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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

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

Werner Baumann - Chief Financial Officer and Member of Management Board

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

Analysts

Sachin Jain - BofA Merrill Lynch, Research Division

Amy L. Walker - Morgan Stanley, Research Division

Fabian Wenner - Kepler Capital Markets, Research Division

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

Matthew Weston - Crédit Suisse AG, Research Division

Andrew S. Baum - Citigroup Inc, Research Division

Florent Cespedes - Exane BNP Paribas, Research Division

Richard Vosser - JP Morgan Chase & Co, Research Division

Christian Faitz - Macquarie Research

Steve Chesney - Goldman Sachs Group Inc., Research Division

Damien Conover - Morningstar Inc., Research Division

Ronald Koehler - MainFirst Bank AG, Research Division

Bayer AG (OTCPK:BAYRY) Q2 2013 Earnings Call July 31, 2013 8:00 AM ET

Operator

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

Alexander Rosar

Thank you, Cleo. Ladies and gentlemen, good afternoon. And also, on behalf of my colleagues, welcome to our conference call. As already mentioned, today we would like to review our second quarter figures with you.

With me on the call are Marijn Dekkers, our CEO; and Werner Baumann, our CFO. HealthCare is represented by Wolfgang Plischke; CropScience by Liam Condon; and MaterialScience by Patrick Thomas.

As always, Marijn will start off with a brief summary of the developments in the second quarter. We assume you have received and reviewed our stockholders' newsletter, the briefing documents and the presentation slides, so Marijn can focus his presentations on the main points.

Before handing over to Marijn, I'd also like 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 speak with you about our second quarter this afternoon. It was a quarter of significant progress with our Pharma innovation pipeline and with new product launch execution, but also a quarter that was mixed in terms of subgroup performance. We saw a strong operating performance by our Life Science businesses. The HealthCare performance was driven by successful product launches in Pharmaceuticals and strong growth at Consumer Care. CropScience saw another quarter of good profitable growth in a persistently favorable market environment. Our new Pharma products performed considerably better than expected. And in light of this, and based on our continued optimism in terms of launch execution, we have raised our 2013 new product sales target by 40% from EUR 1 billion to approximately EUR 1.4 billion.

Unfortunately, the second quarter also saw weak performance in the challenging market environment in our MaterialScience business. Both top and bottom lines missed the level of the prior year quarter, even though its performance improved sequentially over the first quarter. On the group level, we delivered an organic sales increase of 5%. Reported EBIT improved by 74%, mainly due to lower special charges. Adjusted EBITDA came in slightly above the prior year level, and core EPS increased by 6%. Against this background, and based on our expectations for the remainder of the year, we are currently maintaining our full year financial outlook for the group even though it appears increasingly ambitious.

Let me now elaborate on some key figures for the second quarter. When talking about sales, I will concentrate on portfolio and currency-adjusted data. Group sales advanced by 5% to EUR 10.4 billion. HealthCare and CropScience both contributed to the increase, while sales of MaterialScience did not quite reach the prior year level. Reported EBIT rose by 74% to EUR 1.3 billion, mainly due to lower special charges. The special charges of EUR 256 million versus EUR 762 million in the prior year quarter mainly comprised impairment losses on a Pharma research project, restructuring charges and expenses related to litigations, mostly in connection with Cipro settlements in the U.S.

Adjusted EBITDA posted a small increase against the prior-year period to EUR 2.2 billion. HealthCare improved its adjusted EBITDA, due particularly to the positive business development at Pharma. Adjusted EBITDA of CropSciences grew largely as a result of higher selling price and higher volumes.

Earnings of MaterialScience came in below the prior-year period, mainly as a result of lower selling prices and increased raw material cost.

Core earnings per share amounted to EUR 1.54, which was an increase of 6% over the prior year quarter. Then, from a regional perspective, 37% of total sales were generated in the emerging economies, growing at a rate of 6%. We delivered double-digit growth in Latin America and also expanded our business in Asia and Eastern Europe.

Looking at the developed regions, growth in the U.S. was hindered by a slow start to the season in CropScience. In Western Europe, sales rose again by 4%, following a weak Q1, with Germany accounting for most of the increase.

Then, gross cash flow in the second quarter moved ahead by 37% to EUR 1.7 billion, mainly as a result of the improvement in earnings. And net cash flow advanced by 10% to EUR 1.5 billion. After investments of EUR 502 million, the operating free cash flow came in at EUR 1.0 billion.

Net financial debt rose from EUR 7.5 billion at the end of Q1 to EUR 9.0 billion at the end of Q2 because cash inflows from operating activities only partly offset the outflows for the dividend payment in April and the acquisition of Conceptus in June.

So let's now move on to the performance of our subgroups, starting with HealthCare. Sales of the HealthCare subgroup increased by 8% in the second quarter to EUR 4.8 billion, with gains in all businesses. The strongest growth was achieved in our Pharma segment, where sales rose by 10% to EUR 2.8 billion. As already said, the continuing good development of our new products: Xarelto, EYLEA and Stivarga, made a particularly strong contribution to the business expansion, with combined sales of EUR 339 million in the quarter.

Xarelto built on its leading position among the new oral anticoagulants. The robust sales growth for this product continued, especially in Germany, Japan and France. In May, Xarelto was approved in the E.U. for secondary prevention after an Acute Coronary Syndrome.

EYLEA also made a strong contribution to sales development. Significant progress was reported in developing additional indications for EYLEA. Just last week, we received the CHMP recommendation for approval for the treatment of macular edema following central retinal vein occlusion in Europe. In addition, the MYRROR Phase III study delivered positive results in myopic choroidal neovascularization. The first filing in this indication is expected for the second half of this year.

Furthermore, the market introduction of Stivarga continued successfully. And on top of that, we saw the first sales of our new bone cancer drug, Xofigo, following the product's launch in the U.S.

So based on this success, we are now targeting approximately EUR 1.4 billion in new product sales in 2013, EUR 400 million more than we had originally planned.

The performance of our established Pharma products was mixed in the quarter. On the positive side, sales of Kogenate climbed by 10%, partly due to shifts in the order patterns of our distribution partners. We also expanded revenues from Nexavar by 7%, partly in light of the price increases in the United States.

In June, Nexavar was submitted to the EMA and FDA for the treatment of thyroid cancer. The 6% growth of Glucobay and the 5% growth of Aspirin Cardio were largely the result of higher sales in China. Mirena was basically flat versus a strong prior year quarter.

On the negative side, sales of Betaferon continued to recede, mainly by 14% in the second quarter. And sales of our YAZ line were hampered by generic competition in Western Europe and the U.S., resulting in a decline of 11%. We also registered a decline of 4% in sales of Avelox, primarily due to lower demand in the U.S.

Adjusted EBITDA of Pharma moved ahead by 14%. This earnings growth was mostly the result of good sales development.

Now let's move on to our Consumer Health business. Sales in the Consumer Health segment improved by 4% in the second quarter to EUR 2.0 billion. Sales in our Consumer Care division rose by 5%, mainly driven by the performance in the emerging markets. From a product point of view, highlights include the improvement for Aleve, partly due to higher demand in Brazil, and our business with Bepanthen and Canesten lines, which benefited from extended marketing activities in the emerging markets.

Sales of the Medical Care division improved by 3% in a challenging market environment. Higher sales were recorded in Diabetes Care, especially for our Contour line, driven by the launch of Contour Next in the U.S. Sales of our Radiology and Interventional business came in at the prior year level.

Sales in the Animal Health Division rose by 2%. Strong gains there were registered by our new Seresto flea and tick collar, which just this year, has also been launched in the United States.

Despite the sales increase in all divisions, adjusted EBITDA of Consumer Health fell by 7% as a result of higher marketing expenses, especially our investments in the emerging markets.

In sum, the performance of HealthCare resulted in adjusted EBITDA of EUR 1.3 billion for the subgroup as a whole, which is an improvement of 6% over the prior-year period.

So let me now elaborate on the Q2 performance of CropScience. Sales in the CropScience subgroup increased by 7% to EUR 2.4 billion. Growth was particularly strong in Latin America, with positive development in Asia and Europe as well. Our business continued to be supported by persistently high price levels for agricultural commodities. The group -- the Crop Protection business posted sales growth by 8%. The largest increase in percentage terms was achieved for fungicides, driven mostly by sales growth in Latin America and Europe. Sales of herbicides and insecticides also registered slight increases.

In SeedGrowth, however, business declined, largely because of sales in Europe that have already been realized in the first quarter and also, due to reduced canola acreages in Canada.

The Seeds business came in at plus 2%. Here, we were particularly successful with our vegetable and rice seeds. On the other hand, business with canola and cotton seeds declined due to reduced acreages in North America.

Sales of the Environmental Science business increased by 6% in the quarter, with higher sales both in the Consumer business and in products for professional users.

Adjusted EBITDA of CropScience moved ahead by 14%. Earnings growth there was mainly the result of higher volumes and higher selling prices.

Now let's move on to MaterialScience. Sales of MaterialScience came in 1% below the prior year quarter at EUR 2.9 billion. This was attributable to lower sales prices -- sorry, selling prices in Asia and Europe. Volumes matched the prior-year period.

Sales of the Polyurethanes business unit rose by 3%, driven by higher volumes in all regions, except Europe. Selling prices, overall, were at the level of the prior-year period.

Sales in the Polycarbonates business unit declined by 8% due to lower volumes in all regions, resulting from weaker demand. In addition, selling prices, as a whole, were below the prior-year period due to market overcapacities.

From a sequential perspective, adjusted EBITDA of MaterialScience came in above the first quarter figure, but was down by 28% compared to the second quarter of last year. The year-on-year decline was largely the consequence of lower selling prices and a concurrent increase in raw material costs.

So let's now talk about the full year outlook for the group. In view of our first half 2013 results, we are currently maintaining the group forecast for 2013 that we published at the end of February, even though it appears increasingly ambitious. It remains to be seen to what extent the unexpectedly weak development in MaterialScience will be offset by our improved performance in the Life Science businesses.

We are, as I said, becoming more positive on Pharma, because our new product is so successful. We are a little more cautious on Consumer Health and are thus able to reiterate our guidance for HealthCare as a whole. We are also confirming our CropScience outlook for the full year.

For MaterialScience, following the weak performance in the first 6 months, we have adjusted our full year guidance. We now believe full year sales will not quite reach the prior-year figure, and we now expect adjusted EBITDA to come in below the prior year level.

So for the group as a whole, we expect sales for the full year 2013 to increase by 4% to 5% after adjusting for currency and portfolio effects. And based on average exchange rates for the first half of 2013, we expect to achieve group sales of EUR 40 billion to EUR 41 billion. And we expect to increase EBITDA before special items by a mid-single-digit percentage, and we expect to improve core earnings per share by a high single-digit percentage.

So ladies and gentlemen, this concludes my opening 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. Sachin Jain of Bank of America.

Sachin Jain - BofA Merrill Lynch, Research Division

A few questions, please. Firstly, just keeping up for the Consumer Health division on the margin progression there. I think in your introductory comments, you attributed that to SG&A in emerging markets. Maybe you can just clarify the trends within the Diabetes Care margin segment? And on the assumption the margin declined in that business, can you comment on what drove that given the stable top line outlook, and whether you have any intentions of putting cost measures to try and protect the margins? Second question on Xarelto. Bristol, Pfizer are aggressively flagging on their recent calls and -- in increasing SG&A in the second half. Would you intend to match that share of voice perspective and is the increase in SG&A for that product is still within guidance for the year? And then, finally, on MaterialScience, I think your guidance hopes for a sequential improvement in EBITDA in the third quarter. Could you just discuss the drivers of that and whether you're seeing any evidence of that through July?

Marijn E. Dekkers

Okay. Thank you, Sachin. We'll start with the Consumer Health-Diabetes question. Wolfgang?

Wolfgang Plischke

Thanks for your questions. For Consumer Health, reasons for the declining of the [indiscernible] as we've said it already, are our further investment in emerging markets in Consumer Health. But we also see some market-related weakening in Medical Care. You have observed that we have increased our sales in Diabetes Care, but that's kind of a mixed picture because we have some pricing and reimbursement pressure in this market, especially in Europe and Germany, et cetera. And we also see some health care reform impact in our RNA business. In terms of cost reductions, we have started to do cost reduction efforts, but the full effect is not visible now in the second quarter. I hope this will answer your question. In Xarelto, we are making, I should say, applause to our colleagues from J&J, a fantastic progress in the United States. The market share in the United States overall market is now at 24%, dabigatran at 20%, and apixaban is at 2%. And even more impressive is -- are the figures for the new prescriptions. For example, in the oral anticoagulant market, the share of Xarelto is now 34% just for the new prescriptions, whereas, it's 6% for dabigatran, which shows you how Xarelto is progressing in this market. And the comparable picture you see for the new prescription share amongst cardiologist, we have a share now of 39% versus 12% of dabigatran; and apixaban, 16%. So we also have read about, in the press, that there are some activities planned from our competitors, and especially from Pfizer, Bristol-Myers. And we are well-prepared and are willing to further invest into our success in the United States, and I understand that's the intent of our colleagues from J&J.

Marijn E. Dekkers

Okay. So BMS, sequentially?

Patrick W. Thomas

Yes. Sachin, thank you for the question. Quarter 3, traditionally, is the stronger quarter for us in terms of sales and certainly, through July, we've started to see some evidence of that case. Secondly, on supply reliability in the third part has been poor, both from the point of view of planned and unplanned shutdowns. We expect much lower planned maintenance in the second half, so that plays towards stronger results in Q3. And certainly, from what we can see in the rest of the industry and recent announcements, alliances, some of our competitors are having problems with reliability in the next couple of months. The third element is really around raw materials and energy. What I would hope to see some of the benefit rolling through, with benzene coming off its peak and some of the aromatics getting back to their normal margins over NAFTA, so that's really the reason behind our guidance on Q3.

Operator

The next question is from Mrs. Amy Walker of Morgan Stanley.

Amy L. Walker - Morgan Stanley, Research Division

I've got 2 questions, if I may. The first, on HealthCare. You very helpfully gave some indications on market shares, I think in the U.S. for Xarelto. But would you be able to share with us an update on market shares in Xarelto and EYLEA in the key European territories and Japan, if you can, please? And second question, Patrick, just coming back on the trims you were mentioning in MaterialScience. It looks as though, from a raw material perspective, you should actually get some year-on-year relief in raw material costs in the second half. Do you think you'd be able to retain all of that raw material cost benefit in H2 and maybe, keep EBITDA flat year-on-year? Or do you think the vast majority of that benefit will be evened out by weakness from the top line? Just some color around the dynamics there would be great.

Marijn E. Dekkers

Okay. Wolfgang?

Wolfgang Plischke

Thank you, Amy. First, I'm happy to answer Xarelto, some insight. You have seen in the figures that sequentially from quarter-to-quarter, we have seen a growth of more than 40% for Xarelto on a worldwide basis, which shows further progression of the success of Xarelto. The market share, I have mentioned for the U.S. For Germany, the current market share is at 38%. Dabigatran at 11%. Apixaban, 2%. To other countries, France, we are at about 18, have also higher market share now in France. Then, dabigatran, which is at 16%. And in Brazil, 34%; dabigatran, 23%. And then, Japan, which is of major importance for us, and you will remember that we had these 2 big prescription restrictions in the first year after the launch of the product. And this changed in April. In early April, we had a market share for Xarelto of 9%, beginning of April. And at the end of April, we had a share of 21%. And currently, we are at 19%. So we are very happy to see that very good progression, demonstrating the success of our organization in Japan. EYLEA, also there, we have seen very nice progression quarter by quarter of 49% to EUR 73 million sales now in the second quarter. Where is this coming from? Mainly from Japan, Australia and Germany. And the market share, again, in Japan, we have now about 56% market share. These figures are fluctuating now a little bit over the weeks, but very high. Lucentis, it has a market share of 40% in Japan. In Australia, the market share is around 48% for our product. And in Germany, the market share is at 22%, also progressing upwards.

Marijn E. Dekkers

Good. Thanks, Wolfgang. Patrick, the third quarter, a little bit more color.

Patrick W. Thomas

Yes. Amy, maybe if I just help in terms of explaining the bridge year-on-year for quarter 2 in terms of the impact. Raw materials impacted 2/3 of the GAAP in EBITDA in a negative sense year-on-year. But sequentially, if we look at the CapEx the other way around, it's only 1/3. And it's an improvement in raw materials, sequentially, in the quarter. And that is a EUR 35 million improvement in raw materials going from quarter 1 to quarter 2. As we look forward, how much of that can be held in terms of pricing? I think that depends on the supply and demand. In the Polyurethanes and Coatings arena, that I think we will hold on to that margin expansion. I think it's going to be more difficult in Polycarbonates, because the supply and demand balance is not so strong. And finally, previously on the call, at the first quarter we've guided that the total raw material impact for the full year likely as much as EUR 0.33 billion. I would now say it's closer to about EUR 0.25 billion impact in the negative sense. So that captures our overall view on raw materials.

Operator

The next question is from Mr. Fabian Wenner of Kepler Cheuvreux.

Fabian Wenner - Kepler Capital Markets, Research Division

The first question to Patrick. As a consequence of the difficult MaterialScience demand situation, do you foresee any changes to your own CapEx plans or maybe to that of competitors, as you implicated? Specifically, talking about Polycarbs increased sales, are you pushing that out maybe a little bit further? And also, Polyurethanes in Caojing, are you ramping up more slowly or what are you doing with regards to that? Also, could you give a little bit more insight of the utilization in quarter 2 for Polycarbs and Polyurethanes? And then, lastly, you basically, in your guidance for Q3 said -- well, basically for the full year, the reconciliation would be better year-on-year, it wouldn't be like EUR 200 million impact, but more like EUR 120 million. What is that triggered by?

Marijn E. Dekkers

Okay. Let's start with Patrick on the CapEx plan and utilization.

Patrick W. Thomas

Yes, Fabian, thank you for that. In terms of CapEx, we're moving forward with CapEx levels pretty much at depreciation for the next few years. We do have some expansion plans. I think the Polycarbonates unit in [indiscernible] is not a plan that we've announced or talked about. That was -- no, I don't think we've had any announcement on that there. On Polyurethanes, we're just completing a debottleneck in Caojing, which is needed, particularly to get our product balance correct. In terms of Polycarbonates, we can bring the capacity that we are expanding in Caojing to the market at the right time. There's no pressure in terms of project completion. The project is underway and we can manage the revised degree of the planning of supply and demand to meet the needs of the market in that place. So that's the overall view in terms of CapEx. In terms of utilization, then certainly, in Polyurethanes, I'd say that the supply and demand in terms of total industry for MDI is running at the top 80%, somewhere around that 87% nameplate. In TDI, slightly lower. It's always slightly lower, the TDI plant is slightly less reliable. And in Polycarbonates, it's running at about the level of 85% in industry utilization. So all of those are lower than we would like them to be, but we see particularly the Polyurethanes much more balanced, tightening as we go into the next 2-year period, really, there's very few new capacities coming onstream.

Marijn E. Dekkers

Okay. So Werner Baumann, can you answer the reconciliation question, why is that ongoing?

Werner Baumann

Yes, Fabian. The Corporate and Consolidation[ph] factors which drive the reconcile from our guidance, we do have a somewhat better performance of service components, which do contribute to that positive development. And on top of that, we've also reduced cost and investment in a number of areas, in a number of functional areas and already, the second quarter of this year, this should now start to contribute in the second half towards that positive development.

Fabian Wenner - Kepler Capital Markets, Research Division

Can I just follow up on the MaterialScience quickly. Patrick, Can you tell us -- you were mentioning something about competitors being maybe less reliable in terms of supply. Can you name anything in particular, I mean, regionally, if you don't want to name a competitor[ph]?

Patrick W. Thomas

No, I think, in Europe, [indiscernible] and Ireland there's a couple of MDI firms that are struggling. But if you check out [indiscernible], you'll be able to see the [indiscernible] supply.

Operator

The next question is from Mr. Jeremy Redenius with Sanford Bernstein.

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

It's Jeremy Redenius from Sanford Bernstein. First on CropScience. Could you talk us through the success or potential success you're having with the integration you've talked about between your seeds

And chemicals go-to market models? Have you been seeing cost synergies or revenue synergies as part of that model so far? And then second, what are you seeing about the price and volume developments for CropScience as we move into the second half of the year, what are your expectations? And then, on MaterialScience, could you quantify the impacts and the downtime you saw on this quarter, please? Just trying to get a feel for the EBITDA impact or perhaps, the volume lost. And lastly, with Polycarbonates, what do we need to see in terms of demand outlook to absorb the surplus capacity that you were describing?

Marijn E. Dekkers

Okay. Liam Condon, can you talk about integration of Seeds and crop protection.

Liam Condon

Yes. We tend to talk about our integrated solutions offers that we have. And here, we're talking very specifically about offering total solutions ranging from Crop Protection which are, for us, including synthetic chemicals, but also biologicals, onto seed growth and the treatments to enhance the seed growth and then, to seeds itself. And I think the best example for us is in the area of canola, where we are particularly strong. Canada is a market leader. This is a model that is working very well in many of our markets. Reality is, this year, now specifically in quarter 2, that most of our growth is driven by Crop Protection and this is because the Seeds business was particularly hit hard in the second quarter by the long and too long and too cold and too wet winter in the Northern Hemisphere. So I think, overall, the model is working very well. And -- but what's driving our growth in the first half of the -- or the first quarter, second quarter and the first half of the year is very specifically, Crop Protection. On the outlook for the year, we definitely are very confident about maintaining our guidance for the year, and we don't see any reason to change that. It's a little bit too early to call how the harvest are actually going to come in and how commodity prices will develop. But we feel very, very confident about our overall guidance. And we traditionally have, let's say, a relatively weak third quarter, it tends to be the off season and we get returns from seeds, which will for sure happen this year because of the lack of seeds that was planted in the third -- in the second quarter. But overall, we feel very confident about the outlook for the remainder of the year.

Marijn E. Dekkers

Good. Thanks, Liam. Patrick, do you want to answer the question on quantifying the impact of downtime and the Polycarbonates demand?

Patrick W. Thomas

Yes. Jeremy, the rough impact of the plant turnarounds and shutdowns during the second quarter was around about EUR 15 million to EUR 20 million on the bottom line. In terms of Polycarbonates growth, we actually saw minus 1% between quarter 1 and quarter 2 in the Polycarbonate market and in our own sales. That is driven, primarily, by Asia. Remember, 60% of the whole polycarbonate market is now Asia, and about half of that is China. The industry segments within that, which are causing that decline are really a slowdown in the electronics industry, particularly, consumer electronics. And also, some slowdown, to a lesser extent, to some in the automotive industry in Asia as well. We are also seeing much increased competition in Asia, which is the pricing effect. There's 2 dynamics there, you have the highest concentration of competitors in Asia, because it's the main market. But you also have 3 Japanese suppliers who are benefiting from the weaker yen and able to compete much more easily in Chinese markets. So what would we need to see to make it look happier? We need to see a return back to the 5% underlying growth rate. And to see that, we need to see the recovery, primarily in the electronics and automotive sectors.

Operator

The next question is from Mr. Matthew Weston of Crédit Suisse.

Matthew Weston - Crédit Suisse AG, Research Division

The first, could you please just clarify your comments around full year '13 guidance being increasingly ambitious? As I see it, your 2 biggest divisions were significantly better than the market expected in the second quarter. We've just heard from Liam about being very, very confident to meet guidance and you've raised expectations in Pharma. So I'm just trying to understand the message. Is it highlighting that you've kept it flat but that's actually a significant improvement because of the drag from MaterialScience? Or are you actually telling us that there's a real chance that you may have to revise down in the second half of the year? And then, a couple of other quick ones. U.S. Stivarga sales seems to have plateaued 2Q on 1Q. Is there a reason why and do you believe that we'll see a recovery in the second half of the year? And then on China, clearly, an important geography, the HealthCare business at Bayer. Incremental revenues, increased investments in SG&A in that category. Given that some of the problems of your competitors in that market, are you confident that you have the right compliance and controls in place within your Chinese business? And have you been approached by the local authorities over any concerns around marketing practices?

Marijn E. Dekkers

Okay, Matthew, thank you. Just -- I'll answer the question first on the guidance. So what we have said is we are reiterating our guidance that we gave in April of 2013, 3 months ago, even though it looks to be increasingly ambitious. And there's another sentence in the earnings release which basically say it remains to be seen how the weakness in MaterialScience -- and this is weakness vis-à-vis our plans, not vis-à-vis consensus, for we guide vis-à-vis our own plans. That weakness is compensated by the good performance, stronger, particularly in Pharma, than we expected in our Life Sciences business. So that is one part of it. The second part is that we, of course, do certain foreign exchange assumptions, which we are doing based on the average of the first half of the year and then, carrying forward into the second half of the year, where there's also some uncertainty. So I would say that, that sentence of increasingly ambitious comes from the weaker-than-expected performance in Materials, and the question on to what extent Life Sciences will be completely able to compensate for it. But for now, we believe that, that's the case, and that's why we reiterated our guidance. Okay, then, the Stivarga sales.

Wolfgang Plischke

Yes. Thank you for the question. Stivarga, I believe, had a very strong launch trajectory over the first month in the U.S., reflecting the unmet need of a patient population who are waiting for this new treatment. We continue to see those in the U.S. at a slower rate than at the initial launch. And we will, I believe, see further progress in the United States, and we are fully committed to further drive the progress of Stivarga in the United States. But we also will see a pickup with the launches in Japan and later this year, probably, in Europe. And this is already somehow exemplified in the progression we have seen from the first 2 quarters.

Marijn E. Dekkers

Okay, Matthew. Then, your question about the GlaxoSmithKline situation in China. Let me just start with saying that compliance is a very important focus to the entire -- it's obviously, our strict policy to comply with all laws, rules and regulations, and we have a zero tolerance policy for employees who do not fully comply with these rules and regulations. And to answer your specific question, we have not been contacted by the Chinese authorities in connection with the GlaxoSmithKline situation.

Operator

The next question is from Mr. Andrew Baum of Citigroup.

Andrew S. Baum - Citigroup Inc, Research Division

It's Andrew Baum from Citi. All quick ones. First, you've guided down for the full year tax rate. Perhaps you can outline what's driving that and whether that's sustainable and can be further improved on? Second, could you comment on, after R&D, whether Xarelto will be profitable as early as next year? And thirdly, Xofigo, perhaps you could comment on both the rollout, as well as the timing of initiation of Phase III combination trials?

Marijn E. Dekkers

Okay. Let's start with the tax rate. Werner?

Werner Baumann

Yes, Andrew. Yes, we've taken our guidance on tax rate down by a percentage point to around 25%. And given that, we are, year-to-date, we believe that's a very achievable rate. And yes, I can also confirm that, yes, it's going to be sustainable going forward.

Marijn E. Dekkers

Okay. Then, profitable -- and is Xarelto is profitable, Wolfgang?

Wolfgang Plischke

I guess, we can follow your expectations that we'll be profitable next year. Xofigo might be checked with a little bit more insight. We have started to roll out Xofigo end of May, so we have 1 month experience in the second quarter, 2 months experience now. The primary focus, so far, is to get sites licensed to be able to procure and administer the drug. There, I can give you 1 figure, an update on the number of patient-ready sites across the U.S., and as of July 12, this stands at 164 sites. And we are positive that we will see a progression of these sites. And we see progression of the sales. But for sure, at a slower rate than we have seen with Stivarga, for example, because it's a more difficult set-up. In terms of Xarelto trials, additional studies, you asked, I'll just repeat what we have said so far. We intend to conduct studies in the earlier settings of prostate cancer, including combination studies. And we will also go for some exploratory studies in other tumors like breast cancer and osteosarcoma.

Operator

The next question is from Mr. Florent Cespedes of Exane.

Florent Cespedes - Exane BNP Paribas, Research Division

Florent Cespedes from Exane BNP Paribas. A few quick questions. First, on HealthCare, could you give some color on the emerging market performance for Pharma and Consumer products? Secondly, on Xarelto, do you have a quick update on where you stand regarding the antidote? And the last question, for Werner, on the net debt, what is the reason why you now expect there's some EUR 8 billion net debt at the end of the year versus EUR 7 billion?

Wolfgang Plischke

I'll go ahead. Florent, thank you for the question. Emerging markets, you have seen that in HealthCare, we have had a growth in the emerging markets by 8%. If you're interested in the performance in various countries, in China, we had a growth rate of 12% in the second quarter of 2013. In Russia, for example, we had a growth rate of 12%, especially driven by our Consumer Care business, 27% growth in the second quarter. And Brazil, I would like to highlight here, totally in the second quarter, also impressive 9% growth, also very much driven by our Consumer Care business, 45% growth in Brazil. Then, in answer to Xarelto antidote, this development of the antidote is ongoing, also with an external partner. As you know, we entered into a clinical collaboration agreement with Portola, and we have our own activities ongoing. There's nothing more which has to be reported now.

Marijn E. Dekkers

Okay. Werner, the net debt situation?

Werner Baumann

Yes, Florent. It's by and large explained by 2 factors, one is M&A. We have acquired, and have already part of our net debt at the end of quarter 2, Conceptus. And as of July 1, we have closed on Steigerwald. These 2, together, account for just about close to EUR 1 billion. And then, next to that, you will have seen that we have had to take an additional charge for the acquisition of Schering. It's a recent joint -- a recent verified courts in Berlin. It's another EUR 300 million. And those 2, together, leads to a change in guidance by roughly EUR 1 billion in net debt.

Operator

The next question is from Mr. Richard Vosser.

Richard Vosser - JP Morgan Chase & Co, Research Division

It's Richard Vosser from JPMorgan. Just going back to the Consumer business, and just wondering how you're going to ensure that your investments in Consumer, where you're getting obviously very good growth in the emerging markets, bring you profitable growth? How should we -- and aligned to that, how should we think of the margins going forward? Are they going to be under pressure while these rollouts continue and the rollouts of the brands in the U.S. as well? So an idea there would be very helpful. And then, on the CropScience business. The EBITDA that we've got so far in the first half is substantially stronger than last year and I think will be heading towards more than single digit -- high single-digit growth for the year. So just trying to understand what headwinds we should see in the second half. I think you've alluded to returns, but are there any other substantial headwinds we should think about when thinking of the EBITDA? And also, on the top line for the CropScience business, are we going to see any spillover of demand from the Northern Hemisphere into the third quarter from the delayed season? Or is it effectively going to be shorter? And I noticed that the Latin America, that was very strong in the second quarter, is this going to have any impact on the development in H2, has there been any pull-forward here?

Marijn E. Dekkers

Okay. So Wolfgang, the Consumer Care investments, do they lead to profitable growth and how should we think about margins?

Wolfgang Plischke

Thank you for the questions. You should assume that we carefully assess our investment into the Consumer Care business. And we are carefully selecting the countries and the trends that we are investing in to assure the appropriate margin development also in the future.

Marijn E. Dekkers

Good. CropScience, its potential headwinds in the second half?

Liam Condon

Yes. Apart from what I mentioned about seeds returns, which we can expect in the third quarter, we have the issue of, basically, the fourth quarter for us being very, very dependent on Latin America, where we have a specific product mix and simply, a different profitability than what we have in -- what we tend to have in the first and second quarter, which is driven by the Northern Hemisphere. So this issue of product mix and with that, also, various risks that we would have on the logistical side. These are headwinds that we normally face in the third and fourth quarter. The issue of spillover of, do we reckon there might be spillover of demand, somehow, in the Northern Hemisphere from second quarter into the third quarter? We don't necessarily see this. We think that the second quarter ended relatively normally in the second quarter, from our perspective. And in Europe there was, for sure, a lot of purchasing of fungicides due to the rain and then, the heat that followed towards the end of the second quarter. This is more or less factored into our plans that, then, the third quarter tends to be a little bit weaker. So we see that as a normal pattern and so we don't expect, let's say, a higher third quarter in the Northern Hemisphere. And we do believe that there are some missed applications that the latest season will be shorter, particularly on the herbicides side and because of the very long, cold and wet winter. In Lat Am, it's correct, we have a very strong, it's an unusually strong second quarter, particularly on fungicides but also on insecticides. And this is, for sure, related to preordering for the season later on. And this has to do, I think, with at the end of the day, it's a big sign of confidence in Lat Am, particularly in the Brazilian market. And there is, I think, some concern in the market about the ability to deliver. Some of these customers want to ensure that they can actually get adequate supplies and they are ordering earlier than before. And we expect the fourth quarter to be very, very strong in Latin America. And we don't see, let's say, this early purchasing having any negative impact on our ability to deliver, particularly in the fourth quarter. And so we think it's more a sign of confidence in the overall market development, particularly in the fourth quarter for Latin America.

Operator

The next question is from Mr. Christian Faitz.

Christian Faitz - Macquarie Research

Christian Faitz from Macquarie. I have a couple of questions, first of all, on CropScience, congrats on a great first half. Can you talk about potential channel inventory due to the adverse weather in the U.S. on the Crop Protection side? And then, also on CropScience, there seems to be additional competition on the horizon for canola in Canada. Can you tell us how you feel about a new entrant trying to get some of your own comfortable market share? And then, MaterialScience. Can you talk about the current demand situation in China? And also, Patrick, you mentioned that there are some demand in automotive having affected your Polycarbonates. If I look at global automotive volumes, they seem to be quite okay. So what's the specific issue there on the demand side for automotive?

Marijn E. Dekkers

Okay. Go ahead, Liam, on the inventories.

Liam Condon

Yes. On the inventory side, particularly in the U.S., we believe there's no, let's say, unnecessary or additional stock buildup. And there was, at the end of the day, there was -- all the information that we got was absolutely no additional buildup whatsoever. I think what was interesting was if you split out North America between U.S. and Canada, you see a very different development. U.S. was hit pretty hard both on Crop Protection and on the Seeds side. And whereas, in Canada, there was actually a very strong Crop Protection business in the first half of the year, which is largely driven by cereals. So you'll see it a little bit differentiated in North America, and we are not concerned about a buildup of stock or of its inventories at this stage in the U.S. Related to canola in Canada, we have a situation that we are basically, very clearly, the market leader with approximately 50% market share. And as I mentioned earlier, we have a what we call, kind of, the solution here, which -- not just seeds, top, top-quality seeds, but also Crop Protection and SeedGrowth as supporting products. And this total package is pretty compelling and there are -- there is a new competitor entering the market, but we don't believe the total -- that their package will be as compelling as ours. And we would, let's say, we are confident of maintaining our market leadership in canola and cotton, which is a very profitable business for us. So we will do everything to defend it.

Marijn E. Dekkers

Okay. Thank you. Thanks, Christian. Oh, sorry.

Patrick W. Thomas

Christian, on the China effect. There's a couple of effects going on in China, going on in Polycarbonates. One is in quarter 1, the trade has had very, very high stocks. In quarter 2, those stocks seemed to reduce. So that actually is not good, positive news. All industries are relative in China, what we see is very strong footwear and furniture demand, which is good news for our Polyurethanes business. Automotive is kind of mixed, as foreign brands are taking market share in China at the moment and they are growing better than domestic China demand -- domestic China production. And in construction, we see the weakness, which is really the cooling off of the property bubble, which is government driven. The other effect we see in automotive is a rather unusual one, it's the first time we've ever seen it, and that is the Refinish business, which is dominated by two-component polyurethane, has really dropped off dramatically in the first half year. And this can be put down over a number of effects. One, these people are just not getting their cars fixed because they just not got the cash, or they're taking the cash from the insurance and not using it to repair their vehicles. But that's -- that market, the Refinish business, which is very important to us, was down about 12% year-on-year. So an unusual effect. Never seen it before. In part, two-component polyurethane is growing in OEMs, but is still really dominated by this Refinish business. Typically, people don't repair scratches in lots of Asian countries. And so the Refinish business, which was beginning to grow, has slowed down. And we can't really explain and nor can many of our customers.

Christian Faitz - Macquarie Research

Sorry, just to clarify that, Patrick. When you talk about Refinish, you're talking about global trends minus 12%?

Patrick W. Thomas

Yes.

Operator

Your next question is from Mr. Steve Chesney.

Steve Chesney - Goldman Sachs Group Inc., Research Division

Steve Chesney from Goldman Sachs. The first, back to guidance, given the update to the Pharma new product guidance for 2013, just wondering how we should think about your EUR 2.5 billion target for 2015. And then, a quick question on the earlier stage pipeline. It seems you have published some fairly interesting Phase II results for the MR antagonist in chronic heart failure, particularly in terms of safety. I was wondering if you could just give us a quick update on development plans and timeline for the heart failure and diabetic nephropathy indication? Also finally on riociguat, ahead of the Advisory Committee in early August, I wonder if you could describe the evolution of your Commercial organization, and assuming you receive a positive recommendation, when do you think you could launch the product?

Marijn E. Dekkers

Okay. First, start with guidance for 2014 and '15 on the new products.

Wolfgang Plischke

Yes. I understand your interest in this, but I cannot see the progress in the third quarter, fourth quarter and the guidance we have given this year. For sure, we are positive about it, but it's not the time to discuss this activity today. Second, MR antagonist, I'm not in the situation to be able to share any more insight with this product. And I have to apologize. But then, we have the next opportunity at our Meet Management meeting, more than willing to share some more insight into the MR antagonist. Riociguat, I can. We are in preparation for a launch of the product because being optimistic, we are expecting or are prepared for a launch still in 2013. You have probably heard or are aware of the fact that we have an [indiscernible] at the FDA on August 6. The PDUFA date, also public action date is in October in the United States. We are quite excited about this new entry because it is further strengthening our cardiology franchise. And especially in this segment, with this new mechanism, with this new target we are approaching here, we are rather unique. There's no competitor around with the ability to treat a pulmonary arterial hypertension and CTEPH, and probably, we'll get approval for both of these indications.

Operator

Your next question is from Mr. Damien Conover.

Damien Conover - Morningstar Inc., Research Division

It's Damien Conover with Morningstar. Just 2 questions. I had a question on Betaseron. Just was wondering if you could update us with your outlook for the product given the strong launch of TECFIDERA? And then secondly, a question more strategically on the pipeline. Given the very strong success that you had over the recent years of bringing products through the late stage, the late-stage pipeline now looks a little bit more depleted. I was wondering if there is an effort here to really try to reinvigorate that part of the pipeline? And then, also, if you could highlight any late-stage pipeline products that you think have the most potential?

Marijn E. Dekkers

Yes, Wolfgang?

Wolfgang Plischke

Yes. Thank you for this question. First one was around TECFIDERA, Biogen. What I can tell you there is, yes, they are increasing market share. That's happening, that's what we are observing in the market. In terms of our pipeline and the next interesting assets you will see that we mentioned only 2 or 3 of them for the time being. MR antagonist was mentioned already by one of your colleagues. That's a very exciting asset. PI3 kinase, we also have one in development, also a very interesting pipeline asset. Then, we have another sGC compound in development, also very interesting, very unique for Bayer. So what we are currently doing is to further push our ability to accelerate these assets in order to have a clear sustainable growth story also for the future.

Operator

Your next question is from Mr. Ronald Koehler with MainFirst.

Ronald Koehler - MainFirst Bank AG, Research Division

Ronald from MainFirst. First question on HealthCare, with firstly on Nexavar, you spoke about price increases. Can you a bit elaborate what these price increases were in U.S.? And did you have any other of that kind of meaningful price increases in your portfolio? Second question on CropScience. Obviously, everyone is extremely bullish in Brazil. We heard Syngenta saying that they had like a 25% higher inventory prepared for Brazil and you said, at the same time, people are a bit scared that they do not have enough product available. Is there a risk that, meaning, if the weather would be better so that you would sit on a lot of inventories, including your own, I guess? So how your preparation is for the season and, yes, 25% or something like that, is it really an achievable number? Third question on -- Patrick, on Bayer MaterialScience. China. Could you a bit elaborate or obviously, or words which could inform in terms of what you would expect some, let's say, smaller stimulus or anything which you're looking forward for the second half in China? And a second question on Polycarbonates. And obviously, you're talking about this long-term growth in 5%, 6% or so. When I look at, let's say, the last 1.5 years, I haven't seen any growth in your portfolio, so either you're losing market share and the market is growing or the market stopped growing and obviously, if you can a little bit elaborate, is there still a growing market? Are you losing market share? Or what's the development and why are you not growing?

Marijn E. Dekkers

Okay. Thanks. So let's start with Wolfgang, the Nexavar pricing, please?

Wolfgang Plischke

The effect you see in the sales here is partly in light of price increases in the U.S. That's the only price increase that we did for Nexavar. And I don't want to comment about future steps. Then, I have to go back to the first -- I missed 1 point on Betaseron, outlook for Betaseron. So for Betaseron, we have a guidance now that the sales will decline by about 10% in the future. You might have also seen an effect in the second quarter, a stronger decline. But there, you have to compare the second quarter of 2012, which was exceptionally strong because at this time, we had price increases in the U.S. And we also had some other effects like some FX headwinds, et cetera.

Marijn E. Dekkers

Okay. Good. So let's go to Brazil, CropScience.

Liam Condon

Yes, you're absolutely right that everybody is very bullish on Brazil at the moment. Latin American in general, but specifically, in Brazil. And this is, let's say, largely based also on our pre-order books. So apart from sales that we have already invoiced now in the second quarter, what we clearly have, as well, is very firm indications of what the orders will be for the fourth -- for the third and fourth quarter. And this is very, very strong pre-ordering. So we are, let's say, not at this moment concerned about inventory buildup. Our main concern is actually ensuring that we can supply the market adequately. That is a top priority and top attention for us at the moment. There's always the issue of weather impact and risk that something might happen, but the reality is, in Brazil, business tends to be much less volatile from just on an agricultural weather point of view than in the Northern Hemisphere. It's, in that sense, much more reliable. With great heat and usually fairly reliable rain, so it's perfect ingredients that come together there, which is at the end of the day why the region is booming so much from an agricultural point of view.

Marijn E. Dekkers

Good. So Patrick, on MaterialScience, any insight in the politicians minds with respect to some stimuli?

Patrick W. Thomas

No particular insight in terms of politicians' minds, but particularly in China, there's been some announcements of new stimulus to try and avoid the economy slowing down too much and I guess everybody has seen that in the paper. What we -- I think probably the most common sentiment people feel at the moment is when the government announced its 7.5% GDP. We feel like 2.5% GDP. And I think a lot of the industrial players are feeling the same sort of sense in China at the moment. So this lack of infrastructure projects, railway transportation, the latest ban by the Chinese government on any new government buildings. So regional governments are now stopped from building their large, opulent office buildings. That's slowing down the construction sector. And I think the stimulus that we've seen in the past around domestic appliances and things haven't really been repeated. And the scheme that was running to promote electromobility and electric vehicles doesn't -- although the scheme is there, it doesn't seem to be being picked up by consumers. So I think there's been a mismatch, sometimes, between the aspiration of the Chinese consumer and the stimulus being used by the government. So I think that's all I can really say about China on the stimulus. In terms of Polycarbonates, I think last year, 2012 Polycarbonates grew worldwide by 8%.

Ronald Koehler - MainFirst Bank AG, Research Division

Sorry, I didn't catch that. 8, is it?

Patrick W. Thomas

8%, yes. Last year, the world market grew by 8% which was well ahead of the norm. This year, we saw I think, some minus 6% in quarter 1 and then, a minus 1% between quarter 1 and quarter 2. That's -- we haven't got the year-on-year numbers yet. But when we next get together, we'll have a chance to share the detailed numbers as they come out on Polycarbonates. It's something we are watching very, very carefully. Construction industry is certainly lowering [ph] the value chain and it's not growing strongly. We are following what I'll call, a "value before volume" approach in Polycarbonates. If you look at our mix, the reason our price levels are relatively stable in PCS in quarter 2 is because we've increased the volume of compound and more advanced resin material business compared to the more quality grades that we'll be going into on full-paced storage and into extruded sheet, for example, for construction. So there's a bit of a re-management, rejiggling of our portfolio to reduce the vulnerability to the construction industry in particular, to reduce vulnerability to the declining optical data storage market.

Operator

Excuse me, Mr. Rosar, no, there are no further questions at this time. Please continue with any other points you wish to raise.

Alexander Rosar

Okay. Ladies and gentlemen, also on behalf of my colleagues, I thank you for being with us on the call, and for your questions. Before closing the call, let me draw your attention to our next Investor Relations event, which is our Meet Management meeting on October 8, in London. Hopefully, we'll see you all there again. Thank you, and goodbye.

Operator

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

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