Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Alexander Rosar – Head, IR

Marijn Dekkers – Chairman and CEO

Jörg Reinhardt – CEO, Bayer MaterialScience

Werner Baumann – Head, Finance

Sandra Peterson – Chairman, Bayer CropScience

Analysts

Matthew Weston – Credit Suisse Securities Ltd.

Richard Vosser – JPMorgan Securities Ltd.

Tim Race – Deutsche Bank AG

Craig Maxwell – UniCredit Bank AG

Jeremy Redenius – Sanford C. Bernstein Ltd.

Martin Flückiger – Helvea SA

Andrew Benson – Citigroup Global Markets Ltd.

Matt Giveny – Robert Baird

Andreas Heine – Unicredit Bank AG

Florent Cespedes – Exane BNP Paribas SA

Ronald Köhler – MainFirst Bank AG

Bayer AG (OTCPK:BAYRY) Q2 2011 Earnings Call July 28, 2011 7:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Bayer’s Investor and Analyst Conference Call on the Second Quarter 2011 Results. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (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, welcome, also on behalf of my colleagues, to our conference call during which we will review our second quarter figures with you.

With me on the call are Marijn Dekkers, our CEO; and Werner Baumann, our CFO. Our sub-groups are represented by their respective CEOs as well, HealthCare by Jörg Reinhardt; CropScience by Sandra Peterson; and MaterialScience by Patrick Thomas.

Marijn will start off with a brief summary of the developments in the second quarter. We assume you have all received and reviewed our corporate newsletter, the briefing documents and the slides, so we just run you through 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 Dekkers

Thank you, Alexander. Ladies and gentlemen, good afternoon. Let me start my introduction by summarizing the main points. Overall, we are pleased with the performance this quarter. It was the highest second quarter in terms of sales during the last five years. We delivered 5% adjusted year-on-year sales growth and 41% higher net income. Core earnings per share were up 11%. CropSciences continued its strong year-on-year improvement. And we are encouraged by the progress of our innovation pipeline as we continue to build the foundation for future growth. Our group-wide efficiency improvement initiatives are well underway. We are able to confirm our €800 million savings target. Based on the achievements thus far and our expectations for the remainder of the year, we reiterate our 2011 group financial outlook.

So, let me start by elaborating on some key figures for the second quarter. In my comments, as always, I will concentrate on the sales data adjusted for portfolio and currency effect. As already mentioned, group sales for the quarter grew by 5% to €9.3 billion with volumes contributing 3% and higher selling price is 2% to this increase.

Adjusted EBITDA for the group improved by 6% to a little over €2 billion. These improvements were attributable especially to a good season in the Northern Hemisphere for CropScience and a slight business expansion at HealthCare. MaterialScience came in as last year’s level. Reported EBIT increased by a substantial 26% to almost €1.3 billion. Earnings were diminished by net special charges of around €144 million. Restructuring, particularly at CropSciences and HealthCare, accounted for €179 million. By contrast, valuation adjustments for our pension provisions in the United Kingdom resulted in a one-time gain of €35 million.

Net income in the second quarter came to €747 million, up 41% compared with the previous year. Earnings per share were €0.90 and core earnings per share declined by 11% to €1.29.

From a regional perspective, we again expanded our business in the emerging markets. Sales improved there by 7% if adjusted for currency changes. We lost some momentum compared to previous quarters particularly in China. CropSciences suffered from unfavorable weather conditions in China and this has declined by 11%.

At MaterialScience, business receded 8%. In addition to tougher comparison with a very strong prior year quarter, we assumed that destocking by our customers in anticipation of lower prices played a role in the decline in MaterialScience in China. HealthCare continued its strong positive momentum and so business expands by 23%.

In Western Europe overall, Bayer gained 6% and in the United States, sales were up by 4%.

Gross cash flow in the second quarter increased by 19% to €1.5 billion, mainly as a result of the improved operating performance. Cash tied up in working capital was nearly unchanged in the second quarter. By contrast, liquid assets were freed up from working capital in the prior year quarter. Net cash flow was level year-on-year at €1.5 billion. Net financial debt climbed only slightly by €0.3 billion to €7.4 billion despite the high outflows for the dividend variable compensation and interest payments that are typical for the second quarter.

Let’s now move on to the performance of our subgroups. Sales of the HealthCare subgroup rose slightly by 2% to €4.2 billion in the second quarter. This improvement was mainly driven by the positive development of the Consumer Health segment. Sales in the Pharmaceutical segment improved by 0.5% in the second quarter. The business expansion in the emerging markets, particularly China, was able to offset the weak performance in North America and Western Europe. The ongoing genericization of Yaz in the United States as well as the adverse effects of the health system reforms in various countries were the main reason for this development.

The performance of our key Pharmaceutical products was mixed in the second quarter. Kogenate, Mirena and Aspirin Cardio advanced strongly, up 15%, 26%, and 10% respectively. Nexavar lost 4% versus a high base. Betaferon sales declined by 5%. Yaz sales were down 7%, mainly due to the generic competition in the U.S. as I already mentioned. Outside the U.S., the Yaz family of products advanced by 8%

The adjusted EBITDA of the Pharmaceutical segment grew by almost 5% due to lower operating costs as well as the one-time income of €22 million from a settlement. On the other hand, earnings were burdened by a slight decline and negative currency effect.

Sales in the Consumer Health segment advanced by 4%. Consumer Care reported a 6% increase, driven by the strong performance of our analgesics Aspirin and Aleve as well as nutritional supplement One A Day in the U.S.

Sales of the Medical Care segment reached the previous year’s level. The positive development in Europe and Latin America, Africa and Middle East was offset by the decline in North America. This decline was due to lower volumes and prices for our Contour blood glucose meter system. Sales of the Animal Health division advanced by 4%, supported by our Advantage product line, which grew especially in the Europe and North America.

The adjusted EBITDA of Consumer Health was leveled year-on-year. The positive effect from business expansion were compensated by higher operating costs and adverse currency effects. For HealthCare overall, our performance resulted in adjusted EBITDA of €1.2 billion, an improvement of 3% over the prior the year.

Let me also remind you of the good progress we achieved with our Innovation Pharma pipeline during the second quarter, before I move on to the other division. We gained approval from the FDA for the use of Xarelto in the prophylaxis of DVT after hip and knee replacement surgery in the U.S. For the indication stroke prevention in patients with atrial fibrillations, we and our partner J&J have applied for approval in Europe, Japan and the U.S. And for DVT treatment, we have also filed in Europe. Preparations are well underway for a launch immediately after approval. With regard to Xarelto’s clinical news flow, we expect to have data from our Phase III studies ATLAS TIMI 51 and EINSTEIN-PE available later this year or early in 2012.

We’ve also made a significant step forward in our Alpharadin program. In June, the ALSYMPCA Phase III study in patients with symptomatic bone metastasis in hormone refractory prostate cancer was stopped early, because it met its primary endpoint and showed a significantly improved overall survival benefit of Alpharadin.

We target a filing mid-2012, as we expect to have sufficient production capacity for Alpharadin available by then. We also made progress with VEGF Trap-Eye, which was filed in Europe and Japan for regulatory approvals for its primary indication, wet macular degeneration. These were important achievements underscoring our expectation for increasing growth momentum in our Rx Pharmaceutical business in the future.

Before I move onto the performance of the CropSciences segment, I would like to draw your attention to a slight change we have made as of this quarter. We are reporting BioSciences together with Crop Protection to reflect the closer alignment and integrated management approach of both businesses. Sales in the CropSciences segment had trends by 9%, benefiting from a continued good season in the Northern Hemisphere and the substantial expansion of our BioSciences business.

High prices for agricultural raw materials provided a favorable market environment compared with a weak prior year quarter. In the Crop Protection BioSciences segment, sales in the second quarter came in 11% above the prior year period at €1.8 billion. At Crop Protection, this was attributable to growth of our fungicides and herbicides product line. At BioSciences, the expansion of acreage in Canada led to increased sales of our canola seeds. Sales of our cotton and rye seeds also grew especially in Asia.

However, sales of insecticides grew only slightly due to the termination of marketing for all the products such as Temik. Sales in the Environmental Science segment dropped slightly by 2%. Our Consumer Products business stagnated while business with products for professional use receded in Europe, Middle East and Africa. Adjusted EBITDA of CropSciences was up by 24%, driven by significantly higher volumes and improved capacity utilization in our production plant.

So now moving onto MaterialScience. This subgroup was able to build on its performance in the previous quarter and increased sales by a further 8% year-on-year. The expansion of sales was mainly due to higher selling prices in all business units and regions, especially in Europe and North America. Volumes came in slightly below the prior year quarter.

Sales of MDI and PC increased due to higher selling prices in all regions. Sales of TDI came in significantly below the prior year level. Our Polycarbonates business units benefited from substantially higher price.

Adjusted EBITDA came in level on year at €372 million. Increased selling prices more than compensated for higher raw material and energy cost. Higher costs also due to the commissioning of the TDI chain in China and negative currency relations had an adverse effect.

On outlook, overall, we are pleased with the performance in the second quarter and we are able to reiterate our financial outlook for 2011. I’d like to remind you that we increased our guidance last quarter and that we now confirmed this guidance where we continue to target currency and portfolio adjusted sales increase for the Bayer group of between 5% and 7%, which corresponds to sales of between €36 billion and €37 billion. We still plan to increase EBITDA before special items to more than €7.5 billion and to improve core earnings per share by about 15%.

So, now let’s come through the outlook by subgroup. For HealthCare, we are confirming our outlook for 2011. HealthCare plans to increase sales by a low to mid single-digit percentage after adjusting for currency and portfolio effect, and to achieve a small improvement in EBITDA before special items. And that means that in the Pharmaceutical segment, we believe that sales will grow below market rate in 2011. We plan to increase sales by low to mid single-digit percentage after adjusting for currency and portfolio effect, and we plan to raise the adjusted EBITDA margin.

In the Consumer Health segment we continue to anticipate above market growth in sales. And as before, we expect sales and adjusted EBITDA to increase by mid single-digit percentage. The CropSciences business continues to trend positively. We therefore continue to aim to improve sales by a high single-digit percentage on a currency and portfolio adjusted basis. We plan to expand EBITDA before special items compared to the weak prior year by about 20% or more if the season progresses well in the second half.

At MaterialScience, we continue to plan to raise sales by a high single-digit percentage on a currency and portfolio adjusted basis. We continue to expect that EBITDA before special items will increase at a higher rate than sales, although this target appears to be increasingly ambitious. We anticipate that sales and EBITDA before special items in MaterialScience in the third quarter of 2011 will be in line with the prior year level.

So in summary, before opening the Q&A, let me summarize the main points. First, Bayer continued its positive financial momentum in the second quarter. We achieved significant progress in our innovation pipeline. And the efficiency improvements we announced last year are on track for implementation. And then finally, we are reiterating our full year financial outlook for 2011.

And that concludes my remarks, Alexander. We will now be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time, we will begin the question-and-answer session. (Operator Instructions) One moment for the first question, please. The first question comes from Mr. Matthew Weston. Please state your name, company name, followed by your question.

Matthew Weston – Credit Suisse Securities Ltd.

Good afternoon, gentleman. It’s Matthew Weston calling from Credit Suisse. Three questions, if I can. The first with respect to Xarelto. Clearly positive news of the FDA approval in the acute indication, but when should we expect to see the full rocket data published in a medical journal? I’ll recall at your Meet The Management Day, you said you thought it was imminent, but we still haven’t seen it. So I’d like to understand an update timing and any reasons for the delay.

Secondly, with respect to MaterialScience, clearly China demand was down. But you also highlight the increased costs from building extra capacity, the TDI in China. How are those dynamics going to affect profitability going forward in terms of weak demand with added capacity? And then finally in Pharma, Avelox to me is a product look-alike. Is there any specific dynamic there that I am missing? Thank you.

Marijn Dekkers

Okay. Thank you. So, Jörg, if you can answer both questions, Xarelto and Avelox, and then we go to Patrick.

Jörg Reinhardt

Yes. Matthew, maybe at our Analyst Day we should have said soon instead of imminent. But I have to say that in the meantime, I feel actually more comfortable to use the term imminent. I believe we have made good progress and I believe that we can assume now that the publication is going to be more imminent than soon, without me being able to give you an exact date. But you should expect it rather soon.

Regarding Avelox, there are actually two aspects that affect the Avelox performance. One is a negative base affect coming from Japan where we have a significant stocking in the second quarter of last year, which drove significant sales in Japan. We don’t have it this year. And the second one is a change in the distribution agreement that we have in the U.S., which gives us more positive effect on the bottom line, but gives us a little hit on the top line. So these are the two effects.

Marijn Dekkers

And then the MaterialScience, Patrick?

Patrick Thomas

Yes. Thank you for your question, Matthew. I think you put your finger on the China issue. Clearly, the increasing interest rates in China and the type of credit lines means that a lot of customers have reduced inventory during the last quarter and that’s fairly clear across most sectors. The automotive and electronics industry is still being slightly disruptive and isn’t back up to full speed yet following the unavailability of Japanese electronic components, but that’s starting to come right now. And I think it’s fair to say that as we’ve built up our TDI capacity, the market in anticipation has been reducing orders particularly in June knowing that we were starting up in July in anticipation of lower cost – lower TDI pricing.

The one-off costs associated with stocking at the TDI (inaudible) all came in quarter two and they were measured in double-digit millions to actually achieve that one-off starter. The plant is now started up successfully with new technology improvements. But the impact is that we will bring material to market during the third quarter. The first sale and the plant will reach its full operating rate during the end of quarter two next year as we approve the new technology.

So yes, there’s a balance to effect. Clearly pricing on TDI moved up during the second quarter ahead of the new plant. And now we will see TDI price drop back probably or come under pressure. But we will see about demand, because I believe the demand will recover in the third quarter.

Matthew Weston – Credit Suisse Securities Ltd.

Okay. Thank you. Sorry, if I could quickly follow-up, in the second half of the year we should effectively expect automotive back driving volume demand as we also get stocking return but effectively with greater price pressure than we’ve seen in the first half. So what was a price story becomes a volume story.

Patrick Thomas

Exactly. I think you’ve described it accurately.

Matthew Weston – Credit Suisse Securities Ltd.

Thank you.

Marijn Dekkers

Thank you.

Operator

Your next question is from Mr. Richard Vosser. Please state your name, company name, followed by your question.

Richard Vosser – JPMorgan Securities Ltd.

Hi, it’s Richard Vosser from JP Morgan. A couple of Pharma-related questions and one on the cost saving program, please. The first, just wondered what pressures you’re seeing in Nexavar in terms of the competition, whether you’re seeing increased rates of lost share in renal cancer from some of the newer agents there? And whether this is a uniform picture across the globe, what sort of growth have you got in EU and Asia?

Second question is on the potential generic launches of your Yasmin franchise in Europe ahead of the loss of patent, just whether you’re seeing anything that we should be aware of for the second half around the Yasmin franchise in Europe.

Thirdly, just quickly clarification on Alpharadin, whether you think you’ll be able to achieve fast track status with the FDA which would allow a rolling submission ahead of the manufacturing facility being already well aware that this is going to take time to get that facility up and running. But whether that’s a possibility would be useful to know.

And then finally on the cost savings, just wondering, you mentioned that cost savings are on track for €800 million. So I just wondered whether any of those are being realized in either Pharma or CropScience quicker than first envisage. So I think CropScience is backend loaded, but Pharma may be frontend loaded. So I was just wondering if those are coming too quick. Thanks very much.

Marijn Dekkers

Okay. So you take the first, I’ll take the fourth.

Jörg Reinhardt

Okay. So Richard, regarding Nexavar, well we see obviously an effect mainly driven by increased competition in renal cell cancer. We see this effect, obviously a negative effect, actually in U.S. and in Europe. We have – when you look at sales growth in different the regions, we have a small decline in the U.S. with 1% and we have a further decline in Europe with 18%, which is through a large extent also driven by the different healthcare reform actions that are being taken in Europe.

Despite that, we see still good growth in the rest of the world. In the Asia-Pac area, good growth at double-digits at 11%. But nevertheless, we see a slowing down of the overall growth for Nexavar which we expect may continue also going forward. Now with regard to Yaz, we would expect not a real significant effect on the Yasmin or Yaz sales in Europe for the rest of the year, there may be a slight effect, yes. But we think we can manage that. That should be within the guidance that we have been given.

Going forward, however, we do expect a decline. We will see an impact in 2012 and we will see it in the years thereafter. We think that around €400 million of our overall sales are at width-growth of generic competition in those European countries and we would expect an effect of maybe 30% decline in the first year and maybe then thereafter between 10% and 20%. So we will see a significant effect that will hamper the overall growth of the Yaz franchise. So we have been guiding before that the Yaz franchise should be back to growth in 2012 and beyond and we don’t think that’s going to be reasonable anymore. So we would rather see a small decline of that franchise going forward.

With regard to Alpharadin, it’s too early to make any comments regarding filing strategy. Of course, this is a scenario that you have to describe would be nice. But we have no indications yet from the FDA whether that would be possible. So we keep on having an intensified dialogued with them now going forward. But as you very well know, their response came somewhat as a positive surprise and which also explains the fact that the production facility is not yet ready and only ready by mid of next year. So we’ll keep you updated as soon as we know more from regulatory perspective.

Richard Vosser – JPMorgan Securities Ltd.

Okay, thanks.

Marijn Dekkers

And then Werner Baumann will answer the cost savings question.

Werner Baumann

Yes. Rich, if you look at the first half of the year, you roughly realize a little bit more than $200 million in savings across the entire group. And if you look at the distribution and just take the proxy, the overall savings for (inaudible) roughly half, a little bit more half of the overall savings accrued to HealthCare and then a little bit more than 35% go into CropScience, yes. But bear in mind, however, that these savings amount that I’ve just mentioned are growth amounts prior to reinvestments. You will remember that roughly half of the savings are going to be reinvested. And we are well on track with these reinvestments. For example, our sales force expansion, specifically in HealthCare in China for the sales and commercial excellence program 10 years underway in CropScience.

Richard Vosser – JPMorgan Securities Ltd.

Okay. Thank you very much.

Marijn Dekkers

Okay. Next question.

Operator

The next question is from Mr. Tim Race. Please state your name, company name, followed by your question.

Tim Race – Deutsche Bank AG

Hi there. it’s Tim Race here from Deutsche Bank. Just two questions, first on CropScience. Could you just talk about the pricing environment for next year? Competitors have mentioned targeting mid single-digits next year, just wanted to know what your view is on that and whether that’s realistic or not.

Then moving onto just Xarelto. You mentioned that the preparation for Xarelto to launch imminently or immediately post approval. Could you just give me an idea of how much cost you’re currently carrying for the sales force is for Xarelto and how much step up we should expect next year for the Xarelto sales force? Obviously, I know that it’s staggered in terms of which markets you launch and such.

And just whether looking into 2012, particularly in the Pharma division, whether the increased investments you’re going to see with Xarelto launch costs plus the pressure on Yaz and Betaferon, whether we’re actually going to see growth in Pharma in ‘12 or whether we should expect that a bit further out, this sort of more intense growth phase? That’s all. Thanks.

Marijn Dekkers

Okay. Sandy, on pricing.

Sandra Peterson

So, thanks for your question. Our perspective on market pricing in general, as you’ve seen so far this year, has been relatively flat on average for all of the major players in the marketplace. As you know, we’ve maintained what we believe a little bit more discipline on pricing generally speaking over the season. And as we go into 2012, our expectation is we should see a similar performance.

However, we actually also do believe that we should be able to selectively take price, both on the Crop Protection and the BioScience parts of our business. As you know, it’s been easier on the BioScience part of the business to actually increase prices, which we’ve enjoyed. And we’ve been able to with our newer portfolio increase pricing, but there is generic pressure on some of the older products in the portfolio. So that will always be an issue. But our perspective is that we’re cautiously optimistic that we should see some price improvement through next year as long as commodity prices hold up.

Marijn Dekkers

Okay. So, relative commercial, Jörg.

Jörg Reinhardt

Yes, you’ll certainly understand that given also the interesting competitive situation that I’m not in a position to give you exact numbers on sales force investment. But what I can say is that when we look at overall marketing sale expenses, we are now at a level of 35.6% in the second quarter, which is a little bit higher than it was in the first quarter, actually its 1 percentage point higher.

And you can assume that that percentage is not going to go down significantly going forward. If anything, it might even go up a little bit. We will obviously intensify our Xarelto investment towards the end of the year and early next year. But we think that to some extent, we can also compensate with a shift, internal shift of costs and efforts to support Xarelto adequately.

Regarding guidance for 2012 and beyond, it may be little bit early to speculate as to how the 2012 is going to develop. But I mean your assumption that pressure that we see especially now also on the challenges I mentioned before, will have a negative impact on growth rates and also on the bottom line, is certainly right. I’m, today, not in a position to quantify that. But I think that towards the end of the year or early next year, we will be in a better position to give adequate guidance.

Tim Race – Deutsche Bank AG

Great thanks.

Operator

The next question comes from Mr. Craig Maxwell. Please state your name, company name, followed by your question.

Craig Maxwell – UniCredit Bank AG

Hi, good afternoon. It’s Crag Maxwell here from UniCredit. First a question on Xarelto and the Magellan presentations in Japan, we had two presentations on Monday giving a breakdown on that clinical benefit and also various categories of responders, non-responders, et cetera.

What are you plans to show the details of that data to the market? Particularly, I think the market will be interested in the geographical breakdown there that was presented. And also, I mean I say this bearing in mind that a fixed amount of that data is likely to be presented in a couple of months of time at the AHA?

Then secondly, the ATLAS study, can you say whether you did or did not submit an abstract to the AHA for the ATLAS study deadline has passed. And lastly on borrowing of reps, what does your competitive intelligence tell you is the size of the US sales force detailing Pradaxa in the U.S.?

Jörg Reinhardt

Okay, interesting questions. Let me start with Magellan. I mean you have seen the uplifts, you have seen the results, you have not seen yet fully analysis of what is still going on with Magellan which leads us to the expectation that the further analysis of the data that came out of Magellan is still ongoing for a while, despite the fact of that the first group of sub group analysis didn’t reveal any indications as to where this product would be fileable. We still think that there’s more work to be done and we’ll continue to do so. When exactly we will come up with more data, I can’t tell you at the moment honestly.

With regards to ATLAS and AHA, no, we have not submitted. As you know, the study is still ongoing. We have been guiding for results by the end of the year, early next year and that’s still the case. So, we didn’t submit anything to AHA.

And then with regards to sales reps, honestly, I’m not in a position, and even if I would so, I’m not sure I’m willing to share with you what our competitive information resources would be or sources would be. I think you can be reassured that I believe all the three companies or four companies involved in this business will do the utmost to understand what the other guys do, and so do we. But I’m not in the position to share any more information about that.

Craig Maxwell – UniCredit Bank AG

Okay. And just one quick follow-up on the Magellan then. Some of the data was actually presented already, are you planning to share the already presented data with the market?

Jörg Reinhardt

I mean the data in the public domain. I mean the abstracts are available. You mean a publication, a full publication at a later point in time?

Craig Maxwell – UniCredit Bank AG

No. More of the detail of the presentation. Obviously, I mean abstracts are submitted very early on and the presentations had significantly more detail than the abstract.

Jörg Reinhardt

So, maybe we can follow-up on that unilaterally. I can’t tell you at the moment when and if and in what journal this publications would show up, simply too early to tell. But why don’t you follow up with us individually.

Marijn Dekkers

Okay. Thank you.

Operator

Thank you. The next question is from Mr. Jeremy Redenius. Please state your name, company name, followed by your question.

Jeremy Redenius – Sanford C. Bernstein Ltd.

Hi. This is Jeremy Redenius calling from Sanford Bernstein. Thanks for taking my questions. First on HealthCare, for Alpharadin, would you have to run more trials if you wanted to exploit this agent for the potentially larger population of earlier stage prostate cancer patients? And if so, are you planning trials? And then also on Alpharadin, is there any biological reasons why bone metastasis would behave differently in breast cancer?

Second on MaterialScience, I’m wondering if there are any more price increases underway for the third quarter, or have the stabilizing raw materials cost really removed the need to increase prices from here? And then third in Bayer CropScience, where was the pricing weakness that we saw in the second quarter? Thanks very much.

Jörg Reinhardt

So let me start with Alpharadin. Yes, that the answer is if you want to expand the population and the label into earlier patients of prostate cancer patients, we would have to run additional clinical trials. As you know, this is one Phase III trial that shows the market could be positive result, but it is with specific population.

So we will get approval in all likelihood only for that population. If you go into earlier population for proper combinations with chemotherapy or even before chemotherapy, et cetera, we’ll require new clinical trials that we intend to start as soon as we have enough material available to actually do so.

We mentioned before that we will have to wait until the middle of next year to have the production line up and running. And that is our point in time where we will start to have more materials, which will then enable us to also start clinical trials. So you shouldn’t expect us to start any significant additional programs before the end of next year or early the year thereafter.

In terms of breast cancer versus prostate cancer, well, yes and no. No, we wouldn’t expect that a significant, let’s say, biological reason why they should behave differently. However, the impact of bone metastasis on overall survival of prostate cancer patients is going to be more severe than on breast cancer patients. So when we look at overall survival, we saw some benefits. A likelihood to achieve those results awaiting in prostate cancer is higher than in breast cancer, which may mean a more significant outcome in breast cancer. But it’s all currently under discussion and we’ll inform you as soon as we have clear plans there.

Marijn Dekkers

Okay. And then on pricing environment going forward to MaterialScience, Patrick?

Patrick Thomas

Yes. Thank you for this question, Jeremy. I think in quarter three, we’re going to see a mixed picture. I think on MDI supply and demand currently would suggest the prices will remain fairly solid. We may see some increases. And certainly, we will be planning to try and continue to recover what led to the raw material price at high levels. I think in polyether polyols, the same story is true. The market is relatively tight. And we’re putting quite large pushes on price at the moment in that space and I think that will continue.

On TDI, clearly we have two major new facilities that would come on stream, both are starting up slowly. So the market expects the major pricing effects. I think the pricing effects will not be as dramatic as people expect as it will take up the next three quarters to four quarters to get our facility up to full rate. And our competitors’ plants I believe, is also starting very slowly.

And of course, that market is growing. And then finally on polycarbonates, there is new capacity from the Middle East. That capacity is beginning to show up with material in China particularly. And there’s been some pressure on polycarbonate price in China. But otherwise, I would expect prices to remain at a similar level or even increase in some specialized segments.

Jeremy Redenius – Sanford C. Bernstein Ltd.

Okay. Thank you. And then, Sandy, perceived price weakens in the second quarter in Crop?

Sandra Peterson

So the impact on the second quarter on Crop are really one-time effects in a couple of very specific situations. For example in Asia-Pacific, particularly in China and Australia, we saw a pricing pressure due to generics, which was obviously, given the situation of two markets in general with the weather that was further compounded. And then in addition, we had anticipated and planned some pricing adjustments in Canada due to generics and herbicides and fungicides around our canola business, which was part of a long-standing program where we bundled those products with our seeds, and we are getting – increasing the value on the seed side versus the crop protection side of the business. As well as some planned early ordering in our broad acre fungicides in the United States, where we’ve seen a significant increase in our volumes in that business.

So that’s where the weaknesses were. There are – we view them as one-time effects. On the flip side, we saw positive pricing in Latin America, particularly in Brazil and across our whole BioScience portfolio in the second quarter, the pricing was up on average by about 5%. So we don’t view the second quarter as a beginning of a trend. It was an anomaly due to a couple of very specific things that were planned. In most cases, a couple of them clearly were response to generics in Asia.

Jeremy Redenius – Sanford C. Bernstein Ltd.

Okay. Thank you very much.

Marijn Dekkers

Next?

Operator

Thank you. The next question is from Mr. Martin Flückiger. Please state your name, company name, followed by your question.

Martin Flückiger – Helvea SA

Yes, good afternoon, ladies and gentlemen. Martin Flückiger from Helvea. Three questions, please, first one on Bayer CropScience. If you could run us through your current assessment of channel inventory levels in the crop protection industry that would be very helpful. And secondly on Bio, MaterialScience, it appears that April saw some demand weakness compared to May and June, and I was wondering whether you had seen such a monthly order pattern as well. And then thirdly, again on Bio, MaterialScience, if you could talk about your estimated raw material and energy cost impact in 2011. Many thanks.

Marijn Dekkers

Sandy, inventory levels?

Sandra Peterson

So, in general at the moment, as best as we can tell, inventory levels are actually relatively normal rates across most regions and in most product lines. So we’re not seeing any significant over stocking or under stocking at inventories at this moment in time.

Marijn Dekkers

Okay. And then Patrick, two questions for you.

Patrick Thomas

Yes, first question on monthly seasonality. I wouldn’t recognize your suggested seasonality. I think we found June to be the weakest of the three months, primarily because of the effect I described earlier in China and the market reticence to place orders ahead of expected, for example TDI price reductions. We will wait and see and see what happens there...

On raw material impact for the full year, we’re forecasting raw material prices to be significantly above last year’s level. We currently expect that to have a negative impact of between €0.6 billion, €0.7 billion. And we are so far, and that’s true of the last eight quarters, successfully passing on the majority of that pricing effect. So if we look at a bridge between quarter one and quarter two, we have passed on slightly more than the total raw material effect between those quarters. So that’s roughly therefore, where we expect the raw materials, although as with any oil and dry materials at the moment, it’s very difficult to make an accurate forecast towards the year.

Martin Flückiger – Helvea SA

Okay. Thank you. Sorry. Can I just follow on?

Marijn Dekkers

Yeah.

Martin Flückiger – Helvea SA

I didn’t get it acoustically. What was the incremental hedge on raw materials?

Patrick Thomas

€0.6 billion to €0.7 billion for the full year effect year-on-year.

Martin Flückiger – Helvea SA

Perfect. Thank you very much.

Operator

The next question is from Mr. Andrew Benson. Please state your name, company name, followed by your question.

Andrew Benson – Citigroup Global Markets Ltd.

Yes, hi. It’s Andrew Benson here from Citi. I have to get the star one a little bit quicker in the future. But just a couple of things left. The stocking you’re talking about in China, I mean how much longer do you think that’s going to go on? Do you think it’s simply waiting for to get our prices to come down? I mean you talked fairly positively about most MDI holding up at polyols. Yes, you’re looking at price increases. So how much and how long and how further is any destocking likely to go?

And then just on the CropScience area, can you just help rationalize the increase in EBIT relative to the increase in sales, because you got a much bigger actual number for EBIT than you have for sales. There’s obviously quite a big mix effect in cost reductions in there as well.

Marijn Dekkers

Yes, good. So MaterialScience, how long is destocking going on?

Patrick Thomas

Yes. Andrew, this is a really difficult question to answer as your questions are. It’s very difficult to forecast when the destocking finishes. Certainly on TDI, there are, as you know, lots of traders involved in the supply chain and several have taken positions in TDI and they’re now destocked probably within the next month or so. And as the startup of new facility is spread over several quarters, that’s probably not a bad situation to be in. I think when you look at MDI, there’s no doubt that have been increasing their output and then locally in China, has being supplying some of the key industries.

There’s also an issue in China currently with all organic insulation materials which are being re-assessed for far performance for the construction industry, because it slows down the penetration of polyurethane, polystyrene and others into that market. And that’s something we’ve seen in other developing markets. And they’ve established the correct fire codes and standards. So, some of that has affected the construction business as well. And as I mentioned earlier, I think that the automotive electronics industry comes back as Japan continues to supply. And I think the surprise out of Japan is just how rapidly they’ve managed to recover their supply chain. And we would hope to see some positive benefit after that in the third quarter.

Marijn Dekkers

Good, so Sandy how can you be so profitable?

Sandra Peterson

Thank you for your question. I mean as you know, obviously second quarter last year was weaker on average in our margin performance. And this quarter, I would say, it’s a number of things. One of them clearly is our new products that we have launched in 2011 have been able to sustain the pricing that we’ve brought them in on. So it’s a partly volume mix effect, not only in our CP business but also our BioScience business where we saw significant year-over-year growth. And those businesses have good margins.

Our cost reduction programs that we talked about earlier clearly are having a positive impact on our performance in the second quarter and will continue to do so through the rest of the year. And then obviously, with the volume increase that we’ve seen year-over-year on the quarter but also to the whole first half of the year, that’s also have been able to increase our capacity utilization that drives down our cost base. So, it’s due to a number of different factors, all of them moving in the right direction.

Andrew Benson – Citigroup Global Markets Ltd.

Okay, thank you.

Operator

Your next question is from Mr. Matt Maccazini. Please state your name, company name, followed by your question.

Matt Giveny – Robert Baird

Good afternoon. Hi, this is Matt Giveny from Robert Baird. In regards to Nexavar, can you provide the sales numbers for Japan, China and any other markets you may have?

Jörg Reinhardt

Yes. Just give me a second. What I would like to do is actually to break the sales sum in four buckets. So second quarter sales in U.S. was €41 million; in Europe was €62 million, and I’m talking Euros; and then in the Asia Pacific environment was €50 million. Out of that, it was €27 million in Japan and it was €13 million in China.

Operator

The next question is from Mr. Andreas Heine. Please state your name, company name, followed by your question.

Andreas Heine – Unicredit Bank AG

Andreas Heine from Unicredit. Sorry for coming back again on the volume trend in Bio and MaterialScience. Looking on what you would see in other markets and stripping outward you see at some, let’s say, one-offs with these, inventory run down and delaying orders, what you see in China. How you would describe the underlying trends in the first quarter and in the second quarter? Is there now a slowdown in the volume growth, so reaching a plateau or what you expect in the various business lines as a trend?

Then on the CropScience, at first my question on the disclosure, you skipped the sales per products and you merged the two business alliance into one reporting line. Will you have more changes in the disclosure or is that now what we will see also in the future. Secondly on CropScience and insecticides you have a phasing out of old products which probably had an impact noise and main reason of the decline in the sales there. Is that the only reason or is also a generic competition at (inaudible) a reason why insecticides are rather weak. Thanks.

Marijn Dekkers

Okay. Yes, Patrick.

Patrick Thomas

Hi, Andreas. It’s a very volatile market situation but perhaps if I focus in on some countries, it will help give you some flavor. The U.S.A. quarter two and quarter one, so sequential quarterly growth was around about 5% across the whole of the U.S. And the whole of the German-speaking, or what we call DAC, Germany, Austria, Switzerland was around 4% quarter-on-quarter. So they seem to me solid and relatively stable and probably those are good indicative figures for what we would expect to see in the rest of the year. I think it’s notable that we’ve seen Japan at minus 3% quarter-on-quarter. And that is a reflection of the automotive industry and the electronics industry. And that rolls across into China where we talked about the slightly greater reduction sales volume.

So for me, if I look at the colors on the chart, the countries that are most significantly impacted are Asian. China is the most impacted at the moment with the destocking and the slowdown. And I have difficulty forecasting what happens next. But if we are right in our analysis with the destocking, and as you saw the overall public GDP growth rate, it’s above the 8% target rate. And one would expect to see that destocking effect run out during the third quarter.

Marijn Dekkers

Okay. Marijn Dekkers here. I’ll take the question on the reporting on CropSciences and then you can take the follow-up question on this, Sandy. It’s very key to us that we are providing you with as much meaningful information as we can. And we’re committed to do that. But at same time, not disclose information that is really important to have for our competitors and really unnecessary to our investors to really understand the company.

So on the basis of those premises, we’ve made the decision, two things; one is to no longer report the 10 top products in CropSciences and the individual sales momentum; and secondly, now that we are running a very integrated business model between the Crop Protection products and BioSciences products where cost allocation separately among those two has pretty much become impossible, we have terminated the separate profitability reporting.

But we are continuing, and I think this is important that you see this in our disclosure, we’re continuing to report the sales development in the quarter individually for BioScience products then insecticides, fungicides and herbicides. So if you want to compare our performance in seed treatment. But if you want to compare our performance with our competitors, our sales performance, you can continue to do so. Sandy?

Sandra Peterson

Okay. So as it relates to insecticides, you’re right. The impact of the quarter and also the first half of the year is that there are eight old active ingredients that we have been sunsetting or discontinuing for a variety of different – either divesting or phasing out. We started this process last year and it’s going to continue through the end of this year.

But the impact in the first half of this year is about €60 million on our revenue line. And without the effect of these phased out products, our insecticides business actually would have seen in the first half of the year a 7% increase year-over-year. So the majority of it is due to the phasing out of these products. And despite new product launches, we have not been able to yet fully make up for the saving out of those products. And clearly in some markets like China, there has been some pressure from generics, but this is primarily due to the divestment and the phasing out of old assets.

Andreas Heine – Unicredit Bank AG

Good. Thank you.

Marijn Dekkers

Next is?

Operator

Thank you. The next question is from Mr. Florent Cespedes. Please state your name, company name, followed by your question.

Florent Cespedes – Exane BNP Paribas SA

Good afternoon. Thank you for taking my question. Florent Cespedes from Exane BNP Paribas. I’ll ask a question, please. So first, regarding to Betaferon, could you give us more color on the performance by region, price and volume effect, and an update on your view of the performance going forward? Second question regarding women’s health. It is a historical franchise, but is now expected to decline. Do you have any plans to re-energize this division? And last regarding the HealthCare margin. When we look at the performance of H1, this implies a significant decline in H2, notably in Pharma, knowing that you will have the cost-cutting planning impact. Could you share with us why you are so cautious? And what is it a big risk for the H2 in HealthCare? Thank you.

Marijn Dekkers

Jörg?

Jörg Reinhardt

Thank you, yes. Betaferon, yes. I mean, you’re absolutely right. Betaferon did performed maybe surprisingly well. The main reason for that is that we had a positive performance actually in the U.S. We had a slight growth of 1 percentage point in the U.S., which is mainly due not necessarily on volume, but significantly on prices.

When we look at the rest of the world, we do actually have a significant decline especially in Europe, where we have continued significant pressure from Extavia, and as you know, not going to go away soon. We do have a positive development of Betaferon in a number of emerging markets. So for example, in Brazil we have a 30% growth. But overall, I would say U.S. is slightly positive, Europe significantly negative, rest of the world positive. That results in a decline of this group 5%. As we have guided in the past with a high single-digit decline, I would assume that between mid and high single-digit decline is going to be for the foreseeable future, again.

Women’s health, yes, it’s correct. We’re, of course, under pressure especially in the oral contraceptive field especially now also in Europe. In the U.S., as you know, (inaudible). We do have plans and you know that we have a number of lifecycle management activities in this field, be it our patch for example that we are developing, the Flex system that we developed.

And you can be rest-assured that we will continue to invest in this field and look for new opportunities to capitalize on the market leadership that we have in the contraceptive field. What exactly will happen over the next two to three years, I would like to ask you to give us little bit more time to elaborate on that. But we have not written off the franchise at all.

And the third one is margins. We had a good first quarter and a good second quarter. There was a question on Xarelto earlier today. And as you can imagine, there is significant effort behind going to be in the second half and also in the first half of next year, which explains some of the additional cost that we will have. In addition, you also heard that we had, at least in second quarter, a one-time of €22 million, which was a positive effect which we’ll not have going forward.

But there is nothing to be, as you said, cautious about or nothing to be afraid of that would hit in the second half. We simply believe that in the second half, we will have higher efforts, higher investments in R&D, but also in marketing and sales that will motivate our margins a little bit, so that we get back to the guidance that we have given before of the slight margin increase in Pharma. Of course if it gets better than that, we take it as well.

Florent Cespedes – Exane BNP Paribas SA

Thank you very much.

Operator

The next question is from Mr. Ronald Köhler. Please state your name, company name, followed by your question.

Ronald Köhler – MainFirst Bank AG

Yes. Hello. I have one question on TI again. There is obviously a lot of capacity from competitors coming on stream and it might be right that you have the local capacity, but still it seems to be that you need to crowd out some to slow the capacity to get the market balanced again? How are your plans here, which means should we look forward for a more less low price environment for longer time? Second question on the ATLAS study, you said actually it’s still ongoing. If I look through the FDA page, the primary end point should have been reached in June and the study should close in August. Is this the date you can confirm, as of given at the FDA page?

Third question actually to BioScience, now obviously you skipped the reporting and there might be one integration point and I just wanted to, obviously we have Syngenta which also does that integrated business approach. But you lacking definitely the big cultivation plants here like crop, like corn and so on. So what are your ideas here in filling that gap in terms of integration? And second point on profitability, would you have expected that profitability will now significantly increase with some royalty incomes, and might that be also one of the reasons why you not any longer report that or how is that to read? Thank you.

Marijn Dekkers

Ronald, we didn’t get your second question. Would you mind repeating it?

Ronald Köhler – MainFirst Bank AG

The ATS study (inaudible)?

Marijn Dekkers

On Crop.

Ronald Köhler – MainFirst Bank AG

On Crop. Okay, that was the third question, yes. On Crop, the integrated business model, so point number one is obviously Syngenta is doing the same business model, but they have the advantage being active in the large cultivation like corn and soybean whereas you have on the seed side just the smaller cultivation. And the question is any ideas how to run the integrated business so to say without having corn and soya and can you do that actually? And the second question on BioSciences, do you expect some larger royalty payments over the next one or two years coming, which also might be one of the reasons why you’re not any longer report earnings on that field?

Patrick Thomas

Okay. TDI, yes. We have to look at both parts of the equation, both supply and demand. And maybe I can just say something about TDI demand first of all. The growth rates from 2009 to 2010 was actually above 13% and that means we ended 6% above the pre-crisis levels in the marketplace. But TDI has been growing strongly and above historical norm levels.

I think we’re now back to a historical norm which is 1% or 2% above GDP, specifically in the range 4% to 5% growth. And the short-term laws of demand have been in China where the slowing down in construction has impacted furniture. And we’ve seen that both in the TDI market and in the wood coatings market. So we can see clearly that the Chinese slowdown has affected us.

On the supply side, both of the plants sort of starting up at the moment are totally new technology.

Ours is new low cost technology as you described it. Our competitor’s plant is also a new technology for them. And I think it’s realistic to expect that it will take some time before those assets run at full rate. And again, I emphasized our plant will run at a full rate by the middle of next year, so four quarters from now. And that’s because during the startup process, we have to take the plant down regularly to check the condition of the asset for the plant will actually be on and off stream quite often between now and the middle of next year, and then it will ramp up fully and will be fully operational. So without doubt, there is some overcapacity in the second half, but that – we’ll yet to see what the growth rates are.

Jörg Reinhardt

I can confirm, again, that the ATLAS study is still ongoing. It has not been completed. I understand that in the clinical (inaudible) they have indications that it would be completed by August. You’ll have to update that. It is an event-driven trial, so it’s not in our hands and not in our control to determine exactly when the end point of that study would be. So the only thing I can really tell you is that we do expect to have the data and the study completed towards the end of the year, early next year, but not before that.

Ronald Köhler – MainFirst Bank AG

Okay. (inaudible) just want to your question of why we change the reporting in CropSciences. There are no other motives than the ones I mentioned. Sandy, can you then comment on how you run an integrated business model?

Sandra Peterson

Yes. Let me talk about how we actually have been running the integrated business model and the change that we made in the organization to recognize it going forward and what we’re doing to, I guess, address your question about what crops we’re in and how we’re managing it. So, as you know, as a business for the last few years in a handful of crop areas, we’ve actually been running an integrated crop model. So, for example, in canola and in cotton in certain geographies and in vegetables in certain geographies and in rice, we’ve actually been running integrated sales and marketing teams, which has been highly successful to us.

Last year, we made the decision to change at the senior leadership level of how we are managing the business and have one individual who has overall oversight and responsibility now for both our Crop Protection and our BioScience business. He’s our Chief Operating Officer. And in viewing that, it is a recognition that the model that we had been using in a handful of countries was successful. And we are going to continue to do it where it makes sense in the marketplaces where you can actually run appropriately an integrated business model. And so, we will continue to further that as we go forward. So as Marijn said earlier, it was in recognition with the change that we have made in terms of how we’re a management business from the top down, but in a number of markets, we already had been running an integrated business model.

To your question about broad acre crops versus smaller crops, I would just say a couple of things. We are in the right business in hybrid rice and we have a nice business and we continue to invest in it in Asia and Latin America. And so that’s an important business and that can be run in an integrated basis. As you know, we also recently made an acquisition in soybeans. And so soybeans is an area where we are going to continue to invest and continue to expand our business, not only in Crop Protection but also in BioScience.

And as you also know, we’ve made a series of acquisitions and alliances in the last 18 months in wheat, which is a very important long-term investment that we have in a broad acre crop and how we’re going to manage it. As it relates to corn which is clearly the other one, we have a very robust CP portfolio that we’re successful with. And we also have a trade pipeline that we are developing and are very confident will continue to produce good trades that we can trade and license out to other corn seed producers around the globe. So that’s how we’re managing the business.

And just to your last question about royalty income, we clearly get royalty income from our trade portfolio and that will continue. But there is no difference in how we’re managing that than in the past. And we didn’t change the reporting construct to not show those numbers. That has nothing to do with it.

Ronald Köhler – MainFirst Bank AG

Okay, thank you.

Marijn Dekkers

Okay. Cleo?

Operator

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

Alexander Rosar

Okay. Thank you. Also on behalf of my colleagues, thank you for being with us on the call and for your questions. We are now saying good bye and all hope to meeting you soon again. Thank you.

Operator

Ladies and gentlemen, this concludes the second quarter 2011 results investor and analyst conference call of Bayer AG. Thank you for participating. You may now disconnect.

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!

Source: Bayer's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts