Group Management Report

Macroeconomic Environment and Sector Conditions

The sectors in which the Sartorius Group is active differ in their dependence on the economy. The Bioprocess Solutions Division, for instance, operates in an environment that is largely independent of economic fluctuations. The Lab Products & Services Division, in contrast, conducts its business activities also in sectors that are more strongly affected by economic factors.

Global Economy Recorded Slight Growth Acceleration

According to the most recent data, first-quarter economic growth in the OECD countries in 2017 was up 1.9%, slightly above the level of the prior-year quarter of 1.7%.

The world's largest economy, the USA, grew at a somewhat lower rate than expected at the beginning of the year, 2.0% (previous year +1.6%), amid moderate consumer spending. During the further course of the year, stronger growth dynamics are anticipated in view of the robust U.S. labor market, among other factors.

Despite the uncertainties surrounding the planned exit of the U.K. from the European Union, the euro zone reported overall robust development, gaining 1.7% (previous year +1.7%), which was especially driven by strong demand of private households as well as by exports.

Asia proved to be a key growth driver yet again. China's gross domestic product thus rose by 6.9% (previous year +6.7%) due to higher government-led investments, among other reasons. Growth of the economy in India slowed as a result of the country's currency exchange initiative, from 8.7% in the year-earlier quarter to 6.2%. However, it continued to remain at a high level on an international comparison.

Sources: OECD: Quarterly National Accounts, May 2017; Reuters, April 2017.

Continued Positive Sector Development

Sartorius generates the majority of its business with customers from the biopharmaceutical and pharmaceutical industries. In addition, Sartorius serves customers from public research institutes, the chemical industry and the food sector. Accordingly, the trends in these specific sectors considerably influence the business development of Sartorius.

The international market research institute IMS Health estimates that the global pharmaceutical market has grown annually by around 6% on average over the past five years. The main growth drivers were the availability of innovative new medications, improved access to healthcare – in part through the expansion of state healthcare systems – besides the continuously growing and aging world population.

The market for medications manufactured using biotech methods has been expanding overproportionately for many years within the global pharmaceutical market. This is primarily attributable to a high number of new drug approvals and additional market penetration by existing biologics. Overall, the share sales revenue generated by medications manufactured using biotech methods relative to total pharmaceuticals market rose from around 20% in 2012 to approximately 25% in 2016.

Biosimilars, or biological medications nearly identical to original products, have played only a minor role to date in the growth of the biotechnology market. However, the industry has recently made significant progress in the important U.S. market, which develops somewhat delayed compared to the biosimilars markets in Europe and Asia. So far, five biosimilars have been approved by the FDA, the U.S. health authority, following the first market authorization of a biosimilar in 2015 based on an abbreviated approval procedure.

Demand for laboratory instruments and consumables is primarily generated by the biopharmaceutical and pharmaceutical industries, public research institutes and the chemical and food sectors.

According to data provided by Frost & Sullivan, the global laboratory market grew by about 2.4% in 2016. In the face of moderate economic growth and uncertainty surrounding the British referendum against EU membership, Europe recorded growth of merely 1.5%. The largest market for laboratory products, the USA, expanded at a rate of 2.5%. Significant growth was once again reported in Asian countries, such as China and India, in which the laboratory market enjoyed aboveaverage expansion of 7.8% (China) and 8.4% (India).

Sources: IMS Health: Outlook for Global Medicines through 2021, December 2016; EvaluatePharma: World Preview 2017, Outlook to 2022, June 2017; www.biologicsblog.com, May 19, 2017; Frost & Sullivan: 2017 Spring Mid-year Report; May 2017.

Group Business Development

  • Double-digit growth in sales and profit
  • Lab Products & Services develops highly dynamically through organic growth and expansion of its portfolio
  • Robust development of Bioprocess Solutions in light of normalized market growth
  • Forecast for the full year of 2017 confirmed

Product Portfolio Expanded Through Acquisitions

In the first half of 2017, Sartorius added further innovative and complementary technologies to its product array through two acquisitions. The Lab Products & Services Division significantly expanded its portfolio in bioanalytics through the acqusition of Essen BioScience and thus has further strengthened its position with biopharmaceutical customers and in public research. Moreover, the Bioprocess Solutions Division expanded its comprehensive offering of single-use solutions and equipment through the acquisition of data analytics specialist Umetrics.

For further information about these acquisitions, please see pp. 8 and 9.

Sartorius Achieves Double-Digit Sales Growth in the First Half

In the first half of 2017, the Sartorius Group continued to grow dynamically at double-digit rates. In light of the strong organic growth of both of its divisions and the acqusitions of Essen BioScience and Umetrics, the company’s sales revenue rose 11.5% in constant currencies from €625.4 million to €704.1 million; the reported increase was 12.6%.

Sales revenue and order intake
in millions of € 6-mo.
2017
6-mo.
2016
Δ in %
reported
Δ in %
cc1
Sales revenue 704.1 625.4 12.6 11.5
Order Intake 741.9 677.6 9.5 8.4

1 In constant currencies

All regions contributed to growth of the Sartorius Group in the first half of 2017. Sales revenue in the Asia | Pacific region, which accounted for around 24% of total Group sales, showed the highest momentum, achieving growth of 34.8% to €172.2 million (reported +37.7% compared with €125.1 million a year ago).

1 ) In constant currencies

2 ) Acc. to customers' location

The EMEA region, representing around 43% of total Group sales, recorded a gain of 5.9% to €302.9 million against a very high revenue base in the year-earlier period (reported +5.1%, compared with €288.1 mllion).

Sales revenue in the Americas region, which accounted for around 33% of total sales, was €229.0 million, up 4.8% from a year ago (reported +7.9% compared with €212.3 million in 2016).

All changes given for the regional development are in constant currencies, unless otherwise specified.

Underlying EBITDA Increases Overproportionately

The Sartorius Group uses underlying EBITDA (earnings before interest, taxes, depreciation and amortization and adjusted for extraordinary items) as the key profitability indicator.

The Sartorius Group increased its earnings overproportionately yet again in the first half of 2017 relative to sales. Driven by economies of scale, underlying EBITDA thus rose 13.8% from €153.4 million to €174.5 million. The respective EBITDA margin climbed from 24.5% in the year-earlier period to 24.8%.

Underlying EBITDA and EBITDA margin Group
in millions of € 6-mo.
2017
6-mo.
2016
Δ
in %
Underlying EBITDA 174.5 153.4 13.8
Underlying EBITDA margin 24.8 24.5

Consolidated EBIT, including extraordinary items of -€12.7 million (H1 2016: -€9.9 million), depreciation and amortization, amounted to €113.9 million compared with €109.9 million in the previous year. Extraordinary items were primarily related to various cross-divisional projects and expenses in connection with the Group's most recent acquisitions. Due to an acquisition-driven increase of amortization, the consolidated EBIT margin was 16.2%, up from 17.6% a year ago.

The financial result was -€9.0 million in the first half of 2017, relative to -€3.9 million for the prior-year period. This change is essentially attributable to valuation effects related to foreign currency liabilities and hedging instruments and to a smaller extend to higher interest expenses due to acquisitions.

Net profit for the first six months of 2017 totaled €74.5 million relative to €74.2 million in the comparable period. Net profit after non-controlling interest stood at €51.8 million relative to €53.4 million in the first half of 2016, with non-controlling interest accounting for €22.7 million (H1 2016: €20.8 million).

Relevant Net Profit Rises Significantly

The relevant net profit attributable to the shareholders of Sartorius AG rose by 13.6% from €62.4 million to €70.9 million. This profit figure is calculated by adjusting for extraordinary items and eliminating non-cash amortization, and is based on the normalized financial result as well as the corresponding tax effects for each of these items. Underlying earnings per ordinary share totaled €1.03 (H1 2016: €0.91) and €1.04 per preference share (H1 2016: €0.92).

€ in millions 6-mo. 2017 6-mo. 2016
EBIT 113.9 109.9
Extraordinary effects 12.7 9.9
Amortization 17.0 8.5
Normalized financial result1 –8.3 –6.8
Normalized income tax
(2017: 29% | 2016: 30%)2
–39.2 –36.4
Underlying net result after tax 96.1 85.0
Non-controlling interest –25.1 –22.6
Underlying earnings after taxes and non-controlling interest 70.9 62.4
Underlying earnings per share    
per ordinary share in €
1.03 0.91
per preference share in €
1.04 0.92

1 Financial result excluding fair value adjustments of hedging instruments and currency effects relating to financing activities

2 Underlying income tax, based on the underlying profit before taxes and non-cash amortization

Operating Cash Flow Increases

In the first six months of the current fiscal year, the Sartorius Group reported a net cash flow from operating activities of €54.3 million relative to €43.1 million a year ago. Besides reflecting an increase in earnings, this development was influenced by lower tax payments than in the previous year and by a predominantly growthrelated increase in funds allocated to working capital.

Net cash flow from investing activities was -€79.5 million, above the year-earlier figure of -€69.0 million, as planned. Capital expenditures in the reporting period were related to, inter alia, the expansion of production capacity at our site in Yauco, Puerto Rico, and the consolidation and expansion of Group headquarters in Goettingen, Germany. The ratio of capital expenditures relative to sales in the first half of 2017 was 12.9% (previous year: 11.5%).

Cash outflows associated with acquisitions of €362.6 million in the first half of 2017 were related to the purchase of Essen BioScience and Umetrics. The cash outflow of €79.1 million in the year-earlier period reflects the acquisition of IntelliCyt. On the whole, net cash flow from investing activities and acquisitions was -€442.1 million relative to the prior-year figure of -€148.1 million.

Key Balance Sheet and Financial Indicators Remain at Good Levels

The balance sheet total for the Sartorius Group stood at €2,291.7 million in the period ended June 30, 2017, compared to €1,753.0 million as of December 31, 2016. This increase is mainly due to the acquisitions of Essen BioScience and Umetrics.

The Group's equity rose slightly from €736.8 million to €747.2 million between December 31, 2016, and the reporting date. The equity ratio continued to remain at a comfortable level at 32.6% (December 31, 2016: 42.0%).

Gross debt increased from €547.9 million as of December 31, 2016, to €992.3 million as of June 30, 2017, primarily due to the acquisitions mentioned above. Net debt was €919.8 million relative to €485.9 million as of December 31, 2016.

In this context, the ratio of net debt to underlying EBITDA based on the past 12 months rose from 1.5 at year-end 2016, to 2.7 as of June 20, 2017.

Number of Employees Increases

As of June 30, 2017, the Sartorius Group employed a total of 7,364 people worldwide. Compared with December 31, 2016, head count thus rose by 453 or around 7%. This figure includes 208 staff from the acquisitions of Essen BioScience and Umetrics. From a geographical perspective, personnel increased predominantly in the Americas region, by 19%. The number of employees in the EMEA region rose in the reporting period by around 5% to 5,082. In Asia | Pacific, Sartorius employed 1,106 people as of the end of the reporting period (December 31, 2016: 1,069 staff).

Business Development of the Divisions

Bioprocess Solutions: Portfolio Expanded by the Acquisition of Data Analytics Specialist Umetrics

In April 2017, Sartorius expanded the portfolio of its Bioprocess Solutions Division through the acquisition of the Swedish company Umetrics. This company is a leading specialist in data analytics software for modeling and optimizing biopharmaceutical development and manufacturing processes, and has already been cooperating with Sartorius for around five years. For the full year of 2017, Umetrics plans to generate sales revenue of around U.S. $15 million, approximately threefourths of which will be consolidated by the Bioprocess Solutions Division this year.

Strong Performance Given Normalized Market Growth

In the period under review, the dynamics of the bioprocess market returned to normal rates, as expected, after two years of extraordinarily strong growth. The Bioprocess Solutions Division thus recorded an increase in first-half sales revenue of 8.0% in constant currencies to €510.9 million (reported +8.8%). In particular, development of sales in the Americas region was influenced by relatively soft customer demand and limited delivery capacity for cell culture media. Consolidation of kSep acquired in July 2016 and of Umetrics contributed nearly 1 percentage point of nonorganic growth.

The division's business development in the first half was quite different in the regions. The Asia|Pacific region achieved the highest gains, with sales revenue up 44.4% due to the delivery of some larger equipment orders, among other reasons. By contrast, first-half business in the Americas was slightly below the strong previous year's level (-2.6%) due to the factors mentioned above. In the EMEA region, sales increased by 2.2% against a very high revenue base in the first half of 2016.

Bioprocess Solutions
in millions of € 6-mo.
2017
6-mo.
2016
Δ in %
reported
Δ in %
const. fx
Sales revenue 510.9 469.8 8.8 8.0
– EMEA1 209.4 207.2 1.0 2.2
– Americas1 181.3 181.1 0.1 –2.6
– Asia | Pacific1 120.3 81.5 47.6 44.4
Order Intake 546.9 519.2 5.3 4.4

1 Acc. to customers' location

The division's first-half order intake rose by 4.4% compared with a very strong prior-year base, which was influenced by some larger equipment orders.

Underlying EBITDA of the Bioprocess Solutions Division increased by 10.0% from €128.1 million to €140.8 million. Its respective margin rose from 27.3% to 27.6%, especially due to economies of scale.

Underlying EBITDA and EBITDA margin
Bioprocess Solutions
in millions of € 6-mo.
2017
6-mo.
2016
Δ
in %
Underlying EBITDA 140.8 128.1 10.0
Underlying EBITDA margin in % 27.6 27.3

Lab Products & Services: Bioanalytics Portfolio Considerably Expanded

The Lab Products & Services Division significantly expanded its offering of innovative technologies for drug research in the area of bioanalytics with the purchase of U.S.-based Essen BioScience Inc. in March 2017 after acquiring IntelliCyt and ViroCyt in the summer of 2016. Essen's real-time live-cell imaging and analysis systems are an excellent complementary fit with IntelliCyt's products, offering additional growth potential for Lab Products & Services. Essen BioScience is expected to generate sales revenue of around U.S. $60 million for the full year of 2017, about three-fourths of which will be consolidated by the Bioprocess Solutions Division this year.

Continued Positive Business Development

In the first half of 2017, the Lab Products & Services Division increased its sales revenue significantly by 22.1% in constant currencies to €193.2 million (reported +24.1%). The division reported organic growth of around 7% due to strong demand in all regions and all product areas.

Lab Products & Services
in millions of € 6-mo.
2017
6-mo.
2016
Δ in %
reported
Δ in %
const. fx
Sales revenue 193.2 155.7 24.1 22.1
– EMEA1 93.5 80.8 15.7 15.1
– Americas1 47.7 31.2 53.0 47.5
– Asia | Pacific1 52.0 43.6 19.2 17.2
Order Intake 195.0 158.4 23.1 21.1

1 Acc. to customers' location

Underlying EBITDA of the Lab Products & Services Division rose sharply in the first half of 2017 by 33.1% from €25.3 million to €33.7 million. This increase was driven by economies of scale related to strong organic growth and acquisitions. The division's underlying EBITDA earnings margin improved from 16.3% a year ago to 17.5%.

Underlying EBITDA and EBITDA margin
Lab Products & Services
in millions of € 6-mo.
2017
6-mo.
2016
Δ
in %
Underlying EBITDA 33.7 25.3 33.1
Underlying EBITDA margin in % 17.5 16.3

Opportunity and Risk Report

The opportunities and risk situation of the Sartorius Group has not materially changed since the publication of its 2016 Annual Report. For this reason, please refer to the detailed description of the opportunities and risks on pp. 52 et seq., as well as the risk management system on pp. 65 et seq., for the Sartorius Group in the 2016 Annual Report.

Forecast Report

Macroeconomic Outlook Slightly Improved

According to the most recent forecast issued by the International Monetary Fund, IMF, expansion of the global economy in 2017 is expected to progress slightly better at a rate of 3.5% compared with 3.4% projected at the beginning of the year.

For the U.S. market, the IMF continues to predict that economic activity will gain momentum at a rate of 2.3% compared with 1.6% a year ago. Key growth drivers are an end to inventory reductions and a rebound in investment activity.

The IMF also slightly raised its growth expectations for the euro zone since the beginning of the year from 1.5% to 1.7% due to continuing expansive fiscal policy and the positive effects of the pickup in the U.S. economy. In the U.K., the effects of its planned withdrawal from the European Union are likely to be lower than expected over the short term. For this reason, the IMF estimates that the U.K. economy will grow by 2.0%.

Experts project that the Asian economic area will expand by 6.4%, unchanged from the prior year. Supported by government investments, China's economy is likewise expected to grow by 6.6%. The IMF estimates that the development of India's economy in the current year will be impacted by its currency exchange initiative. Accordingly, the IMF revised its most recent forecast to +7.2% for 2017.

Sources: International Monetary Fund, World Economic Outlook, April 2017.

Continued Positive Sector Environment

The trends described on pages 61-63 of our 2016 Annual Report have remained unchanged with respect to their impacts on the development of the Sartorius Group.

Most recent estimates project that the global pharmaceutical market will grow at a compound annual growth rate of 4% to 7% during the period of 2016 to 2021. For the biopharma subsegment, market observers continue to expect overproportionate annual growth of around 9% on average. This growth will be driven largely by the increasing penetration of biopharmaceuticals already approved and an expansion of their indications, as well as by strong research and development pipelines.

Based on Frost & Sullivan estimates, global demand for laboratory products is forecasted to remain stable. Therefore, growth of around 2.8% is projected for 2017. While the markets in the USA and Europe are likely to expand moderately at rates of 3.2% and 1.9%, respectively, market observers expect the highest growth rates in Asian countries, for instance, 7.6% for China and 8.6% for India.

Sources: IMS Health: Outlook for Global Medicines through 2021, December 2016; Frost & Sullivan; Frost & Sullivan: 2017 Mid-year Report; May 2017; EvaluatePharma: World Preview 2017, Outlook to 2022, June 2017.

Guidance for Fiscal 2017 Confirmed

Management confirms its forecast for the full year of 2017.

Group

Based on constant currencies, management maintains its projection that Group sales revenue will grow by about 12% to 16%. The Group's underlying EBITDA margin is expected to increase by slightly more than half a percentage point over the prior-year figure of 25.0%.

For 2017, Sartorius continues to plan on investing about 12% to 15% of sales revenue. Its investing activities remain focused on the expansion of its site in Yauco, Puerto Rico, for the manufacture of single-use bags and filters, as well as on consolidation and extension of Group headquarters in Goettingen, Germany.

Regarding its financial position, Sartorius expects that in light of its most recent acquisitions, its ratio of net debt to underlying EBITDA by the end of the current fiscal year will be around 2.4. Any further potential acquisitions are not reflected in this guidance.

Divisions

For the Bioprocess Solutions Division, management continues to anticipate that sales will grow by about 9% to 13%, which includes a good one percentage point of non-organic growth to be contributed by the acquired companies, kSep and Umetrics. With regard to delivery capacities for cell culture media, management assumes that the situation will return to normal in the third quarter of 2017. The division's underlying EBITDA margin remains projected to rise by about half a percentage point over the prior-year figure of 28.0%.

For the Lab Products & Services Division, management continues to project that, assuming an overall stable economic environment, sales will increase by about 20% to 24%. This includes non-organic growth of around 17 percentage points to be contributed by the companies acquired, IntelliCyt, ViroCyt and Essen BioScience. The division's underlying EBITDA margin is expected rise by nearly two percentage points compared with the prioryear figure of 16.0%.

All forecasts are based on constant currencies.

Report on Material Events

No material events occurred after June 30, 2017.