© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Merck Q4 2017 earnings release call. At this time, I would like to hand the call over to Constantin Fest, Head of Investor Relations. Please go ahead, sir.
Many thanks, Sunny. Warm welcome from my side here in Darmstadt to this full year 2017, Merck conference call. My name is Constantin Fest, Head of Investor Relations at Merck, and I'm delighted to have with me Stefan Oschmann, our group CEO; as well as Marcus Kuhnert, our CFO. In the next half hour or so, we'd like to run you through the key slides of this presentation, and then we'd be happy to take all of your questions, as always.Yes, please keep in mind that we have roughly about 1 hour for this call. Some of us will have to catch a plane for the upcoming roadshows. And with this, and without any further delay, I'd like to directly hand over to Stefan to kick off this presentation. Stefan?
Thank you very much, Constantin, and welcome, everyone, to our full year earnings call. As you know, 2017 turned out to be a quite challenging year for us, with headwinds in Performance Materials, headwinds from currency and a highly dynamic R&D pipeline, which kept us pretty busy. So in the second half of the year, we worked very hard to reach our guidance, which was our promise to you. And I'm proud today to be able to say we achieved it and we managed the headwinds.Healthcare; and I'm on Slide 5. Healthcare had a good year operationally. The base business was very solid, and our pipeline led to the first approvals and subsequent launches of Bavencio and Mavenclad. In Life Science, we finished the year with a visible pickup in momentum and in 2017 as a whole. And the business diligently executed the integration of Sigma-Aldrich. And I can confirm that we reached the EUR 185 million synergy target in 2017.In Performance Materials, the fourth quarter turned out okay given the circumstances. In terms of the adjustment process in Liquid Crystals, we can reassure you that at least so far, the situation has not worsened compared to what we had anticipated. However, it is also clear that the development will continue in the coming quarters. In August '17, we had given you a range for the expected decline in our Liquid Crystals sales for 2017 and '18 of EUR 200 million to EUR 300 million. This range is valid, but we will most likely be at the higher end of this. We anticipate that the expected volume growth will not be able to offset price declines we are facing. For the group overall, we expect a moderate increase in net sales in full year 2018 and a slight organic decline in EBITDA pre compared to last year with a minus 4% to 6% headwind from currencies. But we will discuss guidance in more detail later in the presentation.On Slide 6, we give you a brief look at our headline financials. Net sales, EBITDA pre and EPS pre came in within our guidance ranges, albeit at the lower end. On the next slide, we give you a couple of examples that helped us to achieve this. As I just said, the organization worked very hard to deliver on our promises, and in fact, our efforts to manage the well-known headwinds gained traction over the months. Examples included tight management of our group-wide travel expenses or very conscious new headcount decisions. On top of this, our businesses went the extra mile to deliver on their business plans.Chart 8 now. The regional distribution of our EUR 15 billion net sales is pretty much unchanged compared to the prior year. North America accounts for 25% of our sales, and Europe and Asia Pacific account for roughly 1/3 each. And Asia Pacific remains our largest region.Slide 9. To the AGM on April 27th, we will propose a dividend of EUR 1.25 per share. This is an increase of 4% year-over-year, and it translates into a payout ratio of around 20% of EPS pre. The increase is evidence of our policy to ensure a sustainable and resilient dividend to shareholders. That being said, in the future, our dividends will continue to develop in line with our sustainable earnings, and our strong commitment to deleverage as quickly as possible remains unchanged, too.Now on Slide 11. Before Marcus will guide you through the financials, let's take a minute to share our thoughts on Merck's strategic positioning. The Merck Group, as it is today, has a strong basis for future profitable growth. We hold leading positions in all business activities. We have a unique portfolio with high future growth and innovation potential. And our financial situation is solid as a rock. We aim to deliver profitable growth, which should translate into attractive shareholder return. The next couple of slides provide you with a short overview of what we have achieved so far.Slide 12. Healthcare today presents itself with the best product pipeline ever. The launches of Mavenclad and Bavencio in 2017 were already first evidence of this. And as you will see in the months to come, there's going to be a lot more to come in 2018, which will underpin the confidence in our R&D pipeline. Our announcement yesterday that we reached the primary endpoint in our Phase IIb BTK trial in multiple sclerosis is a good example. And 1 additional word on Consumer Health. The business has seen a very good performance in 2017 and achieved compound organic net sales growth between 2013 and '17 of more than 6%. As you know, we are analyzing strategic options for the business. As soon as we have more details to report we will inform you. And I can reassure you, however, that our process is well underway.Moving to Slide 13, Life Science is our proven success story, and 2017 was another year with impressive financial performance. Our Life Science business has a well-established track record as an innovation powerhouse and is a highly profitable business with sustainable above-average growth. For 2018, we expect similarly positive organic sales growth, slightly above the market rate of 4%. And important for you, we see currently no more signs of any weakness in our key accounts.Moving to Chart 14. Now to Performance Materials. We are all aware that the Liquid Crystal business has been facing difficulties, and I referred to this in my opening remarks. We know it is time to act, and we have implemented organizational changes. We have introduced new management, and the new organization is now focusing on turning around the business as soon as possible, and we will communicate the outcome to you by mid-2018. And with this, I hand over to Marcus to lead you through the key financials.
Thank you, Stefan, and I am now on Slide #16. You have certainly analyzed our full year financials already in great detail this morning, so I will only highlight a couple of additional points here.We have talked a lot about the currency headwinds in the last few months, and in total, they reduced our net sales by EUR 228 million compared to 2016 and by even EUR 337 million in the second half alone. Because of Merck's special regional setup, you can assume that typically some 35% to 45% of this flows through to EBITDA pre depending on which and by how much certain currencies actually fluctuate.The earnings per share pre of EUR 6.16 may have come in at the low end of expectations for some of you. We had a slightly more negative financial result in Q4 due to higher interest rates applicable to our long-term provisions and a EUR 13 million impairment related to the Vertex agreement that is recorded in our regular D&A line. However, with 2017 EBITDA pre only slightly below the prior year, the solid operating cash flow and the further reduction on net financial debt, you would most probably agree with me, that the headwinds in Liquid Crystals and from currencies were pretty well-managed.Slide #17. In '17 -- 2017, our net sales grew organically by almost 4% driven by Healthcare and Life Science. When you look at the first quarter only, the organic sales growth in Healthcare as well as in Life Science was very sound. We'll come to that in a minute. Whilst Performance Materials sales declined by 1.7% organically, which is in line with the trend we have seen in the previous quarters. EBITDA pre in 2017 declined slightly by 1.7% year-on-year, mainly driven by the higher investments in Healthcare, by the ongoing correction on our Liquid Crystals business and the adverse FX environment, which could not be offset by a better result in Life Science and in our Corporate & Other segment.I go over to Slide #18. While our EBITDA pre for the full year is approximately EUR 70 million lower, EBIT is slightly better compared to last year's level. This difference of about EUR 110 million is very much driven by a considerably lower depreciation of amortization charges, partially offset by higher exceptional items. The swing in our D&A charges is primarily related to the write-ups of our Vevey plant and our Mavenclad assets, which we discussed in Q2 and 3 already. In a year-over-year comparison, the gain from the disposals of our Biosimilars activities of EUR 321 million is largely neutral because we also had a EUR 330 million disposal gain from Kuvan in 2016. Not much to say on the financial result, apart from my earlier comments about Q4 and the reasons why Q4 financial results have been lagged a little bit behind expectations, driven by increasing interest, especially in the U.S. As many of you had expected, our income tax line is actually a profit, both for the fourth quarter as well as for the full year. As a result of the U.S. tax reform, we revalued our deferred tax liabilities by EUR 906 million, which led to a corresponding profit in our P&L. Adjusted for this effect, our tax rate would have been 23.4% and thus in line with our guidance range of between 23% and 25%.Given our setup in the U.S., our past acquisitions and some specific provisions under the new tax regime, our average tax rate from 2018 onwards will, in fact, be slightly higher at a level between 24% and 26%.On Slide 19, Healthcare had operationally another good quarter in Q4 2017. The base business was on track and delivered organic net sales growth of 5.9% or a plus of EUR 104 million. Similar to the previous quarters, around 40% of this growth is attributable to the change in our Glucophage business model in China. As a side note, for 2018, the effect will now be fully included in the base. Further, our Consumer Health business contributed another 25% to Healthcare's overall organic growth in Q4. And as Stefan just outlined, we are very happy with the development of this business, especially in the second half of 2017.Even without these 2 drivers, Healthcare grew by more than 2%, and thus posted its 26th consecutive quarter of organic sales growth. Our newly launched products, Bavencio and Mavenclad, performed nicely in their first few months after respective launches and delivered according to expectations. Bavencio contributed EUR 21 million in sales in 2017, and we expect it to generate a mid-double-digit million euro sales amount in 2018. Mavenclad generated EUR 5 million net sales in '17, and we have seen a very good ramp up in the last couple of weeks, both in the number of patients on drug as well as on the number of patients waiting to start their treatment. So we see it well on track to reach double-digit million euro sales in 2018.When you look at our large established products, Rebif and Erbitux, we have seen actually no material changes in the trends compared to previous quarters. Gonal-f's growth trajectory has improved.On Slide #20, we turn to Life Science, which had a very solid quarter when you look at margins as well as sales growth momentum. Research and Applied Solutions achieved yet again good organic growth in the mid-single digits in Q4, driven by good demand across the board. Process Solutions saw a visible acceleration of organic growth to 14.4% in Q4. We observed especially strong demand for single-use systems and services, and we are encouraged by the take-up of growth momentum over the year. You will remember that the start in 2017 was a little bit moderate, but we have been able to increase the top line growth momentum significantly over the last quarters.I would like to reiterate Stefan's earlier comment. We currently see no more signs of key account weaknesses. Profitability-wise, our EBITDA pre margin again exceeded the 30% level in the fourth quarter, even if the recent FX developments do not leave Life Science unaffected. We reached in full our EUR 185 million synergy target in 2017 and confirm the achievement of the full EUR 280 million for 2018.On Slide 21, in Performance Materials, net sales declined organically in the fourth quarter by minus 1.2% and EBITDA pre is 18% below last year's level. On the other hand, Integrated Circuit Materials, Pigments and Advanced Technologies, our 3 pillars alongside Display, were again the sales growth drivers in Q4 and mitigated the decline in Display Materials. In Liquid Crystals, the market share declines have continued as we had expected. Like in the previous quarters, the ongoing sales decline in the Liquid Crystals business and the unfavorable FX environment impacted Performance Materials EBITDA pre and EBITDA pre margin. For 2018, we envisage no change in trend in net sales in EBITDA pre.The balance sheet, on Slide 22 does not show many spectacular effects, so to say. Our equity ratio stands at 39%, improved once more in September '17 and also compared to the end of 2016, albeit it has not increased in absolute terms. Net earnings were basically eaten up by the dividend payments and by FX effects. On the liability side, the net financial debt decreased to a level of EUR 10.1 billion until end of December, and our net debt-to-EBITDA ratio now stands at a factor of 2.3.On Slide #23, we have shown the cash flow statement for the fourth quarter. Our operating cash flow in Q4 was solid with EUR 642 million, and we continued to deleverage the balance sheet as we had promised. You will notice some of the very high fluctuations compared to Q4 '16. Here again, you see very prominently the impacts of the U.S. tax reform. On the one hand, it raises our pretax profit significantly, while -- sorry, our after-tax profit significantly, while on the other hand, this effect is offset in other assets and liabilities as we reduced our deferred tax liability. None of these effects is cash relevant. And now, I hand back to Stefan for the guidance.
Thank you, Marcus. I'm on Page 25. For 2018, we expect moderate organic net sales growth mitigated by a moderately negative currency effect, which we believe, will be particularly visible in the first half of the year. This should not be entirely new. When you look at our second half in 2017, you will see that we lost already 4.5% of sales year-over-year due to exchange. Given the expected magnitude of this effect and because of our focused regional setup, a considerable share of the expected sales reduction will typically feed through to EBITDA pre, and we decided to provide you with more clarity around the topic.So for full year 2018, we forecast a slight percentage decline in EBITDA pre on a currency-adjusted basis compared to 2017. The drivers of this are well known and discussed at length in the previous months. In addition to this, currencies will most likely reduce EBITDA pre versus 2017 to the tune of minus 4% to minus 6%. And let me in that context, give you a couple of additional details. First, we see the average euro to U.S. dollar rate for 2018 at 1.18 to 1.22. Secondly, the exchange headwinds do burden our businesses' EBITDA pre, albeit the magnitude differs between them. Thirdly, exchange hedging gains are expected to help but our hedge rates are fairly close to spot rates and to the above range, so the magnitude will be rather small. Hence Corporate & Other costs should be at minus EUR 320 million to minus EUR 360 million. And fourthly, our guidance is based on a constant portfolio assumption, i.e. it includes Consumer Health.Before we come to the Q&A session, let me add a couple of additional thoughts on the next 2 slides. We understand that there are considerable uncertainties in the market, and this is important feedback for us. And under these specific circumstances, we, therefore, decided to provide more transparency at this point and give you first indications for 2019. Let me reiterate first indications. Please don't expect more granularity when it comes to the information we provide on '19 at this stage. For the Merck Group, in 2019, we are highly confident to deliver growth in net sales, in absolute EBITDA pre and in our EBITDA pre margin. The expected profitable growth in Healthcare and in Life Science will more than compensate the trough year we expect to see in Performance Materials profitability in 2019.So on Page 27, we are summarizing. Merck has a unique and promising portfolio with leading market positions and high innovation potential. Merck is highly profitable and invests strongly in its future. And Merck will show sustainable profitable growth from 2019 onwards. Merck is financially rock-solid, and therefore, able to finance its future organic growth. And we will continue to deliver on our promises. And now, on to your questions.
[Operator Instructions] Our first question on the telephone today comes from Peter Verdult of Citi.
Peter Verdult, Citi. Three questions, please. Stefan, firstly, on evobrutinib, how should we interpret the press release you issued yesterday? Obviously, a policy trial versus placebo but no mention of how the relapse or the lesion reduction faired versus the Tecfidera on the trial. So are you willing to discuss the data a little more this afternoon? Or at least tell us how quickly or not you want to push evobrutinib into Phase III with -- in MS. Secondly, on Bavencio, numerous interactions with KOLs over the last couple of weeks continues to raise the dosing concerns across the JAVELIN clinical program. Could you speak to that? And is that why the dose intensification was added to the first-line lung trial last year? And then lastly, ending on a positive on Life Sciences, very impressive organic growth coming out of Q4. Given the momentum you are seeing and comments about the actions at your major clients, could you just discuss a little more about the top line growth aspirations at Millipore and Sigma-Aldrich versus market expectations of 4% to 5%?
Thank you, Peter. So first, on evobrutinib, this is -- obviously, this is positive news for us. We have communicated because we had said in the past that we would be interested in partnering this asset, which we have in Phase II in 3 indications, one of them being MS. And that we would first want to maximize the potential of the asset by having proof of concept. And we thought that the fact that we believe now that we have proof of concept in this important indication is worthwhile communicating separately. We intend to present these results at Global Scientific Congress this fall. We cannot comment on any insights into the data yet with more granularity. This was a Phase IIb study, which showed a clinically meaningful reduction in lesions compared to placebo, i.e. we cannot speak to differentiation versus other essence -- assets yet. And then the full 48-week data will then guide our next steps. The Tecfidera is a control in an open-label -- in an open-label setting, therefore the study design does not allow us to make any judgment at this stage in this respect. To evobrutinib, Marcus will respond to your question on Life Science top line assumptions.
Yes, Peter, your question on Life Science. So first of all, let me recapitalize what I've just briefly outlined during the presentation. So we have seen a moderate start in 2017, afterward a strong pickup in momentum over the quarters of the year with very nice growth in Process Solutions of 14% in Q4. That leads us actually to the conclusion, to the optimistic conclusion as well, that the key account weaknesses that we have elaborated or that we have pointed to during the year 2017, we believe it is over now. We continue to believe and to assume that our business is so strong that we should be enabled to grow above the market over the next year or this year. We think that the market's growth potential will be around 4%. And so you should be prepared to see an organic sales growth rate which is above 4% for 2018. I do not want to comment on the very bullish comments that some of our competitors have been doing. What I can say, however, is that also we see that our order books look pretty nicely. So that there is, let's say, no doubt that we are at the moment in a quite friendly market environment. And I would like to give now back to Stefan.
Your other question, Peter, on Bavencio. We do not share dosing concerns. The -- when we look at the results of the third-line lung trial, we see the -- sorry, the second-line lung trial, obviously, concerns or the issues are related to the crossover topic. I think you had ample opportunity to discuss that with our head of R&D, with Luciano. The other question was the PD-L1 expression. You know that the tests that different competitors are using use different levels. We've seen pretty encouraging result actually in this trial in the high express as yet and in a mechanistic sense, the primary endpoint was not met. When we test the high dose in the first-line as one of the arms in the first-line trial, this is -- we are testing for the hypothesis that a higher exposure could result in enhanced efficacy versus what we know.
Peter, I have just seen that I have not answered a part of your question, which was your question around the split between legacy Millipore and Sigma. You know that we do not give, I would say, detailed split data anymore. However, I can provide for sure a little bit color. So Sigma, as you know, consists mainly of the research piece. Here, we have actually seen a good Q4, a very satisfactory Q4 while the start of the year 2017 was a bit slower. And here, we have seen a recovery, especially in North America. The BioReliance services for Process Solutions piece is growing double-digit, but it is a relatively small piece of the former Sigma business. On the Millipore side, we have the Applied section, so to say, which is growing nicely. We have had a good year in Applied all over. And also, again, the Process Solutions part of Millipore is as dynamic as the whole division.
Our next question today comes from Jo Walton of Crédit Suisse.
A few, please. I wonder if you could also talk a little bit more in more detail about Mavenclad. It doesn't seem to have had a significant sales in 4Q after some sales in 3Q, and now you're expecting strong growth as we go into 2018. I wonder if you could perhaps discuss with us where you are getting traction, the rollout that you're expecting through Europe? And also update us on your discussions with the FDA now that we know that you are going to file in the second quarter of this year. Looking at the Performance Materials business, I wonder if you could help us a little bit more on the decline of the Liquid Crystals sales. Is there a general price decline such that the market is shrinking perhaps at the high-end of your expectations? Or is the market perhaps okay, and you're actually losing more market share within a stronger market? And if you could also just help us, as we move into 2019, you're obviously expecting profitability to fall again in 2019. Do I assume that your expectation is that sales will also fall in 2019? Or could we start to see that be an acceleration in sales but just at a lower level of ongoing profitability? And my final question would be to get a sense not just of this year's capital expenditure but next year's, because your CapEx is now running quite a bit higher than your depreciation rate.
Thank you very much. So starting on Mavenclad, you know that we have achieved approval in the EU and a couple of other legislations. And the market introduction depends on local pricing and reimbursement discussions, most typically, the first countries where such a product would hit the market is in the EU, is Germany and in the U.K., and we will continuously launch in major European countries going forward, Scandinavia, Spain, Spain and others. So when I comment on Mavenclad, it's mostly about data from Germany, which was the earliest launch in Germany. We're tracking the launch performance of a leading competitor in the high disease activity segment that has led to sales of EUR 5 million. What you must bear in mind is that this product has a very special treatment regime. That means that patients take the product for -- during the course of 2 months. And then that is sufficient for a very long period. So when you have first then you have patients that have been sort of warehoused by physicians in anticipation of the launch, you could see a fast pickup and then a more steady growth over time. We are targeting high double-digit sales in 2018, and we've also recently received the positive recommendation by NICE. So we are very confident on Mavenclad. When it comes to the U.S., you heard us say that we're planning to submit in the U.S., which implies that we're in negotiations with the agency. Filing in the U.S. doesn't mean that we simply take the European package and send it to the FDA. It requires a significant work on specific formatting of the data. We will typically communicate once the agency has accepted the file. We wouldn't file if we didn't think we had a serious chance for getting the file accepted. So when it comes to the Performance Materials business, this is a business where panel makers, display makers still have their own dynamics, I think you're familiar with that. Please do understand for competitive reasons, we don't disclose price and volume details. But as you know, there are always price negotiations, and we must very carefully assess on a case-by-case basis or we must take the decision very carefully how much we discount and how much we're willing to give on the respective LC mixture. Some of our competitors compete on price, but given that our value proposition is not just on the quality and supply chain security but also accounts for the superior customer support that we provide and the ability to supply our customer with the latest innovation, we can still justify a price premium and that's an assumption that we carry forward. You can also assume that, however, that more competition doesn't help the overall price savers either. But please don't forget that has always been price reductions, and please also don't forget that exchange also plays a significant role in that area. For '18, we have given you guidance last year that it will be very challenging to keep the 40%. And if you look at our guidance, you will see that in '18 again, we expect a significantly higher reduction EBITDA than in sales, which will lead to lower margin than in 2016. And we -- sorry, not in '16, '17, obviously. And in the interest of transparency, we gave you some feeling for 2019 where we said that this will be the trough year for profitability. And that right now, the name of the game is to focus on strategic execution and turn around that business.
I will take the CapEx question. We have seen, especially since the Sigma acquisition, a quite significant uptake of our CapEx spend. On the one hand, of course, acquisition-related; on the other hand, also due to the fact that we had to catch up in some areas at the Sigma space and also due -- or following the favorable volume situation that the overall group is in. So that means we have seen an uptake of capacity investments, especially over the last 2 to 3 years. This development, however, has come a little bit, or the increase, has come a little bit to a halt, which means that we expect the 2018 CapEx levels basically in line on the same range as in 2017. For '19 and '20, we would see, let's say if any, only moderate further increases in CapEx. So the big jump actually is behind us, and that was from 2015 to '16.
Our next question comes from Simon Baker of Exane.
Firstly, a couple on the 2018 outlook and guidance. If I look particularly at Healthcare, on the commentary around the expected revenue growth, the expected EBITDA pre evolution and your commentary on cost lines, it's difficult to square one with the other. So I'm just wondering if there's anything else we should be thinking about in terms of cost lines and items beyond SG&A, specifically marketing and selling on R&D within that? And as a broader point on the 2018 outlook, you're now helpfully providing us with organic constant currency EBITDA pre growth rates, but we've not seen those historically. So wonder if you could tell us what the respective rates on that basis were for 2017? Also, unrelated to guidance, on tax, Marcus, I wonder if you could just give us a little bit more explanation as to why the tax rate is going up rather than down in light of U.S. tax reform. And then finally, on multiple sclerosis, I wonder if you could give your thoughts on where you see the volume of Rebif and indeed the interferon market as a whole settling out. I think most of us assume, the market assumes, that decline is almost inexorable. But presumably, at some point, notwithstanding some price reductions, we'll start to see volume flatten out for Rebif and interferon. So I wonder if you could give us your thoughts on whether you believe that? And secondly, where you think we are relative to that plateau?
So thank you for your questions. I will start with addressing the Healthcare financials, financial question. The Healthcare financials are driven by the need to invest in marketing and selling for the launches, including a ramp-up of the commercial organization in the U.S. for MS. And there are no other factors. If you have specific questions, I would suggest that you clarify it with Constantin and Investor Relations in more detail. I would hand over to Marcus when it comes to exchange rates 2017.
Yes, Simon, so actually, we are not prepared to give organic EBITDA growth rates for the past. We have decided deliberately to start giving more transparency on the split of the organic and also FX-driven development of EBITDA pre going forward in order to increase our transparency in that range. But we would not actually provide a comparable basis now over a couple of years back. On the tax rate question, I think this is a very valid one. It's a little bit technical effect. So we would expect actually from the U.S. tax reform the positive effect on cash flows, because all of our cash flows and gains generated in the U.S. would be taxed at a lower rate, which is I think quite straightforward. We believe that we are not significantly affected by the interest-capping rule on the one hand and also not by the new BEIT regime. So this would basically have no material impact on us. What drives or what will drive our tax rate in the future, in the midterm future a little bit up, I mentioned 1 percentage point, is the technical revaluation effect that I've mentioned to you. So think about what happens. When we acquire, let's say, for example, Sigma-Aldrich, we identify intangible assets that we have acquired. We value them and then we capitalize them in the balance sheet and build a respective position of the deferred tax liability, which is basically reflecting temporary difference. So in the future, at the time when we are amortizing the intangible assets, we are releasing correspondingly the deferred tax liability. So that means there is an expense in the P&L via the amortization, but we also have a gain in our tax result from the release of the DTL. What we have done basically now, first done with the U.S. tax reform, is that we have brought forward this P&L relief on the tax rate, the future P&L relief all in this one-time revaluation gain that you see. And simply, the negative data, so the lower DTL releases in the future, they overcompensate from our current viewpoint the future benefits from lower cash taxes in the U.S. And this ultimately leads to the slight increase in the tax rate. So I hand back to Stefan for the interferon question.
Yes, Marcus. And Simon, so if we look at the multiple sclerosis market globally and the interferon market more specifically, the dynamics are obviously an amalgamate of different regional trends. And let's say if we went back a couple of years, any observers would have expected that the interferon market collapse once -- or implode once the oils had been introduced. We have disputed that, and we have already said that interferons and Rebif will stay an integral part of the armamentarium of the physicians. And I think we were right in this. We've seen the different factors influencing results, or that in the U.S. we've had price increases plus a certain degree of market share loss for the interferons while we were defending our market share within the interferons quite well. We've seen in markets like in Europe, we've seen some price decreases given austerity measures and equally slight market share decrease, and we've seen volume growth in some emerging markets. What is new was the, let's say, the impact of Ocrevus as well as generic Copaxone. We haven't seen major effects of that on our market share, and we don't expect major trend shifts going forward.
Our next questions come from Sachin Jain of Bank of America.
A few, please. Firstly, on Performance Materials, just to try and clarify the commentary around '19. Do you expect continued declines in the top line beyond the EUR 200 million to EUR 300 million that you'd previously guided for by the end of '18? If that's so, is that a change and do you still believe in the prior communication of 50% share sort of trough or is that changed? Secondly, on Consumer, thanks for the update, Stefan. But just wonder if you could clarify when we should expect a final decision here? Is there any color on what's taking so long post receipt of bids in December. And then 2 pipeline questions, on the BTK, just to clarify why you need longer follow-up to design a study of that waiting for great evidence of efficacy to emerge? And then on the TGF-beta. On the Bavencio call, Luciano recently hosted, I think you alluded to starting first-line lung studies there and that they could be complementary to Bavencio. Are you able to provide more color on that?
So in your question on PM going forward, as I said, we're not in a position to give a lot more granularity in addition to what we've said. We -- let me reiterate, we sent the positive message that we expect for the -- what we said for the group, i.e. sales growth, more EBITDA pre and the margin increase. And that's what we want to say. We expect -- within PM we expect further growth of our semiconductor and our Pigment business. Our Display activities will on the one hand, benefit from the rising demand for larger displays, and we don't see any major change there. We see -- we expect a certain stabilization of the known dynamics that we see now. We continue to be the innovation leader in this field. There are no Liquid Crystal modes out there that have not been developed by us. We, as I said before, we expect a decline in our Liquid Crystal sales in this range that we have communicated of EUR 200 million to EUR 300 million, and we clearly have been now at the higher end of this range. We have -- we will be reshuffling the business. We have -- as of April, there will be 3 units. There will be a display unit, which is the combined and the combined liquid crystals and OLED business. There will be an integrated circuit solutions unit, which consists largely of the business we acquired through AZ Electronic Materials. And there will be the surface solutions business where the majority will be the business that we had in Pigments before. I would like to ask you for a bit more patience when it comes to details. As you know, we're -- we will provide you with more quantitative guidance in early May. The CH process, the CH process is progressing well. The process is in line with industry practice. The business has seen -- what we should note is that the business has seen very good performance in 2017. We have very strong organic growth for the year, and we see a particularly strong fourth quarter. So I think that's a good sign for the process. We have approached -- potential candidates have been approached in November and they received the book, the package. We had requested nonbinding offers in the course of December of 2017. And now it's standard practice that these offers are being discussed. There's a lot of diligence happening. There are thousands of questions in any such process that are being asked and are being answered. It keeps the organization extremely busy. The Executive Board is analyzing this. And once we see what the situation is, we will take a decision on to which option we will follow, but we are happy with the process, and we see no delays. We did not -- we had discussed the possibility of Pfizer also may be selling their asset when we put our strategy together. We believe that our asset is very, very different from the Pfizer asset. That was about the CH progress. So on BTK, ibrutinib. This is very early, I must just say this. We thought it would be in your best interest to share this information with you as soon as possible. It also indicates that the availability of this data now trigger more activity in the partnering field, where we have entertained discussions, but we've been waiting to see these data. You should expect us to take the next steps in this area. The -- your other question was about TGF-beta trap, and there is -- we have no more color to add today beyond what Luciano said. The decision will be taken after ASCO, and when the second-line, the PDX naive cohort will be presented.
Our next questions come from Wimal Kapadia of Bernstein.
Wimal Kapadia from Bernstein. So just thinking about your 2018 guidance for PM, it seems to suggest that EBITDA margins for the division are moving towards 34%. So if I assume that the other subdivisions within PM remain flat margin, does that imply that EBITDA margins for Display, in particular, actually declined by double digit? So on my math, it seems like EBITDA margins declined by about 10% for Display. Is that a fair assumption? And then following on from that, if that isn't a fair assumption, is it possible that the other subdivisions within PM are actually growing in margin terms such that the Display EBITDA margin is declining more than 10% in 2018? My second question is on Display again. In 2Q '17, you've highlighted a slide, which suggested that Display would be a growth business post the near-term decline. And if we use the very high-tech method of a ruler, it suggests that PM in totality could have revenues of EUR 2.8 billion to EUR 3 billion in 2022 based on the slide you highlighted in 2Q. Do you stand by that exhibit that you presented in 2Q? And then finally, I have 1 question on tepotinib. The METex14 mutation study for me is virtually interesting. Can you just give us a little bit of an update on how the recruitment of the study has progressed? Is it possible for us to see an interim this year? And if we do see an interim that is positive, will that be enough for filing?
Wimal, I'm not sure that I fully captured your questions. So I start to answer to the best of my knowledge, or eventually, we have to go on the second round. So first of all, on the guidance. So we -- if we make the math, yes, we show a slight to moderate organic decline in net sales in Performance Materials, and we mirror against these projections on the EBITDA pre. Your calculation of a mid-30s percentage margin for PM is appropriate, I think. We do not believe or we do not think that we would face any margin declines in our other businesses except for PM -- sorry, except for Display Materials. So that means we are convinced that Pigments, Integrated Circuits, especially Pigments and Integrated Circuits, will continue their very good growth trend and there's no reason for us to believe that we would face any kind of margin declines in 2018 over '17. So -- and then you can make the math what it means for the margins of Liquid Crystals when having in mind, let's say, roughly 50%, 50% portfolio split between Display Materials on the one hand and the rest of the businesses on the other hand. So sorry, I did not get your question, what went beyond 2019.
No, I think that was really helpful for the first question. My second question was on 2Q '17. You highlighted a slide, which suggested that Display would be a regrowth business post the near-term pressure. And that actually, if you look at the PM in totality, it suggested that potential revenues for the division in 2022 could be above EUR 2.8 billion, just using a very simple rule of math. Do you still stand by that exhibit that you highlighted at 2Q '17?
So actually, when we look on this longer time period until 2022, we still stand to this. So there's no reason for us to make a significant correction today. What we see is, however, what we said we will see the decline in trajectory until 2019. And if 2019 is the trough year, then it implies that from 2020 onwards, we would see top-line growth again, which would then actually over a time period from '17 to 2022, could result in a basically flat development there. So this is a statement where I see no need today to meet it or to cancel it. So this remains valid. And as Stefan said, the new organization that we have now brought in place is focusing on turning around the business. And we are working on a new strategy that we would present to you by middle of this year where eventually, we would also then be prepared to provide a little bit more color to financial development, but not sure yet, but we definitely will do is presenting new strategy until middle of 2018.
I'm answering your question on tepotinib. Tepotinib for me is a good example of the sort of choices we're making in pharma R&D these days. I think it's a good example on focusing on a powerful niche with a relatively high probability of success. We have a liquid biopsy as a potential differentiator versus competitor, and that is in lung MET exon 14. The estimated primary completion is June '19. And recruitment, there are no issues with recruitment. We could potentially see interim data in mid '18, but we cannot promise that. And when it comes to filing, that is obviously -- that will be a function of how good the data look. You know that very well. So let's see the Phase II data, and then we decide on filing strategies.
Our next questions come from Gunnar Romer of Deutsche Bank.
Gunnar Romer, Deutsche Bank. The first one would be on the Healthcare guidance for '18. So you're talking about higher underlying R&D, higher selling and marketing, negative mix effects, and then you will lose basically EUR 200 million of special gains that you've seen in 2017, against which your guidance for only a slight EBITDA pre decline looks actually quite strong. So in this context, if you could provide a bit more color on the underlying drivers here, i.e. is it that you assume only very minor increases in R&D and selling and marketing? Also, are you assuming higher gross margins in '18 compared to '17? And what have you assumed in terms of potential milestone or partnering income, if at all? Then secondly, on Performance Materials, firstly, bigger-picture question here. So you seem to become increasingly cautious here also relative to what you said mid last year. So what are the main reasons and how can you be confident that 2019 will be the trough? And in this context, if you can also talk around micro LEDs as a potential threat to your existing Liquid Crystals and OLED franchises? And then more specifically, on the recent developments here in Liquid Crystals, if you look at the market share declines, can you comment on to whom you are losing these shares? Would it be your long-standing competitors? Or are you losing also to new players in the market? And then last question on your guidance for Corporate & Other, quite a significant increase, I believe 6% to 20% that you're guiding. Probably there's even some small hedging gains as you commented. So what is driving that fairly significant underlying increase, please? Does that relate to your 350-year anniversary? Should we expect that to come down again next year? So any additional color around the Corporate & Other line would be helpful.
Thank you, Gunnar. I will start with answering the questions on 2018 Healthcare guidance. This guidance is based on some favorable trends that we're seeing for different products. We've seen that -- we now see that the comparables for the fertility franchise are easier and that we see that there's -- that the good organic or longitudinal growth translates very nice into a growth pattern. We see we have expectations for Bavencio in the mid double-digit area. As I said, we've seen Mavenclad developing very well and tracking the oral competitor that we have identified as the standard that is also in the high-disease area. I think you know what I mean. We expect for Mavenclad high double-digit sales in 2018. So all of these are positive, a highly positive factors. And we're fairly confident on our guidance. Marcus is going to add some more color to this.
I would like to add 1 more point, Gunnar, and that is also something which Stefan had outlined in his presentation. It required us really some effort to reach our financial targets of 2017 despite the headwinds from PM and from FX. So that means we have also, I would say, implemented a new level of cost discipline within the organization, which was reaching across all of the 3 business sectors, and you should expect that some of these benefits will be sustainable, so we'll not swing back entirely in the future. So we would also have a slightly more favorable cost base to start with, and that also helps us to compensate for the planned investments in R&D and in marketing and selling to prepare for any potential Mavenclad launch in the U.S. And of course, it goes without saying that also here, like in the past, we would exercise a high level of scrutiny. So that means we would only invest in these categories on R&D and marketing and selling against robust clinical data on the one hand or -- and/or sound business plans on the other hand.
And Gunnar, your question on how certain are you that 2019 indeed will be the trough year for PM, I cannot give you a simple answer. So let me try to shed some light on what our assumptions are. First of all, remember that Liquid Crystals is about 50% of our PM business now and, that the other nonliquid crystal businesses are growing nicely in the mid- to high single-digit range. So that as the proportion of these businesses will become bigger, that is 1 element. If we look at the Liquid Crystal business as such, dynamics vary from geography to geography. We don't give any specific guidance there, but let me try to explain these in a bit more detail. The main countries in which our panel manufacturer customers reside are Korea, Taiwan, China and Japan, and these markets have very, very different dynamics. We see -- in the more traditional market, we see a market share battle with our, what can I say, traditional competitors. That is something that is no news in itself, and we feel rather confident in being able to forecast developments with a certain degree of accuracy in this area. We have very different market shares in different geographies. In China, we have seen that for the lower- and mid-quality range displays that are mostly used for the domestic market, that we have seen the erosion of market shares. We have also seen that fabs that have been qualified would then switch to -- from a single supplier to a dual supplier type of regime. On the other hand, we see that new fabs are being set up in China. And we see that there is a trend toward more -- toward higher quality and sort of applying more modern technologies to display technology within China and also for exports. And then lastly, we also see some degree of impact in projects such as liquid crystal windows or antennas going forward. When we add all of these trends up, we are confident with this statement that 2019 will be the trough year for PM. And then, Gunnar, we will -- we've put in new management. We have Kai Beckmann, and basically his entire team is new. The fact that there is new management means that we were unhappy with where things were going. So we acted, and this team is working very, very hard in putting a new strategy together, and we will communicate this by mid-2018. Your question on micro LED, that is something that we're tracking very carefully. First of all, we also are into micro LED. There are materials that we make that are being used in micro LED. Currently, this is a very early technology, we've just -- we've seen prototypes for very large displays. Extreme complexity in manufacturing, would require major investments in manufacturing. So for now, we do not perceive this as a threat to us.
Gunnar, I want to take over your questions on segment coverage. So actually the 350-years costs do not play a significant role. They are by and large adjusted. They're still a bit coming this year but the major piece actually is already adjusted in the P&L. The drivers for the increase are actually twofold. First of all, we have -- since we have finalized or completed our new innovation center. We have started some corporate R&D initiatives, which have actually the aim to increase synergies in the business sectors and which by nature or by design are dealing with activities, which go beyond 1 single business sector of Merck, so cross business sector R&D initiatives. They will account for a piece of the increase. The other piece is actually coming from hedging, because the hedging space, we have -- we are currently -- we are at average hedge ratios, let's say, between 1.90 and 1.20. So the majority of the hedging gains were actually coming in 2017 when we were still hedged at rates, let's say, between 1.10, 1.12, 1.13. But when we had the big movements in currencies, when the currency in the second half of the year were depreciating against the euro, that was the time when we had the big hedging gains that have driven our corporate results downwards as we left to the minus in 2017. Now we are at an unfavorable level of currencies, but we don't see much movement at this point in time, which means also when we hedge on a -- when we roll over our hedges, there's no big difference anymore between the former trends and the actual development of the FX rates, which means the hedging gains are significantly reduced. That is also something that is mirrored, as you know, in segment coverage.
Just a quick follow-up on Healthcare. Are you assuming anything in terms of milestones or partnering income? Or would this be excluded from your current guidance in '18?
What we see so far or what we could anticipate is basically included. Now if we have, of course, let's say, things like last year was a royalty swap in this kind of, let's say, more significant portfolio changes, it is not in. But what we could reasonably eventually assume you should be considered as included. And it is by the way, also not so material normally that it should completely kill our guidance. And if it is, then most probably we don't have it on the radar screen yet.
We have time now for 1 final caller, and so the last questions for the call today come from Vincent Meunier of Morgan Stanley.
The first one is on Bavencio. I mean, can you make comments on how is evolving the partnership with Pfizer? And any comments on potential adjustments following the setbacks in lung and gastric 4-1BB trial? And second question is on atacicept, any detail regarding the trial design and the strategy behind in terms of differentiation? And quick question on corporate strategy. Any update on the trade-off between deleveraging the company versus doing business development?
Thank you, Vincent. So on Bavencio and the Pfizer partnership, we feel that the partnership is very, very solid. We've also, just like you, we heard Pfizer repeatedly express the strategic importance of the avelumab business for their success in oncology. We've also said that if there was ever any alternative scenario, which we currently don't have on the radar screen, that the contract would stipulate such a scenario and that we were not naive about that. When we look at what you mentioned as setbacks, we feel that this is very much comparable to what our competitors are facing too. Some trials work and some trials don't work. And if you look at a globe, the third-line gastric trial, it was the only global trial in a third-line setting to evaluate a checkpoint inhibitor compared to active chemotherapy control that was very high risk from the beginning. I was talking about the second-line lung where the most likely explanation is the proportion of patients in chemotherapy arm crossing over to immune checkpoint inhibitors outside the study. But we see encouraging results in moderate to high and high PD-L1 expression patient populations. It's very difficult to extrapolate that on other trials, but we don't see this as a negative for other trials. When we look to atacicept, we have a path forward to begin a Phase III trial later this year, but that will be subject to external financing. We'd said that before, we are preparing for that, but we are -- all of this is subject to the decision whether we get external financing interested in sharing the risk. When it comes to corporate strategy, we maintain what we've said before, i.e. that until the end of this year, there will be no major acquisitions beyond EUR 500 million, unless financed by divestitures. You heard Marcus and me say that we do focus on deleveraging, that we want to deliver on our commitments in this field. On the other hand, I think we have -- we should have some degree of credibility in being an active portfolio manager, both when it comes to divestitures as well as when it comes to acquisitions. So long term, you should expect us to continue to be active in this field and to plan accordingly.
Thank you. That will now conclude the Q&A session. I'd like to hand now back to our speakers for any additional or closing remarks.
Thank you, and I'd like to hand over to Stefan for short closing words.
So we have to end the call. Several of us are trying to catch a plane to go into in-depth discussion. Thank you, very much, for your questions. I'm looking forward to seeing many of you in the upcoming roadshow.
Thank you. Bye-bye.
Thank you. That will now conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.