Roche Holding AG Q2 2010 Earnings Call Transcript

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Roche Holding AG (OTCQX:RHHBY) Q2 2010 Earnings Call July 22, 2010 2:00 PM ET


Severin Schwan – CEO

Pascal Soriot – COO, Pharmaceuticals

Daniel O'Day – COO, Diagnostics

Erich Hunziker – CFO and IT Officer

(Unidentified Company Representative) [Kyle]


Alexandria [Jaba] – JP Morgan

Sachin Jain – Merrill Lynch

Luisa Hector – Credit Suisse

[Sacur] Ducan - Lacuri Security, Europe

[Seven Leger] - USB

Jill Walton – Credit Suisse

Andrew Banks – Morgan Stanley

Marc Becker – Fidelity

Severin Schwan

Good afternoon, Ladies and Gentlemen. Welcome to our Half-Year Conference.

We posted very strong results for the first six months; sales ahead of the market and we delivered a record operating profit for the first six months.

We are, however, disappointed about the recent setbacks in our pipeline. We are disappointed about the delay of taspoglutide, and we are very disappointed about the ODAC recommendation two days ago.

Let me make two introductory comments in this respect. First of all, the market environment is getting more challenging, and we have had these setbacks in our pipeline. This is a reality; we cannot deny this reality. We have to adapt to this reality.

And that means an even more rigorous focus on operational excellence on our cost factors, and further improving our operational productivity.

And you see this already very much reflected in the first six months of this. It ties management on all our cost lines across the organization. We are also fully on track to deliver our synergy target related to the Genentech transaction.

Now second, let me also point out, in spite of these setback, we do have one of the leading product pipelines in the industry. We have more than ten new molecular entities in the late-stage pipeline. We have more than over 30 line extensions in the late-stage pipeline. And this is the basis of our long-term success.

And I do believe that the filing of T-DM1, which we just did this month in July, is a reference and a testimony to the excellence in science that we want to pursue.

Now, let me go quickly through the figures, which you’ve already seen this morning.

Pharma, six percentage points up in local currency if they exclude Tamiflu, primarily driven, as in the past, by the oncology portfolio up 9%, but also a strong performance in Lucentis.

And importantly, a very good start on the [inaudible] in the U.S. and outside of the U.S., which is starting to have an impact on our top line.

Diagnostics, an excellent recite for the first six months; 9% growth. This is twice the market growth, which we estimate to grow at about 4% to 5%, which gets us 5% growth on the group level, including Tamiflu and 6% excluding Tamiflu.

We did have a record result on an operating-profits level. You see this also reflected in the strong margin improvement driven by both additions, primarily on the core level by the productivity improvements in the Pharma Division, and see again the synergies from the Genentech transaction and the various initiatives along the way are starting to kick in.

This is also reflected in the core EPS, which has grown in local currencies by 11% versus the previous year.

And again, as I said in my introduction, the core for the long-term success of this company will be the quality of our pipeline. And in spite of the recent setbacks, which we have, in spite of the delay with taspoglutide, and in spite of the ODAC, I do believe, and I’m convinced that we have a very, very strong pipeline that is very worthwhile to invest in. It’s the pipeline which will drive the success in the future.

We did announce to you that we will have a flat-and-slightly-decreasing development on the R&D side. And you see this already coming through in the first six months as we stick to our guidance in this regards.

We also confirmed this morning our tabulated core EPS score. We do face some stronger headwinds as we go into the second half of this year. Certainly the effect for the U.S. Healthcare Reform, the measure in Europe, we’re starting to feel them. But we have planned this into our guidance and we stick to our guidance as we go forward for the full year.

We stick to our guidance in terms of core EPS growth. The same is true on the sales side with the mid-single digit growth for Pharma and the Group. We expect to continue to significantly outgrow the market in diagnostics.

As I mentioned, we are on track for our synergy targets. And on the balance-sheet side, actually due to the strong cash flow over the last 12 months we decided to recall $2 ½ billion bonds, which actually means that by the end of this year, we will already have paid off 1/3 of our debt related to the Genentech transaction. And we will maintain our dividend policy as announced.

With this, I’d like to hand over to Pascal Soriot. So we all thank you very much.

Pascal Soriot

Thank you, Severin. Good afternoon everybody. It is a pleasure to be here today and report to you on the very, very good first half of this year. Of course, unfortunately, tentatively negative, but the decision of the taspoglutide a few days ago, I think we mentioned and we’ll come back to this in a few minutes.

But if we start with our sales results for the end of June, as you saw in the release that came out a little bit earlier, we experienced very good growth and constant care, 6% excluding Tamiflu. So very much in line with our guidance for the year. A very strong first half.

And I have to say what is very pleasing to see here is that the international region is actually the biggest contributor to growth in absolute value.

In every region, we actually grow faster than the market, and as you can see, International, where quite often people would ask us to question, are you able to grown in the emerging markets with the kind of prices you have? Innovative drugs, yes, but expensive also, and maybe they’re too expensive for most countries.

Here is the demonstration once more that we can succeed in those counties. You will see here, out of the 6% for the first six months, we had 8% growth for the first quarter, and 3% for the second quarter.

In there is a reflection of the increasing impacts of Healthcare Reform and price reductions in Europe in the second quarter. But also the fact that as we reported at the end of Quarter 1, we had the so called Easter Sales effect, and particularly in Europe, where contrary to past years, because of the timing of Easter, we needed up having [inaudible] at the end of March, which typically would have been recorded in April. And thought that balances from one quarter to another. And as I said, the impact of the Healthcare Reform around the world.

From a profitability viewpoint, we had a gross of profit of about 9%, thanks to, as Severin said a minute ago, very good cost control, and of course, some of it comes from the synergies that we generated out of the merger Genentech. But I would be wrong if I didn’t also mention the hard work of my colleagues around the world in the various regions. And also, in the global functions managing those costs because we didn’t make a big announcement like many of our colleagues or peers in the industry did on restructuring. But believe me, we worked very hard at those costs, and we’ve managed them and we will keep managing them very, very carefully.

As you can see here, our commercial investment is stable. R&D investment is not growing much, and we had a substantial decrease in our SG&A expenses, all resulting in a 9% increase of operating profit at constant rate.

Now, even more striking here is the increase in the margin that many of you, I know, has been requesting for some times. So I’m sure you’re going to be pleased to see this is happening. A very substantial increase from 39% last year to 41% of sales for the first six months of this year. So we certainly are driving those margins very diligently.

Now, I will spend a couple of minutes talking about the fact of Healthcare Reform. I was saying a minute ago that the impact of that is increasing in the second quarter. And we expect an even greater impact of cost in the second half of the year because the price reductions in Europe are really starting to kick in in second quarter, in fact, mostly in the second half in particular in Germany.

In the U.S., the impact of Healthcare Reform is growing and certainly would be an even greater mixture as the satisfaction starts kicking in.

But the impact on the first half was a little bit less than 1% of our sales growth rate. We expect more, as I said, in the second half. And for the whole year, you could expect that the full impact on our global pharmaceutical sales would be in the rage of 1½ to 2% of our total sales for the whole year.

Now, I know that you’re often interested in getting a sense for whether our products are still growing, and of course, as I said a minute ago, from one to the other, we had the effect of healthcare on prices and also the so-called Easter sales effect. So some of our products has flat goals from quarter to quarter.

So I wanted to show you here the in-market consumption if you wanted. This is not perfect numbers because they’re, of course, an in-market panel reflecting the usage for all of our drugs. You can see there Avastin, Lucentis on the two-top graph. And you can see those two compounds, two products are growing and very much so for Lucentis. Very strong growth for Lucentis.

And you can also see here that both Herceptin and mycophenolate are showing slow growth. It’s much in line with what we told you for the United States, low single-digit goals for Herceptin in the U.S. and also to some extent in Europe. And the growth on the global basis will be driven by the International region.

Having said that, we expect that gastric will outburst both in the U.S. and in Europe for Herceptin, and the [inaudible] indication should at some time help us drive those with sales in the U.S.

Now, the last-Stage 5 plan, of course we are suddenly very disappointed with the delay in the taspoglutide filing and we certainly can come back to this in more details during the Q&A. I’m sure you’d like to do this.

And also, by the negative ODAC. I have to say we stand by the data, and we stand by our belief that Avastin is useful to patients in the treatment of first-line metastatic breast cancer. And we will be continuing the dialog with the U.S. FDA.

Having said that, we are clearly focused on innovation. And we have to accent that part of this focus, this tragic focus on innovation, we’re not going to be successful 100% of the time. We have had a very high strike rate in the last year or two. Almost every single study, new product, or indication worked. From time to time we have to be ready to experience some setbacks.

But when you look at the totality of the portfolio, we also have very strong views here. We filed for the prevention of structural joint damage for ocrelizumb on the back of very strong data. We filed in the U.S. and Japan for gastric cancer with Herceptin. Very importantly, we filed [inaudible] around the world. And this is an indication which will certainly help us in Europe and in the U.S., but also around the world where we have a lot of potential with ocrelizumb. I believe in the emerging region that we need to unlock the strength of the legal signal in ocrelizumb. This data is going to be helping us getting better access.

We filed T-DM1, as I mentioned a minute ago. This is clearly a very exciting development for us. First of all, this filing was classified as a BLA. And it’s a very important decision because it means that T-DM1 will not benefit from the 12 years of data protection that goes with the BLA.

That means that if the drug was approved in 2011, we would have data protection until 2023 in the United States, which is past the of T-DM1.

The other good news is that it is potentially a first-line application, and we may get approval by the end of this year, or early next year. And that will reflect the strength of the clinical data we have submitted.

And finally, and very importantly – very importantly because is to some extent linked to the discussion around first-line metastatic breast cancer, we have filed for second-line metastatic breast cancer in the United States with Rocephin 2. As you may remember, this is already filed in Europe and we’re waiting to hear from the EMA about this indication.

Now, if I could quickly look at the development of our sales from the franchise-by-franchise basis. First of all, oncology grew by 9% in constant currency, driven by Avastin. As you can see here, 14%, Herceptin, and Avastin is still driven by colorectal cancer in many parts of the world, and breast cancer.

We have seen some early signs of growth driven by CLL in the various part of the world, but also rametodatris [ph] is helping fuel the growth.

As you can see here, growth rate, very much in line with what we told you before would happen.

A couple of words on the impact of the emerging regions, as you can see here, the importance of those markets in the oncology portfolio is growing. On another basis, they generate about 22% now of our global oncology sales.

I’d just like to attract your attention to a couple of points. One is the growth that you can see here as far as Herceptin. The growing importance of the international region. But the second thing is that with MabThera/Rituxan we don’t experience exactly the same kind of growth. In many ways, I personally believe that it is linked to the more difficult access which we’re experiencing with MabThera. The [inaudible] indication will help us convince payors around the world of the clinical value that MabThera has and will increase the growth rate.

The information franchise was impacted by the decline of CellCept in the United States. This effect should now be almost washed out. The second half of the year should see a much less effect of negative goals for CellCept We lost patent protection in the second quarter of last year, and then in quarter three and four this year the effects should be mostly washed out.

The good news is we have had very, very good success with oseltamivir, very good staff in the United States, and also very good roll out in Europe in particular, and France and also some other countries around the world.

As this graph shows you here, you can see we have a very rapid development of our quarterly sales. In Europe, we actually launched, really launched in Germany last year, but in the rest of Europe at the beginning of this year because we only obtain endorsement around France, and Italy and Spain late last year, early this year. So this country is only coming on straight now and sometimes we should see goal effects. In some countries around the world like Brazil and others, we’re delayed with the reimbursement. And they will also come and add to this as time goes on.

In the United States, 50% of rheumatologists are using the drug to date. What is real encouraging in the U.S., I must say, is not represented here, but is the fact that immunization of our messages by physicians is very good. We are very focused on patient profiles. Ocrelizumab can make a difference in the treatment of monotherapy, for instance, in the treatment of so-called hot patients. Those patients who have high CRT levels to start with and Ocrelizumb brings a very strong clinical benefit. In those patients types, we’re making some very good in roads, and the physicians are memorizing our messages very well.

So so far, so good. And we’ve also started enrolling patients in our head-to-head study versus Humira. Lucentis is also growing very rapidly, as I mentioned before; 27% gross. Essentially it’s driven by an increased share in A&D so far, but we have approval and that should really help grow this product. And we expect it next year.

If I move onto biology, we have a negative impact of Tamiflu across here, and that negative impact would be even greater on the second half of the year because last year we sold a lot in the second half of the year. And this year we don’t expect much at all. We have risodidolol [ph] also forecasted for peak sales for this year, a little bit lower than the guidance we gave you earlier in the year because there’s no season of flu.

But Elecys is doing very well in the emerging markets and on the global basis, growing by 5%. And Tamiflu is declining here.

The peak sales for this year, $1 billion. We communicated $1.2 billion at the beginning of this year, but clearly there’s no pandemic business to expect and the seasonal flue is so far very limited. I just heard that we have an increasing incidence of flu in the South Hemisphere where it is wintertime now. But you know, it is too early to judge what the autumn, the fall-flu season will look like.

Now, what news should you expect? And again, as I said a minute ago, we are going to, from time to time, experience setbacks. But when you look at the wealth of news that we’re expecting and the strength of the portfolio, it is to be expected that not 100% of those projects will be positive.

So for the second half, let me just mention BRF, T-DM1, bevacizumab in combination with Herceptin. The bevacizumab data should be published and presented in October. So it’s still a relatively interesting second half of the year from the point of view of clinical news flow. And as you can see, quite a lot of new next year. Lucentis and T-DM1, and a number of all the studies will also come out in the course of 2011.

So in closing, we’re clearly are facing a very different environment, whether it’s us or the whole industry, clearly where we are today is very different from what we could have expected six or seven months ago. And there’s an increasing impact across of the Healthcare Reform in the United States and the changes in the EU. And that impact, as I said a minute ago, will increase in the second half.

We have to have sold the Tamiflu best effect. On the plus side, for the rest of this year, as I said, it should wash out in the second half, so we should not have the same negative impact as we had in the first half. And we are managing our costs and we will keep doing this even more so as we move forward and we are certainly focused on improving our productivity and getting more mileage out of every dollar we spend.

And finally, we are very focused on driving goals in the emerging markets. And so far I must say, very successfully. We have focused quite a bit on the Asia-Pacific Region and probably China because we were, so far, disappointed with the growth in China. We are growing 20% and it was not good enough. I have to say 20% is pretty high already, but the market was growing more than that.

And so we have changed. We made a number of structural changes in our Chinese organization. I think it is going to take a few months before it pays off, but there is already growth in China and there are already signs that it is going to happen. So I’m confident that the emerging markets will continue to develop very positive results.

And on that, I will hand over to my friend, Dan. Thank you.

Daniel O'Day

Thank you. So good afternoon Ladies and Gentlemen. It’s a great pleasure to present to you on the First Half-Year Results for diagnostics for Roche. And I’m very pleased to report, as Serevin has already mentioned, a 9% overall growth rate on the diagonsics line. Just to put that into context, Roche is the world leader in vitro diagnostic with a 20% market share, and the next largest competitor being around a 12%.

I’ve been anxiously watching how the competitors have been reporting. I’ve seen two competitors come out. I was hesitant to use the word two-times the market rate, but in fact, I feel much more confident to now say we’re doubling, actually, the market growth rate from the competitors that I’ve seen coming out.

And you can see that growth rate is being driven across all of our business areas, and I’ll talk a little bit about some of the dynamics that are driving that growth.

Now, I also said to you when I sat here at the end-year result last year that we would increase our profitability in the division. And I’m very happy to come back to you and say we’ve had some major advances in our profitability line. You can see a 47% increase in profitability, up to 18% of the half year. That being driven by, of course, the continued drive of our sales line, but also very close attention, without in any way suffocating our strangling the business on our cost lines to be able to demonstrate this type of profitability.

What I’d like to do is put that into a little bit of perspective for the second half of the year, to make sure that I set expectations for the second half of the year. Those of you that have been astute followers of the P&L on the diagnostic side know that in principle we always have a deterioration of the profit line in the second half of the year. And I expect that to be also for the second half of this year as well.

Now, there are good reasons for why that’s deteriorating. It’s generally deteriorating because of higher instrument placements in the second half of the year, which means our install base is going up. But it certainly affects our cost line.

And what you see in the first half of this year, what’s driving some of the increased profitability as well is that our product mix is benefiting a great deal. So those products with higher gross profit margins in our line are the ones that are actually increasing disproportionately in our sales line. So that’s driving our profit up, while we’ll have continued investment in instrument placement in the second half of the year, which will bring down our profit a little bit from the 18%. And we also have the Mandingo acquisition that’s closed completely in our diabetes care franchise. So that will have an affect in the second half of the year.

But what I want you to understand is this underlying improvement in efficiency that’s represented on the bottom of this graph, is not a one-time event. That’s something we’ll continue to be focused on this year, next year, the year after to consistently see improvements in our profit margin over time.

So we will see a significant improvement at the end of the year also on profitability in diagnostics. We ended last year at 12.2% and I’m expecting to see also a significant increase by year end as well. So we have a very good first half year momentum in that regard.

Now, what’s driving this significant above-market growth? Well, professional diagnostics, which is our largest business, clinical chemistry, amino acid business, is growing very, very nicely at 11%.

We’ve seen the United States return to growth there and contribute further. Our immuno assay business segment is growing in double digits, and that’s driving a significant continued market penetration in that business as well.

Also, we’ve got access now to HTB as a critical immunol assay in that menu. And we’ve received approval in the United States and are launching that. Actually, we just received approval in May, so we’ll start to see also the impact of HTBV in our professional diagnostic business as we go into the second half of the year.

And we know that that HTB assay has a good standalone effect, but it also brings our entire immuno assay portfolio up as well. We’ve seen that in European countries.

Diabetes care, still growing faster than the marketplace. We see outside the United States where we have our new product launch. Very strong growth in Europe and Asia Pacific and Latin America. And we’re still awaiting the approval of those products in the United States, which we expect in the second half of this year. But still growing in comparison to the pressures on that marketplace in a very nice growth rate there as well.

Molecular diagnostic; very good news flow in the first half of the year, which I’ll touch base on later in my presentation, specifically regarding HTB and MRSA.

On the applied science side, we’ve seen growth in all of our business segments and we’ve also recently launched our GS Junior, which is our smaller sequencing platform in the applied science business.

And finally, tissue diagnostics continues to grow aggressively both in the United States and outside the United States. And we rolled out a new advanced staining instrument that’s suitable for smaller markets call the Benchmark GX in Asia-Pacific, and in some of the Eastern European countries as we continue to drive that business in its XUF franchise.

Now, what I’d like to do is just take four examples of news flow in the first half of this year that in fact didn’t drive these results, but to give you some idea of how we’re going to drive also continued sales in the future. These are approvals we received recently but that we’re just in the process of rolling out.

And the first one is on our largest business in Roche Professional Diagnostics. If you remember last year we rolled out the beginning of our COBAS 800 system, which is our immuno assay clinical chemistry system for the highest, ultra-high volume labs out there.

If you remember last year I said we had the largest installed base of any company in this field. And we have the COBAS 6000 that we’ve rolled out over the past couple of years. Now, the COBAS 8000 is in an early penetration phase into the marketplace.

What we launched it two days ago actually, is the immuno assay module, this system. So first we launched the clinical chemistry modules in more than 11 countries, now we have the complete system and can compete significantly in the highest-volume labs in the world, now outside the United States, and it’s under regulatory review within the United States.

The second piece of information I want to give is that we recently announced the outcome of the largest clinical diagnostics trial that’s ever been done. It’s call the AFINA Trial. If you remember the HPB market in diagnostics is one of the most attractive markers in diagnostics. It’s more than a $300 million market in the United States alone, growing at 20%. And we knew that as a second entrant into this market, we had to have clearly differentiated advantages as we enter into this molecular diagnostic segment.

Now, I was personally at the IPB meeting where this data was rolled out two weeks ago to a group of more than 800 thought leaders, clinicians in the field of HPB. And it was a tremendous response to this data. I can tell you this is really game changing data in HPB because for the first time in a prospective randomized 47,000 woman trial, we’ve demonstrated that you actually are missing one in ten woman if you just use the pap smear.

What we have identified is that a negative pap, you can go for your normal pap test and one out of ten woman will be missed in terms of high-grade pre-cancer cervical. And that’s done by identifying HPB 16 and 18 in this setting.

So just to walk through the data, what you see here first on this slide is the data relative to what exists today. And we’ve demonstrated that also in AFINA. And that is in HPB positive, or pap positive, and 14 genotype tyroses positive, you have an absolute risk of about 10% and above 10% you’re referred to colposcopy because you’re in the risk category that refers that treatment.

But you can see here if you just look at the 14 high-risk genotypes alone, your absolute risk is less than 10%. And today those woman walk away with a very unsatisfactory come back in a yea and we’ll test you again.

So this is the data that we rolled out at IPB meeting. And that is if you look specifically at HPB 16 and 18 in this woman, you get an absolute risk of above 10%. And the thought leaders now, of course, this takes some time to change algorithms, but they’re convinced that because that’s above 10%, those women should also be referred to colposcopy.

And obviously, in a country like the UK here, you’re talking, just take the population dynamics, even with routine pap screening, you’d be talking about missing thousands of women a year that have potential precancerous lesions that are currently not sent on to screening.

Now, this is also a three-year follow up study and we’ll continue to look at the affects of this test over a year-year time period. But the pharmacoeconomic story here, as well, and the healthcare story is that if you’re HPB 16 negative, you can also be deferred for three years instead of an annual pap smear.

So there’s also a total clinical and pharmacoeconomic story around this test.

So what is our offering for the marketplace? As I said before, it’s a competitive market, we have to enter with a significantly different market.

First is our trial has shown we’re at least as good on sensitivity and specificity as the assay that’s out there in the marketplace today, the Digene Assay.

Secondly, we’ve demonstrated significant clinical differentiated value with HPB 16 and18. And we’re the only test because of our work flow that allows you on one run with the sample to identify whether that sample is HPB 16 or 18 positive. All the other offerings on the marketplace today in an automated format only look at 14 high-risk genotypes together. We separate that out in our system, which means at a workflow of around 388 samples in a 12-hour period, you can immediately identify those women that are 16 or 18 positive with our test.

So we feel very confident as we prepare now for the U.S. launch of this product because we’ve filed the product. It was accepted in the FDA in June of this year. But as we enter into both the largest market in the world, the United States, after approval sometimes next year, and also in talking with other countries around the world, European authorities, that this data will be very compelling in terms of screening and HPB, and cervical cancer incident.

The second major win that we had in the first half of this year, or third major win that we had, was the approval of our MRSA assay in the United States.

So we now have an assay, that’s a very competitive assay. That by the way, will go out there on one of the largest installed instruments space in the United States. So even in this environment where hospitals are strapped for capital purchases in some cases, they don’t need to buy a new piece of equipment. Every hospital in the United States has at least one Life Cycler 2.0 and we’re launching now an MRSA platform into what is a very attractive market in the United States, more than 100 million growing at a very tremendous rate as you can see up there.

And the reason it’s growing at such a strong rate is the encouragement of the management of hospital acquired infections. Of course in many countries around the world, but within the U.S. Healthcare Legislation, there is a specific mandate that says hospitals that are in the lowest 25% of healthcare acquired infections will actually get Medicare – will get a reduction in Medicare payments to their institution.

So there’s a tremendous, if you want to call it, negative motivation from hospitals to reduce their healthcare acquired infections and we believe that our MRSA assay will pay a significant role in that.

And the last key event of several others that I wanted to talk about today, is the ability for us to take our sequencing technology, our long-read 454 sequencing technology from what has predominantly been in large genomic research centers and we launched what is the GS Junior product actually in May of this year, which bring this down to an affordable level for every size lab.

And of course, every lab around the world is interested in sequencing right now, and this brings it to an affordable level and a high-quality long-read level to be able to continue to penetrate that sequencing market.

So in summary, this is a commitment, that on behalf of Roche, I gave to all of you at the beginning of this year. This is our score card. We’re on track relative to what we intend to deliver for this year. I’d be more than happy to also see many of your faces, or people from your firms at a special investor event that we’re going to have at the AACC meeting next Monday. If any of you really want to get out to Los Angeles, you can still book a flight. We’re going to have it on Monday evening at the AACC event, and we’ll get into a lot more detail on our diagnostics business at that time.

So with that, I thank you very much, and I’ll turn it over to Erich to cover the financials for the first have.

Erich Hunziker

Thank you, Dan. Good afternoon, Ladies and Gentlemen. It’s my pleasure to be here, and I just realized this is my ninth half-year results I am honored to present for Roche. And I can definitely say it’s the most solid, the best in these nine years. And I would like, in the next minutes, to guide you a little bit through. I always know that at this time of the day, the Roche figures have been digested by all of you in a perfect manner and integrated. And I would just like to add some value, even ahead of the Q&A sessions now.

So current impact – I used this chart yesterday internally when we usually do our worldwide management community, I show it and it’s an interesting position for tiny Switzerland to be with the Swiss Franc and to see who has lost against the Swiss Franc, but who has gained. And this year, it’s more less a mirror of the economy strength of this various regions. I think, sorry for our colleagues in the U.S., but I think they still have some problems. And also the European union was struggling.

But on the other hand, we should never forget that there are also area in this world which have their economies under control and are growing, and are contributing to growth of this world economy. It’s actually quite nicely mirrored here.

But the operating profit levels, which my two colleagues have presented, I really can tell you this is solid, and I also understand usually this is in the moment where the question is – and what were the exceptional items, more less keeping backwinds or headwinds to this result.

What you can see here, actually, is that, yes, the only part where we have lost is royalties and other operating income because for those who have followed us closely, last year in the first half-year 2009, we had three positive incomes, two contributions, one-time contributions in our corporation; Boniva and around Senecal LI from Glaxo. And there’s nothing else. You can really the measure that we have taken, especially in the United States, are showing fully through and we can report that our times schedule to deliver another $800 million of synergies in the out of United States transactions are fully on track and there’s a substantial part to be delivered in the second half of this year, but we are totally convinced we have this process under control.

If we know move below the operating profit level, of course one element is very clear, that the interest expenses, they had to go up from – on a half-year basis. No surprise there. But there are two other elements in here, which definitely need some explanation.

Just for those who are not so close, you may recall that we erased these bonds a little bit prior to closing the transaction on March 26 last year. But these – the financing costs of these bonds prior to the transaction, they actually showed up in the exceptional line.

So year-on-year on a comparison, that’s why you have this additional 310 on the interest expenses. But the loss you have, 144 here, what happened here?

We were standing in front of you and we said, we did the whole financing for the Genentech transaction without thinking of Tamiflu. And Tamiflu nicely, actually, was quite successful last year. So we had extra cash on our balance sheet. And you would agree with me, in today’s environment where cash on the balance sheet, risk-free invested, generates really, really meager returns.

And we, of course, remembered that our U.S. bonds have a very clever component in paragraphing that under certain conditions we can call them. So what we did, we called our 2012 2.5 billion bond early. We called it by the end of June, and it will be repaid on September 9.

And this, of course, this part of the process, it gives the one-time charge, which was in the half year of this year because the call point is, accounting wise for the experts, the moment when you call this bond, that’s the accounting point where you have to take the hit.

But of course, you can do an easy net-presence value. You have this one-time charge. You have some opportunity cost of not having the $2.5 billion until maturity 2012. But we save all the interest expenses up to there, and this investment is actually quite profitable from this prospective.

The other element, if you use the time 4X loss, it always turns tough and somebody, like somebody messed something up. I can really also comfort you there. We had to do really assess our operations in Venezuela. And for those a little bit familiar with this country, it has now, I think, free official exchange rates, and it’s quite the jungle to find the way through these official exchange rates. It gave a one-time hit, which we had in the first half of this year. And on the other hand, I have to respect, in this line we also report the hedging cost for currencies. And since the volatility of a lot of currencies has tremendously increased over the last 6 to 12 months, also the related hedging costs have just increased, and that’s a certain reflection which you find here.

Otherwise, I think everything is absolutely under control, that there is less interest and debt securities income, I think that’s just the consequence that we actually don’t hold much equities on our balance sheet anymore.

So this is the picture which Severin has already mentioned about, which we are very pleased. You see this dotted line in red where we actually have now quite the nice advance against our roadmap to repay the Genentech debt and remain fully committed to be net-cash positive 2015.

And you also see that the liquidity challenge for the next two years are now quite low. And by the way, we also repaid, this week on Tuesday, a 500 million, an old bond which we took over with the Genentech transaction. So fully on track. And 1/3, I think is not bad. One-third of the whole debt raised will be paid back just actually 16 months after closing the transaction.

The next chart is missing and I realized it on the way over on the plane. It is my tax chart, but there is also – the tax chart is – I think they thought it was so easy that it’s not worth a chart.

I had guided you that you are on the safe side with 23 to 24 percentage point. Now, you may have been a little bit disappointed that it was to the higher end, but also this has a very, very clear explanation.

In the U.S. we have so-called R&D tax credit, and they usually – they actually hit the balance sheet and P&L positively in the first half, and this year it was really a timing effect that they will come in the second half. And if this would have been year-in-year, the tax rate would have been about 1.5 to 1.6% lower for the half year already.

On the other hand, you also have to respect, and this will absolutely not surprise you, that government has become extremely aggressive at all fronts, not only on pricing products, but also on what they can grant at the tax field. And I have to admit that there were never so many open ends at the tax side that suddenly governments have changed their attitude. And let’s say they move into negotiations, which you always have, because in many countries, especially Europe, you don’t pay annual taxes, but you have this kind of tax review period which sometimes are quite in the past. And then it’s quite a challenging process to come to a conclusion.

And here we have just realized that the environment has changed in one or the other case. We also then reassessed how we solved the situation six months ago, and how we see it now. And I would say if you take the summary of tax provision six months ago and now, we have increased them slightly because the environment has become more difficult. So I would really confirm here that you don’t have to worry around the tax rate.

The other element which, especially if a company has substantial debit, it’s important that this company goes on with a high free cash generation. And if you just used a finger and compared half year and half year, or even the end of last year and this year, then you ask yourself immediately a question. And I think it’s important that you understand that actually nothing is going in the wrong direction.

If you compared the ongoing business, the free cash flow actually has increased, but the if you have an ongoing business, these kinds of things at the cash side ever emerge, but you can imagine, you know exactly.

We pay a significant royalty, for instance, to Gillett on Tamiflu, and last year forth quarter was a boom quarter with results to Tamiflu. But we then have a mechanism since many years that then these royalties are calculated and, of course, accounting wise they are charged to the right quarter. But cash wise, they’re actually paid out in January.

So all together, this has an effect where maybe last year’s cash was too nice and we had the charge of 6 on the million.

The other element was actually good for our shareholders. You see half year on half year we have increased the dividend by 900 million. And now come real effects of the Genentech transaction. And here you have two elements which are absolutely one time.

The first one doesn’t surprise you at all. I had warned you for all these people where we had terminated the situation. Like, for instance, for those of the Politano Research side or in certain manufacturing sides where we didn’t find jobs for them, they had – we took, of course, a charge last year, 2009, in the P&L. This was also under this change of the company line. But they received the cash only when they left the company now in the first half year. That’s this element.

And you know that upon closing of the Genentech transaction, March 26, all the stock options of all Genentech employees vested and there was a positive cash effect on the tax benefits here.

And you may also note that most of these bonds we have raised, they have a payout once a year, which is February and March. So of course, accounting wise in the P&L, you have seen all these interesting expenses accumulating already and charged to last year. But here, this was the first payout, which was different.

So I hope that you see, even if you just compare this 2.1 with this 1.6, and start to vary, there is also, from my perspective, nothing to vary on the cash side.

Balance sheet, yes we have a shortened balance sheet. And yes, as to be expected because the first half year of this company is always weak because the dividend is fully paid not on a quarterly or a half-year basis, but just in the first quarter.

What is also important for you to know, and of course, there may be questions around this; you can be assured that collection of our sales is a top topic for the three of us, for Pascal, for Dan and myself.

And we have, for each region and for each country, we have a task force, monitoring is it worse to do a sale; how do we really collect the money? And we can also tell you that we are prudent. Actually the status has not worsen, and I know there is a lot of noise in this system, and certain countries have more difficulties to pay. But it is not a fundamental change what we experience.

Certain countries have more difficulties at this to pay, and we are watching this really on a daily-to-weekly basis with a taskforce, which really is interested to bring this cash into Roche. And we have also taken – there are some few cases where it is doubtful whether we can recover the full amount. And there we have taken provisions full in line with industry standards and fully in line with what our – also this also had on [inaudible].

But I also beg your understanding that we are, in certain countries, still in open negotiations, and I wouldn’t want to give you the details here. I don’t want to weaken our negotiations team with the argument, oh yeah, I’ve heard you have written down our debt anyway. I think this would be a wrong starting position to still go for 100% of our outstandings. And as Severin has said, we are happy to confirm the guidance for this year.

Severin Schwan

Thank you Erich. And with this, I suggest we go straight into your questions. Who would like to start with the first question? We have one question here. If we could have the microphone please.

Question-and-Answer Session

Alexandria [Jaba] – JP Morgan

First question is, of course, about the consequences of the ODAC panel.

Severin Schwan

Can we do something with the mic; switch it up a bit? It’s very difficult to hear it on our side. Yes.

Alexandria [Jaba] – JP Morgan

Okay. The first question I have is about the consequences of the ODAC panel, assuming the FDA you’re speaking is a recommendation. What are the consequences for the organization? You basically said that you’ve got to proactively adapt to the reality, which could you be a bit – provide a bit more color what’s behind that? Does that mean, in terms of this transaction that also potentially how you’re changing decision-making purchases and thresholds in the development?

And the second question is, one thing which came clear during the panel on Tuesday is that there was all this – there seemed to be a threshold for clinical meaningfulness, which wasn’t so clear at all before. And I was just wondering to which extent you actually had discussions with the FDA – how that threshold is set because I’ve always assumed if you power a study to show a sudden benefit that that defines that threshold. And that’s important in regards to your next files, you’re going to have similar discussions – the same discussion all over again.

I have a bunch of other questions.

Severin Schwan

Okay. Thank you for your questions. If I may take the first one, the more general one, how we respond to this more challenging environment, and then hand over to Pascal on your more specific question, what is clinically meaningful in future, and what are the new FDA standards here.

Now, when I’m talking about a more challenging environment, it is several elements. It’s not only the ODAC recommendations, which we experienced two days ago.

We do see a much stronger pressure. I would say finally the financial crisis has arrived with the pharmaceutical industry. Last year, we had been standing here and you asked, do you feel something of the financial crisis and we kept saying no, we don’t feel anything. And the reason for that is the that the bureaucracies around the world, they take a certain time until these machineries come into effect, and until price reductions are being implemented in law.

And then, of course, we had the Euro crisis on top of it accelerated the process in certain countries such as Greece where we suddenly, overnight, experienced the 27% price decrease. So that is a different environment, and we did expect that the environment would be tougher, it would get more challenging, but it’s probably accelerated, especially in the second quarter of this year. So that is one element.

If you have a price increase, this falls through to the bottom line, and there’s only one way how you can compensate and that is on the cost factor. It’s as simple as that. Our pipeline is what is it. We won’t suddenly have more products coming out of this pipeline just because the prices are coming down.

Now, we have all this work on our productivity, don’t misunderstand me. But I do believe it puts additional focus on us, and it puts a different dynamic on us in line with the market dynamics, number one.

Number two was a big disappointment and that it’s the delay on the taspoglutide side.

Now, here we have different components. The one component is, do we have a product? And here we are analyzing the data. We are analyzing the whole cost of the sensitivity issues, allergic reactions we have observed. That will take some time.

And that question will only be answered probably at the end of this year rather than now because we have to take the time to make the right decisions.

But what we know already today is that at any rate, and we have given you heads up on that, our filing will be delayed by 12 to 18 months. And therefore, it has an immediate impact for us in terms of our commercial structures because last year when I talked to my organization, we were talking about launch readiness of Pascal. Now, if the launch is being delayed, obviously this has an impact on how we set up or commercial factors. We cannot ramp up the organization and do it if nothing has happened. So in this respect, reality has changed.

Now, please do understand that I’m not going to make a public announcement today when we still have to implement, country by country, the respective nationals and have to announce the respective nationals country by country as we go forward because the situation is very different from county to country depending on what infrastructures are already there, how much we’ve gone in terms of repairing.

But the message I want to leave you with is that we are very, very alert of this situation. This didn’t happen yesterday, this happened some time ago and we are diligently working on this and that process is ongoing. And perhaps it’s a bit the Swiss Company style, that we don’t go out and tell everybody what big refactoring programs we have, but rather show by actual effects, what we deliver and how our costs are developing. And I do believe you see this reflected in the half year results.

Now the third component, and that is certainly an additional element of change which we did not expect, the ODAC accommodation two days ago. And certainly this also has an impact on our business, and related to that, the cost factor.

But let me put it a bit into perceptive. We are all extremely disappointed. I can tell you, I mean this was one of the bad days since I have taken over as CEO. I think we are at least as disappointed that as all of you are.

But then again, you know, after this first disappointment, and you step back a bit, and you start putting it into the picture.

If you look into metastatic breast cancer in the U.S., this is toady about 600 million Swiss Franc sales. Now this is a lot, and I don’t want to trivialize it. And of course, there would have been additional growth in the U.S. on that specific indication if the FDA indeed decides to restore the indication.

But then put it into the context. On a group level, this is 1% point of sales. I don’t want to trivialize it, but I want to also put it into perspective. And I do believe we can manage this. And this is also the reason why we did confirm our guidance for the full year.

But put all of this together, past pressure, past delays, the negative outcome of the ODAC recommendation, you can see why we take much more vigorous stance now when it comes to cost management. And I think as a management, we have a responsibility to adapt to such new realities and communicate this in a clear way. Not only to you, but also internally within the organization.

Now with this, I’d like to hand over more specifically on the ODAC and the related questions you had in this perspective.

Pascal Soriot

Thanks, Severin. Can you hear me?

Severin Schwan


Pascal Soriot

There are two parts, I think in this question actually. And one is kind of a general principal and another one is maybe more specific to invest in breast cancer. And we have here the different frames who is, the French is very invested in different concerns to my comments.

Let me start with the general principal. And this is a very good question actually. And there are two parts in it for me.

One is the direct value of TFS and how’s that ratio. And that debate, that is really one key part of the debate. And we have to have the discussion with the FDA and we’ll rise it again in the ongoing discussion we’re going to have with them between now and September 17th because this is a fundamental question. You know, do you stick to purely looking at the effects even it occurs, you know, the custom together and separate again. Or do you, what value do you give to that ratio?

And the second is if you look at PFS, what the relevant PFS? And again, this is a discussion we need to have with the FDA because that is a relevant question for the entire industry; not only for us, for the whole portfolio.

If we look at, for instance, you know, our new drugs T-DM1, taspogluitde, and for most of them when we have a PFS, we powered them, the fully powered to support a full month’s PFS benefit.

Now, the question is, especially in second line, you would say this is large enough. We still need to have the discussion with the FDA. And we will have it because we need to have a sort of certainty in terms of how they’re going to rate those data. And it seems to me that they are not challenging the PFS as an end point itself. But certainly, what we need to understand is what is the magnitude that we are looking for.

So I think on those two points and those are general principles, we certainly will want to have further discussions with the FDA. We have our own view, of course. But we need to clarify with them whether the way we are proceeding with all the programs is certainly, we believe it’s fine, but, you know, is it fine by them too.

If you look at RIBBON 2, which we filed, certainly that will be the topic of a discussion. But this one, we have a PFS benefit that should be of a magnitude that hopefully the FDA considers appropriate. It’s in second line, so you can imagine second line. The expectations are not as high as they would be in first line.

We also have an overall survival how that ratio that goes in the right direction. So the RIBBON 2 data set is certainly very, I mean a lot stronger. Actually, we coded it that way and gives us a lot of confidence. But all of the discussions we certainly need to have with the FDA in the few weeks that are coming up.

In terms of more specifically, I rest and Severin, do you want to add to this discussion and the order?

Severin Schwan

Maybe a few points. I think we acknowledge the ODAC vote, and certainly, it’s an ODAC expert committee on metastatic breast cancer.

We certainly realize that the FDA had stacked the deck against Avastin by choosing voting panel members who have been previously already negative on Avastin. By crafting a briefing booklet which reflected their view very peculiar. For example like Pascal pointed out, more honing in our medians, and overall rather ignoring ratios.

Or for example, how the questions were crafted, there was a request due to the meeting to vote separately on the fully powered cohort and FDA denied this. And you heard me be the sentiment in the room that for the cohort, good meaningful PFS benefit has a ratio for overall survival pointing the right direction, very reasonable safety profile, FDA denied that this vote was taken separately.

It is in ODAC vote, we have to wait for FDA will take action. We can fully confirm that based on the efficacy safety, we can stand behind the data that Avastin is a meaningful option for patients with certain negative breast cancer. And we are not alone.

Immediately after the ODAC vote, we received unsolicited feedback from multiple thought leaders in the U.S. in the field who were rather appalled by what happened at the ODAC panel. So there will certainly be interactions, and we can’t speculate on the ultimate outcome. But I think we all heard that FDA during the ODAC committee rather expressed strong views.

Maybe one last point, this is not a milder toxitration, so part of this room minor talk because of excessive mortality with the drug. And we clearly say, and we have presented the data to last Tuesday, there is no increased mortality and the risk factors always point in favor for Avastin.

Pascal Soriot

Let me just add that, you know, I think it is important for us to say that we totally recognize and respect the decision of the community. And the ODAC is a community of experts, and we clearly do recognize. So their decision, we’re not here for the same way reason, or whatever.

It’s just – the point is, we need to work with the FDA to understand what is the relevant, the relative importance of how that ratio versus PFS, meeting PFS. What kind of PFS benefits should we shoot at for Avastin for future projects.

And also, I would have personally a thought question, which is, you know, why not engaged in a discussion looking at, for instance, zero dollars, or a specific treatment arm when in fact, we had a study that was partly designed to be able to analyze individual treatment goals that are on one side.

So all those questions, clearly we need to engage in a constructive discussion with the FDA in the weeks to come to try and resolve the Avastin discussion. But also very importantly, to have a kind of a clear picture as to expectations and the rules of the game, if we are calling that way, moving forward for all projects that we engage in.

Severin Schwan

Thank you very much. We have one question here in the second row please.

Sachin Jain – Merrill Lynch

Thank you very much. It’s Sachin Jain from Merrill Lynch. First to pick up on your comments when you talked about, or you continue to talk about a delay for taspoglutide versus discontinuation.

So comments, I think you were leading to in terms of change to your primary cash sales force infrastructure. Are they a timing delay or a permanent change? And I guess I’m thinking about that relative to your other primary care policy in development of C-Tap and Aliglitsol.

Secondly, related to taspoglutide, I just wonder if you could give us a feel of how you view the peak sales potential of this product, even if you resolve hyper sensitivity. And how that frames your thoughts on incremental cost for a cardiovascular study and nausea studies, which I guess would be substantial if ACV studies is still recruiting.

Thirdly, just wondered if you could update on your Avastin peak sales source. They were 8 to 9 billion. Obviously, we’ve had gastric prostrate, the ODAC, where do we sit now, and how do you get to your new target?

And my final question is now the C-Tap inhibitor. Three sets of phase data expected next year to imaging, and one potential increment analysis. It was excluded from your new sleigh slide. Any particular de-emphasizing of that product? Thanks.

Pascal Soriot

Okay. If just as a starting point, let me emphasize we are by no means de-emphasizing the CTP inhibitor, whatever was on the slide. I didn’t realize any points of that kind. So CTP inhibitor, it’s a potential gain changer for this company. It has its risks, but we are fully committed to the CTP inhibitor to allocate the sign to metabolism. It’s a whole – Pascal, if you would like to make a comment on the infrastructure related to taspoglutide, and I think your question was how it is all timed and how it sets up. Did I understand this correctly?

Sachin Jain – Merrill Lynch

I’m just trying to understand your answer to Alexandria’s, question were you talking about adapting a cost space.

Severin Schwan


Sachin Jain – Merrill Lynch

And I guess you were alluding to sales force. Are you talking about a delay of infrastructure?

Severin Schwan

Right. I mean, taspoglutide would have been the first product to be launched in the metabolism field. Now with the delay of the file, it is launched in a more similar time frame than an aligliglitosltide. So instead of it just being the original plan, getting fully ready for taspoglutide ahead of the rest of the portfolio coming in, now it’s more of a question building up this infrastructure at a later point. And, or also adapting the infrastructure to the degree it is already in place because we cannot preach here for several years and keep those infrastructures into the surf if you like. This it is just not good management. So that is what I was referring to.

Did that answer your first question?

Sachin Jain – Merrill Lynch

It does, but I want a quick follow-up if we ask the others. I guess the spirit of the question was, are you going to do more in delaying infrastructure span? Is there anything more you can do over and above that?

Pascal Soriot

But if you look at the commercial infrastructure, if you look at the respective sales for structure, the eco structure factor which you need to support this sales force, of course you take a holistic look. The initial looking – at we are looking at here. We have so many sales. That’s how many sales steps do we need. We look at it from a holistic point of view. And that’s the approach which we take, country by country as we go forward.

You had a question on the task four peak sales. Kyle, do we communicate peak sales on task four? Can we have a microphone here?

(Unidentified Company Representative) [Kyle]

I’d be happy, Pascal. Originally at the investor date, remember that we have reflect the taspoglutide up about 1 billion.

Sachin Jain – Merrill Lynch

The question is, even if you resolve hypersensitivity, what do you view peak sales potential in the product line. I guess I can lead you a little bit further given whether nausea rates have come out, injection-site reaction, total discontinuation, and how you frame that in the context of the substantial R&D costs that are so long going for the product.

Pascal Soriot

I mean as far as the R&D costs are concerned, I mean, the trials are basically done. We have still the March 8th trial running ongoing. We will certainly complete the trial as it is fully involved, fully going. And it costs you almost as much if you’re, I mean, for all reasons, you wouldn’t stop it to start with. But I don’t see any savings on that front. I wouldn’t, I mean our focus is on the commercial, on the commercial infrastructure.

As far as the peak sales is concerned, I think we shouldn’t fresh up our numbers now while analysis is ongoing, we didn’t even give a concrete number in the first place.

Kyle, did we communicate anything more specific?

(Unidentified Company Representative) [Kyle]

D-day, the investor day we had reflected the score of -

Pascal Soriot

I wouldn’t like to give you a more precise number than at that time given the analysis, which is ongoing.

You had the third question, and that was on Avastin peak sales. Original guidance, which we gave you was 8 to 9 billion Swiss Francs. Now certainly if the commendation of ODAC was adapted by the FDA, if they take the decision to withdraw this indication, certainly we would be at the very low end of this guidance.

Erich Hunziker

Let me just side into this task four question if I may. I mean there are – Severin said there are two parts, right. One is the project itself, and two is the organization, and the impact of the delay.

And so we can’t give you an answer today because we are looking at the scenarios that exist of us. And of course, one scenario is a very substantial realignment of the organization. But we haven’t made any decision, and we won’t make that decision in the weeks to come.

And as you can imagine, in Europe, things don’t get decided just like this. You have to talk to a fair number of people before you can make a decision and make an announcement.

But maybe the only thought we could leave you with is we’re not going to stay for several years with a substantial cost for infrastructure that, you know, that is not needed. So we have to make some adjustments. The question is what kind of adjustments and there we have actually three scenarios. and we haven’t made a decision. So you need to give us a little bit more time.

But just trust that we will do the right thing and we will certainly manage our costs based on the situation we’re facing. Where we are is very different from where we were six or eight months ago for sure. Now we have a delay. We just have to adjust.

The peak sales, we are working on the data in the business case, and it’s all part of the analysis we’re doing. We need to explore further the root cause of this hypersensitivity we’ve experienced. And we have, you know, a couple of hypothesis here, but we need to explore them further.

And the second is, we need to look at these GI tolerability issue and see what we can do to address that. And we also have a couple of hypothesis about what we can do. But we need to do additional clinical work, short term, very short clinical work to kind of get a better sense for can we see some problems or not. And it will take us until Q4 to understand that.

And as part of it, we understand also the time line, and therefore the impact on the company landscape by the time we launch, and the business case. And that’s roughly when we will be able to make a decision on the project itself.

In the meantime, we’re working on the, you know, what options we will inclement for the organization structure.

Pascal Soriot

On my side on the CETP inhibitor, we didn’t put anything into 2011 because it’s an interim analysis. And therefore we took it out, so it is the guidance of the company.

Erich Hunziker

I would not read too much in that – I mean we, you know, we are very committed to this project. And there is no signal at all, no new data. In fact, there’s no reason to have no new data that would tell us that there is an issue and, you know, we are starting to kind of back out of it. We are as committed as we were three or four months ago, and there’s no new news.

We’ll have new news next year. Those will be limited new news of course because the emerging study is a small study, but it will give us some indication of the effect of the drug. But so far, no new news that you’re not aware of.

Severin Schwan

Thank you for the clarification. If we can have the question here in the fifth row, and then I’ll start shifting on the other side.

Luisa Hector – Credit Suisse

Thank you, Luisa Hector from Credit Suisse. If we could just go back to Avastin and breast cancer. And is there any color you can give us on the attitude, say from the European regulator?

I think there was some documents last year suggesting a degree of concern from a few people around the magnitude of the PFS benefits, and a desire to see more on the overall survival. I think you have both RIBBON 1 and 2 with the European regulators. Is there any more color you can give us from the regulatory side there?

Pascal Soriot

Severin, perhaps you want to –

Severin Schwan

Maybe to cover the document, it was an EPA report, and as part of the approval we got for Dorsataxin, which was just reviewed Tuesday by ODAC as well during last year, we got approval for dorsataxin in the European Union and they requested that we submit formally an overall survival update, which we had shown them just in output form. We submitted those data, and in the meantime, we had amended the protocol and edited further 10 months of follow up. Those data were presented at the ODAC committee where even the ration is finally, again pointing in the right direction for Avastin.

RIBBON 1 is currently under review; both cohorts, now decision has been made yet. Certainly regulatory authorities talked to each other in Europe, according to guidelines in first-line metastatic breast cancer PFS. This is an accepted endpoint and certainly a more holistic view; ration and risk benefit will play an important role.

Pascal mentioned already the two in to FDA. PFS has always been an accepted endpoint without demonstrating overall survival. [Inaudible], therefore I think we can be rather confident that RIBBON 2, pending authority review, could be a success. In Europe, it was mis represented. We have not filed yet RIBBON in Europe. The file will go out later this year.

Pascal Soriot

Of course, we can never speak on behalf of the real authority. They have to make their own decision, their own assessment. But I think the point that is important to keep in mind here, as Severin said, [inaudible] was already approved.

I’m sure you remember that in Europe, we filed the Taxotere study first, and then we filed RIBBON 1. In the U.S. we filed the two together. And so it’s already been reviewed by the EMA. It is actually not like the ODAC that certainly comes up with some new information or whatever. The debate has already happened in Europe also about the PFS benefit and the ratio, and in the end they have decided to approve the extension on the Avastin label to the combination to doxitaxal.

So the debate has happened already in Europe. Now, a debate can always be reopened, of course, but it has happened. There’s nothing new that has come up in this ODAC discussion.

So now what they have on the table is RIBBON on, which is the extension of label to include a combination. That, they have to make a decision on.

Severin Schwan

Thank you. If we switch to the left hand side in the second row. Thank you.

[Sacur]- Ducan - Lacuri Security, Europe

Hi. You mentioned earlier, Sacur Duncan, Lacuri Security, Europe, you mentioned earlier that you’re starting to fell the pinch of the austerity measure in Europe. And I guess we’re all looking at pharma in Western Europe, and if you start there, looking at Avastin, or MabThera, or Herceptin, we can see some lumpiness there compared to the previous quarters.

Can you tell us, or can you give us a little bit of guidance on what proportion was due to Eastern timing and what proportion is due to the austerity measure?

Severin Schwan

Pascal, if you want to take this question.

Pascal Soriot

You’re talking about Europe in particular, are you?

[Sacur]- Ducan - Lacuri Security, Europe

Specifically Europe, yeah.

Pascal Soriot

Well, Europe, as I said, the impact, I think we have – I showed you a chart. The impact of the austerity measures in – if we focus on Europe only, in the second quarter was less than 1% on sales. But then you have the impact of the Easter sales, that was quite substantial. And essentially, the rest is what we’ve told you before.

Herceptin and MabThera/Rituxan are going to experience single-digit growth rates. I think we’re going to see a little bit of acceleration with MabThera in Europe on the back of this year indication and receive some acceleration there.

And we also will see, I think, an acceleration in first-line. We see a little bit of this. But it’s really MabThera that will drive the sales.

In the meantime, we will see single-digit goals, right. And you will have some variations from one quarter to another. If you look back in the history, we always have this. The thing is that when you grow by 10%, if you vary 2% from one quarter to another, nobody asks any questions. If you go single digits, of course, investor evaluations, or end-of-quarter evaluations have an impact. So mostly in Europe, it is the Easter impact.

As far as Avastin, we’re still growing. We’re still growing in Avastin indications. So there’s no big change in the line trend there.

[Sacur]- Ducan - Lacuri Security, Europe

I guess I was just look at, because in Q1 we have 18% and then in this quarter we have 9%. So it is quite a difference if you look sequentially.

Pascal Soriot

Yeah, but the 18% percent was on the back of a Q4 before the 12 lower. The 18% was overstated due to the end of first quarter sales that were communicated before. And therefore, Q2 was underestimated as a result.

Severin Schwan

I think what you should look at is our annual guidance. And our annual guidance is missing on the pharma side, that should give you a feel what growth rates you should expect for the second half of this year.

[Sacur]- Ducan - Lacuri Security, Europe

Relating to the austerity measure, in your guidance, it doesn’t include the UK or France, which hasn’t, up to this point, really given any –

Severin Schwan

No, no, this is a full guidance including the expected nationals which we see in Europe. So this is an all-inclusive guidance. There are no exceptions to that guidance.

Pascal Soriot

And in fact for France in particular, I guess your question was France hasn’t really implemented much yet in the way of price reductions. They haven’t signaled yet that they will implement launch price reductions to start with, but even if they did, nothing would impact 2010 by now. It would be an effect in 2011.

And now estimates, I think, I told you before in our presentation that the impact of U.S. Healthcare Reform and the European scene, we grow in the second half and it will grow even more in 2011 because of the [inaudible] in the U.S. and also because we expect a little bit more additional price reduction programs throughout Europe. But 2010 basically, we’re on track with our guidance.

Severin Schwan

Take the question in the fifth row.

(Unidentified Analyst)

The first question is for Pascal. You were reading this slide with the upcoming pipeline for H2, and you did not mention the results for Avastin, the adjuvant study. Does that mean that you have low expectation and the market should have low expectations?

And the second question is on the dynamics on the margins. You said that you have already, and you will assume optimization of your cross line. At the same time you say that, the R&D level should stay at the same level or slightly below for 2010.

Can we expect in 2011 a drop in R&D expenditure, or not?

Pascal Soriot

As far as the guidance is concerned for 2011, we will update the guidance as usual at the beginning of 2011 when we present to you the full-year results. For today, I have to leave you with the guidance for 2010.

Now, Avastin, we have not given up on it. And we will look forward to receiving the data. But of course, in view of the CO8 study last year, it has a low probability to reach the end point, there’s no doubt. And my understanding is that this is already reflected in the expectations.

There are a lot of mind readers in the room today. The truth is I was simply trying to stay on time and give – keep time for the clinic. And in fact, Scott Finic, I was working with Scott on the way in looking at this. I said, look, there are so many news and the paper is so rich, what do I do with this? I could speak 15 minutes about it.

And then we agreed that I would speak a few, but I knew that speaking a few would create questions. Avastin, there’s nothing new. We’ve told you before it failed and therefore the probability of success is probably lower than we would estimate before.

But there’s still a good chance it will work, and we are very keen to see the results.

Severin Schwan

All right. Perhaps if we can switch back here in the first row, and then I’ll start going back here. We still have another 10-15 minutes to go.

(Unidentified Analyst)

I think this whole issue of Avastin is one of clinical magnitude, but there’s actually a risk benefit. That was really the question here. We should do no harm.

So in terms of the European approval, my question – my line of thought here about whether new data is actually coming to the European regulator or not. So if you accept they have a ratio of less than 1, encompassing in this study, which I agree it is, and therefore [inaudible], the signal about a problem.

And then we look at the Ribbon 1 data that we show a 50% death rate in the Avastin arm versus a 43% absolute death rate in the control arm, which further confirms our signal, which is, of course, new information coming to European regulators.

And that death rate is driven by the current-approved chemotherapies used to day in Europe, maybe dexlitaxel and paclitaxel. But in terms of new information for the regulator, the RIBBON-1 may confirm the thinking for the regulator regarding the currently-approved therapies today. That’s my first question.

Now, my second question is not on beast cancer, it’s around lung cancer. We see the U.S. sales for Avastin are obviously flattish in local currency. And I would have thought that you would have gained a growth there because I understand you’ve switched your lung-cancer sales force into breast cancer to help push the indication. On the interim, it’s about 55% growing that.

So without having gotten no net-to-growth, is there a problem with the lung-cancer indication? We know erlotinib is approved. It’s got very good data in the maintenance setting by 5 months of overall survival in maintenance, which Avastin doesn’t have for first-line therapy of Avastin.

Is there a negative drag on the lung side of things in the U.S. which when breast cancer comes out, if they choose to do so, we’ll end up seeing actually a shrinking of the U.S.? What do you think?

Severin Schwan

Let me, perhaps, give a very real answer to put things a bit into perspective before we get into the last detailed study on a specific indication.

And that is, Avastin has grown by 14% for the first six months. I’ve, just a minute ago, indicated to you the overall guidance, even if the FDA decides to withdraw the first-line metastatic breast cancer indication in the U.S.

And if you interrelate those two points, you see that this is a strong-growing brand. And it is a brand which covers a number of important indications where we have very good clinical data.

With this, I’d like to had over to Severin, perhaps, on the very specific question. I think it was on the breast cancer side, and the Pascal, if you could comment on the specifics on lung cancer please.

(Unidentified Company Representative)

And I take the liberties, Alexandria asked a question about cancer, and there are certainly further growth opportunities coming. And as you explore it more in October, you will see the independent review data of our GOG to 18 and you will see the second positive trial of Avastin ovarian cancer.

Coming back to your point on the dorcetaxel subgroup of the AST cohort, this was a new subgroup, just 54 patients, and I think we highlighted on Tuesday that there was clearly an imbalance in prognostic sectors, which drove the imbalance in the mortality rate.

We can spend behind the dorcetex indication is primarily based on the full-powered and dedicated trial of trust designed to investigate the effect of Avastin on dorcetaxel.

Therefore, we believe we still have the ducks in a row, and the follow-up over survival measure, as we did for Avastin certainly will help in this respect.

Pascal Soriot

In lung cancer, first of all the evidence shows for any kinds of sales, by the way. We’ve got to be careful to look at this quarter by quarter because you have variations. If you look at the last two quarters in the U.S., it’s gone up, down, up, down, up, down, and again, when you have a lower growth rate, single digits, or low double-digits, then you know, end of quarter’s movement have an impact.

Now, it is very clear, and it’s nothing new that in colorectal cancer Avastin has kind of peaked, right? I mean, we have the market share that, the patient share we can get.

We’re still growing in sales. In fact, you should look at the graph I showed you that is capturing the so-called [inaudible].

It is showing you that there is growth there. I mean, it is not the growth we experienced three years ago. It’s not 20%-30%, but there is growth there. And so there’s growth in units.

And as you know, we increased the price a little bit, not a lot, but a little bit. And so, you know, we believe we are on track with our forecast. What we need to keep in mind is ovarian is at some point going to have an impact on sales as well. So there’s another growth driver that is coming up for Avastin.

So we are on track and it’s just not the 20%-30% growth rate we’ve experienced in the past. But it’s in line with what we’ve told you in terms of the overall peak sales guidance, which we just – Severin commented on, was 8% to 9%. In there, there was $1 billion for breast cancer in the United States.

Now, if we lose the indication, you know, on September 17th, then we have to lose, again, we also have to lose listings and then individual insurance companies have to decide to not reimburse anymore Avastin. So when those ifs have been gone through, then we would be, in fact, on course to some extend in between this zero and the 1 billion peak sales we had for breast cancer.

So it’s clear that our peak-sales guidance has to be adjusted. And we certainly will be targeting closer to 8 than to the 9 we had before.

Remember that all of this excludes ovarian, right. This peak sales was given excluding ovarian in the past. And so far, we’re on track with the kind of numbers I'm describing.

Severin Schwan

Thank you very much. If we can take here the gentleman on the right, and then I’ll come back to you.

[Seven Leger] - USB

Thanks for taking two quick questions.

First one, if said on flat 27, we shouldn’t read everything into omitting trials, but, I’m sorry, you didn’t include the ICON7 study there. And because there are a lot of question about Avastin in ovarian, could you give us some comfort that the GOG results were replicated?

We know that the primary endpoint was reached, and just tell us whether any toxicities were see at the FDA.

And also, you guide to 500 mil incremental savings for this year. Are you tracking those at all? Can you tell us what number of savings you have reached in the first half and how much we should look for in the second half of this year?

Severin Schwan

If I may take the second question first, and then on ICON7, perhaps Pascal.

We are not communicating on a half-year basis were we stand in terms of our cost savings. We are cross tacking them internally very diligently. And what I can confirm is that by the end of this year we will reach the 800 million as we have guided you.

On the second one, do you want to take this one, Severin, the coherence and ICON7 doesn’t fully duplicate GOG, but I would say the results are coherent with GOG. I don’t know how far we can comment on those two studies, but Stephen, if you want to add some color?

(Unidentified Company Analyst) [Stephen]

And before we get in trouble, we disclosed the results.

As I mentioned earlier, the independent review data of the GOG trial, which I believe is very important as well. And I would like to remind you all that the primary analysis of the GOG investigators will not be the one which will end up in the U.S. in case we get a positive review. But rather the second one for the tumor marker, where we had a six-month data.

And we are very confident with the independent review data of GOG. Overall GOG is a mobile bust data set. It’s a randomized placebo-controlled blinded trial, what I consider an open label trials. Overall, I think the big picture, I have to say they confirmed it’s a positive trial and we believe it will demonstrate that Avastin will play a major role in the treatment of ovarian cancer.

Pascal Soriot

And then will it be published?

(Unidentified Company Analyst) [Stephen]

In the beginning of October in Milan.

Severin Schwan

Just realize it’s not on the chart here. So next time, we’ll bring a nice chart for you with so much on it you that you can’t even read it.

(Unidentified Company Analyst) [Stephen]

We have to look, on this chart, at only those which are coming and not those which have already been reported; just to keep your excitement up.

Severin Schwan

Thank you. If we can take the lady here in the fourth row please.

Jill Walton – Credit Suisse

I’d like to try and move beyond this year in the guidance for this year because I think most people trying to invest for a longer period. Pharmaceutical companies are big ships and take a long time to turnaround.

A lot of other drug companies have seen a period coming up where their sales growth is not going to be as strong as it has been because of the patent expiries; different reasons to you. And they responded by doing really serious cuts of their costs so that they can try and sustain their earnings growth by a margin expansion if they can’t do it in the sort terms at the top line.

Now, my guess is you’re going into a period where your sales growth isn’t going to be a as strong as you might like it to have been. What I’m trying to get at is with margin gains.

Now, I’m confused as to whether you’ve invested in a primary care sales force that you can then take cost out of, or you were just going to invest in the future so you’ve delayed a bit of cost. You’re the only drug company on the planet where you’ve been growing R&D. Maybe you now feel that you can absolutely reduce R&D. I’m not interested in guidance for this year. Over the next 5 years, you know, should we see a real opportunity for margins to rise in the pharma business?

And then I’d also like to ask for diagnostics. If I look back at my spreadsheet, you used to product 20% operating margins in diagnostics. Has the world changed sufficiently, or that isn’t an object that you could get back to, or is your dominance in the area and your investment in new products such that we could assume that you went back to that sort of long-term diagnostics margin?

Severin Schwan

Yeah, you touch on a very, very important principle question. And eventually, it’s this balance between short term and long term, and it eventually comes down to the confidence you have in your pipeline and various projects which you are pursuing in the pipeline.

And you know, very often these discussion, do we like to invest in innovation or to be looking to our cost structures? I don’t think that this is mutually exclusive. I think you can do both. And I don’t think that necessarily excessive batches drive innovation. What drives innovation is the quality of the science, the quality of the people behind it, and it is the passion of the people they put into their projects. And this is the balance we have to strike.

As far as the shorter term is concerned, we have given you a very concrete guidance for this year, including R&D. If we look out five years, or perhaps ten years, our strategy has not changed. Our strategy is a strategy which is focused on innovation. We have a basic belief that science will progress, and that we can tap into this progress of science, be it internally, be in cooperation with other companies, be it in cooperation with institutions. And we want to leverage this progress in Science.

So we have to find the right balance, and we have to also deliver in the short term so that we have the flexibility to invest into innovation for the long term.

But fundamentally, our belief is in innovation in medical differentiation. And fundamentally, we believe that science will progress. We also believe that we have a competitive and a sustainable advantage by having diagnostics and pharmaceuticals under one roof because maybe things get more tailored and because we can work more closely together between pharma and diagnostics, especially in the early phase, which is more difficult for other pharma companies.

So we believe that we can be on top in science. So fundamentally, we will not cap the cost in a way that it endangers our long-term future. But this must not be an excuse for delivering on the short term and this must not be an excuse for operational excellence and constantly importing productivity across all functions.

I hope this gets to a bit of the flavor without giving you a guidance for 2011 or the next five years how we approach the business and how we see the industry moving on.

We have kind of a three-prong approach if you want. One is kind of the consequences, I may way, of the first product delay and how do we adjust our organization. And we haven’t made a decision to set down number here, but how do we direct this.

The second is portfolio management. You know, how do we prioritize and importantly, how do we raise the bar? How do we raise the bar for the projects we move into Phase 3 to really make a difference for patients and are clearly differentiated?

And it’s easy to say, to talk about. It’s very difficult to implement because some projects are clearly no gos, others are clearly gos, but a lot of them are in-between and they have to have robust discussions around those. So clearly, a lot of our focus is organizing our selves so that we have this and we raise the bar. And we only progress projects that really will make a difference.

And the third, the third part is a version of our excellence, as Severin was saying. And we are launching an additional program there on top of everything we’ve been doing before to look for further improvement in importance of productivity.

So we will keep working on it, but don’t expect an announcement where someone says, okay, I’m going to say 700 million, but we invest so much of it and in the end you look at it, there’s no savings. We commit that we will keep saving money and hopefully as we’ve shown you in the first six months that we are doing it, and we’ll keep doing it in the future.

And it’s not either or. I think that is important, the important message, it’s not either or. If it would be either or, then we ought to get out of this industry.

Dan O’Day

Andrew, I know you’ve been waiting for this question the whole time, and my answer will be very short. But you know, of course we don’t give specific margin guidance in diagnostics, but let me just read the story for you.

Yes, we were at 20%. We needed at 12% last year. There are a number of reasons for why that was, not the least of which was getting into tissue diagnostics in a big way, which is driving our top line now. But I’ve also said, without specific guidance, you can continue to expect margin improvement in the diagnostics business, excluding other major acquisitions.

And I would say also that – your question was have I seen drastic changes in the margins in the industry. No, I haven’t. It’s a little hard to do apple-to-apple comparisons in diagnostics because all the major players are in different segments of diagnostics and many of those segments vary drastically in terms of the margins.

But when we look at it, we certainly expect to get back to, you know, industry standard profitability if not industry leading profitability over time.

Severin Schwan

Thank you, Dan. That was important. Now, Andrew

Andrew Banks – Morgan Stanley

I think I should sit more towards the front next time. I have three quick questions. Erich, you’ve told us how thin and productive Russia is. I have to say that when I think of the peers, Russia is the last company that springs to mind as necessarily being thin.

Could you remind us the size of your U.S. primary cast sales force. And also remind us how many people from Russia attended ASCO this last year.

My point being that my perception is there’s a very deep wedge indeed, which Russia could address to mitigate some of the revenue pressure.

Secondly, could you touch up on the incremental returns on adding to the existing Avastin field force? What I’m trying to work out is what is the relationship there? Have we reached a threshold or can you continue to grow the market positive by adding more man, again trying to address productivity?

And then thirdly, obviously taspo has not been a pleasant experience for either your or investors. You’ve taken for which your CETP inhibitor well head of Merck, especially given the light of what’s occurred with Pfizer and the safety signals from a first-generation compound.

So I guess what I’m getting at is do you think you have sufficient competence and thought leaders internally in the field of cardiovascular and metabolism compared to your legacy businesses of oncology and then before that, neurology? Is there sufficient talent internally? Is it time to actually add to the existing talent?

Pascal Soriot

The first question, the primary care team, we have about 750 people in the primary care team in the U.S. But we also have state of primary care team in Europe. We still have a team in France, in Germany. We don’t have one in Italy. We have one in Spain and Greece. We have a primary care team in Europe, across Europe. So 750 in the U.S.

So I guess if you’re point is, what are we going to do, I guess I can only give you the same answer as before and always. We are exactly looking at it now, and certainly one – there’s a number of scenarios that are kind of this close, unfortunately today, but we are looking the scenarios and then we’ll make a decision in the next few weeks, couple of months or so.

But it is clear that one of the scenarios is for a substantial resizing realignment of the sales force.

As far as the other comment ASCO, we certainly can reduce the number of people going into ASCO. But, you know, joking about the ASCO is a very, very important event for a company like ours. And I can tell you 100% of the – I hope at least, all the people I see going into the ASCO for Roche, they come out of the ASCO, they’re exhausted because they’ve gone from meeting to meeting with customers, with other firms, with internal meetings because people have come from around the world. And people keep working the whole week because it’s a unique opportunity to spend quality time with your customers, and make decisions, etcetera.

But it is clear, the message is clear, there is potential for productivity improvements across the organization, and we’ll commit to work on those and do it.

The third question was the CETP. I think you have to make a difference within diabetes and cardiovascular to start with. Diabetes and cardiovascular are two, I'm mean, you kind of put them together and either call them cardiovascular or call them metabolism. But in fact, the thought leaders, if you want, are different people, both out there in the field, in hospitals, but also internally in the company.

And on that, we have a lot more cardiovascular expertise than we have on metabolism experts inside the company. In fact, to start with, the head of Global Development, Hal Barrin, who’s a cardiologist by training. He doesn’t show it too much because, you know, he knows oncology very well, but he is a cardiologist special.

We have a number of cardiologists that have joined us from different companies. Do we have enough expertise? You never have enough expertise. And suddenly, we have less experience in cardiovascular than we have in oncology for all various reasons.

But I think in cardiovascular, yes we do have quite a bit of expertise, clinical expertise. That is to say, we have a strong team. I have to say, this clearly is a strong team with people coming from other companies.

And practically, we also have a very strong team. You have to realize that a lot of the data that have been published and presented lately about CETP inhibition, our product, the Merck compound, all this work has been internally at Roche and has been lead by people at Roche who really are expert in the field for lipids.

So I think yes. Now, it’s still a very risky project, there’s no question. You also had a question about Avastin.

To be honest, you can always adjust the oncology sales force, but in the U.S., which is the largest market, you know, even in the U.S. force is 150 people. It’s never a huge size or – in oncology, the cost is not in the cost of your sales force, it’s in the cost of your clinical activity, etcetera.

But in primary care, for sure, we have large numbers of people.

Erich Hunziker

Maybe I’ll add something. You know that for many years we are constantly benchmarking sales team, not only to the pharma industry, but also to industries outside the healthcare business where cost pressure is even deeper. And one overall muscle of how we cut step by step our basis, it’s definitely our production network. But you see, I kindly invite you also to respect, we maybe have a special product program. In very many countries, the governments are our main customers and you may also understand in tense times that employment is a very sensitive issue.

And we have just actually cut the rate of two more factories, and you don’t hear anything. On the other hand, we might have had the respective authorities knocking on the door and saying, how can you actually lay off people in this difficult times and still demand prices.

So I think we understood your message very well. And I think Pascal has given you very clear hits, or commitments that this is not just something which is business as usual and we are working extremely closely together with his team and my team to step by step convince you by facts and not by announcements.

Severin Schwan

Thank you, Erich. Perhaps with this, we’ll take one more question because we then have to spread out to the various sessions. You on that side, the gentleman please.

Marc Becker – Fidelity

This is a question, once again, on primary care. On your Slide 53, where the enemy submissions are, it’s very clear taspo now moves over to post 2013. So I now have three drugs to be filed post 2013.

It’s very clear you have an enormous ability to leverage in the primary care sales force. In the scenario that it doesn’t exist to carry the weight of the sales force, how many of the three diabetes are required for you to justify a primary care sales force presence?

It can’t be one, but is two enough?

Pascal Soriot

I mean, the answer is really to get full productivity out of a team – out of one team in two products. But ideally having three halves because what happens, especially in the United States, in the U.S. market, is you need to reach out to doctors, but you also need frequency. You cannot have the same person going back and seeing the same doctor every week or so.

In some cases, frequency in primary care in the United States can be up to 40 visits a year. That’s the way the market is today. It might change in the future, but today’s still leaving with relatively high frequencies. So you need several teams. You want to completely optimize three products is ideal, but only two is fine.

But the point is that having – I think moving forward, we have to, as an industry, and certainly that’s what we are looking at right now, is can you come up with another model and invent – come up with a different business model where you do part of it yourself, or you outsource your sales force. You know, there’s a number of options in terms of how you can do this. You can do it yourself, which is something I’ve learned in the past, and that’s the way most companies would have done it in the past. Moving forward, we need to come up with maybe a model that’s a little bit more flexible so that we can adjust to how many products we have in our portfolio. The answer is, two is the right number, two products.

Severin Schwan

Thank you very much. Thank you for your interest. With this being split out in the various sessions, could I just let you know that Erich and myself will remain here.

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