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Edited Transcript of BAYN.DE earnings conference call or presentation 30-Oct-19 1:00pm GMT

Q3 2019 Bayer AG Earnings Call

Leverkusen Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Bayer AG earnings conference call or presentation Wednesday, October 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heiko Schipper

Bayer Aktiengesellschaft - Head of Consumer Health Division & Member of Management Board

* Liam Condon

Bayer Aktiengesellschaft - President of Bayer Crop Science Division & Member of Management Board

* O. Maier

Bayer Aktiengesellschaft - Head of IR

* Stefan Oelrich

Bayer Aktiengesellschaft - President of Pharmaceuticals Division & Member of the Board of Management

* Werner Baumann

Bayer Aktiengesellschaft - Chairman of the Board of Management & CEO

* Wolfgang U. Nickl

Bayer Aktiengesellschaft - CFO & Member of Management Board

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Conference Call Participants

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* Emmanuel Douglas Papadakis

Barclays Bank PLC, Research Division - MD & Head of European Pharmaceuticals Research

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* Joseph W Lockey

Morgan Stanley, Research Division - Equity Analyst

* Keyur Parekh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Michael Leuchten

UBS Investment Bank, Research Division - Co-Head of Pharmaceuticals Research of Equity Research

* Richard Vosser

JP Morgan Chase & Co, Research Division - Senior Analyst

* Sachin Jain

BofA Merrill Lynch, Research Division - MD

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

* Wimal Kapadia

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor and Analyst Conference Call on the Third Quarter 2019 Results. (Operator Instructions) And I would now like to turn the conference over to Mr. Oliver Maier, Head of Investor Relations and Manager at Bayer. Please go ahead, sir.

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O. Maier, Bayer Aktiengesellschaft - Head of IR [2]

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Thank you, Emma. Good afternoon, and thanks, everybody, for joining us today. I'd like to welcome all of you to our third quarter 2019 conference call. With me on the call today are again Werner Baumann, our CEO; Wolfgang Nickl, our CFO. The businesses are represented by the responsible Management Board members. So for pharma, we have Stefan Oelrich; for Consumer Health, we have Heiko Schipper; and for Crop Science, we have Liam Condon.

Werner will begin today's call with an overview of the key developments and performance of the divisions and Wolfgang will then cover the financials for the third quarter of 2019 and the outlook as well as our key focus areas before we open up the Q&A session afterwards. (Operator Instructions)

So as always, I would like to start the call today by drawing your attention to the cautionary language that is included in our safe harbor statement as well as in all the materials that we've published and distributed today. With that, I hand it over to you, Werner. The floor is yours.

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Werner Baumann, Bayer Aktiengesellschaft - Chairman of the Board of Management & CEO [3]

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All right. Thanks, Oliver, and good afternoon, ladies and gentlemen. It's my pleasure to welcome you also on behalf of my fellow colleagues to our -- today's conference call.

Let's start with the discussion of our development in quarter 3 2019, which was encouraging across the group with all business is delivering good performance. Please be aware that the numbers I will talk about refer to continuing operations and do not include our discontinued operations from Animal Health and Currenta. Those are now reported separately, and Wolfgang will shed some light on the development, including discontinued operations later on.

Overall, we are on track from an operation point of view. Sales grew by 5% to EUR 9.8 billion and EBITDA before special items increased by 8% to EUR 2.3 billion. Our core EPS reached EUR 1.16, up 6% from a year ago. Finally, our free cash increased -- the free cash flow increased by 13% to EUR 1.3 billion.

With these results as a backdrop, let's look at an update on our focus areas. First, target delivery. Given the overall good performance in the first 9 months, we confirm our guidance for the full year 2019 on a going-constant basis as published at the beginning of the year. In addition, we have adjusted this guidance for discontinued operations and foreign currency to provide as much transparency as possible to you. Wolfgang will share the details in his part of the presentation.

Second, in Crop Science, I want to highlight the good operational performance in an overall challenging market environment. And I also want to reassure you that the integration and synergy realization is well underway. Third, our Pharmaceuticals business has continued its strong sales and profit growth. And we are on track to deliver an EBITDA margin before special items of 34%. Excluding last year's onetime income of EUR 190 million, earnings grew by 12% in the quarter, which is twice our top line growth.

Fourth, Consumer Health has shown a solid sales and margin growth, demonstrating that the team is continuing to make good progress in turning around the business. Fifth, almost a year ago, we announced a comprehensive set of efficiency and structural measures from which we expect annual contributions of EUR 2.6 billion as of 2022, including around EUR 1 billion from Crop Science. In this context, we have also decided to streamline the setup of our Board of Management with a reduction from 7 to 5 members effective January 2020.

And lastly, I'm pleased to mention that we have delivered on all announced portfolio measures ahead of time and which I believe with very attractive selling prices. We have already closed the sale of Coppertone and the Derma Rx business that was reported under Consumer Health. And the closings of Dr. Scholl's and Currenta are imminent. The divestment of Animal Health was signed on August 20, and we expect closing of this transaction to happen in the middle of 2020.

Let me now briefly update you on the glyphosate litigation, a topic that remains top-of-mind for many of us. Some of you might have been surprised this morning when you read in our quarterly report that the number of served lawsuits increased from 18,400 in quarter 2 to around 42,700 in quarter 3. This is actually not that surprising if you take into account that plaintiff lawyers increase their advertising spend exponentially from USD 6 million in quarter 1 to $21 million in Q2 and $51 million in quarter 3 in order to attract new plaintiffs. This increase in the number of lawsuits does not change our conviction of the safety profile of glyphosate and is actually by no means a reflection of the merits of this litigation.

In the meantime, the appeals in the first 3 cases are underway. In parallel, we are constructively engaging in the mediation process and are planning for litigation of further cases in 2020 as all remaining cases 2019 have been vacated. With regards to the mediation, we would only consider a settlement if it's financially reasonable and will bring reasonable closure to the overall litigation. And I do hope you understand that I cannot be more specific with regards to the mediation process as we, as an involved party, need to maintain confidentiality.

Let me now turn to the performance of Crop Science. Following a very challenging second quarter with heavy spring rains and flooding in the Midwestern U.S., we reported improvement in both sales and EBITDA for quarter 3. Currency- and portfolio-adjusted sales were up by 5%, driven by the positive developments in North and Latin America. We have seen strong performance of corn and soybean seeds and traits as well as fungicides. In addition, herbicides had an encouraging increase in Roundup volumes in Latin America, offset by declines in Asia Pacific, primarily due to dry weather in Australia. From an earnings perspective, Crop Science increased its EBITDA before special items by 25% to now EUR 527 million. This strong improvement was driven by price and volume growth in Latin America, lower-than-expected product returns in Corn Seed & Traits in the U.S. and the realization of synergies as we progress this integration.

Regarding the cost synergy realization. We progressed substantially better than expected and now assume that we'll realize around EUR 300 million of cumulated cost synergies by year-end. And that is around EUR 100 million more than originally expected. The overall targeted synergies of around EUR 870 million for 2022 does not change. So it's really phasing and that means earlier realization is also proof of a well-running integration process.

Moving on to pharma. Sales of Pharmaceuticals rose by almost 6% to EUR 4.5 billion in quarter 3. Our best-selling products, Xarelto and Eylea, have continued their strong performance. Also, our business growth in China remained very robust. Xarelto grew by 9%, driven by higher volumes in China and Russia. Our licensing revenues in the U.S. exceeded the level of the prior year period. Eylea posted significant growth of 16% mainly as a result of volume increases. The business developed particularly well in Europe and here primarily in the U.K. and Germany but also in Japan. We now expect both products to continue growing in the low-teens percentage range for 2019.

We also saw some encouraging products and other news in the quarter. The FDA has approved darolutamide under the brand name Nubeqa. As a reminder, darolutamide significantly extends metastasis-free survival in patients with non-metastatic castration-resistant prostate cancer but at the same time, demonstrating actually a very favorable safety profile. In addition, the FDA-approved Xarelto for the prevention of venous thromboembolism, or blood clots, in acutely ill medical patients at risk for thromboembolic complications who are not at high risk of bleeding.

Further good news also on Vitrakvi. The European Commission has granted marketing authorization in the EU for our precision oncology treatment Vitrakvi. The drug is indicated for the treatment of adult and pediatric patients with solid tumors that display NTRK gene fusion who have a disease that is locally advanced, metastatic or where surgical resection is likely to result in severe morbidity and who have no satisfactory treatment options.

On the investment side, we acquired the remaining stake in BlueRock Therapeutics, a privately held U.S. biotech company focused on developing engineered cell therapies in the fields of neurology, cardiology and immunology using a proprietary induced pluripotent stem cell platform. This acquisition marks a major milestone on our path towards building a position in cell therapy.

Finally, EBITDA before special items was down by 2% to EUR 1.5 billion because last year's figure included an income of around EUR 190 million from our Xarelto development collaboration with Johnson & Johnson. If you adjust for this, EBITDA before special items is up by 12%, confirming the overall strong performance of the business.

Let's move to Consumer Health next to close out the divisional updates. The performance of Consumer Health in quarter 3 was characterized by solid top and bottom line development. We have seen a positive sales performance in EMEA and Latin America, overcompensating North America and Asia Pacific. We are especially pleased with the sales development of the categories: nutritionals, allergy and cold and pain and cardio. Dermatology also reported higher sales. EBITDA before special items increased by 3%, mainly driven by the successful implementation of the announced performance improvement measures and also offsetting the margin losses that come from the sale of our Rx Dermatology business.

Before I hand it over to Wolfgang, please let me point out that we are planning our next Capital Markets Day with a strong focus on pharma this time and its innovation pipeline towards the end of June 2020. And with that, I hand it over to you, Wolfgang.

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Wolfgang U. Nickl, Bayer Aktiengesellschaft - CFO & Member of Management Board [4]

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Thank you, Werner. Ladies and gentlemen, also a warm welcome from my end. I will now walk you through some additional financial details for Q3 followed by a discussion of our outlook for the full year.

After signing the sale of our Animal Health business and our 60% stake in Currenta, both businesses are from now on accounted for as discontinued operations. As mentioned by Werner, we will focus our discussion on the development of our continuing operations, but I will also bridge the changes between continued and discontinued operation to allow comparability with our original guidance.

Let me start with continuing operations. We had a good quarter. Sales increased currency- and portfolio-adjusted by 5% to EUR 9.8 billion and EBITDA before special items came in at EUR 2.3 billion, up 8% year-on-year. Our EBITDA margin increased by 30 basis points to 23.3%. Foreign exchange effects had a positive year-over-year impact on sales and EBITDA of EUR 215 million and EUR 77 million, respectively. Core earnings per share were up 6% year-on-year to EUR 1.16. Finally, compared to the prior year period, free cash flow increased by 13% from EUR 1.1 billion to EUR 1.3 billion, mainly driven by the increased profitability.

The next chart shows our performance but including discontinued operations. Currency- and portfolio-adjusted sales growth is the same at plus 5%. EBITDA before special items would have increased by 9% to EUR 2.4 billion and core EPS would have been up by 7% to EUR 1.23. The restatements to the P&L have no impact on our free cash flow. We own the cash flows from discontinued operations until the respective divestments are closed.

On the next chart, we show the bridge from core EPS to reported EPS from continued and discontinued operations. On the left, we start with the EUR 1.16 core EPS for continued operations. The next column describing an adjustment of minus EUR 0.65 per share is mainly comprised of acquisition-related amortization of intangible assets while 2/3 of the impact stem from the acquisition of Monsanto.

EBITDA-relevant special items had a minor negative impact of EUR 0.01 as the restructuring and litigation-related special items were more or less offset by the divestment gain from the sale of our derma Rx business which closed in Q3. A positive special item in the financial result of EUR 0.28 resulted mainly from the revaluation of our original stake in BlueRock Therapeutics, which is now after the acquisition fully consolidated. Previously, it was accounted for at equity.

The next column shows the offsetting tax effects on the sum of the items I just explained, bringing us to the EPS from continuing operations of EUR 1.01. Finally, there is an impact on discontinued operations of EUR 0.04, leading to an EPS from continued and discontinued operations of EUR 1.05 for the quarter.

As Werner said, we are very pleased that we delivered on the portfolio measures which we announced last November, not only ahead of schedule but also at attractive valuations. In order to help you with the modeling of Bayer going forward, we provide you with the restatements 2 weeks ago. These summaries are available on our web page. In addition, we thought it would be useful to share this slide with you, which summarizes key information on the 4 divestments. We have provided the sales and EBITDA before special items contributions of the divested businesses as well as the gross proceeds of about EUR 9.3 billion, expected closing dates and the respective consolidation procedure of each of the businesses.

With the Coppertone sale already having closed in Q3 and Dr. Scholl's and Currenta expected to close in Q4, we expect gross proceeds of around EUR 2 billion in 2019. An additional EUR 0.2 billion is expected in Q1 2020 from the real estate portion of the Currenta transaction. The Animal Health deal is expected to close in the middle of 2020. As you may remember from our disclosures in August, 70% of the agreed value of USD 7.6 billion is due in cash at closing and 30% is due in stock, subject to a collar and a holding period. The transactions and corresponding gains are subject to taxation. Overall, we anticipate taxes to be paid of roughly EUR 1 billion that need to be considered with some time lag.

Let's move next to our balance sheet. We reduced our net financial debt by around EUR 900 million since the end of Q2. This improvement was driven by cash inflows from operating activities as well as the proceeds from the sale of the prescription dermatology business outside the U.S. and Coppertone. It was partly offset by the cash-out for the purchase of the remaining shares in BlueRock Therapeutics.

With the U.S. dollar appreciating substantially during the quarter, we had a corresponding impact on our euro reporting, which you can mainly see in the bonds column. As a reminder, almost 60% of our financial debt is denominated in U.S. dollars. The impact of exchange rate changes to our net financial debt is, therefore, quite significant as every percentage point appreciation of the U.S. dollar against the euro is increasing our net financial debt by about EUR 200 million and vice versa.

Now let me focus on the key business drivers for Q4, which are important for us to achieve our guidance for 2019. For Crop Science, we expect the growth momentum in Latin America to continue, and we anticipate a strong start to the next season in the U.S. In addition and as already mentioned by Werner, we expect around EUR 300 million in cumulative cost synergies in fiscal year 2019 related to the integration, helping us to support our earnings also in Q4.

For Pharmaceuticals, we expect a continuation of the very strong development of both Xarelto and Eylea as well as an ongoing favorable business performance in China. Consumer Health is on track to deliver on its turnaround plans and should see a further top and bottom line improvement in the months to follow. In North America, we also expect the business to return to growth in Q4. On the group level, we will continue to be very disciplined on cost and cash management across all businesses. In addition, we expect to cash in from the Currenta and Dr. Scholl's divestments in Q4.

Let's move on and look at our guidance for the full year. Following the good performance in Q3 and seeing a good momentum for Q4, we confirm our group guidance for the full year on a going-concern basis and at constant currencies. That is what you see in the first column on this chart. You will recognize, for instance, a core EPS of EUR 6.80, which we have established as a target at our Capital Markets Day last December and reconfirmed as our guidance in February earlier this year.

In the second column, you see the impact from discontinued operations, specifically the contribution from Animal Health and Currenta, which were included in our original 2019 guidance. We are compensating some sales and EBITDA for a few months of Coppertone and Dr. Scholl's businesses with the other remaining businesses. In the line net financial debt, we have also included the cash proceeds from these 2 transactions.

The third column shows the original guidance adjusted for discontinued operations and thus representing our continuing operations. Without the Animal Health business and Currenta, our currency-neutral guidance would have been around EUR 43 billion of sales, approximately EUR 11.6 billion for EBITDA before special items and around EUR 6.45 for our core EPS.

There is almost no impact on free cash flow as already explained. We own the cash flows from discontinued operations until the deals are closed. We expect Currenta to close in December, so there is a very minimal impact from that transaction. Net financial debt is expected to be around EUR 2 billion lower at approximately EUR 34 billion, which considers net proceeds from the Coppertone, Dr. Scholl's and Currenta transactions.

With only 1 quarter left, we have added a fourth column to share our expectation of the currency impact on our full year financials. Our calculation considers the already realized year-to-date impact and our Q4 forecast, which is based on September 30 spot rates carried forward for the remainder of the year. Therefore, the last column depicts our 2019 guidance after adjusting for the discontinued operations and currencies. Specifically, this results in sales of around EUR 43.5 billion, EBITDA before special items of approximately EUR 11.5 billion and a core EPS at around EUR 6.35. We aim to be at the upper end of the given free cash flow range and would expect net debt to be around EUR 35 billion at year-end.

Before we start the Q&A, let me wrap up by summarizing our focus areas. First and foremost, we are committed to delivering on our operational target as reiterated today as a going concern and adjusted for discontinued operations and foreign currencies. Second, we are focused on the smooth integration of the acquired business in order to shape the future of agriculture. And of course, we will continue to vigorously defend glyphosate while constructively engaging in mediation talks.

Third, we expect to further deliver sales and margin growth in Pharmaceuticals. In addition, we plan to strengthen our internal pipeline as we intensify the external sourcing of innovation. Fourth, we will strive for an improvement of the operational performance of our Consumer Health business as shown in Q3. Fifth, we expect to deliver our target for the Bayer 2022 program both related to the synergy realizations and efficiency improvements. And lastly, we anticipate the successful closing of our remaining portfolio measures.

With that, I will hand the call back over to you, Oliver, to start the Q&A.

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O. Maier, Bayer Aktiengesellschaft - Head of IR [5]

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Great. Thank you, Wolfgang. Thank you, Werner, for your comments. I think, Emma, with that, we can open up the session for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Mr. Andrews.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [2]

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Vincent Andrews from Morgan Stanley. I apologize if I missed this because I had to hop off quickly. But could you help us understand the seed reversals in the quarter? Could you help us quantify those so that we can get a better sense of the sort of completion of the North American season versus the start of the Latin American season?

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Liam Condon, Bayer Aktiengesellschaft - President of Bayer Crop Science Division & Member of Management Board [3]

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Thanks, Vincent, for the question. So we're not -- we haven't broken that out specifically yet. But let me just help you try and understand what happened there. Usually, we have our true-ups in Q3. This year, as you know, was particularly volatile, given this unique flooding in the U.S. So we actually did as many true-ups as we possibly could actually already in Q2 for corn and for soybeans, so we built provisions and then looked in Q3 at what the actual situation was. And what we saw was clearly there was more corn planted, less returns than we had been originally anticipating, so it's about 89 million acres versus anticipated about 86 million, 87 million. And there was less soybeans than anticipated. That was a more minor effect for us but a very big effect for the market, 14% down year-on-year in acreage. And net, that turned out into for us a positive upside on the corn seeds, basically driven by corn seeds and traits. So that was one of the drivers of the Q3 results. The main effect was LatAm positive impact to seed penetration and fungicide sales. But the North American corn true-ups and reversal of provisions was the other point that helped us in Q3.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [4]

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Okay. And as a follow-up, if you could just speak a little bit about seed price cards in North America. There's been a lot of commentary in the investment community about what's happened, soy price cards being lower. I think there's some confusion around what's happened to your corn price cards in terms of promotional spending and so forth. So maybe you can help us there.

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Liam Condon, Bayer Aktiengesellschaft - President of Bayer Crop Science Division & Member of Management Board [5]

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Yes. So one thing that was important for us now as an integrated company going forward is that we basically harmonized, unified all of our basically go-to-market offerings. And we have a new program at Bayer PLUS within which our overall seed offerings are included. And the net effect of that, if you look at it from a corn and soy seed point of view, net effect, we would still be looking at low single-digit increases for our corn seeds and traits going forward. So as usual, wherever we have innovation which we're passing the added value, we also gain through increased pricing in the market. For soybeans, it's a different situation.

The market is much more highly competitive based simply on the fact that there is oversupply right now. U.S. is suffering from the U.S.-China trade conflict. Commodity prices are low. And there is more competition in the market. So here, we're expecting a low single-digit decline going forward. So that's on both corn and soybean kind of the net impact that you would be seeing on the price cards. But overall, from a corn point of view, there is no decline. So just to make that clear because I think that was misunderstood from some of the changes in the rebate programs that have simply been harmonized. There's actually a net increase on new hybrids into the market.

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Operator [6]

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Next question comes from the line of Mr. Kapadia.

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Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [7]

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Wimal Kapadia from Bernstein. So if I could just first start, just a little bit more color on 4Q '19. So your EBITDA margin year-to-date for pharma is around 34%. And when I look at historical earnings, 4Q is typically a high OpEx quarter. So should we expect a trend away from the norms that you guided if the 34% margin is achieved for the full year? Or is that target a little bit stretched? And I think the same question for consumer. Year-to-date, it's sub-20% EBITDA margin and you guided to 21%. So that suggests a margin for the fourth quarter of 24% to 25%. Just to get some color there would be very helpful.

And then my second question is just on China. Clearly, 4Q was strong for pharma in China in certain products, such as Adalat and AVELOX. But my questions are how sustainable is that growth for these products? And then my second question is which of your products are potentially at risk from the next round of volume-based procurement contracts in the region? How do Bayer see these risks more broadly for the portfolio? And what will the strategy be for the bidding? Will you bid competitively and play volume? Or will you attempt to maintain price and focus on value?

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Stefan Oelrich, Bayer Aktiengesellschaft - President of Pharmaceuticals Division & Member of the Board of Management [8]

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Yes. Wimal, Stefan here. So first, to your EBITDA question, we're still fully in line with full guidance -- full year guidance for pharma, so nothing has changed. And the Q4 -- and expected Q4 and Q3 do not change anything about this. So our Q3 was going according to our plans. Please be mindful that we also have the oncology launches in the ongoing quarter. But all in all, we're fully in line with plan.

As to China, a very solid growth. We're extremely pleased with our performance in China in the third quarter, so continued strong basically on most of our major brands there. And when it comes to the volume-based purchasing that you're alluding to, this is difficult to assess from today how this is really going to impact. We have a few products that could be eligible for the list. So far, we're off the list. If we get on, we'll have to see then how our bidding strategy is going to be. I don't think this would be wise to reveal it on this call. But I'm happy to elucidate you about that after we went into the bidding next year if that happens. But so far, it's more guesswork, okay? So we'll have to wait what happens with that.

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Heiko Schipper, Bayer Aktiengesellschaft - Head of Consumer Health Division & Member of Management Board [9]

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Yes. Just on the consumer profitability outlook, obviously when you look at Q3 year-to-date and then outlook, we should have a pretty good Q4. The factors that really play here are, first of all, continued growth. And as we have reset the cost base, we should get good growth leverage. Secondly, I would say we continue to have some tail-end brand divestments that are a bit more skewed towards Q4 this year. So that's also going to help us. So overall, we think that we can still bring in that number.

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Operator [10]

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The next question comes from the line of Mr. Zekauskas.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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Jeff Zekauskas at JPMorgan. In your Crop Science business, your prices were up 4%. And so if you adjust for your divestitures last year, your sales are about EUR 3.5 billion. So a 4% price increase should be an increase of about EUR 140 million. You had positive volume and you had positive currency. Why weren't the EBITDA numbers higher in the quarter? I noticed that you talked about some issues in cost of goods sold. Can you quantify that and explain why you didn't make more than you did?

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Liam Condon, Bayer Aktiengesellschaft - President of Bayer Crop Science Division & Member of Management Board [12]

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Thank you, Jeff. So the price increase was largely, I think, driven by LatAm and Brazil. It was largely the impact of penetration, increased penetration, around over 65 million acres already, but that's still increasing further. So this was, for us at least, very, very good to see. On the EBITDA side, what was, let's say, headwinds for us in the quarter, I'd highlight 2 things: one, on the COGS side, still out of China because of the ongoing cleanup and the blue sky initiative, we are still seeing increased COGS coming for products and AIs that are sourced out of China. So this has been basically a recurring theme throughout the year and that continues. It's unclear how long that will last, but it is a recurring theme and will also continue in Q4.

Overall, we believe, net-net, this is good for the industry because cleaning up means that they're bringing production up also to Western standards. But it's a cost issue for us. And the other one specific, which I'd say is clearly more of a one-off event, given the soybean situation in the U.S. with significantly less soybeans planted than was originally anticipated, so only about 76 million, 77 million acres. So here, we have an obsolescence cost on the seed side, which factored into COGS. So they are kind of the 2 factors that would have held us back from achieving even more.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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And for my second question, because of your FieldView software, you guys have a very good view of corn yields in the United States. The USDA thinks that corn yields will be about 168 bushels an acre this year. Do you agree with that? Do you think that number is basically right? Or do you think it's high or low or by how much?

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Liam Condon, Bayer Aktiengesellschaft - President of Bayer Crop Science Division & Member of Management Board [14]

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Yes. So really hard to call right now. But we do have some quite unique insights. What we are seeing is harvested -- let's say, harvested versus plant, where we're at about 40% also for FieldView. So that tallies more or less with what USDA has been saying with significantly lower or slower than what the average period would have been like the last 5 years but also last year, which would have been well over 60% on corn. What we're seeing with FieldView is what was planted early has a very good yield, so -- and that I think is the USDA assumption is possibly extrapolating forward what's already been harvested.

The problem is there was an awful lot that was planted late. And the later it was planted, the weaker the yield is going to be. So we don't yet see that in our FieldView numbers because it's still too early. But we do have an implicit assumption that the harvested yield is going to be lower than what USDA is currently forecasting. But it's too early to make the call. But given the quality of seed, what we can see in the fields right now, it's hard to imagine that the yields would be as good as are currently being forecast.

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Operator [15]

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The next question comes from the line of Mr. Jain.

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Sachin Jain, BofA Merrill Lynch, Research Division - MD [16]

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It's Sachin Jain from Bank of America. A few, please. Firstly, on Xarelto and the '218 patent debate, could you confirm that you're in settlement discussions with Mylan as the legal docket seems to suggest? And I wondered if you can just give color as to what is outstanding. Is it just choice of date? Or are you still in substantial discussions to whether that settlement stands or not? Second one for Liam on fourth quarter crop. I know there's already been some comments around this. But guidance implies roughly 7% or 8% for fourth quarter. So if you can just discuss the variables on what you're seeing that gives you confidence in achieving that.

And then just a final one on Werner, regarding your introductory comments around glyphosate mediation. You referred to the 2 criteria as financially reasonable and then reasonable closure. The last part of that, reasonable closure, was slightly different on how you worded it on the 2Q call, where you referred to as finality of litigation. Now I would interpret the comment today as slightly looser. But I just wondered if I was overinterpreting that and if you could on comment that.

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Stefan Oelrich, Bayer Aktiengesellschaft - President of Pharmaceuticals Division & Member of the Board of Management [17]

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Sachin, Stefan here. So on the Xarelto patent, you're right. We have once-daily patent for Xarelto in the U.S., the so-called the '218 patent, which expires in February 2034. This has been challenged. We, of course, believe strongly in the validity of our IP, so we're defending this. And we're currently, as Mylan has challenged this, discussing still and discussions on settlement. So this hasn't really changed much since we last talked about this. So you'll have to stay tuned. And I would hope that on the next call, we can give you a little bit more concrete information on where that stands.

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Liam Condon, Bayer Aktiengesellschaft - President of Bayer Crop Science Division & Member of Management Board [18]

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All right. Thank you, Sachin. So Q4, I'd characterize our confidence as good, relatively strong. I say relatively strong because whether or not sales fall into the last week of December or first week of January is not how it's directly influenceable. But I'll indicate to you where we see the growth coming from. Number one, primarily it's LatAm. It's specifically and particularly Brazil. And this will be largely driven by the Crop Protection portfolio because the seeds and traits, we booked a good portion now in Q3, so particularly Fungicides, Herbicides, Insecticides. In APAC, where we are expecting now on the Southern Hemisphere also a good growth on the Crop Protection side again across the board with the portfolio. We have a significant sales expectation for vegetable seeds in Q4. You'll have noticed that we had a very weak Q3.

This is simply due to the fact that we took over -- we sold the legacy Bayer seeds -- vegetable seeds business to BASF and we acquired to the Monsanto business, (inaudible), which is significantly bigger. And we are basically tuning the business now to a full year calendar. You know that Monsanto was on a different financial calendar than Bayer originally was. And that leads to some changes in the phasing, which simply on a year-on-year basis, it means a low Q3 and a high Q4, but just to explain where we would expect to see something coming. And the last one is we're getting early indications from the market of high interest in corn seed in the U.S., North America. Whether or not that actually happens, we will see. But at least, the demand appears to be there so that could also help drive growth.

On the bottom line, I'd just highlight very briefly all of the above, so that the sales growth that you indicated, that will be driving the bottom line. We also have a better mix. As you recall, we have some divested -- or we have some sales, post-closing agreement sales to BASF, which were much more significant in Q4 last year. This year, they're significantly lower. But these sales were highly dilutive on our margin. And so this helps us overall as well from a mix point of view. And of course, what Werner and Wolfgang alluded to earlier, the increasing or the accelerated synergies, which also helps us on the bottom line because relatively, of course, more is going to flow into Q4 than other quarters.

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Werner Baumann, Bayer Aktiengesellschaft - Chairman of the Board of Management & CEO [19]

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Okay. Thank you, Liam. So Sachin, to your question on wording and your finality and reasonable closure, I think your content was there's no difference between what we were talking about end of quarter 2 and now end of quarter 3. But your question gives me the opportunity to explain a little bit where we are and what we really are working on. As most of you know, the glyphosate case is a very special one because it's different from pharma, where you have a door closing event with the label change or what have you or, let's say, change in your, let's say, promotional marketing activity, whatever the reason was for litigation.

Here, we have a product that is perfectly fine in terms of its regulatory status as has been actually seen over and over again with regulatory confirmation, also the very strong EPA stance that EPA took on, let's say, the idea to put a cancer warning on a product that shouldn't have one because it doesn't carry cancer risk that you will have seen from EPA. So we are going to see a product that will continue to be on the market with the existing label. And we need structural measures that we are working on as part of the structural discussions and mediation as we talked about that provide us, I would call it de facto or close to de facto finality from a structural perspective so that we can work with the remaining tail, that is, of course, one of the key considerations beyond the immediate settlement of the cases that we will have at hand at the time of an envisaged settlement, should we be successful with the mediation under Ken Feinberg's auspices.

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Operator [20]

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Next question comes from the line of Mr. Papadakis.

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Emmanuel Douglas Papadakis, Barclays Bank PLC, Research Division - MD & Head of European Pharmaceuticals Research [21]

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Emmanuel Papadakis from Barclays. Two questions. Maybe one on hemophilia, you had a surprisingly resilient results again for Kogenate. Clearly, it is, however, something of a legacy asset in a space that is therapeutically changing, and you've just discontinued one of your potential next-generation options on TFPI and you don't seem to have made a huge amount of progress on the gene therapy collaboration with Ultragenyx. So if you could just talk about your strategic vision for that franchise, do you think you need to now go externally to fix that gap? Do you think what you have at hand is sufficient? Any comments from the gene therapy program or plans would also be of interest.

And then one on Eylea, again another resilient performance. You've obviously got some competitors launching currently and into next year and plenty more data points coming from potential additional competitors through next year and beyond. Could just talk about the extent to which you think volume growth in indications, such as DME, et cetera, will potentially offset that competitive pressure, i.e., should we expect that it can remain a growth asset into 2020 and beyond?

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Stefan Oelrich, Bayer Aktiengesellschaft - President of Pharmaceuticals Division & Member of the Board of Management [22]

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Yes. Thanks for your question, Emmanuel. So first question on hemophilia, let me start off by saying we're extremely pleased with the results that we have in the quarter and that we're having throughout this year with both the Jivi launch but overall factor VIII-based line of products. What is really interesting to note when you look at the hemophilia market is that we were predicted to come in to really heavy weather. And what we're seeing in the facts is that Jivi is hitting a nerve in the market and that we are serving to the needs of our customers. And there's a reason why evolution put factor VIII as a clotting factor into humans. And we're providing exactly that factor that these patients decisioned with, with a very long-lasting safety profile with a strong loyalty that our customers have and our patients have. So we feel actually quite good about our factor VIII franchise in itself.

When it comes to the future, it's too early to say where our gene program -- gene therapy program that we have is going. We have factor -- we have a Phase I ongoing. We have the amount of patients on product so far as planned. And it's early, a little bit too early to talk about the results. But we're not discouraged at all by what we're seeing so far in our gene-based therapy program there. So I think it's still an interestingly resilient business, maybe more than some observers may have thought.

Then on Eylea, Eylea is really an interesting one. And we've upped our guidance for Eylea this year to a lower-teens from singles -- higher single digits. So we're very pleased there. What we're seeing on Eylea for this year positively for the most part is that both volume and pricing are ahead of where we thought we maybe, given some of the -- some countries that had favored use of, let's say, alternative products, like in the U.K. especially but also in Canada. This is not coming through as maybe we may have anticipated, which is I think good news for patients.

And then when it comes to the new product, I think this is an interesting one because they have to go up against the standard that we have established with Eylea, which is really hard to beat. I mean you look at brolucizumab, for example, which was recently approved by the FDA and you look at the label. And you see a slightly different type of label compared to Eylea on side effects, so from a safety perspective. And in a way, that is actually from an occurrence perspective, not insignificant.

When you consider that an ophthalmologist probably sees about 60 to 100 Eylea patients per month and you have a side effect profile that gives you 5% or so in unpleasant side effects, then I would say this is significant and even observable in your daily practice. So we feel comfortable about this. But even more so that from a label perspective, as we compare labels efficacy-wise, there is no disadvantage whatsoever from an efficacy standpoint compared to what we believe is the standard of care, which continues to be Eylea. And when it comes to other products that may join, these data are very early and preliminary, so I wouldn't speculate on this. So the only true comparison that I have so far is FDA label from brolucizumab, and we feel quite confident that we can handle this.

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Operator [23]

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Next question comes from the line of Mr. Vosser.

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Richard Vosser, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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It's Richard Vosser from JPMorgan. First question, just thinking more widely in terms of the savings from the cost saving program that you initiated across the divisions outside of crop, could you give us an idea of how those are going? What savings do you think you can achieve for this year and particularly the savings you might achieve in the reconciliation or the central cost bucket? Secondly, linked to that, just thinking about the reconciliation, perhaps you could give us the idea of where that might come out this year in terms of guidance? Are we looking at another EUR 400 million loss relative to the -- or costs relative to the level that was in your restated numbers?

And then second question, just on pharma. Just thinking about some of the pipeline data points that are coming, perhaps you could set the scene for us on vericiguat and maybe finerenone. Certainly, vericiguat, I think there are Phase III trials imminently around the corner. Perhaps you could give us an idea of when we should think about the time lines and maybe some of the commercial hurdles for success, given we now have SGLT-2s with a 26%, 25%-plus benefit in terms of cardiovascular risk and obviously Entresto there as well. So just some thoughts there on vericiguat, please.

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Wolfgang U. Nickl, Bayer Aktiengesellschaft - CFO & Member of Management Board [25]

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Okay. Richard, thanks for your question. Let me start you off on the savings programs and then also shed some light on recon. As you may recall, we were aiming for a total contribution of about EUR 2.6 billion, some of which will be reinvested in the business. Out of this, about EUR 1 billion comes from the synergies out of the post-merger integration with about EUR 500 million out of Consumer Health, EUR 200 million out of pharma, rationalizing R&D to go more external and the balance coming from the platform functions. We had, at the Capital Market Day, indicated a preliminary phasing of 30% of these savings in 2020, 70% of these savings in '21 and then 100% in '22. We are doing altogether very well. Like we already outlined on the call, this is driven by the [PMI] portion right now. We had originally thought to get 25% of savings this year. With the EUR 300 million that we indicated earlier, that's more like 34% phasing. So we are ahead of the game there. That also brings the total on the overall program over EUR 600 million. And if you, for a second, take the EUR 600 million, contrast it with the EUR 2.6 billion, altogether you're approaching 25%, which gives you a clue that the 30% next year are certainly well within reach. Our teams are doing a really good job there, trying to contain onetime costs where they can and not dropping a ball in the business. So that's really very, very encouraging.

As it relates to reconciliation, I appreciate the question because I can understand how this is a little bit difficult to follow. Remember, there was Currenta in these numbers before. And now with that being a discontinued operation, reconciliation remains a collection of small business. That includes things like our gastro business. It includes -- not gastro in a medical sense, it's our restaurant business basically. We have the travel boards. We have our sports business. But then the main deal in reconciliation are the platform cost that we are not charging to the divisions because there is not -- no clear key. Those numbers can be volatile throughout a year. And you have seen less of an impact in Q3 than in Q1 and Q2, which has to do with, yes, with better platform cost altogether, but it also has to do with some central adjustment to STI, LTI. And we had to make some adjustments to the IFRS 16 implications. And we have some movements to the prior quarter and to the following quarter. I think for your modeling, the most important thing is that we are changing our guidance now that Currenta is out. It used to be EUR 1.6 billion in revenue and a negative EUR 200 million in EBITDA. Now with Currenta out, it's EUR 0.3 billion in revenue and EUR 0.35 billion in EBITDA contribution. So if you look at that and you have 3 quarters of actual, you know that the fourth quarter is closer to what we had in quarter 1 and in quarter 2. So you can use this for your planning considerations.

Last but not least, as the portfolio has changed, as our business has changed, now we're changing some of the structures, we're obviously also reviewing how we do these allocations. And if we make any changes there, we will let you know with our guidance for 2020 and then at the very latest, at the Capital Market Day that Werner mentioned will happen in June of next year.

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Stefan Oelrich, Bayer Aktiengesellschaft - President of Pharmaceuticals Division & Member of the Board of Management [26]

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Richard, when it comes to the pharma pipeline, yes, we've got some exciting months ahead of ourselves here because we're waiting basically on a daily basis now on the results of the first vericiguat Phase III trial, the VICTORIA study in heart failure with reduced ejection fraction. So that study is completed. I haven't seen the data yet. But I can't wait to see it, I guess same for you. We also have, when it comes to the near future, by end of year, we should have study completion and hopefully also the results for the Phase II trial in vericiguat with the HFpEFs, so in preserved ejection fraction patients. More to the pipeline on finerenone, so primary completion for our first Phase III trial in diabetic kidney disease, so-called FIDELIO study, which is an outcome study, we will have primary completion probably beginning of second quarter. So we should have in the second quarter some top line data hopefully. Not to forget that we filed Nubeqa, so darolutamide in Europe, so this is coming, too. We expect launch next year there. And we also have an interesting study that should complete before end of year in Phase III for Xarelto in peripheral artery disease, the VOYAGER PAD study.

Now you asked about giving some context from a competitive standpoint in the heart failure field and how vericiguat could potentially differentiate, that's how I understand it, against a more busy field of competitors, especially SGLT-2s and also Entresto there. So first of all, please be reminded that this will be the potential first-in-class treatment for chronic heart failure because no other sGC stimulator has so far been approved for use in heart failure. And when I -- personally, when I look at the field and when I also talk to the specialists in the field, they see room for multiple different approaches in treatment, multiple classes that you would treat patients with. So there should be enough room. And more specifically, when you look at how we've conducted trial for vericiguat here in HFrEF patients, you would see that not only do we believe that we have a very nice PK profile, which allows for good dosing, but that's comparable to competitors. We see our novel action mode with the opportunity to demonstrate value where others can't go, for example, in post-event patients or in patients with worsening heart failure. So there are, to my knowledge, on worsening heart failure are no concluded studies with SGLT-2s. So we will be ahead of them there. And I think there is enough room to differentiate. But let's not get ahead of ourselves. This is a new class. And I'm keeping my fingers crossed that we actually establish a new class to be effective in the treatment of heart failure, which still, let's not forget, is one of the primary killers worldwide overall.

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Operator [27]

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Next question comes from the line of Mr. Lockey.

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Joseph W Lockey, Morgan Stanley, Research Division - Equity Analyst [28]

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Joe Lockey, Morgan Stanley. Two questions, please. First to Werner, you said this morning the Johnson appeal outcome is not expected at the beginning of next year. Is this delay a function of the mediation processes or simply a function of court time lines? I appreciate there's only so much you can say, but any clarification would be helpful.

And second, Wolfgang, at the Capital Markets Day in December, you gave us a constant portfolio target of EUR 23 billion in free cash flow generation from '19 to '22. I think EUR 12 billion was to support growing dividends, EUR 9 billion for deleveraging and EUR 2 billion for bolt-ons. Over the next 12 to 18 months, you've got cash coming in from divestments, EUR 8.3 billion net as you say, but also potentially some cash going out for settlement. So how should we think about your original capital allocation priorities in that context? And then related to that, when do you think you'll be in a position to provide updated 2022 targets?

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Werner Baumann, Bayer Aktiengesellschaft - Chairman of the Board of Management & CEO [29]

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Okay. Let me start before I hand it then to Wolfgang. On the Johnson appeal, a potential court decision is going to come based on our best guesstimate, in early 2020, very unlikely that, that is still going to happen in 2019. Relative to timing, there's no relation to the ongoing mediation discussions here as it's completely separate, yes? So you shouldn't read anything into it, other than the fact that this is in the hand of the courts and not in our hands and our control relative to timing.

Relative to the decision that might come out of it, this is, of course, nothing but a specific decision in an individual case. Should we prevail, this is a slight positive. Should we not, it might be a slight negative. So relative to the significance, you shouldn't take it as something that is too relevant for the overall litigation complex. And we are just going to wait for the outcome of that first appeal. The 2 others will be following later because it's only filed one set for the appeals that Johnson and the others are still coming, yes, okay? Wolfgang?

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Wolfgang U. Nickl, Bayer Aktiengesellschaft - CFO & Member of Management Board [30]

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Yes. Let me talk about capital allocation and targets. You got it exactly right on the EUR 23 billion. That is the strategy that we communicated, which stresses the importance of dividends but also stresses our commitment towards an A rating, i.e., delevering like we have done this previously after we made bigger acquisitions. On the divestiture gain, it's a little bit time before we spent that money. We had initially indicated that we may do some share buybacks. We still think the shares are very good investment.

But we'll cross that bridge when we get there because these divestments proceeds, the vast majority will come from the transaction with Elanco. And as you know, that's not going to happen between the middle of next year with a portion of it, the equity part coming afterwards. It's too early to speculate about if there is a settlement, how high that settlement will be. Rest assured that we, of course, are playing through several scenarios on that front.

What I can say about the 2022 targets, I mean you got a bit of a clue today regarding the EUR 10. This will obviously not have Animal Health and Currenta included. So you can assume the EUR 0.35 that we indicated with some growth in that business already for now. We will have to look at the rest of the business. And in currencies again -- our current plan is to provide you an update at that said Capital Market Day in June with the full model, including P&L, capital allocation, everything.

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Operator [31]

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Next question comes from Mr. Parekh.

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Keyur Parekh, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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It's Keyur Parekh from Goldman Sachs. Two big-picture questions, please, one for Werner. Werner, as we think about your -- the breadth of your portfolio and your portfolio measures, should we not think of this as being broadly done? Or are there other parts of the business that you might think of as potentially not being part of Bayer longer term? Linked with that, as we think about the emphasis on sourcing innovation externally, can you help us think about what are the -- what is the magnitude of external kind of firepower that you think you have over the next kind of 6, 12, 24 months? That would be useful.

Secondly, we believe there was kind of a recent agreement by which kind of you've agreed with your German employees that until 2025, there will be no more kind of restructuring of your German employee base. Can you confirm that? And if that's the case, kind of where do you expect the majority of your incremental cost savings to come through?

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Werner Baumann, Bayer Aktiengesellschaft - Chairman of the Board of Management & CEO [33]

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Okay. Keyur, many thanks for your questions. First of all, on the portfolio measures, yes, all of them are done. And those refer to the ones that we had announced as part of our capital markets agenda that we communicated in November. As you know, the portfolio, business portfolio is always subject to assessment on whether we are the best owner-operator for our businesses relative to our big businesses, be it pharma, consumer or Crop Science. There's no question around it. And you also see that reflected in our performance. We are doing what we said that we were going to do, be it integration and synergy, the strong leadership positions we have in crop, be it sustained and continued growth in pharma while further building the pipeline or the consumer business that we are turning around.

And Heiko commented on that before, also the prospects of another growth quarter to sustain the turnaround that we were talking about by refreshing our product portfolio and then also catching up. Essentially, we are at our peer growth rate roughly already this quarter. So things are going well relative to everything that we have said. There will be smaller things that we're looking at. Heiko referred to those with some tail brands, but nothing major that you should expect because these are the ones that we announced on purpose so that you know what is coming last year in November.

Secondly, external firepower. We can continue to invest in our businesses. And that is, of course, very important relative to driving development competitively. We have done a few things, certainly further building our Leaps portfolio. We have engaged -- we have a number of additional new companies that we are a partner to in setting them up. We have actually acquired the remaining outstanding shares of BlueRock. And we continue to be on looking out for further opportunities. Of course, we will always have to look at, certainly for the time being, at what it is that we can do incrementally while not knowing what is going to come our way. With the glyphosate litigation, I can only refer back to what Wolfgang was saying. Our finance and treasury departments also from a risk perspective is looking at it carefully. And that's the frame within which we are moving for the time being while the settlement discussions are going on.

Relative to the agreement in Germany, there's one thing that is I think very important to understand on how these agreements work. These agreements are there to enable the further development of our workforce, also in this case, the reduction in-force. And we are typically doing that -- there's a negotiated umbrella that we have with employee representatives that actually negotiate with us on behalf of our entire workforce. And we are then looking at ways to come to voluntary agreements because that is the only meaningful and reasonable way of doing that. You're looking at an overall 4,500 people that we are going to reduce our workforce by in Germany. The alternative would be to go through social selection. And that is actually in nobody's interest. The agreement overall is absolutely no impediment to the realization of savings. It's actually an enabler thereof, just to make sure that, that is clearly understood and heard by everybody.

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Operator [34]

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The next question comes from the line of Mr. Leuchten.

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Michael Leuchten, UBS Investment Bank, Research Division - Co-Head of Pharmaceuticals Research of Equity Research [35]

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It's Michael Leuchten from UBS. Just a clarification question to Liam, please. Just going back to the commentary on input prices and COGS, is it fair to assume that this will actually annualize as we come out of Q4 and we should see more revenue-driven margin leverage going into 2020? Or is this a trend that sort of gets incrementally worse and we should be careful with that assumption?

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Liam Condon, Bayer Aktiengesellschaft - President of Bayer Crop Science Division & Member of Management Board [36]

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Yes. Thanks, Michael. So the 2 issues that I referred to, clearly the soybean obsolescence COGS effect, that's a one-off related to the weather. And China is hard to call how long that will last. We've been seeing that all year. We assume that, that will continue at least partially into 2020. But it's hard to make that -- let's say, be that specific on forecasting because it depends now completely on what happens in China. But of course, our bottom line is going to be driven by the revenue growth going forward and the synergies, which will clearly outbalance any COGS-related impact in 2020.

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O. Maier, Bayer Aktiengesellschaft - Head of IR [37]

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I think with that, Emma, we are running out of time. So I think we're going to close the call here if there's no more questions on the line, right? Yes, there's not. Okay. Good. So with that, there's actually one more thing I'd like to make everybody aware of that I think is important. As indicated, we as Bayer actually have spent a substantial amount of time to upgrade our efforts and ambitions and targets in the ESG area. And at the leadership of Matthias Berninger, who joined Bayer actually in January this year, the teams have worked diligently to be able to develop a 2030 ESG strategy. And what we think with ambitious targets, with overlaying the ESG strategy with a business strategy, there will be, as it looks like, we planned for a webcast to introduce that 2030 ESG strategy on December 10, just to make you aware of that. And the invitations are going to go out in due course within the next couple of days.

And with that, I'd like to thank everybody participating in this call, and talk to you soon. Thank you.

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Operator [38]

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Ladies and gentlemen, this concludes the Third Quarter 2019 Results Investor and Analyst Conference Call of Bayer. Thanks for participating. You may now disconnect.