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Report on Expected Developments

The following report provides a forecast for fiscal 2016 of the development of the Group and its three business sectors: Healthcare, Life Science and Performance Materials. The forecast again covers our key performance indicators as in 2014, namely net sales, EBITDA pre exceptionals and business free cash flow. Subsequent to the successful completion of the Sigma-Aldrich acquisition in November 2015, all forecasts take into account the effects of this acquisition on our businesses.

Forecast for the Group


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€ million Actual results 2015 Forecast for 2016 Key assumptions
Net sales 12,844.7
  • Slight organic growth
  • Portfolio effect amounting to a low double-digit percentage increase
  • Slight organic growth in Healthcare despite continued challenging environment for Rebif®
  • Moderate organic growth in Life Science, with Process Solutions as the main growth driver
  • Slight organic growth in Performance Materials despite continued price pressure on liquid crystals; strong growth dynamics for OLED and UB-FFS
  • Positive low double-digit portfolio effect due to the acquisition of Sigma-Aldrich
EBITDA pre exceptionals 3,629.8
  • Low double-digit percentage increase taking into account the Sigma-Aldrich portfolio effect
  • Additional investments in Healthcare research and development, particularly in immuno-oncology
  • Scheduled realization of synergies from the Sigma-Aldrich integration
  • Maintaining the profitability of Performance Materials despite sustained price pressure on liquid crystals
Business free cash flow 2,766.2
  • High single-digit percentage increase
  • Expected increase in EBITDA pre exceptionals
  • Further investments in property, plant and equipment within the scope of strategic growth initiatives

Net sales

For the Group, we expect slight organic sales growth in 2016 compared with the previous year. Owing to the acquisition of Sigma-Aldrich, we additionally expect a positive portfolio effect in the low double-digit percentage range. As a global corporate group, we are exposed to currency effects due to the fluctuation of exchange rates. In 2016, we forecast a € / US$ rate of 1.07 – 1.12, which we expect will lead to a positive currency effect compared with 2015. In growth markets, however, especially Latin America, the Group is likely to see a negative development as a result of exchange rate effects. Overall, we expect a slightly negative exchange rate effect for the Group in 2016.

For our Healthcare business sector, we forecast slight organic sales growth in 2016. For Rebif®, Healthcare’s top-selling product, we continue to expect a challenging market environment that will lead to a sharp organic decline in net sales. However, we plan to offset this decline through a strong organic increase in growth markets and sales from our co-promotion of Xalkori®. In addition, we expect a slightly negative portfolio effect due to the divestment of Kuvan®.

In our Life Science business sector, we forecast a moderate organic increase in net sales as well as a high double-digit portfolio effect due to the acquisition of Sigma-Aldrich. It is assumed that the strongest driver of growth will be Process Solutions.

We expect that our Performance Materials business sector will achieve slight organic sales growth despite sustained price pressure on liquid crystals, while the UB-FFS and OLED technologies are increasingly becoming the business sector’s growth drivers.

EBITDA pre exceptionals

EBITDA pre exceptionals is our key financial indicator to steer operating business. In 2016, owing to the expected operating development and the acquisition of Sigma-Aldrich, we forecast a low double-digit percentage increase of EBITDA pre exceptionals of the Group over the previous year.

For our Healthcare business sector, we expect a low double-digit percentage decline in EBITDA pre exceptionals, primarily as a result of additional investments in research and development (particularly in immuno-oncology). We expect EBITDA pre exceptionals of our Life Science business sector to increase moderately as a result of organic sales growth. Additionally, a high double-digit percentage portfolio effect due to the acquisition of Sigma-Aldrich can be expected. This forecast has already taken into account the scheduled realization of synergies as part of the integration of Sigma-Aldrich. In 2016, EBITDA pre exceptionals of our Performance Materials business sector is forecast to increase slightly, but at least reaching the level of 2015.

Expenses reported under Corporate and Other are expected to increase significantly in 2016 since we plan to further expand future-oriented Group initiatives such as branding and ONE Global Headquarters and also drive forward the digitalization of the company.

Business free cash flow

Business free cash flow of the Group is forecast to show a high single-digit percentage increase in 2016. Apart from an increase in the operating result, we also expect further investments in property, plant and equipment within the scope of strategic growth initiatives.

Forecast for our Healthcare business sector


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€ million Actual results 2015 Forecast for 2016 Key assumptions
Net sales 6,933.8
  • Slight organic growth
  • Slight negative portfolio effect due to the divestment of Kuvan®
  • Increase in growth markets and co-promotion of Xalkori®offset Rebif® decline
  • Negative currency effect, due in particular to Latin American currencies
EBITDA pre exceptionals 2,001.7
  • Low double-digit percentage decline taking into consideration commercialization costs, especially for avelumab (excluding market launch costs: high single-digit to mid-teens percentage decline
  • Negative portfolio effect in the medium double-digit million range due to the divestment of Kuvan®
  • Rising research and development costs owing to pipeline development, particularly in immuno-oncology
  • Absence of commission expenses resulting from the termination of the agreement between Merck KGaA, Darmstadt, Germany, and Pfizer to co-promote Rebif® in the United States
  • Significant market launch costs, especially for avelumab and cladribine
  • Negative product mix due to Rebif® decline
  • Negative currency effect, particularly due to Latin American currencies
  • Divestment of Kuvan®
Business free cash flow 1,581.0 Low double-digit percentage decline
  • Decline in EBITDA pre exceptionals
  • Stable level of inventories and trade accounts receivable
  • Further investments in property, plant and equipment within the scope of strategic growth projects

Net sales

We expect slight organic growth of net sales in our Healthcare business sector in 2016 compared with the previous year. We forecast a sharp organic increase in growth markets and higher sales from our co-promotion of Xalkori®. This growth is to offset the expected decline in sales of Rebif®, Healthcare’s top-selling product. Since the rights to Kuvan® were returned to BioMarin Pharmaceutical Inc. in January 2016, we additionally forecast a slightly negative portfolio effect in 2016.

EBITDA pre exceptionals

EBITDA pre exceptionals for our Healthcare business sector is likely to see a low double-digit percentage decline. We predict that the focused further development of our pipeline, especially in immuno-oncology, will result in significant research and development costs. By contrast, due to the termination of the agreement between Merck KGaA, Darmstadt, Germany, and Pfizer to co-promote Rebif® in the United States, commission expenses will no longer be incurred. A lower-margin product mix, significant commercialization costs for avelumab and cladribine, and an expected negative currency effect particularly attributable to Latin American currencies will burden the margin of our Healthcare business sector in 2016. Furthermore, since the divestment of Kuvan® will also have a noticeable impact on EBITDA pre exceptionals, we expect a negative portfolio effect in the mid double-digit million range.

Business free cash flow

In 2016, we expect business free cash flow of our Healthcare business sector to show a low double-digit percentage decline over the previous year. The key driver will be the development of EBITDA pre exceptionals. We expect the development of inventories and trade accounts receivable to be at the previous year’s level. Likewise, we expect further investments in property, plant and equipment within the scope of strategic growth projects.

Forecast for our Life Science business sector


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€ million Actual results 2015 Forecast for 2016 Key assumptions
Net sales 3,355.3
  • Moderate organic growth
  • High double-digit percentage portfolio effect due to the acquisition of Sigma-Aldrich
  • Process Solutions expected to be key growth driver
  • Research Solutions and Applied Solutions also to contribute to growth to a smaller extent
EBITDA pre exceptionals 856.1
  • Moderate increase due to organic sales growth
  • High double-digit percentage portfolio effect due to the acquisition of Sigma-Aldrich
  • In line with the development of sales
  • Scheduled realization of synergies of € 90 million from the Sigma-Aldrich integration
Business free cash flow 675.6
  • High double-digit percentage increase
  • Improvement in EBITDA pre exceptionals
  • Development of inventories and trade accounts receivable in line with net sales growth

Net sales

Overall, we expect moderate organic growth of net sales in the Life Science business sector of our company in 2016 compared with the previous year. Process Solutions is expected to continue to contribute substantially to this growth, benefiting from the sustained growth dynamics of the market for biopharmaceuticals. Research Solutions and Applied Solutions are also expected to contribute to organic sales growth, but to a smaller extent. Owing to the acquisition of Sigma-Aldrich, we expect a portfolio effect in the high double-digit percentage range.

EBITDA pre exceptionals

In 2016, we expect EBITDA pre exceptionals of our Life Science business sector to increase moderately over the previous year as a result of organic growth of net sales. In addition, as a consequence of the acquisition of Sigma-Aldrich, we expect EBITDA pre exceptionals to see portfolio-related growth in the high double-digit percentage range. This forecast already takes into account the scheduled realization of synergies amounting to around € 90 million in 2016.

Business free cash flow

We expect business free cash flow of our Life Science business sector in 2016 to show a high double-digit percentage increase over the previous year. The predicted rise in EBITDA pre exceptionals should be the main driver of this increase. We forecast the development of inventories and trade accounts receivable in line with that of net sales.

Forecast for our Performance Materials business sector


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€ million Actual results 2015 Forecast for 2016 Key assumptions
Net sales 2,555.6 Slight organic growth
  • Sustained volume increases in all businesses
  • Typical price decline in the liquid crystals business
  • Strong growth dynamics in OLED and UB-FFS
EBITDA pre exceptionals 1,132.1 Slight increase, yet at least at the 2015 level
  • Maintaining the profitability of the Liquid Crystals business despite noticeable price decline
Business free cash flow 930.8 Moderate increase
  • At least stable EBITDA pre exceptionals
  • Optimization of inventories

Net sales

We forecast slight organic sales growth in our Performance Materials business sector in 2016 compared with the previous year. All Performance Materials businesses are likely to increase their sales volumes. We assume that the growth dynamics, especially in the businesses with OLED and UB-FFS technologies, will be particularly strong. By contrast, we expect a liquid crystals price decline typical for the market.

EBITDA pre exceptionals

In our estimation, EBITDA pre exceptionals of our Performance Materials business sector in 2016 will see a slight increase, but at least remain at the level of 2015. One of our key objectives is to maintain the profitability of the Liquid Crystals business at a high level despite the price decline.

Business free cash flow

In 2016, business free cash flow of our Performance Materials business sector is forecast to increase moderately. This forecast is in line with the expected development of EBITDA pre exceptionals. As regards inventories, we expect an optimization of these in 2016.

Summary

For 2016, we expect a slight organic increase in Group net sales, to which all business sectors are forecast to contribute. Owing to the acquisition of Sigma-Aldrich, we additionally expect a positive portfolio effect in the low double-digit percentage range compared with the previous year.

EBITDA pre exceptionals of the Group is expected to increase by a low double-digit percentage in 2016, taking into consideration the portfolio effect resulting from the Sigma-Aldrich acquisition. This includes expected cost synergies from the integration of Sigma-Aldrich. In our Healthcare business sector, we will invest further in the research and development of innovative medicines and therefore expect additional expenses for the pharmaceutical pipeline. For our Performance Materials business sector, we continue to expect high earning power and assume that EBITDA pre exceptionals will increase slightly, but at least remain at the level of 2015. We expect business free cash flow of the Group to show a high single-digit percentage increase over 2015.