Operator: Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Full Year Results 2012. As a reminder, all participants will be in a listen-only mode.
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 - Head of IR: Thanks a lot Suzanna. Welcome on the call for full year 2012 results. I'm very happy to have our CEO, Karl-Ludwig Kley; and our CFO, Matthias Zachert with me today. As always, we'd like to briefly go through a few slides in the presentation and then we'll be happy to take your questions. Joining this call is also Annalisa Jenkins, Head of Global Direct Development and Medical for Merck Serono to participate during the Q&A session.
With this, I'd like to immediately hand over to Karl.
Karl-Ludwig Kley - Chairman of the Executive Board: Good afternoon, ladies and gentlemen. I would like to begin with Slide Number 4 and presenting the key highlights of the year 2012. First, Merck delivered a strong financial performance in 2012. Secondly, we delivered these results whilst undergoing a significant transformation program. It can be clearly stated that all the initiatives which we've taken care are executed on or ahead of plan. Thirdly, we improved the operational strength of our business. And lastly, we made first efforts to prepare for future growth. I will now touch on all these four categories in more detail. I will walk you through the presentation, and I will begin with the numbers, the financial achievements on Slide number 5.
As you can see, we delivered on our Company guidance that we shared with you in November last year both on top and bottom line. We reported EUR11.2 billion in Group revenue which represents 9% growth over 2011. Group sales increased 8% to EUR10.7 billion. Excluding the effects of currency and acquisitions, we generated a 5% organic sales growth in 2012. This solid contribution is from three of our four divisions, which is affecting the healthy balance and the fundamentals strengths which we have.
On profitability we delivered an EBITDA pre one-time items (totaled at) EUR2.96 billion representing a margin of 27.6%. EPS pre one-time items were up double-digit increasing 12% to EUR7.61 a share.
These results reflect good operational performance in the challenging year. Not only did we successfully manage external challenges like the continued software economy in Europe and pricing pressures from healthcare austerity measures, what I am particularly pleased about is that we have generated solid and profitable growth during a time of significant transformation in fundamentals parts of the Merck organization on Group and divisional levels.
Turning Slide 6, I would like to summarize the key highlights of divisional levels, starting with Merck Serono. Sales of Merck Serono reached EUR6 billion in 2012 as a result of solid organic growth of 5% and the 3% support from FX. On a product level, Rebif, Gonal-f and Glucophage were the largest organic growth contributors. By geographically, North America and emerging markets performed strongly.
We also made faster progress than planned with the implementation of our efficiency measures in Merck Serono which supported the improvement of the EBITDA margin pre one-time items to 29.8%.
In Consumer Health, sales declined 6% organically totaling EUR473 million as a result of softer market conditions in Europe and ongoing pruning measures of our product portfolio organization setup towards profitability. Nevertheless, strict cost containment and the deliberate decision process to allocate resources improved the division's EBITDA pre to 13.4%.
Let's move on to Performance Materials on Slide 7. Performance Materials generated sales of EUR1.7 billion as a result of organic increase and ForEx tailwinds of 7% each. Strong demand for our liquid crystal materials, particularly the PS-VA and IPS (type) were the main drivers of the exceptional organic sales increase. While from a country perspective, China continued to show the strongest growth momentum. Sales of the division's business unit Pigments & Cosmetics improved from a soft prior year. On the bottom line, we generated very healthy EBITDA pre-margin of 43.6%.
Merck Millipore delivered sales of $2.6 billion versus an inorganic growth and FX tailwinds of 4% each. All three business units contribute to growth led by Process Solutions, which saw healthy demand from its biopharma customers, but from a regional perspective, emerging markets in Europe are key drivers. In line with division's strategy to prepare for future growth, significant resources were continuously directed into R&D and commercial operations resulting in EBITDA pre-margin of 22.9%.
Let's move on to Slide 8. I would like to brief you on the progress we made transformation program so far. We've built the foundation in 2011 by bringing in the new management team onboard and subsequently established a new leadership organization. In 2012, we announced a cost efficiency plan and started to implement measures after we reached agreements with the relevant parties and employees. The fruits of these measures can be seen in the last year's profitable growth, which I alluded to before.
In parallel, we updated the financial community about our major initiatives regularly throughout the year as shown on Slide Number 9. The highlights being Merck Serono's Capital Market Day in May and Merck Millipore's Information Day in December. Today, our efficiency measures aim at generating net cost savings of around EUR385 million by 2017 from various areas. Those areas include headquarters and site clearance consolidations, both leaner but more effective commercial and R&D organizations, as well as lower discretionary spending. According to our assessment, this transformation will require investments totally around EUR820 million.
Let's move on to Slide 10 to give you some more details on the restructuring within our Performance Materials which we announced today. This initiatives was started in 2012 and focus on two areas within our Pigments & Cosmetics business.
Firstly, Pigments & Cosmetics busy transformed to a leaner organization in line with Merck's new leadership organization, which is centered around global management of businesses. Secondly, we plan to increase the utilization rate of our manufacturing facilities about one-third from previously 60% around 80% through capacities shift and consolidation of facilities, which will consequently also lead to reduction in headcounts. All these measures are expected to generate a total of around 20 million of net cost savings by 2014.
Moving on to Slide 11, we have summarize key actions that we have taken in 2012 to improve the quality of our operations and to leverage our leading market positions.
Merck Serono, we have strengthened the Rebif franchise, amongst others through the limitation of our value-based pricing approach in the U.S. and through an indication extension in CIS in Europe. With the rollout of our family of pens we've improved our competitive position in the Fertility franchise and we continue to improve our strong position in emerging markets.
In Consumer Health, we began to exit unprofitable products and regions through refocus on core brands in core markets. Performance Materials, we continued to differentiate our liquid crystals materials through incremental improvement in the PS-VA and IPS product lines, resulting in market share gains to the level north of 60% today. In Merck Millipore we capitalize on our high product quality as well as innovativeness of newly launched products which allowed for pricing increases and price premiums respectively.
To take a further deep dive into the organic sales development by region on Slide 12, the emerging markets in North America, we have the growth drivers in 2012 generating organic growth of 9% and 10% respectively. The emerging markets region mainly benefits from the strong demand for liquid crystal materials leading to an increased contribution to Group sales of 35%.
Over the last five years, Merck's sales in the emerging markets have been growing strongly and consistently generating compounded annual growth of around 14%. North America sales growth was primarily led by Merck Serono lifting this region's contribution to Group sales to 20%. In contrast, the share of (Central) Europe declined to 36% as a result of softer sales in all divisions, but Merck Millipore. This brings me to my last category today after financial efficiency operations, which addresses the progress we've made during 2012 to prepare future growth. You'll find the summary on Slide 13.
Merck Serono we started in 2011 to thoroughly scrutinize our pipeline following the arrival of new management team. During this process, we eliminated projects which were unlikely to justify further investment. Those inherited projects, which we decided to proceed, still were assessed as being high-risk. Their continuation was reasonable given the late development phase of the remaining investment requirements needed for completion. In Phase III, these project include cancer drug Erbitux to be used for example for gastric cancer, L-BLP25 to treat non-small lung cancer, Cilengitide for glioblastoma. Unfortunately, all Phase III studies (indiscernible) results since they didn't meet their primary endpoint.
As a consequence of the latest setback we have seen with Cilengitide, we're now taking steps to bring the current program to a close. Merck Serono now starts from a clean base. We have the chance to improve resource allocation and the design of clinical studies in the future. We also took actions to expand our metric of development functions and strengthened both our mid and late-stage pipeline, new drug candidates and our core therapeutic areas. Those pipelines apart in additions included TH-302 and Sym004 in the area of oncology and ONO-4641 and most recently development of Tcelna in the area of multiple sclerosis.
Finally we decided to leverage our expertise in both biological drug development and production to enter the area of biosimilars. Now the task is over and adjustment on the future is out and up to you at the markets.
In Liquid Crystals, our continued R&D efforts to differentiate our products against our competitors and to create unparalleled added value for our customers (indiscernible) driving our market share, as I mentioned earlier, over 60%. It is our clear goal to continue to be the innovation leader in this market. We are, therefore, not only working on next-generation of Liquid Crystals materials but also on OLED. We have entered into collaboration with Epson for the development of OLED ink.
Those inks are intended to be used for printable production technology of OLED's display, from our point of view, the only way to make OLED displays ever cost competitive compared to LCD displays. However, given the complexity and the significant technological challenges in the printing of OLED displays, it is unlikely to see printed OLED displays as comparable (to LCD) display characteristics as a significant market share before 2020.
Finally, moving onto Merck Millipore, if continued our strategy to fuel future growth with newly launched products as well as bolt-on acquisitions in the area of cell culture media, cell imaging, and from microbial testing. As a result of the significant changes of our pipeline in Merck Serono which I've just explained it is noteworthy to look at this very next Slide number 14. Here you can see the setup of the pipeline is dramatically different today compared to two years ago. While in general, in 2011 our R&D spend was primarily absorbed by a lot of costly Phase III projects, with too fragmented therapeutic focus, too little resources were allocated to fuel early-stage projects.
In contrast, today's pipeline looks much more like (indiscernible), the healthy number of projects in Phase I and II and the reasonable number of projects now (indiscernible) state of the Company in the late-stage development.
Moving to Slide 15 and summing up, 2012 was a successful year for Merck. We delivered strong financial performance with the implementation of a substantial transformation program. We strengthened the quality of our operations across all divisions. We partly reinvested resources that were freed up by first efficiency gains into future growth. 2013 will be the year in which most of our transformational initiatives earning bigger fruits and starting to become more visible now in financials. Today, with my colleagues from executive team I'm looking forward to update you on the progress over the upcoming quarters.
With that, I would like to hand over the call to Matthias.
Matthias Zachert - CFO: Thank you, Karl. A warm welcome from myself as well to this full year conference call of Merck (indiscernible) 2012.
I start with Page Number 17, and here I would not like to address each respective number, but will concentrate on the four elements that should be highlighted. First, EBITDA at EUR2,965 million. This is delivering according to guidance with a little (indiscernible) on top. Second, operating cash flow having been the record cash flow generation that the Company has ever reported, driven by strong operational delivery and a substantial working capital improvement. This has led to the fact that we could reduce our net debt reduction level below EUR2 billion. I say that with the level of pride that working capital was reduced by nearly 20%, while sales moved up by 8%.
With this I turn to Page Number 18. The key drivers for the top line improvement were clearly Merck Serono with an organic acceleration of 5%, something this was unexpected beginning of the year, showing a clear performance by the team. Second, strong driver was Performance Materials on the back of excellent and exceptional liquid crystals performance, overall, leading to a 5% growth rate on an organic basis.
Please also take a look at the 4% stemming from currency. Currency rates in 2012 were all benign for Merck, especially as it relates to U.S. dollar but also as far as Asian currencies are concerned. This is something that we have seen changing over the last couple of months, and therefore it's a watch out for 2013.
On Page number 19, we show the reported numbers and overall, you can see that despite taking charges, one-time charges in the magnitude of nearly EUR700 million, we were able to report relatively decent reported numbers with nearly EUR1 billion in EBIT and around about EUR0.5 billion in reported net income.
Noteworthy is the reduction in financial expenses, spending from the clear focus on deleveraging the balance sheet, we have redeemed two bonds that mature and will continue to invest in the course of 2013. The other element I would like to stress is the lowering of the tax rate, however clear statement this was a one-time effect which we could achieve in fourth quarter and which we worked upon, we executed and archived a reduction while this was however a one-time event leading or not changing the underlying tax rate of 25% to 26%.
Let me turn your attention now to the fourth quarter so that step from full year performance to fourth quarter performance and take a glance at our divisions. Overall, let me summarize, you see the strong performance of Stefan Oschmann and his team as far as sales and cost structure is concerned, (indiscernible) leaves her handwriting and as far as R&D is concerned you see what Annalisa Jenkins brings on the roads.
As far as sales specifically are concerned, the strong performance clearly stems from pricing in Rebif while volume-wise, we defend ourselves. I would like to take the opportunity to allude to the fact that in December, however, we saw a clear uptick in stocks in the North American markets. So here our expectation is that in the first quarter, the stock level will be reduced again, and therefore please expect some kind of humbleness on the top line. As far as key growth drivers in the fourth quarter are concerned next to Rebif, please take note that Gonal-f and Glucophage in the emerging markets kept on doing well.
A look at the cost structure clearly shows that we execute according to our plans, as communicated on 15 May here in Darmstadt. So, in absolute terms and in relative terms, every line of the P&L that we can control is moving downwards, and I'll stress that in a moment.
The final point I would like to make on this slide is also currency has helped us in the course of 2012. It helped us nicely also on the royalty income line, because many of our royalty incomes are booked in U.S. dollar, notably the Humira income, and of course with the change in dollar, this is somewhat mitigated or moderated, more moderately developing in course of 2013.
Second point I would like to stress when we talk about 2013 is that two royalty streams, Enbrel, November 2013, and Avonex, May 2013, are going to drop off, which are leading to a reduction in royalty streams of roundabout EUR80 million.
With this, I turn your attention to Page 21 Consumer Health. Overall, the business model has been addressed in course of 2012; we've changed it, we've prune products, we've exited some of countries. Bottom line, however, we've introduced also better resource allocation, which achieved an increase in absolute EBITDA and now we are looking into 2013 for a year of delivery.
On Page 22, you see the strong performance of basically liquid crystals, its performance according to leadership, leadership in innovation, leadership in quality, leadership in worldwide reach to our customers. So, this business is set up as a strong competitive player not only for 2012, but for the years to come.
What I stressed, however, in November conference call is that we see a certain higher stock level, which did not unfold or reduced in Q4. We guided therefore for a one quarter of softness that we expect in 2013. It's not in our hands to know when customers take corrective actions, but this is something that we expect in the course of 2013 to most likely happen in the first half of the year. I will come to that later when I address 2013 guidance.
Last comment on liquid crystals is that of course currency has helped us in 2012 whilst right now currencies are turning in the more humble direction for this business. As far as the Pigment business is concerned, it was simply performing on the profitability side lousy. Top line was okay. But in order to get profitability back to square, we've addressed the restructuring project that Karl-Ludwig has talked about.
Let me now come to Merck Millipore. Overall, a very strong finish in Q4, especially in the Process Solutions business which we explained in quite detail in Molsheim, in December. So, here we got even reports of an organic growth rate of 8%, which in the last several years was never – in the last 1.5, 2 years was never as high as this. I would like to allude however here also to the fact that we saw an over proportional increase in the sales in all the three business unit in course of December, the likelihood is that many of the researchers apparently have still budget lifts and therefore they bought consumables to the limit of their budgets which of course could soften the start for 2013.
On the P&L side and cross structure, you see that we clearly continued to invest in future growth especially in the R&D line, this becomes visible. The direction that we take here is to accelerate on technologies that jumpstart further our disposable technologies and process solutions in the years '16, '17 and '18.
The last point on this slide which is noteworthy, in Merck Millipore, we quite focused addressed the inventory levels. Performance Materials, Merck Millipore were on the inventory side, still not up to standards, and I alluded to effect in November that here, some of our plants will already be taken off stream in December in order to get inventories to a proper level. So, plant shutdowns led to more idled costs, which impacted margins negatively. Of course for 2013, we are now in a far better setup.
Let's come to the balance sheet on Page 24 and the only comments I would like to make here, is we walk the talk on deleveraging the balance sheet on the gross indebtedness sides where we took off EUR1 billion through redeeming our outstanding Euro bonds and we equally knocked down net financial debt two levels below EUR2 billion. It could have been even lower had we not funded our contractual trust agreements by another EUR250 million, but that's with using the (DBOs) accordingly at constant interest rates. Rating agencies therefore took a positive look on our Company and whilst countries were downgraded Merck was upgraded.
On Page 25 I would like to make only one statement on the working capital; mission accomplished. However, the 22% should not be taken for granted. I guided for a 25% operating level. So, here, I think, we've cleaned the bar in 2012. Now, in 2013, most likely receivables inventories will slightly go up at comparable level and 25%, as I said before, is the normal run rate that we should do business with.
On Page 26, let's shade some lights on the cash flow. The changes in working capital are obvious here. Changes in provisions are driven basically by the restructuring charges that we took which of course will in 2013-14 leads to the respective cash outs. These are the key drivers that need to be explained in the cash flow statements.
With this, I turn to Slide 27 and the remarks I would like to make here is, we implement faster. We increased net savings due to adding the Pigments restructuring and all in all, we thus come to roundabout EUR385 million net savings. With the annotations, if we find more, please understand that we would like to jumpstart investments in order to take care of future growth initiatives that Karl-Ludwig has explained and highlighted before.
Page 28, we (progressively) tried to bring across to you the visibility or the tracking of our savings in the P&L. The two businesses that had most shortfall on productivity ratios were, as highlighted in May, Merck Serono and Consumer Health. You see here that we clearly have nicely advanced in implementing our efficiency program. You see that in relative terms, but you also see that in absolute terms. Whilst sales go up, we reduced marketing and selling, admin, R&D, respectively, which is a clear sign, I think, of execution.
Page 29 shows you the deleveraging of the balance sheet, which basically started to accelerate in the course of 2011, and I think we've reached a good status by end of the year.
With this, I turn my attention to Page 13, and we've stressed very early in the year that we keep a modest dividend policy in place. So this is something that we clearly discussed again in our supervisory board yesterday, and we reiterated and it was redecided that dividend policy will remain humble in the forthcoming year, but, of course, we want to show and give a sign of strength and belief in the strength of our business. So our absolute dividend payout would increase and we've agreed with the supervisory board members, which represents our employees as well as our shareholders, that for the next one to two years we will remain with modest dividend increases in the time of heavy transformation of the Group.
With this, I turn my attention to guidance for 2013. As last year, it will be qualitative and we will reconfirm or precise the guidance then on a quantitative basis with Q1 numbers. So here let me provide the qualitative guidance for our divisions. As far as Merck Serono is concerned, we consider Rebif will be stable in course of entire year 2013. Please take note of the fact that by end of March, we expect another entry of our competitor. So, here our assumption is that the first two quarters will show growth, whilst on the third and fourth quarter we might see a contraction.
A far as Erbitux is concerned, our forecast for – or our guidance for 2013 is stable to slight increase. Please take note of the fact that Erbitux didn't grow anymore in Q4, so here expectations should be mild. Whilst, on Endocrinology Fertility and our General Medicine products we would still like to push hard in 2013, especially in our emerging markets. While, of course, Gonal-f will no longer be rolled out with a family of pen, this has been done in 2012, and for that very reason also, be more humble in your growth rates for this product going ahead.
As far as Consumer Health is concerned, we guide for higher profitability, whilst sales will remain more humble, as you've seen in course of 2012. However, the organic contraction should become less or turn to stable sales as – at levels that you have seen in 2012.
For Performance Materials, I think I've made my point already. We do see stock levels at our customers at clearly more increased levels and for that very reason our assumption is that either in first or second quarter, we would see a reduction on volumes (wise) of course, underlying wise the business should benefit also in '13 and '14 from an increase in (arrear) i.e. display size and also an ongoing increase in volumes in the emerging markets. So, for that very reason we remain with a clear message that 2012 was an extraordinary year where everything went in our direction. Even currencies went positive in our direction. So for that very reason we assume that 2013 level EBITDA will be at best the 2012 performance.
From Millipore, I reiterate my comments on strong December turnover that we've seen in 2012, so roundabout 2.5 percentage points higher than we originally anticipated for the fourth quarter so be a little bit more moderate and of course we have to take clear look at the development of the healthcare budgets and if here respective cuts will be made in order to get in line with the national budget deficits which is currently being discussed. On a back of this we point out in a qualitative way the sales at group level to grow moderately, whilst EBITDA should see a slight higher increase in terms of growth rate driven by the savings implementation that you've seen also in 2012.
This, ladies and gentlemen, is all from my side, and I would now like to open up the call for your questions.
Operator: Matthew Weston, Credit Suisse.
Matthew Weston - Credit Suisse: Three, if I can, all pharma related. The first is your commentary that you expect U.S. pharma price raises to moderate during 2013. Given the phenomenal growth you managed to push through with your U.S. Rebif franchise, why do you expect that that will moderate next year? Secondly, with respect to pipeline failures, you spent EUR1.2 billion on pharma R&D. The vast majority of that will have been on the Phase III studies, which, as you pointed out, have not been successful. Yet you've demonstrated the transition in your pipeline, which looks much more healthy in earlier stages, but these require a lot less cost. So, should we anticipate a very material reduction in your R&D spend as the late stage trials come to an end? If not, what are you going to invest that money in? Then finally, I realized the story of increasing margins as you transition Erbitux from Boehringer Ingelheim to (Vevey) have kind of moved on, but can you just give us an update as to where you are in that transition, are you now making all Erbitux yourself and if not, when do you expect that move to take place?
Karl-Ludwig Kley - Chairman of the Executive Board: Thank you very much for all three questions. Let me address them one by one. As far as Rebif is concerned, we basically went out with three price increases in the course of 2012, beginning mid and end of the year. So, for that reason, I think we did what our competitors did as well. Today, I would like to inform you that we posted the introduction of Rebidose, now another price increase of around about 8% from March. So, this is now a price initiative that we took and now of course, we again will watch the market, we'll look at what will happen on the competitive landscape in the course of 2013, we'll look at what will happen generally in the market and then we will reconsider, but for that respective time period I think you should only assume that this would be the one and only price increase for 2013. As far as the R&D costs are concerned you're totally correct, that late stages are reduced. However, first of all, early stages have increased. On top of that, we move now something potentially in the late stages, threshold is just one that has been addressed on Stimuvax, we have to see what we will do, and on top of that, you need to take into consideration, our Biosimilars projects, or our Biosimilars initiatives. This is one that we had announced last year. We will in the course of 2013 invest nearly a triple-digit amount of money in studies on our respective compound that we will have and for that very reason I would be mild in my expectations on R&D cost reductions. What I can clearly confirm to you is that Annalisa Jenkins has accelerated the program on changing the fixed to variable cost structures so that we have enough money available to fund interesting projects in our pipe. So, (indiscernible) and titles have been reduced and now we put our money into the pipe, into clinical studies in order to make sure that also in the future years we are going to see growth coming from (pharma). As far as Erbitux is concerned, the transitioning is as follows. In 2013, we are not going to see a change in sourcing. So, for the entire year of 2013, we will still source externally. It's envisioned as of today that we will only mid-2014 change the sourcing and therefore will start running up our (Vevey) accordingly with on production. This is very much to do with stock levels of take or pay contracts and more I would not like to stress in this regard, only that 2014 you will most likely see the transitioning from external to partly external and internal sourcing which we're taking from summer 2014 onwards. Are all questions addressed?
Matthew Weston - Credit Suisse: Can I just come back with two quick follow-ups if I can? Given the 20% to 30% plus price rises you put through in the U.S. this year, have you seen any managed care push back on Rebif pricing? And just with respect to your comments about (Vevey), does that have a margin implication? Should we see – I assume what you are therefore doing is running a parallel double cost stream for the whole of 2013. So, should we see gross margin improved significantly in '14 as the BI contract comes to an end and you only run one set of costs?
Matthias Zachert - CFO: On pushback question, my only comment that I would like to make, we think we sell an outstanding drug with now even more devices and for that very reason our view is that we sell our interferon Rebif at the right market price and that this is the product that is therefore rightly priced versus our competitors. As far as your second question is concerned, don't assume that the internalization of costs will lead to a significant increase in gross margin. It's positive, but here we are not talking about a triple-digit million euro amount. We are talking about a double-digit million euro amount and therefore, this is not going to rock the gross margin line in 2015 or for half year 2014.
Operator: Vincent Meunier, Exane BNP Paribas.
Vincent Meunier - Exane BNP Paribas: The first one is at the Group level on the debt, the net debt, what's the target in terms of gearing and what's the limit in terms of the repayment of debt? The second question is on the cost savings. When we look at what you did now, finally the liquid crystals is the unique division without any announcement of cost savings, does it mean that Liquid Crystals is already sufficiently lean or does it mean that the current pricing trends in Liquid Crystals and also the investment in OLED don't leave room for more savings? And the last question is on the Consumer Health Care, you say that you want to have future leadership in core markets, does it mean that you are thinking about acquisitions to drop the critical mass in that business?
Matthias Zachert - CFO: So, let me take the financial questions and then I hand over to Karl-Ludwig. As far as net debt is concerned, I already stressed that this morning in the press conference that reducing net debt is no target to say, so when we see opportunities and elements that turn the P&L accretive, we will not shy away from that. so, net debt reduction per se, I'll ask the CFO but I'm not CFO that only looks at net debt, and you therefore can see that from the investments we've already taken in our pipeline in Merck Millipore or in Performance Materials, we don't shy away from also trying to make sure that we do good resource allocation on future growth. But of course at this point in time, as we have guided 2013, don't expect that we do anything bigger, so we will be humble in our cash allocation and will therefore fuel the restructuring that is coming focused M&A for instance in Merck Millipore in the small and medium sized camp on technologies on in-licensing deals and the like. The limit on repayment is basically are the maturities that are outstanding, so we have EUR750 million coupon – sorry EUR750 million bonds in the market maturing in the second half of 2013. This one is at the high coupon which we definitely will collect and repay. Unfortunately the bonds are high priced. So, we'll definitely not pay them back earlier, we wait for the maturity collect them and destroy them so this is the limit of repayment. As far as Liquid Crystal is concerned this business has a very healthy cost structure so here we have basically technical application in every country where displays are being produced. Please take note of the fact that we also invest round about 8% to 10% in R&D to sales in this business and that is a reflection of our belief in this business. But of course, we can only do that as long as this business is doing that very well and for that very reason we have no reason to touch the cost base at all. For CH on the strategic question I turn the word to Karl-Ludwig.
Karl-Ludwig Kley - Chairman of the Executive Board: CH, we're very much with our feet on the ground. So, we speak about focusing on core brands and core markets. We're not dreaming of having leadership positions in the segment. We strongly believe that we can turn the business into very profitable and successful franchise, but we're not building – dreaming of building something gigantic there. Therefore, focus 2013 is very clearly getting the turnaround done, continuing what has been started in 2012, that means pruning the portfolio where necessary, implementing the savings and turnaround times, improved profitability and be successful in the core markets, which we have no plans for major acquisitions from the outside.
Operator: Richard Vosser, JPMorgan.
Richard Vosser - JPMorgan: Just finally on Rebif, if you could just give us an update where you are with the court case with Pfizer and timings around that, and whether that can be an upside this year or next year? Second question just on Erbitux, just could you give us a little flavor of how the growth is in Japan and Europe, where you are in terms of penetration and what you are seeing around competitors coming into colon cancer for that product? Just a bit more detail there. Then just finally on liquid crystals, with the establishment of the Chinese suppliers, you've told us that clearly stock levels are high it seems across the industry. But where are the Chinese manufactures in their ramp-up phase to supply the Chinese market, in terms of what you can tell us there? Are they – if the Chinese economy was to falter, how would that impact those Chinese suppliers and your supply in there as well?
Matthias Zachert - CFO: So here on your first question, Richard, the timing for the Rebif/Pfizer legal discussion, this is little difficult to comment on. I have learned once from a wiser man that you should never predict on the time table of authorities and of course the judge is the final authority anyhow and therefore making a call on his agenda is something that we will never do. For that very reason, I repeat what we have stressed before. A decision can happen any time. We consider that the decision is overdue, but it's not in our hands to make a call on this one. As far as Erbitux is concerned, we've clearly seen that Japan was challenging in the course of 2012, it remained challenging throughout all the quarters. We are doing everything to strengthen our position in Japan and basically I would like to shed light on the fact that here, a few months ago, beginning of the year, we were successful in getting our Erbitux product approved for head and neck. With this, we are trying to do everything to reposition Erbitux accordingly to work with all alliance partners. It's at a high priority level of Belen and Stefan and I'm pretty sure that they will, in the course of 2013, come back with respective results on this. As far as Europe is concerned, of course we see here competition in the market. However the clear competition is rather on the site of the pricing and for that very reason, we of course monitor the markets, but we consider that in Europe the market is not the one that will expand. It's a more challenged market and for that very reason we stress that growth in this business will come, if at all, from the emerging markets. On liquid crystals, the comments on the Chinese manufacturers, of course, they try to enter the market and they are having production facilities there. We currently don't see market shares of significance. The market shares that we see are in the 1% area and basically in the TN-TFT technology, of course, we don't exclude the fact that they might ramp up further in the years to come. However, this is the name of the business in liquid crystals. You have always to invest in innovation and for that very reason our investment in liquid crystals is in the neighborhood of 8% to 10% because today we do the research on new liquid crystals more so that in one or two years we change and upgrade our portfolio further in areas where nobody else is currently competing. You have seen in the course of 2012 an extraordinary performance in IPS and PS-VA and we even gained market share here versus our other two competitors. But because we had quality upgrades and new product line extensions that fastened switching times and picture clarity and this is the direction we will also take in future years. If we stand still, we will fall behind. So, for that very reason liquid crystals will continue running fast and it's highly likely that in the course of 2013 we will give you a very detailed information on this business so that you can feel more comfortable on liquid crystals going ahead.
Operator: Holger Blum, Deutsche Bank.
Holger Blum - Deutsche Bank: Holger Blum, Deutsche Bank. I just wanted to have maybe your view on the pipeline chart on Page 14, as we've seen a lot of changes, maybe you can talk about some of the earlier compounds, if you could just keep one of those, which one would it be and why? Then also a question on Pigments & Cosmetics, where you mentioned restructuring, could you roughly guide us there? What is the current margin gap for that business and where that appears? Third question, the royalty income line of Enbrel and Avonex, the $80 million of reduction, is that a fully annualized number or is it just the reduction to be expected in '13?
Matthias Zachert - CFO: So, let me address the question on Pigments. As a matter of fact, Pigments business that we have is one of the most pearlish or even better pearlescent businesses that is out there in the Pigment industry. For that very reason, the gross margin is very, very high. Normally, if we talk about Pigments that you can see here in Europe, you will find that these are rather commodity businesses with gross margins in the areas of 15%, 20% at most. We are playing in a completely different league. For that reason, we have to invest a lot. We have to make sure that this is a (indiscernible) niche Pigment business and this you see in the gross margin reflected. However, our SG&A cost is certainly too high and our SG&A cost have been even versus other specialty niche chemicals producers round about 5% to 7% higher in SG&A. This is what we are addressing and we took the liberty to have too many production plants in the world. So, whilst enjoying a healthy gross margin, we were operating at the utilization rate of 60%. My feedback to use in chemicals nobody runs with 60 utilization rate, commodity players would be deep in the red and even specialty companies normally try to have utilization level of 80%, 90%. Due to the pearlescent nature of our business, we could have afford with 60%, but we made a clear decision in the management board that we will not bring it back to standard operational levels. So, that is the feedback on your gross margin question and on the steps that we have taken. On the royalty side income, the two products that were mentioned, our next is of course the bigger one and Enbrel only steps out from November, December onwards. The EUR80 million are not annualized, that is the reduction for 2013 in total and therefore you need to annualize that for the year and please come back to the guidance I have made in May 2012 when I already forecasted the absolute royalty income line for the year 2014. With this, I hand over to Annalisa.
Annalisa Jenkins - Global Head of Drug Development & Medical: I think you know addressing the question related to our early and mid-stage pipeline, I'd make general comment initially that overall I'm particularly pleased specifically in the areas oncology and OncoImmunology with the progress that we are announcing out of the pre-clinical into the early clinical space. I might specifically address your question highlight (indiscernible) which is our oral MEK inhibitor I think you're familiar with this pathway. I'm particularly pleased with this program as it really highlights the strategic pillars of our oncology approach to our drug development namely that we're pursuing a program in mono therapy, but particularly in a targeted population and we recently published data phase early – sort of Phase I expansion data in the N-Ras mutative malignant melanoma population. We were particularly encouraged by the response rates in that population and thus have subsequently moved that program forward into a definitive Proof of Confidence study. In addition we have entered into a strategic partnership with Sanofi. I'm looking specifically at novel combinations and we particularly believe that the profile of our MEK inhibitor lends itself in a rather unique way to these novel combinations and we'll be speaking more publically about that program via it progresses. In addition we are looking increasingly to external partnership with academic communities and I would say that there is some early interesting evolving data coming from one of our academic partnership in ovarian cancer. So, I think for those reasons this is actually a very interesting molecule that I would highlight in the Phase I and II space in our pipeline.
Operator: Matthew Hartley, Citi.
Andrew Baum - Citigroup: It's Andrew Baum from Citi. Couple of things. Firstly, could you just outline the impact on your gross margin associated with you taking over the manufacture of Erbitux away from Boehringer? To what extent is (diminished demand) actually compared to what previous expectations were, which used the potential upside in terms of profitability? Then secondly, Annalisa, I know you have been spending a lot of time focusing on the early stage pipeline in terms of licensing deals in the areas (immunostimulus) molecules and vaccines. Could you perhaps outline some of the more exciting, if early stage candidates that you are looking at, and when do you think potentially they could reach the market?
Matthias Zachert - CFO: So let me come back to the external contract that we are having. As I stressed before, the transitioning will earliest happen in course of 2014, and for that very reason it's not going to have a significant impact in the gross margin in 2014. Should it come on an annualized basis, we will not immediately step away from our external partner, because you would always like to have a dual sourcing in place. So that leads me to the statement that, of course, we will ramp-up in course of most likely then 2015 towards the majority producer ourselves, where we still have roundabout 10%, 20% being externalized. Now for the annualized positive impact, you can assume a double-digit saving, but how high this will be, my feedback to you is let us rather work through 2013 and then see how strong we are going to ramp up in 2014 our own production, and then I would like to give you more granularity on the underlying annualized saving. Today, my indication will only be that it is a double-digit million amounts, but not in the high, but rather in the mid-range of the millions. So, that's my comment on Erbitux and with this I hand over to Annalisa, again.
Annalisa Jenkins - Global Head of Drug Development & Medical: As I understand your question, you're really asking about what we're keeping an eye on in terms of the mix for the phase of delivery, I guess, on our pipeline. So, I would address my comments to a couple of the programs. Clearly, TH-302, we about a year ago now completed that transaction. The initial read from that program will come from soft tissue sarcoma. I think we've already guided to the fact that there's a PFS Futility analysis, that's event driven, likely to be in mid-2013. I think our partner Threshold, as you know, leads that program and we'll probably provide further guidance on the program in the coming months. Obviously, we've indicated the start of our Phase III program for pancreatic cancer just last month, but given the timeline that's a couple of years out. I would also highlight Sym004, a transaction again we completed this year. The lead indication there in refractory third-line head and neck cancer we're starting to see some early data emerging there and again I think we'll be able to find further update as the year moves on in that space. As you're aware, we're also in the process of examining data on the ONO-4641 program in multiple sclerosis. We expect to update you mid-year on the efficiency related to that program.
Andrew Baum - Citigroup: I guess I was asking a little bit earlier than that. I know you've got an IO-12 in Phase I and I think you have some additional (indiscernible) related therapies in late-stage preclinical, (indiscernible) clinical. I know your background was involved in that. So, I was just trying to get a sense that what you have there and when you think they will be ready to move in to the clinic.
Annalisa Jenkins - Global Head of Drug Development & Medical: Into the clinic? Okay. Well, we actually – yeah, so we have a pretty competitive emerging portfolio in OncoImmunology. You know that I have a very strong interest and background in that area and I am particularly pleased that by the way that program is coming together being let out of Boston with a number of academic partnerships. Yeah, so, IO-12 is in the clinic. We also have PD-L1. So, we expect at some point to be heading into the clinic in the coming months and a number of (indiscernible) program probably best to perhaps later this year to provide further guidance on that portfolio as it matures, Andrew, because I'm not quite sure that we're ready to disclose the targets on the programs just yet.
Operator: Daniel Wendorff, Commerzbank.
Daniel Wendorff - Commerzbank: I actually have a few questions on Merck Millipore and one on liquid crystals. Starting off with Merck Millipore, you mentioned the potential impact from the sequestration in the U.S. My question there would be, I assume that lab solutions and bioscience businesses would be affected and I was wondering whether you have any idea of how the impact might be on your business. On Bioprocess Solutions, I assume that the growth rate we've seen in 2012, that this is also a good indication for 2013? Also on Merck Millipore, in Q4 the adjusted EBTIDA margin was also down not just due to the gross margin issue, which you explained, but also due to the high investments into R&D and sales and marketing. Is that something we should expect for 2013 as well? Then on liquid crystals, you mentioned that there is some level of stocking in the market and this might work off someone in H1 this year. Is it already visible in Q1? We're almost through Q1. Any update on that one would also be helpful.
Matthias Zachert - CFO: Yes, with pleasure. So, let me come first of all to the questions on North America. You're totally correct in your assumption that Lab Solutions and Bioscience will be impacted most. So, I realize that our Merck Millipore Information Day in December yields results in getting this business across to the Street. Absolutely, our assumption is if we get negative pushback on sales, that will impact LS and Bioscience. However, the information on potential budget cuts is just one, one and a half weeks old. So, we started the request to our sales force to assess that, and this is something that you cannot assess within just a few days, and for that very reason we selected, I took the liberty to highlight that to you, but we cannot give any quantitative information on this. Then your second question on the growth rate in the Process Solutions is the growth rate 2012 indicative for 2013 and my feedback here was, please be more mild, be little milder here for the first quarter due to the strong uptake that we had in Q4. We had an organic growth rate of around about 8% solely for Process Solution which is far higher than you have seen in the three quarters before and especially high in the sole month of December, which was clearly higher than our quarterly expectations and roundabout 2.5% high, and for that reason I indicated also this is a watch out for Q1. Now, as far as R&D and marketing and selling investments is concerned, on marketing and selling, it will most likely not be at the same level of 2012, but we still will invest in marketing and selling going forward, especially in the emerging markets, whilst R&D, you can assume should be as high as 2012 levels percentage wise, because the upgrading of the disposable technology and pharma manufacturing is something that will at least go on for the next two years, because the (indiscernible) setup which we explained in Molsheim is one that takes longer. The technical application here takes longer. The preparation on bio (indiscernible), et cetera, with disposable technology take longer and therefore this is a rather than an R&D investments that was visible in '12 and will continue in '13, '14 and '15. With this I would like to turn to liquid crystals. Here, well, we've started reasonably well in the first quarter. However, we can only see basically one and half months. So we saw some softening, because the base in 2012 is strong, but we didn't see destocking in Q1. But our view is this can happen any moment. So March, we assume, would be also at modest level, but there is no sudden contraction that we see in March. But our assumption is clearly that first half should see lower volumes, because at some point in time the destocking always happened. We've seen that over the last several years, and for that reason I would like to flag that early on in order to avoid surprises along the lines.
Operator: Michael Leuchten, Barclays.
Michael Leuchten - Barclays: Two quick ones. One in Merck Serono, the other income line, if I adjusted for one-offs, that continues to run at a reasonably high expense level. I thought there were some inventory write-downs earlier in the year that distorted that, but it seems that is continuing. Can you just confirm it's still the case and how is that or could that change going forward? Then the second question on Biosimilars, usually if you put a project into the clinic in Biosimilars, you then have to dedicate capacity to that project. What does that mean for you from an investment perspective? Does that mean you have to increase your investment on the Biosimilars slide?
Karl-Ludwig Kley - Chairman of the Executive Board: So, let me give you feedback on that one, start with the Biosimilars one. The beauty of Biosimilars capacity is we have a rock solid, big plant in (Vevey), which is currently not that highly utilized, as you know, and for that very reason we took in summer 2011 an impairment of EUR165 million because in entire production lines, there are four production lines and entire production line was not utilized at all. For that very reason, the likelihood that we need to do heavy investments to accommodate Biosimilars is low. On the one-off items, Merck Serono is not a small business or on Merck Serono there's always something that doesn't fit into the other elements of the P&L. so, when you look into 2012, sometimes there were inventory write-offs that however were predominantly taken and cost of goods sold and other times you have receivables that you need to impair or you have some lawyers that you need to hire for whatever legal cases you're having. Some of them are known to you and then of course you book these costs in the other expense item, but as the name implies it's something that happens and is not truly associated to functional costs and it's I think normal nature of the pharmaceutical business.
Operator: Thank you, there are no further questions.
Karl-Ludwig Kley - Chairman of the Executive Board: Then ladies and gentlemen, on behalf of the management board, I think you for your interest in Merck, and I wish you a very nice day. Hopefully, we will see you on the roads. Thank you and, bye-bye.