or the other cost has to be made up for in terms of incremental earnings to cover that cost. So secondly, the second bucket somewhere in the area of a little bit more than EUR 30 million relates to the expenses we had in quarter 1 in the context of our 150-year anniversary. That is, to the large extent, of course, nonrecurrent, both in terms of quarterly sequential development but also in terms of year-over-year. It happens to be the fact that we have somewhere in the area of a little more than EUR 50 million in anticipated expense for this 150-year anniversary, and you also have to put that into context. We are not giving an additional salary or something of that nature to our employees. It is more a token, which is a small medal and a book, but with 110,000 people, it still adds up. And in terms of total percentage of payroll, it is less than 1/3 of 1% of total payroll. In terms of expense, of course, we also get quite a bit of positive halo effect and publicity with the surrounding activities, the scientific symposium and the like we are planning for the year, so some of that money is also to be considered as an investment behind our brands. Last but not least, full year guidance for the recon for this year captures a stock price at the level of about EUR 80, yes? So that means that in the next quarter to come, there would be additional accruals beyond 100% entitlement, and that is covered in the minus EUR 200 million. It's actually the vast majority or the big majority of the increment, which is showing up in recon, which relates to the stock price.

Operator

The next question is from Mr. Cespedes.

Florent Cespedes - Exane BNP Paribas, Research Division

A few key ones. First on Betaferon. Is your guidance on Betaferon for the year a little bit too aggressive? Where are you losing most of the sales? And is there any chance to see the release of a provision for discounts in Q2 or at the end of this year? Quick question on the geographical performance in Pharma. What explains the still soft performance in Europe? Is it mainly due to YAZ decline -- and in the Latin America and Africa, other countries? What is behind this quite soft Q1? And the last question on R&D. 2013 is a year of execution, with a lot of the product launches. But could you share with us what are your priorities for the products which are in earlier phase, and if you could share some thoughts in terms of a potential partnership?

Marijn E. Dekkers

Okay. Thank you. Now let's start with the Betaferon questions. Is the guidance too aggressive and are we making provisions for discounts?

Wolfgang Plischke

Our guidance, as you remember, was a high single-digit decline for Betaferon. And as you can see from our first quarter results, the decline was 6.9%. So we are well within our guidance. This is mainly driven by volume declines. There is some pricing effect in the United States still in the fourth -- first quarter. And we will see this further volume decline throughout the year 2013. Europe regional performance, we had performance of 1.5% growth in the first quarter. This is mainly driven by some generic pressure, especially in the Mediterranean countries, and it's also driven by some decline of the sales of YAZ. And with Mediterranean countries going back there, that's mainly Spain and Italy where we see this generic pressure. In terms of other European countries, I just want to mention Russia here where we put a lot of focus on, both in our Pharma business but also in the Consumer Care business. And there, we had a very successful quarter with a growth of the business of 37%. And also, in Germany, we are quite successful with a growth rate of 18% for our business. Then, I believe remembering you also mentioned Latin America. There, I can say that our business is also developing nicely in the areas where we put emphasis, and which is especially our Consumer Care business, totally in line with the strategic intent we have for our overall HealthCare business. Then, the last question you had was research and development, where do we put emphasis on. We put emphasis on the further life cycle management of the products we just launched. You know that's starting for Xarelto. We have started command, pioneer, et cetera, which are very important for us for the long-term growth of this brand. Then, we have a series of other clinical work still ongoing in the various additional indications for EYLEA, because the success we have is just based on the first indication we launched, which is already very successful, the wet age-related macular degeneration, but we have developments ongoing in central retinal vein occlusion, where we expect the finalization of the trial in the first half of 2013. We have diabetic macular edema, where we will have data in the second half, and we are also having activities ongoing in myopic CNV, which is very important in the Asian population. Then, we have activities ongoing, as you know, in our compound, riociguat, where we will inform you in due time about our plans in which further fields we would like to invest. Then we have radium-223, where we will get an indication for castrate-resistant metastatic prostate cancer. But for sure, we will look into other indications to make a much broader product out of this. And then, we have a couple of projects in our Phase II pipeline we are highly interested in, and in due time, it might be at our conference in New York, we will give you some more insight into these projects.

Operator

The next question is from Mrs. Walker.

Amy L. Walker - Morgan Stanley, Research Division

It's Amy Walker from Morgan Stanley. I have 3 questions, all on MaterialScience if I may, please. The first one is it looks as though year-on-year volume decline in Polyurethanes was around about 3.5% in the first quarter. Is that roughly right? And how much of that was underlying demand weakness in Europe, and how much was the turnaround in North America, please? The second question, I'm a little bit confused as to why raw material costs were cited as a key impact on EBITDA in MatScience this quarter. Aromatics price inflation in Q1 looks less severe than in Q3 or Q4, so was there some other raw material that caused the issue? Or was it that actually idle facility costs were already the bigger driver of the weakness in profitability? And the last question, please. You say you expect strong sequential improvement in MatSci EBITDA in Q2, but EBITDA would need to maybe double from the Q1 level to reach last year's 2Q levels. So do you think that's possible? Or does your guidance for flat MatSci EBITDA for the full year assume substantial back-end-loaded growth in H2? And if so, what drives your confidence that, that's achievable, please?

Marijn E. Dekkers

Okay. Thank you, Amy. Patrick?

Patrick W. Thomas

Yes. Thank you very much, Amy. I think you're right in terms of Polyurethanes. We showed an overall 3% decline in total volume effects. In terms of regional effects, Europe accounted for around about that average minus 3%. North America was actually up about 8% and Latin America and Middle East up also. Asia Pacific was up double digits, around about 14%. So that was the overall effect, so clearly, a European-dominated volume decline. If we look at quarter 1 aromatics, the reason in my bridge that I've highlighted this is because if I take sequential quarters, quarter 4 to quarter 1, then we have an impact of about EUR 100 million on EBITDA. The volume effect and price effect are negligible in comparison to that on a quarter-on-quarter comparison. Without the year-on-year effect, raw materials were up about EUR 140 million, offset by about EUR 117 million in price on equivalent quarters, quarter 1 '12, quarter 1 '13. And the majority of that effect rolled through aromatics, primarily the benzene price. And I think you and I discussed this at the management event. We were expecting benzene to roll off this peak level and come down, whereas in fact, with our contract mix and our benzene derivatives, we actually saw that raw material price staying longer at that higher level than we had expected. In terms of how we look at guidance, let me try and help there with, clearly, the first quarter was impacted by the effect you described, which is primarily the extended maintenance shutdown we had to take in North America. And that had about a EUR 30 million to EUR 40 million impact sequentially quarter-on-quarter, and that's how much it cost, indirect cost. There were also some minor indirect costs related to the purchase for resale of material to comply with our contractual obligations to supply. Secondly, if we look at the rest of the year, particularly the second half, we're planning to increase prices through the rest of the year to try and improve our performance, and we're implementing further efficiency improvement. And I think we look particularly at China, where we are concerned about the strength of the market. We believe that in the second half of the year, the Chinese government will start to release some of the infrastructure projects, which would stimulate the growth back to a more conventional level.

Operator

Your next question is from Mr. Baum.

Andrew S. Baum - Citigroup Inc, Research Division

It's Andrew Baum from Citi. A couple of questions, please. So first on the YAZ litigation, I just want to make sure I understand this. So of the 14,500 plaintiffs, 9,000 of these are complaining of gallbladder rather than thrombotic-related issues. And then, it goes on to say that you've offered a settlement. Could you just clarify that those 9,000 are solely gallbladder, that there's no other thrombosis-related issues? And also, could you confirm the timeline for when that settlement was determined, whether you got 90% of the requirement that you've set, so just to help us understand the closure of liability risk associated with that product? And then second, in reference to Japan, rather unusually, Novartis on the call admitted that they had effectively screwed up the launch in Japan, and they were taking those learnings onto other markets. Perhaps you could comment maybe not on what Novartis did wrong, but really, what are you doing right, and what do you think is the secret for success in that market that seems to have evaded your competitor?

Marijn E. Dekkers

Okay. Andrew, Werner Baumann will answer the YAZ question first, and then Wolfgang will dance around when he answers your EYLEA question.

Werner Baumann

Okay. Andrew, first of all, I can confirm your understanding that the 9,000 cases you quoted are exclusively related to gallbladder cases. Those we have offered a settlement for, which we reported on in the quarterly shareholder letter in the legal section. We have offered for that settlement $24 million, not because we think that anything is at fault here, but simply for practical reasons given the sheer size of these cases and the related legal cost, which we would have to expense in case of litigating them. And then, it is also depending on reaching that 90% quota, which, of course, we are not entirely in control of also in terms of timing, for that settlement to become effective.

Wolfgang Plischke

Okay. And then EYLEA success in Japan. I believe our success is based mainly on the following issues: First is that we put a lot of priority on this launch. We established a dedicated own sales force for this product with experts we hired in this field, and we have a great partner in Japan, which is launching the product together with us. This partner is Santen, which is the #1 ophthalmology company in Japan. So both organizations are working closely together, and I believe this made -- beside the product quality and the market who waited for an alternative -- made the success in Japan in the first quarter 2013.

Operator

The next question is from Mr. Jain.

Sachin Jain - BofA Merrill Lynch, Research Division

It's Sachin Jain, Bank of America. A few product questions in Pharma, please. Firstly, on your launch preparedness for radium-223, I just wondered if you could update us on the number of sites in the U.S. with commercial license, how many patients you now have in the expanded access program and where you are with sales force hiring for that product and whether you'll be ready to launch ahead of a potential middle with [ph] PDUFA? Secondly, on Betaferon, it was touched on briefly earlier, but I think you've seen 19% declines x U.S., which is significantly below the minus 5% for your '12 run rate. So is there any specific factors you'd cite in that outside of FX? And is the reduced marketing, I imagine, on this product having any impact? And then finally on Xarelto in Japan, I understand the prescribing limitation has come off recently. Could you just comment as to the extent of volume inflection you may have seen there?

Marijn E. Dekkers

Okay. Wolfgang, radium.

Wolfgang Plischke

Radium-223. As you know, the PDUFA date, you can calculate yourself, is August of this year. We are prepared for launch, yes, with all the details, which are necessary for this rather complicated product, which means licensing of the units who will use the product or the distribution chains, the supply chains you have to establish. So we are prepared for launch of the product. In terms of the access program, we have running an access program for radium-223. There's a high demand for this program driven by the medical needs within this indication, and we are carefully managing this access program these days. Betaferon, yes, it's a decline, as you mentioned. This is a volume-driven decline, as I said it before in my comment to the Betaferon decline, which is about 7%. Nothing special around this. I believe we will be within our guidance until the year end, which is a high single-digit decline for Betaferon, mainly driven through volume decreases. Xarelto Japan, yes, you are right. There will be a change of the 2 prescription period. Actually, this will end, end of April. So in the first week of May, we will have the opportunity of better -- the GP, the general practitioner, the cardiologist, et cetera, they have the opportunity to prescribe it for a longer period. And we are confident that this will increase the penetration of Xarelto significantly in Japan.

Operator

The next question is from Jo Walton.

Jo Walton - Crédit Suisse AG, Research Division

It's Jo Walton. I have just a couple of questions on Xarelto. Looking at the U.S. level that J&J gave us and the level that you gave us, it looks like you're effectively booking 18% of the end user sales as your level of sales. Is that a fair reflection of the effective royalty rate that we should be looking for, for that product going forward? Secondly, I wonder if you could give us a little bit more color on the market shares that you have for Xarelto in Europe, and I appreciate that you're doing extremely well relative to products that are in the U.S. But Boehringer Ingelheim's home market is more in Europe than it is in the U.S., so I wonder whether you're experiencing stronger competition from competitors in Europe. And if you could also tell us what risk we should put on the effective pricing that you have given the comments that we keep seeing from AMNOG about if you have really successful new products that will launch before the new sort of pricing review came in that we could see that pricing review process attached to them. I would imagine that this class of drugs, in general, would be pretty high up that list, so what sort of impact that could have seeding out from Germany?

Marijn E. Dekkers

Thank you, Jo. Werner is going to take the first question and Wolfgang the next.

Werner Baumann

Yes. Jo, you cannot take the 18% as a proxy because it's a market factorial on what we book and what J&J shows as end market sales. I'll give you a few of them in order to explain a little bit further. First of all, we sell the product in terms of the product price for physical product delivery. That's one part. Then we have milestones and royalty payments due, and last but not least, there's, of course, a phasing issue between our deliveries to J&J and their end-market sales. And of course, as we have mentioned in other occasions, we do have a scale of royalties due to us, which, depending on the sales milestones we hit, can go all the way up to 30% of sales.

Marijn E. Dekkers

Okay. Wolfgang, market share in Europe for Xarelto.

Wolfgang Plischke

Yes. Thank you, Jo. Give you some flavor for our market share development in Europe. Let's start with normally the most difficult trend for the U.K. in terms of acceptance of new drugs. There, the market share is around 4%, and dabigatran is about 5%. Then if you go to France, market share is now leading above dabigatran. So we have a market share of 15%. Now dabigatran is behind us with 14%. And then if you go to Germany, we have a market share of 31%. Dabigatran is at 11%. So that's a little bit of a flavor of the European market share development, which is very, very promising for us. Then pricing eCreek [ph]. You are right that there will be an assessment of some therapies, including the new anticoagulants, by the so-called eCreek Institute [ph] , but that's a process, which has been announced now. Apixaban went through the procedure already. Dabigatran will also go through the procedure. So we will do. All these drugs have comparable prices in Germany, and we are fully convinced regarding the benefits of Xarelto, and we are looking forward to this assessment. A little bit on the timeline, so that you also get a flavor when this will happen. We expect a decision of the assessment by mid of 2014, and the final pricing decision, which will be made through negotiations, will not be before end of 2014.

Jo Walton - Crédit Suisse AG, Research Division

And if I could push my luck, I apologize. I forgot to ask a question. On -- and I'm sorry to go back to EYLEA. You give EYLEA less often than you give Lucentis, which effectively means that it is a lower price. You haven't mentioned price as being a key aspect of the success of this product. Would we be right to assuming that the effective price is significantly lower in Australia and Japan than for Lucentis?

Wolfgang Plischke

Our pricing strategy is to have comparable prices to Lucentis. But you can assume, including rebates, that we have a competitive price versus Lucentis to also use this to drive our launch and our sales in the markets we are entered in.

Operator

Your next question is from Mr. Faitz.

Christian Faitz - Macquarie Research

Christian Faitz here from Macquarie. Two quick questions. First of all, MaterialScience. Patrick, do we see any pickup in China post the slow takeoff after the year -- New Year celebrations? Can you -- considering that, how is Q2 going so far? And then second of all, for CropScience, Liam, can you share with us any general inventory issues in fungicides, for example, as a result of last year's drought in the U.S.? And how is demand for glufosinate at the moment benchmarking against glyphosate? Also in Lat Am, there was an increase in glyphosate resistance issues.

Marijn E. Dekkers

Okay. Christian, thank you. Patrick on China.

Patrick W. Thomas

Yes. Thank you, Christian. The situation in China is still relatively slow and relatively weak. We're still waiting to see whether the government picks up speed a little bit in the second half of the year. And I think there's a couple of other factors there, which are coming into play. One is the relative value of the yen, which means our Japanese competitors, particularly in Polycarbonate, are exporting a lot of material into China, which is really weakening prices in China as well. So this yen effect is causing us some problem in terms of trying to get PCS price movements. But I think we have to really wait through the first -- through the second quarter to see what the real underlying growth rate's going to be in China.

Marijn E. Dekkers

Okay. Liam, the inventories of fungicides and glufosinate demand.

Liam Condon

As we stated previously for last year, we didn't have an issue with fungicides despite the drought because our -- most of our fungicides were preemergence, so they were already sprayed by the time that the drought hit. We didn't -- what we did not know was whether there would be an impact on competitors. I think most of our competitors were stating then that they would see fairly normal inventories. Our impression at the moment is that there is an issue with inventories in fungicides in the U.S., and sales are relatively slow on the fungicide side. So this is an indication for us that there are inventory issues. But as I said, this is not related to our products or any carryover from our products from last year. This is basically a market channel issue for fungicides. On the glufosinate side, as you know, wheat management is a huge issue at the moment, particularly in North America and for sure becoming more important in Latin America as well. The demand for glufosinate ammonium as a very effective alternative to glyphosate is extremely strong. We have seen growth in the first quarter of approximately 50% year-on-year growth for glufosinate ammonium. Plus, we have other herbicides -- that's corn herbicides. For example, at Ingle [ph], where we're growing 24%, 25%. So continuously strong demand here, and Lat Am, there is growing demand. But here, at the moment, in the first quarter, it's more related to fungicide and insecticides than herbicide sales.

Operator

Your next question is from Mr. Wendorff.

Daniel Wendorff - Commerzbank AG, Research Division

Daniel Wendorff from Commerzbank. Two remain, actually: One on the margin development you saw in the Pharma business in Q1 and which looks strong year-on-year. I assume, in light of the unchanged guidance for the full year, that we are going to see a sort of declining level during the quarters, and I wonder if you could give us a bit more color of how that would pan out. Is it a particular quarter we should be thinking of being particularly weak in light of ongoing marketing initiatives? And second question follow-up question on EYLEA, could you say how many countries contributed to the performance in Q1, so how many European countries, in particular, outside of Japan and Australia?

Marijn E. Dekkers

Okay. Thank you, Daniel. Margin development in Pharma, Wolfgang.

Wolfgang Plischke

Yes. Margin development. You are referring to our margin in the first quarter and the guidance we have given that we will slightly increase our margin for Bayer HealthCare. What will happen in the quarters to come is that we will have some phasing of our marketing and sales expenses because we want to drive our launches and our rollouts for our products in all countries. And as you have seen, we have started very well with EYLEA and Stivarga, and we have to drive this through, which will add some more investment. And the same will -- true for the preparation of the launch for radium-223 and for the preparation of the upcoming regulatory decision for riociguat later this year. So we have our hands full to secure the sales growth and the future of the companies in the year to come, which needs additional strong investments. Further on, we will also see, as in previous years, phasing of the R&D costs, which will be higher in the quarters to come. EYLEA sales, I mentioned already Australia and Japan who have been quite successful driving this, but we have launched in various other countries: in Germany, in Switzerland, Colombia, Austria, Sweden, Norway, et cetera, many other countries, and you will see the progress of this in due time.

Operator

The next question is from Mr. Grueten.

Lutz Grueten - Commerzbank AG, Research Division

Lutz Grueten, Commerzbank. One follow-up on the guidance you've given on Bayer MaterialScience.

Putting all together, it seems to me that a recovery on pricing power, Chinese demand seems to be a bit back-end loaded for the second half. Wasn't it a bit premature already to cut your guidance or to adjust your full year guidance after Q1 results?

Patrick W. Thomas

No, I think it was prudent to give the best guidance we can, and that's my honest judgment in what I think will happen this year. So I think that we have to see our way through the second quarter, and then we will update you, of course, after the second quarter.

Operator

The next question is from Mr. Ijem.

Whitney Ijem

This is Whitney on for Cory Kasimov from JPMorgan. Quick Pharma question, could you please break out Nexavar sales between Japan and rest of world?

Marijn E. Dekkers

Thank you, Whitney. Nexavar sales break, Wolfgang.

Wolfgang Plischke

Yes. Nexavar sales, I can give you a breakout. We had Nexavar sales in the first quarter of EUR 170 million. In Japan, our sales have been EUR 22 million, being 2% above last year. Is this okay, or do you need more information?

Whitney Ijem

If you have more, it would be great.

Wolfgang Plischke

It will be great, yes? I can give you also the sales in emerging countries, which are 2.8% up, yes? And if you look at China, they are even 7.4% up.

Operator

We have a follow-up question from Mr. Race.

Tim Race - Deutsche Bank AG, Research Division

Yes. So just following up on the Xarelto royalty, first of all. So if you could -- now it's becoming new more important, the U.S. revenues.

[Technical Difficulty]

Marijn E. Dekkers

Sorry, what's the question? Hello? Tim, can you hear us? Operator?

Operator

One moment please while we relocate Mr. Race.

Tim Race - Deutsche Bank AG, Research Division

Operator, I'm still here.

Marijn E. Dekkers

Okay. We can hear you.

Alexander Rosar

We can hear you.

Tim Race - Deutsche Bank AG, Research Division

Okay. I could hear you. Anyway, my question is just following up on Xarelto. The U.S. sales and the royalties that are coming through, or the revenues going through. I understand the timing in phasing, but at 18%, it feels like a little bit low, and now it's becoming more and more important going forward. Could you just give us a bit more granularity on at what point -- or what sales revenues it actually steps up to that 30% level and whether the 18% we're seeing in this quarter is unusually lower versus what you'd expect based on the end market sales? And then just maybe a strategy review question on Diabetes Care. First of all, just given the reimbursement changes we are seeing in the sort of midpoint this year, what do you expect for the -- in terms of growth for Diabetes Care going forward? And then just given that this is going to be a more difficult market, even more competitors coming in, lots of pricing competition and reimbursement competition but offset by good demographics, what is the strategy for this area going forward? There's lots of players here that are either discussing pulling out, consolidating or just riding it through. I mean, what are your preferences here for Diabetes Care?

Marijn E. Dekkers

Okay. So the first -- thank you, Tim. The first question on Xarelto royalty will be answered by Werner, and then the second question on Diabetes Care by Wolfgang.

Werner Baumann

Okay, Tim, let me repeat what I said earlier, and there's actually not much more to be commented on. You can't take the 18% as a proxy going forward. There are different drivers behind, let's say, the ratio of our sales to J&J's market sales. One of them you addressed already in your question, and that is the different phasing between our supply and J&J's end market sales. On top of that, we have staggered royalties agreed with J&J that mean depending on the sales level, we can reach up to 30% of J&J's sales as royalties. First quarter sales of J&J were a little more than $150 million. It will still take some time to get up to 30%. From our end, I can only say the earlier, the better.

Marijn E. Dekkers

Okay. Diabetes Care?

Wolfgang Plischke

Diabetes Care, just the strategic questions for our business, and we are committed to this business and we are driving this business. And yes, you are right. You see a slight decline in the third quarter, but actually, we do -- we are doing quite well if you compare this with other competitors in this market. And for example, if you look at some countries like Germany, we had quite a success in these markets with our new products. And we are confident that we will compete nicely in the next 3 quarters with this business. In addition, you have to understand that this business is providing quite a significant cash flow for us, which is important for our overall performance within Bayer HealthCare.

Operator

There are no further questions at this time. You may continue with any other points you wish to raise.

Alexander Rosar

Okay. Thank you, Cleo. Ladies and gentlemen, also on behalf of my colleagues, I'd like to say thank you for being with us on the call and thank you for your questions. Our next Investor Relations event will be the mid management conference in New York on June 11. Hopefully, many of you will make it to meet us there again. Now we are saying goodbye.

Operator

Ladies and gentlemen, this concludes the First Quarter 2013 Results Investor/Analyst Conference Call of Bayer AG. Thank you for participating. You may now disconnect.

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