Merck KGaA (MKGAF) Q1 2019 Results - Earnings Call Transcript

About: MERCK Kommanditgesellschaft auf Aktien (MKGAF)
by: SA Transcripts
Subscribers Only
Earning Call Audio

Merck KGaA (OTCPK:MKGAF) Q1 2019 Results Earnings Conference Call May 14, 2019 8:00 AM ET

Company Participants

Constantin Fest - Head of Investor Relations

Marcus Kuhnert - Chief Financial Officer

Belén López - CEO of Healthcare

Conference Call Participants

Matthew Weston - Credit Suisse

Wimal Kapadia - Bernstein

Joseph Lockey - Morgan Stanley

Simon Baker - Redburn

Florent Cespedes - Societe Generale

Luke Sergott - Evercore ISI

Falko Friedrichs - Deutsche Bank

Luisa Hector - Exane


Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the First Quarter 2019. As a reminder all participants will be in a listen-only mode. [Operator Instructions].

May I now hand you over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Constantin Fest

Many thanks, Leah, and a very warm welcome to our Merck Q1 2019 Earnings Conference Call. My name is Constantin Fest, Head of IR at Merck. Today, I'm delighted to have with me Marcus Kuhnert, our Group CFO; as well as Belén Garijo, CEO of our Healthcare business sector.

During the next half hour or so, we'd like to run you through the key slides of this presentation and following that, take all of your questions.

And with this, I'd like to directly hand over to Marcus to kick off this presentation. Marcus?

Marcus Kuhnert

Thanks, Constantin. Good afternoon, ladies and gentlemen. Welcome to our Q1 earnings call.

You will remember, as well as we do, Q1 was a busy start into the year for us with the signing of the M7824 alliance with GSK in February, followed by our announcement of the Versum acquisition only a couple of weeks later and the approval of Mavenclad in the U.S.

Organic sales growth was 5.7% up in Q1 while EBITDA pre declined slightly by minus 2% compared to last year when we had received a €50 million milestone payment. Currencies were not that much of a headwind than we had anticipated earlier, and this is also reflected in our full year guidance. We expect net sales in the range between €15.3 billion and €15.9 billion, EBITDA pre of €4.15 billion to €4.35 billion and EPS pre between €5.30 and €5.65. I'll give you more details on our assumptions later.

I'm going to Slide number 7. All our 3 business sectors posted organic net sales growth in the quarter with Life Science being the biggest contributor on the back of a very dynamic environment in Q1 2019.

Healthcare sales growth was driven by Mavenclad and Bavencio while the core business was stable compared to last year despite the weak development of Rebif. Belén will give you more details in a couple of minutes. And as expected, Performance Materials posted a 3% organic sales growth as the liquid crystals business continues to benefit from the capacity ramp-ups at selected customers.

In terms of EBITDA pre, you see the minus 2% organic decline. In a nutshell, this is due to last year's milestone payment and the price declines at liquid crystals and mitigated by strong growth at Life Science and the IFRS 16 effect we mentioned already in March.

Currencies, especially the U.S. dollar, were more favorable in the last weeks and benefited our 3 businesses as you can see when you look into the detailed financials. However, as we are still hedged at roughly 1.20, these gains are offset by hedging losses on our corporate segment.

The key message of Slide number 8 is relatively simple. There's little change compared to the previous quarter. So I'm going to skip this and turn directly to Page number 10.

We discussed sales and EBITDA pre already, but let me highlight 2 additional points on the earnings line to reconcile the 4% year-on-year EBITDA decline to the 15% EPS pre decline. As you know, we adopted IFRS 16 at the beginning of the year. And we said that this would lift full year EBITDA pre by some €130 million compared to the prior year. In Q1 2019, the effect was €32 million.

Now as you know from first year business school, a shift from operating lease to finance lease is more or less neutral at pretax level because it triggers higher depreciation charges amongst others, but this is the main impact. As a result, this EBITDA-pre gain does feed through to our earnings per share pre.

Second, we impaired some €27 million of intangible asset from our F-star collaboration. In total, these 2 effects raised regular D&A by €60 million roughly year-on-year and account for approximately €0.10 of the shortfall between Q1 EPS pre and the consensus expectations.

Further down on the P&L, and I'm now on Slide number 11, I would highlight 2 points. The higher depreciation with a net effect of €52 million. And remember, €32 million out of this is IFRS 16 as well as higher exceptional items of €33 million compared to last year are the 2 main reasons why EBITDA pre declined by €38 million year-on-year but EBIT declined by €123 million year-on-year.

And I mentioned the F-star-related impairment already. In connection with that, we also reduced the carrying amount of the existing option to acquire F-star Delta by €45 million, which lowered our reported financial result in Q1. And contrary to the €27 million effect in operating result, this €45 million in the financial items is an exceptional.

And now, I hand over to Belén to lead you through the Healthcare slides.

Belén López

Thank you, Marcus. Hello, everyone, and also a warm welcome from my side. So Healthcare had a solid quarter with Bavencio and Mavenclad, continuous growth achieving a total of €40 million incremental sales year-on-year and significantly contributing to our organic sales growth during the quarter.

Our core business was organically stable versus Q1 2018, which is a significant achievement given that revenues from our biggest product, Rebif, declined significantly in Q1 2019. Actually, when we look at the volume evolution of Rebif, the decline is in line with previous quarters, more or less minus 12% year-on-year. And our share within the interferon markets holds up very nicely.

Q1 decline is exacerbated by some inventory effects of around 5% year-on-year, representing more or less 1/3 of the volume decline. So that means 1/3 of the volume decline in Q1 is due to inventory changes.

Also, there is increasing competition obviously coming from some of the new entrants. And this is influencing the evolution of the interferon markets, but our share within interferon markets is actually kept, and we expect to continue on this trends toward the coming quarters.

The decline of Rebif was fully offset by the very strong performance of our General Medicine and Fertility franchise with Erbitux being about stable.

Looking at the bottom line and as Marcus mentioned already, the year-on-year comparison is negatively influenced by the Peg-Pal milestone of €50 million that we received last year. So if we adjust for this onetime effect, our EBITDA year-on-year has been about stable.

Moving to Slide number 13. I just spoke briefly about the increasing contribution of Bavencio and Mavenclad. As you know, we ended Q1 on a very positive note in relation to the U.S. approval of Mavenclad. Together with the announcement of the global alliance with GSK, the U.S. approval of Mavenclad was definitely the highlight of the quarter. Today, we have Mavenclad approved in 55 countries with market access having been granted in around half of it, including the U.S. as we will discuss later.

You may also remember that we promised to give additional guidance on peak sales today. And here we are. Mavenclad is expected to generate, according to our assumptions, peak sales of €1 billion to €1.4 billion. And for 2019, based on the current dynamics of the brand and the launch in multiple countries and as we see the impact of the U.S. as of Q2, we are expecting to see sales moving up to a mid-triple-digit million euro amount.

Bavencio as well has been gaining traction. Our next major milestone will be the approval of Bavencio in renal cell carcinoma in the U.S. As you likely -- as -- or as you have seen before, the PDUFA date is set for June. The EMEA filing has been already validated and we have submitted in Japan. Based on the current discussions we have with the FDA, we are confident that we will get approval sooner than later and likely ahead of the PDUFA date.

For 2019, we also confirm our expectation of Bavencio reaching high-double-digit million euro sales based on the development of Merkel cell carcinoma and the uptake of renal cell once we have the FDA approval.

Moving on to Slide number 14. I wanted to take a closer look to the way our portfolio in MS is evolving because as you see on the slide, we continue to make a significant progress in this respect. We believe we are very well positioned as a key player currently, but also in the future.

Only a couple of days ago, we have shown the 48-week data for evobrutinib in multiple sclerosis at the ANN Conference. And the data confirmed the rapid and sustained lesion reduction that we have seen already in the 24-week data.

We are also happy to report that we have no new safety signals. And now we are looking forward to initiate in the Phase III study in the second half of 2019. You have seen that simultaneously, we've got also the data of this study being published in the New England Journal of Medicine, illustrating the potential that is clearly endorsed by the scientific community.

A couple of points to add to Mavenclad. While it's very early to report initial commercial feedback from the U.S., I would like to highlight a major achievement in generating access. You saw our press release. Only a week after we have announced the approval with the coverage by Cigna Express Scripts, a leading U.S. PBM covering 80 million lives. So the team have been extremely active on preparing for the launch, and this really illustrates how much ready the U.S. team is to continue to drive the Mavenclad launch in the U.S.

Outside of the U.S., as you see also have on the slide, for Germany and the U.K., we continue to see a positive development of our market shares in the high-efficacy-dynamic segment.

I have already mentioned or given some comments of -- on Rebif. And you also know to complete the picture that during the American Congress of Neurology, we presented additional data on this flagship, injectable Rebif, and we are planning a label update towards the end of the year to include women of child-bearing age.

Page number 15. I would like to take a quick look at our core business because as previously discussed, we have a very highly resilient core business, which has been sustaining very impressive growth rates and has been able to help us partially and even fully offset the weak development of Rebif. The business have been investing into the emerging markets and into innovative business models in order to foster continued growth in the future. And this is clearly the example of Fertility, our General Medicine franchise, which is on double-digit growth. And even now, Erbitux, which is being pushed for the inclusion of the brand in the China's national reimbursement drug list.

On Page 16, you see our well-known catalyst towards Q1 2020. And at this point, I would like to announce that we will be hosting our Annual R&D Update Call on June 14 as we do every year, following the American Congress of Clinical Oncology, so-called ASCO. And as previously agreed, we really look forward to seeing more advanced interim results from the tepotinib Phase II study in non-small cell lung cancer patients with MET exon-14 mutations. Please understand that due to the ASCO embargo, we will not be able to share any additional details today on this particular publication.

A brief update on our alliance with GSK. I already mentioned this was one of the highlights of Q1. We continue to very dynamically work on the Wave 1 clinical trials program. And in Q1, we saw the initiation of 3 additional studies in non-small cell lung cancer patients and also biliary track cancer. Until the end of 2019, we will continue progressing with Phase II Cignal-finding studies, and we will announce at least 4 additional trials until the end of the years.

And with this, I want to hand it back to Marcus.

Marcus Kuhnert

Thank you, Belén. We are on Slide number 17. Life Science posted another impressively strong quarter. Sales growth organically of 9.4%, and that was driven by all 3 SBUs and also driven by all regions. The customer demand remains very strong. And overall, Process Solutions contributed almost 2/3 of Life Science overall organic growth in the first quarter, and that was primarily driven by bioprocessing.

The strong organic sales growth in the first quarter translated into an organic EBITDA-pre growth of 13.4% and an EBITDA-pre margin of 31%, slightly supported by the aforementioned IFRS effect. It's also the reason why we upgrade our full year guidance for Life Science. We expect organic net sales growth to be in the range of 6% to 7% and organic EBITDA pre around 10% to 12% above prior year.

On Slide number 18, where we look a little bit closer on our Performance Materials division, we saw a 3.2% organic sales growth, which was attributable to sustained strong demand for OLED as well as the new panel capacity ramp-ups in China, which are temporarily benefiting our liquid crystals volumes. We see now this trend stretching into the second quarter 2019, but we still expect that the second half of the year will become tougher due to the elevated prior year based on the one hand and the capacity expansions, which we expect that they're near completion as well, of course, as the ongoing price declines, which we are exposed to.

Our Semiconductor Solutions business had somewhat a sluggish quarter and slower start into the year being organically slightly below prior year. And this is due to the widely observed market slowdown predominantly driven by volume and price declines in the memory sector. However, experts recover -- experts expect a recovery in the second half of the year, and we continue to believe and we are very convinced that the midterm market trends remain intact.

The EBITDA pre declined by 8.5% organically in the first quarter 2019, in line with our expectations for the full year and driven by the negative -- predominantly by the negative pricing effect.

Due to Performance Materials focused currency exposure, the margins benefited from the favorable development, especially of the U.S. dollar but also of the Asian currencies and came in at a level of 31.9%. We maintain our view on the full year outlook of PM and specifically forecast net sales to decline between minus 3% and minus 6% versus last year and EBITDA pre by minus 7% to minus 11%.

Quickly on the balance sheet on Slide number 19. Ahead of the Versum acquisition, which we expect to close in the second half of the year, our balance sheet is in solid shape with an equity ratio of 46% and a net financial debt-to-EBITDA ratio of 1.9x. The slight increase compared to the level at -- in 2018, which was 1.8x, is fully attributable to the IFRS 16 adoption where we added some €0.5 billion to our financial debt from -- as I said from this mentioned IFRS 16 effect.

Our operating cash flow improved year-on-year, especially as a result of lower tax payments during the quarter. The CapEx was marginally lower than last year while the total investing cash flow also captured some temporary investments of the cash proceeds that we received end of 2018 for the divestment of our Consumer Health business.

With that being said, I'm now going to the guidance chapter, and I am now on Slide number 22. Here, we start with a well-known overview of our EBITDA-pre drivers for 2019. The only change compared to the picture that we have drawn in March is actually the currency effect. Given the more favorable currency development in the first quarter, we now expect euro/U. S. dollar to be in a range between 1.13 and 1.17 as opposed to 1.15 to 1.20, which we have guided in March. We have also seen some of the emerging markets' currencies devaluing less severely than we had initially anticipated in our guidance.

In the course of the second quarter, you can expect to see a total of round about €140 million of nonrecurring income in Healthcare. While we have already outlined the Q1 was, in that respect, an absolutely clean quarter, we expect some sizable effects in the next quarter. This includes approximately €30 million from the GSK upfront payment. You know that we are recording this as a deferred income, some €75 million from the Peg-Pal milestone. And in addition, we expect to receive approximately €35 million from the anticipated approval of Bavencio in renal cell cancer in the U.S. that Belén has just mentioned.

For the second half of the year, we currently believe that we will get another more than €100 million income from milestones and other measures of active pipeline and portfolio management. However, I think it is clear that to the -- due to the uncertainty of nature of these nonrecurring income parts, we can do only a precise -- a relatively precise guidance for the second quarter and give you a more directional outlook for the quarters 3 in here, which I just did.

And that brings me now to Page number 23. As a result of our Q1 numbers, we upgrade our currency assumptions and confirm our March guidance for the organic growth in net sales and EBITDA pre. When you look deeper into the business sectors, you would see a slight upgrade in Life Science and a minor downgrade in Healthcare.

Overall, we forecast for the group moderate organic net sales growth of 3% to 5%. Currencies will be neutral or -- and up positively with -- up to 2% to this. So in total, we see our 2019 net sales in the range between €15.3 billion and €15.9 billion. For EBITDA pre, we confirm organic growth in the low teens. That means between 10% and 13%. This includes the already mentioned €130 million benefit from IFRS 16. We have discussed this already in March.

Allow me here -- one word of clarification. This €130 million are a windfall for the EBITDA pre. However, they are expenses when we look on it through the EPS-pre lens. It is depreciation and that means we're burdening EPS pre. So this €130 million, while they help us in EBITDA pre, they will be no difference to prior year. They are expenses and, thus, be deducted from EPS pre also this year. That is important to note.

Currency should be positive also in EBITDA-pre level in the same range between 0% and plus 2% in a year-on-year comparison. And this finally translates into an overall nominal absolute EBITDA pre between €4.15 billion and €4.35 billion for 2019.

Given the effects in the first quarter and the explanation that I just gave on the impact of the -- or the missing impact of the IFRS 16 on EPS pre plus the €27 million write-down on F-star, we predict that earnings per share pre for the full year should be in a range between €5.30 and €5.65.

In a nutshell, and I will skip basically Slide 24 where we go into the detail or where we have shown the details of the business sectors, just maybe the 2 main messages. We have lifted the currency guidance amid the better-than-expected development of the U.S. dollar and the Asian currencies, and we have slightly adapted the organic guidance for Healthcare a little bit down and for Life Science a little bit up while we kept the overall EBITDA guidance for the group basically in line with the March guidance.

With that, thank you for your attention during the presentation. And Belén and myself, we are now ready to answer your questions.

Question-and-Answer Session


[Operator Instructions]. Thank you. And we will take your first question, and it's from the line of Matthew Weston from Credit Suisse.

Matthew Weston

A number of questions, if I can, please. Marcus, with respect to Healthcare and the changed guidance but also the additional GSK income that was announced since you last disclosed it, you've just confirmed the onetime income, which is essentially significantly greater now as a percent of the Healthcare contribution than I think it was when you last gave us guidance. So the question is obvious. What's going worse in Pharma? Or what are you investing more in Pharma such that you are slightly guiding down Healthcare, but now you have the additional GSK income? And the second question is with respect to Performance Materials. So clearly, a very marked deterioration in gross margin in that -- in this quarter, which is a little bit unusual given that you've got strong demand from China for liquid crystals. The release seems to suggest that all of the GM effect is in the Display business. So can you confirm that? Or is there also meaningfully -- meaningful gross margin pressure in this Semi segment as well and should that cause us concern? And then very quickly, finally, Versum. Can you just make a comment as to whether or not you remain confident in the deal closing, particularly I think we have [AFS] and the Chinese SAMR approvals outstanding. Can you give us any update on the dialogue there?

Marcus Kuhnert

Thanks, Matthew, for your questions. I'll start on the sequence as you have asked. So the first one was on Healthcare, the GSK income, et cetera. So I think that we have not given a precise guidance on the nonrecurring income parts in March. We left this pretty open. We just said that we expect that the nonrecurring income parts for 2019 would be higher than 2018. And that is actually what we also see materializing now with, as I said, a clean first quarter where nothing was included but starting now, some €140 million in Q2 and another €100 million plus in the quarters 3 and 4. It's even maybe a little bit the opposite because we believed at the very early in 2019 that the GSK income, the deferred income part for 2019 was even in our initial assumptions a little bit higher because they're closing after all the antitrust checks, et cetera, of the GSK partnership was -- a little bit later than we had expected, yes? So that means there's even a little bit less nonrecurring income included in the Healthcare guidance that we have originally anticipated, which would be partly made up by strong ongoing operating performance. Other than that, basically, we're on the same expectation level then we were in March, more or less.

The PM gross margin topic in the first quarter. So here, we will see, of course, the negative price effects that are feeding in into the P&L. We also had some smaller inventory write-downs in the first quarter, which we would partially expect to be reversed in the next couple of -- or inventory revaluations, I must be more precise, which we expect to be partially reversed in the next couple of quarters. So we do not expect, I would say, an ongoing gross margin pressure which would be significantly worse than our original assumptions that we have -- that were included in the numbers in the qualitative March guidance or what we have communicated to you over the last couple of months.

The last question on Versum. Here, actually, we have basically no news. We continue to expect the closing on the second half of the year, most probably rather towards the end of the year. The regulatory approvals, especially the antitrust approvals, are well on track. We expect maybe a little bit more lengthier process in China and in Taiwan. We have already received antitrust clearance in the U.S. We have at least the preliminary filing for the [indiscernible] filing is out. So here, everything is basically on track and no news to what we have communicated at an earlier date. So we are continuing working through the topics.


We will now move on to our next question. And our next question comes from the line up of Wimal Kapadia from Bernstein.

Wimal Kapadia

Wimal Kapadia from Bernstein. So just firstly on Mavenclad and the peak sales expectation. It's 2x that of your previous EU estimate. So I guess my question is, does that actually imply that outside EU is only expected to be €500 million to €700 million will suggest an even lower number for the U.S.? Or have you actually lowered your expectations for the EU? And my second question is on renal -- the renal cell carcinoma opportunity for Bavencio. Does the early approval of KEYTRUDA actually changed your expectations for this indication? And then tied to this, if I look at what Bavencio did in 1Q, it did €22 million, and you guide for high double digit for the year, which suggests a relatively limited growth. Is this a conservative assumption given that first-line renal will be approved before the end of the quarter? And then my final question is just on Versum. Just looking at the Versum results, the company showed growth but albeit slower, and it looks like you have reported relatively flattish performance for Semis. So are you still sticking with your longer-term guidance of mid- to high-single digit growth for the Semis business?

Marcus Kuhnert

Thank you, Wimal. I'll start immediately with your last question. So yes. It is indeed the case that Semiconductor start was due to the market weakness, and I have alluded to volume and price declines in the -- especially in the memory segment, somewhat softer into 2019. That is, indeed, reflected in the quarter releases that we have seen across-the-board. So when we look on the full year guidance, we believe that the Semiconductor growth for 2019, for us, indeed, will be slower than in 2018, but that is something we have said already much, much earlier. Currently, we believe that while the second quarter again might be a little bit weaker one, we see a recovery or currently believe there are some signs that we might see a recovery in the second half of the year. And on top of that, we believe that the midterm trends that will make the growth over the next couple of years are absolutely intact: digitalization, Internet of Things, the need for new chip technologies and chip materials to cope with the increasing requirements to process and to store data. All this is absolutely intact, and we are very confident that this is going to play out to our favor, especially once we have closed the Versum acquisition.

Belén López

So Wimal, let me take the Mavenclad peak sales question. And once again, we have previously guided to €500 million to €700 million for Europe and this still holds. We have also said that the U.S. would at least be, in terms of potential, as large as Europe and the rest of the world with the exception of Canada and Australia, which are still important markets, will represent a very low percentage of the total revenues of Mavenclad. Having said this, this is a long-term forecast and, hence, the broader range. We are expecting to give you further color on the pickup of Mavenclad in the U.S. probably during the Q2 earning call -- earnings call and -- or in June during the R&D update call. So this is for Mavenclad.

Then you have a question on renal. And we believe that Bavencio, in combination with INLYTA, is offering a very important new treatment option in the first-line setting for patients with advanced renal cell carcinoma. Let me highlight, once again, our very robust benefit on PSF -- PFS and a very clinically meaningful improvement in the overall response rate in all renal cancer patients across the 3 subgroups. So we are very confident that the 31% reduction in the risk of a PFS event and the more than 5 months advantage in the median PFS versus the comparator, sunitinib, is going to be actually a practice change in this setting.

Then you have a question on the Bavencio guidance. And well, point taken. We will give you further informations once we are more advanced on the launch of renal cell.


We will now move on to our next question. And our next question comes from the line of Joseph Lockey from Morgan Stanley.

Joseph Lockey

This is Joe Lockey, Morgan Stanley. One for Marcus and two for Belén. Marcus, your CapEx is lower for the quarter, but guidance for '19 implies a 26% jump at the midpoint. Apologies if this has been disclosed, but can you quantify how much this increase is from IFRS 16? And how should we think about the absolute number going forward? Belén, on evobrutinib, can you clarify your partnership intent? There have been some conflicting headlines as to whether you'd like to keep the MS indication for yourself and sometimes saying that you'd like to partner. What's the current report there? And then finally, I know it's back to Mavenclad, sorry. Now you have U.S. approval, are you in a position to say how much of the mid-triple-digit number you expect to come from the U.S. this year?

Marcus Kuhnert

So I'd start with your first question, Joe. So on the CapEx number, we believe that the current guidance includes some €150 million approximately CapEx effect on IFRS 16. When we look forward, we believe that the CapEx number over the next, let's say, 2 years will be around €1.2 billion round about, yes? So we might see eventually slight increases -- a slight increase over the next 2 years, but we should not cross significantly the €1.2 billion part. So all in all, what will definitely happen is that the CapEx growth over the next 2 to 3 years will be significantly reduced, significantly slower than what we have observed over the last 4 years in the past. And this is our clear plan going forward, that sales growth should outpace CapEx growth over the next couple of years.

Belén López

So Joe, let me answer your question on the BTK partnering because as you know, following our recently announced global alliance with GSK, we now have much more flexibility around evobrutinib. So we are keeping our options open. And partnering, as well as external financing, as we have discussed before, could be still an option. What is most important, however, is that we are planning to progress to Phase III in multiple sclerosis regardless of any ongoing partnering discussions. And on the top of this, we are, of course, as you know, evaluating evobrutinib into additional indications, namely array and systemic lupus. And in this respect, we will provide an update to you on the evolution of the project at a later stage during the year.

So then your question on the breakdown of the Mavenclad peak sales, allow me not to give more granularity on this since we usually stay on global guidance.


We will not take our next question, and it's from the line of Simon Baker from Redburn.

Simon Baker

I have two, if I may, please. Firstly, on Life Science. Last year, you talked about hardware placements being a drag on organic growth. By the end of the year, you were talking about seeing some pull-through of consumables on the back of that. Is that still a significant contribution this quarter to the very strong organic growth in Life Sciences? And have we reached the peak impact of that given that you grew, what, nearly 9.5% in the quarter and you're guiding to 6% to 7% for the full year? And then one for Belén on MS. One of the suggestions that emerged from the AAN Conference last week was the idea that the current approach to MS therapy starting with relatively mild drugs and working to the more active agents is actually the wrong way round, that one should start aggressively and then move with time and age to milder agents. Given that you have one of the high activity agents in Mavenclad, I'd be interested to know what your view is on that approach. And what -- to what extent anything around that paradigm is included in your peak sales assumptions for Mavenclad or what the incremental benefit could be if we did see more earlier use of the more active treatments?

Marcus Kuhnert

Simon, I'm starting with your first question on Life Science. So here, indeed, we have seen in the last year, I would say, somewhat a divergence between very strong hardware sales that we were experiencing in the second quarter last year and a somewhat slowdown in the consumables part, which has had a negative effect on the business mix and then our overall margins. I think we have explained this effect in length in 2018. That has somewhat turned around in the third quarter where we saw the consumables picking up and another healthy margin quarter. And when you look on our current margin development in Q1, you may easily guess that that's what -- this was not at all an issue in the first quarter of 2019. So here, we have seen good hardware sales but accompanied also by a very, very solid and strong further growth in consumables. And that is reflected also in our good margin of 31%. As I said, there's also an IFRS 16 effect included. But even if we take this out, we are still growing ahead of sales in EBITDA pre. So that means also without the IFRS 16 effect, we would have had a margin expansion over the already very healthy level of Q1 2018.

Belén López

So Simon, going back to your very good question on the ongoing scientific debate about the earlier use of high efficacy agents, mirroring what we have seen happening in oncology. So treating first, treating earlier and treating with high-efficacy drugs. I acknowledge that this is a scientific debate for the moment. We have not seen any paradigm being shifted with the exception of some smaller markets, and we haven't factored any of this in our guidance.


We will now move on to our next question, which comes from the line of Florent Cespedes from Societe Generale.

Florent Cespedes

Three quick ones. The first two for Belén. First, Fertility. Could we have a quick update on the dynamic of this business where the growth is coming from and -- or where do you see the -- some pressure there? Second question on [indiscernible] from emerging markets. Could you elaborate the performance of these businesses, these countries? And is there any risk in China given the change in the regulatory environment? And the third, the last question for Marcus on Life Science. How do you see the midterm growth on the -- of the Process Solution? In other words, is the mid-teens growth sustainable? And what is driving this strong dynamic there?

Marcus Kuhnert

Yes. I d start with your third question, Florent. So currently, we have actually really no signs that the strong growth of Process Solutions should in the nearer -- in the near to midterm future significantly come down. I do not know whether it will be 15% all the time, but I think what we currently see a double-digit growth rate is definitely not unrealistic. The major growth driver is the very strong and continued demand for monoclonal antibodies. So that also means that business with bioprocessing is actually within Process Solutions the major driver of the growth.

Belén López

So Florent, on your Fertility question. Fertility is very, very, very resilient and really expanding on 2 major strategic drivers, our early move to emerging so-called growth markets. So expanding outside of Europe and then expanding our portfolio. And therefore, the Fertility franchise has been very, very strong last year. All regions have contributed to this growth, but the U.S. was particularly strong in 2018, following the announcement of the contract with CVS Caremark. And we saw this having a huge impact on accelerating the growth during 2018. Gonal-f continued to be solid, solid in other growth markets, particularly in China, but also LatAm. And most importantly, we have seen that the remaining Fertility portfolio, in particularly -- particularly Pergoveris is growing nicely and bringing almost 8% organic growth. We have -- on the Fertility franchise, we have guided to mid single-digit growth, and we are not going to change this forecast. While Gonal-f has shown stable organic growth, once again, the portfolio has been driving accelerated growth of the full franchise. And we are really -- we have no reason and we see no major risk coming from China in association with the regulatory environment for our Fertility business, therefore, confirming that we are going to stay in the guidance we have communicated.

Marcus Kuhnert

Let me add one more point, Florent, to the growth drivers in Process Solutions. So on top of the very healthy and robust demand for monoclonal antibodies, it is also the whole area of gene editing, self therapy and novel modalities, which is currently ramping up very quickly, very steeply. And you may remember that had some onetime costs when we started ramping up the production in Q2 last year with our Carlsbad facility in the U.S. where we said we have experienced some onetime costs in the second quarter, but expect on the first batches to be shift beginning of the third quarter, that has indeed happened, contributed to the strong development thereafter. And here, we see a very, very promising growth trend and a very, very strongly growing business field, which shall contribute as well to the midterm growth prospects in Process Solutions.

Belén López

Florent, apparently your question on China was beyond Fertility. So let me comment more generally on the other businesses. Definitely, this is a very relevant market for us and is today bringing tremendous contribution to our growth, and we see this across the business. So Fertility, I mentioned already, after the inclusion of Erbitux in the essential drug list, we consider this to be a very important driver of our Erbitux business in emerging markets. And of course, the double-digit growth of our General Medicine business is very, very much coming from our great development in China and also now eventually being accelerated through the pre-diabetes indication that has been approved now in around 30-plus countries.


We will now move on to our next question, which is from the line of Luke Sergott from Evercore ISI.

Luke Sergott

Sorry about that. I think I was on mute. Just a couple here on Life Science and dig in a little bit more on the Process Solutions. Can you guys talk about more where if this is the Process Solution growth, is that more due to existing biopharma? Or is this due to more build-outs from CDMOs, et cetera? And how much of that is due to growth in the APAC region versus the rest of the world?

Marcus Kuhnert

Okay. So it is more existing biopharmas, but also CDMOs play an increasing role going forward. But that has also to do with the increasing role that I've just mentioned regarding the topic of viral vector production, gene editing and novel modalities. When we look on the role that Asia Pacific played in Process Solutions, we have recorded here double-digit growth as well basically line with the growth of the overall division. What we see in Process Solutions is a very, very balanced growth pattern across the regions. That means there's basically no regions falling short and no region, let's say, with significantly above the Process Solutions' average, yes? So Asia Pacific fits into that picture.


And we will now take your next question. And it comes from the line of Falko Friedrichs from the Deutsche Bank.

Falko Friedrichs

It's Falko Friedrichs from Deutsche Bank. Three questions, please. Firstly, on evobrutinib. And can you already give us some flavor for the upcoming Phase III trial design? And how that could be structured, for instance, in terms of the patient population? And secondly, regarding the 4 remaining antibodies in the F-star collaboration, will these continue to be of clear strategic interest for you going forward? Or is there a risk that you will stop their development as well at some point? I'm just trying to get a sense whether the impairment was antibody-specific or if this entire collaboration might be at risk. And then lastly, could you provide a bit more color on the BioContinuum Platform in Life Science that you mentioned in the release, which does look like an interesting opportunity? Is this platform already being utilized or still in development?

Belén López

Falko, let me briefly touch on your Phase III trial design for evobrutinib. So we are going to focus on IMS in principle. We have to also make a decision on the dose and what is going to be the reference agent. So if you look at the 48-week data that we have just presented, you can of course speculate what the dose is going to be. And we will actually give additional information of the Phase III trial design once we have completed the discussions with the regulatory agency. Your second question was on...

Marcus Kuhnert

The remaining antibodies.

Belén López

On F-star, right? So we will continue the collaboration with F-star. There are some exciting early discovery activities related to other innovative co-stimulatory biospecific antibodies that we look forward to better understanding together. Remember, this deal was an option deal. So we decided not to opt in to this FS118 mainly because of the kinetics of this compound and the prospect of that clinical development not really meeting our standards for clinical differentiation on the basis of the pharmacokinetic data that we saw coming from the first study in patients. But we are indeed evaluating other biospecific antibodies because this is a very good fit with our immuno-oncology discovery efforts, and we will come back to you with more details when we finalized the conversations.

Marcus Kuhnert

On your question on the -- so the BioContinuum Platform, so from our point of view, this represents, in a way, the next-generation bioprocessing. That means that the key word here is continuous bioprocessing. That means the manufacturing of biotherapeutics will be revolutionized by a higher efficiency, simplified processes and also a higher quality and consistency. In detail, what we mean is that in the context of the continuous production and cleaning, so bioprocessing of biologics, we aim, in the future, to combine process steps that are currently separated into a very consistent and continuous process. And when you look on pilot studies, there are indications that we would -- could see significant cost reductions when we are switching to such a kind of next-generation bioprocess manufacturing in the future. However, we should also keep in mind that this will take some time to establish, and it is not something that we will see tomorrow. It is rather in a time, I would say, horizon of 5 year-plus from today. But this is a very promising, strategically relevant initiative in Life Science.


We will now take your last question, and it comes from the line of Luisa Hector from Exane.

Luisa Hector

On Mavenclad, I just wonder if you can talk a little bit about any future R&D investment because we can see that you've started a couple of Phase III studies looking at previously -- or treated patients who are not well-controlled. So I just wondered if we should expect a little bit more of that or plus with recent head-to-head studies? And then on Bavencio, can you give any color -- as you look at the sales potential there how that might split between the U.S. and ex-U. S. regions, please?

Belén López

So Luisa, we are, obviously, investing on some medical affairs studies, post-marketing studies for Mavenclad whenever it's scientifically justified, but we are not investing on new indications, for example, or in global -- what we call global R&D at this time. So the majority of the investment you have -- you may have been able to pick would corresponds to a smaller post-marketing trials, medical affairs trials or even post-marketing commitment in some countries. But I confirm no global R&D investment. And on the question -- on your question about the global guidance of Bavencio, as I mentioned before for Mavenclad, we only give global guidance but not country-by-country guidance. Is this answering your question?

Luisa Hector


Constantin Fest

Well, this was all the time we had allocated for the question. Thank you so much for joining this call, and we all look very much forward to meeting all of you in the upcoming roadshows in the next coming days. This concludes today's call. Thank you very much. Goodbye.


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