Merck KGaA (OTCPK:MKGAF) Q2 2013 Results - Investor and Analyst Conference Call August 7, 2013 8:00 AM ET
Constantin Fest - Head, Investor Relations
Matthias Zachert - Chief Financial Officer
Amy Walker - Morgan Stanley
Holger Blum - Deutsche Bank
Matthew Weston - Credit Suisse
Steve McGarry - Societe Generale
Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the second quarter results 2013. As a reminder, all participants will be in a listen-only mode. (Operator Instructions)
May I now hand you over to Constantin Fest, Head of Investor Relations, who will lead you to through this conference. Please go ahead, sir.
Suzanna, thanks a lot and welcome on the call for Q2 2013 results. I am very happy to have our CFO, Matthias Zachert with me here today. During this call, we would like to briefly go through a few slides in the presentation and then will be happy to take your questions. With this, I would like to immediately hand over to Matthias.
Warm welcome to my part as well. I would like to start the presentation on page four immediately. What can be noticed from the second quarter is that overall we delivered another quarter where all financial statements as relates to profitability, cash flow but also balance sheet strength going the right direction.
We posted an organic sales increase of around about 3%, but of course had to experience also tougher market environment especially as it relates to currency headwinds. As far as our efficiency program is concerned, which we will just announced round about 12 months ago in May 2012, we're fully on track. By now have also implemented the efficiency measures and initiatives in France, which we're still due in the first quarter and we found an agreement in the second quarter and we're now implements this initiative accordingly in the third and fourth quarter.
Last but not least on the efficiency measures is that eventually in the second quarter, we were able to sell our Geneva headquarter close to the (inaudible) which of course lefts it's mark in the financial statements which is predominantly visible in the cash flow contributions that we've seen.
As far as divisions are concerned, we can basically communicate an increase in margin expansion in nearly all of our divisions but one reflected a double-digit EBITDA increase pre-exceptional items.
As far as EPS pre’s concerned I think you can even see an increase of 18% being part with a steep reduction in net debt which in the first half of 2013 has led to a stronger balance sheets which was reduced in terms of in debtness by round about €600 million leading also that two positive upgrades by Standard & Poor’s and Moody’s.
Let me now come to page five and here a specifically through the two columns that you see on the upper part of the slide. Organic growth wise we are in all respective divisions well on track, as far as overall group is concerned I had alluded already in the first quarter to the fact that we had a relatively modest comparable based Q1 2012, while the other two quarters, especially Q2 and notably Q3 had higher reported sales due to at that point in time, where the currencies were favorable across the globe and in North America and also in Asia.
Now in the second quarter this year versus last year, of course you see a decline of 4% reported wise in currencies and that would be even a slightly bigger number in the third quarter as of course here last year, some of the currencies were stronger than compared to this year.
So therefore please assume that this Q2 trend is going to be one on currencies that is reflected also in the third quarter. Organically however, I think we are clearly are going into right direction, and you see that on page six if you go through the set up that we have, we continue with the momentum that we posted also in the last several quarters.
The organic sales growth is coming like in the past from emerging markets, and they are from this very, very diverse space that we have around the globe. We have posted also a nice favorable increase in North America spanning from Merck Serono that is notably also from Merck Millipore.
While Europe remains sluggish also that is something that you have seen in the past. A little change to previous quarters is Japan and the other companies associated to this area and we see a very nice performance of 6%, which is the reflection of the launch of Erbitux pattern in Mexico and Japan. So this in the second quarter becomes visible. Unfortunately, it’s reported wise eliminated by the strong devaluation of the Japanese Yen.
With this, I would kindly up to you to move your attention of page eight, and here are two our key financial indicators. Reported sales as indicated organically have gone up but being reduced by the currency contraction. Participants keep us away posting strong fundamental numbers. EBITDA pre we expanded by around about €80 million versus previous year which was already a decent result, margin expanded by round about some 300 basis points which I think shows you clearly the structural improvements that we were able to achieve despite currency headwinds.
EPS, as I mentioned, this is an even stronger over proportional growth. And as far as operating cash flow is concerned please take a note of the fact that we had last year substantial one-time benefits through working capital improvements, which of course is not something that we can repeat this year. We keep our working capital tightly managed and still post round about 22% on sales and our working capital is reflected that used to be 30%, 1 to 2 years ago.
So here tight management continues, but of course an operating cash flow different to last year. We now see cash flowing out for the restructuring charges we took last year. In the second quarter we catch out round about 70 million.
So if you adjust working capital and restructuring cash, you will see that underlying operating cash flow has been very healthy in work again. This among others has led to a nice reduction in overall net indebtedness, and it's not worked even in the last six months, we could reduce net severe indebtedness by 600 million despite second quarter being normally a quarter with the net debt position remain stable or even slightly increases due to dividends being paid from interest and employee participation programs, of course being in the money around the globe.
With this I turn the attention to page 9 and here show the reported numbers. Of course this year versus last year are hardly comparable. We post strong reported EBITs while last year we took the lion’s share of one-time restructurings in the P&L which this year in the second quarter have been clearly smaller charges.
As far as financial result is concerned, you see that’s reduction in interest of course occur as we have deemed the bond last year and another bigger bonds will be redeemed in the second half of this year with (inaudible) here, the financial results position should also further improve going ahead.
Of course, in light of higher profit, we have to buy and pay higher taxes, but I think you see here that our tax ratio of 24% is one that goes in the right direction, leading bottom line to a nice expansion and reported EPS.
Let me now address the segments and I'll start with Merck Serono on page 10. So the same trend that you see on group sales, group reported sales becomes visible also in Merck Serono organically and most of our products we're doing respectfully good. However currency is putting harm on reported sales as well. Costs are tightly managed everywhere on marketing and selling, admin and also R&D, while on the later one I course refer to charges that we took last year for the Erbitux programs. On R&D, however, we're well on track to reduce infrastructure costs while expending clinical investments.
So this in essence has led to a very nice and visible margin expansion from below 30% to above 30% which I think shows you the structural change. A few elements that I would like to shed further light on is of course the royalty income line that has reduced and this is in line with we guided for last year when we announced that royalty income would come down in course of 2013 and ‘14. So now Avonex has in May, beginning of May 7th may run out in terms of patent and contribution for the royalty income. So you should now assume that round about $13 million quarter-on-quarter for Q3 and Q4 will of course no longer be in our P&L going onwards from Q2.
And the second element here is the comments I would like to make on Rebif, I think we have done our work on Rebif nicely and of course in the second quarter you will see the price increases that we have posted in the last six to nine months respectively. We are quite happy with the launch of the RebiDose on our new prescriptions. We see that 6% to 8% is basically now going to RebiDose. So this is something that is enlarging our position or defending our position in a better way and of course we take note of the tougher competition that we're respectively preparing for.
For some of you, you might have seen that on 1 August, we took another price initiatives after various competitors went out already in June and the months before with price actions we have considered 6% to 7% price increase for Rebif from 1 August onwards as appropriate.
With this, ladies and gentlemen, let’s turn the attention to page 11, consumer health. Here we had very, very strong punch in Q1 on reported growth, sales but also profitability indicated that second quarter will face tougher comparables. As a matter of fact, business has performed better than we had originally expected. So the sales contraction was modest and we are slightly better than EBITDA pre last year, few 100,000s not that visible, but what I would like to convey to you is that here we consider ourselves better positions compared to last year.
My indication all the conference calls was that this business is still a little volatile and we had started the transformation project a little later in consumer health. Now in 2013, with half year numbers going exactly in the direction that we aspire to report, we have considered that business is far better positioned in ’13 than in 2012. So also here the initiatives that we started on focusing on the strategic brands, focusing on the right markets and changing the results allocations that turns out to go in the right direction.
Let me now move to page number 12, and it’s difficult to use the right words for such a unique quarter, it definitely is performing even strong than in Q1, which was already an exceptional quarter, so after exceptional quarter we call this a unique quarter and here despite currencies going very much against us. So here the organic growth is reflected through the technology improvement that we do in our current existing technologies leading to strong function [PSDA], leading to strong improvement on IPS versus TN-TFT technology, I think here we have given all the communications while we like these different technologies and of course bottom line that is next to the treatments contribution and which was also more visible to a nice overall quarterly results.
On page 13, however, I would to like make very clear again and indicates that expectations need to be modest for third and the fourth quarter in light of the inventory stocking that we still see in the chain which does not reduce really in the second quarter and it’s according to our Q1 feedback expected also today for the second half of the year.
The comment I would like to make is that third quarter, the tendency foreseeing destocking in the third quarter can be there, but is considered from our perspective is not in that eminent due to the fact that the different manufacturers normally keep their stocks for Christmas season and therefore our assumption is it will happen in the second quarter but the likelihood that this will be visible is rather for the fourth quarter and not for the third.
On page number 14, I would now like to make a few comments on Merck Millipore. Here we see a very strong organic growth, so far the life science tools companies have posted results more in the neighborhood of 3 to 4 percentage points, organically we come up with 6% which is I think a good performance being predominantly driven by our Lab Solutions business here namely bio monitoring and lab water, where we have also very, very strong market position and it’s fundamentally also our single used products of the biopharma production orders in the Process Solutions business. So they continue delivering very, very good momentum above industry growth rates and therefore this is a clear positive.
Cost are managed, but unfortunately and this was an element I looked into more detail in the quarterly close not everything has gone down off the line, we slightly improved versus previous year, but it could have been better, if currencies had not turned against us, which I would like to explain in more detail on page 15.
So what you see here is specifically the exposure we have to the Japanese Yen and last year the sales wise it loss slightly above €600 million. We have one-third in each of these business. Merck Serono, Performance Materials and Merck Millipore, we buy a large invoice in Japanese Yen. However in Performance Materials and Merck, Serono, we have a real cost structure behind it [whilst] in the Millipore, this is literally not existing few sales reps but not a big organization and for that very reason the entire invoicing that we do in Japanese Yen is of course is very quickly over the last few months leading to a margin erosion in the neighborhood of more than 20, 25, 30 percentage points to the invoice, due to the devaluation that occurred in the Japanese Yen.
But we of course are looking at Merck Millipores now at the product-by-products position that we have in Japan and wherever we see differentiated products and contracts running out, we will of course investigate whether this can be mitigated and I think this is something that’s in many companies are experiencing that look at Japan these days, exporting to Japan, but as the Japanese government is striving for higher local inflation, I think corporates around the globe will contribute to this.
On page 16, the only marks that I would like to make is that of course, we prepare for redeeming the bonds that is due in the second half and as a matter of fact, it’s coming up in the next month or two months. So for that very reason we have now, of course a lot cash and marketable securities which will then be used for deleting the bond’s maturing.
The second element I would shed light on, back to shed light on is property plant and equipment so here you see that’s next to some depreciation of course very visibly the Serono headquarter at Geneva is no longer part of our balance sheet. So this chapter has also finally been closed.
Let me address three lines on the cash flow statement on page 16, so here third line changes in provisions, last year reflects the one-time charges, this year reflects of course one-time charges that we provision for it, but equally round about €70 million flowing out for respective severance payments, changes in the working capital in line number seven shows you that last year we had a strong one-time in-flow in working capital.
Also this quarter, we managed our working capital. We still hold working capital to sales ratio of 22 which for industry strength I think its sounds and of course in the investing cash flow, you will see the proceeds that we've received notably for the Serono headquarter, thus leading to a reduced investing cash flow.
With this, ladies and gentlemen, let me turn to page 19 on the group guidance which is of course done and reported in currency like the shareholder is exposed to reported currency, we want to set in the same boat as you are and here we confirm our group guidance different to other companies in Europe.
We basically mitigate the negative headwind that we see on the variety of currencies that unfortunately go against us and confirm guidance items sales 7.7 to 10, EBITDA pre at 3.1 to 3.2 and EPS at 5 to 9. So with Q1 and Q2, we consider ourselves fully on track to let deliver in this range but of course keep in mind, you should always be in the guidance provided by the group and this of course holds true at group level but also at segmental level.
And with this, I would like to turn my words to page number 20, where we are more specific, of course again on the four divisions that we have. Here basically, everything has remained stable with one exception that we upgraded performance materials based on the good second quarter performance. Originally, it was between 700 and 740. I know most of you went to rather the 740, now operationally we clearly see ourselves in the 730 to 750 corridor, so this a sign of confidence and not a sign of weakness. And of course it helps us also to mitigate the currency shortfalls we are basically seeing especially in the Merck Millipore division and also in the other two divisions that equally being impacted.
Ladies and gentlemen, this is Merck second quarter and I would now like to open the floor for your questions.
(Operator Instructions). The first question comes from Ms. Amy Walker from Morgan Stanley.
Amy Walker - Morgan Stanley
Good afternoon, it’s Amy Walker from Morgan Stanley. I have three questions all on Serono please. So the first question, can you talk a bit about your Anti-PD-L1 assets in the pipeline. It looks like that seem develop through (inaudible), is that correct? And do you think you might need to partner with another company to successfully commercialize an immunotherapy and oncology? And lastly when do you expect senior physicians really to tell that on that particular asset?
Second question can you remind us of the fixed versus variable portion of your R&D cost in Serono today and also where you think that quietly to move (inaudible) announced restructuring programs?
And then the last question Serono delivered cost upgrade EBITDA right this quarter, it may be seemed to achieve 250 million or 300 million Seronos I think by the end of this year. And I guess the rate is quite increases in potentially will moderate given we though generic on horizon as well. So with all of that in mind can you just help us to understand what you see the (inaudible) organic growth at Serono over the next 12 to 18 months, thanks very much?
So I address all questions in the opposite order of some chronology. As far as I see Merck Serono savings are concerned, I confirm that we are on track incremental so that we have communicated leading to the amount of savings in the P&L that Europe basis are even €260 million. Now as far as the second part of your question is concerned today we comment on the second quarter and of course the forecast for the year that 2013 on the moderate growth that we have communicated. It’s have never been my style in the last two years to make midyear comments on organic growth for the years afterwards.
So I think what you should understand is that we consider our portfolio in the position where we are trying to defense our of course two products. We have established what we like to continue growing in the business areas that we notably has in the emerging markets that have posted growth over the last several quarters and which should definitely be a growth engine also that going forward.
So when we enter into the year 2014, it’s of course likely then that we stop communicating our ambitions for organic growth in the next two years, but at this point in time we would stick to our sales to second quarter comments, full year comments and to deliver on the numbers that we have promised basically one and half years ago, because that would be the first time that we what's hopefully than deliver the items that Merck has promised to the Street.
On your second question fixed and variable, the comments that we made in May 2012 were basically that we had ratio on pure R&D costs. So taking out local R&D and respective investments and technical operations, we gave indications that the fixed and variable basis at that point in time was two-thirds, one-thirds leaning towards fixed costs being eventually and as I called it's deal entitled. And this by now more and more moved into the direction of two-thirds, one-thirds in favor for variable and from that you can see that we over the last one to one and half years have very, very nicely managed under the leadership of Stefan Oschmann and Annalisa Jenkins, the change of resource allocation, which is of course something which is beneficial going ahead.
As far as your comments on the pipeline compound is concerned, I'm very happy that you have taken note of it, it's something that's of course it's not becoming more visible in our Phase I clinical pipeline and this is that is in our hand. It is one that we would like to develop. We have made first comments on this (inaudible), but again it’s very early in the quarter and it’s feasible that if we advance likely further and we are going to make more communication on that in the next 1 to 2 years to come because our view is that of course right now in Phase 1 and Phase 2, we have changed, we have got more compounds into this Phase 1 and Phase 2 but it’s not yet the time to make noise about the pipeline. So we keep our feet on the ground we work hard in order to improve but improving the pipeline is more than 1 to 2 years, so this is something that we were most likely interest when we have something more to say.
The next question comes from Mr. Holger Blum of Deutsche Bank.
Holger Blum - Deutsche Bank
Holger Blum, Deutsche Bank. Just on the two follow-up on the liquid crystals inventory as situations this time, it seemed that the inventory level is roughly 2.5 weeks. At the chart you have shown that the Q1 level is more like released a little bit now, it seems that the market data has been changed a little bit going up. So maybe you could sum up where you see the inventory clear level and the change in the statistics likely whether it has import this quarter or part of that?
Mr. Blum it seems that you have used your ruler very carefully comparing one graph with the other. I cannot deny what you are saying. So as a matter of fact, second quarter we saw some little, little reduction in inventory but as you've said this is only half the week. So from 3 to 2.5, I think that is something that’s should not rock the needle too much. So therefore, I confirm what you have said but at the same point in time, I would clearly state that things should be put into perspective and this is the comment that we made on the second half.
Holger Blum - Deutsche Bank
Okay, thank you. Maybe a small follow-up on technical question on minorities (inaudible). Did you buy something out? Is at a spanning trending or just quarterly volatility?
We've not bought anything out and therefore you should that is normal quarterly volatility and nothing else. Next question please.
The next question comes from Mr. Matthew Weston from Credit Suisse. Please go ahead, sir.
Matthew Weston - Credit Suisse
Three if I can. The first on R&D, you stressed the move to more flexible costs and obviously a number of key trials have now come to an end with FIRE-3 stocks in April all now concluded. What should we expect for the second half of the year on spending because while I understand you may invest further in other early stage assets clearly the late stage spending will be significantly reduced and it will take time for the pipeline to refresh?
Secondly, on Rebif, can you just give us some indication as to your medium-term outlook the price in the interferon category given what you’ve seen from Tecfidera and the likelihood of generic competition next year?
And then finally on liquid crystals, Matthias as I understood your comments that you’ve just made, you are suggesting that 3Q is likely to be more normal whereas 4Q is the quarter where we should be aware of potential inventory reductions, so if I take what you’ve already delivered in the first half of the year, I assume 3Q is in line with last year that would suggest that by the end of 3Q, you will booked around 615, 620 of EBITDA pre, if I take the mid-range of your guidance that suggests 4Q is going to be a €120 million, which would make it the worst ever quarter in liquid crystals since the real fall off in 2009. Is that really what we should be looking for or am I missing something around Q3?
All very good questions, Matthew thank you for relating them. So let me address them one-by-one, but I start with liquid crystals, I think you should consider that destocking is something that modestly might be visible in the third quarter, but my personal assumption is if you look into the simply the seasonality that we have the likelihood is that the display manufacturers will continue producing potentially a little less strongly than in the past two quarters because they would prepare in light of their stock situation, they would still prepare for the Christmas season.
But then afterwards our internal assumption is that we might lose one to two weeks simply of normal order and pattern and that is of course something that with high utilization rates that we’ve shown in the last several quarters, this would then immediately reduce bottom by contribution to around 80 to 85 percentage points, so from this incremental sales reduction.
So here I would not go into direction that you have indicated out be little bit more humble on third quarter, but of course clearly more modest on the fourth quarter expectation and that is basically what our guidance shots leads to in your models.
Now as far as the interferon whole business is concerned, I think we have been very clear outspoken in 2012 that our view is that there would be more competitors coming into the markets and we see that with Tecfidera, we might see more with (inaudible) coming and therefore our rates will be, interferon class.
I think right now what you have seen is that the interferon also get market share in light of Tecfidera launch. I think relisted reasonably well, if you look at the new prescriptions in the markets that you see that we also lost round about 2% to 3% in market share but testing other compounds that has been harder it’s also in the interferon area, and this relates to Europe. This relates to the US and now we have to see what is going to happen in the next 12 to 24 months.
We cannot deny that competition as tougher. However, the generics that we have come on CapEx zone, we have to see how they will be priced. So far, we have seen that the US market has not being that price sensitive. So there is something that needs to be watched, we have to see CapEx complex owners not an easy compound, it’s not a pure clinical play so you will not see at least that is our assumption, you will not see such a dramatic price decline short generics come on CapEx owned and therefore we need to consider, how the market is changing in ‘14, each year the price sensitivity is going to change or not. And if pricing truly comes down significantly or not.
The only thing that I would like to allude to here is that we are very much focusing on [rebirth], we have adjusted the pricing all which definitively give some help in the quarters going ahead. And of course we are very focused on repositioning rebus versus the remaining interference and clearly have communicated that this is the area where we would like to over the next several years, defend our position and potentially gain our market positioning in the enter their own class very explicitly.
Now on the R&D costs your point is totally correct. Here we have they, they are the late stages, that they have come to an ends over the last several quarters. However we initiate also new trials and especially as you can see in Phase 1 and Phase 2 they are now more trials that are running at this point in time. And of course, I cannot excludes that we take the next two thresholds on the pancreas also other a favorable decision moving something from Phase 2 to Phase 3, which is something that we communicate quite happen and in the second half of this year.
So at this point in time for R&D, you should assume somewhat the spending trends that we've had in the first half of the year, potentially little more as you've seen in the second quarter going ahead the first quarter was a little higher for other reasons. But round about the level of second quarter is one that you should assume for the third and fourth quarter ahead.
With this I think I have answered all your questions. Next question please.
The next question comes from Mr. Richard from JPM. Please go ahead sir.
Hi, thanks for taking my question. So a couple of just you alluded to the high utilization rate in performance materials and obviously the cogs in performance materials has been very high. Could you give us some color on how much have utilization benefit is coming from pigments, how much is now performance materials and how sustainable this level, this much lower level of cogs is obviously into Q3, assuming no destocking and potentially in Q4.
The second question on Rebif, just coming back to the inventory adjustments that you highlighted in the presentation, just what sort of level of inventory adjustments were there, I think if I look at the price versus volume changes as in the prescription changes and the price rises, it pretty much explains the U.S. development, but if you could give us an idea of how inventory change and what do you expect that to change because of your latest price action?
So, Richard, it’s always a pleasure taking your questions on Performance Materials, let me give a little bit more color to it. In pigments, we have put in place a variety of initiatives that are being executed and we're here, I think with the fourth quarter conference call indicated that we took certain actions in various plants in order to achieve high utilization and moving it from 60% utilization to 80%.
By today, I would very much like to say that we are very, very much advanced in this regards and for that reason, the gross margin in pigments has clearly improved and that is something that we consider as sustainable going at.
As far as [LC] is concerned, there has not been any mentioning from our side that we reduce structure cost or infrastructure cost. However, here the gross margin improvements, you can clearly see extending from the fact that the mix has turned towards PS-VA and IPS and for that reason of course, the gross margin overall, has expanded and therefore you see simply higher profitability. This is sustainable or not, little bit depends also on the mix going ahead. Our current view is PS-VA and IPS will report stronger volume momentum also in the next quarters to come for the trends that we have conveyed to you end of April in our capital markets day events, and for that reason we should also see the trends going into our favor.
Now on your question to the wholesaler inventory reductions, we basically when we look at Rebif here, we have seen and the slides that we show in the appendix, we’ve basically seen wholesaler inventory reduction Q1 versus Q4, so you saw a bigger reduction on wholesaler events on the volume sides in the first quarter.
In the second quarter it was clearly smaller, a few millions but not double digits and that is what you have to understand in the entire the first half. We have taken a few days round about three days on inventory in the U.S. and that has reduced our volume contribution versus the last quarters in 2012.
The next question comes from Mr. Stephen McGarry.
Steve McGarry - Societe Generale
Steve McGarry from SocGen. Two questions, firstly on Rebif, can you give us an indication of what your view is for having how much headroom you have over the next few years from Rebif pricing which is before it might become counterproductive and just give us an idea the quantum?
And secondly also Rebif, can you maybe say something but course space supporting Rebif and for those any measures you take over the next few years to protect profitability of that franchise even to say was declined markedly?
And then thirdly on tax, you reported a tax rate of 23% in the first half indicating 25% to 26% and actually for the full year, is this based on a change in the geographic mix in second half of the year or are there any other factors there or maybe you just been very conservative?
Steve better taking your questions on price, I think what we have communicated on the Rebif pricing is basically the exiting by competitors pricing actions happening and therefore we are taking price actions as well. And for the forthcoming quarters and also for 2014 and ‘15 just look today not assume for the price increases. So we always have to monitor market environment, competition and product reason, and you should not assume further price increases on reverse going ahead.
So clearly this is the approach we take on the Rebif as of today and so the situation competitive large change we will always revisit, but this has been of course a decision we would take in future quarters or years.
As far as cost base is concerned, should we face an erosion difference to the one that we are assuming for the years to come, stronger erosion, of course we have to consider our cost base and I think this is quite normal for the product. It's more important to shed light on the fact that by end of 2014, sorry by end of 2015 our co-promotion agreement with Pfizer comes to an end which is far more positive implications than any cost elements on Rebif. So this is really the cornerstone that you should look at. We currently expensed hundreds of millions or transfer hundreds of millions on the co-promotion for the U.S. and automatically this is something that would drop completely by December 31, 2015.
Now on the tax side, you will notice the improved tax ratio, however he likes to reflect that in a current environment where you are still posting one-time charges in the substantial one-time charges, of course the tax rate is a little bit more volatile and therefore it's managed and with a 24% I think we are doing well, but you should not change the underlying ratio for the tax group which we communicated this to be between 25 and 26. Should we put respective changes here or should we achieve respective changes here, we would update this guidance, we have deliberately not done this cause the tax rates is right now not an area where we can reflect anything. So I hope this clarifies also question on the (inaudible). Thank you. Next question please?
The next question comes from (inaudible) from Bank of America.
Just three had for sure one. Need just a clarification comment from an earlier question on the longer term commentary. I think on the first quarter call you mentioned an aspiration to grow, Merck Serono EBITDA in 2014. Just in light of daily comments I wondered if you could just address that in license and Rebif transaction that was gain?. Secondly going on as in the slides you referenced the economic situation impacting overall market, I wondered if you could update on your expectations from by a similar impact than when that would be any greater given the price sensitivity, patients are allegedly showing at the moment. And then the final question is on the pipeline, just to clarify the Phase II go now go decisions, I know for the challenge system, you have access to exactly what date are we waiting for the full regulation discussions?
So first of all on the Merck Serono, what I said in Q1 conference call that we on Merck Serona, but basically for the Merck group, we are not trying to spend still with 2013. So we would of course like to develop this group Merck. And also over the next couple of years, if you look back into the last several years of Merck's history, you see that this company has evolved substantially. When the company was listed in ‘95, go back to this year they have been good years, they have been bad years, but fundamentally this company has substantially improved over the last several years and decades. And this is something that we want to bring to stop. As a matter of fact the management team that has started year 2011 would like over the next several years to strengthen Merck further.
But of course there would be volatility and there would be challenges and all of them we have to address and we cannot of course always predict that every quarter will be the better than the previous quarter, that is something that would be I'm serious and therefore the one thing that you should take as clear statement from our statement, we would like to change this company further structurally and in a healthier way.
As far as on specific guidance for Merck Serono and (inaudible) is concerned, I am not here to convey that, I am clearly giving guidance on the specific division only from the next year onward and would like to refrain compared to the statement I have made before. We would not stop end of the year on Merck.
Now on your second question on Gonal-f, of course we will face as indicated in the past or we assume to face also on Gonal-f that competitors will take some market share notably in Europe as this is something that we factored in to our plans. However, we clearly assumed that the emerging markets especially Asia we continue driving volume growth in Gonal-f and I think we are here as a clear market leader worldwide well positioned to therefore keep this business table or continue growing it. Even though we see after a year 2012 that so far in first half 2013 the market was a little bit more challenging because especially what we see here in Europe is in a recessionary environment the wish of couples to have a baby a simply not as pronounced as you have in positive economic environment and this is something therefore we have to take note of.
As far as (inaudible) is concerned here basically the discussions are ongoing with the regulatory authorities as we speak and that there are reason the communication on that we have conveyed to be in the second half of 2013 with the goal or no goal decision but at this point in time there are still interaction with respect to regulatory authorities and only once that happens we are going to make a call on this in the interim support. Next question please.
(Operator Instructions). So if there are no further questions in line, I would very much like you to look into the Merck Q2 numbers and see that the company in whatever financial statement item is it the balance sheet, is it the P&L, is it cash flow, I think yes in a not easy environment posed good results and are looking forward to see you all on the roadshow which is starting this evening and for that reasons see you on the roads. Have a good summer break and speak to you again with third quarter results. We look forward to it. Bye on behalf of Merck.
Ladies and gentlemen, thank you for your attendance. This call is being concluded. You may now disconnect.
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