Bayer's (BAYZF) CEO Marijn Dekkers on Q1 2016 Results - Earnings Call Transcript

| About: Bayer A.G. (BAYZF)

Bayer A.G. (OTCPK:BAYZF) Q1 2016 Earnings Conference Call April 26, 2016 8:00 AM ET

Executives

Jürgen Beunink - Manager-Investor Relations

Marijn Dekkers - Chief Executive Officer

Dieter Weinand - Head of the Pharmaceuticals Division

Erica Mann - Head of the Consumer Health Division

Werner Baumann - Chief Strategy and Portfolio Officer

Johannes Dietsch - Chief Financial Officer

Liam Condon - Head of the Crop Science Division

Analysts

Sachin Jain - Bank of America Merrill Lynch

Florent Cespedes - Societe Generale

Tim Race - Deutsche Bank

Jo Walton - Credit Suisse

Peter Verdult - Citigroup

Richard Vosser - J.P. Morgan Cazenove

Luisa Hector - Exane BNP Paribas

Vincent Meunier - Morgan Stanley

Daniel Wendorff - Commerzbank AG

Damien Conover - Morningstar

Emmanuel Papadakis - MainFirst Bank AG

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Bayer’s Investor and Analyst Conference Call on the First Quarter 2016 Results. Throughout today’s recorded presentation all participants will be in a listen-only mode. Presentation will be followed by a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Mr. Jürgen Beunink, Investor Relations of Bayer A.G. Please go ahead, sir.

Jürgen Beunink

Ladies and gentlemen, good afternoon and welcome to our conference call, also on behalf of my colleagues. Today, we’d like to review our first quarter figures with you. With me on the call are Marijn Dekkers, our CEO; Johannes Dietsch, our CFO; and Werner Baumann, Chief Strategy and Portfolio Officer.

Pharma is presented by Dieter Weinand; Consumer Health by Erica Mann; and Crop Science as well as Animal Health by Liam Condon.

Marijn will start off with a brief summary of the developments in the first quarter. We assume you’ve all received and reviewed our interim report, the briefing document and the presentation slides, so we just focus on the main points.

Before handing over to Marijn, I’d like to draw your attention to the Safe Harbor Statements. Thank you, Marijn.

Marijn Dekkers

Yes, thank you, Jürgen. Ladies and gentlemen, good afternoon, it gives me great pleasure to welcome you to our Q1 conference call to share a good set of numbers with you today. And I’m pleased to report that we’ve had a successful start to the year.

We started up with good sales and significant earnings growth on the group level, especially the Pharma Division showed substantial sales increases. The group’s earnings growth was driven by all segments. We received approval in Europe, the U.S. and Japan for Kovaltry for the treatment of hemophilia A.

We were also granted marketing authorization for Xofigo in Japan. We are pleased with the recent decision of the U.S. Patent and Trademark Office to grant patent extension for rivaroxaban, the active ingredient of Xarelto.

The U.S. compound patent will now expire in August 2024. To reduce our remaining stake in Covestro further, we decided last week to transfer 10 million Covestro shares into the Bayer Pension Trust. And this funding now reduces our remaining stake in Covestro from 69% to 64%.

Based on our achievements in Q1 and our expectations for the remainder of the year, we are confirming our full-year sales and earnings guidance for 2016. Now, let me briefly cover some key figures of the underlying Q1 performance. And please note, when mentioning sales I’m referring to portfolio and currency adjusted data unless otherwise stated.

Group sales advanced by 3% to €11.9 billion, driven by all Life Science businesses. Reported EBIT climbed significantly by 20% to €2.3 billion. Earnings were diminished by special charges of €272 million, mainly due to extraordinary amortization in relation to our Pharma product Essure.

Adjusted EBITDA for the group posted a strong increase of 16% to €3.4 billion, driven, as I said, by all segments. This excellent development was accompanied by higher R&D expenses of about €160 million in the quarter and negative currency effects of around €60 million.

Core earnings per share amounted to €2.37 and that’s an increase of 14% over the prior year period. As a result of the improvements in EBITDA, gross cash flow increased by 28% in the quarter to €2.6 billion. Although more funds were tied up in working capital versus the prior year, net cash flow almost doubled to over €1.3 billion as a result of the divestiture of our Diabetes Care business.

With capital expenditures of €363 million, the operating free cash flow came in at roughly €960 million. Net financial debt at the end of the quarter stood at €16.3 billion, a decrease of €1.1 billion from year-end 2015, following cash inflows mainly from the Diabetes Care divestment.

So in summary, in the first quarter all Life Science divisions drove the good organic sales growth. Actually the Life Science organic sales growth rate was 5.9%. The substantial improvement in adjusted EBITDA was generated by all division.

I will share the Q1 performance of our Life Science segments in more detail now and also provide you with an update on some key Pharma pipeline efforts.

Start with Pharma, Pharma sales advanced 12% to €3.9 billion in the quarter across all regions. This growth was driven by our recently launched products Xarelto, Eylea, Stivarga, Xofigo and Adempas, which posted combined sales of close to €1.2 billion in the quarter compared to about €900 million last year and that’s up 35%.

Xarelto was able to build on its leading position world-wide with market share gains in the anticoagulant space. These gains translated into sales growing globally at 31% with volume increases in Europe and Japan contributing.

Eylea again significantly expanded sales, up 49% versus the prior year, and this is mainly due to growth in major European countries and Japan. Xofigo sales, which advanced 37% and the Adempas now at €56 million in the quarter, also made positive contributions to the overall sales performance. In contrast, sales of Stivarga declined by 5% due to increased competition in the U.S.

Performance of our established product portfolio was mixed in the quarter; compared with a weak prior year quarter, sales of Kogenate advanced by 14%. We started marketing our new hemophilia drug Kovaltry in the first quarter. Sales of the Mirena family grew at 7% mainly due to higher demand in the U.S.

The sales decline of 8% for Betaferon resulted from shifts in tender business in Latin America. Sales in the U.S. however increased.

Following the strong sales growth, adjusted EBITDA of Pharma showed a substantial 16% improvement over the prior year to nearly €1.3 billion. The Division performed excellently despite an increased investment in R&D as well as negative currency effects of around €30 million.

Let me also provide an update on some key assets of our mid-stage Pharma pipeline. As you know, we prioritized five Phase II projects, for which we expect it to be ready for Phase III decision by the middle of this year. And these assets are Finerenone, Vericiguat, Vilaprisan, Molidustat, and Copanlisib. Now, four out of these five assets, we now have positive Phase II data available. Two of those are already in Phase III and for two we currently plan to enter Phase III. For the fifth one, we are still awaiting Phase II data.

Let me give you a few individual detail, start with Finerenone. Finerenone is already in Phase III for diabetic kidney disease. We decided to focus our efforts in this clinical program and will at this time not proceed with the Phase III trial in heart failure. Then Vericiguat, for Vericiguat we will pursue the Phase III development in the heart failure with reduced ejection fraction together with our partner, Merck & Co. However, the Phase II study in heart failure with preserved ejection fraction did not meet this endpoint.

Thirdly, Vilaprisan, for Vilaprisan we completed the first Phase II trial in uterine fibroids and top-line data suggest a very competitive profile in this indication. And we plan to proceed to Phase III of the clinical development here as well. Then Molidustat, for Molidustat, our HIF-PH inhibitor, in development for renal anemia, we recently completed three Phase II studies. And top-line results indicate positive outcomes of the program, but given the competitive environment the Phase III program will require large outcome studies and against this background we are currently evaluating options including a potential licensing of Molidustat.

And then finally Copanlisib, decisions on Copanlisib, which is in the development for non-Hodgkin lymphoma will depend on the results of the Phase II study, which is running in parallel to Phase III and those data are expected in the third quarter this year.

So that’s the update on the Pharma pipeline. And now, let us move to our Consumer Health business. Sales were up 2% at €1.5 billion, driven by strong advances in Latin America, Africa, Middle East and Asia Pacific. The economic situation in Russia hampered sales development in Europe and also North American sales declined slightly.

Our key brands showed a mixed performance. Aspirin sales including the business reported on the Pharma grew at 4%. Bepanthen sales advanced an impressive 10%, especially in the emerging markets in Western Europe.

Canesten benefited from strong volume increases across all region posting a 21% increase in sales. Nevertheless our top brand, Claritin, have to register a decline of 7% mainly resulting from lower quarter-over-quarter sales in China. The gratifying performance in the U.S. for Claritin could not compensate this development.

Adjusted EBITDA in Consumer Health increased by 4% to €383 million, mainly as a result of the business expansion and cost synergy. Negative currency effects of about €20 million held back the improvements in the quarter.

So let’s now look at Crop Science’s Q1 performance. Overall Q1 for Crop Science was a quarter in which we held up well in a weak market environment. Sales increased by 1% to €3.0 billion. In Europe, sales remained at prior level. In North America, we posted a 4% growth on the back of a double-digit increase in our SeedGrowth as well as Seeds business.

In the Latin America, Africa, Middle East regions sales advanced 1% driven by the Fungicides business and higher sales of vegetable seeds. Lastly, in Asia Pacific, we have to record the sales decline due to development in our Insecticides and Fungicides businesses.

Adjusted EBITDA at Crop Science was €1.1 billion, that’s 6% increase compared to the prior year. The positive effects of higher selling prices and lower cost of goods sold, could overcompensate higher expenses for R&D as well as negative currency impact of around €15 million.

And lastly, our Animal Health business advanced sales by 9% to €408 million, this business benefited from increased demands in the U.S. where especially our Advantage products achieved sales increases. Sales of Seresto, our new flea and tick collar for dogs almost doubled in the year, supported by a higher demand in both the U.S. and Europe. Adjusted EBITDA for Animal Health improved by almost 20% to €122 million, thanks of course to the group’s business development.

So then with respect to the guidance, based on our performance in the first quarter and our expectations for the remainder of the year, we are reiterating our guidance for 2016. We plan to grow our Life Science sales organically by a mid-single-digit percentage to approximately €35 billion and to improve EBITDA before special items by a mid-single-digit percentage.

And for full-year core EPS and that includes our remaining stake of Covestro, it is anticipated that we also improved this by mid-single-digit percentage. The 2016 guidance is also reiterated for all business segments as we published it in February.

So ladies and gentlemen, we are overall pleased with Bayer’s start in the first quarter of 2016. Each of our business segments contributed to our earnings growth momentum in the first quarter. And for the group as a whole, we expect to deliver important sales and earnings advance in 2016.

And that concludes my remarks, and we will now be happy to take any questions you may have. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Sachin Jain, please state your name, company name, followed by your question.

Sachin Jain

Hi, it’s Sachin Jain from Bank of America. A couple of pipeline related questions following those introductory comments. So firstly, could you comment on the reasons for not progressing Finerenone in heart failure and why you view the situation differently for Vericiguat, given it’s a similar indication with similar headline Phase II data, is predominant reason the cost sharing on Vericiguat with Merck?

Secondly on Molidustat, how long do you expect partner discussions to take, have those commenced yet? I’m wondering, if you can comment at a high level on any aspects of differentiation you see in the Phase II data you have in-house?

And then final question is sort of financials around pipeline in mid-term R&D spend, given fewer fully funded large outcome studies internally, just where do you sit within the 32% to 34% range now for the 2017 Pharma margins? The indication previously been that if you’ve progressed a lot of these assets you would be at the bottom-end of that range, clearly that’s changed a little bit. Thank you.

Marijn Dekkers

Okay. Thank you, Sachin. To answer the pipeline questions first, Dieter, start with Finerenone.

Dieter Weinand

Yes, I’ll start with the question for Finerenone. We recently completed a routine portfolio review. And when we consider all our assets that we have, from a competitive and a commercial perspective, and as a result, confirmed that the main value driver for Finerenone has always been DKD. And reached decision, it was a commercially driven decision, not to pursue Finerenone in congestive heart failure. So that is what drove that decision.

With regards to Vericiguat, it’s a different situation. As we already and Merck already disclosed, we are planning to move this product forward into Phase III later this year with our partner Merck in congestive heart filature with reduced ejection fraction. And that decision has already been reached and we are now finalizing the best way forward with our protocol.

When we will start partnering discussion, I don’t think we should be in a position to just comment on any particular partnering discussions we might have. We continue to - we had top-line data that was positive and we are considering all options now to see how we move that product best forward in that regards.

Pipeline R&D funding, I don’t think we’re going to be revising our guidance at this point. We have a rich Phase III and Phase II pipeline. We continue to evaluate what our biggest opportunities are. We focus on our resources strictly on the biggest value drivers within our portfolio and continue to move our portfolio forward and make the necessary R&D investments to ensure sustainability and success for our continued growth in the future, so…

Sachin Jain

Apologies, can I take a follow-on? I still don’t quite understand the reason for difference in Finerenone and Vericiguat. Is it data-driven? Is it new mechanism of action? Is it sort of cost sharing? Just exactly where do you sit on that?

Dieter Weinand

There is no new data on Finerenone that drove this. As I indicated, this was a commercially driven decision looking at the commercial environment, competitive environment that there is, and the perceived opportunity for Finerenone. And we look at the commercial potential of Vericiguat separately in that commercial environment, in which Vericiguat would be competing.

Sachin Jain

So, again, just to clarify, why would you view that differently?

Dieter Weinand

We see both of these competitive landscapes where we would be competing congestive heart failure differently, how it would fit in the armamentarium of physicians.

Sachin Jain

Okay. Thank you.

Marijn Dekkers

Thank you, Sachin.

Operator

Next question comes from the line of Florent Cespedes. Please state your name, company name, followed by your question.

Florent Cespedes

Good afternoon, gentlemen, Florent Cespedes from Societe Generale. Quick questions, first on Kogenate franchise. Is there any stocking effect following the launch of Kovaltry on your new products? Secondly, on consumer, could you elaborate a little bit on why the sales are down in the U.S. and what do you intend to do to reenergize this trend?

And maybe on Vericiguat on preserved ejection fraction population, you announced that the results didn’t reach primary endpoint. First wondering if you could give a little bit more color and maybe just a question on how are you planning Investor Day during the second-half of this year, maybe we just focus on your R&D project and the usual questions for management. Thank you.

Marijn Dekkers

Okay. Thank you, Florent. We start with the Kogenate question for Dieter.

Dieter Weinand

So Kogenate is obviously impacted a little bit by buying patterns and shipping patterns. And we are going into first quarter this year of a much weaker quarter than the first quarter of 2015 combined with some additional orders we received this quarter, so that drove a stronger first quarter.

Kovaltry stocking did not have a significant impact on the performance of Kogenate, although I would mention that Kovaltry launched. It’s proceeding in line with our expectations. We are pleased with that launch.

Marijn Dekkers

Okay, and Consumer Health, Erica, sales in the U.S.

Erica Mann

Thanks, Florent. The decline of minus 1.6% in the U.S. was mainly driven by a weak cough-and-cold season, combined with additional competitive pressure impacting Aleve. These negative effects were partially offset by an increased demand for other U.S. products. So Claritin grew at twice the allergy market, at 6.3% versus 2.6% in the market. We saw Aspirin in the U.S. up 7%, MiraLAX up 8.7% and MiraFIBER was also launched in the first quarter. So the fundamentals in the business are good. We continue to execute on our plan and I think that should answer your question.

Florent Cespedes

Thank you.

Marijn Dekkers

Okay, then Vericiguat, maybe little bit more detail, Dieter.

Dieter Weinand

Quick…

Marijn Dekkers

Preserved ejection fraction did not meet its endpoint.

Dieter Weinand

Yes. There’s not much more to say. It didn’t meet its top line results endpoint. So we are not moving that product forward in preserved ejection fraction. The data, more detailed data will be released at an upcoming scientific conference.

Marijn Dekkers

Okay. So, Florent, stay tuned on that. On the management meeting you will understand that with the CEO change that is taking place at the moment with Werner Baumann, becoming the new CEO of Bayer, we didn’t think it was in the last few weeks a good idea to do a management meeting like we always do in March. But I think there is good news on the horizon, Werner do you want to say something on that.

Werner Baumann

Yes, it’s all right. I can only second what Marijn said. We did extremely good, yes, so we are just about to send out a hoster [ph] date within the next days. And the plan, Florent, is that we continue the same routine we have had before. But as Marijn just mentioned, the timing was not ideal for the spring meet management. So the spring meet management will eventually then move to the time slots right after summer. And it’s going to be in the beautiful Leverkusen surroundings, yes.

So it’s going to be a meet management whether it is in Stadion [ph] or wherever, we don’t know yet. What you should expect is the comprehensive update on the strategy of the businesses. There you will have the chance to interact with our senior management in each of the businesses and the corporate arena. And last but not least, we will also update you on our mid-term targets.

Florent Cespedes

Excellent, thank you very much. I look forward to that.

Marijn Dekkers

Okay. Thanks, Florent.

Operator

Your next question comes from the line of Mr. Race. Please state your name, company name, followed by your question.

Tim Race

Hi there, team. It’s Tim Race here from Deutsche Bank.

Marijn Dekkers

Hi, Tim.

Tim Race

Hi there. So a few questions if I may. So first on the pipeline, obviously you had a few setbacks, a few products move forward. Lots of investor questions obviously on this aspect and clearly the root of this is that they don’t feel there’s enough in the pipeline. So do you feel there is enough in the pipeline to do - or replace Xarelto on your products in the long-term organically, or do you feel you’ll have to go to the market at some point and [buy more through] [ph] M&A, or relicensing? And what’s your preferred route and where would you be focusing?

Then maybe another question on portfolio management, could you discuss Covestro, the timelines in terms of your stake, how long you intend to hold it for? We’ve obviously seen first signs of some further divestments so any further focus there?

And just finally on Animal Health, if I may, we have lots of comments in the press linked to your liking this business. The key issue is that there’s a scarcity of assets to buy. So what do you see as the current market environment and how long do you feel you can operate in this environment before your lack of scale impacts the business going forward? I’ll leave my questions there and thank you for your answers and thank you, Marijn, for hosting these calls.

Marijn Dekkers

Okay. Thank you, Tim. So, Dieter, general comments around the strength of the pipeline.

Dieter Weinand

Yes. As I mentioned before we believe we have a very strong pipeline with 17 profits [ph] in Phase III and 18 in Phase II. So I think we have a very strong pipeline going forward. We focus as you know in the areas of oncology cardiovascular medicine, women’s healthcare, hematology and others. So in our focus areas we have significant pipeline assets. We mentioned already Finerenone in DKD. We mentioned Vericiguat in congestive heart failure.

We also have a partial a1 agonist, we are moving forward. We have Vilaprisan in uterine fibroids. So we believe we have a very strong pipeline. We will not comment on any particular partnering opportunity we might or might not be considering. But every company and ours as well, have partnered with other companies to enhance our pipeline licensing and other products in a past. And we see no reason why we would not continue that practice to look around what we have internally and complemented, as need be, externally.

Marijn Dekkers

Okay. Then Johannes Dietsch, our CFO on the Covestro timeline.

Johannes Dietsch

Yes. Thank you, Tim, for the question. And for Covestro we can reiterate our intension to fully divest to the remaining stake. In Covestro, mid-term, we have not attached a detailed timeline to that, but we are committed and we are currently evaluating all our options. We have nice vario-crystallization [ph] since we can, we are very pleased with development on the Covestro stock.

We want to exit in a very optimized way. Therefore, we start with one transaction recently that was last week, when we transferred 10 million shares into the Bayer pension trust fund, so stay tuned on the further development in this aspect.

Marijn Dekkers

Okay. And then, the Animal Health question, Tim, Werner Baumann will answer that.

Werner Baumann

Yes, Tim. First of all, I think our testimony of quarter one, we currently don’t lack critical mass in order to show nice growth. It’s always also a question of product portfolio. And we are particularly pleased with the excellent performance of Seresto, which in a very short period of time made it to becoming a blockbuster in the Animal Health industry with annual sales of more than €100 million, yes, so significantly also surpassing our own expectations.

At the same time, it is a great industry, a lot of people would die to be present in that industry. It has been on record that we would love to strength this business that is a position that we have faced for long period of time. You can be assured that we continue to look at ways to strength the business.

There are, of course, different ways to do that. You will also [indiscernible] not go into further detail on what it is we would eventually be looking at. And that these businesses on our portfolio, we continue to look at performance strategic framework of the respective industry we compete in. And take the right decisions to further develop our portfolio and the company with it. So that’s all I can say at this point in time.

Tim Race

Okay.

Marijn Dekkers

Okay. All right. Thank you, Tim.

Operator

Your next question comes from the line of Jo Walton. Please state your name, company name, followed by your question.

Jo Walton

Thank you very much. Few questions, please. Firstly on the Pharmaceutical division, you’ve got very strong improvement in the margin in the first quarter, despite increasing your R&D as a percentage of sales. I wonder if you could just tell us, how representative you feel this margin improvement is, so whether there have been any one-off effect?

And looking at the portfolio, perhaps you could give us this opportunity just to update us on what you think your share is with Xarelto relative to your key competitors, whether the ACS indication has made a difference in Europe? Clearly for our valuation looking at the longer term trajectory of Xarelto is still extremely important.

And also just on the cancer product, you’ve alluded to strong competition for Stivarga. I wonder if you can tell us what your plans are for turning that around, whether if that has now reached a peak and declining, maybe Nexavar will as well, because that’s about to receive much more series IO competition in renal cell carcinoma. Thank you.

Marijn Dekkers

Okay. Thank you, Jo. So let’s start with margin improvement, Dieter, in pharma.

Dieter Weinand

Yes. So we are not revising guidance as I mentioned before. There were no one-offs driving that per se. We have previously stated that we will be very prudently managing our expenses, focusing our resources on the greatest value drivers. That is in commercial and in R&D.

And going forward, you asked why we would not see growth. I think you are alluding to the question that what’s impacting our margin going forward. So let me explain a little a bit, as you know, or may know, on April 1 in Japan, we got a biannual price decrease of 6% to 7% overall range for the portfolio, that is in the high-double-digit million euro range impact.

We have price pressure in China, healthcare reformed cost containment measures, in particular the pricing, the provincial bidding in China and the provincial price harmonization in China followed by hospital bidding, that then triggers again synchronization with the provincial pricing that will put pressure on us in the second half of the year in pricing.

The third aspect is we see commercialization of Stivarga in Germany that will have an impact in the second half of the year. And with our Eylea sales growth, that’s a profit sharing product that obviously has lower profit than some of internal product, this is a profit sharing product, that impacts overall profitability going forward.

You asked about Xarelto, we have roughly a 34% share for Xarelto based on IMS and that’s again versus the fourth quarter by 0.1% and 2.1 percentage points versus the end of Q4 - versus the end of December 2014, so we continue to expand our market share of Xarelto. We have good performance for Xarelto and that’s global share, we have good performance of Xarelto in Europe, also in Japan, you know that in Japan we took some measures to focused our promotional efforts and targeting messaging and so on that had some impact. Our NBRx share there has substantially improved over the last year, particularly since mid-last year, so that’s driving performance.

You asked about Stivarga competition. We have since - launched or coming into Japan a while earlier, but now in the U.S. - in the U.S. we see a bolus impact where there’s patients waiting, what has happened in Japan, although in the labeling was slightly different, physicians have opted to use long-serve aptus [ph] Stivarga in patients that are of lower performance status and have been through numerous course of therapy.

So in later stage disease utilization for long-serve, that has helped move Stivarga in earlier phases - or earlier stages of disease treatment in patients that are of a better performance status and therefore can tolerate the product better. In the earlier use Stivarga, the better potential for completing the course is an outcome. So we anticipate the similar evolution in the utilization of long-serve, a 5-FU prodrug versus Stivarga, and expect us to respond commercially in the U.S. to correct and to regain our share there.

Nexavar, yes, we see Nexavar competition will continue to come, but we also believe we are in a good position to continue to perform well with Nexavar going forward.

Jo Walton

Thank you.

Marijn Dekkers

Okay. Thank you, Jo.

Operator

Next question comes from the line of Mr. Verdult. Please state your name, company name followed by your question.

Peter Verdult

Afternoon. It’s Pete Verdult here from Citi. Three questions. Number one is on oncology. Given the pipeline setbacks this morning for the MEK and the CDK, I was wondering if you could remind us when your internal efforts in IO, or immuno-oncology, are likely to enter mid- or late-stage development? And sorry for the prickly question, but would you accept the statement that Bayer is now looking increasingly at a competitive disadvantage in oncology? And if not, can we discuss why that’s not the case?

Secondly, on Kovaltry, I realize it’s early days, but could you give us any sense of whether patient starts are coming mainly from Kogenate, or are you seeing switches from other products?

And then lastly on Crop, just wanted to get an update on the landscape there. Are you still seeing signs of irrational behavior from competitors in markets like LatAm? And can you remind us on the level of appetite you have to entertain JVs and partnerships with respect to your Seeds business? Thanks.

Marijn Dekkers

Okay. Thank you, Peter. So oncology, we will go first to the oncology question, Dieter.

Dieter Weinand

Yes. So we have been focusing more on the small molecule side than immuno-oncology. And we did not participate in the first way of the immuno-oncology product development that we saw in the industry. But we have initiated business collaborations with Compugen and the German Cancer Research Center. We are focusing specifically in immuno-oncology with phyte [ph] antibody and prostate cancer in the Phase I in clinical trials.

With the Compugen collaboration, we are focusing on a couple of products as well, so I think that is the next wave that will come in immuno-oncology. Overall, in the oncology pipeline, we have ODM-201 in development in Phase III for non-metastatic castrate-resistant prostate cancer. You are aware of Copanlisib, we are in Phase II with anetumab, so I think we have a focused efforts in certain areas such as the radiotherapeutic platform with Xofigo, as well as with the thorium platform, and we are making our first trials into the second wave of the immuno-oncology portfolio.

With regards to Kovaltry?

Marijn Dekkers

Yes. Where do the patient starts come from.

Dieter Weinand

Yes, it’s too early to delineate where the patient starts come from, it is to be expected some will come from Kogenate that we expect some of that. But also as patients are switched, that are not very well served by other compounds from other products as well and normally you will see a proportional switch from market leader by market share coming to these longer-acting products, as we have seen also for danupdate [ph] in the market, but it’s too early to have any numbers to delineate that.

Marijn Dekkers

Okay. Then Crop, Liam, are your competitors rational or irrational, I think was the question and what is your level of appetite for partnerships in Seed?

Liam Condon

Yes, so related to the level of irrational behavior, and you mentioned specifically LatAm, honestly, I think it’s relatively limited. I mean, normally, we see this through pricing and excessive discounting, but given the fact that most of our competitors are challenged from a margin point of view, I don’t think anybody has a major interest in irrational pricing behavior. So I do think this is rather limited right now.

On the collaboration in Seeds side the way forward - we’ve always said that we want to build out further our Seeds business and there are different ways of doing that. We’ve been investing organically, we’ve had some acquisitions, minor, smaller acquisitions that we’ve made and we continue to look at all options that create value for Bayer, but we remain very committed to further building out our Seeds business.

Peter Verdult

Thank you.

Marijn Dekkers

Okay. Thank you, Peter.

Operator

Next question comes from the line of Mr. Vosser. Please state your name, company name followed by your question.

Richard Vosser

Hi, it’s Richard Vosser here from J.P. Morgan. Thanks for taking my questions. First question, just on around the women’s health franchise, and I saw obviously the Essure product had an impairment, so a couple of questions. Just wondering what’s left in terms of the write-down there and perhaps outside of Mirena and Yasmin, we can see how first the commercial franchise is developing behind the scenes, and how you are seeing that franchise developing going forward together with your pipeline?

Second question just on Crop Science. And just thinking about - I think it’s been a very solid development in terms of a wet winter in the northern hemisphere, in Europe at least, but just if we could have some color on how the seasons are developing and with respect to the northern hemisphere and probably too early for Latin America, but is this a representative quarter, or have we had any pull-through of demand in Europe?

And then finally, one question on Animal Health, as you mentioned, a very strong quarter. Just wondering if you are seeing any benefits from disruption from other players where some uncertainty over their businesses might be weighing on their abilities to sell into the market, but just some thoughts about how sustainable that level of growth is. Thanks very much.

Marijn Dekkers

Okay. We’re going to split the women’s health question in two. Our CFO will first comment on the Essure write-off and then you’d comment, Dieter, on basically the strategy of the business with Mirena and Yas and the other components of it.

Johannes Dietsch

Yes, thank you. For Essure, the putting-in [ph] numbers are available. We acquired this company Conceptus for roughly US$1.1 billion and allocated at that time roughly 50% into goodwill and 50% into IP. Lot of the IP part we impaired now 50% of it. So the remaining 50% is still in our books.

Marijn Dekkers

Okay, and then, women’s health business portfolio.

Dieter Weinand

So we’re coming off a good quarter with higher demand for Mirena family in the U.S. As you know, there is a trend that more women are for long-acting contraception. We fully anticipate to continue to partake in that trend and take advantage of it. The launch of Jaydess and Skyla is proceeding very well. We have successfully co-positioned the products in the market. We see the smaller or shorter acting product Jaydess and Skyla being utilized by younger women approximately 10 years younger than those utilizing the five-year slightly larger and longer acting Mirena product.

That market will continue to evolve with longer-acting intrauterine devices and we will continue to participate in that.

So I think the market is steadily - slowly but steadily growing. And we will partake in different market segments within that market of the longer acting contraceptives.

Marijn Dekkers

Good, and then, our weatherman, Liam.

Liam Condon

Yes, so as you know, kind of first quarter 75% of our sales tend to be in the Northern Hemisphere. And what we had a unique result was especially with canola, a very profitable Seeds franchise for us in Canada in the first quarter in March. In some years it can be March, in some years it can be April. But what it basically means is, because we have that book now in the first quarter we won’t see that stellar outperformance in Seeds in the second quarter, and simply because we only sell it once then in the first-half of the year in the Northern Hemisphere.

So North America, that being a big seeds market, will be relatively weak. And in contrast to that, Europe, which was flattish in the first quarter, will see probably a very solid development on the crop protection side. So they will probably balance each other out. And then, we get into the interesting second-half of the year, which is Southern Hemisphere dominated LatAm and APAC, and there we’re expecting a slight pickup in growth.

And we’re not seeing much growth right now. But we’re expecting some growth then in the second-half of the year. And with that if you balance all of that out, the reason why we’re sticking to our guidance staying low at low single-digit growth for us.

The little shimmer of hope we have for the future, I mean, we see this year remaining a difficult market environment for the large part of the year. Question is, when do we come out of the downturn. And we’re all hoping this is going to be 2017. There is not much signs that it’s going to be at the end of 2016. We hope there might be a small pickup at the end of 2016 and that this shimmer of hope that we have now is good sales development of our SeedGrowth products which are kind of a future indicator of potential growth in the market.

We had minus 15% failed for SeedGrowth last year as a treatment of Seed product. And in the first quarter we had a plus 5% sales growth. So that gives us a little bit of confidence that the future outlook looks probably okay. But this year will remain a very tough market environment.

Marijn Dekkers

Okay. Thanks, Liam. And then, as you know, ladies and gentlemen, Animal Health business also reports to Liam Condon. So he will comment on whether or not we are benefiting from the destruction of some of our competitors.

Liam Condon

No, I don’t think this was the case in the first quarter. We had a very strong sell-in to the market, particularly of our Seresto and Advantage brands for flea and tick treatment of dogs and cats. And this is sell-in in North America especially in the US. And then what we hope to see is then consumption from thereon in. So our very strong performance was purely related to a very strong sell-in to the market.

Marijn Dekkers

Good. All right. Thank you, Richard.

Richard Vosser

Thanks very much.

Operator

Next question comes from the line of Ms. Hector. Please state your name, company name, followed by your question.

Luisa Hector

Hello, it’s Luisa Hector from Exane. I have a few questions, please. So on the Covestro stake, the movement into the pension fund, is that now complete, or could you do more and are there any tax implications of that movement?

On your guidance, it does look as though you changed your currency assumptions updating them to the end of Q1. So can you give any color on the impact of that, or perhaps the FX effect on core EPS that you are tracking to based on that currency update?

And then perhaps pipeline, we haven’t touched on the eye area and you’ve recently inlicensed from Regeneron, another asset there. Could you talk about the positioning of the various compounds you now have? So you have Eylea and the PDGFR combo and now this second option in the pipeline. So how do you see those fitting together? And can I just confirm how the global rights on the latest compound whereas the other two are just ex-U.S.? Thank you.

Marijn Dekkers

Okay. Thanks, Luisa. We start with Covestro’s stake.

Johannes Dietsch

Yes, yes, we had a transaction of 10 million shares, that’s about roughly 5%. Of course, we could have done more. But for the time being we started with this amount. It is related to the possibility of the pension fund to diversify their asset base and they cannot take unlimited amount of one asset. However, Covestro stock is very liquid asset and it’s a listed stock; therefore we can use this very nicely to reduce our pension liabilities in this respect.

So this was the first stake. I think by pension trust we are through for the time being, and now, as I said before, we are evaluating our options going forward. But regard to this transfer, the sale of shares or the transfer of shares in Germany largely tax-free. It’s 95%, the tax-percent [ph] on the capital gain, which is also very limited in that case.

Marijn Dekkers

Okay. Then guidance remains the same. Is there a currency effect here?

Johannes Dietsch

Yes, in general, of course, you saw that we had in the first quarter a very negative impact on clean EBITDA of €60 million and we normally give the guidance as a 1% change in our currency basket. When all other currencies are weakening by 1% against euro, we translate into €90 million loss in our clean EBITDA.

Marijn Dekkers

Okay. And then, Dieter, the eye programs, can you given an update on what’s going on in the new compounds for eye medication?

Dieter Weinand

So you’re correct. We recently signed a couple of agreements with our partner, Regeneron. One is Eylea, in a combination with a PDGFR-beta compound in a single injection. And the other one is Eylea within H2 [ph]. We believe that the market - the continued significant unmet medical needs and addressing multiple pathways could offer potential additional benefit to those patients suffering from retinal eye diseases.

In delivering these compounds in a single injection as opposed to the Novartis and Ophthotech, Provista, which will be delivered in two different injections 30 minutes apart would provide not only medical benefit, but also convenience to the physician and the patients. So we believe that the market is evolving towards these combination products that address multiple pathways and it therefore hold promise for incremental clinical benefit in a single injection.

Marijn Dekkers

Okay. Thanks, Dieter. Thanks, Luisa.

Operator

Next question…

Dieter Weinand

Oh, there was - the question was - no, we don’t have the U.S. rights. That was the second part. Sorry, I didn’t address that. We do not have the U.S. rights.

Operator

Next question comes from the line of Mr. Meunier. Please state your name, company name followed by your question.

Vincent Meunier

Good afternoon. Thank you for taking my questions. The first line is a follow-up on Covestro. Can you explain us what could be the limitations again on possible new-trench [ph] and the tax implications for that again? Sorry for this question again.

And also what should we expect in terms of use of the proceeds and more precisely is the repayment of the debt still the priority in a low interest rate world and in the context of the pipeline decisions announced today? I have also a question on Consumer Health. I mean, the top line synergies, you said last quarter that it could take longer to generate these top line synergies. Is there any improvement or any change versus last quarter and how to proactively accelerate the sales and the top-line synergies other than just waiting for acceleration of GDP growth in the countries where you are exposed?

And the last question is, on the guidance for this year, is it fair to assume that there will be a sequential increase of the costs following the 10% EPS beats this quarter?

Marijn Dekkers

Sorry, Vincent. Could you repeat that third question, because it didn’t come through?

Vincent Meunier

Yes. It was a question on the guidance for 2016. Is it fair to assume a sequential increase of the costs in the remaining of the year?

Marijn Dekkers

A Second [Multiple Speakers] sequential, okay, a sequential increase. Okay, sorry. Sequential increase, yes. Okay, so thank you, Vincent. So we start with one of our favorite topics, the tax implications of Covestro.

Johannes Dietsch

Yes, with Covestro, we took a question about limitations and proceeds, how to use it. You are absolutely right, we are in a low interest environment and we have also long-term goals outstanding. We have sufficiently filed our debt position. However, proceeds clearly are being used currently in different priority to reduce our net debt and also to reduce our leverage. With Covestro, as I mentioned before, from the joint perspective on capital gains, there are no limitations and I can only reiterate that we have the intention of [indiscernible] taking the midterm to get rid of our remaining stake in Covestro.

Marijn Dekkers

Okay. When we go to Consumer Health, Erica, top line synergies. What are you doing to accelerate the top line with the Merck acquired products?

Erica Mann

Well, the key there for us is to continue to have new innovations and to expand our marketing programs. We have good examples of how we’ve done that. We’ve relaunched Coppertone in Brazil. We’ve also introduced new lines out of Dr. Scholl’s in the United States, and we have leveraged our significant larger scale that we have in the U.S. now to better obtain - better positions in terms of shelf space for our products. All of these efforts will continue, so we won’t just sit and wait for the economic conditions to turn, but we are actively looking at expanding our brands further.

Marijn Dekkers

Okay. And then, on guidance, Johannes?

Johannes Dietsch

Yes. If I understand your questions correctly, what seeing a sequential increase of cost quarter-by-quarter, I don’t see that the cost base should significantly increase over the next couple of quarters. Quite to the contrary, we had in Q1 compared to last year Q1 really high increase in R&D costs, which will be lower over the whole year if you look at our yearly guidance of €4.5 billion in R&D. Therefore, we will also see pretty flattish development of our sales and marketing costs due to the programs installed, especially at pharmaceuticals. Therefore, I don’t see an increase over next quarters.

Vincent Meunier

Many thanks.

Operator

Next question comes from the line of Mr. Wendorff. Please state your name, company name, followed by your question.

Daniel Wendorff

Daniel Wendorff, Commerzbank. Thanks for taking my questions. Three, if I may. One relating to the Crop Science business, also taking into account what you just said on the Seeds outperformance, the product mix-effect the positive one you saw in Q1, which also drove the adjusted EBITDA margin up. Is it fair to assume that this will slightly diminish as of Q2 with the different product mix, meaning Seeds being less important as it relates really to Seeds in Q1?

And second question regarding the reconciliation and adjusted EBITDA contribution which was even positive in the first quarter. I think you guided for minus €200 million for the full year. So should we expect therefore a big change in Q2? And maybe asking the question differently, what resulted in the positive contribution in Q1?

And last question on the Consumer Health business, and you mentioned that Latin America was strong and Russia was weak. Could you give us a bit more color on how you see things evolving now in Q2 and maybe also going into the latter half of this year? Thank you.

Marijn Dekkers

Okay. Thank you, Daniel. So how important is the product mix going forward in Crop Science.

Liam Condon

Yes, thanks a lot. I’ll give you a little bit of color on the margin in Q1, the elements that make it up. So pricing was a core part and this was split out in crop protection with 1% pricing increase and Seeds with a 4% price increase. And that Seeds part is not something that we would expect to be recurring. So this is specifically related also to canola, which we sell once.

It’s also related to our vegetable seeds business, which will continue to perform strongly throughout the year. But the canola impact from Q1 is not a recurring element. Then we had some positive COGS, mix effects, related to the portfolio that we sold, which will not necessarily be recurring impact. And then we have our standard, let’s say, operational across discipline, which will be a recurring element.

So going forward, we would not see the level of margin that we saw in Q1. And there will be certain elements that will continue, but the product mix will have a bit. As we move forward in the year we will have a rather somewhat more negative impact than we’ve seen in Q1.

Marijn Dekkers

Okay. Johannes, recon?

Johannes Dietsch

Yes, Wendorff, question on recon, here we have the true-up of our stock option programs and whenever we see a decline in share price we can reduce our provision. And whenever we see an increase in share price we have to increase the provision. Last year in Q1, we had the strong increase in share price and we added €65 million to our provision for long-term incentive. This year, we saw in Q1 a decline in share price and we reversed €60 million. That is a swing of €125 million in recon compared to previous year.

Now as the shipment is going up, of course, we will increase our provisioning again and the sensitivity is here that €1 in share will add to €3 million in true-up in provisioning. So it all depends on the share price for the remainder of the year. Currently, we do not change our guidance for the €200 million for the full year.

Marijn Dekkers

All right. And then, Eric, Consumer Health geography mix going forward for the year.

Erica Mann

Yes, we continue to focus on driving share in most localities and countries in which we compete. It’s important to note that the second quarter we see a lot more seasonality as the allergy markets and the sun markets kick in, so Coppertone and Claritin. But we also have planned in the back-end of this year additional launches, around 30, which will require additional investments to support those launches effectively.

Daniel Wendorff

Thank you.

Marijn Dekkers

Okay. Thank you.

Operator

Next question comes from the line of Damien Conover. Please state your name, company name, followed by your question.

Damien Conover

Great, thanks. This is Damien Conover with Morningstar. Just a question on the fibroid drug, I wanted to ask about how you are seeing that drug match up against AbbVie’s fibroid drug, which showed very strong Phase II data last year.

Just want to see how you’re positioning your fibroid drug and your Phase III development, potentially compete with that drug. I know there is a very different mechanism of action, but just seeing how you guys are thinking about looking at that overall market.

And then, another question on this U.S. pricing environment, I appreciate you have less exposure within the Pharmaceutical business to the U.S. market. But just wanted a gauge from you guys how you’re seeing the pricing environment there. Thank you.

Dieter Weinand

It’s all, well…

Marijn Dekkers

Okay, Dieter, yes, do the fibroids first.

Dieter Weinand

Yes. So we only top-line data, so it’s a bit early to render any particular comparison. We now have to have trials at this point in time. But the top-line data, we have it encouraging. And we believe it will have a - if confirmed in additional clinical trials, a very competitive profile for Vilaprisan for uterine fibroids.

The second question that you asked us, it’s on the U.S. pricing environment. You were correct, as you stated that our exposure in the U.S. is relatively small. It was roughly 23% of Pharma sales. Other companies have 30% range exposure to the U.S.

If you further look at our product mix and the coverage for our product, 50% is really commercial coverage, which primarily includes managed care, hospital and cash, 30% are Part D, 10% to 15% roughly medicated, 10% other. So our exposure is rather limited in the U.S. and would not be of significant impact or as significant impact as it might be for the companies with greater exposure.

Marijn Dekkers

Okay. Thanks, Dieter. Thank you for the question, Damien.

Damien Conover

Great. Thank you.

Operator

Next question comes from the line Mr. Papadakis. Please state your name, company name, followed by your question.

Emmanuel Papadakis

Hi. It’s Emmanuel Papadakis at MainFirst Bank in London. Thanks for taking the question. A couple around the hemophilia franchise, if I may. First, I was wondering if you could just refresh our memories where we are in damoctocog regulated product in terms of completion and the manufacturing side and filing.

Secondly, if you could, give us an update in your thoughts around the potential risk from disruptive entrants in that space over coming years?

And then, perhaps, thirdly, as a tandem to that, your thoughts about the potential for NAV-based gene-therapy platform, which I know you amongst other companies, are working on to emerge as long term standard of care.

And then…

Marijn Dekkers

Sorry, sorry, Emmanuel, can you repeat the third question? Just repeat…

Emmanuel Papadakis

Sure, yes, the third question was around the opportunity for gene-therapy…

Marijn Dekkers

Oh, gene therapy, yes, okay.

Emmanuel Papadakis

And then, the final one I’d sneak in quickly if I could is on product guidance. You provided several of those around Q1. The ones I’d be particular interested to hear an update for the Eylea, Xofigo and Xarelto, where I think you said Eylea would grow at least 20% this year, Xofigo towards 50% and Xarelto around 20%, if you could, update us on where we are regarding those, that’d be very helpful.

Dieter Weinand

Okay.

Marijn Dekkers

Okay. So, start with hemophilia first, manufacturing company…

Dieter Weinand

Yes, so we have not changed the timing of our damoctocog alfa filing which is still planned for the mid-2017 timeframe. So we have not changed anything there. We’re still on track for that. Gene-therapy for hemophilia, as you know, we are in that space as well. You probably have - I just saw the BioMarin update or early data that they released, so we are - that would probably be competing with what we are also looking at, but we’re moving forward strongly with that particular aspect as well.

Then me asked me to re-guide Eylea, Xofigo and Xarelto, which I probably wouldn’t do. So we’re still pleased with the current growth.

Emmanuel Papadakis

Okay. And maybe if I could just sneak in a follow-up on the hemophilia, in terms of the potential risk to existing recombinant factor VIII based products in their current versions, all long-acting from disruptive entrants in the mid-term, could you provide us any thoughts on that?

Dieter Weinand

Yes, I think that this is a fairly slow moving market in terms of switching to newer therapies. We are convinced that recombinant factor VIII products will continue to be a major part of the armamentarium of physicians in treating hemophilia patients. So there will - we anticipate that ultimately there will be some technology. But we also believe that the damoctocog alfa with the once-weekly dosage schedule, and a proven and very well-known treatment modality, will play a significant role still within that market.

But like I said, we are also competing for the disruptive technology with our gene-therapy program.

Emmanuel Papadakis

Very helpful. Many thanks.

Operator

Excuse me…

Marijn Dekkers

So - just go ahead, go ahead.

Operator

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

Marijn Dekkers

All right, well, thank you very much. Thank you all of you on the phone. As you know, this is my last analyst conference call. And I would like to thank you for all your support that you have given Bayer and also me in the last six-and-a-half years.

I have the fantastic memories of our management meetings. I hope you do as well. And you can look forward to those meetings, as Werner said, continuing but now at a different time of the year. Really only wish that you give Werner Baumann and the old management team here the wonderful continued support that you’ve also given me.

So thank you very much and I look forward to seeing some of you at some point, also of course in the future. Thank you.

Operator

Ladies and gentlemen, this concludes the first quarter 2016 results investor and analyst conference call of Bayer A.G. Thank you for participating. You may now disconnect.

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