Healthcare

25 KB EXCEL

­Healthcare

Key figure

Change
€ million 2017 2016 € million in %
Net sales 6,999 6,855 144 2.1%
Operating result (EBIT)1 1,447 1,593 – 146 – 9.2%
Margin (% of net sales)1 20.7% 23.2%
EBITDA1 2,155 2,425 – 269 – 11.1%
Margin (% of net sales)1 30.8% 35.4%
EBITDA pre1 1,949 2,128 – 179 – 8.4%
Margin (% of net sales)1 27.9% 31.0%
Business free cash flow1 1,448 1,648 – 200 – 12.1%
1
Not defined by International Financial Reporting Standards (IFRS).

Development of net sales and results of ­operations

In 2017, the Healthcare business sector generated organic sales growth of 4.7%. Negative foreign exchange effects of – 1.6% and a negative portfolio effect of – 1.0% resulted in overall sales growth of 2.1%. Consequently, net sales amounted to € 6,999 million (2016: € 6,855 million). In the Biopharma business, organic sales growth was especially attributable to medicines from the General Medicine franchise (including CardioMetabolic Care), first and foremost ­Glucophage®, Euthyrox® and Concor®. The Consumer Health business also delivered very strong organic growth. By contrast, sales of the two top-selling products, the multiple sclerosis medicine Rebif® and the oncology drug Erbitux®, declined organically. The negative exchange rate effects resulted mainly from the decline in the value of the U.S. dollar, the Chinese renminbi and the British pound. The divestment of the business in Pakistan at the end of 2016, which primarily affected sales in the General Medicine franchise (including CardioMetabolic Care), led to a portfolio effect of – 1.0%. Commission income, which is also included in net sales, dropped by – 53.4% to € 83 million (2016: € 178 million). This was especially attributable to the takeover of the Glucophage® commercialization rights in China from Bristol-Myers Squibb at the beginning of 2017. In the past, Healthcare recorded exclusively commission income for Glucophage® sales in China. Since the beginning of 2017, the business sector no longer reports commission income for this product, but rather the corresponding sales for Glucophage® in China. In return, license payments are made to Bristol-Myers Squibb.

The development of net sales in the individual quarters as well as the respective organic growth rates in 2017 are presented in the following overview:

HEALTHCARE

Net sales and organic growth1 by quarter2

€ million/organic growth in %

1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.

HEALTHCARE

Net sales by region – 2017

€ million/% of net sales of the business sector

Europe, which accounts for 36% of Healthcare sales (2016: 37%) and is the business sector’s largest region in terms of sales, saw an organic sales decline of – 1.4% and generated net sales of € 2,502 million (2016: € 2,555 million). This was particularly due to the difficult competitive situation and further price reductions for Rebif®. Sales of Erbitux® and Gonal-f® also declined organically, the latter being due to the unusually strong growth in 2016. The organic sales growth of the Consumer Health business as well as initial sales of Mavenclad®, which was approved in 2017, could only partly compensate for this development. Overall, net sales decreased by – 2.1%.

Asia-Pacific, the second-largest region in terms of sales, generated organic growth of 20.5%, contributing 23% to the business sector’s net sales (2016: 21%). This was mainly due to the changed business model for Glucophage® marketing in China as of January 1, 2017. The business with fertility medicines, including Gonal-f®, as well as the Consumer Health business generated double-digit organic growth in some cases. A portfolio effect of – 4.7% resulted from the divestment of our business activities in Pakistan. Including currency headwinds of – 2.8%, net sales in the region amounted to € 1,581 million (2016: € 1,399 million).

In North America, net sales amounted to € 1,494 million (2016: € 1,601 million). The organic decline of – 4.5% was mainly driven by the development of Gonal-f®, which had benefited from a favorable competitive situation in the previous year. Moreover, the difficult competitive situation for Rebif® and the organic sales decline of Saizen® contributed to this development. Besides double-digit organic growth of other fertility medicines, initial sales of Bavencio® also had a positive effect. This immuno-oncology medicine was approved in the United States for the treatment of metastatic Merkel cell carcinoma in March 2017 and advanced bladder cancer in May 2017. Including negative exchange rate effects of – 2.2%, the region’s share of Healthcare sales was 21% (2016: 23%).

In Latin America, where organic sales growth amounted to 11.1%, net sales of € 922 million significantly exceeded the year-earlier level (2016: € 839 million). Organic sales growth in all businesses and therapeutic areas, especially for Erbitux®, Euthyrox® and with core strategic brands in the Consumer Health business, led to this development. Including negative exchange rate effects of – 1.0%, the region’s share of Healthcare sales increased to 13% (2016: 12%).

The Middle East and Africa region generated net sales of € 500 million (2016: € 461 million). Organic sales growth of 10.4% resulted mainly from the development of fertility medicines, Euthyrox® and Concor®, as well as double-digit organic sales growth of the Consumer Health business.

23.5 KB EXCEL

­Healthcare

Net sales components by region – 2017

€ million/change in % Net sales Organic growth 1 Exchange rate effects Acquisitions/ divestments Total change
Europe 2,502 – 1.4% – 0.7% – 0.1% – 2.1%
North America 1,494 – 4.5% – 2.2% – 6.7%
Asia-Pacific (APAC) 1,581 20.5% – 2.8% – 4.7% 13.0%
Latin America 922 11.1% – 1.0% – 0.1% 10.0%
Middle East and Africa (MEA) 500 10.4% – 1.9% 8.5%
­Healthcare 6,999 4.7% – 1.6% – 1.0% 2.1%
1
Not defined by International Financial Reporting Standards (IFRS).

Net sales and organic growth rates of the key products developed in 2017 as follows:

HEALTHCARE

Product sales and organic growth1

€ million/Organic growth in %

1 Not defined by International Financial Reporting Standards (IFRS).
2 Including Neurobion®, Dolo-Neurobion®, Dexabion® and Gavindo®.

Sales of the drug Rebif®, which is used to treat relapsing forms of multiple sclerosis, saw an organic sales decline of – 5.5% in 2017. Including negative exchange rate effects of – 2.0%, sales of € 1,611 million were recorded (2016: € 1,741 million). The organic decline was primarily attributable to performance in the main sales markets, namely North America and Europe. Generating 63% of sales (2016: 61%), North America remained the most important sales market for Rebif® despite an organic decline in sales of – 3.2%. Price increases in the United States at the beginning of 2017 and in August could not offset declining sales volumes. Including negative foreign exchange effects of – 2.3%, sales in the region amounted to € 1,012 million (2016: € 1,071 million). In Europe, both price reductions and continued competitive pressure led to an organic sales decline of – 12.1%. This resulted in sales of € 456 million (2016: € 524 million), reflecting a decline in the region’s contribution to total Rebif®sales to 28% (2016: 30%). The other regions, namely Latin America, Middle East and Africa, and Asia-Pacific, generated sales of € 142 million (2016: € 145 million). They once again generated a 9% share of Rebif® sales (2016: 9%).

Including a slight organic sales decline of – 1.3% and negative exchange rate effects of – 1.7%, sales of the oncology medicine Erbitux® amounted to € 853 million (2016: € 880 million). In Europe, the top-selling region for Erbitux®, sales decreased organically by – 4.2%. This development was mainly due to compulsory price reductions in several countries as well as to the difficult competitive situation. Sales in Europe amounted to € 447 million (2016: € 470 million). Consequently, the region’s share of total Erbitux® sales declined to 52% (2016: 54%). The Asia-Pacific region saw an organic sales decline of – 3.3% and contributed 31% to sales (2016: 32%). Together with negative exchange rate effects of – 2.5%, sales amounted to € 263 million (2016: € 280 million). Double-digit organic growth of 23.6% in Latin America led to sales of € 87 million (2016: € 73 million), lessening the impact of the sales decline in the other regions despite negative foreign exchange effects of – 5.1%. At € 56 million, sales in the Middle East and Africa region were at the previous year’s level (2016: € 56 million). Organic growth of 0.6% was canceled out by exchange rate effects of – 1.1%.

24.5 KB EXCEL

­Healthcare

Sales and organic growth1 of Rebif® and Erbitux® by region – 2017

Total Europe North America Asia-Pacific (APAC) Latin America Middle East and Africa (MEA)
Rebif® € million 1,611 456 1,012 14 67 61
Organic growth1 in % – 5.5% – 12.1% – 3.2% – 1.9% 12.6% – 7.6%
% of sales 100% 28% 63% 1% 4% 4%
Erbitux® € million 853 447 263 87 56
Organic growth1 in % – 1.3% – 4.2% – 3.3% 23.6% 0.6%
% of sales 100% 52% 31% 10% 7%
1
Not defined by International Financial Reporting Standards (IFRS).

With Gonal-f®, the leading recombinant hormone used in the treatment of infertility, the Healthcare business sector generated sales of € 704 million and was thus significantly below the year-earlier level (2016: € 753 million). The organic sales decline of – 4.6% resulted primarily from performance in North America and Europe. The strong year-earlier sales in North America were due to a favorable competitive situation. Positive, and in some cases double-digit, organic growth in the regions Asia-Pacific as well as Middle East and Africa offset this development. By contrast, exchange rates had a negative impact of – 1.8%.

In the Endocrinology franchise, net sales of € 383 million were below the year-earlier level (2016: € 404 million) due to a slight organic sales decline of – 2.3% and a negative exchange rate effect of – 2.1%. Sales of the growth hormone Saizen®, the top-selling product in the franchise, amounted to € 259 million (2016: € 270 million). This was attributable to both an organic sales decline of – 2.1% and a negative exchange rate effect of – 2.0%.

The General Medicine franchise (including CardioMetabolic Care), which commercializes products to treat cardiovascular diseases, ­thyroid disorders and diabetes, among other things, generated organic growth of 16.4%. Including currency headwinds of – 1.3% and a negative portfolio effect of – 3.2%, net sales amounted to € 1,925 million (2016: € 1,720 million). Double-digit organic growth was due in particular to the performance of Glucophage®, which is used in the treatment of diabetes. Sales of Glucophage® grew organically by 74.7% and included the effect of the takeover of the ­Glucophage® marketing rights in China from Bristol-Myers Squibb. Including an exchange rate impact of – 2.0% and a portfolio effect of – 1.8%, net sales of this diabetes treatment increased to € 662 million (2016: € 388 million). Euthyrox®, a medicine to treat thyroid disorders, delivered double-digit organic growth of 12.4% in 2017 and generated sales of € 370 million (2016: € 332 million). Organic growth in all regions, above all the markets in Asia-Pacific and Latin America, contributed to this development. Concor®, a beta-blocker, grew organically by 5.6%. Including currency headwinds (– 0.9%) and a portfolio effect (– 1.5%), sales amounted to € 444 million (2016: € 431 million). The portfolio effect in General Medicine (including CardioMetabolic Care) resulted mainly from the divestment of our business in Pakistan at the end of 2016.

In 2017, the Consumer Health business, which markets over-the-counter pharmaceuticals, generated organic growth in all main sales regions totaling 7.6%. Including currency headwinds of – 0.5% and a portfolio effect of – 1.0%, net sales of the business amounted to € 911  million (2016: € 860 million). The global core strategic brands contributed significantly to this development, particularly Neurobion® and Nasivin®, as well as the regional brand Vigantol®, which is ­primarily marketed in Europe.

The results of operations developed as follows:

30.5 KB EXCEL

­Healthcare

Results of operations

Change
€ million 2017 in % 2016 in % € million in %
Net sales 6,999 100.0% 6,855 100.0% 144 2.1%
Cost of sales – 1,587 – 22.7% – 1,377 – 20.1% – 211 15.3%
(of which: amortization of intangible assets)1 (– 2) (– 1) (– 1) (> 100.0%)
Gross profit 5,412 77.3% 5,478 79.9% – 67 – 1.2%
 
Marketing and selling expenses – 2,722 – 38.9% – 2,587 – 37.7% – 135 5.2%
(of which: amortization of intangible assets)1 (– 558) (– 565) (7) (– 1.3%)
Administration expenses – 299 – 4.3% – 270 – 3.9% – 29 10.7%
Research and development costs – 1,632 – 23.3% – 1,496 – 21.8% – 136 9.1%
(of which: amortization of intangible assets)1 (– 1) (– 1) (–) (–)
Other operating expenses and income 688 9.8% 468 6.8% 220 47.0%
Operating result (EBIT)2 1,447 20.7% 1,593 23.2% – 146 – 9.2%
 
Depreciation / amortization / impairment losses / reversals of impairment losses 708 10.1% 831 12.1% – 123 – 14.8%
(of which: adjustments) (– 51) (71) (– 122) (> 100.0%)
EBITDA2 2,155 30.8% 2,425 35.4% – 269 – 11.1%
 
Restructuring costs 40 12 28 > 100.0%
Integration costs/IT costs 28 18 10 54.3%
Gains (–)/losses (+) on the divestment of businesses – 316 – 330 13 – 4.1%
Acquisition-related adjustments
Other adjustments 42 3 39 > 100.0%
EBITDA pre2 1,949 27.9% 2,128 31.0% – 179 – 8.4%
1
Excluding amortization of internally generated or separately acquired software.
2
Not defined by International Financial Reporting Standards (IFRS).

Gross profit of the Healthcare business sector decreased slightly in 2017 and amounted to € 5,412 million (2016: € 5,478 million). At 77.3%, the resulting gross margin was below the previous year’s figure (2016: 79.9%).

The increase in marketing and selling expenses related mainly to the market launches of Mavenclad® and Bavencio®. This item again included license expenses payable to Bristol-Myers Squibb as of the beginning of 2017 owing to the takeover of the commercialization rights to Glucophage® in China.

Research and development costs amounted to € 1,632 million (2016: € 1.496 million); the resulting research spending ratio increased to 23.3% (2016: 21.8%). This development was mainly due to higher investments in the Biopharma pipeline. Furthermore, 2016 was positively impacted by the release of provisions amounting to € 57 million. These were originally set up in connection with the termination of clinical development projects in previous years.

The development of other operating expenses and income was due to multiple effects in both 2017 and 2016. For instance, license income, which is reported under other operating income, included the milestone payments for the approval of Bavencio®. In 2017, the medicine was approved in the indication Merkel cell carcinoma in the United States, the European Union, Switzerland, Iceland, Liechtenstein, Norway, Japan, and Canada, as well as for the treatment of urothelial carcinoma in the United States. This item also still included higher royalty income from Avonex® and Plegridy® (both Biogen Inc.) due to the additional patent granted in the United States in June 2016 as well as income from an agreement on a one-time payment for future license payments at the beginning of 2017. The gain on the divestment of the Biosimilars business in August 2017 amounting to € 319 million also had a significant effect on other operating expenses and income. The previous year was also positively influenced by the gain on returning the rights to Kuvan® to BioMarin Pharmaceutical Inc., USA (€ 330 million). Both effects were eliminated in the calculation of EBITDA pre. The following impairment loss reversals and impairment losses were also included in other operating expenses and income: The reversal of the impairment loss on the intangible asset for cladribine tablets in 2017 owing to the regulatory approval of Mavenclad® amounted to € 17 million. In addition, an impairment loss recorded in 2011 on the biopharmaceutical production facility in Corsier-­sur-Vevey, Switzerland, was reversed in the amount of € 69 million. Moreover, 2017 included an impairment loss of € 33 million on the co-­commercialization right for Xalkori®. In 2016, this co-commercialization right was already impaired by € 71 million.

After eliminating depreciation, amortization, impairments and reversals of impairment losses as well as adjustments, EBITDA pre decreased to € 1,949 million (2016: € 2,128 million). This led to a margin relative to sales of 27.9% (2016: 31.0%).

The development of EBITDA pre in the individual quarters in comparison with 2016 is presented in the following overview:

HEALTHCARE

EBITDA pre1 and change by quarter2

€ million/change in %

1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.

Development of business free cash flow

In 2017, business free cash flow amounted to € 1,448 (2016: € 1,648 million). The lower level in comparison with the previous year was mainly due to the decline in EBITDA pre. In addition, higher capital spending contributed to the decline in this key figure, whereas the development of receivables had a positive impact.

24.5 KB EXCEL

­Healthcare

Business free cash flow1

Change
€ million 2017 2016 € million in %
EBITDA pre1 1,949 2,128 – 179 – 8.4%
Investments in property, plant and equipment, software
as well as advance payments for intangible assets
– 411 – 348 – 63 18.0%
Changes in inventories – 39 – 38 – 2 5.0%
Changes in trade accounts receivable
as well as receivables from royalties and licenses
– 51 – 94 43 – 45.6%
Business free cash flow1 1,448 1,648 – 200 – 12.1%
1
Not defined by International Financial Reporting Standards (IFRS).

The development of business free cash flow in the individual quarters in comparison with 2016 is presented in the following overview:

HEALTHCARE

Business free cash flow1 and change by quarter2

€ million/change in %

1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.