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Executives

Severin Schwan – Chairman and CEO

Pascal Soriot – COO Pharmaceuticals Division, CEO of Genentech

Erich Hunziker – CFO

Daniel O’Day – COO, Diagnostic Division

Roche Holding Ltd. (OTCQX:RHHBY) Q4 2010 Earnings Conference Call February 4, 2011 12:30 PM ET

Operator

Good morning and good afternoon. I am the Chorus Call Operator for this conference. Welcome to the Roche’s Full Year Results 2010 Conference Call and the Live Webcast. Please note that for the duration of the presentation all participants will be in listen-only mode, and the conference is being recorded. (Operator Instructions)

At this time, I will turn the conference over to Dr. Severin Schwan, Chief Executive Officer. You’ll be now joined in the conference room. Thank you.

Severin Schwan

Good afternoon, ladies and gentlemen. It’s a pleasure to be back here in New York and go through with you the 2010 results for this year. 2010 has been a challenging year for us but we did fully meet our financial guidance made good progress, our operational excellence, initiative and I think most importantly in spite of the aspects which product pipeline we did progress in important two medicines in late state development. And today with 12 new molecular entities I believe the most promising pipelines in the industry.

Let’s have a look into the slides. We’ve seen Pharmaceuticals up by 5% excluding Tamiflu multi currencies, Diagnostics even up by 8% so there is slight market growth on a Group level 5%. We had to cope with major headwinds in 2010 first of all as expected Tamiflu sales were around by 2.3 billion sales. You can see that we still have about 900 million sales in (inaudible) when we go into the outlook for the current year. You are all aware of the situation with metastatic breast cancer actions with the FDA which had already an impact in 2010 of CHF125 million. And again you will see that it continues have an impact for the current year.

And very importantly, we had to cope with price cuts due to the U.S. Healthcare Reform and the austerity measures in Europe and also the annual price cuts in Japan. In spite of those healthcare reforms in spite of the pressure on our prices we did keep the momentum both. Now if we turn to the profitability, the increased profits net of sales Core operating profit up by 7%, Core earnings per share up by 10% in local currency. Also our margins increased again on the Group level from 33% to 35% on an operating level. Based on the good results, the Board of Directors proposes to increase the dividend by 10% which is 6.60.

The goals have been achieved in 2010 both on the sales and on the earnings level if you now turn into 2011 the priorities are clear first of all to execute our operational excellence initiative which we announced last year. But then, very importantly, to drive future growth by progressing our pipeline, and I think it is good to see how the depth and breadth of our pipeline has developed over the last years with now 12 molecules late stage.

What I’d like to point out as well is that six of those new molecular entities are post the trials for personalized healthcare. We are hopefully going to launch our BRAF compounds, malignant melanoma this year as another five important medicines lining up, medicines which are clearly tailored to specific patients, but the promise of personalized healthcare is getting real getting to patients.

To conclude, if we look into our core EPS guidance for 2011, we have announced that we want to increase earnings by single-digits. You see on the one end the positive effect from our operational excellence initiative and the remaining synergies from the Genentech integration so that in total its CHF1 billion. We do see organic profit growth, but at the same time we have to digest major items introduced here.

On the one hand, continued pressure from the U.S. Healthcare Reform with introduction of exercise tax. You see the full year impact of the price cuts in Europe. We expect lower Tamiflu sales. We still had pandemic sales of 600 to 700 million last year. We are not planning for stockpiling orders by government in 2011. So that should result in a normal seasonal flu year of 200 to 300 in sales.

Then we have patent expires in certain geographies for Boniva and CellCept. And as you are all aware, we are in discussions with the FDA regarding metastatic breast cancer. We have already seen an impact in 2010, and we expect this skew-up up to 800 million for metastatic breast cancer as we go into 2011 and the vast majority of this short-fall looks great.

Avastin is still growing in the other indications, in particular, in the emerging markets. International market, the penetration rates are very low, but there is no doubt that the ongoing discussion with the FDA impacts us for 2011.

So that’s again a summary on the outlook, and before I hand over to Pascal Soriot for the pharmaceuticals division, let me just also take this opportunity to close on a personal note. It’s the last time that Erich joins us today here in New York at our Investor Conference, and I’d like to take this opportunity to thank him for the many contributions over 10 years of service with Roche. Erich has built up a first class finance organization during this year. And if you are all aware of, he secured the financing of the Genentech high work position. In the midst of the financial crisis with very favorable conditions and this is widely sold, widely regarded as one of his professional masterpiece.

So Erich, thank you very much, again. Thank you for many constitutions, also an enormous act of gratitude for outstanding contributions you made to the successful development of it. Thank you very much. With this, thank you.

With this Pascal over to you. Thank you.

Pascal Soriot

Good afternoon, everybody. You can see that Erich loved Asia. He is master of the Japanese goal technique so and very, very well. And it’s a pleasure to be here with you today and present this 2010 results for our Pharma division.

As 7 or 12 minutes ago, certainly 27 was a very eventful year for us and we often said like we are sailing towards global storm, the external one that is so called health reform in the United States, a very substantial, very rapid fast productions we faced in Europe and Japan and internally, of course, we have to deal with a few pipeline setback and the ongoing controversy around Avastin in breast cancer in particular.

Despite all of this, we are very, very proud of the results, we achieved because if you exclude Tamiflu, which really is one off in a way they spending it and sales, of course, declined dramatically because we through spending – received the last year but if you exclude Tamiflu we achieved 5% growth rate at the constant clearance – constant clearance rate.

As you look at the last of growth rate, it is actually 1%. I know IMS is reporting 4 to 5% but we all know that IMS is underestimating the increasing level of rebate that are given to mainly stay on the United State and although estimating the market size and the growth rates in some countries around the world.

If you use Pharma evaluator, which is collecting win data from companies the market growth was actually 1% of constant rate and minus one through (inaudible), so 5% versus 1 as certainly, we believe a very, very good result given the your concerns around the – the one over point, I would like to attract your attention to here is the growing importance of the so called international region, is essentially made of the emerging market are construct and that’s region is almost as big as Western Europe growing by double digit.

So you can immediately get a sense for the growing important of those countries on a big way. If you exclude Tamiflu but also look at the healthcare reform and that the fast productions from Japan and Europe, essentially the core portfolio grow by 7%. At the end of the day, of course, we have to manage the total top line but it manages to giving you a hope – a good sense that the core portfolio, the core of our portfolio is still very well alive and growing quite nicely.

As you look at this by product, and surprisingly the growth drivers were Avastin, Rituxan and Herceptin as well as Lucentis, but the few points I’d like to attract your attention to here. First of all in blue international region as you can see for all our products, the international market I was suggesting is very large proportion of our total goals. But despite the questions that we would have been put to us as far as the ability of those so called expensive products to grow in the emerging markets, you can see here that we are doing extremely well.

The second point is may be a little bit more – the third one is that we didn’t grow in the U.S. And we don’t see any green path on the Avastin side here. We did very well in Japan in yellow, but we didn’t grow in the United States. This we expect to continue in 2011. Actually we expect the decline of Avastin in 2011 as our counter sales continue to decline.

Lucentis is very well and you can see here on your Actemra/RoActemra, which essentially grow in Europe because we don’t have reimbursement around the world yet. And in the United States we didn’t have a J-Code last year, so we didn’t have our reimbursement of expenditure and also pact of filing expiring year at sales (ph).

Now despite the sales decline we – and again, you have to – some of the sales decline you have to keep in mind we lost $3 billion, 2.3 billion coming from Tamiflu and 800 million or so coming from the healthcare reforms around the world. So 3 billion is pretty substantial amount of top line to look through it (ph) especially because the healthcare reform impact went straight to the bottom line. And for a very active cost management started at the beginning of the year, but intensified with the launch of the Operational Excellence programme, we still manage to actually deliver an operating profit.

You see here the three, actually remember as we told you at the beginning of 2010 we managed the R&D (inaudible). That led to an expansion of our operating margin. We are close to 40% now coming up from 38% in 2009. If we now look at product-to-product, first of all, the oncology franchise of overall grew very nicely. Each product Avastin that’s the higher 15 by 79%.

Here, of course, the impact of breast cancer in the U.S. we see these continue to take on in CLL was not so high and NHL in the emerging market and the impact of maintenance in Europe, impact of the gastric cancer indication for Avastin in Western Europe. And the negative effect of Herceptin in Japan which were quite essential for us.

All-in-all a very sustained growth rate for all these product. Avastin on this slide, I guess, the one message I want to leave you with is the breast cancer patient share, which was about 60% as you probably remember still increase, and decline rapidly to close to 35% at the end of last year. We expect further decline moving into 2011 due to the confusion that is on the discussion around the breast cancer indication, of course.

Now the international regions now are presented here for some reason, it appears from the chart of blue part. That we grew 31% in international region and 51% in Japan. As you can see a fairly sustained growth rate. The other indications are either stable or growing. We are making good progress in Europe with lung cancer. In colorectal cancer across Europe we had 5 – 45%, it’s stable. It varies of course, by country of course and I believe we need to make more progress in colorectal cancer across Europe. But overall, no impact of this debate and on the other indications, the one indications that was really factored in breast cancer and particularly in the U.S.

Now moving forward, of course the challenges is this indication that there are reasons to believe that Astellas we’ve kind have washed out the effect on sales of the breast cancer indications, the reasons to believe that Avestin can grow. First of all there is still quite a long way to go for Avestin in metastatic colorectal cancer in a number of countries around the world. In Europe with very much store in the emerging markets where we are only beginning really with Avestin and we’ve launched in China and so far we are getting some pretty good results, so that’s one.

The second one is the treatment duration and the treatment through multiple lines, the lines with TML study will result on next year. The results are what we believe they would be, this will be a reason for extend treatment duration which is for longer treatment and will of course be a growth driver for Avestin. And finally, the ovarian cancer indication should help us grow this product. So given the circumstances we are under – we revised the estimated peak sales to around CHF7 billion.

Now Lucentis grew very, very nicely last year and we really saw a pretty good growth rate in Q4 for longer treatment duration in AMD, but also through the launch of the RVO indication. We are making good progress with Lucentis so far in the RVO indication. We are expecting this year a new data in DME and we are awaiting of course the results of the CATT study which we expect to come out in the first half of 2011.

Actemra is very well, everywhere we launched it. We’ve experienced pretty good response, and we can see the quarterly (ph) sales are growing, first quarter rapidly and we are gaining – we’re getting more countries on stream every month as we gain reimbursement, including as I’ve said U.S. getting J-Code in January. So far the response is every good. We filed for the pediatric and arthritis indications, which is a small indication from a surgical point. So it is very, very important indication for patients, and so those kids are suffering from a terrible disease and clinical results is extreme high, absolutely outstanding and we are looking forward to get an accelerated approval of the product review, so we have now the approval for this Endothelial function and we also got a label extension.

Now let me cover up few points, first of all the emerging markets, as I’ve said are representing a fairly important, a very important of our total business. You can see here we have – we have experienced a CAGR of about 10% over the last few years. Last year we gained 11% growth rate and all our key products are actually growing very nicely and representing a very substantial part of our total sales. So that shows that we can do well in the emerging countries, increased the kind of portfolio we have. You don’t need to have branded generics to do well in those countries, and also succeed within the duration driven strategy.

Second question, I would like to say a few words about, I know it has been on the minds of many people obviously have fixed in-treatment duration. Now that we have a study looking at two years of Herceptin versus one year of the HER2 study, we expect that it will read at in 2012. There is number of studies looking shorter treatment duration, usually six months, six to 12 months. They are listed here.

The point I wanted to make to you is that this typically will read out at the same time or later then as HER2 study will reach and a number of this studies will actually, after their protocol determinate is how to be positive. So essentially we look forward to the results of HER2. We believe that this study would support longer treatment duration, goes very well with our plan to develop, it’s a 15 years formulation of Herceptin to facilitate the administration assisting longer period of time.

There is already today a number of patients who are receiving assistance for pretty long duration and we are really convinced that this would be a pretty strong also either for Herceptin.

Second thing is biosimilars and I wanted to take the example of Herceptin here. So what do we do as far as biosimilars? The first thing we do is focus on – is in line with our fragile innovation. It’s the focus on moving the standard of care forward. So, if you look at breast cancer across a driven first line and second line, you can see that all the time we will actually be reshaping the way helping positive breast cancer is treated. First of all we’ll introduce the HER2 formulation that we’ll reframe to and this will really help longer treatment duration. It would also help improve the tolerability of the administration and suddenly is a way to improve the care administration, but also way to perfect Herceptin from biosimilar response.

Secondly, we will launch pertuzumab in combination with Herceptin. We release the results of the NEOSPHERE study and CLEOPATRA study now is running and we should get results this year in combination with Herceptin. And our goal here is to increase the level of clinical efficacy, again move the standard of care and reduce the use of monotherapy Herceptin.

And finally, we have developed Pencilian I (ph) for second and first line treatment of breast cancer. So you can see here that essentially the way HER2-positive breast cancer will be treated with turns of time and the place made for Herceptin monotherapy will suddenly reduce substantially.

The second message for the today is that in Europe we have essentially biosimilars will impact us the most. We expect an impact of course, but that impact is not going to be a small molecule like Orozoncare (ph) it’s not going to be like or some of small molecule loosing sudden protection.

Look at what happens in the EPO market, this year that market across Europe and see some effect that it is across Europe because in some countries like Germany the impact is more dramatic than this. But you can see here that impact on value and volume share is actually not that huge, I mean, of course the impact is there but is not a very, very sharp decline at to in terms of small molecule.

And finally, in the emerging markets there is an opportunity for us to actually in produce the more flexible pricing policy and actually also proposals to payers and try to pay our public payers in number of those countries we improve access for patients. Look at China for instance as an example, there is only about 7% of patients today who could benefit from Herceptin who receive it and it’s essentially out of focus expense is very, very re-endorsement by regional formularies in China.

In Russia it’s a bit better but there is still an enormous number of patients benefited. This is only looking at those patients who are diagnosed. These countries typically what happens is, the only breast cancer patients are not well diagnosed and they are fixed up at time they are metastatic.

But we are now working on is implementing screening camping’s to make sure we actually diagnose those patients generally. So there is an opportunity to actually help patients get access, increase the volume by introducing more flexible pricing policies.

So in summary, first of all you have to consider the landscape over the next few years in by geography. First of all you do that – it’s not unprotected for both Rituxan and Herceptin, till 2018, 2019. So we are really are talking about show up in the rest of the world when we talk about biosimilars. So in Europe, we are going to move toward the standard of care as I explained earlier with new products.

Secondarily, the impact of biosimilars on Herceptin itself will be there, so we believe not as much as a small molecule. And thirdly in the rest of the world, we think we can do all the volume by reducing our price, loose of course some shares to the biosimilars that overall grow our volumes.

If you combine all of this we believe that all the time we have a chance to actually go to a hopeful franchise. This is a schematic representation. We of course don’t close any of our internal forecast but we believe there is potential for this entire franchise to grow post patent expires.

Let’s finish by sharing with you what the 2011 picture looks like as far as our portfolio and see a lot of activities, a lot of projects ongoing. We’ll have a lot of news, lot of clinical flows throughout 2011. And just let me just highlight a few here.

BRAF, we recently announced that the BRIM3 study which did its co-primary endpoint Overall Survival and PFS and within each of this physiology we’re the patients in the console ARM (inaudible) BRAF. They are now preserving very with a great sense of urgency to file with the FDA, DMA and other agencies around the world.

Second is Pertuzumab, I’ve talked about the Pertuzumab and there are few minutes, the CLEOPATRA data study we read out this year and depending on the strengths of the data there is an opportunity therefore us to fight early in 2011 again.

And finally, hedgehog in advanced basal cell carcinoma model, the Phase II pivotal study that we read out this year of course also enabled us in early fighting. There’s many other projects, I don’t want to list them all.

Let me just turn to the Actemra, this is a very critical study. The HORG study versus Actemra, we believe it has the potential to change the way patients are treated in rheumatoid arthritis broadly cycling that it is moving from one anti-TNF to another so a very important study that would also regarded.

And so very quickly BRAF, I have talked about it and want to file this year both in the U.S. and Europe on the basis of the Brain III study, very, very strong results, extremely strong results, which will be coming (inaudible).

The hedgehog, I’ve also talked about this one, people told us Phase II data should enable us to find later this year. We will have the data by Q1, for basal cell carcinoma, which is a small indication, but certainly a very important indication, patients don’t have many options of (inaudible).

And finally, the CLEOPATRA study, we’ll – also we’ll add this year for pertuzumab we had earlier results with new sales (ph) you remember there we showed a very nice strategically complete response rate when combining Herceptin with pertuzumab to give always (inaudible). So clearly a very great opportunity to move the way patients are treated in metastatic breast cancer.

Finally, those are the priorities that we set ourselves for 2011. We preparing to launch in the half pertuzumab, hedgehog and EBITDA. Launching this product and product that we view is actually going work wider but our pharmaceutical division and the diagnostics discovery country-by-country work very close together. So we launched the product and the diagnostic test for the same time with a very coordinated fashion, so we actually first illiterate testing. Typically what happens with something like this is testing lags and if testing is not well done then of course we impact the utilization of our growth.

Second, is we will maintain our focus on the emerging markets. We are investing a lot in the emerging countries and particular in China. We’re investing really a lot in China, expanding our credit cost around the countries.

Investment in the late-stage pipeline, you have the message that we need to manage our R&D cost and we are doing this, but certainly we are prioritizing and investing what detects to prioritize this pipeline, which is extremely rich.

And finally, the implementation of our Operation Excellence plan. The profits (ph) we make last year, but we still have quite some work to do this year particularly in the developments in the area as we are reshaping our organization. Thank you so much.

Unidentified Company Representative

We made tremendous progress with the management team. Pascal Soriot is now talking about diagnostics that’s maybe the first time, please remember that.

Pascal Soriot

If you allow me, I’m not very good behind a podium. So I’ll come down here because quite of my objective is to try to – for those of you who don’t cover diagnostics routinely is to bring it closer too. So I want to physically get closer to yourself.

Bottom line is for diagnostics at Roche’s here. We had a very strong year. And this was – we also face some of the same healthcare constrain that as Schwan talked about out there in our markets. We’re the number one company in the molecular (ph) diagnostic with 20% share, with a next competitor at 12% share, and despite all that we were able to grow almost two-times the global market growth rate at 8%.

And I believe that is something about the diagnostics industry by the way in terms of pressures on the healthcare markets around the world. They will be seeing 8% growth in this time period even with pricing pressure suggest that there is this fall for diagnostic. Buyer to be able to better allocate healthcare within the calculated budget. And we’re certainly seeing that within each of our businesses.

So what you see here, across each of our businesses, some very healthy growth and I’ll pieces on part a little bit for you, about an 8% overall growth in a market that’s growing 45% as the global market leader we’re essentially of course taking share but we’re also creating the market in terms of what diagnostic brings to the healthcare environment.

Regionally as Pascal presented, we are also experiencing some very significant growth in the emerging market, but in every single one of our markets and successfully growing faster than the market growth rate, for that market by each year.

In the E7 countries alone in diagnostic now that accounts for 13% of the overall turnover and that’s growing to 21% and China grew 38% – greater than 40. So the infrastructure spend in the emerging market when they build up their labs in their hospital base clearly pulling up products in that direction and we’re still at the very early stages of the penetration.

So this is what I am particularly impressed with the Roche Diagnostics, which is reshaping the P&L and I said you last year we would – we came through with the 8% growth with a 30% core operating profit margin. We improved our operating profit margin by close to 4%

Next slide. And that’s driven obviously significantly by the top line sales growth, but also in terms of sustainability for the future, it’s driven to a large degree by product mix. So the new products that are driving the sales growth are products that have larger gross margin and that’s falling down through the bottom line. That combined with an ability to manage the cost line and the R&D line and very importantly, and I have a slide on this the cost of good line, the ability to find our cost ratio much better in relation to our sales ratio, at a 4% cost to sales increase. This in the recent past they are growing faster than sales, other than the systems put in to place I believe it’s sustainable that we will see to start to sales like most relevant (ph).

So overall, a 30% increased operating profit margin and this is when I do my little commercial on those of you – haven’t yet put diagnostics in your evaluation models. I was a little hesitant to ask you last year when we ended up on a slightly different accounting message that Erich will talk is a 12% margin. But it is 20% margin greater than the 20% margin in a business that has a different risk profile in Pharma. I would ask and urge all to take a look at the – I think sustainable and a very important part of the Roche engine in addition to what it does diagnostic fields. I will give some examples on why I think it brings the group here.

So you see the operating profit margin increasing by 3 to 6% that translates through to also the operating free cash flow. Now as I said, why do I think some of this cost of goods is sustainable because we systematically put programs in place to be more efficient in driving our economies and sales, particular at the manufacturing. So we have programs that were now almost two years into driving in from the manufacturing efficiency. We have more to do there and more saving accessible.

On the service side, which is a big part of our business that once we placed the systems, service costs are considerable, we found an ability to deliver best-in-class service with more efficiently across our countries, and then finally, this margin mix of portfolios.

We also took advantage when the group looks at the operational efficiency programs to consolidate some of our price. We do this not just for cost reading although it is for cost reading also because it allows us to find our product developments. So for instance, we have now our point of care products all being developed in Switzerland versus Switzerland and Austria. And now we’ve done the same thing for our diabetes care products, (inaudible) diabetes R&D book. So this will occur over the next couple of years and we’ll continue to look for opportunity like this sustainable to improve our business.

And just to talk a little bit more about each of the businesses. Professional Diagnostics, our largest business growing at 11%, I’ll give you one example next to show what’s driving that business. But this is our Clinical Chemistry and our Immunoassay business or large central lab business where we are significant player here going significantly faster than the market and you can see our regional mix for the growth pretty equal across the region, of our drug.

Diabetes care is one market within our diagnostics, but it’s suffering a bit more from the economic conditions, overall global diabetes care market is growing at about 1% to 2%, we’re still growing fast at 4%. But this is more of consumer lead business; factionary income comes to play of economic cycle for pressure on this. But you can see here in Europe we’ve been successfully at driving our new products into the marketplace, always to get these outside of Europe, so the type of growth we saw in Europe.

Molecular Diagnostics, we are the world-leading company in Molecular Diagnostics, 30% share. You have to take the next three competitors combined. And yes, at a 4% growth we feel we can do better there. We’re getting into some of the high growth businesses this year with our launched in the HPV into United States and then you’ll see significant entry into oncology of molecular diagnostics.

Applied Science, 4% growth, we were also affected here. This is our Tamiflu effect, so this didn’t have H1N1 sales in that business in 2009 considering 2010, but the underlying business, the core technologies, are growing quite well at high single or low.

And then Tissue Diagnostics, really a growth story here, its 17%. This – remember with the ATHENA acquisition several of years ago, it’s still a business that has its greatest presence in the U.S. and significant opportunity outside the U.S. But even in the U.S. where we have almost an 80% share, we’re growing at about 15%, outside the U.S. more than 20%.

So if you remember, we have razor blade model in diagnostics, and what I want to show is the power of our installed base out there, when you have a good innovative menu placed onto those. So once we get our systems in the lab, they are very difficult to displace, and then key is to get new innovative menu on that system. And I just took one example which is – typical an example which is our assay business, our largest business in Professional Diagnostics.

But first of all, I mean, it’s nice to see a number like 2 billion on the assay. Close to some of the numbers that Pascal already hit. And the second thing is that this has grown double-digits for the past 10 years. In fact, we probably could have gone a little further past 10 years. But you see here, last year we had 17% growth on this and this is an example also, the gross margins, to talk about, the gross margin of the new assays are very strong, let’s say (inaudible) So this growth also brings subsequent growth in our bottom line.

And then an equal example in our second largest business, the diabetes care business, where I’ve said in Europe we had a new products represented here in the Orange line that is penetrating massive in the marketplace and those are the products we also need to get into (inaudible).

So our strategy is focused on two key components because of this razor laser going on with testing efficient which means you get a good instrument into the lab and meets the lab customers and then I think they do well. So here, I would argue competitors can also do this quite well they’re ahead of the company.

But what I want to concentrate is the second aspect of our strategy which bringing medical value equation to diagnostic as I believe that that is where we are unique, where we differentiate from the competition, where we leverage our strength in the primary diagnostic where we bring really this value on to the reagent business go through our instruments. When we look at it as diagnostics for those things that are involved in prevention, participation or therapy monitoring and then we put another bucket about diagnostics.

Let me just speak about three key events in 2010 and in terms of the R&D portfolio on medical value. This year we have filed similar to files that are done some respect to pharmaceuticals demonstrate the clinical value of our assays. Here is also where I believe we can continue the growth rate. So three key studies, I won’t go all of them in detail, but just to give you drill down into one example (inaudible) was really a pharma level prospective trial where we have 47,000 patients. And what we discovered from these trials that with our test identify one out of 10 women with our test (inaudible) 10% of the women have missed.

Neck Cancer is the second leading cause of death – of cancer death in women and then if it sound early its actually quite preventive. So here, I mean there is a long medical case from the genomic case and we just released the highlights of the data in July of last year and will be rolling to subsequent analysis out in this quarter. So this is a game changer in terms of – also then had a system that is able to identify our lab customer base and we will be rolling this out in the largest market for 2011 and passed second half of – that’s US$250 market growth at market today growing at double-digit.

And there is similar examples we have for instance in our professional diagnostics business heart failure and looking for proBNP and diabetes care and looking at glucose monitoring. So this is I believe a unique aspects of Roche and been able to do these trails requires confidence does not all diagnostics have been passed and we also leverage greatly to know-how and frankly also the gastric and finally would be able to run these trials.

The other aspect of medical value I just wanted to mention here is the Companion Diagnostics portion that were mentioned by both Severin and Pascal this just represents some of the programs we have in fact within the Roche Group we have more than 100 collaborations all in the R&D level we have diagnostics RRMS really speaks to the innovation driving. We have more than 22 that have Companion Diagnostics hypothesis and then we have V6 which are in later stage compound and Phase II is getting ready to market.

And couple of points I want to make here and that is that the breadth of Roche Diagnostic’s difference start, because what you see here is three of these comes from our tissue diagnostic, two come from molecular diagnostics and one periostin comes from our professional diagnostics.

The reason that’s important because you never know where the science is going to go sometimes until late phase, sometimes earlier and being able to have the breadth of portfolio means that regardless of where the science goes, we’re in a position to be able to supply the diagnostic and help us get Ph.D status onto the market. And we certainly believe that the group, that is obviously the future of the healthcare to be able to target the patient population. Also on obviously regulatory review and approval, but also uptake in the marketplace.

So it’s not to be underestimated. By the way what it takes to get two groups to work together through R&D groups, two commercial groups, but it has been very successful and that sale is right, BRAF is the one that we’re most focused on now commercially to have a joint launch for the relaunch of diagnostic that is available on our large installed base throughout the world, so that it has – doesn’t get in the way at all of patients access for the compound of sales group.

So in addition to our internal innovation, we’ve been externally focused through this year. We have two reasonably sized acquisitions which are supportive of our business strategy. Medingo, the patch pump technology, overall business has been fair and bioenergy which is important compliment or tissue diagnostic by bringing, really tissue diagnostics into the 21st century kind of pathologist always having a look through microscope to the slide and whether we count HER2 the levels to determine whether you are HER3 or HER1-positive. This takes it, puts it into a computer generated image and has an algorithm that allows you to determine more reliably, what’s the size of cancer in oncology.

So these are the types of innovation that will help us continue to drive that Tissue Diagnostics both at 17% also forward into it. We had a number interesting research collaborations business in HP and also freedom to operate on our continued diagnostics very important for freedom to operate (inaudible) all of which have major programs with Roche.

So in conclusion, I think we’re in a good phase right now with Roche and Diagnostic that commitment level to bring obviously new innovations to marketplace 2011 and it’s with that confidence that we say that we tend to continue to grow significantly faster than this market in sales in ‘11 as well. And do that with good margins. So don’t tend to go backward in margins.

Well thank you very. And I’ll turn it over to Erich now to cover the finance.

Erich Hunziker

Good afternoon, ladies and gentlemen. Great to be back in New York and still many familiar speakers – faces. So, if we – okay, if we look at the – most of them, do not have any surprises for you, but I think some of them deserve some explanation

2010 our tax rate was quite high and many of you were concerned that there was a wrong trend in this because the good news is that the full year 2010 tax rate is actually in the right direction. What happened in first half and the second half? One element has to do with the developments in this country, A, remember that the final days actually of 2010 there was a huge struggle in Congress about the big tax bills. It didn’t as Park (ph) introduced tax bills there was also the R&D credit. We were very glad that this actually passed and we received R&D tax credit. And I think it’s also not only as figure, it’s really important for us that this country honors investments in R&D. We are one of the largest employers of scientist. I know very well for some of you is the R&D cost or R&D expenses but for me this is building the future. The company dares even in this eco time to really generate (inaudible) up for scientist.

The other developments which deserves an explanation is of course the operating free cash flows. Here people could say hey, this is a negative trend it goes down by 10% but also here I give you an explanation which I think is basically to understand, we had an excellent Tamiflu year 2009 and especially in the last quarter of 2009 we sold a lot of Tamiflu. And you know that Tamiflu doesn’t originate in Roche Group Lab it actually was originated in the Labs of Gilead and therefore Gilead is first and has a nice royalty. And this royalty is usually paid in cash after the quarter that Tamiflu generated.

So in January 2010 we have a huge cash out to Gilead for actually the royalties which happened in the last quarter of 2009. And the other element which also was at times delay effect was, I think even in this room the former Genentech management informed you that during taking Genentech’s private, Genentech employees no longer repeat any auction, but they repeat the so called retentions program. And the last part of this retention program was actually paid out by the end of March 2010. So this was also a cash out.

If we go to the financial expenses there, all these funds we raised in 2009 in March, many of those have an annual coupon, which means accounting wise of course the interest expenses are charged to 2009 in their proportion, but cash wise it all hit for the first time in March 2010. And therefore, they are absolutely not concerned about the cash flow development I think can be explained.

If we look at the level of operating profit and of course after Pascal has explained the development of the Pharma operating profit and Dan has shown you how great he is doing in diagnostics. And I think that’s kind of a promise to do more. If I understand it correct by coming closer to you so, I think there is a positive trend also in there. But what you can see is debt we couldn’t get it from the market. We had a very real flat sales and still we contributed an increase in operating profit. And of course here the interactions – the integration of Genentech and Roche Pharma USA were important. And again here, you can read every day, companies are cutting cost. I think if you heard that you look a little bit behind this or just cutting cost in a little bit manner mean, thus putting the same work on less and less shoulders, and this is just not sustainable. We tried very much and also in the whole operational excellence programs.

We try to fundamentally reengineer our business. This means we take old processes out which are no longer done. We do not just try to put the same work on less shoulders. And just to give you an example, we had total independent IT systems here on the Roche Pharma site in Montreal, and of course Genentech has their US IT system.

So to bring these systems better we actually invested 350 million, to not just only see which system is better but out of the experience of the two systems to get a much more efficient system for the future which is also better for our internal customers, for the external customer and which is much more cost effective.

And I think this was also the driver for the whole operational excellence program that we looked behind just vigorous, but looked into the processes and wanted to make this look better for the future. And you can see this operating margins, I leave it up to you, everyday our competitors are reporting their figures and we can lean a little bit back today in the peer comparison.

We are not leaning back to even improve these margin. But as you will find out, we are quite already in the top quartile of the industry and we are fighting to be being better. If we go into the details here, and I don’t take into – into this chart to become too complex, but just one point of reference, Roche was always in the lead supporting very rich accounting standards, we think it’s very important that we have clear accounting standards and that our speakers represent, actually follow this accounting standard.

On the other hand, we respect that investors would like the underlying business and there was always this conflict of interest, because between the accounting standard factors, who said everything has to be a strictly according to the rule, and on the other hand there were the investors saying, hey, can’t you show us a little bit where the one-time effects are? Can’t you explain it a little bit better, what is the development of the so called underlying business?

So what, from this year onwards, you get from us is that absolutely full standard international financial reporting standard account, but you get also the so called core accounts. The core accounts reflect, from our perspective, the development of the underlying business.

And of course, since I’d say by our interpretation, we also have to be totally transparent. You have a full reach in our financial report between the international financial reporting standards accounts and the core results. And since it’s the first time to show you these figures here, I have the expert, my top experts in accounting and controlling here, and they will also offer a workshop here should any questions with these figures arise here.

If we now go below, the operating profit and come to the financial result, we had also as you can see the financial result is worst in 2010 and 2009. So what work the delta which go down and again here you see a one-time cost drive at the future, if you remember, we raised all this bonds for the Genentech transaction prior to seeing any swine flu on the horizon.

So we had a very, very clear financial plan over the next 10 years and I can tell you this plan is still absolute valid and suddenly we had an additional 3.5 billion in Tamiflu, which came into our company.

And as you can see we are fully committed to our bond holders, what we then did in 2010 we actually called bond 2012 bond only $2.5 billion early. And we even by the end of the year had another extra $1 billion for which we called $1 billion of the 2014 bond early. This gives accounting wise, this gives a one-time charge now, but on the hand, of course, it will get a release in the interest payments in the following years.

If you go into the so-called Forex results, this has all the clear origins here. We’ve seen in past calls chart and also Dan was saying, yes growth rates in China I think 38% and in other smaller markets there too. Of course, all many of these international smaller markets have a very volatile currency. And therefore, we always have to charge is it better to take this volatility into our account or to hedge it.

And there is one currency, I think nobody ever would touch to hedge because this famous gentlemen that Venezuela has not only declared its own time zone, Europe has also declared his own currency exchange rates. (Inaudible) just in December changed its exchange rate the official one for pharmaceuticals and diagnosis and this has given a one-time hit, which you find there.

But altogether, I personally think this is the lowest financial result you should see from Roche. And it should be an upswing into the future. This is the cash situation, where you see where it started with our net debt position very strong operating free cash flow. And then we paid you a nice dividend last year and as Severin has pointed out the Board of Director has submitted to the annual shareholders meeting of March 1st.

An increase of the dividend to a fix (ph) CHF60 and I can say it Swiss francs, which means hopefully something to you also as a currency. So what you can see that free cash flow the free cash flow here of 4.7 in a year which even had some extra effect is reported in proportion to the remaining net debt then I think you would see why we are fully committed to bringing this company back to a net cash position related by the end of 2014.

Here, you have to mature these catalogues to bonds but the next chart, I think is even a little bit better, here you now see how over the next 20 years, the bonds of our rates, and you see there is just one 2013 Europe bonds remaining the big green one, you may ask why. Why didn’t they call part of this one. And there is just a difference, if you issue American bonds, we’ll have an option to call them. The European bonds do not have such property, so that’s why we went for the 2012 and 2014 bond that you may see this is definitely maturity profile, which absolutely doesn’t mean huge challenge for Roche to follow.

And I think this in Europe, but I kept it in also for you. Interesting element, this is the five years credit defaults. Well, for those who are not so familiar with this, this is just the insurance premium at the start of a five-year bond, which you pay to be assured that you get your principal of 100 at the end of five years.

Interesting element of this chart that Roche was almost debt free in 2009. We had three bonds outstanding of – adding up not even to $2 billion and we have a net cash position of CHF23 billion. And still if you wanted to get an insurance coverage for Roche bonds, as you can see you would have paid 72 basis points. What does this mean? Even an absolute nobody, we were not in the United States with bonds. We had no cash program in the United States. So, we were absolutely not on the map and therefore, the insurance premium was very high. Then we raised over 40 billion in bonds and then you can see of course, with rating these bonds and with having the financial crisis we shot up to 250, but the good news is, just in the last month, if you look at the developments, it seems for many bond holders or investors they refer to entrust on it Roche than to Germany and we consider this as a nice reference to where we have developed. So this is the balance sheet which is also getting healthier and healthier by each half year, though we go very confident into the future. And with this I hand over back to Severin.

Severin Schwan

Thank you very much. As suggested we go directly into your questions. We have about another hour here before we break out in. So who would, you have – if you could take the mike.

Question-and-Answer Session

Severin Schwan

Very favorable, sorry, yes.

Unidentified Participant

(Inaudible)?

Severin Schwan

I suppose do you have more integration there?

Unidentified Participant

Referring to Herceptin are you referring on the CD20 potential?

Severin Schwan

Was written about full written. I’m not going by the way.

Unidentified Participant

Two follow-ups on that question.

Severin Schwan

About 15, I really don’t know so we’d have to get back to you.

Erich Hunziker

Do we have further questions? Yes, one in the back there. Yes, please.

Unidentified Participant

I have some pipeline questions on Dalcetrapib I assume you’re having interim – interim analysis this year. Two questions on that. I mean if the efficacy is specifically significant at time of the interim analysis as the trial setback to early stop conversely up to that point have you had any ESMB look on the safety issues if we outcome the study?

Pascal Soriot

For this – I guess two elements to that question. I think you’re probably referring when you say when you’re mentioning to analysis I think you’re referring to the interim analysis on the dal-OUTCOMES study. But there is another dimension which is we are running two studies or we’ve been running two studies one called dal-VESSEL and then we will come back to OUTCOME – dal-OUTCOMES later. But we’re running a study called dal-VESSEL which is looking at the effect of blood pressure and the endo failure function and another study called dal-PLAQUE which is looking at the effect of the Dalcetrapib on the plaque itself. Those two studies are safety studies. We would present them at a Conway this year.

The dal-PLAQUE results we just received and we’re analyzing them and we’re preparing to presume them as quickly as we can. I can only tell you that so far the safety data we have seen are very reinsuring. And then, we have the dal-OUTCOME study, which is actually the cardiovascular outcome study, and that study has two interim analyses. One at 50% of the event and another one receives at 70% of event switch. So the 50% of the event, which we will analyze this year, this is purely a 50 and I receive that one, so the DSMB will look at the analysis, and tell us whether we should stop or continue and that’s all we will know out of this one. I have to say we are relatively comfortable with this analysis considering what we know, or what we’ve seen in dal-VESSEL and dal-PLAQUE, but of course we have to wait.

And then there is another interim analysis when we reach 70% of the event. That one is also an efficacy reading, but it’s only next year. So this year we’ll have no efficacy reading. To answer your question, we just have 50 signals. Does that answer your question?

Severin Schwan

Okay. We can have the next question, please. Yes, please.

Unidentified Participant

(Inaudible)?

Severin Schwan

Well, I mean – answer – this – we think this study is really going to be very critical study not only for our products but in the term of the treatment of Alzheimer, because it will also give some clarity as to the effects of EBITDA on the PLAQUE and also importantly whether the PLAQUE is indeed the reason for again the (inaudible). The thing what we believe of our product is that it is safe. Although EBITDA compound and development have said effects, but this one doesn’t have and we developed a sub-q formulation because we won the first series at the administration of this Genentech over a long period of time.

Well, I think the sub-q will certainly help patients who little bit waited for long period of time, but really the key to fundamental question here is whether the drug was for (inaudible) and we know from anymore model that it remove the PLAQUE but it is – that the PLAQUE of course is responsible for the Alzheimer’s disease that there is no post (ph) to be. So I guess that study would answer not only whether this question of – this very fundamental question to Alzheimer’s disease.

Unidentified Participant

So what’s your data for this?

Severin Schwan

Actually I can’t remember exactly when that result. This company is new. Sorry we would have to check and get back to you.

Erich Hunziker

Thank you. (Inaudible) and the first 12 please.

Unidentified Participant

I think you have outlined the strategy selling Herceptin since – by changing the paradigm. Now can you sort of share your thinking on the Rituxan franchise? How these going to put pressure on that thing and importance of (inaudible)?

Erich Hunziker

Do you have to be listed the HER2?

Unidentified Participant

Rituxan?

Severin Schwan

The Rituxan franchise. Yes, so I’ve covered the example of the HER2 franchise. The MabThera franchise, similar situation where Rituxan is patent protected in the United States for most of the decades; so we are really talking Europe and rest of the world.

And here our strategy is similar to what we are doing with Herceptin. We are developing a subcutaneous formulation that we believe will help us to protect parallel with franchise and we’re developing a follow-on agent GA101, which we believe will increase the efficacy level and help us move again the standard of care.

It is clear that not to say how, it doesn’t have – I mean, within Herceptin we have a full range of products with T-DM1 pertuzumab and other in SC formulation to defend the franchise not so high, it’s purely relying on GA101, moving the standard of care.

But again keep in mind that first of all, in the U.S. we are patent protected. Two in Europe, biosimilars, let’s assume they get approved which the question is how long does it take them? And to some point they will get approved.

The question then is for what indications did they get approval and how do they extrapolate from one indication to another? So you can imagine that if you get an approval as a biosimilar for iNHL then you could extrapolate to maintenance iNHL will be reasonable to assume it, could be done with some clinical data that you could not get extrapolate – you cannot extrapolate to CLL (inaudible) separate indication.

So before biosimilar gets labeled that is as expensive as the Rituxan label, it will really take them quite an amount of time. And so by then we will have hopefully developed GA101.

Unidentified Participant

Appreciate it.

Severin Schwan

Essentially we want to lift the efficacy level and now we certainly – so far we have response rates as are elevated by 30% plus and so that’s basically what we are actually targeting now and let’s get forward.

Severin Schwan

Thank you. We have a question in the back please.

Unidentified Participant

How are treatments in patient stream that goes from – where you dose Herceptin now has been – as opposed a subcu Herceptin as far as dosing and how often we get treated?

Severin Schwan

So in – I hope I’m giving a question. I mean essentially we can just – we are going to move from a AV formulation to a circular formulation, so it’s relatively simple. The only difference between the two is that AV formulation in the administration is dose is weight based whereas for the subcu we have a flat dose. That’s a difference, but from a clinical practice view point it’s not such a big difference, actually simpler was a flat dose and it will be driven subcutaneously.

And I believe it is really important. First of all because the other data we have tend to indicate that we have less reaction, and net reaction to the administration is direct, but more importantly, if they had two studies, show that two years of Herceptin is better than one year and compliance will become an issue. People would think you have breast cancer, if your doctor tells you, you need to take Herceptin for two years, as a patient you are going to take it.

The realty is not like this, the reality is that when patient start feeling better they want to stop the drug and what we see from our research is subcu formulation really helps because they feel, that they are under control, that they have moved on, they no longer are cancer patient and they are just taking subcu formulation as appose to going to the high. So it really helps them psychologically. And it helps with the compliance. In fact, without the subcu formulation our forecast would be that the average treatment duration which is about 48, 50 weeks today with Herceptin would increase but not to two years, it would increase only 20 to 30% based on the research we have done so the subcu I think will really help drive that.

Unidentified Participant

Thank you.

Severin Schwan

Yes, somewhere in the middle here.

Unidentified Participant

I read somewhere that you have a new drug for lung disease or lung cancer, can you talk a little about that?

Severin Schwan

Yes. We have moved beyond the process of moving a monoclonal antibody which blocks the c-MET receptor on lung cancer cells into Phase III. And we have communicated positive Phase II results. But we are moving this now into pivotal trials it’s one of the well, new molecular entities which you find on this list of our late stage portfolio. Now it called Metsnip (ph) so it’s a monoclonal antibody which docks on the c-Met receptor and its developed in combination with placebo. And we have seen very good results when combining this net-net with placebo in c-Met positive patients. So it’s a very interesting example for personalized healthcare because we can stratify a bit like HER2 and Herceptin.

We can stratify patients into those where we expect good response and into those that we would not expect the response. Well, that finds really exciting with this phase II data is that our hypothesis originally was. If you have a high expression of c-Met receptors the drug should work very well. If you have a low expression of c-Met receptors you should have no effect of the drug, a bit like Herceptin.

And that will turn out to be the case is that indeed, if you have a high reception – at high expression as expected you have a good efficacy. But very interesting, if the expression of c-Met was low we had actually negative clinical outcome. So it was worth treating with this monoclonal antibody.

Now what that tells you is that if you would, if we would have developed this drug in the traditional way, the positive events would have been compensated by the negative events, we would have seen no efficacy and we would have said well, probably there was something wrong with the hypothesis. And it’s just doesn’t work or there are some other effects, which we don’t understand.

Only due to the fact that we have the stratification, only due to the fact that we could closely collaborate between pharma and diagnostics in this case which meant (inaudible) for a very specific c-Met tissue test. We have now a very promising drug in late stage development. So it’s hopefully one of the next poster trials of personalized healthcare. And you know there is a huge medical need still in lung cancer. So let’s keep fingers crossed, the data are confirmed in the late stage pivotal trials, very exciting data coming through. We have more questions, yes, another one here in the second row.

Unidentified Participant

Can you just give us an update on Avastin and the FDA as concerned timing and what you expect and what your – anything that tells about by your plans and (inaudible)?

Severin Schwan

Pascal?

Pascal Soriot

Yeah, well, the only information I can really share today is that as you know we’ve requested the hearing. And we are waiting to hear from the FDA whether we would be granted the hearing. And we should hear from them in the next few weeks and that’s as much as I can tell you for today. It can deny the decision of hearing, yes, and then technically we have another option to go further with this, but essentially we are waiting to hear from them. And then we – based on their response we just have to decide what we’ll do from there.

Unidentified Participant

Is the meeting restricted to first-line or can you bring in the (inaudible) data and talk about this ...?

Pascal Soriot

meeting is about the first-line indication, it’s about the – actually the meeting is about the (inaudible) and approval in breast cancer, which was a first-line in breast cancer indication excited up whole world in combination with paclitaxel that’s what demoting really is about. Can we maintain the (inaudible) to the approval or not? It’s not about (inaudible) and extension and it’s not about second line.

Unidentified Participant

What is the expense for second guide line?

Severin Schwan

Second line we got a complete response letter for that application. And I think we are looking at what our plans moving forward are but essentially at this point in time we have a – we are rejected, we had a complete response letter.

Pascal Soriot

Sorry the most important step for us is really what happens to the first time indication and so if we lose it, we had to withdraw in the indication intimately of course that would have an impact and that’s basically the rationale behind the self-decline that we are focusing at this point in the United States in breast cancer but also elsewhere in the world, because even though European authorities where you confirm the indication essentially the payers might actually be challenged – challenge us on the basis of the situation in United States. But it is really an important point to keep in mind. In Europe we got a confirmation and in the U.S. we got the NCCN Guidelines that will confirm their recommendation that Avastin is a useful option in the treatment of breast cancer and they did that almost at the same time of the year. Moving further the FDA was reviewing the indication was a negative view to it. But it’s a very complicated situation as you can imagine in here.

Unidentified Participant

They didn’t track us on the sales, but I would emphasize and answer this before, it’s about for all the big disappointment for women in the U.S. We’ve taken away this opportunity to treat devastating disease, where the European authorities have really stated the benefit for Avastin also in the indication of breast cancer. So that’s where we are and the harsh reality is that oncology is insecure. What does this mean for reimbursement? If take (inaudible) on the treatment the reimbursement to be insured as we go forward given the timing discussion with FDA and we see penetration rates coming down, so we have flexes to you from the shareholder point of view in terms of our guidance for next year. But really the sad news is for women in the U.S., who do not have access to this treatment option. Yes please. If you could ask?

Pascal Soriot

If this discussion with the FDA decides regarding you have provided on better results analysis that was based on this data, you provided in other words that your data is good and you are approved so it should go with you, is there something wrong with the data?

Severin Schwan

No, of course data need to be interpreted and people take different fields. And I prefer to the – to prefer to the interpretation of the European authorities rather than our own interpretation because people might assume that, I am biased, as the manufacturer of this drug. So all I can say is that the scientists in Europe take a very different stand on the track. They feel it is a very important treatment option and if you read the press release, which EMEA did at the same time when the FDA communicated that they would withdraw that the label for this indication. It was also a verdict in a very, very positive and strong way.

So the European authorities clearly positioned and said in that specific question against the FDA. What I’d also like to emphasize is that the Europeans took a very differentiated view. So they looked at the various combinations of Avastin with different types of chemotherapies into the very specific on those chemotherapies where they think there is less value for patients and paclitaxel that they felt that the clinical benefit is given. So we feel that the doctors in the U.S. should have the choice to give Avastin to women actually the NCCN guidelines, which I think guidelines by the physicians very much confirmed that few, but FDA takes a different position.

Pascal Soriot

It’s a critical message that two different, two reasonable people kind of have a different view, looking at same data filed interpretation. And again Europeans they were said concluded the NCCN guidelines they are closer to you because they are issued by group of the top breast cancer experts, not a group of oncology, general oncology. The best breast cancer experts in the United States and their guidelines will confirm the use of Avastin to breast cancer in combination with taxane though it is of course pretty confusing kind of a situation and really a question of interpretation data in front of us.

Severin Schwan

We have another question in the back, please.

Unidentified Participant

What if function is included in your long term Avastin guidance for ovarian cancer?

Severin Schwan

The ovarian cancer is included in the guidance for peak sales. We are not specifying exactly how much we expect for ovarian cancer but we did indicate value on that this could be well between 500 million and 1 billion. So we are not giving an exact number here, but we are giving the peak sales for the entire Avastin franchise. Yes a question, here.

Unidentified Participant

Potentially those TDM-1 pertuzumab may be proved in first line and second line metastatic breast cancer I was wondering how Roche (inaudible)?

Severin Schwan

I was wondering that at some point the question will be asked. When (inaudible) 40% the operating margin and thank you so much. The combination of pertuzumab and TDM-1 as I showed on my chart we see pertuzumab are in combination with Herceptin as the ideal treatment for the adjuvant setting and we have a program running in the adjuvant setting, and also first line setting.

T-DM1 in combination with docetaxel or any taxane I should say, we see as a good option as a store manager. And we are also – we see a place for in combination with trastuzumab in second line. The balance for the event without taxane, so it would be trastuzumab plus T-DM1. So we see the combination of taxane, Herceptin was adjuvant first line in T-DM1 coming in later lines of treatment. But I am showing combination with trastuzumab as well.

Pascal Soriot

And this is of course an exciting proposition if we can work both on the tolerability with the T-DM1 because we eventually at the place chemotherapy and at the same time can increase the efficacy with pertuzumab, but that would really shift the standard of care in this important disease both on efficacy and on the safety dimension.

Severin Schwan

If you can take the question in back and then move forward?

Unidentified Participant

My question is for Pascal. He was talking about flexible reimbursement plans in emerging market to improve penetration rates in market such as China and Russia. If you could maybe give us some example for both flexible arrangements and so how they might work?

Pascal Soriot

Yeah, I mean, I was general on purpose because of the plans, we have a variety of options. Some of those items, some of those – I mean those terms can arrange for the reduction of our price, into a reduction of our price provided we get extended access, and broader access in the southern geography.

In some other cases, we are looking at packages when we actually provide testing, screening. So throughout the screening campaign because in many of those countries the issue is, as I said a bit earlier, women with early breast cancer are now diagnosed little early enough.

And I was explaining the other day to a group of people. If you compare the Poland and Spain, which have very similar population and quite frankly Poland is not even what you would call as emerging market its closer to Europe. But still you see similar population, same number of metastatic breast cancer patients, but much lower number or the adjuvant breast cancer patients.

The people tell you there is no breast cancer in our country, the reality is that unfortunately patients are not diagnosed earlier enough and they are only diagnosed when they get to the metastatic setting.

So really the key is to diagnose them earlier enough, so we can save their lives, because when you treat them in the adjuvant setting, you talk about saving lives. When you treat the patients in the metastatic setting, they unfortunately typically only talk about extending lives.

But often what we try to do is, offer to provide free screening campaigns and sometimes taking particular the ATHENA test for HER2, for HER2 the same. So there is a – in other cases we have – we’re doing like an example with legacies (ph) in Egypt, since where we have two Trigonox. One, one is biggest things (ph) for the product market and another one is a different brand to supply the public market where we sell to the government so it is totally different price point.

Another example in Nahoko we have tier pricing. So we have all sorts of, options ranging for the very simple price reduction to tier pricing to package offers, all sorts of things here.

Severin Schwan

I think the important element if I just may add to Pascal comment is, when you go and discuss with government in the emerging markets on pricing, really the important element is that then you really get access, that access which increase and that can be very lengthy discussions. And I would not see certainly a topic change in the dynamics. This is really step-by-step – almost on the deal basis where you are in discussions with government officials and we would only go for a price reduction.

If we see an increase in volume otherwise it wouldn’t make sense neither for patients in those countries concerned and also ourselves, but it’s not a process which is going to happen all the night. I think this is something which we will see being implemented all by longer timeframe. I think we had another question here in the third row and then I call if off.

Unidentified Participant

Yes. Two questions for Dan. First is on margin, not necessarily when you get to 40, but roughly.

Severin Schwan

The 40% (inaudible).

Unidentified Participant

But you did identify in your presentation in the effect of mix on margins for your presence. The ongoing effects of the manufacturing actions you have taken in the last couple of years and then you have so ahead of you some of the contribution from operation – operational excellence, where would those factors bring your segment margins? That’s the first question.

And the second is, Erich, has painted a picture for the next number of years after he is left that the business is going to really be putting free cash flow towards de-leveraging. And are you not going to be looking for acquisitions if you are not, does that inhibited all your ability to go ahead of your industry for the next number of years?

Severin Schwan

Okay. Thank you. First of all, on the margin side, yeah. I believe when we look at the four percentage point margin increase. There are significant product mix issues in there as well as operational efficiency, so product mix I really think is sustainable. And also the operational efficiency that was the year-on-year.

Unidentified Participant

In this business, given the dynamics in the business, we’re seeing margins in the range of 17, 18% to 22, 23% so to speak.

Severin Schwan

Yeah. I believe given our size, given our economies of scale, given our penetration level we should be at the upper end of that range and driving that. However, we now continue to reinvest in the business clearly particularly but some of the medical value components that I spoke about out there, I mean those who are requiring less. And particularly, if you want to see value based pricing more so in diagnostics than we’ve seen today. So we don’t guide specifically on the margin and certainly 40% would be a nice dream. But I do believe that we should be very competitive on the margin side just as we are on the share side and on the volumes side.

Pascal Soriot

But relative to your question relating to acquisitions absolutely we want to remain flexible for that I believe the Ventana acquisition was really the last significant key in vitro diagnostic puzzle that we didn’t have a good presence and with the Ventana acquisition we’ve basically cover the front. I mean we cover everything from proteins to DNA to RNA to tissue based diagnostics. So from the overall big piece puzzle that we had with the future of diagnostics I think were quite complete. However, we want to continue to do these types of acquisitions that I spoke about in the past.

I mean looking at continuing with care in diabetes and how do we get to the artificial pancreas and what components do we continue to need either within or with outside our company for Tissue Diagnostics. So I think we’ll see these bolt-on type acquisitions and then the other area that we have to be very keen about in addition to our own internal researches is the fast emerging areas of diagnostics.

And that’s where you saw the research collaborations, for instance, in sequencing, I mean, to use Erich’s Famous S-curve comment, that’s diagnostics, the fastest S-curve generation I’ve seen so far is in the area of sequencing. I mean, getting to this single strand sequencing, this $100 genome, or the $1,000 genome I think will come over the course of the next five years.

So what we’re trying to do is, first of all, protected support our in vitro – our in vivo sequencing business, the 454, but based on number of bets out there in the mid-term to make sure we don’t miss the next S-curve. So all these things are very important and that’s why I also say I mean, the margins we should be competitive with, but we should – I mean, you could manages this business, your margin, that is much higher than that, but I think you would cut out your longer term future in that with this.

Unidentified Participant

Thank you.

Erich Hunziker

I think we had a question. Over there, if you could have the microphone please, so that everybody can here you.

Unidentified Participant

Part of your discussion in – Erich?

Erich Hunziker

Yes.

Unidentified Participant

And the point was made that you hope to have 10 group compounds on the market in three years, I don’t have the exact quote, but that’s just of it. That would give you probably the largest new market share in the business in the United States, if you are successful. Is that your expectation to be successful often enough in the next three years?

Erich Hunziker

The comment was really relating to the 12 new molecular entities in late stage, and of course we hope for as many to be filed and come through to the market, but I also want to manage our expectations. It is unlikely that all of them will make it and all of them will make it especially in this short timeframe.

Now very concretely, the BRAF, based on the early termination of the BRIM trial two weeks ago, we are now very confident to not only file this year, but hopefully have accelerated approval especially here in the U.S. and be able to launch the product already this year.

The two other products which are eminent for filing, provided that the data read out positively is Hedgehog and is pertuzumab. The other compounds will follow step-by-step, not all of them would be launched within this timeframe, but we hope that as many of them will make it.

So it’s really reading the crystal ball. How many of those will make it, but what I would say is that if you look at the compounds, they are really shifting the standard of care. So if they make it, they make a difference for patients. They really make a difference in the practice of medicine and therefore I think and particularly the L (ph) positioned in few of the increasing pressures which we see in the healthcare system. I do think it’s not only a matter of the quantity of the compound which you are getting through. It’s increasingly a matter of the quality of the compounds which you have in your pipeline.

I think increasingly this is what we’ll count because if the sources are getting tighter, if the pressure on prices is getting higher. I mean eventually payers will allocate the resources to products and solutions where you have a real difference for patients where you have long life, where you increase the quality of life, I’m totally convinced of that.

I think especially these times where we have to do the price pressure, I am convinced that with our focused strategy on hi-tech innovation strategy of combining the expertise between pharma and diagnostics we are well positioned. Then we’ll see in a couple of years how many made it. But those which made it I am sure have a very good prospect.

Unidentified Participant

Thank you.

Severin Schwan

Do we have other questions Pierce (ph)? There are two questions on that side if we start here.

Unidentified Participant

I had a question for Daniel. One general and then one more specific, be interested in your comments on how important you think the shift and point of care is within the diagnostics space? And on the second question, specifically how do I understand the HPV opportunity? Is it going after the traditional path of market or is it also going after existing HPV diagnostics in the market?

Daniel O’Day

Okay, very good. On the point of care shift, I mean we see this as an important future trend for sure in the diagnostics environment. The question will really be in terms of the economics just to step back from it.

Principally, point of care test are higher cost test, higher cost of goods test, but they give a quicker results. So the real question, when looking at point of care for us is, is there a benefit to that rapidity in results. And if there is – if there is something a clinician can do in a short period of time, so things like emergency room, cardiovascular testing, very clear they can do something. If it’s an oncology point-of-care test, where you get the result in one hour versus overnight – I’m trying to say that that’s not really such a benefit.

So if what we see dynamically is that makes a difference, that will drive it towards point of care and we want to be in that. If it doesn’t the economies will shift to the central lab work, because as long as you can do it overnight and do it in a large reference that’s always going to be more efficient and more cost efficient.

So we’re keen on that sector. The other thing that’s very important in that sector strategically is reproduce stability results also similar to the central lab and IT connectivity and workflow.

So we see it as very important, but if you have a point-of-care test, a clinician or patient should be able to get the exact same quality as if we’re done in the central lab because as often times patients are going between these different satellite centers or hospital centers. And so that’s another future in terms of reliable result we look at and then have he IT system to be able to record that result regardless of where it’s taken and done so you have a patient’s record that’s consistent?

Erich Hunziker

On HPV opportunity, our clear strategy is to – is to first of all – in most countries it will be – sorry, in United States it will be a test that’s using conjunction with half initially, as it is today with a competitive products on the marketplace. And because that’s a largest market our first strategy is share this place of the current on market HPV DNA test and we feel that we have significantly differentiated data and the systems specifically because we can separate out 16 and A team have the clinical data to do that.

But that’s a short-term more in this place in the current HPV Test. Longer-term, however, particularly with the results of the ATHENA trial, we think we can really displace path in a primary screening study. And that’s why the ATHENA trial is also a three year follow-up longitudinal study. We have data what we reading out over the cross of the next two to three years and presuming you can demonstrate that with a HPV DNA Test 16 and 18 that you can identify women with cervical cancer better than PAP, and by the way over the course of three years they don’t develop PAP, they develop cervical cancer or HPV 16 or 18. You can change the market from an annual PAP smear to a once every three year HPV DNA Test.

And particularly in Europe that’s going to be important, because in Europe we don’t see co-testing being supported by the healthcare systems, frankly. I mean, they will either continue to do PAP or they will switch to HPV but they all unlikely to do two test strategy just for simple economic reason.

So that’s our strategy also particularly XUS (ph) is to look at the strong ATHENA data to get countries to look at replacing PAPs with HPV and better and more accurate diagnostics.

Severin Schwan

We have a question here in the last row and then they had just one last question. Yes, please.

Pascal Soriot

Another diagnostic question. You mentioned in your presentation about the IP protection on your new – molecular markers. Taking into consideration of the recent U.S. Patent Court decision against Myriad on the patent facility of genes. Should the Supreme Court actually uphold that decision looking across Roche’s or any diagnostic portfolio in your company, does that have any meaningful implications for you, if you no longer have the ability to patent to protect the genes, the diagnostic based on the gene patent conversely did that open up new business opportunities for you?

Severin Schwan

Right. So our feeling on that, I mean, our feeling on that is it’s a gene based intellectual property will continue to be upheld in the marketplace. The Myriad cases, a specific case and it deals with the strength of Myriad patent situation as well which I obviously won’t comment on in any detail at the moment and like to do that. But from our intelligence and what we know about it, we think it’s very unlikely to go to a stage where they say is absolutely no ability to protect IP associated with the biomarker used in Diagnostics. And I think that would really be (inaudible) to innovation around the world. So that’s – I mean that’s our current view on it I have to say. And our model – our business model does of course relies to a certain extend on IP, but very differently from pharma.

So yes, we have IP on some assays, but many assays have open IT and even with that we compete from the different various entry and that is that on our systems, the way that we sell our systems is by being able to have breadth of menu and then unique menu on one system. So, I would say that we really look to have unique menu whether its IP protected or not, and that is what really makes the difference in terms of the sale of our system versus the competitive system out there in the marketplace. But of course, we are always looking to protect IP whenever we can.

Erich Hunziker

It is also more common in the diagnostics industry that you exchange IP so if you have specific IP in the pharma industry then you speak to your IP and you develop your product for the market. Very often what you see in the diagnostics industry is that the players have mutual interest to exchange IP. If you look into the history of Roche, we very often took an approach to make our IP available for other players, and I think it was a good strategy. I mean first all from a financial point of view it’s reside within royalty income for us, but also by doing that you set a standard in the market probably the best example is the PCR patents, which we actively out license. But we did this with other elements. One example which Ben showed on the – on his slide was NT-proBNP. So we have been excessively out licensing NT-proBNP to set the standard in the market. And likewise we have also the possibility to access IP which is provided by our company. So we have seen each of them up there which we’ve licensed in from Genzyme in this specific case and other parameters. So the dynamics in terms of how the industry operates in IP is different between diagnostics and pharma. And you can see – immediately see why this is the case, because you would stifle the growth of the market for all players if you cannot develop a menu on the platform. I mention, everybody who has IP needs to place an instrument in the left. I mean there comes a point when you get to a space limitation, if you need for every new test, new instrument. So all the players has an incentive to exchange IP.

But having said this, it’s an important element of driving the business and I believe in this combination between pharma and diagnostics we have a particular good opportunity to generate IP with the expertise of pharma and also with possibility to – if you’re almost like free ride on the clinical trials, which are done in pharma.

If you look at beta for example, no other company in the world could develop a new beta test as we can and the simple reason because our own test is part of the clinical trials and the filing of the beta inhibitor and there is a number of other examples in our pipeline.

Look at the c-MET (ph) test that we discussed beforehand for lung cancer, very similar situation or if you look at Periostin for IL-13, we have specific opportunities here but we would always consider to provide such IP to other players to set the standard in the market and to drive menu expansion across different platforms.

Severin Schwan

Can I take one more question before we go into the break out session, just one more question in the panel. If not then I can invite you to join the Pharma session which is just next door with Pascal. We have diagnostics down the corridor, which is in the Lotus Suite and also, the accounting workshop Erich referred is down the corridor in the Lotus Suite. Thank you very. Have a good afternoon. Erich and myself we stay here for the strategic session in this room. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines. Thank you.

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