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Executives

Severin Schwan – CEO

Dan O’Day – COO, Pharmaceuticals

Roland Diggelmann – COO, Diagnostics

Alan Hippe – CFO and IT Officer

Analysts

Sachin Jain – Bank of America Merrill Lynch

Richard Vosser – J.P. Morgan

Andrew Weiss – Bank Vontobel

Tim Anderson – Sanford C. Bernstein & Co

Michael Leuchten – Barclays Capital

Jo Walton – Crédit Suisse

Andrew Baum – Citigroup

Peter Verdult – Morgan Stanley

Vincent Meunier – Exane BNP Paribas

Keyur Parekh – Goldman Sachs

Severin Schwan

ROCHE HLDG AG DIV RT (OTCPK:RHHVF) Q2 2013 Earnings Call July 25, 2013 7:00 AM ET

Severin Schwan

Good afternoon ladies and gentlemen. Welcome to our briefing on the Roche Half Year Results. Overall Roche delivered strong operating results for the first six months. You’ve seen this morning the financial sales are up by 5% on a Group level. Core earnings per share up by 12% and in spite of the setback of our (inaudible). We also made overall good progress on our pipeline.

We move to Bcl-2 and anti-PDL1 into late stage pivotal trials. There is a number of promising compounds coming through from early development such as Elotuzumab or anti-factor D. The further strength from our two portfolio with a positive CHMP recommendation for Herceptin subscu. So overall a good momentum on the innovation front.

On the sale side, pharmaceutical is up by 6% very much driven by our key cancer medicines, but we also saw very good growth of Actemra, rheumatoid arthritis getting one of our key brands with a growth of 33%. Diagnostics up by 3% and acceleration versus the first quarter, very much driven by the clinical diagnostics business.

So we are back to a good sales momentum in mid-single-digits and it is very much driven by the U.S. in absolute terms, the biggest growth contributor strong performance there, but we also see continued good development in our key emerging markets 10% up in the first quarter, again 11% up in the second quarter very much driven by the performance in China up 26% in pharma, 19% in diagnostics.

Turning to profitability you can see that we bring the goods development on the top line also to the bottom line. Margins stand now at 41%, this includes one-off impacts from the past service income, but even if we correct for the past service income margins would be up by approximately up by 1% point at 39.4% and absolute operating profit growth would have been at 7% outgrowing the sales growth and that is also reflected in core earnings per share up by 12%. If we would exclude one-time effect of the past service income would be up by 8%.

I mentioned that we moved Bcl-2 and anti-PDL1 into pivotal trials. We have now reached late stage pipeline with 10 compounds in pivotal trials. Let me just also emphasize again the excellent results, we could communicate for GA101 yesterday, the head-to-head study against MabThera, where we showed that we could significantly increase PFS in the direct comparison versus MabThera.

So on the basis of those strong results. We confirm our outlook for the full year. Group sales to grow in line with previous year. Core EPS to grow stronger than sales and that excludes the PSI effect and on the basis of that we are confident to further increase the dividend and with this a handover to Dan O’day for pharma.

Dan O’Day

Good afternoon from my side as well. And looking forward update you on the results of the pharmaceutical division for the first half of 2013. Let’s dig a little deeper into the sales, where the 6% increase in overall sales for the first half of the year. You can see, we had a very strong first half in the United States that’s driven by a number of products.

Certainly the newly launched Perjeta and Kadcyla, but also Avastin, Actemra and Lucentis amongst others. So a very good strong first half in the United States, in Europe we grew at 1% significantly ahead of the market here. In fact, when you look at the price differential or the price impact for Europe in the first half of the year. We anticipate that it’s around 4%, which mean in volume terms we grew at 5% in Europe.

I think really speaking to the innovative nature of our products in that constraint health care environment. Japan growing in 2% really quite good considering the fact that, AVISTA one of the products there was returned to Eli Lilly and with the strong growth of the oncology portfolio, we still see a growth on the top line regardless of the price decrease we also had in Japan last year.

And then finally international region growing at 5%, the E7 growing 11% and I’ll get a little bit more into that in my talk. And of course the strong sales line has led to a significant increase in core operating profit as well, to give a couple of details on the P&L. We did have a significant impact on the royalties for the first half of this year, with Lucentis, Eylea, Humira and some one-off product disposables.

As we go into the second half of this year for year-on-year effects. We expect that will decrease over the second half of the year on a percentage basis. The cost of sales actually when we look at cost of goods in period cost. We’re actually growing below the sales growth. So the explanation for the slightly higher cost of sales is actually related to Tamiflu and Avastin royalties, which is obviously also generated from the very strong sales of those two products in the first half of the year.

R&D in line and G&A predominantly effected by the PSI effect which Alan will talk a bit more about. So again a 9% increase in core operating profit at a margin that’s really at the top end of the industry. So when we look at the overall product progress in the first half of the year. I guess the first thing, I would take away from the slide 17 is that, innovative products, the new products are clearly far outgrowing the products that we are declining in our system.

And as expected Pegasys has declined as a result of the warehousing of patients at this stage, particularly in the developed market. It continues to grow in the emerging markets and here you can see the effect in Japan of the loss of AVISTA. Again Japan overcoming this with a strong oncology growth.

I’ll talk a bit about the oncology programs in the next slide, but just to say the Tamiflu is clearly the result of the very strong flu season in the U.S. which occurred in the first two months of this year and then really strong growth on the Actemra side with 32% increase in overall sales there as well.

So when we break down the oncology franchise, that’s growing at 8% in the first half of the year really contribution from across the portfolio. MabThera/Rituxan growing at 3%, this was affected also by the timing of some of the tenders and the phasing in the U.S. varies a good solid underlying demand with MabThera and Rituxan. When we look at Herceptin franchise that’s growing at 11% really solid demand across the three products that are now part of the entire franchise.

Avastin at 12% and Tarceva making progress with now with 4% growth good uptake in first-line and we are seeing stabilization in the second-line as we expected. Now this is a nice picture to show what now six indications in Avastin are driving really this growth has driven quarter-on-quarter by the ovarian cancer indication in Europe, and then in colorectal cancer the treatment beyond multiple line is really helping to grow in all of the regions around the world.

So this is again a very strong picture for Avastin and really driving our overall oncology growth. Digging a bit further into Avastin with the existing news that ASCO around the cervical cancer indication. We have the potential to add in fact a seventh indication for Avastin. We’ll certainly be taking that study and approaching the Regulatory Authorities in the U.S. and Europe and having discussions with them about the ability to file that data for an indication in cervical cancer.

And then also to ASCO we had the news the glioblastoma trials. We continue to feel confident that the data supports the filing in Europe. We will of course have discussions with the U.S. and most likely in the second half of this year and to just remind you in the United States, we have about CHF170 million of the total Avastin franchise in glioblastoma in the United States as we continue to look at the product in the United States market.

So the HER2 franchise 11% growth really strong uptake of Kadcyla in the second-line and beyond therapy areas and metastatic breast cancer in the United States and very exciting the TH3RESA study also read out, which is just yet one more trial that shows the efficacy of Kadcyla. In this case, against physicians choice and second-line and beyond.

So further, solidifying the data on Kadcyla in that setting. Perjeta continues to rollout well in the United States with penetration increasing in the first-line setting by around 5%. We have seen, there was some use in the second-line and beyond setting off label prior to the launch of Kadcyla. So we’ve seen Kadcyla obviously picking that business up particularly in the United States, but the continued growth in the license indication in the first-line continues and of course, we are just beginning to roll out now in Europe with the approval there and obviously the time, it takes for reimbursement.

We’ve rolled out the product in Switzerland, in Germany and the U.K. with the vast majority of countries and Europe still in the reimbursement process. And of course very exciting is the Neo-Adjuvant for Perjeta that we have filed in the United States and the PDUFA date is October, 31 for that as well.

And then finally, the good news on Herceptin subcutaneous again the part of the entire franchise. We received a positive CHMP opinion in June of this year, so we would expect to launch that in Europe and other markets outside the United States around the world in the second half of this year, which is again another strategy to protect the franchise against biosimilars as we move forward.

So I have to say, we are really encouraged the data on Lucentis in the United States. I’d been a bit more cautious to the beginning of this year, but on Lucentis and I’ve been positively surprised to see us stabilizing our share really in AMD, which as you know is the vast majority of the market. Not only that, but we see the entire market growing in AMD.

We see some evolution from Avastin business into AMD into Lucentis and Eylea. Our share in RBO is stable and of course the growth for us continues to come also in DME, where we continue to penetrate that share wise in the United States. So good strong growth for Lucentis. I have to say that, we continue to see growth through Lucentis in the second half of this year as well.

Now the E7 markets are growing nicely 11% growth, pretty steady growth quarter-to-quarter overall 26% growth in China. Again it’s driven by the oncology franchise good growth in Brazil and in other markets. We do have some tender effect and I’ll come back to this in Russia. There’s been some timing of tenders that’s affected the business in Russia, but the underlying demand is good and strong and we expect that to resolve itself as we go into the second half, but it has some impact some of the demand for Herceptin and MabThera in our numbers at the first half.

Now to dig a little bit deeper into the international region, which includes obviously the countries beyond E7. Here we really did have some more significant tender effects that are effecting this 5% growth, which is not truly represent of the underlying demand. You see the strong growth in China, again driven by predominantly the oncology portfolio at Turkey, but then you see in Algeria, which has the phasing of the tender is completely different from last year.

So last year, we had it in the first half. This year, we expected it in the second half, so you get two effects there and it causes a magnitude effect of about CHF131 million but we do expect the business in Algeria to continue to be positive for us in the second half of the year, so I just wanted to explain a bit tender effects there.

So turning the attention to the innovation, well Severin already mentioned this. The very first medicine ever that show superiority to MabThera. I mean MabThera set a very high standard and for the very first time in a head-to-head fashion. We’ve seen a product and this product is GA101 be superior significantly superior to MabThera is CLL and this is very exciting data for us. I think it’s very exciting data for the future for the hematology franchise and we look forward to presenting this data later this year.

We’ve submitted it to ASH and we expect that you’ll be able to see more detailed data at that period of time. Again to just remind you GA101 in the United States has both breakthrough and priority re-status and we would expect to hear back on that by the end of the year. And of course in the NHL programs as we communicated to ASCO due to the recruitment of those trials having them accelerated.

We do have also the filing dates now for NHL and DBCL in 2015 and first-line Non-Hodgkin lymphoma in 2017. So PDL1, we are also very excited about, these are still early days. I think for immunotherapy and cancer. We think we have good strong data on our anti-PDL1 is encouraged us to move ahead now with a single arm trial that’s diagnostically enriched if you like, an ability to look at the effect of this non-small cell lung cancer patients that are diagnostically positive and we have patients now ongoing in that trial and we expect to have a read out of that trial in 2014.

And we’ve also officially moved this into our late stage development to PDL1 and we are looking now at metastatic non-small cell lung cancer, also in second and third-line in more traditional phase III trial, that phase III planning is now underway and we would expect to be enrolling patients later this year early next year on that with the potential filing for that in 2016.

Obviously the PDL program is broader than this, we are in the process of looking at combination another indications as well as, we look at the promise of this new therapy. Made some exciting progress on the subcutaneous front. I’ve already spoken about Herceptin, I just remind you that for Herceptin. We are talking about ex-U.S. sales, which were about 65% of the sales and predominantly in the adjuvant setting, which were around 70%, as a protection mechanism and inability to add a huge convenience to patients and to health care systems by administering infusion in minutes versus hours.

We had the same strategy with MabThera subcutaneous that is still under review as we expect in EMA and I’ll remind you, in this particular case, we are talking about 50% of the sales outside the United States and utility of this would really in the oncology setting, both in the induction and the maintenance phase. Again a stabilization strategy, a convenience to patients and ability to differentiate before biosimilars.

And then really a growth opportunity is clearly in Actemra subcutaneous. You know the vast majority of the market is subcutaneous in biologics, in rheumatoid arthritis. We are very pleased to say that in the U.S. this review is going well, in fact so well we’ve brought it forward now into the end of this year and that opens up a significant portion of the biologics market as you can see here 70%.

So in the outlook side, just to get a little bit deeper in the portfolio that Severin presented. Since we last spoke to you at the first quarter. We’ve officially moved the anti-PDL1 and the Bcl-2 inhibitor into late stage trials. The Bcl-2 inhibitor we are looking at p17 deletion trial and we are also looking at in combination with MabThera and GA101 for the future amongst other trials, we are looking out for the Bcl-2.

Now relative to the decision making in the progression the portfolio. We do now have data in house and we are looking at that data at Etrolizumab to alter Ulcerative Colitis and anti-factor D for the dry form of AMD. I would just say, you’ve seen the data on Etrolizumab that was already presented and anti-factor D will be presented in August.

So we are now analyzing this data and determining the right step forward and we will make a decision on both of these compounds by the end of the year. We have a number of other compounds in the middle section, which are yet to read out, yet to inform us and this will be done in the second half of this year and the first half of next year.

And then we have made some decisions on a couple of other compounds in our portfolio that we’ll look to partnering opportunity for us. So we mentioned before the anti-PCSK9. We are in the process for both competitive and intellectual property reasons looking at partnering opportunities for that outside the group. We won’t move ahead with that, alone in side of Roche.

And we’ve now received the full results from the ANNAPURNA [ph] trial, which basically was successful but given the way the field has moved in HCV. We don’t see this is being as competitive as other agents in the marketplace. So as you know, we have a focus strategy on Danoprevir for China and we’ll be looking at mericitabine and setrobuvir to see if there are other potential partnering opportunities for those compounds as well.

So the data you can expect in the second half of this year. As I said anti-factor D which will occur in Toronto at the end of August at ESMO. We will give you some additional longitudinal data on the phase I of the anti-PDL1 and the TH3RESA trial and Kadcyla, so that’s coming also at the end of the August, early September.

And then importantly also the GA101 data, which will be presented while we submitted it and we hope it will be presented, we assume it will be presented in December in New Orleans at ASH.

So just to conclude on the progress on the pipeline. We made very good progress as you can see here, of course Aleglitazar did not meet it’s expected endpoint and we are now in the close down phase of that. Of course that’s a disappointment to us and to patients, but having said that it’s, it was a high-risk program, it’s one that has quite a high bar to show significance in cardiovascular disease and in a way, it’s of course to better to know sooner, rather than later on a product like Aleglitazar, if it has some safety signals.

So we are in the process of closing that down now and of course we have the Actemra subcutaneous in North America. We expect an indication on that NRA still in the second half of this year, U.S. approval. The Neo-adjuvant and Perjeta and of course the GA101 in front-line CLL as well.

So a good overall quarter not just on sales but also for the portfolio. So with that, I’ll turn it over to Roland to cover diagnostics.

Roland Diggelmann

Well, thank you, Dan and good afternoon from my side as well. It’s a pleasure to be able to report on the diagnostics sales and results for the first six months. As has been mentioned, 3% growth for the six months was good momentum in the second quarter, 4% growth in April-to-June month and as you can see the growth vary much due to strong growth in Professional Diagnostics 6%.

Diabetes Care remains a challenge with -5%. As you may have heard, we have restructured the organization integrated the Applied Science business and the majority of sales are now under Molecular Diagnostics, which had an impact on Molecular Diagnostics. The underlining from Molecular is a strong 4% and good growth as well in Tissue Diagnostics with 6%. So overall, the Clinical Laboratory business doing very well with a 5% growth.

Geographically, strong growth from emerging markets both Latin America and Asia-Pacific. Good growth also in EMEA, positive growth in difficult market environment same holds true for Japan and also North America impacted by Diabetes Care but excluding Diabetes Care positive growth of 2%, also in the United States.

Looking at the P&L, good momentum from growth trend translating to the bottom line was a 10% core operating profit increased also due to the cost control. Some one time effects that I would like to mention here that will now reoccur in the second half. Namely a favorable ruling on VAT in Germany CHF230 million [ph] and then bad debt from 2012, which did not occur in the first half of 2013 in the magnitude of CHF47 million. So a combined closed to CHF80 million one-time favorable effects on the core operating profit.

In terms of the integration of Applied Science. We are reporting the numbers in a different structure, we have integrated qPCR biochemical reagents and sequencing into molecular diagnostics. We expect from this a better technology flow through being able better serve our customers and also drive internal synergies.

Custom Biotech which is largely reagents pharmaceutical manufacturing is now part of professional diagnostics, due to leveraging internal but also product synergies. So this is new reporting structure four business areas. Professional Diagnostics, Molecular Diagnostics and Tissue Diagnostics in a core laboratory setting and then Diabetes Care.

I’d like to share a couple of highlights in terms of technologies and products. In Professional Diagnostics a very strong growth in Immunodiagnostics 12% growth again double-digit in the very core fundamental business in Immuno. At the same time, new products which I will share with you at a later stage. Diabetes Care, I’ve mentioned that and I will talk to you a little bit more, a challenging environment continues to be challenging.

On the other hand, Molecular Diagnostics was the FDA approval of the EGFR test. HPV sales doing very well namely in the United States, with more than double sales and also the FDA submission for primary screening of HPV testing, which we expect to go to a panel hearing.

On Tissue Diagnostics strong growth and continue penetration in EMEA and Asia-Pacific and good growth and uptake in primary staining, which offsets some of the reimbursement and guideline changes in the United States.

A few examples on Professional Diagnostics very excited. We have previewed our new fully integrated total lab automation system called the cobas 8100, which provides huge improvements in terms of automation, hands off, high volume, throughput. A completely modular system that can be tailored to customer needs and really driving the efficiencies in the laboratory and for our customers.

And on the other hand, three new tests that we have launched providing more in increase medical value proGRP for the accurate diagnosis of lung cancer and then two tests for the diagnosis and the patient monitoring in Immunosuppressive. Another exciting event is the acquisition of Constitution Medical, which will strengthen our commitment in hematology provide us with a novel technology also in the basis of increased automation in hematology which is very much at the core of our business at the core of the laboratory business. So exciting new technologies novel and innovation.

On Molecular Diagnostics, as I mentioned the approval of the EGFR test by the FDA, which is a simultaneous approval for the label extension together with Tarceva, very excited about this opportunity. As it will run on the well-established, well penetrated cobas 4800 instrument, any compliments our oncology panel.

And then on Diabetes Care, it continues to be a challenging environment both reimbursement cuts this year especially noteworthy of course in the United States was decisions by CMS to reduce reimbursement, but also price pressure in Asia-Pacific. We have and are in the process to continuing to restructure, we are addressing this in terms of reducing the cost-based, integrating R&D, integrating or reducing the number of platforms, but then also addressing the commercial organizations in those markets that are affected by reimbursement cuts.

On the other hand, we continue to invest in innovation. We continue to see also good uptake of differentiated of innovative systems notably the Accu-Check mobile which is growing more than 40% year-to-date, but we also continue to invest in insulin delivery systems and continuous glucose monitoring and according studies, will actually demonstrate that the benefit of structured tested of integrated approach to diabetes management with helping better patient and better glycemic control.

That brings me to, the key launches of 2013. As you can see, we are well underway to deliver in our launch plan nine out of 13 and confident to achieve the last four launches within the planned period and with that I’d like to thank you and now hand over to Alan Hippe for finances.

Alan Hippe

Well, thanks Roland. Thanks for the team for setting the stage. Couple of comments on finance and you see here on this slide, the finance highlights and was the headlines. The business highlights the improved financial result. The net debt is down by CHF3.7 billion since June, 2012 and then I have two rather technical topics I would like to talk about.

I will touch upon all of these items in my presentation. When you look at the Group performance as Severin said, Group core EPS growth with 12%. I think I don’t have to elaborate about sales, it has been described well, but when you look at the core operating profit up 10%, let me mention here that the past service income in fact, which I will elaborate about in a couple of slides and give fast let’s say an uptake here.

If you exclude this effect for the core operating profits. The growth would have been at 7%. Same applies to the core net income. Core net income up 12% in constant rates. If you exclude this effect, the growth would have been 8% and on core EPS 12% growth as outlined here on the slide excluding this effect. The growth would have been 8%.

It is worst to mention, this effect has no impact on the operating free cash flow and on the free cash flow. So let me focus quickly on the operating free cash and especially on the free cash flow. When you look at the operating free cash flow goes up by CHF200 million and when you look at the free cash flow, it even deteriorates a little bit compared to last year, so what’s behind that.

We had a major cash in last year from the Spanish Government, so called Montoro planned. A lot of companies benefited from this. We got a cash inflow of CHF730 million last year and as you can see, on the operating free cash flow side. We were able to over compensate this. So we had really a high bar, we overcompensated by CHF200 million. What we could not overcompensate anymore on the free cash flow line was really the higher dividend by roughly CHF400 million.

With that, let me go to the P&L and when you look at the royalties and the other operating income and you know, we are really dependent here on the success of our partners. So Humira, Eylea, Lucentis are good things to mention here, also the outline since the income and as Dan has mentioned already could well be, that to momentum both slow down a little bit in the second half of the year and why is that because we came in last year in the second half, with quite a good half.

So the base effect from last year is quite a significant one and you might remember in this time. We had Eylea milestone payment and also a couple of product disposals, but this is something which is a little bit volatile asset highly dependent of success of our partners.

Cost of sales, when you look at the cost of sales 5% up, higher royalty expenses good ones from MabThera, Tamiflu and Avastin. Higher collaboration expenses especially in the U.S. and also a positive the VAT refund Roland has talked about of roughly CHF30 million. When you look at M&D, moving in the right direction. Here also a benefit lower bad debt expenses compared to last year, which also shows a little bit that our receivables and credit management really goes in the right direction.

And when you look at R&D up 3.6% majorly driven by late stages. I think here really, the opportunities Dan has talked about really show and 3.6% is well in line with everything we expect. In G&A, the PSI effect comes into play because you see a development of -20%, which at first looks very favorable and it’s very favorable. The past service income effect of in the collaborating profit CHF252 million is booked here.

So when you exclude this effect G&A would have gone up by 7%, here to mention it’s really the medical device specs in diagnostics as well as IT systems that we bring into the company. Co-operating profit growth 10% excluding the PSI effect asset plus 7%. When you look at the margins and Severin has started with that first of all margins went up and also in pharma as well as in diagnostics. And the past service income has helped us here, but I can say very clearly if you exclude the past service income effect on the group level in pharma as well as in diagnostics all margins go up.

And now let’s come to the past service income, which is a very, very technical topic to deal with because it relates to changes that we have made in the Group Pension plans and majorly in Switzerland as well as in the U.K. and these are very technical things. For example in the U.K. we have changed really the index, which demonstrates or brings in the future related inflation assumption if you liked and we went really from the retail price index to the consumer price index, which I perceive as being a very technical procedure, so it represents really a one-time IFRS accounting impact on the IFRS pension liability to these plan changes, which means this is a one-off reductions of probations.

Asset no cash effect at all. We have not taken any cash from the pension plans and it doesn’t mean a reduction in company cash contributions. It might be, that we have also pretty small impact in the second half of this year coming from these actions. With that, I’d like to go to the tax rate and you see the tax rate increased from 22.7% to 23.1% and the reason for that is a good one because the business runs well in the U.S., it runs very well in Germany up 8%, it also runs well in France, but all these countries are high tax countries. So well, unfortunately the tax rate moved with it. My expectation for the tax rate at the end of the year is around 23%.

When we look at the net financial results? Well it shows an improvement as hopeful and as predicted so contributes to the core EPS growth. But let me do this really step-by-step. The first point to talk about is the currency impact and the currency impact is majorly driven by the devaluation we have experienced in Venezuela. This accounts for CHF62 million in the sheet here.

When you look at debt redemption, you might remember. We have done a recall of $400 million for a bond due in 2019 that brought in here -$78 million and -$32 million is just the difference to what we’ve done last year. So evidently this year, in the first half year we have done more than last year. And then you see the interest expense positively was CHF139 million and this is the result of our debt down payments we have done right at the beginning of the year.

When you look at the operating free cash flow and the margin itself? You see really that for the Group level we are pretty much stable. We are also pretty much stable in pharma and we go down on the diagnostics side and here once again worst to mention is the cash inflow that we have seen last year coming from Spain, which was very significant. So once again on Group level CHF730 million cash inflow last year. We evidently overcompensated this. And for the pharma side that meant CHF436 million and for diagnostics it meant last year CHF294 million, just to clarify the effect here.

If you exclude this effect and the last year, the operating free cash flow would have gone up by 15%. The investments in PP&E and intangible assets are pretty much at the same level as half year 2012. Another rather technical point is the operating free cash flow and the impact of reporting alignment that we have done, which in fact goes down to our equity compensation plans.

We have refined the calculation of the free cash flow in 2030 to fully exclude the impact of employee stock options and the reason for that is, we have done a peer comparison and we thought it might make sense to refine the methodology just to be in line with our peers. So what we’ve done is, we brought all the cash outs and cash ins related to our equity compensation plans below the free cash flow lines.

And they’re now shown as changed in net debt, which is outlined in the half year financial report on page 42. I’ve talked about the debt situation already and that we have reduced our debt exposure quite significantly right at the beginning of the year and you see it on the left-hand side on this slide. We paid down EUR3.3 billion and we paid down $1.75 billion right at the beginning of the year and it shows on the lower interest expenses.

We’ve also done a call of $400 million bond which is due in 2019, bottom line 66% of the Genentech related debt has been repaid and that means CHF48 billion we brought onto our balance sheet in line with this transaction cumulatively CHF32 billion have been repaid at the end of June, 2013 and that leads us to the net debt situation and also to the net debt to total assets ratio.

Let me first talk about the net debt situation that’s a small number on the right-hand side of this chart. You see June 30, 2013 as a small number up there the –CHF13.6 billion this is the net debt stated at the end of June. When you compare that with the earlier 30 June, 2012 there the number was CHF17.3 billion. So we have a reduction of CHF3.7 billion in a one year time frame.

When you look then at the ratio, net debt to total asset at the end of the year 2012 and this is 16.4% and when you really take the trajectory and the trend coming from this upper line. I think, we feel and I feel comfortable that we will get into our targeted range of ‘02, 15% net debt on total assets end of the year.

Another point to mention and this is a standard in my presentation, is the currency impact on the Swiss Franc results in 2013. And you know how that goes assuming the June 28, 2013 exchange rates remain stable until the end of 2013 which is pretty unlikely. The 2013 impact is expected to be the following; and we look at half year, whereas the -1% on sales, the -1% on core operating profits, the -2% on core EPS. This is very much driven by the Japanese Yen.

When you look at the full year with -2% on sales, -2% on core operating profit and -3% on core EPS, the U.S. Dollar comes into play a little bit. You see the impact has been at half year plus 1% from the U.S. Dollar and will be a 0% at the year end. Good with that, let’s go to the outlook once again and I don’t want to be redundant here, but very clear on one hand. The outlook is confirmed, but on the other hand.

It is worst to mention that the one-off effect for the PSI is excluded, when it comes to this guidance and with that. Thanks for your attention and we are happy to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) The first question is from Mr. Sachin Jain from Bank of America Merrill Lynch. Please go ahead.

Sachin Jain – Bank of America Merrill Lynch

Hi, Sachin Jain from Bank of America. Thanks for taking my question. First the obligatory, I guess and my question for Severin. Listening comments from wire this morning suggesting you folks on bulks of acquisitions very particular. Sorry (inaudible) as a fact, single any potential those would be in the less than CHF15 billion or something like that and then two part of questions for Dan.

Firstly on PDL-1, your list of the first study is completing in ‘14, filing is listed as ‘16 and beyond. I understand that Bristol has a similar study with a response rate endpoint listed as potentially fileable. So I’m wondering, if you could comment on what discussion you’ve had around filing on response rate understanding that doesn’t seem to be your base case and then final part of question on the factor D.

Just to clarify comment through the facts assume to the Phase II study have met, if primary endpoint given your discussion potential Phase III. I’m wondering, if you could provide some color on the Phase II endpoint. I understand it’s plaque lesion progression, what would you view as clinically meaningful for that? Thank you.

Severin Schwan

Sachin, thank you very much and may I start off with the M&DA question. So indeed there is no change in our M&DA strategy. We continue to look for opportunities to bring external innovation into the company, by licensing deals, by technology deals or else you have seen actually in the first half of this year by acquisitions like Constitution Medical and we will continue with this kind of bold on acquisitions as we go forward. Dan, if you want to answer on PDL-1 and factor D?

Dan O’Day

Sure. So, Sachin first of all in PDL-1. I think you’re right to point out that, our diagnostically enriched trial is I guess similar to what we see the competition doing in those areas. Perhaps for I think we are being appropriate I don’t know that we are being conservative, but where the competitors to actually be able to have a fileable product based upon their faster market singular arm trials.

And we also had a successful trial with our PDL-1 diagnostically enriched then it could be that could also be a faster market strategy for us as well, but having said we don’t anticipate that in our base case like you point out. We anticipate that a Phase III trial randomized will be needed for FDA purposes and therefore that’s why we have the expected first filing in 2016.

So it will be in relation to the competition, I guess is what I would say there. Anti-factor D, I’m afraid that I really can’t respond to a lot of questions on that because the date is going to only be presented in Toronto at the end of the – it’s a Phase II trial as you know. So I would say that, I really can’t give you much until it’s presented. Once it’s publicly presented, I think we can discuss the date more robustly.

Sachin Jain – Bank of America Merrill Lynch

Thank you.

Severin Schwan

Thank you. Can we have the next question please?

Operator

The next question is from Mr. Richard Vosser from J.P. Morgan. Please go ahead.

Richard Vosser – J.P. Morgan

Hi, it’s Richard Vosser from J.P. Morgan. Thanks very much for taking my questions. A couple on the HER2 franchise please, could you – you alluded to the penetration of Perjeta is going up 5% in the quarter? Could you give us an idea of where common penetration is and also what sort of duration of treatment you’re getting from Perjeta, now it’s been on the market for almost a year?

And just on Herceptin at the same time, obviously it’s been leading into by Kadcyla just how should be we think of Herceptin from here, should we think of it the climbing or should we think the some increase in duration with Perjeta, that holds balance this out, just some idea there. Then on Lucentis of course an excellent result where the market is stabilizing. What do you think will happen once you see the DME data for Eylea?

Do you think, it will end up seeing more declines through ‘14 for the Lucentis franchise and then just one question on R&D with the Aleglitazar termination and some products been chosen to out license, could you give us an idea how you’re thinking of reallocating or reducing the R&D spend because of those decision going forward in the second half of ‘13 and ‘14. Thanks very much.

Severin Schwan

Thank you, Richard. Perhaps, I start off with the R&D question. Now it is correct that on the one hand, we have savings because we don’t continue with the trials, but on the other hand. We have obligations to terminate all these trials and there won’t be a material impact for the second half, so the net effect of that will not be material as far as next year is concerned.

I mean, Aleglitazar of course is one of the opportunities in our rich pipeline and a lot will depend on how the various compounds move on in our pipeline. You’ve seen, we expect many readouts to come for the next months and depending on the data we will see, this will of course also very much determine our investments into late stage R&D. so we will give you a better indication at the end of the year, when we give the guidance for 2014 for the HER2 franchise. Dan, if you could take that?

Dan O’Day

Sure. So thanks for the questions and the first two, I’ll answer around Perjeta and the second one Lucentis. I think maybe just to frame the questions around Perjeta, I do think more and more will be important and I’ll explain why, that we look at the HER2 franchise combined because there will be a lot of interplay over the next months on this business and I’ll try to explain that.

First of all specifically to your question. How is Perjeta in the front line setting? You’re right from our data we see its growing quarter-on-quarter, quarter one and quarter two about 5% which brings us close to overall the 40% penetration in the first-line segment. Now I’d remind you. I mean the current label for Perjeta is connected with Doxyhexal [ph] which in the United States of course there is quite a bit of Paclitaxel used. We do have Phase IV trials ongoing right now with Paclitaxel which could broaden if you like, the comfort level of the chemotherapy backbone for that over the months and years ahead.

So I think in terms of duration of treatments. It is extending of course because of the extended survival, but I don’t have the exact figures on that. the other thing, that I would just remind you of when we take a look at Perjeta in addition to the backbone therapy continuing to expand overtime is of course, the Neo-Adjuvant which will have towards the end of this year and of course the other big event from Perjeta will from a data perspective will be the MARIANNE trial which reads out, towards the end of next year at this stage.

So we look at how Perjeta interplays with Kadcyla in the first-line setting. So it’s a complex interesting story. The good news is that, there is several different ways it can play out over the course of this data and also to remind you, that Perjeta is just beginning to get launched in Europe and in other markets in the world.

So Perjeta is really progressing, as we expect in the appropriate indication first-line setting. As I said second and third-line. We’ve seen similarly displacement because of maybe some enthusiasm in the U.S. when it was first launched before Kadcyla came into that segment and then on Lucentis. I think your specific question was relative to DME for Eylea.

First of all, we don’t expect for a couple of years to really impact the marketplace there. Currently in the DME setting, we have probably about a quarter of the market share. The rest of the market is Avastin and surgery options, but we see a nice continued uptake penetration of Lucentis in DME and we think that will continue for the foreseeable future on Lucentis.

Severin Schwan

Thank you. Dan. In the meantime, we got in a question from the webcast audience, from a webcast. When will Bitopertin be available on the market? Dan, correct me if I’m wrong but filing is planned for 2014.

Dan O’Day

2015 filing.

Severin Schwan

Filing for 2014 and launch for 2015.

Dan O’Day

Filing is ‘14. Thank you. You corrected me, though.

Severin Schwan

Can we have the next question from the telephone please?

Operator

The next question is from Mr. Andrew Weiss from Bank Vontobel. Please go ahead.

Andrew Weiss – Bank Vontobel

Thank you for taking my questions. Could you give us an indication whether there is any kind of inventory buildup in Kadcyla or if most of that second quarter revenue growth is too underlying demand? With regard to the charge that you’re taking for the Hep C, can you give us a sense of what the remaining CHF222 million are on the balance and what they actually represent?

Third question; the U.S. revenues for Applied Sciences are not disclosed anymore, but if we try to back it out. It looks like; you’re getting smoked in that market. Could you give us an indication of how big the impact in the U.S. and lastly? GA101, it was a protocol interim’s analysis, could you give us the boundaries for stopping that trial? Thank you.

Severin Schwan

Okay. Thank you very much. Perhaps we start off with Kadcyla and GA101 with Dan.

Dan O’Day

Yes, of course so for Kadcyla. No we don’t see and in fact in the U.S. there really isn’t an opportunity to do a great deal of inventory buildup because of the nature of how physicians are reimbursed there, so I think that really is true underlying demand and again I just remind you, for Kadcyla whereas Perjeta. The appropriate indication is first-line and of course a cancer patient is only first-line once in their life.

Whereas with Kadcyla, you have the population of patients from second-line and beyond and I think that’s certainly one of the explanations for the really strong uptake of Kadcyla and I think the sales that you see really do represent demand. Secondly on the HCV charge, yes I mean as you know we have entered into an arrangement with Danoprevir in China and we are still considering some activities with mericitabine in particular.

So that’s the reason we hold some value on balance sheet at present because there’s value on those compounds as well and then finally, I’m sorry I do have to correct, but Bitopertin is 2015 filing.

Severin Schwan

It is 2015. Right, could you also say something to GA101 what have been the boundaries for the trial?

Dan O’Day

I’m sorry, I didn’t hear that question.

Severin Schwan

The last question I believe was what was the boundaries specification of the trial but actually.

Dan O’Day

For the GA101 the stage two readout. No I’m sorry, we can’t really comment on that, but we will see more at ASH on the stage two.

Severin Schwan

Okay and Roland if you could comment on the U.S. Applied Science business?

Roland Diggelmann

Yes indeed, Applied Science. We actually see some positive developments in qPCR and the nucleic acid purification cells, also some moderately positive from biochemical reagents. Where we lose sales is on the sequencing business, where we do play in niche segment only which is the long read, low-throughput segment. So this is the main impact on the sales. For the other businesses actually a solid performance.

Severin Schwan

Thank you, Roland. With this, can we have the next question please?

Operator

The next question is from Mr. Tim Anderson from Sanford C. Bernstein. Please go ahead.

Tim Anderson – Sanford C. Bernstein & Co

Thank you. If I can go back to earlier question on M&A. you had mentioned still looking for bolt-ons. I tend to think of bolt-ons is maybe being in the single-digit billions range. Well I’m hoping that, you can talk but what you see the upper limit generally speaking for bolt-ons and then a couple pipeline questions on GA101?

Do you – can you remind us whether you think that the positive CLL ‘11 results foretells that in the NHL setting you’ll see a similarly big benefit and because you saw, this trial finish early, might we see the Phase III and NHL also finish early and then on MetMAb. The drugs in Phase III for big indication which is long and you might have data out in the next 12 months or so, but it seems like it’s been kind of quite.

It doesn’t seem to be too much buzz on the compound. There wasn’t very much of a presence at ASCO and I’m wondering, if you can just update this on your level of enthusiasm for this program and maybe firm up the timeline for single arm data?

Severin Schwan

Thank you. So if I start with the M&A question. This is really very opportunity driven. Whenever an opportunity comes along, we would look at and we would take a few and whether we can create value for our shareholders, by ceasing such an opportunity. So we are not looking at it in terms of specific values but we really do focus on opportunities, where we build our existing businesses be it products, be it technologies and as you know we are not in this big mega-merger acquisition.

So I’m afraid, I wouldn’t be able to give you any specific on potential opportunities, which might come along in the future. With this Dan, if you can take over for the product related questions?

Dan O’Day

Sure. So thanks, Tim for GA101. Your question around positive CLL data pretending NHL. I mean, I’d say a couple of things on this. I mean first of all, of course MabThera first started with CLL and then it went on to NHL, but I would be very careful. I mean, they’re two different diseases NHL and CLL. We’ll have to see, how they progress and of course we are very encouraged by the data in CLL and the magnitude of the effect that we see, but I would never want to guess a clinical trial before we see the results.

And likewise, I would stay away from trying to guess on whether an interim and NHL would readout similarly the way the interim readout in CLL. But having said that, let me just expand the discussion a little bit because of course we were encourage by GA101, but we’re not putting all the eggs into that basket. So we’ve got Bcl-2 inhibitor now that we are taking into late stage development.

We’ll be looking at that as a standalone agent in the p17 deletion refractory relapsed CLL, but we’ll also be looking at it in combination within anti-CD20 backbone both MabThera and GA101 and the reason we are doing both is exactly because we are not exactly sure, how the NHL studies will turn out. So we want to make sure, we have many different eventualities covered.

And I think, as we look at the ABC’s which as you saw in the slide that Severin and I presented, the antibody-drug conjugates 22 and 79b. We will also be looking at those in a similar fashion. Those combined with an anti-CD20 background still to be determined whether that’s MabThera, GA101 or both, but I think you’ll see that in addition to single agent potentially superiority vis-à-vis MabThera and non-Hodgkin’s lymphoma.

We are also looking at a combination of therapy both within Roche and potentially outside of Roche to create superiority non-Hodgkin’s lymphoma. So stay tuned, it’s going to be an exciting period of time, but I think we have a lot of early encouraging data and then finally on the MetMAb. Yes, I’d love to be talking more about this.

We are very excited about it Phase II results were extremely encouraging in this segment of patients and lung cancer. The second-line non-small cell lung cancer trial is recruiting while we expect the result from that in 2014, so that we’ll read out in 2014. We are extremely excited about this compound. We are also looking at it in first-line non-small cell lung both squamous and non-squamous and we are also looking at its utility in colorectal cancer in Phase II trials.

So this is a compound because of the net expression in a variety of cancers and the encouraging data we saw in lung and Phase II that we are excited about. I think part of the problems as we have so many products to talk about, we should probably should talk about Met a little more frequently, but we are excited about it and we are looking forward to seeing data next year on this.

Severin Schwan

Thank you, Dan. Can we have the next question please?

Operator

The next question is from Mr. Michael Leuchten from Barclays Capital. Please go ahead.

Michael Leuchten – Barclays Capital

Thank you, couple of questions please. Number one Dan you mentioned, the U.S. is a growth driver in H1. However, if I look at the quarterly progression, there are some soft spots in the U.S. for the oncology portfolio. I wonder, whether you could shed some light on that? Secondly on the comment you made about tenders, particularly the ones that are delayed have you won any of those tenders, since the quote the half year has closed to give us an idea, how of much that might actually come sooner than later?

Thirdly, just if I could back to the R&D comment that Alan made, I thought you the commitment for R&D was to be flat. Now it’s up, not much but it’s up in H1 in pharma and also in diagnostics. I just wondered, how feasible flat R&D budget really is given the portfolio that you have and the Phase II assets that are coming through in the U.S. highlighted.

And then lastly just going back to MetMAb, I just wonder how the negative in the triple negative breast cancer fits into the comments that you just made in terms of the future settings for that compounds. Thank you.

Severin Schwan

Michael, thank you. If I just make if some more color on the R&D side. We’ve never said that it’s flat, we always said R&D to be stable and what we mean by stable is that we also account for inflation for example and certain fluctuations, which come along the way depending on what products are being moved forward into late stage development. Where we literally kept R&D’s for research and early development and when it comes into late stage.

We have fluctuations and we adjust depending on the outcome of the respect trials. And the first half of this year was 3.6% this is substantially below the sales growth. You can argue that, this is at the upper side of a stable development, but overall I feel comfortable that we can continue with that pace as we go forward. Dan, on the additional questions. If you could take that over?

Dan O’Day

So Avastin as you see is pretty strong in the U.S. in the first half. I’ll comment specifically in Herceptin and Rituxan because we had to have some phasing I think of the ordering the sales pattern, but just to take Herceptin. I mean you see that, we had a 1% growth for Herceptin in the second quarter, but we had a 17% quarter growth in the first quarter of this year.

I think it’s more instructive to actually look at those two quarters combined. You get about 9% growth and therefore you see that there is still good demand in the United States for Herceptin, having said that of course with the launch of Perjeta and with Kadcyla we would expect some erosion of course of Herceptin, overtime as those two products come into play.

Now in Rituxan, it’s kind of the same thing. In quarter one, we had a 12%, in quarter two we had a -1%, again did some phasing of ordering and how that progresses. Overall, it’s a plus 6% for Rituxan in the United States and quarter four last year was 7%. So I don’t think, that’s indicative of any type of demand just to give you some hard numbers to that. So we don’t see a slowness in oncology in the U.S. in anyway.

I think we see a natural evolution and more and more I’m going to turn your attention to the U.S. too, I’m looking at the HER2 franchise because there’ll be interplay between those three products, but then of course feel free to look at MabThera and Avastin separately. So let’s look at the tenders delayed. Yes, I mean I think some of these are delayed. So for instance, with Brazil we have the tender it’s just not sure, when it’s ordered and how it’s progressed and the same thing in some products also for Russia.

With Algeria, I think it comes with a bit of riven [ph] so we have confidence, we’ll see the tender coming through in the second half of the year, but to say that it’s firmly awarded, I think is a bit premature, but that process will continue and then the final thing on triple negative breast. I’m glad you brought that up, that’s a trial that was started two and half years ago in an early research group of Phase II and at the end of the day. When we looked at triple negative breast, there is about 12% of patients in triple negative breast overall that are Met positive.

It’s obviously a very, very difficult disease state to have anything working and there were three arms to this Phase II trial. So when you broke down that 12% and when you broke it down into the three arms, it really wasn’t possible to tease out. Met positivity rate that was at all meaningful in terms of numbers of patients to see any type of a trend. So I would discourage looking at the triple negative breast cancer as a pertaining to future Met trials.

I’d much rather focus your attention on the Phase II lung, which at a sizeable number of patients, we had you know looked at statistical significance with and without Met positive and I think that’s probably more indicative, but we’ll see of course as the trials come out.

Severin Schwan

Thank you. Dan. Can we have the next question please?

Operator

The next question is from Jo Walton from Crédit Suisse. Please go ahead madam.

Jo Walton – Crédit Suisse

Thank you. Three quick ones. You highlighted the tax rate going up because of the increasing proportions of profits in the U.S. should we therefore assume that if it’s 23% this year, maybe it’s going to be a rising trend over the next few years. Still sticking on the U.S., I wonder if you could talk a little bit about pricing in the U.S. you alluded to the net pricing effect in Europe.

There is been press speculation about your three foreseen hospital pricing and how discounts sparing out $1 billion. So I wonder, if you could just tell us little bit about that and finally you referenced that one of the reasons for taking a partner on the PCSK9 was an intellectual property element, does that mean effectively you haven’t got room to maneuver and we should think of this is only perhaps a less valuable asset for you?

Severin Schwan

Alan, if you can start on the tax rate please?

Alan Hippe

Happy to do that and I think, a very justified question. First of all I have to say, I think we give our guidance really on a yearly basis, so I think that’s really the point. Look I think, the momentum at the moment is good as I have indicated for the full year. I expect really the tax rate to be around 23% and I would even say, I think even for the next year. I think that’s a range why I feel comfortable with.

Jo Walton – Crédit Suisse

Thank you.

Dan O’Day

Sure. So U.S. pricing 340B, Jo. I mean, remember this is something that went into effect last year the year before that. I think it’s now been a couple of years. So it’s really a part of our base business. I mean just to describe what it is. I mean it’s a discount program that applies to certain hospital institutions in the United States that have a certain percentage of Medicaid like patients or underinsured patients and therefore those hospitals, the totality of the population in those hospitals regardless of whether they’re underserved or underinsured receive this discounting, but this not something revolutionary.

It’s something that’s really been evolutionary in our business. In other words, it’s year-on-year we are seeing only a minor shift I would say from our business in the United States, our oncology business in the United States to these 340B institutions and although I may have, a small effect over the course of the next several years. There is no major effect on that and again it’s included already in the strong U.S. numbers that you see for oncology.

And then finally on the PCSK9, I’m afraid when it comes to IP issues as you can imagine. It’s really not productive to speak in detail about those. So I would leave it at that and I would say, we are still in the process of looking for partners and looking for value for that asset.

Jo Walton – Crédit Suisse

Thank you.

Severin Schwan

Thank you. Dan. Can we have the next question please?

Operator

The next question is from Mr. Andrew Baum from Citi. Please go ahead sir.

Andrew Baum – Citigroup

Yes, good afternoon couple of questions please. Firstly, just back to you BV strategy. You obviously supposedly tried hard to diversify your book earlier away from your dominant presence in oncology with limited success. Could you give us sense of your current focus whether it’s more in pharma or in diagnostic assets?

And separately could you comment on how much value you see, given the valuations of some of the U.S. star technology companies and then the second question is, could you outline how far away from cynical developments are you other check point inhibitors and CCR based approaches in oncology?

Severin Schwan

Okay, so let me start off with the business development strategy. How we look at developing our pharma versus the diagnostics business, it’s really opportunistic. It is really a matter of what opportunities are coming up, can we create value around our core franchises and we look both the trauma and diagnostics and then in terms of making a decision to proceed or not, it’s many, many affect us of course, the price is one effect. The strategic fit is extremely important potential synergies, we can generate between target and our sales.

Is there a cultural fit in terms of the people we take on board etc. so you know it’s really, I think what I’m saying is, its opportunity driven and every case is different and you have to look at all the criteria, which typically are very, very specific for the respect opportunities. It has always been the case and we will proceed like this as we go forward. On the oncology side, Dan?

Dan O’Day

Yes, so Andrew. I have to admit you kind of stumped me on this one, but I’ve flicked it out. So we do have check inhibitors, I know in Phase I in dose-escalation studies, but they’re early I would say that and I would. If I can offer to you, I’d offer that we’d get back to you with some more details on that.

Andrew Baum – Citigroup

Thank you.

Severin Schwan

Thank you. Dan. If we can have the next question please?

Operator

The next question is from (inaudible) Christopher [ph] from Sylvia [ph]. Please go ahead.

Unidentified Analyst

Yes, good afternoon. Thank you for taking my question. So few are remaining question on Zelboraf could you maybe give a bit new outlook for the rest of year and especially 2014 as we expect the entry of new branded competitor or two new branded competition on the market and when should we expect the Phase III readout of your combination of Zelboraf making a big choice between the first half or second half of 2014.

And the on Avastin, you showed a very good growth due to ovarian cancer but also second, I guess colorectal cancer? Can you give us a bit more color on the market share you have compared to also competition, how you stand this? Thank you.

Severin Schwan

Dan?

Dan O’Day

Yes, okay very good. On Zelboraf clearly you saw the nice growth in the first half of this year. We are significantly I’d say now in the United States with a high testing rate and a high treatment rate and of course, we now have the competition that has approval for the two additional agents still waiting approval for the combination of the two agents, but of course when that combination comes through. We would expect competition in the U.S. market and whenever, if that gets approved outside the U.S. then we would also expect that type of competition going into 2014.

So I would say that, we will see some dynamics of course in Zelboraf with competition in 2014 on that. Relative to our own trial, that looks at our MEK inhibitor and Zelboraf. We expect that data to readout next year in 2014 and will obviously pretending the outcome of that file that progress that ahead. For ovarian cancer penetration rates, sorry I’m just looking at. So I’m just, I just wasn’t on top of my head. It’s above 30%, I would say the ovarian cancer penetration rate for Avastin in the EU markets.

Severin Schwan

Thank you. Good can we have the next question please?

Operator

The next question is from Mr. Peter Verdult from Morgan Stanley. Please go ahead.

Peter Verdult – Morgan Stanley

Yes, good afternoon, Peter Verdult here from Morgan Stanley. Severin just wanted to ask the same question, asked a bit differently. If we look at the pipeline how that’s developed in the outlook for oncology is looking very positive the outlook for cardiovascular metabolic and the Hep C franchises clearly less positive with essential nervous system at its high risk and the outlook slightly uncertain depending on how those studies roll out.

So I suppose the question to you, is how comfortable are you with Roche becoming less diversify from a therapeutic area perspective going forward. Especially given what changes in dynamics we are seeing the field of oncology that’s the first question to you Severin. Dan, just quickly on the anti-PCSK9. IP aside, this was and actually you were talking about the R&D day last September. I just wanted to better understand, what’s actually changed since September seek a partner for this product.

I wasn’t aware of any incremental data and then lastly Allan, sort of repeated question from me, but we’re hurdling towards 15% net debt to asset leverage target by the end of the year, could you just refresh us and on how you’re thinking about balance sheet utilization over the next 18 months thanks.

Severin Schwan

Thank you, Pete. The question of diversification beyond oncology. I think the answer really is, we follow where the science takes us. We are not thinking in terms of therapeutic areas. We are thinking about it in terms of do we understand, the biology. Do we understand the science behind, do we think we have the capabilities, the technologies to make a difference in those respective diseases.

And from that perspective, I’m absolutely sure overtime there will be scientific progress and new opportunities coming up also outside of oncology. Oncology of course will remain important for us, but I do believe that we should not focusing only on oncology but that we should be open for opportunities outside.

Now having said that, the risk profile indeed is different, but so are the opportunities. If you take CNS for example of course, if you have a Phase II trial say in Alzheimer. You can measure, whether the plaque is removed, but you cannot measure any improvement in cognitive typically. You cannot measure any improvement in cognitive function, so that means entering larger trials needed you take much more risk. on the other hand, of course if you’re successful then it’s a huge opportunity and I think at the end of the day with a portfolio, it comes back to the right mix.

So you take bets which are less risky perhaps, less opportunity but I think a company like ours has always done this and I think we should continue to do that to also take some higher risk opportunities with a potential of very higher returns. There were questions for Alan, if you start off on the balance sheet side.

Alan Hippe

Yes, well question about the target range of over to 15% net debt on total assets, but what we were going to do here. If we really achieve that range, yes first of all let me say first things first, first let’s get into the range. I said, I think it’s pretty likely that we can achieve that this year. If everything goes as it has gone so far and I hear about the other question for me is a major one.

When we do, we drop out here, there is still time left and when I think, we will make up our mind and look at this and once we have a concrete intention plain idea. I think we are happy to address it, but for the time being, the target is to get within that range and I think then we, when we have the risk to drop out, I think then we come back.

Severin Schwan

Right and we shouldn’t have a technical problem to deal with that. I think it’s actually a good problem to have. Dan, there was a question on the pharma side.

Dan O’Day

Sure and just to clarify now. The ovarian cancer market share is around 35%, 36% just so you know. Now in the anti-PCSK9, you’re right we were more bullish at the Investor Day or the R&D Day last year. I’d say that the, product continue to perform relative to how we expected possibility for decreased duration of dosing, but what did change since then was the IP landscape, things did adjust between when we spoke to you last September and when we eventually made decision this coming spring.

So I don’t think there is any one event that caused us to change our opinion about internal enrollment versus partnering, it was a series of events and it just got to a risk level, where we determined that this is product that would not be in our best interest given all the other opportunities we have in our portfolio to proceed with and that’s when we decided to make the decision to go out and seek our partner for it.

Severin Schwan

Thank you, Dan. If we can have the next question, please.

Operator

The next question is from Mr. Vincent Meunier from Exane BNP Paribas. Please go ahead.

Vincent Meunier – Exane BNP Paribas

Good day, gentlemen. Thank you for taking my question. First a follow up on the performance in emerging markets in pharma it was plus 2% at constant exchange rate and you were talking about tenders in brazil and in Algeria. It is unique reason for this relatively soft performance. The second question is on GA101 and the timing of development in lymphoma because in CLL of all the past few months indeed the program has accelerated and you have completed the trials well in advance.

Is it safe to assume the results in lymphoma could be published before ‘14 in refractory (inaudible) NHL and in ‘16 for the first-line NHL? And the last question is, an update on the search for a new Chairman is there any possibility to come back to the former system of the combination of the two positions Chairman plus CEO.

Severin Schwan

Okay, so let me just start right away with your last question. No there is no, intention to combine the Chairmanship and the CEO hold. I feel very happy as CEO, so that means we will get a new Chairman and as previously announced. We should be communicate that still in Autumn this year. Emerging markets, Dan?

Dan O’Day

Right so in emerging markets, if I understand. Your question, I mean we had the 5% growth in the emerging markets. You referred to a 2%.

Vincent Meunier – Exane BNP Paribas

Yes, it was in pharma. In pharmaceuticals, in internationals. In the press release its 2% at constant exchange rate.

Dan O’Day

Okay, quarter two. I’m sorry you’re speaking of quarter two. I’m with you now. Okay, yes quarter two. Yes back to your question. I mean, is this predominantly explained by tenders. The answer is, yes. I mean these are really, CHF130 million and the emerging markets is a significant amount. They can fluctuate the growth rates. So as I said before we have, some delayed tenders in Brazil, but not a lack of demand there.

We’ve got Russia really going through a change in the way they’re tendering on an annual basis, which is causing an impact here and then we have Algeria and we have Iran, which is about another CHF30 million or so, so when you add all of those up actually it really is explained vis-à-vis the lower quarter two and I think, when you see the quarter three numbers, you’ll see some different figures in that direction as well.

And then the second question on GA101, I appreciate your optimism on that. I’d love to be as optimistic as you, but I have to say I think in terms of the speed of trials, where we are still expecting that assuming the trials go to their endpoint, which is our assumption that the 2015 would the filing timeline for DBACL and refractory and then the 2017 for NHL.

So I can’t give you different dates, but of course. You know if we were to get more aggressive data. We will let you know quickly and act on it. But those are really the dates that we are working by and we think they’re the most realistic dates.

Severin Schwan

Thank you. Dan. We can have the next question please.

Operator

The last question for today is from Mr. Keyur Parekh from Goldman Sachs. Please go ahead sir.

Keyur Parekh – Goldman Sachs

Good afternoon and thank you for taking my questions. I have three, If I may. First Dan, if you can help us think about the opportunity for Avastin in cervical cancer because we saw great data at ASCO, just wondering how you guys are thinking about monetizing that opportunity.

Secondly, Alan if you can talk a bit about margin progression for the first half. Obviously pharma doing very well diagnostics improving, but it’s just would love to get your sense for where you see, you’re from a restructuring perspective in the diagnostics side and how much opportunity there is to get more and thirdly just in sense of a guess, your sense of way you see the greatest opportunity amongst the late stage assets.

Obviously MetMAb very excited about, but as things progressing forward. Anything that you think might be meaningfully underappreciated by us?

Severin Schwan

Dan, you want to start off? We need another hour for Dan – promising opportunities in late stage, but I’m listening how you’re prioritizing.

Dan O’Day

So let me start with cervical cancer. Cervical cancer is a really exciting opportunity. You also saw that ASCO in terms of the opportunity in a country like India. In terms of being able to identify it early. I mean the reality was cervical cancer disease is, the vast majority of the disease is in the developing world or in the emerging world. In fact, the incident of cervical cancer in Brazil alone is bigger than the United States and the EU 5 combined, just to give you a magnitude of that.

So there is significant opportunity here I think, the question first and foremost is, can we get approval for the indication based upon the trial and that’s where we really focusing on how and speaking with regulatory authorities. So we’ll have to come back to you, after those discussions and inform you further whether an approval is possible in that indication and then secondly it really becomes an access issues and again you know, we have had creative ways of approaching public markets in Brazil for instance with MabThera where we differential pricing in the private and public market and in other markets around the world.

So this is something that again, we would have to then be creative about how we find access for Avastin into the markets for cervical cancer has its highest incident. So of course, we weren’t expecting this data at ASCO, so we’re just starting to get our plans around that and then relative to the portfolio.

I mean, I would say, we talked about MetMAb. We talked about the MEK inhibitor with BRAF coming out here as well, GA101. I would say the other thing, that I’m excited about in the field of immunology outside of cancer is Lebrikizumab. So we are now beginning the full phase III trial of Lebrikizumab. We had the second Phase II trial that really reconfirmed the results from the initial Phase II trial that showed pretty significant reduction in exacerbation in a diagnostically focused population with Periostin.

So I mean I think that’s something that’s quite interesting. I think also the CNS portfolio is something that we are going to know, next year Bitopertin and schizophrenia exactly how that stands out. Ocrelizumab we know has affect in MS, the question will be the robustness of the safety profile, as we get into larger patient population and Gantenerumab is just first of the kind, with all the risk that goes along with that, but all the potential.

So I would say, those on the late stage side that’s where we are at and in the mid-stage or the Phase II I think we’ve highlighted the ones we have data on PI3 kinase is something else that’s going to coming through here soon, that will take a look at the data and the antibody-drug conjugate. So I think we’ll be able to inform you more and more as the months go on in the second half of this year and the first half of next.

I’m interested, Severin. Would you have picked different compound?

Severin Schwan

Yes, heard about your gravity. I also had Lebrikizumab on the top of my list. So we are very much behind this. Thank you very much. Dan. Alan, can you give us flavor?

Alan Hippe

And that’s exactly the point, Severin. I think you frame it well. Keyur, as you can imagine I can just talk to you directional. First of all, I’m very happy with the margin progression that we’ve made in the first half and let me outline once again that the margin improvement was certainly driven as well by the past service income. So take that out, I think all margins have improvement in grueling diagnostics.

I would say, things are really progressing well. We are really taking advantage of the leverage we are having, so I think that moves fine. I also expect to move on like that in the second half. And you know in the second half traditionally, our margin goes a little bit down compared to what we have at half year, but I think really full year, we are heading well.

My point is at little bit, as Roland pointed out with his margin. I think he had a couple of one-offs in the first half and I think you should expect that. you know we have given, how should I say you guys to feeling. I think stabilizing the margins and diagnostics would already an achievement. My take away in the first half. I’m far away from judging really Roland’s work, but I think that moved well look at the cost development that you see in diagnostics, which is a quite favorable one.

And certainly this is also driven by all the restricting he has implemented.

Severin Schwan

Thank you, Alan and on that positive. I’d like to thank you for your interest and close our briefing. Thank you very much.

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