Merck KGaA's (MKGAY) CEO Karl-Ludwig Kley on Q2 2014 Results - Earnings Call Transcript

| About: Merck KGaA (MKGAY)

Merck KGaA ADR (OTCPK:MKGAY) Q2 2014 Results Earnings Conference Call August 13, 2014 8:00 AM ET

Executives

Karl-Ludwig Kley - Chief Executive Officer

Marcus Kuhnert - Chief Financial Officer

Constantin Fest - Head of Investor Relations

Analysts

Amy Walker - Morgan Stanley

Matthew Weston - Credit Suisse

Steve Chesney - Goldman Sachs

Odile Rundquist - Helvea-Baader Bank

Michael Leuchten - Barclays

Marietta Miemietz - Prime Avenue

Ronny Gal - Bernstein Research

Operator

Dear, ladies and gentlemen, welcome to the Merck investor and analyst conference call on second quarter results 2014. (Operator Instructions) May I now hand you over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Constantin Fest

Thank you, Christina. Thanks a lot. A warm welcome on the call for Q2 2014 results this is, Constantin Fest, Head of Investor Relations at Merck, and I am very happy to have our CEO, Karl-Ludwig Kley, and our new CFO, Marcus Kuhnert, with me here today.

As always, we would like to briefly go through a few slides in the presentation and then we will be happy to take your questions. With this, I would like to immediately hand over to Karl?

Karl-Ludwig Kley

Good afternoon. I am happy to be here with you today. Just a quick run through some of the numbers. I am going to give some introductory remarks and then hand over to Marcus, who on his thirteenth day in the job has to justify the number which I had to run as the acting CFO in the last quarter. It's a good feeling to have him here to be part of the team and certainly all of you will look forward to communicating with him as we go along.

I start with chart number four with the highlights. It was a sound quarter from our judgment. All divisions growing organically. The emerging markets contributed particularly well which was part of our strategy as we told you when we moved into the Fit for 2018 program early in 2011. The acquisition of AZ has been completed. Integration is well underway. At the moment we see no roadblocks, stumbling points, so it's going smoothly. Also the cultural fit is very strong which helps in resolving business issues.

EBITDA pre-margin developed very well, not only reflecting organic growth and feeling therefore the currency affect and also cost control obviously contributed further to the good development of margin. Balance sheet is strong as always. Cash flow is strong and we confirm the full-year guidance for the company.

Let me move on to the businesses. In terms of percentage, the strongest organic growth comes from consumer health which was no wonder, as the division is mostly active in the emerging markets. Merck Serono and Merck Millipore coming in second and Performance Materials, of course, comparing to a strong quarter last year or the old performance, Performance Materials came in last at the organic setup. The only major portfolio contribution of course in Performance Materials, which then leads in absolute growth in the top line of 17.3%. Overall, of course, FX takes its toll which at the end leads to a moderate growth of 1.9% for the company.

EBITDA pre despite FX, despite the well known lots of royalty income shows a further improvement to €846 million. Of course in Merck Serono you see the minus 23 but if you remember the Avonex and Enbrel royalty income losses exceed already 30 million, so even there part of the royalty loss was compensated not only FX loss. So in terms of top line and particularly profit development, very good quarter and we are quite satisfied with the business development in the second quarter.

Chart number six demonstrates again the ever-growing importance of the emerging markets. I do not have to go too much detail but if you transfer it into absolute numbers, the organic growth for the emerging markets was €107 million, which demonstrates the importance of this business has far us now. The decrease, slight decrease in the North American market of course has to do also with the Rebif development which you are well aware.

A bit more of a deep dive on page 7 for the emerging markets, which outlines the organic growth. Particular reference I would like to make to China and Brazil. Some of you may have read the Executive Board was in China last month. We spent a whole week there to discuss with customers, opinion leaders, authorities on market development, on possibilities we see there and we have also announced some further investment as we go further in China. China will continue to play a major role in our emerging markets segment.

So much as an overview where we stand as a company, and I would like to hand over now to Marcus to guide you through the business, the financials and the guidance.

Marcus Kuhnert

Thank you, Karl. Good afternoon everybody also from my side. Let me make some few words of introduction. First of all, I am obviously happy to be here now. After the announcement has taken place in May, I was still three months in the waiting position and now really keen to start at Merck and I think it's a quite good start today with presenting very solid numbers, as Karl said as he achieved as the acting CFO.

For those of you I hadn't yet the chance to speak with, let me very briefly introduce myself. My name is Marcus Kuhnert. Before Merck, I worked 15 years with Henkel in a variety of functions predominantly finance but also including a business responsibility and an assignment to the emerging markets to Southeast Asia. Most recently I worked as CFO of Henkel's Laundry and Home Care division which is roughly €5 billion business with 10,000 employees worldwide. Now I am actually excited to have joined Merck and also to work with you in the coming months.

Now let's jump into the results. I am on Slide number 9. And as Karl has pointed out, we have seen a very solid second quarter with positive nominal sales growth despite still significant FX headwinds as we have consolidated AZ now for the first two months with a sales contribution of €89 million. The EBITDA improved slightly and over proportional to sales which resulted in a moderate margin increase over prior year's second quarter, so we were able to show again margin above 30.3% which is 20 basis points above prior year.

Main contributor for the increase in margin, also the increase in absolute EBITDA pre were the solid organic growth, ongoing cost discipline and cost savings from the well known efficiency initiatives and obviously the contribution from AZ. And that was more than enough to compensate the ongoing FX burden, the loss of the royalty income versus last year and also the heated up competitive environment for the Rebif franchise, especially North America but now also increasingly in Europe.

Earnings per share pre-reflect the sound operating performance and also benefit from a slightly lower tax rate. I will reference on this a little bit later more in detail as well as on the balance sheet items that you will see on the bottom of the slide. Just so much, net financial debt increased obviously from the payment of the purchase price for AZ and working capital increased for the reason of the first time consolidation on May 2.

With that, we jump to the next slide and the reconciliation from EBIT to earnings per share. As we have seen, the EBITDA pre which is main stay for our operating performance, as increased quarter-over-quarter by €20 million. On the other hand the EBIT, the reported EBIT is going down by 5% to €441 million. The reason for this decline is the one-time effect from the first time consolidation of AZ. We have had in the context of the purchase price allocation and inventory step up of €30 million which has burnt the cost of goods sold for the two months, May and June of second quarter and consequently also burnt the gross profit margin and actually was feeding through EBIT, net income and earnings per share. So this €30 million one-time effect is responsible for the EBIT and EPS reported decline. This is clearly a one-time effect so that is why we have adjusted it in EBITDA pre.

Earnings per share, actually as already mentioned, were positively impacted by lower income tax and consequently lower tax rate. The reason for the decline on the tax rate are twofold. First of all, our share of profit in jurisdictions with high tax rates have declined over the -- or in comparison to the last year's second quarter or to put it more positively we have generated more profits in countries with low income tax brackets. And secondly, we were benefiting from a one-time tax refund which brought our tax rate to the artificially low-level of 21.7%. And just to reiterate the guidance for the tax rate here, this is not the ongoing level we are going to expect for the third and the fourth quarter. We remain with our guidance to end the year with a tax rate between 23% and 25%.

Now let's have a closer look on the single division. Merck Serono, showing solid organic growth of 3% driven by strong performance in the emerging markets. On the other hand when we look on the division from a franchise perspective, Rebif is actually softer globally from volume declines in North America and also in Europe. You are well aware that we have done price increases in the second half of 2013 which unfortunately, meanwhile overcompensated by declining volumes and also the competitive pressure in Europe is now heatening up with competitors also launching their oral products. They have started in Germany and we expect this to go on also in other bigger countries in Europe. So the competitive environment for Rebif has become tougher.

On the other hand, Erbitux has shown a nice performance in the second quarter driven predominantly by Japan and by the emerging markets and also Europe was, after a weak start into the year in the first quarter, was now returning to positive territory. Fertility was also strong here, especially Gonal-f, with a strong performance from the emerging markets. EBITDA pre is declining, also the margin is slightly going down as the solid organic growth was actually not enough to compensate for the negative FX effects and of course also the already mentioned lower royalty income in Merck Serono from Avonex and Enbrel.

Let's go now to consumer health. Consumer health actually showed a strong quarter in terms of topline growth, 8.5%, also here mitigated by negative currency effects but at the end of the day a strong performance in topline growth. Also driven strongly by a good performance in the emerging markets and by a strong performance of our strategic brands. Just to remind you, we have reclassified beginning of 2014, two strategic brands from Merck Serono to consumer health, Neurobion and Floratil. And the numbers you can see here for prior year restated so that we are comparing apples with apples.

The margin increase from 19.8% to 22.4% is obviously due to the fact that we have positive mix affect as both of these reclassified brands have grown over proportionately. They have very high margins so they add with a positive mix effect to the margin of the division but also better pricing as a significant component of our organic sales growth and ongoing cost discipline contributed positively to the margin progress.

Performance materials. Here of course the story of the quarter is the first time consolidation of our AZ acquisition. You can see it in the sales bridge at the bottom of the slide with a significant portfolio effect of 21.5% but also the base business showed sound organic growth of 1.8% and also sub-segments of performance materials are growing. And from a regional perspective in this division as well, the emerging markets are the main growth driver. When we look on it from a franchise perspective, all subdivisions have contributed to the positive organic sales growth. And two additional notes, our flagship technologies, IPS and PS-VA develop positive in the face of tough competitive situation in one of our most important markets in China and also in the face of high comparables in the last quarter as we were benefiting in the second quarter 2013 still from some subsidy measures in China and some other tailwinds.

There was also virtually no de-stocking in liquid crystals in the second quarter, so currently we see an inventory level of approximately one week of excess stock in the supply chain left. So no, let's say, major affect on that front. The AZ acquisition is included since the May 2. The business is performing according to our expectation and the integration is well on track.

Last but not least, let's turn to Merck Millipore. Merck Millipore showed sound 4% organic sales growth which was outweighed by negative FX effects in roughly the same amount and we see a small portfolio effect as we have divested the discovery and development solutions business per April 1. So that we see a slight nominal decline in sales. The key growth drivers from a regional perspective again in this division were the emerging markets. When we look on it from a franchise perspective, process solutions remain as the key growth driver for the division driven by a strong bio-pharma demand. And also here, positive pricing effect is a significant component of organic growth, and continuous cost management were the two main drivers behind the margin increase from 23.4% to 25.2%.

With that, we now turn to the balance sheet on Slide number 15. And the message here is pretty simple. The balance sheet reflects basically the first time consolidation of the AZ acquisition. You can see it on the asset side of the balance sheet with a strong increase in intangible assets. The purchase price allocation has revealed some €800 million additional goodwill and roughly €1 billion of identified and capitalized intangible assets, predominantly production technology. These assets will be amortized on a scheduled depreciation over the next couple of years and we expect a high double-digit million euro amount per annum in our P&L from the depreciation. At the same time receivables and inventories are increasing reflecting predominantly the consolidation effect from AZ and cash and marketable securities consequently go down because we have used this to pay the purchase price.

The net debt has increased from some €300 million end of last year to €2.2 billion by the end of June, reflecting also here a slightly higher or a higher net debt level due to the purchase price. Nevertheless, it is a very healthy balance sheet and you will see on the next slide accompanied with a very solid and strong cash flow generation which brings us in good position for further inorganic growth if opportunities should emerge from the market.

The last slide in the financial section is the cash flow statement. And here basically I have two main messages. First of all, strong operating cash flow on the level of prior year and significantly higher than last year's investing cash flow. This reflects the purchase price that we have paid for AZ and includes also expense for CapEx and intangible assets but there is nothing spectacular, so the big jump comes actually from the purchase price of AZ.

With that I would now switch to the guidance. So most probably one of the most important messages for you guys today is that we are going to confirm our full-year guidance as we have given earlier this year for full-year 2014. We expect to close the year in a sales corridor between €10.9 billion and €11.1 billion. EBITDA pre expected to be in a range between €3.3 billion and €3.4 billion and EPS pre after the share split between €4.50 and €4.75. All numbers are including the AZ acquisition.

To provide some more details on the guidance on divisional level. You will have noted that we have slightly adapted the guidance for Merck Serono and also for performance materials. As you have the numbers in front of you I suggest that I address immediately the changes. For Merck Serono, we have reduced a little bit the upper end of the corridor for the EBITDA pre due to the strong competitive pressure on Rebif, that is now also increasingly, being increasingly visible now also in Europe. On the other hand behind the good growth performance in the first half year and the good momentum that we currently see in the emerging markets, we have slightly lifted our growth forecast or guidance to now slight organic growth. And please keep in mind or have in mind that the margins in emerging markets, a little bit lower than in the mature markets so that this over proportionate growth in the emerging markets is not necessarily a contradiction. On the other hand we have slightly reduced the EBITDA forecast.

On performance materials, we have lifted a little bit the lower end of the corridor for EBITDA pre. Also here are two main reasons behind. The first one is solid business development of the base business in the first half of the year with ongoing high market share and high profit margin. And secondly, just the fact that the integration of AZ is fully on track so that this removes a little bit risk from the lower end of the corridor.

With that we are through and we are, Karl and myself, we are now happy to take any questions that come up.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Amy Walker, Morgan Stanley. Please go ahead your line is now open.

Amy Walker - Morgan Stanley

I am going to try for three questions, please. The first is, management said today that the cost cutting program that was announced in 2012 is almost completed. I was under the impression that there were some aspects of the program, for example at Millipore, that were still going to stretch beyond 2014. So I'd just like you to explain does this mean that that's no longer the case? And do you expect that the full benefit of all the restructuring and the AZ synergies will have been fully captured in the P&L by the end of 2014, please?

The second question, I wonder if you could give us a bit of an update about where we are in the industry cycle for performance materials, both in liquid crystals and then also in the semiconductor business that you've acquired with AZ, please. And then the last question. What are you seeing in terms of pricing trends in the U.S. market in your key franchises and how did the 3% organic growth at Serono break down in terms of price and volume? Have you seen any notable changes in the trend in U.S. pricing in the first half and what do you expect going forward? Thanks very much.

Karl-Ludwig Kley

I hope somebody here last half of the last question but I will start with the first one. You are right, in the Merck Millipore franchise there are some parts which take a little bit longer. It's not very much, it's mainly related to supply chain management and logistical issues. But it's all under control. It will only all be delivered may be with a short delay, so no major issue to be addressed. When it comes to the industry cycle...

Marcus Kuhnert

Amy, you had also asked for the synergies from AZ. We expect to realize the full amount of synergies in the second year after the acquisition. So not all synergies will have materialized by the end of 2014.

Karl-Ludwig Kley

Then coming to your question to the industry cycle. In the liquid crystals, we do see some stocking effects in the pipeline but not very much. I would estimate them at the moment, roughly, about one week or so. So it's nothing major, it's just -- but still there is some stocking so there might be a slowdown for the football and soccer fans, of course not in Germany but maybe in the rest of Europe, particularly in the U.K. Sorry for the statement but I couldn't miss the chance to address soccer issues. For the semiconductors, we see the cycle now going down. We expect to meet the trough in 2015. So this is, it's a setup that we have and to be quite flexible at production network which we have in our AZ franchise. We think we can deal very well with this.

You then asked for the pricing volume issues in the U.S. and in the EU for Rebif. Coming to Europe first, let me first say Europe -- Europe hardly has any possibility to increase prices at all. So whatever we see on volume decline in Europe translates directly into margin. We are seeing the orders taking off well in Germany. We probably will see some good affect in France. In the other European markets usually because of their tendency to enter into long reimbursement discussions et cetera, it takes longer until you will see the effect of anything.

When it comes to U.S., we had our last price increase in December '13, as you know. We have not done any price increase since. So what we see there is volume decline not compensated by any compensation on price. What might be interesting though and I would like to add that on Rebif, that of course there is no reason at all to seeing sing a swansong on Rebif. To my judgment, we are defending quite well. We are doing better. When you compare it to the forecasts over the last year, I think we are doing quite, reasonably well. For example, when I see what we get in new patients in the U.S., in the past we had roughly 13% of new patients and now we are at 10%. So it's going down but at a level which I think demonstrates that we are able to defend the franchise quite well.

When it comes to your models, last remark. I would suggest at the moment not to assume any further price increases for Rebif, given the current market environment. Hope that answers your question, thank you.

Operator

The next question comes from Matthew Weston, Credit Suisse. Please go ahead your line is now open.

Matthew Weston - Credit Suisse

Three questions as well, if I may. Firstly, if you could give us a preliminary indication of what the impact of TECFIDERA's rollout in Germany has been. And while we are on the subject of Rebif, can you just set out whether or not you expect an impact of the launch of PLEGRIDY in the second half of the year or do you think that that will likely largely be a substitution event within the Biogen portfolio? Secondly, regarding cardio metabolic care, Glucophage has continued with its relatively weak trajectory and it's in real contrast to the rest of your emerging portfolio, which is growing very strongly. Can you explain what's different with Glucophage and whether or not we should expect that decline to continue? And then finally, a strong quarter for Erbitux. You highlight Japan as one of the key growth drivers. In the past you've been prepared to give us the Japan revenue number. Can you do that again?

Karl-Ludwig Kley

Impact of TECFIDERA first. It's quite similar to what we have seen in the -- as markets are very strong, uptake may be even stronger in Germany at the beginning. You have to take into account that you start quite quickly in Germany because, first, we have a very peculiar reimbursement and pricing rule. Where in the current setting, in the first year you can set the price freely and then the negotiations with the reimbursement authorities start. So there is an incentive for companies to push very strongly in the first month to get a high market share and then have a stronger basis for the reimbursement decisions. So I would not -- if I adjust the numbers for that affect and think through it, I think it's very comparable what we see in the U.S. as far as TECFIDERA is concerned.

When it comes to the PLEGRIDY, I think, of course the first person you would have to ask, with all due respect, would be our friends from Biogen. And I am sure they would have a good answer on that. When it comes to us -- now this is of course assumption, we think, but please take it as an assumption, that there will be some cannibalization. And we also -- we believe that there will be something in that rather in the Biogen's thing but let's wait for the facts.

When it comes to Glucophage, you should not read a major thing into that. We have some changes and adjustments in our supply chain management towards the emerging markets. It compares to a very strong quarter in 2013, so I would encourage you not to read something special in to it. This is more of a phasing thing. The unchanged, encounter a growing demand in emerging markets, namely also China. So I believe it's reasonable to assume that this downturn this year seem to not continue over the long-term as we go forward. We consider Glucophage as a very strong franchise going forward.

Then you asked for the numbers for Erbitux of Japan. When it comes to numbers, who would be better prepared to answer them then our CFO here.

Marcus Kuhnert

Hi, Matthew. Actually we do not numbers on single country level. What we can say is that we had in the same quarter rest of world, sales of €36.5 million and Japan is the biggest country out of it for Erbitux. And we have had very good organic sales growth of 14% so you can assume that Japan is something between 70% and 80% of the ROW region.

Karl-Ludwig Kley

This is as close as we come.

Marcus Kuhnert

I cannot go closer here.

Operator

The next question comes from Steve Chesney, Goldman Sachs. Please go ahead your line is now open.

Steve Chesney - Goldman Sachs

Tanks very much for taking my question. Two please, first for Dr. Kley. We've seen a string of recent deals whereby primarily family-owned companies in Europe are selling off pharma assets on the one hand, perhaps to take advantage of higher valuations but at the same time perhaps a statement about the sustainability of R&D and risk tolerance within their own portfolios. I wonder if you might comment on those deals and what is your own view about the positioning of the pharma business within Merck? And then secondly for Marcus, just a quick one on Serono margins. We've seen an impressive sequential increase in gross margins quarter-on-quarter despite a decline in royalty income. Can you talk about the mix factors that may have contributed in the quarter and the sustainability of those gross margins going forward? Thank you.

Karl-Ludwig Kley

Steve, if you look into our businesses, we have a number of businesses where I believe we do very well. I mentioned the cardio metabolic franchise, I mentioned the fertility franchise. I also believe that in market we are doing very well with products like Erbitux and Rebif. So a traditional weak point has been the pipeline part. And we have started to address this in 2007, we then did not succeed with the first attempt. We now then started to move along, you don't turnaround pipeline, consistent pipeline failure within short term. But the fact that we now also announced the hiring, the joining of Luciano Rossetti, who certainly is a heavy weight in terms of R&D management, on to our team. It tells a story that we believe we are on the right track moving our pipeline along.

So this leads -- therefore at the moment we do not see a reason, any reason given our strong, strong in-market presence and given our, what we see progress in pipeline and project management, to take any major decision for Merck Serono. So will add more spice to that, I believe when we meet in September on the Merck Serono Pharma day which will tell you more about our story. So selling pharma is, the critical mass, and that was your last point, the critical mass certainly might be reached when it comes to products with many indications, but we certainly think about how do we reach critical mass in such indications. But these decisions we will take when it comes to it.

So putting it all together, no reason to sell. It's a good contributor to our business and it remains a cornerstone of Merck going forward. With that I will pass on to Marcus.

Marcus Kuhnert

So question was on the Merck Serono gross margin development. We are actually seeing a slight decline from 2013 to 2014 and you are right, Steve, that the decline in light of the reduced royalty income would have been expected to be higher. Here we can say that of course also in the cost of goods area, here we benefit a little bit from adverse FX effect. However, that should not play a major role because also obviously the sales are impacted. But we are obviously also working on cost reductions in the areas of purchasing and in further optimizing our supply chain which gives a little bit relief on the cost of goods sold. Please keep in mind, and now I come to the second part of your question, the sustainability. That from the second half year of 2014, we will have another strong impact from reduced royalty income as then the Humira royalty income will have completely vanished and this is going to take forward in 2015. So we will see here the gross margin coming down a little bit more but we will also work on countermeasures, especially in terms of cost reductions to try to mitigate this effect as far as possible.

Operator

The next question will come from Odile Rundquist, LWA Baader Bank. Please go ahead your line is now open.

Odile Rundquist - Helvea-Baader Bank

Just one, first question on the ONO deal that you discontinued in June. I'm not sure I see any impairment of the termination of this program. I'm maybe right or should we expect something in the third quarter? Then maybe you can give us some color on what we maybe could expect at ESMO, especially with your asset of immuno-oncology, even phase I study in different genotypes. And then the last question on financial results. Just if you can give us a guidance or level what we should expect for H2 but also for 2015 for financial results, or expenses related to that. Thank you.

Marcus Kuhnert

So I will start with the ONO question. In ONO we have, actually we have two effects from the termination of the agreement with ONO. The first one is actually that we have an asset impairment which amounts to € 14 million and which is reflected in our results for the second quarter. The second effect is that we obviously have to continue some of the clinical studies because we cannot stop immediately with that. And here we are talking about a low double-digit million euro amount and this amount actually has burdened the R&D costs and is one of the drivers for the increase in R&D costs that you see in the Merck Serono division over 2013.

Karl-Ludwig Kley

Coming to your ESMO question, Odile. ESMO as you know is on September 26, so it's still one and a half months ahead. What we hope to see is the biomarker analysis on the CALGB study for the [RAS] (ph) analysis. At this point in time, of course, I can't confirm this. You know it's an independent study group and in an independent study group you are dependent on what they do and how they proceed. But this is what we would like to see. Any additional topic which might come up, we would inform you then on our Pharma Day which is prior to ESMO on September 18, so I believe. So at the moment that's all what I can say to ESMO.

Marcus Kuhnert

Your last question referred to the forecast or the guidance for the financial items, second half year and full year 2015. Actually, let's say, when we say we do not alter any more our financial structure, our capital structure, we would expect an ongoing level between € 40 million and € 50 million per quarter in the third and in the fourth quarter 2014. For 2015, we would expect similar levels in the first half of the year. As one of our bonds is going to mature in March, we would expect of flat relief, a further relief on the financial items and for the second half of 2015.

Operator

The next question comes from Michael Leuchten, Barclays. Please go ahead your line is now open.

Michael Leuchten - Barclays

Two margin questions, please. One on the contribution of AZ into performance materials. It seems the margin contribution is quite strong from the inorganic growth in that division relative to what that business has reported in the past. So I was wondering if you could add a bit more color on how that works maybe from a phasing perspective and what that means for the second half. And then a second margin question for Serono. Your guidance implies a pretty good margin for the second half, yet you have flagged further deterioration of the royalty line. You are talking about more pressure on Rebif which I presume is highly profitable for you and you're also saying that the cost savings program is almost complete. So where is that margin support coming from if you have those headwinds that is implied in your margin for the second half? Thank you.

Marcus Kuhnert

First of all, yes, your question on AZ. As AZ is now integrated into our company, we do not report any longer separate AZ figures because it's now part of performance materials. The only explicit number we are going to give is actually the sales number that I have shared with you, which amounts to € 89 million on the second quarter. All in all, as I already mentioned, AZ is performing according to our expectations and as AZ was a publicly listed company their forecast, consensus forecast, is still around for 2014. And if you look on these consensus forecast, I would say you get a pretty good impression on the EBITDA contribution that we expect for the eight months remaining in 2014.

The second question was on the margins of Serono. So here actually, as we have already said, we have reduced a little bit the upper edge of the corridor. Actually acknowledging that we are facing more competitive pressure in North America and now increasingly also in Europe. In parallel and what is going to support the margins or should support the margins going forward, is that we have a close eye on costs. You will notice in our Q2 P&L that, for example, the marketing and selling expenses have been significantly reduced. So that is going to have a contribution actually on the absolute results. And going forward, the agreement with Pfizer actually will terminate at the end of 2015. So here we expect, again a significant, or I will say a ramp up of the revenues are revenue stream in end of 2015 going into 2016, which should provide some further relief in tailwind to the EBITDA and to the margin.

Operator

The next question comes from Marietta Miemietz, Prime Avenue. Please go ahead your line is now open.

Marietta Miemietz - Prime Avenue

I actually have a number of product related questions, if I may. The first is Erbitux. You had very good sequential growth in Europe from Q1 to Q2 as you mentioned, Marcus, in your introduction. Is that actually due to you gaining momentum as a result of the RAS label change or is there another reason? And can we expect similar sequential growth over the coming quarters? And a somewhat similar question on fertility. You made some changes to your marketing, especially in China, and that really seems to be paying off. So do you think we have seen the full effect of that already in Q2 or should we expect further substantial sequential growth over the coming quarters?

And then I wanted to come back to Glucophage. So my understanding is that the China sales are now no longer being recorded in the actual Glucophage sales but are actually going through the royalty line. So I was just wondering is that correct? Can you give us roughly the impact that that is having on Glucophage sales and when that effect will annualize? And I was also wondering if you can just go into some more detail about your supply chain issues because I had been under the impression that Glucophage was negatively impacted by European supply chain issues and now you mention emerging market issues. I was just wondering what these issues are and how long it can take to resolve them. And then I was also just wondering, with respect to Glucophage in China, I think you said earlier on that the co-promotion income could, in a best case scenario, come close to compensating for the loss of Humira royalties. And I was just wondering if that is still the case.

And my final question is on liquid crystals products. Just could you give us an update on the timeline for the rollout of SA-VA and Blue Phase mode? You've said in the Q2 report that you launched new mode for mobile devices. So I was just wondering, is that already SA-VA and was that launch a very concentrated launch mainly in small applications like cell phones or was it broader? And basically how long until we see a really material impact from the new mode launch on your numbers? Thank you very much.

Karl-Ludwig Kley

Thank you. It was a number of questions, I hope I get all of them right. So I will start with Erbitux. I think in Europe, I think it's a combination of issues. In some areas the RAS issue might have taken place but I doubt whether it's fully and widely launched. It certainly has to do with some push and some rearranging or to personnel changes which we put behind Erbitux, because I personally still believe that the full potential of the product is not yet exhausted. RAS might have contributed but I would not put an overly strong context on that one for Europe in this quarter.

Second, the fertility. Fertility for us has been and is a key product so we spend a lot of time on not only in China but all over the place. On life-cycle management, on marketing concepts, on marketing approaches. But you asked me a long-term question which, everything we expect for 2014 is baked into the forecast. So there you should not take into account any particular activities which would pay off in 2014. In a long-term strategy, fertility for us with all its marketing effects, remains a major issue, remains a major contributor to growth. Of course we have to take into account that biosimilars might come into play and some marketing activities, of course also now, to fortify our positions in order to defend ourselves against possible entry of biosimilars.

China, Glucophage it was. We are supplying actually -- we are supplying from our positions in Europe which you are aware, into emerging markets. And therefore these supply chain issues I touched upon in my entry statements, were exactly referring to the point that the effect it has on other markets than Europe. It's, as I said also in my statement, it's nothing which you should take into consideration for long-term. We sort it out. We are in the process of sorting it out and I think I answered Matthew's question earlier that we are on the right track there.

Coming to your other question, whether the co-promotion royalties from Glucophage can compensate for the loss of Humira sales. To certain extent, yes. We have to work out how much it means in detail but we see at least some compensation to that effect. Finally, the Blue Phase and SA-VA. At the moment we are certainly focusing more on the SA-VA. With every product we have and every new mode we have and every new technology we have, the first thing is to test it with the customers. Before the customer has not accepted it, we will not make any announcement and any statement what has happened and what could happen to these new products. But be assured, that we are working on SA-VA, we are working on Blue Phase, we are working on even more modes going forward. The key is acceptance and production integration by the customer and that’s the focus. So therefore it's too early to give you more insight into the next generation of liquid crystals products. I answered all your questions. Thank you.

Marietta Miemietz - Prime Avenue

Sorry, can I just clarify the comment in the Q2 report about this new technology having been launched for mobile devices? That is not SA-VA, that's basically just a tweak on the existing technologies?

Karl-Ludwig Kley

No, no. That’s not SA-VA and that's a small business.

Constantin Fest

I think we have time for one more sort question, please.

Operator

The last question comes from Mr. Ronny Gal. Please go ahead your line is now open.

Ronny Gal - Bernstein Research

Thank you for taking my question. I have two. First, on Gonal-f. Can you just give us your assessment of where Finox is now in their launch plan for Europe for the biosimilar product? And do you expect competition in the near-term only in Europe or should we expect it in also other parts of the world? And second, again on biosimilars, you have now obviously made a decision to go in and penetrate the biosimilar market on your own. Can you explain us a little bit about your, talk a little about your view of the competition in the market? The concern is not so much that you can make them but that the competition intensity in that market will be very high. How did you convince yourself this is not the case?

Karl-Ludwig Kley

So first, we have seen the first entry of biosimilars in some European markets. I have to say that up to now I am not very much impressed by the market share they have gained. And so they have not been able to capture market share which I believe has also to do with the quality of our products and our life-cycle Management there. Obviously, I did not say Gonal-f, but something else, because I was just admonished that I should repeat that I'm talking about GONAL-f. So currently no major impact on any of the biosimilars launch in any of the European countries. Second, for the by biosimilar, of course we have a business plan. We have a business case. We have announced that we are focusing on autoimmune and oncology. May I propose that we give more light to that in the upcoming pharma day because I believe that many of you have more questions on that, so we should spend more time on that. It will be one of the topics on the agenda of our upcoming pharma day.

Operator

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

Karl-Ludwig Kley

This is concluded by me by saying goodbye and thanks to all of you for participating. If you have any additional questions, the investor relations line is open to answer all of your questions. Thanks and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!