Roche Hldg Ltd Spons (OTCQX:RHHBY) Analyst Day Conference Call September 21, 2011 9:30 AM ET
Karl Mahler – Head of Investor Relations
Daniel O‘Day – Chief Operating Officer, Roche Diagnostics
Colin Brown – Head of Roche Professional Diagnostics
Paul Brown – Head of Roche Molecular Diagnostics
Eric Walk – Chief Medical Officer, Roche Tissue Diagnostics
Garret M. Hampton – Senior Director, Oncology Biomarker Development gRED
Roland Diggelmann – Regional Head, Asia Pacific
Alan Hippe – Chief Financial Officer
Vincent Meunier – Exane BNP Paribas
Keyur Parekh – Goldman Sachs
Matthew Weston – Credit Suisse
Andrew Lenner – Morgan Stanley
Marcel Brand – Crédit Agricole Cheuvreux SA
Keyur Parekh – Goldman Sachs
Okay. So, welcome. Good afternoon. Thanks for your interest in Roche and it’s a pleasure to be here and I’m really impressed by the crowd, (inaudible) last annual day, how many people are going to come and actually I see more people here than over the Half Year Conference. So congratulations, Dan, already.
Those who follow us closely they know that this is the third event we do this year for you, for the investors. We had one at ASCO where we had five trials. All five trials, which obviously had a hazard ratio below 0.56. Extremely strong data and I’m pleased to say that we already have an approval of two of them for Tarceva and BRAF in record time.
And at the European Society of Cardiology, we had two trials; two phase IIb trials, Dal-VESSEL and Dal-PLAQUE, our HDL increaser, CETP inhibitor and today it’s all about diagnostics. So diagnostics is in the focus.
And I have to say that, on a personal point of view; diagnostic is really a great business to be in here. I learned a lot also over the past weeks and months. I have to say also during the preparation of this event here. And diagnostics is in the focus of all stakeholders at the moment, I mean for the payors they care about reducing costs and the regulator care about better targets and better medicines, patients of course they don’t want to be treated with side effects but with medicine that really works for them physicians and I think and I hope that maybe we get three takeaways or that you have three takeaways, after (inaudible) from my point of view, diagnostics offers a long-term and say those casual platform that is important for the group and had a typical focus of this one later on.
Second is that Diagnostics is instrumental in developing new targets, that is the second takeaway I hope if you look at from today. The third one is with pharma and diagnostics. We have a focus model because we have two business units were we focus on, but on the other hand, diagnostics also represents about 20% of our business, so it’s also rich diversifying our business model and Alan will also focus on this one later.
So in other words and to summarize Roche Diagnostics, I believe, is a under appreciated, undervalued whatever menu you want to have for this one, a growth platform for the Roche group. With that, I wanted to hand over to Dan. I wanted to thank you for hosting the events today. I wanted to thank Alan that he found time in his busy schedule to come here and to present the group’s perspective. I wanted to thank all the speakers today, so you have really great opportunity here to see all the growth platforms from the various business units like tissue diagnostics, molecular diagnostics, professional diagnostics and Dan will walk through later on in more detail through the program.
With this one I last but not least wanted to thank Alan and Dan for making this event happening. I mean they have spend a lot of time together with the speakers today in preparation and also they pick up something to eat later on because there is also dinner prepared outside, so if you go out on the left side and this one I would like to hand over to Dan.
Thank you and good afternoon everybody. Thank you for helping me to win a bet with Karl, it doesn’t happen all the time, so I appreciate that. Most importantly, thank you for coming today and for your interest in Roche and your interest in Diagnostics. It’s really a pleasure to be up here with distinguished group of my colleagues to take the messages that of course I had a chance to speak with many of you about over the past year, year and a half, but bring them into even more life have a chance to investigate them together and frankly also to see some of our technologies.
We have some technologies on display here and we’re going to give you a lot of examples throughout the course of the day, about what it is that special about Diagnostics, what it is such unique about Roche. And we’ve got two heads of our business, two heads of our businesses here with me today of our five businesses that Paul Brown who runs Molecular Diagnostics, and Colin Brown that runs Professional Diagnostics. And they will be giving you more flavor on how our business model works in those two very important businesses within our diagnostics portfolio.
And then after the break, we’re going to attack it a bit more from both a medical scientific perspective and a market perspective. And I’m very pleased to have here today, Eric Walk, our Chief Medical Officer from Ventana, our Tissue Diagnostics group, and Garret Hampton, who is our Biomarker Head, out of Genentech Research and early development.
To give you really the side also from pharma and from somebody that’s managing our innovation engine in pharma to be able to give you a perspective on what it means to have pharma and diagnostics within one company from his perspective.
And then we’re going to close with one of our fastest growing areas, review the emerging markets, but a specific focus on China, because China has been a very significant contributor to our group results and to our divisional results. And that’s going to be done by Roland Diggelmann, who runs that particular area.
Then I’m very pleased and thankful that Alan again made time in his schedule. He has been very busy also learning the diagnostics business, and I have a lot of questions for him when he presents to test his knowledge, but it’s great that he has come here today. He’s been working with our customers and our businesses, and he’s going to give you his perspective as a relative newcomer to Roche about what diagnostics does to the Roche Group, and how it helps the Roche Group.
So my message to you has been and will continue to be the following, and that is that diagnostics and in particular in vitro diagnostics, are a part of the solution of the global healthcare crisis that’s going on today. And I believe that’s what’s driving the ability for this industry to grow in an environment where many, many contributors to healthcare are troubling in growing. And I think it’s also one of the reasons why you see Roche growing at almost double the market growth rate over these years.
And my second point is that, Roche is uniquely positioned to take advantage of that IVD diagnostics growth in the future. And I use that word unique that I want to come back to and my colleagues will come back to time and time again in the conversation, because we really want to point out what is competitively different at Roche from other companies. Why is our structure make us able as the world market leader to grow faster than the market, and why do we have some confidence that we’ll continue to be able to be the leaders in diagnostics, be leaders in providing healthcare solutions.
To do that, I want to start with a review of the market to tell you what is the market today. Well it’s today about a $44 billion market, and it’s been growing attractively for the past five years, the past 10 years despite some of the pressures on the healthcare system. And we expect that growth to continue and you can see there are different aspects of our business that are growing faster than others and that has something to do with of course the innovation potential within each one of these businesses and of course if you (Inaudible) these apart there are pieces to these business that are growing even faster than others. And the important thing for us is that being in all of these businesses gives us some unique advantages, and I’ll try to point that out throughout the course of my discussion.
But why am I so confident that diagnostics will continue to have a poll from the market? Well there is a couple of key trends on the right-hand side here. The first one is that labs are continuing to consolidate, they are becoming more efficient, they are demanding that our products respond to their needs, and we’ll talk about some of that. Today, diagnostics only accounts for 2% in most countries of the healthcare spend and yet it’s used in about 70% of clinical decision-making today.
So, today it's a very efficient way to be able to find the right patients for therapies, but what we also know today is that 50% of the medicines that are used in patients on average across therapeutic areas, actually have no affect on that patient and we're seeing that could cause side-effects. So, we still have a long way to go to better efficiently manage patient care and that's why I'm so confident that even with these price constraints, even with the austerity measures we see in many countries, which obviously do affect us, on a net basis, the value the diagnostics bring to governments, to health ministers, to healthcare society, far out ways those pressures and why we are continuing to grow in a marketplace that is faced with those pressures.
Clearly, the understanding of science, molecular biology is also driving some of the explosion and innovation here and particularly in the area of companion diagnostics. And then finally, the growth in infrastructure spend that we see in the emerging markets, very different from emerging market to emerging market, but we're seeing a very strong uptake of all product as the emerging markets put new healthcare standards and systems into their countries.
So, Roche is by far the number one company in in-vitro diagnostics as you can see here, with a 20% share and there are number of things that contribute to both that size and also our growth rate. But certainly the breadth of technologies we’re involved in, the way we are able to gear our products to our customer base and the ongoing innovation on the menu drives our competitor advantages, in addition to the fact that our global presence in more than a 130 countries is something that allows us to get a single solution, out to people around the globe very quickly and take advantage of that technology taking route.
You’ve seen the half-year results. We grew at 5% through the first half of this year. We are continuing to focus on obviously all of our key deliverables for this year, and we are making progress with our key product launches and that’s driving each one of our businesses. And likewise we are keenly focused on cash flow and our profit line and you can see that we are continuing to make profit there as well and improvement in our profit there as well.
Last year, we had really a fundamental year in diagnostics by growing the profit line more than four percentage points and that came through a lot of efficiencies, that came through product mix and we continue to focus on that this year as well.
So with that overview of the market, I want to get into now what’s the business model of diagnostics, and this is really going to set the framework for the other speakers to give some specific examples. The reason I point this out is that many of you I know are quite familiar with the pharmaceutical industry, some may be detailed knowledge of the healthcare industry, but I want to point out that, we play in many different segments In Vitro Diagnostics.
In Vitro Diagnostics really means that portion of the diagnostics, we take a sample from the body, it could be a blood sample, it could be serum, it could be tissue, you put it into some type of an analyzer and you get a meaningful results at the other end that has an impact on the patient or the clinicians decision making. And that’s the way we define In Vitro Diagnostics as opposed to diagnostics that also look at things within the body, x-rays, MRIs, these types of things, so we differentiate those in the marketplace.
Our position is in In Vitro Diagnostics. We believe that our fundamental understanding of science within the Roche Group, the evolution of molecular biology, this is the place where we feel a great deal of innovation will occur and this is where our strength is as an organization.
Today, we are going to be speaking mostly about the orange section here, the In Vitro Diagnostics businesses that have the most connection also with our Roche Group and the pharma products. Clearly, we have an attractive business in diabetes care as well. And many of the same principles that I’m going to speak about, we also apply in diabetes care in terms of looking for the ever-evasive artificial human pancreas. And we are evolving our business along those lines to drive our diabetes care business in the future.
And our Applied Science business is also an integral part of our division. It deals with the life sciences market, with the research markets, so it’s different than the regulated market and we play in a piece of that market. We play in the most highly innovative area of that market, and we do that, number one, because it’s an attractive market. But number two, it allows us to be first to diagnostics with the most attractive technologies. And that’s proven time and time again to be the case in organization. But for the stake of today, we’re going to be focusing on molecular tissue and professional diagnostics, and the role that they play within the Roche Group and with our customers.
So what is our business model? I mean, I have spent 20 years in pharma, and move to diagnostics. I found that a very strange animal at first, and thanks to my colleagues educating me. I really began to understand what is this business and why is it different than pharma? And really the major competitive advantage, sustainable competitive advantage in pharma is obviously based around exclusive IP. I mean there's no way you could have the attrition rate you have in pharma and still have the business model if you didn't have protection of your assets after the launch period.
Well, that’s very different for diagnostics, as I’ll explain. The vast majority of the IP is quite open in diagnostics. So our business model and our competitive barriers to entry really revolve around a razor/razor blade model. In other words, we win by installing our instruments into our lab customers, into hospitals, and then providing those instruments, which are close systems, they can only use our reagents with the reagent pull through on those systems.
This is proven to be a very strong competitive barrier to entry particularly in our largest labs, because once a lab adopts these types of technologies they live with them for three, five years and often continue that for 10, 15 years. So the key is obviously to keep up the speed with the instrument and to make sure you have the menu, that’s attractive to your customer base.
And we do that in two major areas of our strategy just to simplify it. We focus on two major buckets of strategy. One is testing efficiency, and the other one is medical value. And testing efficiency really means what are we doing for our lab customer? How we’re making it easier for that lab customers to run thousands of tests overnight to produce the results in a reliable and effective and in efficient manner.
And this is really the way the diagnostics industry was born. It was literally born by the fact that you would have a technician in a lab that did highly manual processes and steps and the industry was born by taking those steps that a human was doing and automating them into our machine.
Clearly that’s a simplified way of describing the industry. But it's important that I articulate that, that’s the way the industry started, because we’re now at a stage of evolution in the industry, where that is still important and will be important, but as the percentage of importance, medical value is becoming much, much more important than testing efficiency as we move out in time. You have to have both to be successful, but in terms of my statement about our ability to make an impact upon the healthcare crisis that’s going on around the world that’s going to come through medical value.
So for testing efficiency, we generally look at two things, do we provide good lab solutions? And do we have a complete menu? On the lab solution side, there is an evolution that's going on within diagnostics where we were first focusing just on automation then we went to kind of a higher level of need of our customers, which is work flow integration, how do we make sure everything within the lab works well together.
And then the third point, all of these create greater differentiation as well and greater competitive advantage is to then connect your systems in with lab information systems with hospital information systems. And then this connectivity that also helps the lab to be more effective and efficient. And the way that we designed our products to be modular in approach, so they grow with the expansion of our labs and our IT connectivity has allowed us to both keep up with our customers needs and anticipate those needs for the future. And we’ll have lots of examples of that from my colleagues.
Then there is this issue of complete menu. And I think this concept is actually quite important both in this context and also in the context of companion diagnostics. This is an actual example, we’ve removed the numbers because we haven't publicly disclosed all these, but it shows you that in the blue line which you're looking at there is really more of than a hundred different assays within our Immunoassay business and a sales volume. So you see a sales volume in this line that was going long quite nicely for several years. But there was one particular assay that labs wanted that will complete the menu, complete the standard menu and that was HCV. When we were able to get a hold of that, you can see that the HCV assays itself was a highly profitable, highly revenue driving assay. But nothing fundamentally changed on the blue bar here. And you can see the whole blue bar also lifted because of the efficiency that we provided to the lab customers.
This is an important concept because we look at value within diagnostics, not just at what does one assay bring in terms of its NPV, we look at the fact that the totality of a complete assay lifts our whole razor-razorblade model and allows us to be both obviously a higher growth business, but also a more efficient business in the future.
I'm often challenged to say well, does one companion diagnostics make a different materially to your business, and I would say, maybe not one companion diagnostic, but a suite of companion diagnostics combined on a platform that has a wide array of menu items differentiates ourselves in the competition and allows us to be really the winner when it comes down to competitive bidding.
So the second aspect of our strategy really is based on medical value. And here I think Roche is unique, Roche is unique, because of the focus that we have on science, the focus we have on patient needs, all these comes together the work we do in the pharma side, the work we do in the diagnostic sides comes together to make us stronger than the competition in terms of approaching this. So we're going to give you a couple of examples today.
But there are three key aspects to being successful with medical value. One is, we’re focusing on the right things; two, we’re protecting that innovation; and third we’re driving the appropriate level of data with clinical and pharmacoeconomic benefit to change prescribing practice out there in the marketplace.
So just to give you an example of how we approach unmet medical needs in diagnostics, there are several different places that diagnostics can play a role in health care. It can be upfront in a screening program, it could be in the diagnosis of the disease, it could be in how we monitor disease course and it could be eventually in prognosis or prediction of future iterations of that disease or exactly how long that person might be able to live.
And we just gave a couple of examples here. We literally have a map where we’ve mapped out every disease state within Roche both with our pharma and diagnostic colleagues and we've identified those areas we want to go after. This is one of the key tools we use when we’re prioritizing our R&D portfolio and diagnostics.
And you can see I mean just to build this out it's true in oncology, it's true in infectious diseases, it's true in our cardiovascular therapeutic areas, and there are specifically holes in this graph, but there are holes on purpose, they’re holes because the need for particularly diagnostic there may be fully satisfied or it may be that you don't actually need the diagnostic in that setting. And so this is what we've done and this is to give you just a small portion of the examples that we have actively going on within diagnostics to address these questions. And we’re going to be talking about some of these actually today and the role they play in this. So the first one is focusing on the right areas. The second one is, do we protect our innovation.
Now as I said before, the vast majority of IP and diagnostics either doesn't exist, it's freely available or it’s widely licensed. And that will continue to be the case, I think moving forward. However for new inventions for high medical value assets it becomes extremely important to be able to protect that IP and I also believe that as a result of the research we do in the Roche group we’re best positioned to be able to do that. We do that systematically within our research houses on the pharma side, when a new biomarker is identified of potential clinical significance, we not only filed the IP and the pharma use of that product, but we immediately also filed the IP under diagnostic use of that product. And therefore make sure we are protecting our assets as we move forward. Of course not all inventions are done in Roche.
So we also need to be able to bring in IP from the outside and we’ve done that pretty successfully both with our ability to negotiate on brining IP in, but also because we hold a lot of IP ourselves, it allows us to get access from others in generally semi-exclusive work, co-exclusive type arrangements. So, we are going to continue to be I think the leaders on driving this IP. And the first thing is really about clinical utility.
Now in the past, the vast majority of diagnostics have been really based on non-clinical data. The question is can you measure something in the body and can you do it reliably and consistently, and if you can do that, you can get regulatory approval in many countries and markets. But in the future and clearly today we have plenty of examples. The real key will be not just the non-clinical development, but really the clinical development, not just showing you can measure something, but saying what does it mean? And most importantly what type of clinical intervention change can you have that will either help outcomes, help a particular patient or drive new medical practice, new medical care. And of course, we have a lot of experience in this within the Roche Group. Is this essentially the pharma model, it has to be adapted to diagnostics, but we were really using that expertise and know-how to drive our ability to bring these things forward.
And we are developing good clinical data. We are developing good (inaudible) data. And now new to diagnostics, we are starting to take these advances to new customer bases for us. In the past, we focused almost exclusively on the labs, today and in the future we are going to focus on the labs, clinicians, payers and we’re doing that today for instance with HPV, which Paul will talk about in the United States. Going directly to OB/GYNs with one of the largest clinical trials or I should say the largest clinical trial ever done in diagnostics with 47,000 women, with extremely compelling perspective statistically significant data on why HPV genotyping test is able to identify more women at risk for cervical cancer more efficiently, more pharmaco-economically than Pap smear alone or Pap smear plus 14 high-risk genotyping.
So, Paul is going to talk about that and there is other examples, but the concept of having a value to that in investment is very much within our model today, and another example is from professional diagnostics where we have a hundred immunoassays all averaging around CHF2 a test, but then we have some with IP and medical value that command four to five times that price point. So this isn’t just theory, it exists in our model today and we're systematically pursuing this to raise the value that we bring.
We have this range of technologies, and you may say, well, that's interesting, but where does it really become meaningful? And we’ll have several examples today. But I just wanted to give you a perspective from the patient, which we look at all the time in terms of what we are doing going to make a difference to the disease course of the lives of a patient. And this is an example taking melanoma, skin cancer, and looking at it from initial diagnosis to ongoing therapy monitoring.
The point I want to make here is that because we have so many technologies, breadth and depth, we touch that patient's lives at many different parts of their treatment. It starts with a biopsy of a particular melanoma, which in the case of melanoma quite easy because it's on the skin. It moves into our tissue diagnostics technology, where we do a primary staining essentially to rule in or out disease, and then we move to that a advanced staining platform where we can further discriminate the course and nature of that cancer. And those two technologies are within our Tissue Diagnostics Group.
And then, with the launch just recently of Zelboraf and BRAF V600E mutation, we can then take that patient on to a next level, and say okay, you have melanoma but do you have a particularly mutation type that will respond to [ACADO] therapy. And we do this through our Molecular Diagnostics Business, which then looks for a particularly genetic mutation called the B600E mutation, identifies whether a melanoma patient has that mutation. And in general that accounts for about 60% of melanoma patients and then we can deliver immediately back actionable information, a therapy that has a very high success rate in those patients.
And this concept of course brings our two groups together as well. And then depending on the progression of the patient we can go to our professional diagnostics business with a protein-based Elecsys assay to monitor the recurrence of the disease.
So as you can see, I mean, both from a lab, customer perspective, from a patient, from a physician, having this breadth of offering allows us to follow the patient from start to finish, allows us to be the primary provider to a lab, allows us to make a difference on the course of melanoma in terms of the overall healthcare system. And there is many other examples, but I just used this one, so you could understand how these things come together and what breadth and depth means when we talk about that in our business.
So a clear focus of the Roche Group is obviously personalized healthcare, is companion diagnostics and I want to spend a few minutes on why that's an important strategy for the group and why it's a benefit to Diagnostics than to Pharma. We are clearly focused in Roche, and have been for more than a decade now on two different core pillars of innovation in healthcare, and that's pharmaceuticals and that's diagnostics. We see those as the two areas where we are likely to get the best innovation and the best results for patients and to the healthcare system out there.
Now our overlap today actually in terms a number of programs and projects maybe quite small but it's very powerful, it's very powerful because its that this overlap part that we get some of the unique advantages of being able to identify medicines that we are focused on in particular patient type and new diagnostic that allows to differentiate our offering out there in the environment, different from our competitors. And this overlap is really where we focus in terms of the unique group advantages.
We do work with external pharma companies as well and Garret can even give you some idea of what was like pre and post Genentech privatization to work with Roche. There are different synergies we have within the Roche Group versus working outside the Roche Group. Within the Roche Group this is what we enjoy and it's now what we enjoy when we work outside the Roche Group and that is starting from the research phase we have unrestricted access to IP. I mean this is a very important concept because IP of course doesn't come immediately. You have to file, you’ve got to wait, and during that period of time every innovation-based company will be very careful about what they share with external partners and external collaborators. But the fact that our researchers at sites can literally sit together, diagnostics pharma researches looking at a particular problem, trying to identify a pathway, how to measure it, how to develop a molecule to attack it, gives us a lot of advantages in the early stages of research, to give you some examples of.
In the development phase, we’ve seen how this comes together in a very synergistic way because diagnostic regulatory pathways are getting more and more difficult. We have to start earlier and earlier in the companion diagnostic process to be successful. And by having two companies together, we can collaborate in real-time to make sure that we have a validated assay going into our Phase II, Phase III trials that will be approvable at the time of the drug launch.
Again something that we enjoy a speed and an ability and an ease of working together that really proved itself out in the Zelboraf example where we went from IND to launch in five years time, which is most of you know for pharma is really like light years as Pascal, my colleague would put it. And that was capable because we had this back and forth between diagnostic and pharma, because we had a very good effective pharma product and we were able to move it through the regulatory channels quickly and let FDA work together on their side on the approval of both.
And then finally we are right now in the commercialization phase of Zelboraf where we can have two sales forces going out that have the same objectives which is to penetrate the market for patients with BRAF Mutations in the marketplace and drive a faster adoption curve of the pharma products in the marketplace because of our breadth and presence over across a 130 countries.
So all of this allows us to have some unique capabilities within the Roche Group to drive Companion Diagnostics and personalized health care, and this really as come out also in the numbers; the numbers of collaborations that we have, you can see over time we significantly increased the number of collaborations. Today we have more than a 160 and many of these in the blue range are early stage examples and of course many will fail because of the attrition rate in pharma, but the point is we have really grown the collaboration. We now have 22 Companion Diagnostics programs going on within Roche.
And you can here numerically, the difference that made in terms of the ease of collaboration pre-and post-Genentech privatization. I mean the numbers really went up significantly from a 100 to 170 in one year, when we were able to work freely together, have umbrella agreements that allowed us not to have one negotiations and to drive our collaboration much, much further.
You’ve seen this, most of you this is obviously the late stage attractive portfolio within the Roche Pharma Group with 12 new molecular entities, and you can also see the shape of that curve in terms of oncology and other indications. But the very exciting things after more than a decade of working together early stage research is to see all of these Companion Diagnostics products coming through now to late stage.
And we now have six of these 12 that have Companion Diagnostics connected with them that require a Companion Diagnostics to really focus the efficacy and demonstrate the reality and the benefit they bring to patients. We’re going to talk about these examples throughout the course of today, MetMAb, lebrikizumab, Zelboraf, T-DM1, pertuzumab and our Hepatitis C program.
One point I want to make on this slide is these six Companion Diagnostics come from three our different businesses. Just to make one more point on the advantage of having a breath of technologies. They come from tissue diagnostics, they come from molecular and they come from professional.
And again the reason that’s important is those 160 programs often a) particular pharma program will have five or six or 10 hypothesis going on in Phase I and Phase II. And you often don't know where the biomarker is going to come from, whether it’s going to come from a protein source, a genetic source or a tissue-based source, and so quite late in the process. So by having the breath of our business, we can move with the science. We can move with the science more quickly and we can keep the product going in the pipeline.
So in summary, I hope I’ve given you just an overview of how we look at the market, how we look at Roche’s unique advantages in this marketplace, and why I’m confident that we’ll continue to be a leader in diagnostics moving forward, and that we’re uniquely positioned to take advantage of some of the benefits we see out there that diagnostics can still very much bring to the healthcare system and society.
So with that, I’d like to turn it over to Colin Brown, to bring you into the Professional Diagnostics business, our largest business of Roche. Colin, welcome.
Thank you. Thanks, Dan. Good afternoon ladies and gentlemen, and thanks for the opportunity to come here and shed a little bit of light into Professional Diagnostics, our largest business, our longest serving business. And I often think of Professional Diagnostics as the engine room of a cruise ship. It’s efficient, economical, smooth and powerful. And it provides the motive force to take us to all parts of the world. And its overall around about a $5 billion business, it’s just under half of the diagnostics business in total. And we’re working in the largest segment of the market, about $30 billion segment, and we’re very successful.
As you can see here, we are growing roughly twice the market right, and have been for some considerable time. And we achieve that through two key things, really one is having unique technologies, particularly our Elecsys technology for immunoassay. But also we have a very specific platform strategy that allows us to take more and more share of the laboratory business, and this has been very closely aligned to the developments in the market, which have really focused on customer consolidation.
So many of our customers now operate multiple sites, multiple laboratories both in commercial labs and in hospital laboratories. So these two things combined have enabled us not only to maintain our position, but to grow our market share in the laboratory marketplace. And as Dan said, it also gives us the opportunity to take part in the increased growth opportunity from personalized medicine.
So looking at our business now, we now achieved the number one market position in the laboratory business, in marketplace which is growing 5%, we’re growing roughly between 9% and 10%. And our focus is in all of the market segments that are growing in this business, and in all parts of the world. So we’re growing above market rate in each segment, and in each geography throughout the world.
If we look at the – how we achieved this. It’s really about having a very broad portfolio. So if you look here on this slide, you can see the seven top players in the marketplace. And you can see those areas where each companies operating in the different technology field, so more opportunities in the market. And Roche has the broadest portfolio across each of these areas, and the depth of portfolio in each of these segments.
And just to give you some idea of the strength that gives us. So far this year, the first half of this year the growth that we’ve achieved in Roche Diagnostics is half of the total growth of all of these seven companies. So we’re representing half of the growth of the top seven in this field. And we’re adding around about 450 million Swiss francs to the top line every year.
We’re covering right away through from the largest commercial labs, these largest commercial labs have been consolidating and growing in size over the last 10 years. And some of these labs are now processing as much as 40,000 patient samples per day. And we go right the way through the different types of laboratories in the hospital, the locations within the hospital, and the healthcare continuum, there’s a lot of focus in the last few years on developing chronic disease management in primary care.
Right the way through to home monitoring. So we have in our coagulation monitoring business, which is use for the patients on oral anti-coagulation. We have more than 500,000 instruments in the hands of patients. So right the way through from the largest instrument in a commercial lab to a handheld device for a patient.
I mentioned our Elecsys technology for immunochemistry. Immunochemistry is the largest segment within the professional diagnostics business. And since we introduced the technology, we’ve had 10 years of consistent double-digit growth. In fact, last year we had one of our best years ever with 17% growth.
And just to give you some idea of the spread of testing that we have. We’re doing more than a billion tests a year using this equipment on these tests. And that reflects 30 tests every single second of every hour of every day of every year. And that means that we have huge reach across the whole world.
In terms of point-of-care, we see, this is also a very important part of the laboratory diagnostics market. What we’re seeing is that the point-of-care market is one of the fastest-growing segments of the laboratory markets. It’s going around about 7% a year, and it’s a $5 billion business at present, of which we have around $850 million every year. And we’re growing the fastest in the market in this segment as well.
So, Dan talked about two pillars of our growth, testing efficiency and medical value, and that’s our longest serving business. I think testing efficiency came first to the professional diagnostics business. And for us that focus is crucial to our success and we’ve looked at the market place and studied very closely with our customers to develop a strategy that’s appropriate. And the key component of that strategy is a single platform strategy. So from the smallest satellite laboratory in a remote hospital to the largest co-laboratory within the major hospital, when you do a test with Roche it has the same test result, the same juice that goes on all of our different systems all the way through. And that is a fairly unique capability, which attracts people to come to Roche even though that this is a well established business and it underpins why we’re able to grow double the market rate.
So here is an example of a system that would be going into a large co-laboratory. The sample is coming here and they get onto the automated system. If the system then determines through its testing menu and the IT, which instrument will actually process the test, and then having processed the test, it sends it back into refrigerated store. And if the test needs a rerun because there are additional requirements it automatically feeds it into the system again.
These are very complex installations. They are very large and each sight is a unique combination. So we have to work very closely, not just to produce the what we deliver, but the discussion with our customers to tailor that solution to provide a customized solution for each and every site because many of our customs have old building, they have to be able to put these all electrical systems around pillars in a building. And we did each of these one through an individual consultancy project.
And just to give you some idea now, these projects are going-on on a worldwide basis and some of our biggest customers are in the emerging nations. So I’d just like to take a little bit of time aside to talk to let you have a look at some of our solutions that has been provided for our customers.
So it wouldn’t be Brazil if there wasn’t fireworks and I think these are not just videos that we use for these kind of shows, we will actually use these with our customers in the process of helping them understand how this new solution will fit in our laboratory.
So it’s a live example and most of the slides that we’ve worked on in this context we’ve done a lot of workflow studies and we’ve discussed for months with our customers in advance the type of solutions that they want to get, how they expect to grow over the next few years. And it’s that kind of close partnership and the relationship that we build with our customers which in many cases retains our customers for 10, 15, even 20 years through two or three, four generations of installation and it provides that rock solid capacity base for us to grow in the future.
And again coming to London, I thought it was a great idea to share some of the locked out London (inaudible) for our portfolio for immunochemistry. So here we have infectious disease line, here we have the oncology line, cardiology et cetera. 96 tests on a platform now and it’s a huge opportunity for sustainable growth because each of these tests requires a regulatory process to be introduced. And now that we’ve got 96 tests each of these would probably take years worth of regulation to regulatory process to get into the market, and maybe three to five years worth of development. So if anybody who was going to try to copy this, they would need 96 years of regulation and 96 years – sorry, almost 400, 500 years man-years worth of effort to get to this point. And that breath of menu has downside, provides us with the capacity for growth in the future as well as the menu of course you need the installed capacity on a worldwide basis. And we have more than 43,000 instruments installed on a worldwide basis. And that means that when we are introducing new assay it’s available immediately in all of those 43,000 platforms across the world and that’s a unique position in the market place.
We talked also about the trend in the market place. So we have 43,000 installed instruments. We have more than 1,000 pre-analytic systems, which deliver the samples to those laboratories, more than 3,000 IT systems, which support those systems. And you might ask why there are only 3,000 systems with 40,000 instruments? Because many of our customers have between two to 10 instruments and they only need one IT system to work with that.
And we also provide the IT solutions to coordinate Point of Care solutions because there is obviously a lot of part of concern if an individual nurse is using a device. How do you make sure that you get the same quality between 40 or 50 nurses working in a hospital where all of these devices are connected through our cobas IT 1000 system, which provides the connectivity to all of those devices and brings the information into the patient record.
So not only do we provide the secure power and the base for the business, we’re also participating in the future of our world, which is moving us downsize from differentiation only through testing efficiency, through differentiation by medical value. I’ll just give you one example of a test that we introduced this year HE4 for ovarian cancer. It’s using combination with a marker called CA125, which has been in the market for many, many years. But by combining the two test together, we can increase the sensitivity of diagnosis from or more than double the sensitivity by using these two tests together, and the combination is better than either of the individual tests alone and this is going to have a very significant impact on the supporting physicians to make the right diagnosis for ovarian cancer.
Another example would be Vitamin D deficiency. It’s incredible that Vitamin D deficiency affects more than 1 billion people in the world and Vitamin D deficiency is a key component of the early stage developments of many different diseases and we see it very much as part of our portfolio of bone disease markets. And these tests together based on a 40,000 installed capacity base means that we got a very quick delivery of innovation to all of those different customers on a worldwide basis, and we can really influence the outcome for those people with vitamin D deficiency.
So in summary, then for Professional Diagnostics, our focus is the complete solution for the laboratory network, and also for the point-of-care within the hospitals and in the patient’s home. We maintain our market leadership, and we’re sustaining the growth. And because of the combination of the installed capacity and the innovation in new testing, we are sure that we can maintain that sustainable growth for the next 10 years or so. And finally, we are able to participate in extending the menu into very specific personalized healthcare areas, particularly in the protein diagnostic field.
So with that, I’d like to hand over to my colleague, Paul Brown, to tell you a bit more about the molecular business. Thank you.
Thank you, Schwan. So, good afternoon, ladies and gentlemen. It’s my pleasure to now give you a little bit of information and some background to share with you what’s going on in the world of molecular diagnostics. I would argue that molecular diagnostics is a fascinating area. It’s an area that is moving very, very quickly, and I hope to be able to show you that it’s an area where I believe Roche is well positioned to succeed.
So let’s take a look, first of all, at the market. Today, the market is worth about 3 billion U.S. dollars, projected to grow over the next five years with a CAGR of around 9% to just over $5 billion. You’ll see that the two biggest blocks on the chart on the right are virology and blood screening, make up the bulk of the market. These are very important to Roche. These make up around about 70% of our total revenue, and these are areas where we have a very strong presence in the marketplace. These whilst they will probably grow at mid-single digit over the next four to five years, there are some very significant opportunities for us within molecular diagnostics to capitalize on those, and I’ll come back to that in a moment.
The most rapidly growing areas of molecular diagnostics are microbiology and predominantly this is health acquired infections in hospitals. And then, the other two areas of the molecular diagnostics market that are growing very rapidly are oncology and the area of HPV and I'll talk about both of those in more detail. On the slide, you can see that in front of view, the HPV and oncology group together in that top block, so that the core market is made up of Virology Blood Screening and the rapidly growing segments, Microbiology, Oncology and HPV. So if you look at where we are today, you can see from the pie chart that Roche is number one, with about 32% market share, so significantly ahead of the next largest competitor.
So what give rise to that strong market position? Again very similar messages to that that you’ve heard from Colin in the previous presentation, if you look at where we are in comparison to our competitors, we have a very broad offering across all of the key areas of the marketplace.
In Virology and Blood Screening, a very significant area for us, very complete menu there. Down to the bottom of the chart, where we start to talk about Oncology and this is a very exciting year for Roche, for Roche Molecular Diagnostics, where we launch our oncology portfolio into the marketplace and I'll come back and talk about that in more detail in a moment.
Let me just touch on some of the key things that I think are happening in the marketplace and tell you why I think we are well positioned to continue to grow and to succeed in this marketplace. In Virology, many of you will know from your pharma experience, there are some very, very interesting things happening in Virology, with HCV, the advent of the new small molecules, Boceprevir and Telaprevir are really going to provide opportunities to see more patients treated, more testing. So we believe there is a very interesting opportunity there in HCV particularly, but also in HIV, in the developing world to see growth in the Virology market, and again with our complete menu of Virology tests, we believe that we’re well placed to do that.
In Blood Screening, we have got probably the most complete menu of tests in Blood Screening. Tests for HIV, HPV, HCV that used in Blood Screening by blood banks and also recently launched tests for Parvo B19 virus, HIV virus, which are all very important, not just to blood banks, but also to plasma fractionators.
Very significant opportunity for us in the emerging markets and Roland will touch on this later on in his presentation around China. So this is a market, where we believe there are some significant opportunities ahead. And for us one of the key things that we’ll be looking for is to have a stronger presence in the U.S. market in (inaudible).
I'm going to come on and talk about the bottom three in a little more detail. We have just launched this year, in the middle of the year, our HPV test for cervical cancer screening, which we believe is a real game changer for Roche and it allows us entry into the biggest single molecular diagnostics market. We’ve also recently filed our CT/NG Chlamydia/Gonorrhea test in the U.S. market and we expect approval in the U.S. market at the end of the year.
Genomics and oncology, this is the area that’s probably one of the fastest changing in terms of what’s going on in clinical medical practice, and this is really the area in many ways where personal healthcare and personalized medicine has really sort of hit the road. We’ve made great strides here on both. I have an example and Garret will talk a little bit more about personalized healthcare in the context of the pharma portfolio.
So let's come back to the two pillars that both Dan and Colin talked about that are central to the success of the Roche Diagnostics business. It's also exactly the case for Roche Molecular Diagnostics, two important pillars improving testing efficiency and delivering medical value.
So let me first of all start with testing efficiency. If you look at where we are today in Molecular Diagnostics, we have a lot of specialized labs, very fragmented, the platform base is rather fragmented. But when we look at what we see out there in the marketplace when we talk to customers, what we certainly see in the future is likely consolidation, more automation, more focus on workflow and efficiency in the labs. And in essence, the business moving more and more towards some of the things that Colin has just shown you in the Professional Diagnostics business of highly automated workflows, highly efficient labs.
So with that in mind, we have been working now for a number of years and are now very well advanced in developing a new platform, our platform for the future, which really brings automation, high throughputs to the Molecular Diagnostics labs. So this is the system, a new system, this is the first time that we’ve shared this in public in this way. This is our system that we affectionately call at the moment, NewGen. This comes in two sizes, the smaller size, which is capable of generating about 300, delivering 300 tests a day. The NewGen 1000, which is capable of doing about 1,000 tests a day.
You can see and I hope that the connectivity to what you saw in Collin’s presentation here, these are modular systems, they can be connected together, they have generic reagents and generic juice, all of those good things that we now take for granted to some extent in Professional Diagnostic that we believe are fundamentally going to revolutionize the workflows within molecular diagnostics labs. And just in the way that you saw the demonstration from Professional Diagnostics, there will be the ability to link these things together with other systems in the lab through workstations.
So the key question pops on your mind is, well if we do that, how are we going to be positioned against that competition. So let me just show you what I think this is going to mean in terms of how we’re stuck up against competition when it comes to throughput and workflow in the laboratory.
If you see on the right-hand side, there’s the 1000, capable of generating about 1000 tests per day, roughly equivalent to four of the smaller machines and equivalent to 16 [Abbott] and 2000. That’s pretty impressive, and if you are at a lab, I can tell you just the space and the workflow advantage of being able to switch out 16 instruments for one is really very significant.
So let me now turn to medical value, which is the other of course key pillar for us within diagnostics. Many of the tests that we’ve developed within the molecular diagnostics business are focused on tests that have high medical value meeting unmet medical needs.
So let me start first of all with one of our very recent examples, our HPV test, which is a test that identifies those women at highest risk of developing cervical cancer. Most people will be aware that there is a huge body of evidence now that shows that about 90 plus percent of cervical cancers associated with infection with high-risk genotypes of HPV.
Of those genotypes, genotype 16 and 18 are really the biggest culprits, genotype 16 and 18 account for about 70% of all cervical cancers. So what we embarked on some time ago, and we publish the result of this data about a year ago, and actually just this morning we presented more of that later at the International Papillomavirus Conference in Berlin was our theme of study. Dan mentioned, there’s 47,000 patients study that’s an enormous study, but even by pharma standards and the biggest registrational study of its type.
Well that study was specifically designed to look at was the value 16/18 genotyping and how important that would be for clinical decision-making.
What you can see on the panel on your left is really one of the key pieces of data that came out of that ATHENA study, wherein one in 10 women who had a negative PAP, but were 16/18 positive had pre-cancer, so conventional PAP was missing one in 10 women who had pre-cancer.
So the way the text is set up is the test on our cobas 4800 platform has four channels and it gives you three results in one; it gives you phenotype 16, genotype 18, and then 12 other high-risk genotypes as a pooled result. So with that three-in-one result, what a physician gets back from an HPV 16/18 genotype test from Roche is how important and how valuable that information is in clinical decision-making. Those women with 16/18 infection are at highest risk of progressing to pre-cancer.
So what comes along with this is of course not just the need to develop the test to get it out into the hands of physicians and into the hands of into the labs and talk to physicians, we have to think about how do we drive that forward. So as Don mentioned right upfront, one of the things that we’ve done this in this particular area is we put in place a specific, dedicated field force to go along the OB/GYNs in the US, to drive home the message, to drive home the importance of the value of 16/18 genotyping not just with the physicians, but to put pressure on to the labs, but also to talk to payers and to other stakeholders in the system.
So this has been a very, very exciting year for us. The HPV test was approved in May, launched about and approved about four or five months ahead of schedule, which I think is a testament to the quality of the dataset and the quality of the farm.
Many of you have seen that earlier this year we acquired mtm, a company that Eric will talk a little bit more about and the technology Eric will talk about in his talk. I just want to make the point that with the acquisition of mtm, along with our HPV test, Roche has an incredibly powerful offering for cervical cancer screening.
So the HPV test, the cobas HPV test for the 16/18 genotyping, really allows us to identify risk of developing disease and Eric will share you is that the MTM technology allows us to really detect and characterize that disease once it’s there.
If you look at the marketplace today, the opportunity today is predominantly in the U.S. market and we have got a lot focus, as I said, using a very powerful physician field force, lot of activity going on in the U.S. But if you look, you can see within Europe and the rest of the world, there is not so much business there today and I turn that around and say this is a very significant opportunity for us and those are the geographies.
So what we are doing? Well, with the data that we’ve generated from ATHENA, we’re using that data to talk to stakeholders, talk to payors, importantly work with the KOLs that develop the guidelines to get 16/18 genotyping into the guidelines.
Very importantly, the ATHENA data wasn’t just a one-year study that was used for the registration of the current HPV test. This is a study that we’ve kept doing for three years, a very significant commitment of course, but with a very clear view that the reason we want to do that is to get to a primary screening claim. And we believe that at the end of the three-year extension to ATHENA, we will have a solid data set that will allow us to proceed to a primary screening claim in the U.S.
Interestingly in some parts of the world, in some parts of Europe, some parts of Eastern Europe, we’ve got a number of governments who we are having discussions with, who will probably not go via ASC-US or adjunct screening that will go directly from where they are today directly to primary screening. So those discussions are ongoing and we look forward to seeing that developed further.
So lastly, I just want to touch on the last examples around medical value. There is probably no other area of medicine that has evolved more rapidly over the last five to 10 years than oncology. And with our knowledge of molecular biology with a deepening understanding of disease, the number of molecular targets has really exploded.
When we look at what we think are the most important targets, we have really focused down on six or seven key targets that we think are going to be very, very important in the oncology space in the future. Then also in the table shown is a selection of the some of the most important targets where we’re developing biomarkers to be used in oncology many as companion diagnostics.
Garret will touch on some of these in a little more detail, so PI3-kinase that will probably have utility in breast colorectal cancer, EGFR, an EGFR test which many of you will be familiar with, of course, from the non-small cell lung cancer area, KRAS in colorectal cancer. And then I'm going to say a few words about BRAF, which was our most recently approved test in this area as a companion diagnostic.
Interestingly, I think also comment of Garret’s presentation as we move forward, it’s very possible what we’ll see these tests used together in studying a number of new therapies. So let me just say a little bit about BRAF and then I'll finish, I’ve just got the yellow card. So BRAF was the first example of us truly going through a companion diagnostic since the Herceptin stories sometime ago.
So the BRAF cobas test was developed in parallel with the ongoing program for Zelboraf. The cobas test that was developed was used to select patients for the Phase II and the Phase III studies. And those patients if they were V600E mutation positive were then enrolled into the studies and of course the data from those studies has been extremely powerful.
What we‘re able to show through the development of the test, which we have a test that is better than the previous standard of Sanger Sequencing, a test that gave much better results. And of course unlike something like Sanger Sequencing, we have a test with the turnaround time is extremely quick and very, very robust and reliable and the test again running on one of our CoDx platforms, the cobas 4800.
So what’s been one of the success factors in this companion diagnostic and remember the test and the drug were approved within one hour of each other by the FDA. So this is a really truly success story for companion diagnostics, not only that we have pharma and diagnostics working together, we had two arms of the FDA working together in order to bring this all to light.
But right from the outset, coordinating clinical trials, the two project teams, the two parts of the Roche organization working together in a way that I think would not have been possible had we not been under the same umbrella. That has flowed over and continued into joint dialogue with payers, with reimbursement authorities and now moving on even further into the joint commercialization and launch of both the BRAF test and Zelboraf.
So in summary, I’d say from a Roche molecular diagnostics perspective, we’re well placed to capitalize and to build on the core business that we have in virology and blood screening. There are some very important rapidly growing areas in molecular diagnostics, HPV and oncology, where I think we’re also very well placed to continue to grow and to build mainly in the future.
And last, but not least I’ve given you a first glimpse of what we believe is going to be increasingly important, which is a platform strategy in consolidation and building menu on a single platform, much aligned to what you saw in Professional Diagnostics. So with those three things for the future, I think we’re well set to be successful business over the next 10 years.
So with that Dan, hand over back over to you for the Q&A.
Great. So we’re going to take a pause at this point in the program before we take a break and see what questions you might have. Colin why don’t you come up, Paul, you can ask questions on any topic, but we thought we would concentrate a bit one these two businesses first, and see where your questions are going. So I’ll turn it over to you right here at least. I think because it’s been Webcast, if you wouldn’t mind waiting for a microphone, that’s great.
Vincent Meunier – Exane BNP Paribas
Thank you, Vincent Meunier from Exane BNP Paribas. A couple of questions, just first general question on the personalized healthcare, can you quantify the improvement in terms of timing of development, success rate and also what is the impact on the overall cost of the development for drugs? And then on the HPV, what is the timing for the expected expansion of the testing guidelines, especially in Europe; and for you what are the key differentiating factors compared to the offer from Qiagen?
Very good. Thank you very much. Paul you will handle the HPV, let me just address the R&D productivity question. I think relative to what does companion diagnostics do for us in terms of speed, cost of trials. It’s a little difficult to give a specific quantification number, but I’ll give you the example any way of BRAF.
With BRAF, we’re able to take the product from the first IND to U.S. launch in five years. And what that meant was a couple of things in terms of R&D productivity. I mean the first thing is, we had a magnitude of effect with that product that allowed us to take some risk in the development program because we knew the product worked. So for instance, we were able to start the Phase III program three months after the start of the Phase II. We did that at risk, we did that at risk because of the magnitude of effect these trials are in the preclinical phase. But by overlapping the Phase II and Phase III programs like this, we were obviously able to save considerable time, and because we were able to target the patients with part of the BRAF V600E mutations as Paul mentioned, patients were selected into the trials obviously for that and of course we have to take non V600E mutations as well. We were able to sort of ramp up the patients and progressed those patients’ trials.
And then the other way we were able to progress the program was at the conclusion of Phase III, we were prepared with both the diagnostics and the pharma division to actually turn the file around in just three months time from the conclusion of the results of the information. Normally, again that will take much longer; require more resources, more man hours, more people, and we were able to do that in three months. And because of the strength of the data and the fact that we targeted the patient population and had a very attractive risk benefit ratio, at least in our opinion, it took the FDA only four months to review the product into approval.
So obviously, I mean quantifying those costs, we haven’t exactly put together yet, but you can imagine, if a normal development time, if the product takes 10 years and all the corresponding efforts that goes along with that and you’re able to do that in five years, which is by the way my colleagues would quickly tell me, don’t get used to five-years development timeline, every product within the Roche Pharma portfolio. There are number of things that came together here. But five years maybe an exception that may not, we will see how it goes forward. And it clearly is molecule-specific and product-specific, but obviously, by reducing that time, by focusing the patient populations and Garret will speak to this even more, we can have a much more efficient R&D productivity associated with that, we reduced the risk, the probability of success of the product coming out, and we can be more efficient as an organization.
So we are – I think Garret would agree, we’re at the beginning of our journey here. We can do much more with our R&D productivity and we intend to, but clearly the ability to target patients and to have two groups of people on diagnostics and pharma working together will be the key driver to our R&D productivity in the future.
With that, Paul, a little comment on where we stand with the guidelines and competition for QIAGEN.
So let me start with the guideline question first of all. As you can imagine, there is no one universal guidelines, the guidelines are very much region and country specific. But I would look at in a number of ways. So we’re working at a national level on guidelines and we’ve both provided the 16/18 data to the bodies that are looking at guidelines, most of those guidelines change on an annual, biannual basis. So we are working with national bodies both in Europe and in the US.
But more importantly, you also have guidelines and local protocols within a country, and so we’re working again at the level below national guidelines to get the 16/18 data implemented in local guidelines as well. And I would expect that some of those changes will come through more quickly than the national guideline changes.
We also recently published as a fantastic manuscript, published by (inaudible), just a few weeks ago that shows the real value of 16/18 genotype. And what we’ve did, we took a fairly unprecedented step. We have basic and pull together a group of KOLs, and given them access to the ATHENA dataset. And given the ability to look at that dataset and to mine that and to use that information. And we’re starting to see now the first publication, the first one, a couple of weeks ago, I think which will start to have a very professional…
Vincent Meunier – Exane BNP Paribas
Journal on clinical oncology or…
Vincent Meunier – Exane BNP Paribas
Yeah. And so that's the first thing on guidelines. As far as the Qiagen test is concerned, so the key thing to say first of all is that we show very clearly in the ATHENA study, head-to-head that we have the same sensitivity and specificity as Qiagen in terms of test performance.
The huge differentiator is that, we have 16/18 genotype upfront, okay. And I hope it was clear. We haven't got time to show you enough of the data today, but the 16/18 genotyping data is extremely powerful, it's very actionable. Those women that have 16/18 genotype infection of those that are most at risk of progressing to pre-cancer. So that's very important and very powerful information for the physician.
With Qiagen, you don't get that information upfront. If you want that with the Qiagen test, you have to go and do another test. You have to do a reflex test. And we can say, okay well that’s okay. Let’s do a reflex test. The challenge is that, you may not have enough sample to do that reflex test. You may have to go back to the woman to get another sample is really just not a practical way forward. So the key advantage of our assay and the lab test is – those three-in-one results upfront and actionable 16/18 data write-up put the get go.
Just one comment on that to indicate the power of this data. I mean today, the guideline suggests that if you are positive and a pool of 14 high-risk positive, you should be deferred to colposcopy immediately, because you have the absolute risk of developing disease of greater than 10%.
What we showed in the data is even with a pep normal results, so pep negative. If you’re HPV 16 or 18 positive, forget the pool result, you will also have an absolute risk greater than 10%, which would imply relative to the guidelines that guidelines should also defer those patients immediately to copascopy, even in the absence of a negative path. So I mean that’s very powerful data that again it will take us some time to adjust the guidelines, but it will also drive I think over time uptake of this test in the labs as well. So thanks to the HPV question, can we go to the middle here and then we’ll work our way back. Yeah. Please.
Vincent Meunier – Exane BNP Paribas
Meunier from Exane BNP. I have a follow-up question on HPV and especially on the penetration rates as far they know it's 35% to 40% in the U.S. already, so I was wondering how do you see this figure evolving moving forward? And just a first question on the pricing and how do you positioned yourself compared to casual test especially at a consumable level?
Right, so in terms of penetration, you‘re right, there is certainly in the HPV market it’s a market that is certainly underserved, there is a significant potential there in the U.S. in both the ASC-US and the adjuvant market for that to grow. And so I have two objectives of course, I have to take share in the U.S. from Qiagen and also to see the market grow over time, wholly grow and what we look to be able to do once we have the three-year data from these and get the primary screening claim is to see that marketplace evolve over toward the primary screening. What was the second part of the question?
Vincent Meunier – Exane BNP Paribas
So pricing, the reimbursed coding within the U.S. currently is I think its $49.55 is the reimbursed quoted price for an HPV test. So the key thing for us is again three-in-one test that you get three results HPV 1618 genotype plus the other two high-risk for the same reimbursed price. So in terms of value add for the system and for the payers of course its very good value. In terms of our pricing to the laboratories, we are on par with Qiagen.
Thank you. Can we go to the middle in here? Thank you.
Keyur Parekh – Goldman Sachs
All right, can you here me?
Unidentified Company Representative
Keyur Parekh – Goldman Sachs
Okay. It’s Keyur Parekh from Goldman Sachs. Two questions. One, can you talk a bit about the fact that if you're talking about 100 test that had roughly 2 Swiss francs a test, how was that trend moved over the last five years? And what can Roche do or the industry do to move the $2 to $2.5 per test? And secondly kind of more specifically on HPV, can you give us some estimates about how bigger market do you see in five years time? Is are you expecting it to be a multi hundred million dollar contribution to the Roche Diagnostics business in 2015?
Colin, you want to…
Okay, I think…
It’s a $2 consensus it’s really specific to immunoassay…
Yeah that’s the Elecsys immunoassay platform. I think there is two things. One is on in terms of testing efficiency, there is always a pressure to do more for less, and that’s something that we participate in by managing our efficiency in production and capacity of systems that we can cope with that. But more importantly that what we see for the medical value is that for those tests where we have a scribe specific medical value by rather than simply selling into the laboratory, we sell those tests directly to our physicians that appreciate the benefit of those tests. So tests for example like TROPONIN or proBNP, proBNP for heart failure, we see that we can combine five, six times of the average price for those tests. And in fact in those areas where we’ve been able to extend the indication by protecting the indication, we’ve been able to increase the price of those tests. So it’s very much a case of focusing on the medical value and having a balance between routine tests and extra medical value tests and those medical value tests can, as we now see that we’ve got even more coming through which with proactive clinical studies and health economic studies we anticipate that we will be able to get ten even twenty times the price for some of those tests. That really was capitalizing with the clinical value and the intellectual property protection.
Thank you Colin.
Yes, so for HPV, yes, it’s a market that we anticipate to grow within the U.S. and also rest of world. In the U.S. currently around $250 million HPV market expecting to grow up probably north of 350 towards 400 over the next five to ten years. From our perspective, of course, yes it will be an important contributor to the molecular diagnostics business for Roche. We are looking to take a significant market share away from QIAGEN and we’re looking of course to participate in the growing market and again I think a big part of that potential growth will come along with our ability to get moving towards the primary screening market downstream once we have the three year data from ATHENA.
Yeah, and thank you, Paul. And an important lever to that answer to that question in terms of magnitude of benefit, we’ll have a lot to do with how quickly primary screening is adopted. And of course, we don't know exactly when, but our premise is that Europe will not go towards a co-testing solution; the healthcare systems will not support that. So it will move from a primary screening with PAPP to eventually a primary screening with HPV DNA.
And we saw this by the way, with NAC blood screening. Once you get one or two countries that start to put that type of screening into effect, you tend to get a domino effect with the other countries because obviously the public want to wonder, why in Denmark or in the U.K., you’ve got a better screening program than in France and in Germany. And this happened also with our nucleic acid testing with blood screening, it tends to move. But what you need is a catalyst to get that ball rolling and although we’re in significant discussions, we need one or two countries to move to that, and then I think we can better predict the adoption rate and the potential of this product and in what particular timeframe we'll do it with.
And by the way, even in countries, some of the emerging markets like China, et cetera that have no screening programs, they’re also considering how do we implement these. Because if you have no screening program today, with the data you have available today, it would never really make sense to start with the Pap smear because with the screening program, you want your most highly sensitive test first and then you want to treat a few more specific tests, which Eric will talk about the specificity of this MTM acquisition.
So putting a new program into place, you would just not start with PAP smear. And there again, we have lots of markets that have no screening. The question will be the adoption rate of that.
So we don't know exactly when it's going to come. I think we're well positioned to take advantage of it. We'll monitor it and be able to give you some updates as those develop.
Keyur Parekh – Goldman Sachs
Can you just remind us when we get the pre-ATHENA data? Is it next year we get it, or is it 2014 that you're looking at?
Unidentified Company Representative
The three-year ATHENA data?
Unidentified Company Representative
Unidentified Company Representative
Okay, can we move our way back? Sorry, the gentleman in the yellow tie and then we'll go to the next row. How are we doing? Five more minutes? Okay, great.
Matthew Weston – Credit Suisse
Good afternoon. Thank you. It's Matthew Weston from Credit Suisse. Two questions, if I could. With respect to HPV, what kind of market share do you think you have in the U.S., and what do you think that that could be in five years time? And with the announcement of the launch of NewGen, you set out that you had about 3,000 sites, I think with 43,000 instruments in Professional Diagnostics. What number would you anticipate for the NewGen platform, let's say, in five years time? And how much CapEx is that for diagnostics in terms of getting that installed base in place before the tests start working?
Well, okay. So a lot of questions, all rolled into one. So as this taken one at a time the current situation in the U.S. so I can't give you a figure of exactly market share today. We launched just a few months ago in the U.S., so it's really too early to give figures for the penetration in the U.S. market because the key thing is that you have to get into the labs, get contracts in place and that is going well, but it's too early to give a figure precise penetration after just a couple of months of launching to the marketplace.
The second one in terms of in terms of NewGen, clearly in molecular diagnostics the total reach across the world is not going to be anywhere near as large as we see in professional diagnostics. We anticipate that the NewGen 1000 instrument will be used predominantly in the very large volume accounts. So for example a lot of the blood screening accounts, very large Virology accounts and then clusters of NewGen 300s in the smaller to medium-size labs across the globe, and then the as far as the CapEx, I’m not sure…
Maybe just to make a point on that, we have two different models that we work with our customers on relative to placement of instruments. One is the customers purchase the capital equipment and then we have a particular reagent contract that goes along with that. But more and more our customers are pursuing reagent rental models where we place the instruments, we obviously then lock them into higher reagent rates and longer-term contracts accordingly to amortize the cost of those instruments overtime.
What we see in our P&L is that the placement of instruments comes into our period cost line, which is a part of our cost of goods line. And what happens as you introduce a new instrument like NewGen or cobas 8000 or cobas 6000, there is a gradual change over instrumentation. See you don't necessarily see a sudden blip on a period cost line, what you see is a gradual evolution of that. And maybe to your question how long does it take once you place new instrument till that instrument starts to become a revenue producer for us on the reagent side, usually it’s around three months I’d say, Colin is that about a quarter later in the professional diagnostics.
It depends on the mix, but most of our customers are looking to operate between three and seven years. And generally speaking on the CapEx element is paid off within the first year.
But in terms of the reagents really getting up and running on the machine…
So it takes about two to three months to get fully operational.
Matthew Weston – Credit Suisse
I mean the other thing and that’s a characteristic of our P&L in the second half of the year often times replacing a lot of instruments in October, November and December. And those instruments are not yet revenue producing, which is why if you look at the history of diagnostics P&L over time, we often have a slightly lower P&L in the second half of the year and the first half of the year because those instruments only then produce revenue after the end of the calendar year into the first quarter. So it just depends a little bit on when we’re launching new instrumentations but overall across the division that tends to balance itself out.
If we can go to these two gentlemen and then we’ll take – we’ll take a break, we’re going to have another Q&A session as well.
Andrew Lenner – Morgan Stanley
Great, thanks. I’m Andrew Lenner from Morgan Stanley. Just very quickly more broadly on the market, could you give us some sense of what’s been driving, this is same slowdown in the market in 2011. Clearly there been some volume delays where’s that happening in the US and Southern Europe and what’s driving that? And then also on pricing where we’re seeing pricing pressures that coming from lab consolidation and professional diagnostics. Just a more general color comments would be very helpful?
Great, and the slowdown was in what market did you ask?
Andrew Lenner – Morgan Stanley
Well, that’s my question to you.
All right, what markets do we see a slowdown in? The one market that is being more effected by these economic times is the research based market. We’re seeing that in our Applied Science business. So the discretionary spending in both Academic Institutions and even in our own Pharma companies has been squeezed a bit and we’ve seen the capital purchases their slowdown a bit I would say.
The other aspect of our business that has also been more affected by the economic environment is our Diabetes Care Business, which is basically a consumer-based business. And what we’re seeing here although you continue to see growth as reduced treasury – pressure growth because there’re many patients out there that are deciding to test less, less frequently some times because of the economic pressures they maybe undergoing as well as some, I’d say increased competition in our Diabetes Care Business, particularly in the United States market from a variety of new emerging market competitors that are coming on to the marketplace there. And that’s offset – the reason the market, that’s offset by obviously the explosion in diabetes, which is going on. So there is a clear volume increase there as well as price pressures.
Andrew Lenner – Morgan Stanley
In an environment of the increasing austerity though, should we expect more pricing pressure and volume delays to come from laboratories assuming that everything we’re hearing negatively across Europe and US comes true over the next 6 to 12 months.
I mean clearly that’s an unknown exactly where the economic environment where we are, but in some other countries in the [Oil Belt] countries that we work with, I mean there are customers that are taking a little more time to replace their instruments. But fundamentally we haven’t seen them stopping to acquire new instruments, we exceed and continue to place new instruments, upgrade their instruments, the volume continues in the healthcare system. So I don’t expect a major adjustment to the growth in the line.
On your point on the consolidation of our lab customers; that is true that as our lab customers consolidate, they obviously increase their buying power, which is one of the reasons; and this is by the way it is nothing new. In fact in the United States this has been consolidating for the past five or six years; in Japan likewise. So we have been growing in the Professional Diagnostics business versus our largest business still at 9% despite of these consolidating customer bases.
So what you have is obviously some increased pricing pressure, but we’re brining out more and more differentiated instruments to combat with that; plus the volumes are increasing and oftentimes when you get a consolidated customer base that’s going on your platform, you are converting and increasing market share from a variety of satellite labs that perhaps who weren’t Roche Systems that now go in to an ever expanding Roche Systems.
So getting business in a major central lab, commercial lab for us is sustainable and we grow with their volume as well. So that’s basically – and by the way, I think Roche is uniquely positioned to deal with the highest volume customers out there in the environment, I mean both through our instrumentation as you saw in Colin’s presentation and also in Paul’s. One last question, and then we’ll take a break.
It’s (inaudible) here from Morgan Stanley. Just on pricing, if we look at the growth of Roche and the market in terms of diagnostics over the last five years, can you give us a ballpark figure of the pricing component of that growth there has been? And then in terms of the 5% or 6% growth that you expect going forward, I mean again could you quantify why you think pricing would be some of the component of that growth?
Yeah, we’ve been pretty consistent over the past years and we expect that to continue. We have a price deterioration in our business of between 1% to 2% per year and that’s because it’s in the past and we see that pretty much the same moving forward as well.
So with that I’m going to invite you all to have a coffee break. I want to encourage you because we have some colleagues here also from our U.K. organization that has some instrumentation setup and some displays over there to go and touch and feel these instruments. And we will get back together again at 4:30, is that correct? Okay, thanks very much.
So welcome back from the break everyone. My name is Eric Walk, I'm a pathologist and the Chief Medical Officer of Roche Tissue Diagnostics, which is also known as Ventana Medical Systems.
And I come to you today from Tucson, Arizona. You can see a picture of our office here in Tucson in the shadow of the Santa Catalina Mountains and I invite you all to visit us. I just wouldn't recommend visiting in the summer time; I recommend visiting in the winter or the spring.
So really it’s my pleasure to give you an overview of RTD and Ventana. I will first give that overview and show some of our strategy and our current products, and then what I want to spend most of the time on is our focus for 2011 and beyond and give you a sense of what our pipeline looks like and how we intend to contribute to that pipeline, especially with regards to PHC and medical value products.
A little history at the top, Ventana Medical Systems was founded by a pathologist; you can see the pathologist here, Dr. Thomas Grogan, out of the University of Arizona. And Dr. Grogan founded the company based on a principle or concept that really wasn't understood initially by investors. And that concept was that innovations in anatomic pathology of all fields could valuable to patient care and could be transformed into a robust business. And proof of understanding of what this business could be coming from the fact that Dr. Grogan had to go to 37 separate venture capital firms before the 38 was willing to invest in the company.
And thankfully, Dr. Grogan was persistent because as you can see from these statistics, the company has been quite successful. We operate in over 60 countries today. We have an installed base of more than 6,000 systems and we’re the leader in our particular market and that's anatomic pathology and advanced staining, and I’ll describe what that entails in a minute.
We have revenue north of 500 million and we’ve enjoyed a high double-digit growth rate for the past years. IP and patents are very important to us. We have a broad and growing pattern astute and I wanted to emphasize the fact that our business versus some of the other businesses within Roche Diagnostics is focused on anatomic pathology, which I’ll get into and it’s also oncology focused. So we do not operate in any other disease areas other than oncology.
A little bit about our market as I mentioned, our market is advanced staining and anatomic pathology and that consists of two main technologies, immunohistochemistry, which is essentially the determination of protein expression that pathologist can see on the slide and in cells and a very similar technology called in situ hybridization, which allows pathologist to visualize nucleic acids, DNA and RNA, again as they’re looking through the microscopic in tissues and cells.
And this is a business that’s growing at a CAGR of 12% and are currently at about $1 billion dollar business going to just under a $2 billion business within five years.
If you look at our market share, we are the leader in our core business, which is immunohistochemistry. We have a market share of around 50%, so by far the leader of the market. And in in-situ hybridization, this is a growth area for us; we haven't been in this business very long, have about a 15% market share with Abbott really enjoying the lead in this particular market. But what I'm going to show you is that we have novel technology that we feel will allow us to actually flip our market share with Abbott in the near future.
Before I get into the portfolio, I wanted to explain to you a little bit about how pathology workflow works, because you may not be so familiar with the anatomic pathology lab. So pathologists rely on tissue for their diagnostic work and that tissue comes in from the operating room, and it's processed. There is a tissue prep step where the tissue has to be examined by the pathologist, it has to be dissected, it has to be measured and ultimately it's embedded in racks and sliced very thin and put onto glass slides. And those glass slides are processed in a variety of different ways that allow the pathologist to see the cells at the microscopic level and make their diagnosis.
The first test that's always done globally is called H&E, and that’s also referred to as primary staining. H stands for hematoxylin and E stands for Eosin. This is a purple and a pink stain that essentially dyes that tissue and allows the pathologist to make a very general diagnosis as you can see here. About 500 million of these tests are done worldwide. So it's also an attractive business segment.
Some, a proportion of these cases need to go for additional testing, so-called advanced staining, and that's where the immunohistochemistry and in situ hybridization come in, in addition to something called special stains. And what these tests do are to allow the pathologist to refine their diagnosis based on the expression of proteins in the case of IHC and in the case of ISH are the expression of genes. And finally of course in the workflow the pathologist needs to report their results and more and more reporting of results involves digital pathology and imaging.
So the Ventana portfolio consists of instruments as well as assays and all of these work streams in the anatomic pathology lab and I’m not going to go into them in detail due to time, but we have very good coverage around H&E, IHC, ISH and special stains. And we have a product called VANTAGE, which is a workflow product that ties all these instruments together and allows the pathology lab to track with great detail specimens to the lab and optimize their workflow. Also, we acquired last year a digital pathology company called BioImagene, which allows us to integrate digital pathology and image analysis into the pathology workflow and diagnostic process.
I wanted to mention to you that the field of anatomic pathology is currently undergoing a very dramatic evolution. Traditionally, pathologists as I implied spend most of the time looking at H&E slides and IHC, ISH slides with the intent to make a diagnosis, a morphology-based disease classification and essentially what they do by looking at patterns of cells is to determine whether a sample is cancer or not cancer, and of course this is a very important diagnostic endpoint.
But what’s happening in the field is of course diagnosis remains important, but what’s becoming more important is that the balances themselves are reporting on companion diagnostic assays. So you may not realize that most companion diagnostic assays actually are worked through with pathologists and an example is for two testing both with IHC and ISH and Ventana operates in both of these areas and I am going to give you a sense later in the talk on what additional companion diagnostic programs we’re working on. But very important to realize that pathology itself as a field is becoming transformed because of personalized healthcare with pathologists in my mind being really the drivers of PHC especially around companion diagnostics.
A recent FDA approval that fits very well into this model is our HER2 Dual ISH assay. This is a revolution in testing in pathology because for the first time on an automated system, pathologists can actually see individual genes with their light microscope, this was not possible before, it required complex testing and floracid microscopy. And just to give you an example of how powerful this is, I’ll briefly teach you how to interpret this test.
As you remember, I am sure from your high school biology all genes in the body are represented by two copies; you inherited one from your mother and one from your father. So the normal complement on any gene on the body is two. So in this test the black dots are HER2, so you can count how many HER2 copies are in this cell, it’s two. The red dot is the chromosome that HER2 sits on, it’s chromosome 17 and you can also see two copies in this particular example.
So this particular patient is normal for HER2, in comparison with this patient you can held the black dots here, it’s obviously more than two, it’s about 20, but the chromosome itself is normal, there are only two. So the ratio there is dramatically increased, so this is amplification for HER2, this indicates that this patient should be a recipient of Herceptin and so clearly this is an important task for our HER2 franchise at Roche.
This particular product has enjoyed rapid market uptick and really it’s proof of how revolutionary this technology is. In the EU, we are in a leadership position in this particular market of HER2 testing by ISH in just 12 months. In Australia, we captured greater than 70% market share in two years.
Why is this happening? The test has been proven to be as good as the gold standard test, which was much more difficult to interpret and perform. And in addition it has a number of advantages both from the workflow perspective, much faster run time and it’s fully automated as well as being preferable by pathologists because it has the morphology to cellular and tissue context that they really demand, allowing them to interpret the test in the context of the other cells in the sample.
So now I’m going to spend the rest of the time on the pipeline for Ventana and to give you an idea of how we intend to develop innovative tests. Consistent with the Roche strategy for medical value in testing efficiency, Ventana also intends to of course innovate on the testing efficiency side, this is very important, but we are especially emphasizing medical value, because this is the way that we feel we will differentiate ourselves from our competitors in our market.
And to give you an idea of how specifically we’re going to do that, I’ll show you some examples. At a very high level, this is our development funnel, so these are late stage assays and this is our incubator, assay incubator. And as you can see, we at the moment have a number of concepts for diagnostics in this early phase across a number of different cancer types. New concepts come from a number of different sources, they come from pharma partnerships, they come from interactions and collaborations with key opinion leaders and thought leaders and they also come from acquisitions. And I’ll you an example in each of these categories.
First on pharma partnership, we partner both within the Roche Group and outside of the Roche Group on companion diagnostics. MetMAb, the drug from Genentech is one of our more important companion diagnostic programs at the moment and you’re probably familiar with the MetMAb data, I’ll briefly summarize it. In the trial for MetMAb in combination with Tarceva, this is an example of a trial that without companion diagnostics probably wouldn’t have lead to a successful drug. If you look at the Kaplan-Meier survival parts here and the hazard ratio close to one there really is no survival benefit at least in a statistically significant way.
However, when we look at the data stratified by the diagnostic which in this case is at net IHC assay run on the Ventana platform, now all of a sudden you have a clear separation about the survival curves with the test arm that MetMAb plus Tarceva are experiencing a three times increase in survival versus the placebo.
And I should add and Garret will give you the details on this that if you look at the patients who had met low or met negative expression, they actually not only did not have a survival benefit, they actually did worse than the control arms. So in this particular story is a very compelling case for the companion diagnostic.
Second example of a pharma partnership comes from outside of Roche Pharma. This is a company called Clovis Oncology, where we collaborate with them on a compound called CO-101. This is a drug that's been exploring pancreatic cancer and it is an analogue of gemcitabine, which is the current standard of care for pancreatic cancer. The difference with their version of gemcitabine is that has a lipid tail to it that allows this drug to pass through the cell membrane and not rely on the drug transported gemcitabine must pass through. The data shows that in patients and around 50% of the patients do have low hENT1 expression, in these patients the gemcitabine survival time is much less, four months versus 13 months of survival after gemcitabine in hENT low patients.
In contrast the Clovis Oncology team believes that in patients with low hENT1 that their CO-101 drug will work just as well as gemcitabine with baseline normal hENT1. Again this is an immunohistochemical assay that we're developing for our automated platform.
So that was, those are two examples of pharma partnerships. Now I want to show you an example of an innovative assay that comes out of our KOL collaborations and specifically this is a collaboration with University of Michigan and also Weill Cornell Medical College in New York and that’s around prostate cancer stratification. And as you may now prostate cancer as a disease is dramatically overtreated worldwide and this is because we have no good way to determine which prostate cancer patients will have a good outcome versus a poor outcome. So it was a very important discovery in 2007 that the Gene ERG is rearranged in about 50% of prostate cancer patients, so not only of that this gene rearrangement leads to dramatic differences in prognosis in prostate cancer with the normal, the ERG normal patients experiencing a very good prognosis in the ERG rearranged patients having a very poor prognosis.
So the idea is can we create a test that makes it very easy for pathologist to determine ERG status and combine this with other biomarkers to be effective in triage in patients to treatment or to a less invasive follow-up.
And then to close, I’ll show an example of an acquisitions and this is an acquisition that was referred to by Paul, this is the acquisition of MTM and as you know MTM is the company that brought some market the p16 portfolio of test. And what is p16?
p16 is an important biomarker in the evolution of HPV infection has it goes to cervical cancer and as we understand it. The p16 biomarker is a downstream biomarker actor HPV infection so specifically HPV has a protein called E7, this is an Oncoprotein and E7 triggers a sequence of pathways that leads to the cellular proliferation that we think eventually of these cervical cancer and p16 is over express as a consequence of this pathway.
So we can measure p16 by immunohistochemistry and use that in the context of tissue testing as well as cytology test and these are two products that are on the market in Europe and we’re looking to bring them to the U.S. market very soon.
And finally my last slide, just to show you the same slide that Paul showed you but talk about the right side of the slide, as Paul mentioned the acquisition of p16 allows us Roche to have a very comprehensive offering in the area of cervical cancer, screening and conformation and just to confirm with you the process of working of a patient with cervical cancer starts with path screening or HPV screening, it moves to triage of certain patients at higher risk to colposcopy and cervical biopsy to take a piece of tissue.
And then that biopsy must be read by pathologist to actually confirm cervical cancer or cervical pre-cancer. So the CINtec Histology assay allows us to be much more accurate with the diagnosis of cervical pre-cancer data shows us that up to 40% of the time pathologist miss interpret the cervical biopsy and over diagnose cervical pre-cancer, so p16 will help us correctly.
And the p16 cytology assay, which is called CINtec Plus is a marker that is combined with Ki-67 a proliferation marker, this will help us much better triage those patients that may have cervical pre-cancer to biopsy. And as I mentioned before, we will do this hand-in-hand with our colleagues at Roche Molecular utilizing the HPV test for triage in those areas where it makes more sense to use the CINtec Plus assay for triage in other areas where the data tells us that it makes more sense for patients.
So to summarize, we are in a very strong position to continue to innovate in the filed of anatomic pathology and oncology. Our strategy is really to defend and extend our market leadership position in our core business at immunohistochemistry. We want to continue to invest in innovations, in medical value assays like the prostate risk assay that I told you about. And finally, we think it’s very important to contribute to the transformation of the field of pathology especially in the area of personalized healthcare and companion diagnostics.
Thank you. And at this point, I will pass it onto my colleague Garret Hampton from Genentech.
Garret M. Hampton
Okay. Thank you very much. So it’s a pleasure to be here today on behalf of Genentech as well as many of our Roche Diagnostics partners to discuss the development of companion diagnostics from a pharmaceuticals point of view.
So I want to give you a quick primer on Genentech Research & Early Development. You may already know about the changes since the Roche acquisition and integration, but I want to set some context about what our organization does, what our agreement is, specifically around the delivery of molecules through early development. I want to further rationalize companion diagnostics for you. I think you all understand the concept, but there are a few points to make in terms of how we think of this in early drug development and I want to highlight those for you.
Our organization, I’m probably jumping ahead, but our organization is specifically in charge of bringing molecules to what we call the life cycle divestment point, and then the end of Phase 2 proof-of-concept studies. So we don’t deliver molecules through all the way through to marketing and so the extent to which we can inform our molecules development is completely critical for de-risking our Phase 3, and I’m not going into that in some detail.
I will give you two examples both in lung disease, one in asthma and one in lung cancer that I think serve as powerful examples of how the integration of diagnostics into Phase 2 proof-of-concept studies, gives us a very high level of confidence that we in fact have an active drug and substantially de-risks Phase III development and that’s a decision that as you all know cost between $200 million and $400 million. So again, the focus here is not necessarily brining in companion diagnostics. I thought you all could hear me.
Okay, I’m double good. So I’ll discuss these because again for us it’s not the deliver of the companion diagnostic at the end of Phase III, for us it’s about de-risking Phase III. And so I’ll give you these two examples to show you exactly how we do that. And then to give you a summary, essentially a snapshot where are we with respect to our portfolio and how is companion diagnostics; and in fact our relationship with Roche under the same umbrella impacting that development.
So as you know in 2009 Roche acquired the rest of Genentech and we were integrated with Roche in the same year; quite rapidly over about and year and a half. Like Genentech, gRED aspires to make fundamental scientific discoveries and to translate those discoveries into therapeutics that are both first in class and best in class, and they address specific unmet medical needs. We focus predominantly on oncology; although increasingly we are looking at additional therapeutic areas such as neurosciences, metabolism; areas that traditionally we haven’t had strength in and that we are nonetheless making a very significant investment.
This is the result of some five to seven years of considerable investment from Genentech now gRED in developing large extensive broad deep pipeline in the early development. There are total of 39 molecules that are some stage between IND-enabling studies and Phase II proof-of-concept studies. As you can see, the majority of these molecules are within oncology, but you can also see with an early development as well as in Phase II, we have a number of molecules and these additional indication areas. There is really important point to make on the slide with respect to the portfolio in that over the next two years, 2012, 2013, we’re going to be moving in the order of about 15 molecules from Phase I and Phase II, which is obviously a considerable investment.
Moreover, if you look at some of the molecules in oncology at least; they can be indicated; most of the molecules can be indicated for the same disease setting. That means that we have to understand which patients in a lung cancer cohort or a breast cancer cohort are most likely to respond to these therapeutics and gain proof-of-concept and develop ability for those. We can continue to stack molecule upon molecule on top of standard of care; that's not a tenable business model over the longer-term. What this says is that we need to understand disease at a very fine level such that we can place these molecules accordingly, not just singly, but actually in combination and that's another part of the excitement at the moment. There are many molecules here that in combination appear to have very significant benefit.
As it stands today, and I think it's really impressive and it is at least in part, a consequence of the reverse integration, I can't disclose the molecules nor companion diagnostics associated with the early development portfolio, but what I can tell you is that roughly 75% of our portfolio of molecules are associated with companion diagnostics.
So let me rationalize a little bit further, companion diagnostics. I think it's fair to say and it's oftentimes surprising that molecules have typically been developed based on either disease, anatomic site of origin or generalized symptoms. And it's surprising that many of the targeted therapies have gone through this paradigm. It therefore shouldn't be really surprising that most of the molecules in Phase II, Phase III, roughly 60% fail as a consequence of lack of efficacy. And one has to wonder how many molecules in that – the molecules that have gone through that process are actually active in subgroups of patients, but nonetheless the effect is to lose it down, and that's a position that we really don't want to put ourselves in. And so I think it goes without saying that development of targeted therapies that we only expect to be active in subpopulations of patients should be developed with respect to those targeted populations and matching those folks with mechanism of action of the drugs.
So why do we think at Genentech Roche that we have unique advantages? And we thought very hard and carefully in combination with our Roche partners about what it really means to be under the same roof. And although it seems like somewhat of an arrogant statement at the top, I think it's fair to say that Genentech is a world-class scientific organization, drug development organization. I think we’ve proven our expertise in drug development over the years and we are now combined with the breadth and the depth of Roche Diagnostics. It's not just a partnership of one business area with Genentech; it's a partnership with a large organization that has most of the platforms that we would typically use to develop companion diagnostics.
Our organization is aligned around PHC. And what that specifically means is that we have the corporate goals and local goals that commit us to delivering molecules with the companion diagnostic at this lifecycle investment point. And let me be clear about what that means; it means that we have to have integrated the companion diagnostic assay, a prototype IVD assay into Phase II such that at the end of Phase II we’re able to read out the data on the safety and efficacy of our molecules, but also the correlation or lack of correlation with our biomarker and the drug. That means we have to make a very, very significant investment at the earliest phases of drug development in order to be successful in that endeavor.
I’m sure you’ve seen slide like this before all the way going back to the white paper from the FDA in many years ago, but I did want to highlight several points about how we work together. Within the pharmaceutical division gRED, we have groups that are actually dedicated to discovering hypothesis that relate to whether or not patients are likely to respond to a specific therapy or not. We have groups such as (inaudible) development that reduced this to practice that develop the biomarker strategies for integration into clinical development and do initial technical feasibility studies. At a point in which we feel that both the data and the science are compelling we transfer that diagnostic at least the needs of diagnostic to our Roche partners.
And what that actually means today is signing a two sheet contract that basically outlines the cost of the timeline. Where we to do this outside, it would be 200 pages and it would take eight months. Here it takes a couple of days to do that. And so we have essentially a immediate access to the business areas that have these platforms.
Notice also again that in the majority of cases, we’re making that investment at a very, very early stage. We have a lot of antibody drug conjugates that are specifically targeted against multiple targets in different cancers and we would not necessarily make the investment for the diagnostic for those molecules whose activity is guided within Phase I where we’re working with somebody on the outside. So we make a lot of at risk investment where we think the science is very, very compelling.
So let me give you two examples. You’ve seen MetMab and I’ll give you some more detail around that. Lebrikizumab is really very exciting example and non-oncology, example and I really don’t think there has been (inaudible) to date.
So what you’re looking at and I apologize for the busy slide let me bring you through. What you’re looking at on the left hand side here is an experiment in which asthmatic patients in controls have the epithelial lining or brushings taken from the epithelial lining and then large scale gene expression analysis done on these measuring the expression of thousands of genes. And the experiment is simply to ask based on these patterns of expressions of genes, which patients tend to cluster together. So which patient’s disease tends to look like each other and you can see that there is a small sub group of patients here who have a gene expression pattern that appears to be indicative of a pattern you would expect to see with induction by the IL-13 cytokine. So it’s not an unreasonable hypothesis to suggest that these patients maybe likely to benefit from an anti-IL-13 therapeutic. In contrast equally interesting is the fact that, the rest of the patients co-cluster with the control, they just really don’t show this kind of pattern of expression.
Obviously, it would it be ideal to have a non-invasive test to assess this hypothesis. In one of the genes encoded by or one of the proteins encoded by the genes and the signature is Periostin, which encodes for protein that’s accretive and can be found in the blood stream. And you can see the patients represented about this group here tend to have a higher expression of Periostin in the periphery than those patients that don’t. And so the hypothesis is quite simple, are those the patients that will respond and are those the patients that won’t.
We’ve performed a randomized Phase II blinded study specifically comparing Lebrikizumab against placebo. And looking at the change in forced expiratory volume after a 12-week period, although patients were treated for 20 weeks and then observed for another eight weeks, and what you can see in this graph appear is that there is benefit from the administration of Lebrikizumab in adults as compared to the administration of placebo. But what’s very striking is the fact that the majority of that benefit is in patients that have this high expression of the Periostin protein. By contrast, if you look at the diagnostic negatives so to speak, you really don’t see any appreciable benefit.
The delta here is 5.5%, 8.2% in the Perostin High, and only 1.6% in the negatives. So here we have a case in which we’ve done a Phase II, looked at the safety and efficacy of a drug, and asked the simple question, is that diagnostic correlated with the activity? And I think you can appreciate that it is. It’s very likely to be an active drug and that’s what I mean by de-risking Phase III. We walk into a Phase III study and make the investment with a higher degree of confidence than we otherwise would.
The second example is MetMAb and we’ve been through that with Eric. And I can partly skip this slide. One notable observation was that the Met oncogene, which is a growth factor signaling receptor just like EGFR, tends to be amplified in patients who’ve undergone EGFR therapy but have failed. So there is definitely some sort of crosstalk in between these two drug factor signaling pathways. And that’s actually what led to the trail, it was specifically asked if we blockade both of these pathways, do we see efficacy?
And as Eric showed you in the Alzheimer's population, population that wasn’t stratified by any diagnostic, there is no appreciable difference between whether you have MetMAB on top of Tarceva or placebo, whereas in sharp contrast, overall survival was not the actual end point, it was PFS, so it was even more surprising to us the extent at which we saw the OS difference. You can see very significant with the addition of MetMAb (inaudible) as Eric pointed out, it’s absolutely opposite as far as we can see in patients that have very low expression of MetMAb. We don’t understand that, we obviously have a number of theories to rationalize why that happens, but it is as Eric said, a very important example of a diagnostic that can predict benefit and harm. And again, it’s a Phase II study that in our mind significantly de-risks the investment for Phase III development. Again, we’re going into Phase III development with a high degree of confidence that we’d likely have in active drug.
We apply this extremely broadly across our portfolio and we have made a very significant investment into molecules that target both the MAP kinase pathway including RAF, Zelboraf as well as the PI3 kinase pathway, AKT and mTOR via a dual inhibitor with PI3 kinase. Every single one of these molecules is enabled by a companion diagnostic assay, whether that be loss of P10, a negative regulator of the pathway immunohistochemistry for mutational analysis of all of them relevant mutated oncogenes in these pathways. It’s one of the most important pathways in cancer and I think it fits the investment here in terms of pharmaceutical development to have a companion diagnostic that goes hand in hand with this. This is going to enable us, I believe, significantly. I think we have some very exciting molecules in this pathway, but it’s even more exciting that we have a diagnostic that’s going to lead us to the correct patients to treat.
Of course, it’s not just cancer, it’s multiple indications and the point I really want to make here is the fact that again having, being under the same roof as far as diagnostics, we believe is critical for our success because it has the breadth and depth that we would want from any one diagnostic partner, but we’re able to engage several business areas at the same time with multiple contracts that take two days, not eight months.
So at the end of the day, and I’ve said this probably too many times, what are the advantages of the PHC here. I think certainly early proof of concept. Do you or don’t you have an active molecule, the best way to assess this is to look in the correct patients, stratified slides like I showed you are one way to do that selection trials or another which we’ll do with PI3 kinase. Faster time to market as Dan pointed out, don’t expect five years each and every time, the significance of the effect of Zelboraf for the earliest stages was very high. And so it allows to the simultaneous Phase II, Phase IIIs.
For some of the mutated oncogenes, I’ve no doubt that that’s going to be the case, but for other target classes that antagonize pathways in different and more settle ways, I don’t think five years is a realistic expectation. I do think that overall this reduces attrition. If you can gain proof a concept in Phase II studies that suggest you have an active drug and you go into Phase III and de-risk it essentially, one can envisage at least a development paradigm, where the attrition is reduced because the success rate goes up. Patients, safer and effective therapeutics, I think MetMAb is a great example of that, and payers unquestionably more cost effective therapies.
So to summarize, I think it's fair to say that we’re maximizing patient value, by the co-development of medicines with accurate diagnostics. And we truly believe that being partners with Roche Diagnostics and extensive interactions of the very earliest stages is critical to our success. I do think it's fair to say also the combination of world-class science with Roche Diagnostics is what leads to this engine and I consider it a very powerful engine.
And Roche Diagnostics truly is enabling personalized healthcare. It's not rhetoric. It's not applied to one molecule or two molecules or three molecules. You’ve seen that it’s broadly applied to an extremely large earning development portfolio, with I think reasonable expectations that that will engender success for at least a large proportion of those molecules.
And with that, I'll end and introduce Roland Diggelmann for the next presentation.
Thank you, Garret. Thank you very much. Here we go. I'd like to take you from research and development into commercial and diagnostics and focusing on the emerging markets. For the purpose of this presentation, I'll be speaking more about Asia-Pacific and in particular about China, which is one of the biggest opportunities that we’re having.
As you can see in sales, the breakdown mostly from emerging markets, very solid growth from Latin America and Asia-Pacific, there is some lower gross markets in these numbers as well and Asia Pacific for instance in Australia and New Zealand, but overall very good growth far above market. And another number that you may be interested is the E7 growth, which is around 14% for the first half of the year, and accounting for 13% of our total sales.
Our structure in Asia-Pacific, we’d like to be structured around the customers very focused around the customer needs. In fact, we also like to be present in the markets directly. So, we have 14 affiliates. We have more than 2,000 people in the organization in Asia Pacific. But more importantly, we have more than 1,400 people who are customer facing. We’ve added salespeople, service people, applications people, so we really like to be where the customer is and making sure we meet the customer needs.
In terms of the market, we believe there is very, very strong fundamentals in Asia-Pacific, the healthcare investments continue to be strong, so the governments definitely invest a lot in healthcare. And there is a very simple rationale for that, in that the patients or the population are supposed to be having a higher consumption. Higher consumption from the population into a savings, most people in Asia-Pacific save for healthcare and for their old age. And that's not only them, but also their children and their grandchildren. So one way to induce higher consumption is to improve the healthcare and the healthcare coverage. I think that's a very fundamental and very strong point along with the other points which I’ve demographic of course and increasing affluence of the population overall.
For us in diagnostics, we are very early in the cycle in healthcare investments. Any time a hospital is built, any time infrastructure is being constructed, you need one sort of a diagnostic infrastructure as well. So we are early in the development cycles, and we are able to benefit very early for our broad position in the market.
The market shares, we are market leader by quite a significant margin was 23% in Asia-Pacific. We feel the markets are growing in and around 13%, which will take the markets roughly to about 6 billion Swiss francs by 2015, so significant growth, a lot of growth coming out of China, India other emerging markets and the rest of the countries in the region.
The strategic focus that we employ, very similar to what you’ve heard earlier from Colin and from Paul. Insulin placement strategy, one to have the broadest installed base, and at the same time very importantly where we have a very modular offering. That means we can capture our customers very early and we can grow with them, but we can also go into the very high volume labs in the very big hospitals. So we cover a very broad portfolio, at the same time we’re very focused on the reagent flow through, as also elaborated by Colin. We have the broadest menu, we have the deepest menu, and this of course allows us to be very successful, in particular around immunology, which is the fastest growing segment but also the most profitable segment.
Specifically, for Asia-Pacific we have a very large focus on service. We believe that service is going to be the key differentiator, and we are ensuring that service always stays with us even if we are acting in a market employing distributors. And then at the same time as I mentioned earlier, we want to be direct in the markets, so we have presence in all the markets. We build our own dedicated sales force for the different segments and we also tried to look at our people and make sure that we have not just the best people but that we can retain those people. And that’s a very important element for growth for sustainability across Asia-Pacific. We think that we have an attrition rate that is far lower than the industry average, and this is also one part of the success that we’ve had.
Allow me to shift to China and spend a little bit more time on the Chinese market. I am sure you know the fundamentals in the Chinese market. Obviously, a very exciting market. We have a growing population. We have an urbanization of the population. We also have the biggest investment in healthcare for a long time in that the authorities are investing roughly about US$120 billion in healthcare reform. All of these factors will continue to fuel more IVD testing. And there were few more IVD testing across the entire country, starting with the very urban areas but going also more into the rural areas over the next years.
You can see one of the pictures on the left side. This is what a hospital looks like in China. There is no primary care in China as you may know, so everybody goes to the hospital even for a flu. And so there is enormous patient flows, up to 10,000, 15,000 ambulatory patients a day in a hospital. And these patients obviously need to be taken care of. Obviously that results in IVD testing. At the same time, the government invests in building more infrastructure and facilities to manage the patient flow.
The environment itself is complex. The entry hurdles are high, not unlike in other areas. Of course the SFDA, the Chinese FDA imposes high hurdles around regulatory. Reimbursement is individual by province, so even if you have a registration, reimbursement needs to be obtained for every province.
It is clearly a distributor market. Most sales go through distributors, and I will come to that in a moment. And it is a system of tiers, both hospital tiers as well as city tiers with different access to patients and population. It is certainly also a very price-sensitive market in that there is local players, quite a big amount of local players. We estimate about 400 local players in the IVD industry and all the multinational players that are in the market as well. And the IP protection is relatively low, also difficult to enforce, not so material for IVD.
This is the market in China. We are number one in China as we are in actually every market in Asia-Pacific, bar one, which is Taiwan, you will also note the large number of other players, which are local players. And at the same time you will see that there is a market growth that we estimate around 17% over the next years, which will take the market to around 18 billion renminbi by 2015. So, more than a doubling of the market in five years, and there is quite an equal distribution around the growth rate of course professional or centralized diagnostics being by far the largest sub segment.
Further trends, specific to IVD, I think of course a growing patient numbers, especially infectious diseases and immunology, and the tremendous opportunity in work flow automation and laboratory IT, in managing and helping these hospitals in being successful, meaning being more efficient, reducing the turnaround time, and saving cost. What is also very interesting is that the hospitals in China are actually the laboratories are revenue generating entities for the hospitals, one of the few, but a very important revenue generator in the hospital.
Another big trend around blood screening, the molecular testing or NAT testing is going to be endorsed by the authorities, which will potentially lead to a very high number of blood donations a year. We estimate that to be north of $50 million donations once fully implemented, and then of course opportunities in Life Sciences or our Applied Science market, growing segments in proteomics sequencing, but also large and very fast growing pharmaceutical industry in China locally.
And then finally, diabetes care, a very interesting market, in that we estimate around 19 million people, which largely are undiagnosed in China with diabetes. So, a large number of people there, no reimbursement to day, this may come in the future, but today everything funded out of pocket for those patients.
What have we done in the last years? We have embarked in the fairly aggressive plan in placing instruments, a long line the global model, the global strategy that we employed. This was led to about a 32% CAGR over the last years, which you can see here, which is roughly about two fold market growth.
We have benefited from being early in the market. We also have employed a novel model and that we are not requiring our distributors to purchase the instruments, but that we charge them for service fees. So, we place the instruments, our distributors have their cash flow free to help market and sell, and we have a service revenue model with the distributors on top.
So this has allowed us to grow faster in the market. At the same time, we have put a lot of emphasis on service, and we also keep the service in-house, which means our distributors are not servicing our instruments, neither pre nor post sales. We do that ourselves, which means we are able to control the service, but we are also able to manage the quality of the service. For a distributor, this is more an expense; for us, this is ensuring our customers are satisfied and receive the highest quality service.
We’re are also looking to invest heavily in lab IT and workflow and the connectivity and the consulting of hospitals and labs in order to make sure that they are as efficient as possible and that we can continue to grow within it. And of course we have a broad access. We currently serve about 60 cities and we are looking to expand that significantly over the next years. And this is what how we'd like to do that. Obviously, we have a large installed base, which we tend to leverage. We want to continue to leverage the flows for reagents, adding new tests, new assays as they become available through the broad platform that we have.
We want to make sure we are an integrated solution provider, meaning that we can offer the instruments, the assays and the service, all from one organization. We also want to make sure that we capture a significant amount of the growing molecular blood testing market, the NAT market. And then we have an enormous opportunity in continuing to grow in this market going to Tier II hospitals, Tier III and IV cities, and also expanding our partnerships with commercial labs.
And this is the picture that you see here. Currently our served market in China is focusing on the large hospital, the Tier III hospitals, and on the upper segment of the Tier II hospitals. This would comprise roundabout 8,500 hospitals altogether. We feel there is tremendous opportunities to go deeper and also to expand geographically.
There is probably somewhere north of 100 cities with more than 1 million population. This is enormous opportunities for us. We are not covering the entire country, but we are covering more than any of our competitors.
So with this, we feel we have a very strong fundamental business across Asia-Pacific and also in China. We feel we have a business that allows us to grow sustainably sales and profitability. We continue to be able to maintain a leading position through being an innovation leader and differentiating testing efficiency and of course medical value.
And last but not least, I think with the instrument placement strategy, I think we can continue to be successful. We can continue to grow faster than the market. And we also continue to make sure that services and lab IT on an integrated part of our solution, which in turn again help our customers to be not only successful, but also efficient and cost effective.
Thank you very much. With that I’d like to pass on to Alan Hippe, our CFO. Thank you very much.
Okay, thanks a lot. I don’t know which is used, but I’ll make a guess and (inaudible) one. Okay, about that (inaudible). Okay, great opportunity, what a wonderful day. You have seen the presentations I have to say, I am pretty impressed. Last time I stood here and I don’t know exactly whether this was this room, might be, might have been the other room there. I admitted very openly that at least I had wrong associations with FISH and DISH.
But I think it was Eric here, Eric really clarified that today. So I feel much more how should I say it, now substantiated, when I really mentioned these two words. Two messages today, and the first is, and I’m really coming with a group perspective. It’s all about dia today, but well there is a group. And I get a lot of question about diagnostics and the meaning the diagnostics is the Roche Group. And it is very clear, first message it’s an integral strategic part of the Roche Group, very clear. We have talked about PHC today extensively. But let me and that’s a second message also mentioned it’s not just about PHC, it’s also about financial diversification. And I will touch that in a second. And the third point is well, you will see it, it’s also about cash, it’s pretty good cash generator and contributes to the group.
With that, let’s make a step back, and I’m really starting now with the Roche Group. And this is really much of the outcome that was always our foundation, our basis for the strategy and we discussed that. And I have really the pleasure to join the group and was involved directly into the strategic reviews that we have done. And we have discussed this and here you see the opportunities and the opportunities are really our believes, we really believe there is to a high degree an unmet medical need, it’s a glimpse of the obvious, I agree. But nevertheless, we looked at this, we looked at data. We totally believe in that.
Second point is economics, and here things get a little bit more touchy. But we think payers are prepared to pay for differentiated products and differentiated drugs. And this is really what Roche is all about, differentiated drugs. I think whenever things are marginally differentiated and perhaps, not so impressive in the market, well, perhaps that’s not something we should deal with to a large extent, and then scientific. So science is really driving us. We have a big knowledge, you’ve seen that today in the presentations, you have seen in Garret’s presentation, Eric’s presentation but also what we make out of this in the market. So that’s really our foundation; and we believe in the progress of science. So let’s say that’s the focus we’re looking at. And we would like to look at this and work on basis of this believes together with pharma on one hand and with diagnostics on the other hand.
Having said this those businesses are businesses in their own rights. So you have pharma on one hand and you see here medical differentiated as I said scientifically and certainly the clinical expertise that having innovation networks that we are working with and value based pricing. And then you have diagnostics. You have testing efficiency and here is the word efficiency for a CFO certainly have where is dimension and medical value, value is also a very, very good word. So testing efficiency and medical value and you’ve heard all the expressions and all the explanations today already. Together certainly here we have access to that segment of personalised health care and we can be much more speedy and quicker than everybody else in that field and I’ll dig in to that. And certainly this faster adoption gives us opportunities in the market.
Let me explain this a little bit and look I think we have implemented here a couple of bars and this bars will change, it’s just how should I say a rough picture, where we would like to draw here. And you see here this is today’s situation, and then comes personalised health care into play and what does personalised health care really deliver to the group. And the first point is admittedly and very transparency, well, we’ve reduced the patient pool for a good reason, but that’s how it is. It’s not like as we deliver our drugs to everybody and hope that there is a certain efficiency that is not the case. I think personalised health care will help us really to focus and stratify patients for good reasons. But is this just a negative? Evidently no, because we use this whole day today to explain why there is also a lot of positives and you see it here.
I think differentiated drugs and on top that that we can say that (inaudible) efficacy from a drug. I think we have a very, very good foundation and basis to our view here concerning payers that we well deserve a certain price in the market, and that gives us stability, it might also give us increased, price increases in the market.
Increased market share, why increase market share? Because we are much quicker. We go into the market and I think pRED is a very good example, on one hand we got really the approval from the FDA at the very same date for drug as well as for our test, and really able from the very first day to penetrate the market. So I think that’s really something, which should help us.
Lower development costs, we’ve talked about that. We stratifying certainly our patients, we’re also able to minimize the clinical trials or at least the patients who take part in the clinical trials and that will bring the costs down. And when you look at the faster penetration, certainly that’s what I’ve mentioned already and also certainly the point tying to market, which should help us, and certainly is of benefit to us. And as said, I think, it’s not like we are also always mentioning we have six NMEs in late stage concerning personalized healthcare. And as you’ve seen today that is much more in the pipeline, much more.
But there is also another element about diagnostics because it’s personalized healthcare thing that was what you’ve heard pretty much all the day. There is another point. And this is a pretty bitty chart, and I admit. And what we tried to clarify or to show here is on one hand, we are focused. I do see here the focused pharma companies, if you like, on the lower hand side of the chart. You also see that Roche in fact, yeah, is to a certain extend diversified because diagnostics come in, which is about 20% of our business. And this business certainly has also certain characteristics as I have mentioned already, I think it’s a pretty sealed business. And on the other hand, it’s also less, we are less riskier and you look at it compared to the pharma business, and provides us very stable and fine cash flows. So that’s fine and from a financial point of view, gives us more stability.
When you look at this diversification, you can even go a step further. And we asked ourselves, how about market positions, and I come from, if you like, oil industries; so automotive and steel business and whatever. And we look pretty much at market positions and I think that’s key that you have fantastic market positions. And when you look at our disease areas and where we play a certain role and these are, if you like, the first four segments. And when you look really at our businesses with biologics and diagnostics, you see that we’re not just diversified in diseases areas and as well with diagnostics, we have also leading market positions. And I think I encourage you to also compare that to other companies and how they look like even when they are much more diversified than we are, what market positions they have.
With that, let me summarize a little bit the characteristics. I think everybody has touched in this presentation, then started. I think the number one position by far in IVD with a 20% market share. It’s a leading growth that diagnostics has and is really outperforming the complete market. And then certainly, the future with 160 personalized healthcare projects and it is not all about oncology, oncology is the major part, no doubt about this. But there is also other things coming, and we see for example here, the asthma part today. Yeah, and then the cooperating profit and the margin, which has increased quite substantially from 17% to 21% and we worked on this and there might be even more opportunities in the future.
When you look at the gross, I don’t have to mention that once again, and are outperforming the markets, and we have talked about pricing and the challenges we have in some businesses, on the other hand we have fantastic opportunities with that business together with the group. And here you see the operating free cash flow, and I think quite a number and increasing over time can always be more, and we work on this certainly, but I think when you look at the trend here this is pretty promising.
Another point is about the value of business. And I think certainly, the valuation comes to you, yeah and you will make up your mind about the value of diagnostics. We just gave you a couple of indications here. When you look really at the market itself, yeah and certainly you can always argue about the peers, but does it fit together, it’s just an indication as I said.
Then you get a certain idea when you just look at the markets, yeah and when we take a certain multiple, and what it means to us in case of value. If you go even a step further, and you look at transactions, the picture even changes quite significantly, and you could well argue, yeah that in fact we drive the average even a little bit up with our Ventana acquisition.
But as you’ve learned today, yeah that’s quite a [chanceful] thing to do and tissue diagnostics is one of the major pillars that we’re having in that business, and especially for personal healthcare. But I think it gives you a certain idea what this business should need in case of value to the Roche Group.
Well, with that let me summarize what’s really diagnostics brings to the Roche Group. Well solid growth, profit and cash contribution and quite significantly it’s a lower risk business admittedly, yeah was more stable development, which I think is at least a financial diversification, which is mentioned in point three. It is active in the highest growth segments and future growth segments, which is very promising, especially in an industry, which is very much focused on growth and certainly it’s of course the pharma productivity through PHD.
With that, I would like to thank you for your attention, a fantastic team, yeah thanks to the presenters. I was very impressed, I learned a lot today, I have to admit. (inaudible) that have spend the time here, and I think we’re happy now to receive your questions. Thanks a lot.
Great. So if I could invite all the colleagues to come up, gather around the table, so people could see your faces and direct the questions. Maybe while we’re getting organized here, can I just take one question is from a colleague getting by webcast Tim Franklin from [Maine First]. His question was, is there scope for Roche Diagnostics to carry out companion diagnostics program with other pharma companies, this came in before the break. But I hope by now you seen that’s an integral part of our strategy actually, we clearly with our business model in order to continue to stay competitive, want to have the broadest menu. And on the other side, other pharma companies want to work with the largest diagnostic company to make sure that their assets progress well and that they can put them on to the marketplace on a large, installed instrument base. So we do; we maintain firewalls clearly between Roche Pharma, between Genentech, between our diagnostic partners and we’re working very actively with a number of different companies and it’s important to our business model and we respect very much those collaborations.
The message I have today is that as you’ve heard from the other speakers, in terms of the overall strategy of PHC that can work, but it's suboptimal. In other words, we get more advantages, we can reduce the time to market, we can work earlier in the stage of the process we can have much discussion about negotiation of the contract for instance. And can you imagine, with a five-year development time, if we had to spend eight or nine months working on a contract, what would that do to the impact of bringing Zelboraf to patients with melanoma.
So there's countless examples for why within the Roche Group we enjoy unique advantages, but I would say, very much, it’s a part of our strategy to be the diagnostic provider of choice to pharmaceutical industry in general.
So with that I'm going to turn it over to you for some questions. Gentleman right here we can start with, and please direct your questions to anybody, including Paul and Colin here as well.
Hi, it's [Mike Aiken at RBS Pharma Team]. I've just got a general question on the diagnostics business. Now if you've got an installed base of instruments and machines and we assume that additional tests would deliver sales leverage, then when and by how much will this fall down to improve margins?
Unidentified Company Representative
Yeah, I mean clearly, this did fall down to improve margins actually last year, just to take the example of 2010. As I said before, our four percentage point improvement in margins last year was driven, in the one hand about half of that was driven by cure cost efficiency measures within the vision. And by the way, our work is not done there, Alan. We are continuing to look for efficiencies and we have ongoing programs correspondingly.
The other half of that came, maybe more directed to your question from product mix. And what we mean by that is new assays under instrumentation, assays and instruments that improved gross margins. And we certainly intend to continue to pursue having that drop down to the bottom line, obviously appropriately investing back in innovation where we need to, managing the price pressures of our business by continuing to drive the top line and also the contribution of these multiple assays to our bottom line as well.
So we're going to continue to focus on that, where we also have to remember within this industry because people often ask me, why can't you just get the Pharma margins, right? I mean, wouldn't that be a nice thing to be, to be at 38% and 40% margin base.
Again, the competitive barriers to entry are a bit different here and also our cost to service is a bit different. I mean we have instruments out there; we have huge service forces, which are integral to our business model. So we do have a cost base to get a return on investment that is different, that is different in Pharma and also in the after service sales basis. So we’re going to continue to do everything we can to improve the margins, we have a keen focus on that and certainly as you suggest the business model of new assays is a big contributor to that. Maybe in the far back and then we’ll work our way forward, if we can.
Thank you. Tim Anderson at Sanford Bernstein. I have three questions that are kind of all right in that drug diagnostic interface. And the first is on personalized healthcare, you touched on this kind of, but most of the progresses you noted have been made in oncology. And I'm wondering if you think there is any other therapeutic areas that are about to crack up in terms of the underlying science, such that we'll see a similar level of progress or is it going to be kind of one-offs like Lebrikizumab?
The second question is on Lebrikizumab, are you incorporating a companion diagnostic into the development program, just to clarify. And then the third is on MetMAb and you probably mentioned this before, but what percent of patients have met over-expression such as they’d be eligible for the product?
Unidentified Company Representative
I think that's all over to you, Garret.
Okay. Perfect questions. I think for the first question I don’t see there is a one-off, the investments with Genentech Research made was to try and understand the disease at a molecular level. And I think it's been done very effectively on oncology for the past 10 years and so we have some idea of subsets of lung cancer, breast cancer and what have you. But we’re starting to see subsets of other common diseases, mostly in the immunology space, I'm quite struck by the degree to which they’d been delineated and I'm not just with respect to certain therapeutics, but definable subgroups. So I expect to see much more in progress in that area, we certainly have pipeline products that fit very well with that.
Aside from that, it isn't quite clear how to tackle this in metabolism, for example in neuroscience, I think they’re much tougher areas. That's not to say that there aren’t committed efforts, there are, but I think this is going to be tougher, just to be realistic.
And then with respect to Lebrikizumab, you asked me will we be bringing in a companion diagnostic into Phase III. And for MetMAb, your question I think is really prevalent, so our estimates from the Phase II and we’ll publish new estimates from several retrospective Phase IIIs something around 50% to 55%.
I think we had some questions over in this area. We can take one right here. Yeah, right here, it’s perfect.
First of all I just want to clarify on the importance of the periostin levels because my takeaway actually from the Needham Publication on Lebrikizumab was that patients with high periostin levels were just the sub group of those with TH2 IL-13 phenotype and now it’s on it more like high periostin as an overall surrogate marker for the IL-13. So I was just wondering if you could clarify that and just give us a rough estimate of what percentage of patients or asthma patients you think will ultimately be eligible for Lebrikizumab?
And the second question is the very general one on coagulation status monitoring. If you could just briefly comment on the size of that market, the importance to Roche and whether if there is any concerns at all that that market could come under intense pressure as warfarin usage decreases because of the new oral anti coagulant? Thank you.
I think with respect to Lebrikizumab, there is unquestionably a relationship between periostin as a surrogate actually of the IL-13 gene signature if you will on the Th2 phenotype that hasn’t been clearly delineated, and I would have to ask the folks back at Genentech to comment on that and I could do that through Dan.
Okay, with the market for oral anti coagulation, what we actually see is that the activity of the new drug is actually growing the market and creating more opportunity. So we have a roughly around about a 300 million business in the CoaguChek monitoring business. And our analysis would show that that still has the potential to grow because the percentage of patients that are all oral anti coagulation that have personal monitoring is still a relatively small percentage of the total. So we see that overall that will be space for both the new drugs and the existing therapy. But I think it’s one of those areas where we shouldn’t forge that in terms of clinical evidence, we have a one of the strongest portfolios of clinical evidence to support that the combination of warfarin and coagulation monitoring is the gold standard therapy and in these economic times, for example, that combination therapy is much more cost effective than some other new drug therapies are being promoted.
Another point is that the new drugs are not licensed for all of the indication that are available for oral anti coagulation so the focus for the new drugs is predominantly an atrial fibrillation but for those patients that are on mechanical heart valve for example those new drugs aren’t licensed for that indication. So we see actually a very bright future for the coagulation monitoring business, particularly on a worldwide basis as we roll out into more and more countries, the self-monitoring, in particular into those countries where the new drug is probably not going to be affordable. So a good future for that business.
Unidentified Company Representative
Thanks a lot. Right here in the front and then we’ll move our way back to the center again.
Marcel Brand – Crédit Agricole Cheuvreux SA
Thanks for taking my question. Marcel Brand from Cheuvreux. The biggest medical need in oncology today, I think most physicians would agree is to identify those patients who do not react to chemotherapy, which is the cornerstone therapy in solid tumors. If we take a look across the most tumors and most settings, it’s fair to say the majority of patients’ only experience side effects and have a lot of costs associated with it. Is there anything that you have in the pipeline to alleviate that most severe problem in oncology? I appreciate that MetMAb and HER2 is all very fine as a start, but it only affects a fraction of the suffering of oncology patients.
And then the second question is of the companion tests that you have in the pipeline, how many are invasive versus non-invasive? My question is obviously related here to the availability of tissues and the commercial implications of that.
Unidentified Company Speaker
Yeah. That’s an excellent question. Can I answer the last one first? So I think availability of tissues is a critical issue. I think personally it’s what’s going to drive innovation. So while we develop assays currently that might use, if you will, a reasonable amount of tissue, I think what we’re doing in combination with Pharma and Diagnostics are really defining the business drivers that says that small amount of tissue, in the cases of cancer have to be used more efficiently. So I don’t know if limiting tissue is all that’s going to be the limiting factor. There are going to be certain cases where for example any tissue doesn’t exist. So there are strident efforts to try and develop surrogate markers that thus far has been really challenging.
In terms of actual numbers, the majority of the types of tests we described thus far should be in the archival tissue that we’ve also made significant progress with circulating DNA and circulating tumor cells and using those to identify the mutant patients and looking at concordance studies try and evaluate the extent to which that can be done. That progress is really exciting, but probably not ready for primetime, but I think that we're going to try and push the envelope, certainly on the ctDNA and CTCs to the extent that we can, because I do see that that's the diagnostic push. Certainly for hormone refractory prostate cancer, pancreatic cancer, it's going to be the same so we take those kinds of approaches.
Your first question on chemo, I think there has been a remarkable amount of research done over the last 15 years and very little delivered for it. I think it's very unclear why there seems to be such dramatic responses with such small numbers of patients for chemo and then a general incremental benefit, if you will, for another subpopulation of people. It's clearly critical to understand that because we combine our targeted agents with standard of care, which is typically chemo. And so I think that there is a big cause for trying to understand both the primary chemo responsiveness as well as the combination of that with targeted therapeutics and hand waiving to a certain extent because we really don’t have a good handle on why is the subpopulations at this time.
Marcel Brand – Crédit Agricole Cheuvreux SA
Eric, anything your perspective on the second point.
We are interested in looking at response and resistance markers related to chemotherapy treatment. One specific area that I can mention is in the area of mismatch repair enzymes where there has been some interesting data there. But on the Garret’s point, it has been tougher than targeted therapy predictive biomarkers. I think we're very early on in our understanding of the mechanisms underlying response and resistance to chemo.
The naming with targeted agents to be just to make one final comment, we are in an era of exploiting oncogenic mutation, oncogenic addiction if you will, where the cells are exclusively dependent on those types of alterations. I think the challenge, just to put it down, there the challenge with other target classes that aren't of that kind of exquisite nature is it going to be tougher and tougher, not that as like chemo, and of course we'll have a mechanism of understanding, but I think the complexity will increase before decreases to vitro companion diagnostic.
If we could come over here and then we’ll work – I'm just trying to give multiple people a chance to ask questions too.
Marcel Brand – Crédit Agricole Cheuvreux SA
Okay, thank you. I had a general concept regarding to personal – a personalized healthcare or personalized medicine. In 2008, America Congress however tried to wrap up white paper on personalized medicine, yes, I can't remember exactly. But to balance then, that is the driving behind the personalized medicine is to let patient less dependent on hospital and a doctor. The healthcare cost so many doctor and hospital. So not reduced healthcare at (inaudible) U.S. for 17% of GDP healthcare and not only reduced healthcare, they threw out a concept, personalized medicine. In order to achieve that growth, we firstly have to – medical diagnostics should be a mature technology, but to understand that means medical – personalized healthcare more to us will depend on – more or less depend on hospital doctor to reduced healthcare, but from your concept, is personalized healthcare is still carry on to support hospital professional diagnostics rather than say in future have a point of care, non-professional diagnostic (inaudible) for disease. So how to get clarification regarding to personalized medicine and personalized healthcare from whatever you talked about?
That had a financial ring. Alan?
I saw it, yeah, and you joined in, yeah. So, now look, I think first of all, I think that that’s a great question. I think first, you have seen our definition of personalized healthcare. Yeah? Really what we would like to do is to combine diagnostics as well as drugs. And in fact it is to say to give let’s say a very clear, not just signal, pretty much a guarantee, yeah that the drug is really working. I think that’s really what we have in mind when we talk about personalized healthcare.
Is that leading then to lower costs in the hospital? Well, could be the case, yeah, and because look, I think at the end we know the patients that get treated with our drugs that these drugs really work, at least with your product from PHC. I think that’s all I can say. We have – and that’s what I know on purpose, yeah, we use personalized healthcare in comparison to that personalized medicine. That’s my takeaway.
Thanks, Alan. And Colin probably wants to make mention of this.
Just a couple of things on the management of chronic disease, because I think one of the other examples of – we are using personalized healthcare very much here in terms of selection of therapy, from the examples this afternoon, but if we talk about coagulation monitoring for example, the evidence that we’ve created shows that patients that look after their own oral anti-coagulation management actually have a better quality of life and a reduced level of complication.
So absolutely fits with the other part of your example, which is that by moving it to the patient and moving it from hospital management, that is lower cost and you get better outcomes. So that's one example. The other example would be, say for example with diabetes management or for example management of heart failure. By using diagnostic tests you can move the management of the patient from the hospital setting either to the primary care setting or in some cases directly to the patient. So both of those methodologies for personalized medicine are actually working in parallel.
Unidentified Company Representative
Yeah, It’s a very important nomenclature point. We refer to personalized healthcare, usually to Companion Diagnostics. But your point's very valid. And particularly in our blood glucose monitoring business, we’ve shown in a very large trial for a step study that if you have routine monitoring of your glucose over a three to four day period and you structure your insulin dosage, you get a much better management of disease, lower side-effects, less business to the hospital.
So there are a lot of other things we do within diagnostics that lead to economic benefits for the healthcare system, which is again my whole premise on what diagnostics can play also in the future.
You just said, I had a question, then we'll go back if we could.
Marcel Brand – Crédit Agricole Cheuvreux SA
If you take prognostics rather than diagnostics, which starts with physiology and life expectations, and you look at the last 100 years of life expectations, you should be starting at the bottom of old age to focus your target of what you want. And the people of that category who are professional, many of them PhD’s have not been able to get the sort of information you've been presenting to Roche today. I think it's fantastic, and you should publicize that more and not Dr. Douglas, but I think you need to make very subtle Swiss type of propaganda.
Unidentified Company Representative
Thank you very much for the suggestion. We would be more than happy to share the information more broadly in a very Swiss way, so that's great.
Can we go to the gentleman in the back and then we tone down I guess.
We have one Swiss out there.
Thank you. Two quick questions, if I could. Firstly, one broad brushstroke one, you very elegantly painted the picture of how much health economic benefit comes from diagnostics. But how come, if I’m a drug company, I can raise the price of my drug 15% a year in the U.S. and no one can do anything about it, but there is incessant downward pressure on diagnostic pricing, and will it ever change?
And then number two, when it comes to Companion Diagnostics, and particularly with the oncology portfolio starting with MetMAb, is that actually going to make any money for the Dx business?
I understand that clearly it's going to make money for Roche, but for Dx, is it actually going to change anything or you going to give it away free or the volumes are going to be so relatively small that actually is just going to be helpful and booked in the Rx business.
Okay, excellent. Thanks for your provocative questions. I mean and please time in here whoever wants, but on the first one, I’d be the first to admit that there is wild price increase is not sustainable, and I don't think it is sustainable any more in the pharma side. But I do believe that we will see changes to reimbursement prices to diagnostics in the future, but we're starting, you have to remember where we're starting one, we were starting from a fairly archaic reimbursement base today. I mean literally in the United States this CPT codes are built up based upon the number of steps it takes that you’ve automated from a lab technician to get to a result. So in today's remuneration market, reimbursement market in the United States there isn’t a direct reflection on the value you bring to the healthcare system.
Now obviously in these healthcare time shifting reimbursement policies and procedures is not something that's done overnight. But I do believe first of all with increased IT protection, which I think is step number one because the more IT protection the more leverage you have to be able to encourage a change in reimbursement. And secondly, with the work that we are doing around the real clinical data around some of our assays, we will be able to improve reimbursement policies in different countries around the world. It's going to take time, but I do believe it's possible and I believe Roche is in one of the best positions to be able to do that because we’re going to have the most clinical data for a diagnostic to be able to drive that.
The second one, I always get that question because when I was in pharma, I asked the same thing of diagnostics and now my pharma colleagues ask me the same thing, they say what we want Dan, as we want a companion diagnostics that you can produce really quickly that you can be reliable and validated and run exactly the same throughout the world, and we wanted tomorrow on an installed base such as biggest possible. And the fourth thing we wanted for free. And I always said to my pharma colleagues, I can do the first three, but I can’t do the last one nor does it make sense. It doesn't make sense, first of all there is no need to give it away free because look at the impact that €200 B-Raf test may make to a multi tens of thousands patients, sorry multi tens of thousands euro therapy for Zelboraf. I mean there is no reason to give it away, there is more than enough value for that, and we should be demanding more reimbursement.
And the second thing it is helpful to our business model, the other speakers have tried to explain this as well, but to Colin’s business for instance, if he has periostin IT protected on his platform and he has other key assays that are companion diagnostics that are only available in his platform, then he will differentially be able to sell his entire platform in the marketplace, and he will have a lift in his total volume of business on the remaining part of his platform. So we, and Diagnostics do not look into business case just on a single assay, this is true by the way of all our assays. We have to look at the complement factor that it gives to all of our assays.
So yes I would argue in the immediate term the vast majority of the value in terms of the pricing of the pharmaceutical product is perhaps captured within pharma and by the way on a Roche Group perspective I know Alan doesn't really care whether it comes from pharma or diagnostics just as always it comes. But I have to say I want to be specific, here, we’re not just doing this out of courtesy, we're not just doing this because we feel that it's good for the Roche Group, we’re doing it, because it’s also good for the diagnostics business and it differentiates our products on the marketplace. Yes please?
Keyur Parekh – Goldman Sachs
Keyur Parekh from Goldman Sachs. I have got two financial questions if I may. First I think there’s been tremendous progress made on the diagnosis division as it relates to cash-flow, I assume more than doubled your cash flow from operations in the last two years.
That was tremendous Parekh.
Keyur Parekh – Goldman Sachs
But it’s still substantially below your cash flow margins in the pharma business, so I understand the different nature of the businesses. But on an ongoing basis in two years time what's a fair cash flow margin to look at. Is that kind of close to pharma, is it 5% below pharma?
Now, look, I think first of all, I think I now speak for Dan and inevitably, I think he has made tremendous progress. I think very clear we have addressed the networking capital issue that we’re having in the whole group. Yeah, and this is not just diagnostics this also goes well to pharma. That might be that in certain areas, we have made some progress in pharma and we can really speedup some things on the diagnostic side. Of course there might be something coming, but let's look at this I think well if there’s some opportunity, there might be some opportunity. I think today we’re not in a position to give you the perfect margin in two years time frame. All we can say is well we have some measures running, you have seen some of the indications today we have talked about networking capital already so lets see what we can achieve.
Keyur Parekh – Goldman Sachs
And second one, as we look at the kind of what’s happenings through some part of the olive belt as you call that and the rest of the world. And that shift in the business between consumables and capital expenditures for lack of a better word. And how should we expect margins to substantially progress over the next kind of couple of years?
Yeah, well I think my firm statement and commitment has been that first of all, I expect that Roche diagnostics is the number one company in diagnostics, should also have industry leading margins. And frankly not just myself, the credits of the colleagues and frankly my predecessors have been working on that for years and I think we are there now. I mean at a 22%, 21%, 22% margin rate, we are in the top of the industry and we want to retain that, we want to maintain our competitiveness there and we want to drive that moving forward. But we are within an industry that has a reward in those ranges, so we have to remember that, we are playing in that box.
In terms of what’s going on in some of the austerity measures in particular countries in Europe, I mean as I said before, clearly, we have some effect in those markets, exactly what’s going to happen in the future, you all could guess as well as I could in terms of what some of those countries will do. But that’s also offset again by some of the fast growing emerging markets that Roland talked about today.
And by the way the margins we are getting in these fast growing markets are equal or in sometimes better than what we are getting in some of our more mature markets. So there is a balance going on globally on this and I believe that we will have some pluses and minuses, but overall, I think the margins in the business are sustainable as we move forward.
And let me mention here Dan, I think at the end, I think margin is a good thing to look at, no doubt about this, but we talked about networking capital already and the receivable situation I think at the end it’s about cash. I think we have to balance things and look at the risks we face at the moment in the olive belt. And we have been out and we addressed it, very openly. So (inaudible) made a clear comment about this and that we are going to be more disciplined in that sense and I think that has to be seen in combination here, no doubt about that.
Okay. One last question and then we will break. That would be great. Thank you.
Do you see increasing businesses coming from your actually from your competitors, if I look for the co-development of the trial of [gRED] and Zelboraf between Bristol and Roche, and looking on your leading position in all the efficiency of the diagnostic business actually it would make sense if the competitors are bigger biotech companies and the pharma companies are coming to you to your diagnostic division.
Merck already announced collaborations starting the collaboration with BGI, but it is just to start last week.
And actually it really makes sense the competitors are coming to you, to your business?
Yes, absolutely. And by the way we have a collaboration with Merck as well [Ben]. So we have a number of collaborations, some are public, some are not public at this stage. But there is an interesting dynamic going on with that if you allow me to comment. When I go back a few years ago and what we saw was pharma companies were not Roche, but many pharma companies were just starting to get into understanding diagnostics and understanding how to work with a diagnostic partner. And I have to say many companies when they came to discuss with us, we said, we’d be happy to develop it. It will cost X, Y, Z and we’ll work with you to make sure you get it ready it for launch and launch on to a launched installed base.
There are many smaller diagnostics companies they’re going out there with much more attractive deals to these pharma companies and some pharma companies went with them. What I would just tell you is the experience we’re having is those companies are coming back to us now. They’re coming back to us, because they’ve either had a failed experience, they’re coming back to us because the stakes are getting higher with a companion diagnostics guidelines in the U.S., where it’s been very clearly stated now by FDA that in order to get to your pharma product approved in draft guidelines, you will need an IVD approved at the same time.
So the days of launching a pharma product based upon a clear lab based test, I think we’ll less become less and less popular and therefore the stakes are going up. So we’re seeing a lot more interest in Roche and we have a lot of partner companies out there, that we’re very pleased to work with. And I think they can have reliance, the number one, we have very good development experience. We have IVD approved platforms that we’ll put it on to out there, so there is no risk of whether the platform gets approved or not. And then overnight they get it on to a large installed base. So that’s part of our business model, it’s a very important part of our business model and so on.
So with that, I just want to thank very much all the speakers. I am really honored and grateful to have a chance to share the stage with them today. I’d like to thank Alan and Dan for all the work behind the scenes. And most importantly, I’d like to thank you for your interest in Roche and Roche Diagnostics. And I hope you’re walking away with a better feeling is a valuation also of Roche Diagnostics within the Roche Group.
We’re really looking forward to having all of you joining us for dinner and that’s going to be right outside this room to the left, is that where we’re going next. Okay, great. Thank you very much for your attention.
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