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Executives

Severin Schwan - CEO

Pascal Soriot - COO, Roche Pharmaceuticals

Daniel O'Day - COO, Roche Diagnostics

Eric Hunziker - CFO

Hal Barron - EVP Global Development and CMO, Genentech

Stefan Frings - Avastin Franchise Director, Roche

Analysts

Timothy Anderson - Sanford Bernstein

Sachin Jain - Merrill Lynch

Alexandra Hauber - JPMorgan

Andrew Kocen - Redburn Partners

Marcel Brand - Credit Agricole

Amit Roy - Nomura

Vincent Meunier - BNP Paribas

Keyur Parekh - Goldman Sachs

Andrew Baum - Morgan Stanley

Luisa Hector - Credit Suisse

Roche Holdings AG Basel (OTCQX:RHHBY) Q3 2010 Earnings Call October 14, 2010 8:00 AM ET

Severin Schwan

Good afternoon, ladies and gentlemen, and welcome also from my side to our quarter three sales call. As you've seen, we delivered a solid sales growth for the first nine months on the Roche Group level at 6% in local currencies if we exclude expected decline of Tamiflu. Pharmaceuticals was up by 5% in local currencies, Diagnostics up by 8%, significantly above the market.

If we turn to Page 6, you know that we have started a productivity initiative called Operational Excellence this year. I'd just like to reemphasize again we are doing this off a position of strength, and we continue to focus on innovation.

We have now 12 new molecular entities in the late stage pipeline, which I believe is industry leading. The environment is getting more challenging. We're all aware of the increasing price pressure in the U.S. and Europe, increasing regulatory hurdles. This is the reason why we adept our processes to get the necessary financial flexibility to continue to invest in our strong pipeline and to protect our profitability. As we announced earlier, we will communicate the detailed measures before yearend.

If we turn to Page 7, again, here you can see that we've further progressed our late-stage pipeline. We have now up to 14 new molecular entities in the late-stage pipeline, and a number of exciting data, if we turn to Page 8, have just recently been announced at ESMO namely for T-DM1 in breast cancer, MetMAb, Tarceva in lung cancer and Avastin for ovarian cancer.

I don't want to put too much emphasis on external service, but it is good to see, as you can see on Slide 9, that the Science magazine just recently announced that Genentech again ranked number one in terms of top employers in the biopharmaceutical industry, and it's also good to see that Roche is ranking among the top five players. And I believe this underlines our continued commitment to innovation in science.

To conclude with Page 10, we confirm our outlook for 2010 based on the performance for the first nine months. The mid single-digit growth for the Group and Pharma, excluding Tamiflu, is significantly above the market growth in Diagnostics and the double-digit for core EPS earnings.

And with this, I'd like to hand over to Pascal Soriot.

Pascal Soriot

Thanks, Severin, and good afternoon everybody. As Severin just told you, we experienced a very robust third quarter. On a cumulative basis, as you see on Slide 12, the Pharmaceuticals division, excluding Tamiflu, grew by 5% in the third quarter, and so a growth rate of about 4%. This is after of course the impact of the healthcare reform, which we estimated about 1.5% on a global basis, including both the U.S. and European effects. So our growth rate without this would have been close to 6%.

So a 5% growth rate, excluding Tamiflu, for the first nine months places us in line with the market growth rate. I would even suggest that we are slightly ahead of the market growth rate, because growth rates reported by AMS and others for the market tend to underestimate the impact of rebates increasingly common in the marketplace in the United States. So far so good. We are in very much in line with the market and certainly above.

On Page 13, you can see what are the products that are driving our growth and which products are slowing us down. Of course, the biggest from the point of view of holding us back is Tamiflu. We lost $1.2 billion in sales with Tamiflu in the first nine months compared to the previous year, and this was totally expected, because the pandemic sales are of course behind us.

We're also impacted by the sale by CellCept. The patent expiry of CellCept is still having a drag on our topline, but it should actually be finished for quarter four. Quarter four last year in the United States for CellCept was low, and we should not have this negative impact of CellCept in Europe any more moving forward.

I'd like to spend a few minutes talking to you about the products that are driving our growth, because each of them is really experiencing pretty good growth. If you look at Avastin in the quarter grew about 7% in local currency, MabThera/Rituxan 6%, Herceptin 8%, Lucentis 34%, Xeloda 16% and Tarceva 9%. So a very healthy growth rate across the entire portfolio.

And if you were to look at MabThera and Herceptin, what is happening is actually exactly what we told you several months ago that you should be expecting for both MabThera and Herceptin we have low single-digit growth rate in both the U.S. and Europe. And the growth of these two products is driven by the international region.

Let me just give you a couple of numbers. We grew MabThera by 16% in the third quarter in the international region, and it was 14% the quarter before. So the growth is accelerating in growth rate. Herceptin grew by 29% in the quarter three in the international region versus 20% in the previous quarter. So those products are very much on track with what we told you before.

Avastin is growing by 34% in quarter three in the international region. Now, the effect that we are noticing is a slowdown in the United States and to a lesser degree a little bit in Europe, but much less. And certainly in United States, that slowdown in sales is linked very much to the uncertainty surrounding the breast cancer indication, and this is probably something that will remain until we have reached a conclusion as far the breast cancer indication in the U.S.

Moving on to Slide 14, oncology sales across the board grew by 8%. Avastin, I just talked about a minute ago, grew by 11% on a year-to-date basis. We launched in China. We have good uptake in Japan. We still see a good growth in colorectal cancer around the world. And lung cancer is stable or even growing in Europe. And of course, breast cancer is certainly a more difficult situation.

If you look at MabThera/Rituxan, the growth there is actually driven by the adoption of CLL and the increasing use of the 500 milligram dose which still has got some way to go, because in some regions of the world that dosage is not yet in full use. We see a patient share increase also in CLL.

We see a beginning of growth in follicular maintenance in relapse patients, but I think what I wanted to highlight to you today is that some of you may overestimate the impact that the maintenance data, the PRIMA data has in first-line follicular maintenance. We haven't got approval for this indication yet. In the United States, we already have 95% in share in that segment.

So the growth will come out of Europe and the rest of the world. And in those geographies, we need the indication and a label to obtain our investment. So we haven't seen growth in that indication yet. It is ahead of us. And clearly, we'll keep driving MabThera forward over the next few quarters.

Herceptin is doing very well. As you saw here, we still see a growth in the HER2 positivity rate and particularly in Europe.

Moving to Page 15, if you look at Avastin, we have a slight decline in first-line metastatic breast cancer share in the United States from 55% to 50%. Sales seem to have stabilized actually over the last few weeks, but suddenly we were over the last quarter negatively impacted by the developments in the United States around that indication.

In Europe, we are stable in colorectal cancer, and we are reporting here a stable picture from (inaudible). In fact, we are slightly growing. We started growing in the last couple of quarters, and it is a very positive picture. And we also have growth rate in patient share in metastatic breast cancer, as you can see here, from 30% at the end of last year to 35% in Q2 this year.

I'd like to talk to you a little bit about Actemra on page 16, because this is really a success story and we are very happy with the results so far. The uptake remains very encouraging. In the United States it is prescribed by nearly 60% of rheumatologists, and we have a patient share of 4% to 7% following anti-TNFs.

As you probably remember, we don't have yet approval for the first indication. We hope that we can obtain it over the next couple of years. But in the context of the approved label, we are extremely excited with the results we've seen in the United States and in Europe and particularly in some markets like France we're doing extremely well. We are about to file sJIA pretty soon.

Another very exciting product for us is Lucentis in the United States on Slide 17. We had, as I told you a few minutes ago, accelerating growth in the last quarter in quarter three, and this is essentially due to continued increase in the number of injections in AMD patients, but also the launch of the RVO indication in Q2. And the initial uptake is very encouraging.

Importantly, you can see the population of RVO patients is not as large as AMD patients, but it's certainly a very large population and should help us drive the growth of this product over the next few quarters.

And next, we expect the results of the use of Lucentis in DME patients. And again, this is a quite large target population in the United States. There is a risk on the horizon across the CATT Study and we would have to wait until early next year to know this study result.

Moving on to page 18. A few words regarding Pegasys. You will note, when you look at sales that the figures itself are not so exciting. I would say that the one thing I wanted to highlight to you is, in fact our market share is increasing. As you can see here, our market share is increasing very steady here, rapidly in fact, and we are at about 75% share in most markets around the world. Note that in the United States we are above 75%.

What has been happening is, the market has been declining because patients are being warehoused. The research we conducted over the last few months is very clear. Doctors are telling us they are warehousing their patients in anticipation for the launch of the new all-oral agents.

So we believe that the launch of this new all-oral agent will drive an acceleration of the market number of treated patients and an acceleration of Pegasys sales. We are very happy to have both the danoprevir rights from InterMune, because very importantly, of course it gives us access to this important new treatment therapy, but importantly it gives us freedom to operate in combining Pegasys with all antiviral agents for the treatment of Hepatitis C.

So we have total freedom to operate, and certainly we expect great positive impact on Pegasys.

Avastin, on page 19 as I said is of course going through a challenging period as far as breast cancer. But this product has growth still in colorectal and lung cancer. Importantly, this product has potential growth in ovarian cancer. And I wanted to show you here and remind you here the results of the GOG trial that clearly demonstrates the value of Avastin in the treatment of ovarian cancer, a condition in which no new therapy has actually come to the market over the last 10 years.

But what is also very important in this GOG trial is that it really reinforces the assumption that with Avastin, patients should be treated longer. And we believe moving forward, Ovarian should be a growth driver for Avastin but treatment duration should also be a growth driver, and those results support this assumption that treatment duration matters.

The ICON7 trial was presented at the ESMO and we believe confirms the results we saw with GOG. This is a positive study, possibly less impactful as the GOG trial, but I'd like to remind you that the dose used was lower and the treatment duration importantly, was shorter and we had more early stage patients.

But the one important point I think here to remember when you think of ICON7 is the shorter treatment duration.

Two new agents that also were discussed at the ESMO conference, on page 20 and 21. First of all, T-DM1, outstanding results from the point of view of safety in particular. When T-DM1 was compared to the start of regimen of combination of docetaxel and Herceptin the efficacy as measured by objective response rate was similar. But as you can see on this graph, very substantial reduction in adverse events.

In particular I'd like to point to you, there is very substantial reduction in Alopecia, Neutropenia and Diarrhea, and we all know how traumatic Alopecia is for women suffering from breast cancer. So we believe this agent has a very, very important place in the treatment of breast cancer patients.

Another very exciting product, MetMAb on page 21. We also presented results at the ESMO. And in so-called MetMAb positive, over-expressing patients we will represent about 50% of lung cancer patients. We demonstrated a strong PFS benefit

Just like to remind you that these earlier results a are of a small population, so out of a small population like this you shouldn't expect very statistically significant results. But clearly, the difference in PFS is very substantial. And subsequent data confirm our view that this agent will actually play an important role in the treatment of lung cancer moving forward.

On page 22, I'd like to conclude by sharing with you some of the news flow that will come through over the next few weeks between now and the end of the year. And we'll be presenting results in multiple sclerosis, the ocrelizumab results in the treatment of RRMS. We'll be presenting results with our new polymerase inhibitor in HCV, BRAF in the treatment of melanoma, GA101 in aNHL, GlyT-1 in the treatment of schizophrenia, and finally pertuzumab in HER2 Breast Cancer treatment.

I recognize that over the last few months we suddenly experienced a few setbacks in our portfolio, and those setbacks sometimes create doubts as to the strengths of our pipeline. I just invite you to look at this slide in front of you, this page 22 and just process the information you have in front of you.

And also, want to remind you that T-DM1 and MetMAb that I just talked about are not represented here because the resulted were just presented at the ESMO. And if you look at these slides all these products are Phase III candidates. It really shows you the strength of our portfolio.

And in fact the challenge we have as an organization is to fund the development of all these agents while growing our profitability. So the Operational Excellence program we launched is not an exercise in desperation; it's really a productivity improvement program that is aiming at freeing up resources that we'll invest in, in growing this pipeline.

So we are very excited in the results we'll be presenting over the next few weeks and we invite you to join us in London on December 9, where we'll be presenting an update on our late stage pipeline.

Thank you so much, and I'll hand over to Daniel O'Day.

Daniel O'Day

It's a pleasure to present the quarter three for you on Diagnostics. The key message is really that the Diagnostics Division is firmly on track to deliver above-market growth this year through quarter three. All the businesses are contributing as you'll see.

Our Operational Efficiency programs are underway for margin improvement in the division, and we are continuing to roll out new and innovative products that will allow us to grow not only this year but in subsequent years at a very fast pace in the diagnostics marketplace.

When you look at Slide 24, you can see through September of this year, we have an 8% overall growth in the diagnostics division. And you can see that each of the business areas is contributing to that in terms of the leadership position.

On Slide 25 we can see a little bit more how that breaks down by regions and some of the key factors that are allowing us as the world leader in in-vitro diagnostics to continue to grow significantly above the markets. In our largest business, professional diagnostics, we're having a 10% growth. Strong growth also now in North America with the launch and roll-out, just recently of our largest analyzer, the cobas 8000 in the United States marketplace.

In Diabetes Care, we have strong growth particularly outside the United States where we've launched our new innovative product line, soon to be launched in the United States. And you can see overall 5% growth there in a market that is challenged by the current economic situation. So strong above market growth there in Diabetes Care as well.

Molecular Diagnostics you can see that the rollout of our cobas 4800 system which is the platform that handles our HPV assay as well as CT/NG and other assays has had strong uptake ex-United States. And this is the same platform that's under regulatory review right now in the United States combined with our large ATHENA trial database which demonstrated a strong medical value of our HPV test in identifying women with cervical cancer, even in the absence of a negative pap smear.

On applied science, we're rolling out our GS Junior product which is our smaller sequencing product into the marketplace with good uptake. And tissue diagnostics growing strongly at 18% with continued rollout of both systems as well as innovative assays in the diagnosis of cancer.

Now turning to Slide 26 to give you an example of our third quarter progress, as we committed to you at the beginning of year, we have now rolled out both our immunoassay module on our cobas 8000 system, our largest analyzer system to the largest labs in Europe. And we've also rolled out our clinical chemistry analyzer in the United States.

A key point on this is, in addition to the cobas 8000 market penetration, we continue to penetrate well with our largest install base instrument in this business which is the cobas 6000 module. And the other important point to point out here, which is impressive in terms of growth, is our immunoassay growth rate of more that 16% across the globe which for our largest business is a key driver steady innovation in professional diagnostics.

Also in the third quarter, we continued our targeted acquisition strategy. If you recall, we had the Medingo patch pump in the first half of the year. And in the third quarter, we added to our world leading strength in Ventana, our tissue diagnostics business by acquiring a company called BioImagene in Sunnyvale, California. And what you can see is it adds very nicely to the portfolio of products for our customers out there in oncology. And allows us to strengthen both our offering to our customer base and the value we provide as well to our internal Roche Pharma organization in terms of PHC.

Well, what this allows you to do is to take a slide that is normally a very manual slide, put it into an image, share it with clinicians at multiple sites for better diagnosis, as well as algorithms that take subjectivity out of the diagnosis from tissue diagnostics. And a good example of that is actually on Slide 28 to pick up on Pascal's comments; the MetMAb program just recently introduced that ESMO is facilitated by a specific IHC assay developed within our tissue diagnostics organization to identify those patients that in fact will benefit from this important new therapy within the Roche pipeline.

So this is another example of PHC becoming ever more prevalent in terms of our late-stage pipeline. This adds to of course our BRAF which is also with Roche Diagnostics, T-DM1, of course Herceptin and more than 160 programs within the Roche organization right now that we have in mid to late to early stage development on companion diagnostics, bringing the group strategy to life in the later stage portfolio.

So to close on Slide 29, I can confirm that we're well on track to delivering upon our commitment within the organization of above market growth as well as you can see on that slide, the additional elements in each business that we intend to deliver to drive our growth not only in 2010, but to set us up for strong growth as well beyond.

So with that, I will turn it over to Eric Hunziker to cover the financials.

Eric Hunziker

Thanks, Dan. If we turn to chart 31, it becomes obvious that major currencies and in this case it's the euro, the U.S. dollar and to a certain extent the British pound have really weakened against the Swiss franc and this couldn't be compensated by all these smaller currencies which actually have gained against the Swiss francs.

If we turn to chart 32, some of you have followed us for many years know that in the year 2004, we have pioneered with the idea of a core concept where we wanted to give you a clear ongoing and frankly on the underlying business. And of course in our ambition to be a little bit a leader in transparency and we are also following out what all our peers are doing. So we have come to the conclusion that it's a the right time for us to move to the next S-curve of this core concept. And this would look in a sense that we will no longer have any kind of exceptional lines in the IFRS statement. So we will have the IFRS statement as is.

But then we will build you a very transparent bridge to core P&L for the two divisions and for the group which you then can follow-up much more transparently what's really happening without a lot of detail as support from our side. And as we did this in the past, we will offer for those who are interested in this, we will offer a workshop in an analysts call in frankly one week from now where Ian Bishop and Erwin Schneider and Karl Mahler, the key expert team, will give you all the details on this concept.

And of course, we will also then give you the restated background material so that you are well prepared in time to then when we come out for the 2010 results in early February that you can actually already work in the new concept which from our perspective are much easier format for you and where you have a better transparency.

So in the interest of time, I am not reading out Chart 33 where we're confirming, as Severin has prompted out our guidance for the year, and I would now open up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) First question from Mr. Timothy Anderson, Sanford Bernstein.

Timothy Anderson - Sanford Bernstein

You had mentioned U.S. reform in European price cuts pressuring sales a little bit. Can you quantify what the impact to sales might have been in the quarter? And second question is on the topic of biosimilars. Can you outline what you expect regulatory authorities in Europe will require for biosimilars to get approved to Rituxan and Herceptin? We're wondering if it may just be response rate data followed after approval by post marketing collection of more robust data?

Pascal Soriot

The first question related to the impact of Health Care Reform. If you add Health Care Reform in the United States and the price reductions that we have experienced across Europe in Germany, Spain, Greece and a number of other countries, the impact for the quarter was about 1.5% of our sales. We expect you have this in the appendix is Slide 86. So it's 1.5% for the quarter. We expect that it may go up to close to 2% in quarter four as the full effect of European price reductions come into force. And it should steady out from there.

And next year, we also have the impact of the excise tax in the United States that would kick in. We would expect that by then the effect will be between 2% and 3% on our topline. So that's the answer to your first question.

As far as the second question, TNF, I wouldn't want to speculate as to what the regulators in U.S. and Europe will actually be deciding. The draft guideline says, we'll come out in Europe pretty soon. And there will be a phase of consultation, and probably we will have the final document by mid next year, and in United States the process is also ongoing.

The discussions will take place as soon as the first draft comes out. There's a variety of options, one of the options indeed is that in Europe they may decide to give a quarter by similar breaks on the basis of response rate, followed by confirmatory trials. This however that happened should take for instance Herceptin, I would think would only be possible for the metastatic setting.

And it would be very difficult to extrapolate from the metastatic setting to the adjuvant setting, where the effect of Herceptin is further realized, while understood, and where you would expect noninferiority studies demonstrating clear clinical benefit to be necessary for the approval. But it's difficult really at this point to speculate on what the regulators will come up with.

Beyond this regulations, I would like to remind you is that, we are patent protected in Europe until 2014, number one. Number two, it will take biosimilar companies quite some time to complete their development programs. Even on the basis of a response rate, you could imagine the study size will be such that we would expect them to not reach the market before late 2014 or 2015 more likely.

And finally, as you know we are preparing to manage the post patent life cycle of products like Herceptin, MabThera, and if you look at Herceptin we have strong data with T-DM1, you will see soon in the next couple of months, strong data with pertuzumab. So in between pertuzumab and T-DM1 we are very well positioned to manage the life cycle of Hercepting, and on the MabThera side we have GA101.

Operator

Next question from Mr. Sachin Jain, Merrill Lynch.

Sachin Jain - Merrill Lynch

Just a couple of product questions and a couple of questions on operational excellence if I may. So firstly, on MetMAb, data strong hazard ratio and improving PFS for six weeks. I just wondered if you have had any discussions with the FDA as you start thinking about Phase III, as to what they would view as a clinically meaningful improvement in PFS or overall survival as you think about the Phase III studies there?

Secondly, on T-DM1 I think you have historically talked about potential for premium pricing for this product relative to Herceptin. Do you believe you can get premium pricing if the data that we have seen so far is replicated by broadly similar efficacy and advantages down to safety profile?

And then just a couple of questions on operational excellence, just referencing the slides, you make two points. Firstly, focusing investments to drive innovation suggest further portfolio rationalization. I just wonder whether you have put any new metrics in place to discontinue compounds versus the metrics you have used historically. For example, significant discontinuations following the Genentech merger.

And then secondly, your comment was protecting profitability. Again, just to understand from a top-down perspective the scope of what you are trying to achieve, is what you are trying to achieve the cost-cuttings to offset topline pressures? But do you think we can see upside existing consensus forecast, which already expects margin expansion?

Pascal Soriot

Maybe I'll cover the pricing question on T-DM1 I'll quickly, ask Hal Barron to address your MetMAb question. And, Severin, do you want to answer the next question. So on the T-DM1 price, Sachin, yes, we see pricing upside for T-DM1 very much through in the United States, and we are in the process of doing pricing research. And the data we have received so far are very encouraging I would say.

I can't tell you what pricing we are thinking about, because we are still of course discussing this and we would keep this information until we launch, confidential until we launch the drug. But there is definitely pricing power here with T-DM1.

Clearly in the U.S. but also we believe in Europe and the rest of the world. The clinical benefit is certainly very, very clear and in patients who are in need of new solutions, very encouraging here. Hal, do you want to cover the MetMAb question.

Hal Barron

Sure. I think you know we're early on in the days of discussing this program with the FDA. But what I will say is that while we've had discussion with them in the past about clinical programs and the magnitude of clinical benefits that's needed to be seen, that's really predominantly focused on PFS.

And when we observe in the Phase II, a hazard ratio of 0.55 for overall survival, I think there is a little doubt that in effect like that on overall survival is confirmed in a robust statistical manner, reasonably confident that the regulators and others will see that as a dramatically improving clinical effect and won't be of significant concern.

Severin Schwan

On the operational expense you had a question regarding whether this would also concern our portfolio. Yes, we are regularly reviewing our portfolio and certainly the hurdles which we see going up in particular by the FDA also has in impact on how we look at the portfolio. And I think the good example for that is T-DM1, where we power the study originally for PFS and we change the protocol.

And we have basically dropping the size of patients to power it for overall survival as co-primary end-point. So it is operational excellence is also looking at prioritization of our portfolio as we go forward. In terms of profitability and guide in some profitability we will provide this guidance as usual when we communicate again and that's beginning of next year.

Sachin Jain - Merrill Lynch

I want to raise a very quick follow-up on that last point. Just a top-down scope of what you are trying to achieve, if the extent of what you're trying to achieve to offset the pressures you have seen recently or can we think about something significantly over and above that?

Severin Schwan

I wouldn't comment on that at this point in time. We will communicate the decent measures of operational excellence before the end of the year as we'll certainly provide you with the best flavor. On the magnitude of this initiative and impact on our cost base and we will then provide the guidance for 2011 as you communicate the yearend results.

Operator

Next question from Mrs. Alexandra Hauber, JPMorgan.

Alexandra Hauber - JPMorgan

Firstly, just to clarify on the new jargon which came with the Genentech acquisition, we used to talk about Phase III GOG division and now we have the LIP divisions. And I sort of roughly know what they are, but is there really, could you just tell us what really the difference is? And if I look at the three products while we have the LIP divisions, the MetMAb, polymerase inhibitor and Ocrelizumab , given that they are all in competitive fields. Can you give us an indication of what the earliest Phase III start would be for these three molecules?

And second question is, just on applied science, what happened in the third quarter, because your local currency growth, is really slumping from 14% in the first half to minus 2% in the third quarter. Is that just finally the no more swine flu test, and the 200 million we are seeing now is the sort of sustainable level, excluding this one-time bump from the swine flu?

And the third question is, Erich, it is good to see that you want to be a leader in transparency. Can you just tell us where you are in your thinking on the quarter reporting for next year?

Severin Schwan

Perhaps we'll go first with Hal if you could comment on the criteria for LIP transitions and if then Pascal could take the second question on the sales growth in the third quarter and before, and before we are listening to Erich on quarterly earnings. Hal, please.

Hal Barron

Good question. The LIP quicker in the movement into Phase III are very similar. And the way we think about this is for any given molecule when the data set has been generated that gives us adequate confidence that the drug is likely to be first or best in class, and really make a big difference for patient. Then we make the decision to really un-gate a significant amount of resources and move it through into it's next phase of development.

Some times that actually does occur at the end of Phase I when the days in Phase I is extremely compelling, we've had examples of that. Often times in fact most of the times it's at the end of a group of concept study in Phase II where we now have evidence like with MetMAb that is likely to be an important drug. And so prior to the design of Phase IIs we identified a criteria that we believe is needed to be established in order to make that transition, and we designed the trials in order to be able to see those effects. And then at the end of the study, unblind the data and assess whether it's in fact crossed that threshold and make the decision.

So hopefully that's clarity on the process there.

Alexandra Hauber - JPMorgan

And on the earliest Phase III starts for the three compounds?

Hal Barron

Well, for the MetMAb, it's just early on. We've just made the LIP “go” in Q3. And so we are moving forward. I can't really give you a specific date for the start of that although we're hoping to do that soon. Obviously, there is discussions with the regulators and design etcetera.

So with the polymerase inhibitors, obviously additional data that we need to review in order to ensure that we can design the study correctly. Ocrelizumab I think is probably the first advance down there, and we're aggressively pursuing designs with the FDA and the EMEA and hope to start those trials soon.

Pascal Soriot

Maybe just to add on this LIP transition, first of all for everybody's memory, LIP stands for Lifecycle Investment Point. And as Hal said, this is the time when we move compound into Phase III. But it is an important point in time because it takes place before the start of Phase III and it is actually a time when we review the entire lifecycle plan over time. And Hal Barron and David Loew who is our Global Head of Product Strategy co-chaired this meeting, and at that point in time we really decided on the full lifecycle of the products. It's a very critical time point where we try to have more and more very demanding product profiles of course to be competent here.

Daniel O'Day

In a completely different order of magnitude, our H1N1 in Applied Science is very similar to Tamiflu and Diagnostics in fact. So in magnitude, we had CHF50 million to CHF80 million of sales last year in H1N1 which don't exist in our Applied Science sales issues because that's really the effect that you've seen in quarter three. It is not reflective of the rest of our product line that's in Applied Science.

Alexandra Hauber - JPMorgan

There was nothing in the first half? Because even on an absolute basis, although it is difficult to tell apart from FX effects, so this was really a third-quarter and fourth-quarter effect last year but then nothing this year at all?

Daniel O'Day

By the time we ramped up and delivered the products it was a greater rate on the second half of the year, that's correct.

Erich Hunziker

If we come to reporting Alexandra, I tried to listen very carefully to the wishes of our customers. And really listening to the customers, I found out that the top priority is really in easier core concept so that also investors without a lot of endless capacity would really have an easier access to our data. And I respect that the quarterly results are high on your priority list, but I have to serve all customers around the world and step one by one it's not forgotten. So it's good that you reaffirmed your interest, and I will take a note of it.

Operator

Next question from Mr. Andrew Kocen, Redburn Partners.

Andrew Kocen - Redburn Partners

On Avastin in breast cancer and the delay to the FDA decision, you said this was because you submitted additional information from RIBBON-1 and AVADO. Could you give us any clues as to what that might be? Is it sort of subgroup advocacy or biomarker data or anything like that?

And then a question on T-DM1. Obviously the ESMO results were excellent, and you will want to try to get the drug to market as quick as you can. Do you think you will be able to start adjuvant trials at any point before EMILIA or Marianne readouts, or you're going to have to wait until 2012, 2013 before you start adjuvant studies? Thanks.

Pascal Soriot

On the Avastin breast cancer question, United States and all, we have submitted a very comprehensive set of data but I would not want to comment on the contents of the application. We want to keep this confidential between the FDA and ourselves, and we'll have to wait until the conclusion of those discussions on December 16 when the FDA would make a final determination.

On the T-DM1 question, we are right now working through a long-term strategy, our lifecycle strategy for this product. Hal, you want to add on that question?

Hal Barron

No, I think you are right. We are working on the strategy, and I think as the data evolves in understanding the relative benefits of the drug compared to Rituxan-Herceptin combination, that's really helping us inform where best to place our bets on this molecule. And as you say, moving into the adjuvant's an option, we also have to think about how pertuzumab fits into the picture and the emerging beneficial safety profile that we're seeing with the drug in the Phase III was presented.

So we're putting all those together and we'll be coming up with a strategy as it relates to adjuvant quite soon.

Andrew Kocen - Redburn Partners

Do you think it is technically feasible to start adjuvant studies before you've got even second line data?

Hal Barron

I think it is technically feasible depending on the data generated. In fact some studies in the new adjuvant setting can be useful in gaining resources in an adjuvant program, and that's becoming a strategy that some people employ. And as you know we'll be presenting data from NEOSPHERE very soon and that may shed light on the utility of such an approach.

Operator

The next question is from Mr. Marcel Brand, Credit Agricole.

Marcel Brand - Credit Agricole

Three questions. One is the FDA decision obviously on December 17 and presumably the EMEA decision as well shortly thereafter or around that time. To what extent will these data points influence the timing of the announcement and the nature of the cost savings program? That is the first question.

The second question is on the German healthcare reform. What is your latest take on the German healthcare reform? Do you expect the necessity also to negotiate reimbursement prices of already launched products?

And the last question is on Avastin. I saw that international sales, and I refer to pages 21 and 26 of the press release, I saw that the currency headwinds for Rituxan in international sales was 4%, for Herceptin it was minus 3%, but for Avastin it was minus 11%. So that to me suggests that you have suddenly in Q3 unusually high sales in one country group with a weak currency, or do I have to think about another interpretation?

Severin Schwan

Let's start off with Operational Excellence. The timing, we have communicated that we will inform you about the detailed measures before the end of the year. And this is not directly linked to the expected decisions by the FDA or the EMEA at the end of the year.

Marcel Brand - Credit Agricole

So that means the announcement could still come, let's say with a decent distance to Christmas around mid-December.

Severin Schwan

It will be before the end of the year.

Marcel Brand - Credit Agricole

Okay.

Pascal Soriot

On the German healthcare reform question, we don't expect to have to renegotiate the prices of our marketed products. But of course, any payer is able at any point in time to reassess the utility of the drug and the price that we could have paid. So that can happen anywhere in the world, but as a result of the healthcare reform in Germany, we don't expect any specific review of the market product.

My colleagues and friends are looking to some explanation for your last question. Maybe one explanation could also be is that the mix is very different, and Avastin is a lot more represented in the United Sates and Europe.

Marcel Brand - Credit Agricole

No, no, I relate to international sales.

Erich Hunziker

Marcel, we are working on it, the experts. And I would suggest that we go on to the next question, but I will come back to you. At the moment my team has analyzed your figures. They are well advanced, but I want to keep you up here and would go on to the next question please.

Operator

The next question is from Mr. Amit Roy of Nomura.

Amit Roy - Nomura

Just got three questions, firstly on T-DM1. Through the reduction in alopecia, virtual absence is clearly a great game. But I guess at the meeting, we were also told that T-DM1 is carrying a 40% liver toxicity versus to about I think 13% on a control arm, 20% thrombocytopenic, more deaths and importantly stable disease figure was I think seven patients worse on the T-DM1 on compared to the control, not offset by the slight change in the complete response rate. And so when you take the full safety into consideration, how do see that balance between increased liver toxicity versus good things like the reduction of alopecia? That's the first question.

Second question on Avastin in colon cancer in Europe. I noticed from your penetration that you currently every quarter, have you written a 45% are stable? The word 'stable' next 45%? You normally use that phraseology for U.S. colon cancer, U.S. lung cancer where it's fully penetrated and not growing anymore. Am I to understand that the European metastatic colorectal cancer has stopped growing at 45%?

And the last question, again, there was really some quite stunning data on Avastin in breast cancer in the taxane pre-treated triple negative breast cancer patients. I believe it was 10 months of overall survival significant. Clearly I'm aware there is probably a little bit of data mining going on there. But is this some also I think you have about six, maybe eight studies in triple negative breast cancer patients with Avastin. Is this a strategy that you might be able to retain an indication in the first-line setting?

Hal Barron

First let me comment on the T-DM1 safety data. As you point out there was an increased risk of thrombocytopenia in patients treated with T-DM1 versus Herceptin and docetaxel as well as hepatic dysfunction in the grades one, two and three. It's important I think though to realize that there were actually no grades for higher thrombocytopenia or hepatic dysfunction events.

So what we're seeing is adverse events but of the Grade 3 and lower. And it is important to compare and contrast that with the beneficial, differences as we're seeing with serious adverse events. When one looks at Grade 3 or more adverse events in total, there's actually a 50% reduction, 37% compared to 75%. So, you see a marked reduction in many adverse events outside of what was coming including alopecia.

And I think importantly, one point is the incidence of febrile neutropenia, a very significant event. Basically, there were no patients in the T-DM1 arm experiencing that, whereas the total numbers of patients experiencing febrile neutropenia was 10.3%. So all in all, I think you are right to think that this is going to the safety package has to be evaluated in total.

But we believe given the targeted nature of the therapy, and the data generated today that this represents a favorable safety profile relative to trastuzumab docetaxel.

Pascal Soriot

And just very quickly comment on the Avastin development in Europe in colorectal, what the statement said was that share in colorectal was favorable. But this is the last delta point compared to the previous one. We run those surveys every couple of months. And it is quite common to have a period where from one data point to the other you show studies and then you go again.

If you go back two years or three years, the history of the development of colorectal cancer penetration in Europe, we've had some of those periods. Our forecast is still that Avastin will grow further in colorectal cancer in Europe across markets. Some markets are more advanced than others, but across Europe its only still has potential to go further. And we are lucky enough here today, we have different frames with that franchise, global franchise head for Avastin. And Stephen will address your other question.

Stephan Feldhaus

With respect to your question on metastatic breast cancer, the sub-group analysis we have shared with the public on our full dataset of pre-positive towards metastatic breast cancer was driven by the investigative interest to see how Avastin is performing in taxane pre-treated. Again with the retreatment of taxane.

So those are exploratory analysis, more positive generating and certainly not definitive. We have in Europe full approval for Avastin companies with paclitaxel and docetaxel and those data remains strong as they are. So take them as it was written on the conclusion that those more reconfirmed that Avastin is an active agent in this setting, but we are not homing in on a certain sub-group and you commented already earlier in report you wrote that it is taxane treated in triple-negative breast cancer and that is certainly not an indication or subset we are going to pursue.

Amit Roy - Nomura

Perhaps one follow-up question. What is the rationale behind, I believe, it is six to eight triple negative breast cancer studies you are doing, for example, the BEATRICE study in triple negative patients in that case?

Stephan Feldhaus

The triple-negative breast cancer in adjuvant setting was a test of market strategy, and that is certainly independent of the data you see currently in the metastatic breast cancer setting. We believe the data we have in triple-negative metastatic breast cancer are competitive as they are, and we see the highest penetration in market in this setting.

Operator

Next question from Vincent Meunier, BNP Paribas.

Vincent Meunier - BNP Paribas

The first one is on Avastin. Can you please tell us what is the proportion of U.S. sales for Avastin breast cancer already lost? And also do you know why the FDA has decided to delay the decision?

The second question is on the biosimilars. What will be the implication of the FDA's Advisory Committee on biosimilars for Roche coming soon? And more precisely, what do you expect with regards to the monoclonal antibody class of molecules versus other classes like insulin or growth hormone or EPO? And also, can you please give us an update on the ongoing review of taspoglutide and also the timing for dalcetrapib?

Pascal Soriot

The Avastin sales, it's really impossible at this point to give you specific response, because this breast cancer, discussion with the FDA started in July. And we actually track our penetration every couple of months, but it's very difficult to estimate the sales, a lot specifically in breast cancer.

What I can tell you is that the sales in breast cancer in the United States for Avastin will present on a newer basis about $600 million that's what we expected this year. We've lost some of that, that's certainly the case. But as I told you before, patients share in breast cancer has dropped, but then it looks like it has stabilized in the recent weeks, because our odds for Avastin overall have stabilized. And then when we backtrack into breast cancer speculations, it seems that we are stabilizing in breast cancer.

I can't give you a specific dollar number. I can only tell you that the indication represents $600 million of sales for the year. In term of the FDA, I think I have derived this guidance question a little bit earlier. The only thing I can add is that we expect and certainly we're almost done with the guidelines for antibodies would be a lot more demanding than they were for epo drugs or insulins.

This is a much more complicated type of molecules. And therefore we expect guidelines that will be requiring a lot more clinical data than has been asked before for insulins and epo. Let me just remind you though that in the United States we have patent protection for Avastin until 2019. And by the way, this is an important element to keep in mind for everybody, because even as you consider Herceptin or MabThera, the patent expiry is only relevant to Europe. In the United States, we are patent protected until the end of the decade.

Now, for the other question I might ask Hal to try for an answer.

Vincent Meunier - BNP Paribas

And could you give us update on taspoglutide?

Hal Barron

The question was an update on taspoglutide? Is that what you'd like me to cover?

Vincent Meunier - BNP Paribas

Yes, please. Just to know what are the next steps? Where are you in the review? And what are the criteria you will retain in order to take your decision to stop or not completely all trials and the development of the molecule?

Hal Barron

Currently what we're doing as it relates to taspoglutide program is trying to better understand from a root cause analysis perspective the ideology and mechanism of the increased risk of hypersensitivity reactions that was seen in the patient who are antibody drug, antibody positive. And we have a number of hypotheses that are being explored both pre-clinically as well as clinically by examining some of the patients who had an adverse event. And we're expecting to tally that data to help us understand whether there is impurities or other aspects of the molecule that are causing these adverse events by year end.

We also are in the midst of understanding whether there is alterations in the formulation that could be done to affect the incidence of discontinuation due to nausea and vomiting. And studies are being evaluated. We have information to light us with whether this can be mitigated. With those two pieces of information we expect to make a decision in collaboration with our collaborators as to whether we can move forward.

So we should have all that information soon and we will keep you updated as to what we decide.

Operator

Next question from Keyur Parekh, Goldman Sachs.

Keyur Parekh - Goldman Sachs

First Severin, you mentioned on the press release that you are looking at strengthening your innovation capacity. Can you explain or can you talk about that in a little bit more detail, please? Secondly for Pascal, two questions please. Can you discuss the potential outcomes from the EMEA review of Avastin's use in metastatic breast cancer? What is pointing this review and what do you see as the potential outcome there? And secondly, can you talk about your expectations from the CATT study for Lucentis revenues in 2012 and beyond?

Severin Schwan

On your first question regarding strengthening the innovation capacity. I mean our strategy is based on innovation, our strategy is driving forward a pipeline for long term growth. And to do that we also need the necessary financial flexibility to have this capacity to invest in our strong pipeline. And when we see an environment which is getting more challenging in terms of pricing pressure and which is getting more challenging in terms of regulatory hurdle, then we have to adapt our structures and our cost structures accordingly so that we have this capacity to invest and to continuously invest for the long term into innovation into our strong pipeline. This is the driver and the rationale for this initiative.

Pascal Soriot

As far as the EMA review, the EMA has to make two decisions. One is relating to the expansion of label that we requested to include the Xeloda on the basis of our RIBBON-1 study. And the second is of course to go through this whole procedure that has been announced recently. Stefan, do you want to add anything to this.

Stefan Frings

I mean if we are in Europe and not in the United States, improved in combination with both paclitaxel and docetaxel, the really one to see is one client name with two independently powered cohorts. One with Xeloda where Pascal referred to where we are looking at label expansion and there was another cohort with numerous agents, more reflecting standard of care, anthracycline and taxanes approved included data of docetaxel as well. And those triggered a signal where now EMA asked us to pull up with more analysis to confirm that the data which initially led to the approval in combination with paclitaxel and docetaxel remains as they were initially assessed.

Pascal Soriot

So those are the facts. As to your questions about the outcomes, I wouldn't want to speculate on those outcomes. We will certainly be watching very closely with VMA until 16 December. But in the meantime, I think it would not be appropriate to speculate on what the conclusions of those discussions could be.

As far as CATT, well also very difficult to speculate on the outcome of this study, as you know this is a study that is comparing Avastin and Lucentis in between of AMD. We expect the studies to read out early 2011. Now even if the study demonstrates non-inferiority of Avastin and Lucentis in the treatment of this patient, from an efficacy view point, the other dimension to consider is safety. And it may well be that the safety of the two agents is not comparable. So I think again, speculating about the results of the study will not help us much. We have to wait until the study reads out.

Let me just remind you though that first of all, it is clear that even if the agents were considered equivalent, the patients on Lucentis would be blindsided. So patients on Lucentis will be see their drug reimbursed by CMS if they round Lucentis prior to the results of the study. Lucentis is also going to be reimbursable to patients who fail Avastin if indeed again the agents were sure they are equivalent. And on top of it we have Avio and the additional indications that I had talked about before BME, which will help drive the course of Lucentis in the months and years to come.

So we expect of course a negative impact if again CATT was unfavorable to Lucentis, but difficult to speculate on the outcome of the study.

Keyur Parekh - Goldman Sachs

And I guess if I can have a quick follow-up on that. Can you comment on what proportion of your current Lucentis sales is into the CMS?

Pascal Soriot

It is almost entirely covered by CMS. Lucentis is almost entirely a CMS based drug. And so the decision by CMS on the national basis but more importantly the decision that each regional carrier will make in the United States without cost influence the use of Avastin in AMD, it is unlikely that the indication will be on the label because the study would probably not support an indication, the label. So then each CMS carrier on the regional basis will have to make a decision as to what they do as far as reimbursement of Lucentis versus Avastin.

But again you know we have to wait for the study results.

Severin Schwan

Before we go to the next question, an interim answer for Marcel Brand, you may remember he had enquired with regards to international sales for our major oncology product. Marcel, as you know in peak regions we very often have tenders and it seems to be an effect of the tenders in specific markets. But we haven't nailed it down exactly to the (inaudible), so I could check that Karl will come back to you with the exact details.

Operator

Next question from Mr. Andrew Baum, Morgan Stanley

Andrew Baum - Morgan Stanley

So, firstly, could you just tell me if you are still actively promoting Avastin in breast cancer in both US and Europe? Second, whether given the impending implementation of Operational Excellence, you sense any negative impacts on the motivation of your field force given concerns about longevity of their positions at Roche? And then finally, perhaps you could remind us of when you believe your intellectual property in Europe for Herceptin expires? Obviously you have a raft of patents, but I have not seen that on your site anywhere where you believe is the most significant one and when it expires.

Pascal Soriot

Thank you, Andrew, as far as Avastin in breast cancer, we are actively promoting it in Europe and the rest of the world. In the U.S., we decided proactively to stop the promotion of this indication, as long as the discussions are ongoing with the FDA. So there is no breast cancer promotion in U.S., but very active promotion outside the U.S.

As far as the operational excellence and it's impact on the sales force, I would say boldly speaking I can't see an impact of course a number of people are at some level of anxiety when it comes to teams that are promoting products that are certainly less core to the organization. But as far as the critical products that are driving our growth like oncology, et cetera, people are suddenly a lot more confident. And there is no reason to feel worried in fact. So it's really more an issue that would concern some part of the organization at this point in time.

As far as your last question I wouldn't want to comment on our patent on our IP rights.

Severin Schwan

We let our challengers find out. So can we have the next question?

Operator

Next question is from Mrs. Luisa Hector, Credit Suisse.

Luisa Hector - Credit Suisse

I have three questions, first on Avastin in breast cancer. Just wonder if you can give us any color on the reasons for the slowdown. Is it linked to the data, the FDA panel or perhaps a fear of reimbursements disappearing?

And has there been any discussion on those compoundium listings yet or is it too early ahead of an FDA decision?

And then on Tamiflu, do you have any visibility on the 2011 orders, or is it too early? And finally on MabThera, can you update us on any essential plans to launch that in the U.S.?

Pascal Soriot

As far as breast cancer, Avastin, it has stabilized. It's still down in comparison to the previous quarter. But on a month-to-month basis, my belief is that it has actually stabilized. The impact is simply coming from the uncertainty that surround the indication and the fact that physicians can't be sure that the drug will be reimbursed if the indication was removed from the (laboratories).

So as soon as you have uncertainty around an indication, of course physicians have questions and payers have questions. We haven't seen anybody decide to no longer reimburse the drug for the treatment of breast cancer, I have to say. So, that is very good news because payers in the United States are still reimbursing breast cancer.

But that uncertainty has of course had an impact on physicians' mindsets and conceptions. But again, it has stabilized in the recent past.

As far as Tamiflu, I wouldn't want to comment because I think we gave you some comments on Tamiflu as part of our guidance for next year. So I wouldn't want to comment on 2011 orders. The only general comment I could make is that clearly pandemic sales are behind us, so you shouldn't expect too much of that in the next year.

So broadly speaking, Tamiflu would be driven by the normal, if I may call it that way, seasonal business if you want.

MabThera, at this stage we have no plans for the United States, but we can always revisit those plans after Amgen lose patent protection on their product. But at this point we have no plan to launch.

Severin Schwan

Ladies and gentlemen, this brings us to the end of our conference call. Thank you very much for the interest you showed in Roche, and looking forward to talk to you at the next event. Thank you.

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