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Executives

Severin Schwan – Chief Executive Officer, Roche Group

Pascal Soriot – Chief Operating Officer, Pharmaceuticals

Daniel O'Day – Chief Operating Officer, Diagnostics

Alan Hippe – Chief Financial and IT Officer

Roche Holding Ltd. (OTCQX:RHHBY) Full Year Presentation Conference Call February 3, 2012 12:30 PM ET

Severin Schwan

Good afternoon, ladies and gentlemen. 2011 has been a good year for Roche. We achieved all our financial goals and very importantly we made significant progress in our late stage pipeline.

I like to start with an overview on the financials, overall group sales at constant rates up by 2%, pharma up by 1% in line with the market in spite of the expected decline of Avastin in metastatic breast cancer here in the U.S., diagnostics up by 6% primarily driven by our so-called Professional Diagnostics and by tissue-based diagnostics.

We’re fully on track in terms of our savings from our program operational excellence, which is CHF 1.8 billion in savings, core EPS up by 11% and based on these results we can increase the dividend by 3% to CHF 6.80 as the Board has proposed for the upcoming annual assembly.

Now, when I stood here last year, I stressed two dimensions on the one hand, of course our strategy remains very much focused on innovation, on science and on the progress of our pipeline. But at the same time in this challenging environment it is equally important to work on our productivity. That of course is very much the case with the progress we made in operational excellence but it goes beyond the synergies we achieve here in terms of improving productivity across all functions and all parts of the organization and also having a local networking capital, as you will see later.

Now, let me start on the productivity dimension, again we increased our margin which stands now at 36% on a group level. And as you can see on the next slide, operational excellence really is a very important component of this development. We lost about CHF 600 million from the various austerity measures.

In Europe, the healthcare reform, the excise tax in particular in the United States. As expected we had a decline in Tamiflu, we had the decline in Avastin and we lost patents on two products namely CellCept and Bonviva. You can see a compensating effect with the profit growth of our underlying business but very importantly cost savings of CHF 1.8 billion otherwise we would not have achieved this margin improvement.

As far as the dividend is concerned, let me just emphasize that we have now a payout ratio of 55% and also let me emphasize that we will keep this attractive dividend policy irrespective of the planned Illumina acquisition. Now let’s shift to the pipeline. 2011 was really an outstanding year in terms of our pipeline progress. As you can see, 17 of our 20 late-stage clinical trials delivered positive results. That is amazing, I think not only for Roche, but also from an industry perspective.

And obviously these results were feeding our late-stage pipeline. We have now 12 new molecular entities in late-stage, and you can see the progress we made in 2011. We filed three new products, and two of those have already been approved in the U.S.; Zelboraf against malignant melanoma, and a couple of days ago, Erivedge, a novel treatment against basal cell carcinoma, the most common form of skin cancer.

Let me also point out that personalized healthcare is getting [reality]. The concept of targeting specific patient subpopulations by means of companion diagnostics, is now moving to patients.

Zelboraf has certainly been the highlight in this respect, but you can see that in our late stage pipeline six out of 12. So this is half of our portfolio, is being develop in combination with companion diagnostics test.

Just a few words regarding the planned Illumina acquisition, you had seen that we have outgrown the market in diagnostics year-over-year over the last year. And I believe one of the key success factors has been our broad portfolio of diagnostic test, which we can offer to our diagnostic customers. And in order to be able to offer such a broad portfolio, you need the key underlying technologies, which are necessaries to measure the biomarkers in the various human samples and we have developed such technologies in house. If you look back over the last 20 years, from time-to-time we made acquisitions to get some of these key technologies in house.

Beginning of the 90s, PCR which today’s the basis of molecular diagnostics, a multi-billion segment where we keep market leadership. IHN, which gave us full access to these ECL technologies the basis for our immunology growth, which we enjoy today and as you know a couple of years ago, we invested into the underlying technologies to do tissue-based testing. And we do believe that chain sequencing will be a key technology platform for the future.

Let me shift into 2012, really the key message of this slide is that we will see an acceleration of our growth, driven by the Diagnostics business and also the key franchises in Pharma. You see Avastin turning to growth again and also very much driven by the new launches, Zelboraf, Erivedge and also the expected launch of pertuzumab in the second half of this year.

At the same time, as I said earlier, we will continue the focus on efficiency improvement. There is another CHF 600 million to go to reach the planned savings from the Operational Excellence program and we also have an increased focused on networking capital in particular in Europe where we have relatively higher outstandings.

To concludes, we expect sales growth to accelerate for the Group & Pharma to the low and mid single-digit. Diagnostics again above the market, full savings on Operational Excellence as announced and Planned of CHF 2.4 billion, high single-digit Core EPS growth and attractive dividend outlook. And again let me reiterate, we will stick to this attractive dividend policy in spite of the planned Illumina acquisition.

With this, I would like to hand over to Pascal, Pascal for Pharma.

Pascal Soriot

Thank you, Severin, and good afternoon everybody. It’s really a pleasure to be here and I have to say, as Severin was telling you a minute ago, it’s a much more comfortable position to talk to you this year than certainly last year when we had to report back on an unfortunate series of setbacks in our portfolio and we were not seeing the Operational Excellence program for 2011.

I think this year, what the key messages that we’d like to leave with you is that for Pharma, 2011 was really a transition year and we have made enormous progress on what we told you a year ago we would actually try to achieve.

We have achieved our Operational Excellence savings, almost completed, still a little bit of way to go, but essentially completed. From a sales viewpoint, you will see in a minute we can say it is a transition year but there is an acceleration that we can report back and from a portfolio viewpoint, which is the most important part of all, we have made enormous progress and that we will cover some examples of this.

If we start with sales, essentially we grow by about 1% excluding Tamiflu. As you can see here, we grew by 3% in the United States, declined in Japan and in Europe and grow in the international region. That 1% is not much, but is very much inline with the global market that grew by 0% to 1%.

I’d like you remind you (inaudible) in many ways of our estimates the growth of the market. If you look at, some are evaluated on their estimate because of exchange rate issues. Our best estimate is the market is flat to growing by 1%. So we are very much inline with these but certainly not sufficient in our view.

The good news is that quarter four was certainly better. You can see here that Europe is starting to pickup a little bit and pickup is probably not a great word because we are still declining but the decline is less than it has been in the previous quarter. So hopefully we’re starting to leave the austerity measures behind us and also the effect of Avastin breast cancer behind us.

You can see here, the U.S. growth was certainly much better and we accelerated in the International region as well for a total growth rate of about 3%, Japan was still impacted by the aftermath of the earthquake and the accident in the nuclear site, and we hope to ensure we look certainly better than that.

If you look at it from a product viewpoint, no surprise here, our growth was driven by Herceptin and MabThera. I just like to point at one thing related to Herceptin is this blue color that you see here representing the International region and that gives you a sense of the fact that, the emerging markets are starting to represent a pretty substantial part of our total growth for products like Herceptin, for MabThera. For MabThera to a lesser extent, because the (inaudible) and CLL indications are still driving growth in Europe and the U.S., but certainly in the years to come, we expect this blue part to grow even from MabThera.

So growth is driven by those two products that are experiencing pretty nice growth rates Lucentis did very well in the United States, I’ll come back to this. MabThera is still doing very well. Not surprisingly of course but suddenly Avastin declined, you can see here a pretty substantial decline in the United States in green on the bottom of the chart. We also experienced patent expiries of Boniva and CellCept and that impacted us. And what’s not represented here is the decline of Tamiflu due to the pandemic sales going away.

So Tamiflu pandemic is hopefully behind us. Avastin, I have to say, the breast cancer issue is hopefully behind us and on a quarter-to-quarter basis, our patients sharing breast cancer in the United States is starting to level off and stabilize. So we expect some growth in 2012 for Avastin on the global basis driven by the emerging markets, driven by the ovarian indication in Europe, and driven by continued goals in colorectal concept.

What you don’t see on this graph is Pegasys. Pegasys was more or less flat in 2011, but in the last part of the year, especially in the last quarter, we had growth in, particularly in the U.S. and we expect that growth to continue in 2012, essentially as you know due to the launch of the new oval agents in the combination with Pegasys, and a kind of report that we have in the United States, about 90% share was Pegasys now. So we’re very happy with the development of this product.

Our P&L resembled very much the cooperate, the overall company P&L, as you can see here, profit was essentially driven by cost reductions in cost of sales, in commercial expenses, in R&D, as well, minus 2% more or less flat. And in G&A, the growth you see here is essentially due to the excise tax, which is the charge to G&A. But if you look at pure G&A [extremely] excise tax in the U.S., G&A declined by minus 6%.

We put a substantially effort for the Pharma divisions for 2000, net of them managing our cost base downward. If I look at the main franchise that starting with oncology, you’ve seen a minute ago, MabThera and Herceptin going by 8% and 9%. As I told you, MabThera was driven by NHL, still (inaudible) is generating substantial goals in Europe, in particular, the (inaudible) CLL as well and very much through the emerging market and Herceptin is driven a little bit by gastric cancer as a new indication, but very much saw the growth in the international region.

Avastin minus seven, nothing special to report, yeah I talked about it before. We also saw nice growth for Xeloda and in particular in China and some other emerging markets, as well as in the U.S. I must say, we were helped here by the fact that there was continued shortages of 5FU in the U.S. market that added to Xeloda. But by and large in the many countries around the world China and others, Xeloda did extremely well.

Lucentis grow very nicely, in fact, in AMD, I think we’ve managed the CATT study much better than we had anticipated actually. We had an initial negative impact on the patient show in AMD, the patient show Lucentis, we had a decline in Q2, Q3, and in Q4 we started growing again our share. In quarter four and AMD was higher than the share in quarter three. Essentially, because of the way we managed the issue, but also as you know, there were a number of ocular infections in September, October in the United States that created pretty substantial people in the marketplace and certainly I highlighted to physicians the danger of using Avastin on an off level basis and certainly Lucentis benefited from this.

Yervoy is continuing to grow and we have filed for DME as this reported here and we expect to launch it in the second half of 2012. Actemra, Actemra is still growing. We are now expecting to get approval for the first time indication in the U.S., we filed for that. We also plan now to file for the subcu formulation. This is very substantial and very significant for Actemra, especially in the United States. As you know, this market is very much influenced by whether you have a [magic] formulation on or subcu formulation and we believe subcu would certainly help us a lot. The head-to-head study versus (inaudible) will also be a substantial milestone.

And importantly I have to say, we’re making substantial progress with Actemra around the world in monotherapy. You know that Actemra has very differentiated data in monotherapy. We have been focusing on that differentiation pretty substantially in the most recent past and making very substantial progress for that.

Now we’re not preparing to launch, while preparing, oh, I’ve launched already in the U.S. the Zelboraf, it’s only preparing to launch the Zelboraf in Europe and around the world. We got approval for Erivedge in the United States two days ago with a very, very favorable label. I’d like to remind you we got approval on the back of a Phase II study that gives you a sense for how substantial the clinical benefit is with Erivedge to convince the authorities to give us approval with those kinds of data. And we are waiting for the EMA review hoping that we might get approval, but of course this is less usual something not usual at all, I should say in Europe to get approval of with the Phase II data so probability here is lower.

Very good results so far with Zelboraf in the U.S., I’ll come back to this. The sales force is meeting this week as you can imagine, they are pretty excited launching Erivedge, and they will start doing this next week. We are shipping as of today and as of next week we will be promoting it. And finally, we’ve filed for pertuzumab both in the U.S. and Europe and are expecting approval this year.

This is Zelboraf. I think what is really important to keep in mind here is the formidable synergy that having pharma and diagnostic under the same roof is actually bringing to us. We’ve been talking to you about customers’ healthcare and the synergies between the two divisions. Essentially from a research and development viewpoint until now, we are now taking this into the field of the commercial level and the diagnostic team and the pharma team in the U.S. has done a fantastic job launching Zelboraf and our diagnostic test at the same time. We have had enormous success penetrating hospitals with the test, can we pull out the, as you today four months after launch more than 60% of patients who have melanoma tested for BRAF mutation and of those who have tested 50% have BRAF mutation as we expected through our clinical program and of those who are BRAF mutated as you can see on this graph here 78% receive BRAF.

So an extremely rapid progression essentially because we did extremely well convincing doctors to test for this BRAF mutation through our pharma organization of course with very much through the diagnostic organization in the field as well.

So something really that if you leave it on the daily basis you’ll realize we could only do as effectively as we did because we are part of the same organization in the same roof and because Dan and I, we get on so well together that helps.

The second product I’d like to talk about is Erivedge. As I told you minutes ago, everybody is very excited about this one, and the pictures you see on the left are the pictures that I can present to you. They are variable pictures, they are not very nice, but they are variable picture and I can tell you basal cell carcinoma is the most common skin cancer and advanced cases from a test study cases of BCC can be absolutely awful. You can see the impact of Erivedge on this tumor here from the top to the bottom and in the bottom you only see the scar that is left. And the tumor has [rigoroused] tremendously.

I could have used pictures here of patients who have total deformity on their face completely disfigured with this tumors. They have no options today. And many patients have actually no longer candidates for surgery and have no option, and Erivedge is bringing an option to these patients, so I need of new solutions. So those patients who are metastatic or alternatively have an advance case of basal cell carcinoma and our no longer candidates for surgery basically our candidates for Erivedge treatment there is about 20,000 of those patients so we estimate on the European U.S. bases, and those are the patients who would benefit from this product.

It’s a difficult population to estimates I must say because, it’s not always clearly who is a candidate for surgery or not, so this is something that we are refining as we go, but suddenly a very exciting product with a great potential. And a final one I’d like to highlight to you, which we filed and now getting ready to launch later this year, is the pertuzumab this is the CLEOPATRA study, just a few things here you see the PFS benefits in first time metastatic is six months.

Now I think it is important to keep in mind that, this is the same kind of benefit that have set in short in the first time metastatic setting a few years ago, when we introduced it. In the metastatic setting you typically expand large, you don’t save lives, and then when we brought Herceptin into the adjuvant setting we’ve saw the results, that, you all know, and we estimate that about 10 years, Herceptin has prevented in only the top five key EU markets about 28,000 women from developing metastatic breast cancer, and essentially saved their lives, you can multiply this by three on the global basis.

And so it’s an enormous impact on patient’s lives and pertuzumab will not take this to the next level. And so again we are very excited with we still take down we now have a program in the (inaudible) to setting of cost in combination with Herceptin.

Let me say a few words about the emerging market. And I think it’s important to talk about this because often people tend to think that because of the nature of our products and their price, we cannot succeed in the emerging markets because we have too expensive products. Where you can see here in the top seven what we call internally the E7, the emerging seven, the seven biggest we are growing by about 13%, 14% a year that has accelerated in the last two years.

I can tell you in Brazil, Russia and China, this three biggest of those, our biggest focus, we are growing much faster in the market. So we are actually doing extremely well, that pulls that our products can be successful in those markets. And in all of those markets, those three top ones, we are in the top five companies locally, so we have demonstrated our portfolio can do well. The one country here that is still too small in our view is China – is India sorry. And certainly, we intend to do much better, we’ve changed our plans locally, and we intend to do much better in the next two to three years in India.

This is a kind of an illustration of what this markets look like. And it varies of course from market-to-market, but essentially, you have three segments, you have the typical segment of drugs that are paid by the public payers. You have a small emerging private insurance segment, similar to what we see here in the U.S. but much smaller of course. And you have a large, typically large out­of­pocket segment. In India and China the out­of­pocket segment is extremely it ask patients tend to pay their [drug] out­of­pocket.

And in some other countries we have a larger public segments like we have in Europe. And so those three segments vary country by country, what we’re trying to do is increase our penetration in the public segment, we are trying to pull up the creation of a private insurance market; in China for instance, in Russia. In China in particular, we’ve made good progress; 1.4 million policies were issued in China for catastrophic diseases in particular concern we’ve been working extremely how to try and boost that further.

And finally, in the Out of, we’re trying to reduce the out-of-pocket segment, but also in that our-of-pocket segment we’re trying to be flexible to adapt our pricing structure and volume.

So I’ll give you a few examples of what we’re trying to do across these market segments. The first example of what we’re trying to do, and maybe before I do this let me just tell you that it can be confusing when you look at it from the outside, because there is no one thing we are doing, it’s not the United States market where you have once five year implemented everywhere. The more of the outside Europe and U.S. is extremely fragmented; the rate (inaudible) is different. So essentially, outside used to be flexible and that adaptable, and do what’s right for a given market to increase access to our medicines.

So an example of this is a patient existence program in China, where we essentially charge for the first five months of treatment of Herceptin, the rest of the treatment is given free of charge. Another example is, we introduce sometimes second brands, in countries where it’s possible, and it’s not possible everywhere, but in some countries, we can introduce the second brand at a lower price points to address the public market to have Herceptin for instance in the private market and the out­of­pocket market and the second brand to low our price point to add to sell to the government, to the public market.

And finally, we have a series of other things which I would call Tailored Models here, one little example I can give you for instance in the Philippines, Morocco and other countries. We actually charge people in a basis of their income level, to have an income tested pricing structure, so we have mechanisms in place to test income and charge people according to their, to how much money they can pay.

So in China, this Assistance Program basically gives that. We introduced it in August, and you can see here our substantial increase in patient numbers. You might think, okay, well that’s great you’re giving half of the treatment away, so you’re going to lose half of your saves. The answer to this is no, because in fact most patients pay out-of-pocket, and most patients were only able to pay the first five or six months of treatment.

And so essentially, what we are doing is giving them a chance to be treated properly, and pay the first five or six months out of their own pocket, the rest of the treatment is given free of charge. They are treated properly, which is really the right thing to do, but also physicians are less reluctant to start off patient, because if you’re a physician, you think, they going to pay for four, five months and then run out of money, essentially, I’m going to get them bankrupt and not help them a lot from a medical viewpoint. So I’d rather not start them on Herceptin. So now that they know the patient can go the full course, they are less reluctant to start them and initiate Herceptin surge.

This is a small example in Egypt, where we introduced a second brand of Pegasys called Pegferon here to sell to the government. You might know that in Egypt, Hepatitis is an enormous problem and in the private market, we were only able to treat a limited number of patients, introducing the second brand at a much lower price point and charging it to the, selling it to the government, as allowed us to increase substantially the number of patients treated and of course the volume has sold.

Let me close with this picture. Here I won’t go through every single project, but I just want to leave you with this message that 2012 is going to be another pretty busy year for us on a portfolio viewpoint and I hope a good year, we started well we have the TML study for Avastin and CRC is positive, so it’s very exciting, and it would be a challenge for Avastin, pretty big chance, I believe overtime. Early that’s got approved in the U.S. and you see here we have a large number of news that will come out for the year.

TDM-1, let me just mention on a couple, TDM-1 will I think be very substantial, Herceptin and MabThera, HiSeq will also be very substantial news, and so you’ve seen through 2013 their GA101, (inaudible) so a pretty heavy news flow from a portfolio viewpoint.

Hopefully you’ll agree with me, we are starting to turn the corner going through this transition year on 2011. The pipeline is getting momentum and hopefully starts to look a little bit better also in 2012 compared to what we experienced in 2011.

Thank you very much. And I will hand over to Dan.

Daniel O'Day

Thank you very much, ladies and gentlemen. Most of you know I don't do well behind the podium, so I am going to come down here where I can move a little bit more. And it’s a Friday afternoon, so I want to engage you in the diagnostic session. The couple things I want to cover here today with you. First of all, the 2011 performance, like to dig a little bit deeper into the Illumina transaction that Severin had introduced to us here, and then end with some of what we expect to do in 2012 as well.

So across our five businesses, we grew faster than the marketplace again in 2011. And the two businesses that were most behind the drivers for that growth for the Professional Diagnostics, our largest business, and then Tissue Diagnostics, that’s the Ventana organization that we acquired back in 2007 that is now fully integrated, and really driving this potential throughout the world.

We also made some really good progress on the profitability fronts as well. We grew our operating profit margin by 14% last year to 22.4%, which puts us in my estimation given the mix of our business really at the top of our industry league and I think that’s appropriate for the world leader in diagnostics, we did that through a number of things product mix, the new products we’re driving out there enjoying higher gross margins. We did it through cost efficiency measures.

We now have a couple of year track record of making sure our cost of sales line is kept in check with sales, and we continue to invest in the business as you see on the M&D and R&D line, which is very important to continue to retain our leadership position out there. Some of that M&D, R&D line was also driven by the three acquisitions that we did last year as well.

So just to give a little perspective on our ability as the number one company in diagnostics to continually grow faster than the market place; you’ll see the market from 2010 to 2011 did come down a bit. I think particularly from the economic situation we continue to maintain a distance to the market.

Our share is 20%, the next company is 12%. So the model that we have which is a very large installed base, present more than a 130 countries with the broadest array of technologies, which is allows us to really be the best provider to our customer base is really driving this above market growth. And last year alone we launched 60 instruments or assays on to our large installed base out there to continue to drive our competitive advantages in the marketplace.

Now regionally the growth plays out like this, we grew faster than the market in all regions. You’ll see the different dynamics going between the different regions. In North America, we actually had a 4% growth, as you’ll see our Diabetes Care franchise declined by 4% and the remaining part of our business grew by 7%. We now have new products in the Diabetes Care that are beginning to be launched, which I think will begin to address that decline in the Diabetes Care market. But the really good single is, when you look at United States for instance on our Professional Diagnostics business, it grew by 9% last year, significantly better than the market and making a big difference in our largest business Professional Diagnostics.

Europe was obviously affected by a lot of the austerity of programs, but still at 3% growth and 50% of overall turnover contributed a great deal on the absolute growth side. And then finally, Japan, I hope that most difficult year that Japan sees for quite sometime in a flat market growing at 6%. I really give my colleagues in Japan a great deal of tribute.

Now, in the Latin America and Asia Pacific market is obviously very, very fast growth. And it dig down a little bit into Asia Pacific that 17% growth is off the back of being the number one company in Asia Pacific with the 23% market share. And then just looking at China, which is our fifth largest country today and continuing to grow significantly, we see a 36% CAGR growth, double the market growth rate for the past five years.

And I think we’re just still beginning to really penetrate the extent of the market. We intend to really expand our presence now to many cities outside the major cities to the small cities have just have a million people in Japan of which is 150 that we think they need to penetrate into the many years to come. So, our competitive environment but one in where our instrumentation, particularly with the infrastructure spend on new labs and hospitals, is speeding well into that investment level.

So, as I said, all five businesses gave us growth. Last year we had Professional Diagnostics, the immunoassay portion of that business is now CHF 2 billion business that’s growing at a CAGR of 13% over the past ten years. And it continues to be an area where we innovate and provide new medical value products on the tens of thousands of instruments out there. So 9% well ahead of the marketplace.

Diabetes care more affected by the economy with a consumer involvement there, growing at 2% and as I'll speak about a new launch in the United States.

Molecular diagnostics, we're the clear leader, we launched HPV in the United States, we’re getting some good momentum there. We have a physician field sales force is calling on OB-GYNs with a story and message around HPV 16 and 18, which is really getting a good pickup and we launched three new companion diagnostics, which I'll touch on.

Applied science was clearly affected by the research, the softness in the research market and also some one-time effects we have between 2010 and 2011. And then finally, tissue diagnostics growing at 15%, this will be important when I come back to Illumina. Because outside the United States, tissue diagnostics is growing above 20%, in many markets close to 30%, which talks about being able to tap into our potential in the Roche global infrastructure.

So as I said after five years really of no new product launches in the United States in diabetes care, we've broken through with our new chemistry. We’re beginning to now have the new products come through with the nano being approved in January of this year and of course we have many other products we’ll be filing to drive the same products that are growing outside the United States in the number one diabetes care market in the world as well.

Pascal mentioned the launch on BRAF, I won't go into that more. I do agree we get along, but more importantly our people get along and drive the success of that franchise of BRAF. And relative to EGFR and KRAS, we also rolled those out and EGFR is being used in conjunction with Tarceva, ex-US in first-line therapy as well.

So, the last year we had 160 collaborations within the Roche group, this year we have more than 200 and the momentum in terms of the number of meaningful genetic companion diagnostics coming to the marketplace is really picking up. And this will also be important when I come back to the concept of sequencing in terms of looking at multiple mutations across particularly tumor side.

And then we had three acquisitions for the year in Diagnostics. Two on our largest business, one a front-end automation, PVT a company in Germany another one of platelet coagulation function testing company. And then finally, the second of two acquisitions we now done with Ventana tissue diagnostics investing in that technology. We have p16, which is a really interesting biomarker that allows a bit high sensitivity and specificity that combine with our molecular test, or screening allows us to really change the way cervical cancer is both screened, but also diagnosed and monitored, essentially in the future, in my opinion, replacing the Pap smear test. Then it also shows the strength of being in multiple technologies having two businesses coming together for one disease state to change the course of therapy of a disease.

So I'd like to touch base on the Illumina acquisition, we're very enthusiastic about this, we think it fits extremely well into the leading model of Roche’s Diagnostics. And most of you may be familiar with Illumina, but just remind you it is the world leading company today in sequencing and microarrays. It is in the research base today, it’s close to US $1 billion in turnover in those two technologies and it’s based in San Diego. It had a very good track record of success, good sales, good profit, good cash flow generation and would be accretive to our margins from day one as well.

The other thing I would mentioned to you is that it is really focused on the research in academic market today, 80% of the turnover comes from that most and most of it from the largest genome centers around the world and it’s also heavily focused in the U.S. marketplace, which was, had some similarities to what Ventana was when we first began working with them as well.

So the rationale for acquisition is really four fold. The first one is the market is attractive. We want to increase our participation in this market, first in the research field and then in the mid-to-longer term in the routing clinical regulated IVD diagnostics marketplace. We think there is potential for expansion significantly in both of those, and we believe the market will grow from around US $1 billion in 2010 to more than US $2 billion in 2015. And driving that growth is the fact that technology is now at a price point, a throughput and a workflow point that allows it to [dig] a deeper into the research setting, and also be the right technology to go into the IVD setting in the future.

It also strengthens our portfolio significantly. So we also have sequencing and array businesses, but just to give you one example of why they are complementary within those businesses, we have a long read technology, Illumina has a short read technology and they do different things depending on what you're looking for in terms of the genome.

So they are complementary from the standpoint of those technologies and they also are complementary in terms of what we're looking at with the combination of sequencing with tissue diagnostics with molecular diagnostics, and eventually with our immunoassays business.

We think there is tremendous potential to unblock this business with the two companies together. With our large commercial presence one way to unlock it is two things of course geographic presence. So take it from a mostly U.S. based company particularly in order is ready to go into the small and medium size research labs. We have a sales force to calls on those customers, they could immediately take the products and be able to penetrate this deeper into the research base field.

And then secondly, when it ready for the IVD diagnostics area, we have a very large commercial presence out there to drive that commercially into those fields as well.

And then finally, the entry into FDA, I mean as [Karl] spoke about the advances of our portfolio, clearly other companies have portfolios that more and more we have an ability to do something with a known genetic mutation and I put the emphasis on do something because there have been actual information. But I think there will be a tremendous draw into the clinic study. Today, we know the major cancer centers around the world, several here in New York, are already doing a certain type of sequencing. They are usually looking at between 50 and 200 mutations for some patients in some disease stage upon entry into clinical diagnosis for cancer diffuse one therapeutic area.

We believe that momentum that has already been demanded by the marketplace is going to increase and we also think we are in the best position to be able to tackle the hurdles of what it takes to get a research technology into the clinical study. It’s not an easy task. It takes quite a bit. We know we’ve had more than 30 years of experience of taking promise from the research setting into the clinical diagnostics. The regulatory hurdles are high. The development experience, you have to have the GMP manufacturing. All those things lead us to believe the combined Illumina and Roche are must better off in terms of accelerating this into the marketplace in driving us.

Clearly, there are risks associated with the markets. I believe that Roche’s research funding is the concept of new technology coming out and the hurdles to FDA approval. That’s why we feel that the two companies combined are in the best position to be able to manage those risks and take advantage of the opportunities moving forward.

So last thing I’d say on Illumina is just we – I personally we collectively have tremendous respect to the organization for the management for the employees there. That’s why we contemplated the fact that upon successful completion of an acquisition scenario, we would combine our two businesses, our two life-sciences business, our life-sciences business with Illumina and we were headquartered out of Santiago. I think it's quite important that we headquartered out of the largest portion of our new business. And also, I think sends a signal to the employees and management of Illumina, that we’re very serious as we have been with Ventana and others about retaining the culture, retaining the innovative spirits, and investing in this business for the future.

With that, I just have really one slide to end on, which is we plan to launch another 40 instruments and assays in 2012, 16 of them, we're going to monitor with all of you on this slide to make sure that we're keeping track of it. We have two already in the month of January that we've had approved. The one I already mentioned in diabetes care. And we just recently got this week, the approval for CT/NG on molecular diagnostics platform in the United States, which is quite important because it's a menu expansion for our HPV platform as well in the U.S. marketplace.

And again, we stand committed to deliver an above market growth for 2012. So, thanks a lot for your attention. With that, I'll turn it over to Alan to cover the Financials.

Alan Hippe

Thanks, Dan. Yeah, great pleasure to be here. Wonderful opportunity I think on a Friday afternoon. Let me make a couple of comments on the financials. When we look at the financial performance 2011, you see the highlights. Our core EPS went up by 11% in two major drivers, one has the cooperating providence we have seen with 6% by the other points to financial results. So deleveraging pays off and is an element of the core EPS growth momentum that we're having.

Operational excellence, mentioned a couple of times today, drove certainly as a savings in the P&L and I will dig into that in the second. We see also the strong operating cash flow that the company has. And we will outline that because it is instrumental and very important that we have financial flexibility. And why is that so important? You look at the last point with the dividend and because we are very committed and to be very clear here, the Illumina transaction is not going to effect our attracted dividend policies negatively. And what that means and I would give you a couple of comments later on just to describe our understanding here.

This is kind of a summary. Of all these things that I’ve mentioned and when you go through it, you see on one end the sales and I think the sales have been described. I think plus 1% is certainly not an outstanding sales growth for us, and you have seen this, the guidance for 2012 was higher so look we achieved the core EPS growth of 11%.

As I said, there are two elements to mention, the core operating profit growth of 6% and then turn you see the core net financial income, which went down as negative effect quite significantly and helped us to create momentum, which led us to a core net income of flat 11% which has been shown in the core EPS.

For us even more importantly, the operating free cash flow which went up by 14%, we show the margin later on and also the free cash flow which amounts in extra currencies, $3.9 billion was fine (ph). And you look at the P&L, certainly, operational excellence paid off, and to see it also in the number, when you look at the cost of sales and M&D, and also in R&D, I think it is clearly reflected.

G&A is a little bit confusing, going up by 6% but as Pascal mentioned, (inaudible) exercise text incorporated and so let’s say in fact the healthcare impact, where healthcare reform impact that we have in line. When you extract that, you need a account for $149 million for your strength in U.S. dollars it is $168 million then you would see G&A went down by 3%.

Operational excellence, was that statistics (ph) mean for us, in the year 2011, and you see the headwinds that we have had. You see on the left, side the core operating profit in 2010, on the right hand side, the grey bar, is the co-operating profit in 2011, at constant exchange rate of 2010. And you see there is a headwind, you have a CHF 609 million here coming from the austerity measure, and despite cuts in Japan.

You see the CHF 1.1 billion that we went down, due to Tamiflu as mentioned roughly minus CHF 500 million Avastin Pascal talked about that. And other products which went out of patent and then you see the growth that we have had of the underlying business, the profit growth that we have had in the underlying business. And then you see what the cost savings meant to us, because we were able to grow the co-operating profit by roughly a billion, even a little bit more, in constant exchange rate.

When we look at operational excellence, people sometimes ask where do, I really find these savings and how is that tangible these savings, because certainly as I’ve showed things go up and down in our P&L, and the bridge shows it a little bit, yeah, what this program meant. But I think what is really tangible is the headcount reduction.

And we are planned in for the program, in total a headcount reduction of 4,800 people and look what we have achieved, until the end of 2011, 3,850 people left the company and 690 have been notified.

So at the moment we are roughly 4,500 people and the program is not over as you know. And there are still 600 million to deliver in the course of 2012, and certainly there is the number of 4,800 seems to be a pretty good estimate and something we were going for. When you look at the headcount development overall, you might ask yourself okay, how is that going together, because the net reduction is roughly 2,000 people.

And you see where we have rent up enough people really in the area where it counts. And you’ll see it in Pharma China, and as Pascal talked about it, I think the ramp up of 770 people in this region makes a lot of sense and will bring us a lot of sales and good profits.

And the other point is diagnostic, and Dan presented the growth momentum that we have in this division, which is outstanding. So, we added 1,500 people and 300 out of this 1,500 people come from the acquisition, Dan has talked about.

The margins, now the margin went up to roughly 36% for the group in total and then you see the Pharma division, which is at 40.9% and let me mention here because we have heard that some people are little bit concerned about the growth momentum of the margin in Pharma in the second half and immediately here an element comes in, which we would like to mention that comes from Chugai. Because Chugai grew in case of margin quite significantly in the first half of the year and came down quite significantly with the margins of second half.

And the reason for that is quite evident, it was quite. It was quite happened in March and we enjoyed quite some and Chugai enjoyed quite some pre-stocking in March and that certainly brought the profits up and the margins up in the first half and then due to supply challenges the margin went down in the second half. And all in the margin for Chugai was 22% roughly in the first half and 16% in the second half. When you compare that with 2010, 2010 the development was exactly the other way around, for the two halves of this year.

Yeah, diagnostics as Dan said 22.4% at the top of the gang and a nice improvement and with the growth momentum, I think that comes well together, that we also are able with that growth momentum to bring the margin up.

The operating free cash flow, I mentioned that a couple of times and really my presentation is pretty much about the financial flexibility because we got a lot of questions about what’s this Illumina transaction really means to our financial. And you see one thing here, the operating free cash flow went up quite significantly by 14% and the margin now is 32.3% but that thing is quite remarkable.

What is first even more remarkable is really the trends that we’re having overall and there you see the use of our cash that we generate and what we do with the free cash flow. You see on one hand yeah we have the dividend certainly always related to the previous year, which is then paid out in the year 2010 and you see the CHF 4.7 billion free cash flow that we have generated in the year 2010.

And then you look at the year 2011, operating free cash flow went up by 14% and the free cash flow even went up to CHF 5.7 billion in constant exchange rates. When you look at the actual you'll find the CHF 3.9 billion – at constant currencies 2010. But you see very, very clearly how we move and that there is a lot of room for flexibility.

I talked a lot about the financing costs and the financial income. That's the financial result, in fact has also driven quite significantly core EPS growth. And this is what you see here on this slide. You see the nice development that we have had in the financial results and you see also how we brought that down over time. And this is quite significantly and that will stick into that in a second.

The other payout here in the dividend and the payout ratio and while we have heard some comments about that. But give us some credit when you look at the year 2008 and the payout ratio of 44% and when you now look at 2011 with the payout ratio of 55%. I think these are quite significant steps the company has taken and therefore the increase of CHF 6.8 here you could argue it's just a 3% increase. But when you really look at the payout ratio, you see what it means for the company.

With that, let's make here little bit, couple of comments about financial flexibility and where we're going with the use of cash. First of all, I’ve talked about the debt reduction capability of Roche already. And we saw it might make sense to put that even a little bit more to the point. And here you see overall the debt, the income under debt which was triggered by the acquisition of Genentech, that was overall CHF 48 billion. And of this CHF 48 billion, 42% are paid down already and that equals CHF 20 billion. CHF 20 billion are paid down already, CHF 4.5 billion alone in the year 2011. And you see roughly CHF 28 billion are with us still at the exchange rate of 2009. When you now look into the balance sheet, you will find CHF 26.7 billion, while the difference is really just the exchange rate.

You see also the early buyback that we have done all with positive NPV. As you can imagine and that really brought negative to the financial result CHF 172 million, when you compare that with 2010 and with a negative number of CHF 255 million that was also an element, which helped us in the financial result, in the course of 2011.

When we look overall, then let me stipulate that we have the highest leverage in the industry. And at least, when it comes to big Pharma and we have done here really a comparison and the benchmarking admitted these 2010 numbers and we will update that, when we have all the final numbers also of our competitors together. But you see we came from leverage, total net debt and total assets in 2010, 31% and went to 25%.

The benchmarking total that’s going for to be net cash positive as – if you like as a capital structure target, it strips on a very reasonable one. We lost our target still because it is a commitment for efficiency and for generating a lot of cash flow, which I think is a very target we have.

On the other hand, you can argue about the capital cost of Roche. And we looked at this and we agreed that seeing between 0% and 15% net debt on total assets might be a good area to be in, a good range to be in. And we are still far away from that and certainly a potential transaction with Illumina will increase our debt quite significantly once again and the whole deleveraging process is going to start again.

Pascal Soriot

Well, I think about talking about the balance sheet to a large extent. Look at our cash and the marketable securities that we have on hand roughly a CHF 11 billion not a major change to 2010 and look also at the equity ratio, some of you might remember, how the equity look like after the Genentech transaction. We are back now to 24% equity ratio in the 2011.

Networking capital and Severin mentioned it. At the beginning, well, cash is important to us. And so we have to take a look at the trade receivables. And when you look at the group receivables, the first point group receivables increased by 6% and from CHF 10.1 billion to CHF 10.6 billion and when you look at our sales growth, you would argue well, and there is a little bit to do and you’re right. I think that’s something we have to address.

The good message is when you look at the receivables in Southern Europe, and you might remember, yeah, when you look at the media that we have been a frontrunner addressing that issue and also implementing measures in Southern Europe. Well, I think because the crisis is a critical factor and which we have taken care of that. Then you see that the receivables in Southern Europe went down by 4%.

Admittedly, the Greek bonds that we got from Greece that we sold in the year 2011 helped to drive the development. But what we would like to bring across here is this issue is well addressed in the company, we work on this consistently, and we have really addressed all the customers, really to increase the cash generation coming from the receivable side and I can say increase in the last month. We had [higher cash incentive].

Illumina transaction, I think, in fact, Dan had said most of it. When you look at our offer, which is published now, I think you’re familiar with the US$44.50 per share and the total consideration of US$5.7 billion. We have started, we have the tender of a process Illumina has to respond in 10 business days and we also started the proxy process, so that’s done and you’ll find that in all the documents that we have published.

Well, the outlook. Well, this is a little bit of good housekeeping, because you have seen the impact that we have had from the Swiss franc and from the strengthening of the Swiss franc in 2011, which was very, very significant. It is just accounting, but nevertheless, I think crucial to understand our numbers.

This is a projection for 2012 [evolve] currencies remain stable. In the course of 2012, stable, I guess starting with the end of 2011. And you see it could be a relatively calm year in that regard, but let’s see, yeah, how it turns out?

Yeah, the priorities for 2012 go on improving the efficiency. I think operational excellence is still running. So less $600 million will be quite an uphill battle because rather to begin you have the low hanging fruit and the more you get going, the tougher it get, I think we are committed and the confidence that we can get the savings. But I think its quiet an effort.

And the other point is continued focus on the productivity improvements and certainly as said on the networking capital. I think I don’t have to talk about the pipeline. This is crucial and drives our business and I think this is really the basis of everything we’re doing.

The outlook for 2012, Severin went through it. I think once again, when it comes to the dividend outlook. It is directly, and we are committed you know that Illumina, and the Illumina transaction is not going to hit our effective dividend policy negatively.

And with that thanks a lot for your attention.

Unidentified Company Representative

Alan, thank you very much. With this we start the Q&A session here in the [Plano] and we have approximately 40 minutes to go here in the [Plano] before we split into the breakout session. Can I have the first question, please? Do we have a question? Yes, please, here in the middle.

Question-and-Answer Session

Unidentified Analyst

Hello, my question is about the Illumina acquisition. I guess, on a strategic standpoint, what would you say about the strategy of acquiring a company essentially doubling your Applied Science division, which as I could see in all of your divisions, the lowest margins and also these acquisitions that you proposed was in my opinion fairly high notables of strengthening are in sales back, sorry, earnings by (inaudible) or about, so what would you say about that? Please.

Severin Schwan

Certainly, I will reiterate that the offer which we have made Illumina is a very attractive offer. It is a compelling offer, which represents full and fair value, which creates value for both companies and of course reflects the synergy we can achieve by combining the two businesses as Dan has laid out in terms of our global footprint. In terms of our capabilities, we can bring in by transitioning this business from the research setting into the routine clinical setting.

As far as the business at (inaudible) is concerned we feel this is a very attractive business and it’s a very attractive business segment. As you have seen, Illumina has solid margins, it generates cash flow, it is a billion business already today, and we expect this market to grow over the future. It’s full and fair, but it is attractive I believe for both shareholders, the shareholders of Illumina and the shareholders of Roche. Dan, do you want to add something?

Daniel O'Day

To add to that a little bit, I would just comment on the importance of the life sciences business, to the fundamentals of what we do. Firstly, you mentioned the margins, I mean, I think what I showed up here was a slight decline in 2010 revenue sale to 2011. And the other thing about this business is, it’s very fast moving. I mean, if you look at the history of our Applied Science over the course of the past five years, we had very fast growth years and we had some slower growth years, because the technology changes very rapidly in this segment. It’s a very attractive business on its own and it’s also a very attractive business in terms of our model, because many of the new technologies go from the research setting into the diagnostics study. So it’s also above beyond its attractiveness, it’s also a very important strategic business for us, it’s allowed us to be first entry in the many diagnostics marketplaces, it’s allowed us to strengthen our diagnostics footprint around the world, it’s allowed us to have the largest number of technologies with our IVD customers. We look at it both as an important standalone business and an important business for a totality in diagnostics.

Unidentified Company Representative

Thank you, Dan. Can we have the next question please just in the back, you can have the mic please. Thank you.

Unidentified Analyst

Thanks. I had a question about Pascal’s comments about the austerity programs. With being behind you in pharma, I just want to make sure I understood that, your positioning of that, is that the austerity effects will be less than they were last year even in light of some of the new German reimbursement changes that have come on board.

Unidentified Company Representative

Pascal, do you want to take that question?

Pascal Soriot

Yeah hi, I guess you said experience, I’m not sure I captured this, so tell me if I don’t answer exactly your question. I think you’re talking about austerity measures in Europe and what we see moving forward. What I was trying to say is that 2011 was a pretty tough year in Europe from the point of price reductions across the board, across the industry et cetera, et cetera. I think, at least we are up out of the business, because I was not talking on behalf of the industry. I think for our type of products we will hopefully return I believe, to a more standards if I may quote it this way, a normal kind of momentum where we get some price reductions, but they are not as (inaudible) not as much as we have experienced in 2011. I think what you would see and you for instance, you see it in Italy you are going to see it in France and all other markets. The government is not going to impose on pharmacies for instance, like we do in Italy to dispense the lowest possible medicine of generic. In the U.S. that’s what happens all the time. In Italy, you can still sell branded generics at a higher price. So this is going to go and then, of course in this segment, there will be price reductions. We will hopefully experience lower price reductions. I think our biggest constraints for our business in Europe is going to be utilization control. We have had some of this; we’ll continue to have some of this where our payers would want to pay only for drugs and indications where value is demonstrated and so, we’ve lost quite a bit of our [flavored] use in Europe over the last 12 to 18 months not that we are promoting it of course we are not, but physicians in oncology go to the ASCO and as you know and they were using our drugs in number of indications, which they can’t do anymore because that has been stopped. So we’ve lost some of it and hopefully, Europe looks a little bit more stable for us moving forward, but still a very challenging market. I think we have to expect the whole market to be fled to declining in Europe in this year.

Unidentified Analyst

And just going back to Germany, is there anything…

Unidentified Company Representative

Germany, I think what you see is increasing focus again on payers demanding value for money. But what you see is really an increasing influence the quick in particular and the whole process of establishing value for money. That you’re seeing some companies used all their applications and there are few months because they saw they were not going to get the right pricing in Germany compared to other European markets, because if we can – and the government were actually looking at benchmark products competitive products they were low priced generics. So we are going to see more and more of this and we’ll see challenges to get around investments for new products for sure. I don’t expect substantial price reductions in 2012, as I can’t say today for our products.

Unidentified Company Representative

Perhaps to add on that, really here we come to fundamental question in terms of which strategic direction we are taking. I mean there is just no doubt that price pressures will continue not only in Europe across the world also in emerging markets. There is no doubt that governments somehow have to fix the household deficit and we strongly believe that especially in such times, you need to demonstrate value, and the only way how you can provide medical value all the time is by innovation by providing truly differentiated medicines, which prolong the life and which improve the quality of the life.

I do belief as the environment is getting tougher as patches are getting tighter even more so our strategy, our focus, research, science driven strategy, which goes for differentiated solutions will payoff, whereas companies who are in this middle between generics on the one hand and innovative products on the other hand, my prediction is they will disappear. People will simply not pay for marginally differentiated products. We will see a segmentation in the market of generic players, of course there will be demand for that, there is no doubt probably a few who have the economies off the scale to be really competitive, and you will see a number of big players and smaller players in the truly innovative field. But with the pressure increasing, this field in the middle, which used to be pretty big, I think will disappear overtime. If we can have the question here in the middle please, yes.

Unidentified Analyst

Thank you. I’ve got two questions. First following up on what you just mentioned brings up the theme of biosimilars, I know you’ve got a relationship with [Lamson], but perhaps you could speak to the opportunities in the [fractures] business relative to biosimilars and if all of your biosimilar effort is sort of in the along the basket. And then the second question on the diabetes with the Solo’s insulin pump, wondering what the gating factor is and having that introduced into the U.S market.

Unidentified Company Representative

Okay. Perhaps I can take your first question on the biosimilars. We don’t have any specific relationship with (inaudible), they are a supplier for certain ingredients, as they are for many other players in the pharmaceutical industry, but we don’t have a specific relationship with them in terms of biosimilars simply because we are not going into biosimilar. We have clearly stated that our policy is a continuous focus on our innovative medicine, however what we have also said is the dynamics in biosimilars will be different and therefore we fell confident that we can compete with our own products even then when patents will come off in particular of course for Herceptin and MabThera in 2014, 2015 in Europe as you know in the U.S. patents only expiring at the end of this decade.

Now what is our strategy here, clearly our fundamental strategy and there is no difference between biosimilars and generics. Is a focus on innovation on introducing the next standard of care? This is why pertuzumab has been so important and where CLEOPATRA was probably the most important, the one of the most important trial read out in 2011, because it allows us to move to standard of care in this case and HER2+ breast cancer setting. And that is what we are going to do for all of our other franchises. Perhaps for the diabetes care question Dan if you could take that?

Daniel O'Day

Pretty big so, so the Solo Patch pump is right now in the transits of being ramped up in terms of manufacturing. It was when we purchased Medingo, it was really a manual manufacturing we’re moving it into a highly automated large scale manufacturing process. We expect to launch it in Europe this year in some markets and then be filing up to the U.S. market later this year as well and it’s ready to be filed on the ramp up to it basis. Thank you we had a question on that side, please be in the middle, yes please.

Unidentified Analyst

All right thanks for taking the question. Just two quick ones on your Illumina offer. Have you spoken a lot of shareholders of Illumina have bought shares for prices greater than where the shares are trading out? Have you had conversations with shareholders and could you describe how those conversations have gone in order to have confidence in the 44, 50 offer? And then what’s the difference about this situation than your bids, your previous takeovers of Ventana and Genentech that give us confidence that you’re not going to increase your offer?

Unidentified Company Representative

All right again the confidence you should you have is that it is a practice that it is compiling 33% full and fair value to Illumina’s shareholders. We would not comment on specific conversions with shareholders. I think we had a question here on that side, is there any question here? In the middle please.

Unidentified Analyst

From the dividend payout ratio, you’ve had change in the way you viewed debt. Currently, now you’re comfortable keeping a certain amount of debt rather than be moving to the net cash position given the fact that you don’t have the option returning cash to shareholders via share buybacks and you got in notion to how much you need to spend to run the business. How should we think about the dividend payout ratio and now that you have caught up largely and can you go higher from here. What is the sustainable level be for the business?

Unidentified Company Representative

All right, we wouldn’t give a specific guidance on the payout ratio, but I guess I’m repeating myself. What you should be confident about and this is what we reiterated over the last two days is that in spite of the Illumina transaction. I think that was a concern and the community. In spite of the Illumina transaction, we will stick to our attractive dividend policies. You can fully relay on that. And as far as Illumina is concerned, a size of, a transaction of this size we feel very confident to finance at attractive conditions. Without jeopardizing, the baby has taken in terms of dividends. Yes please can we have the question here and then, if we started you and I’ll get to you next.

Unidentified Analyst

Still with complicated signs, you haven’t many, many products, sell products in many courtiers you deal with lots of regulators. The question is, when there can only be one CEO, the question is when does the complexity of the organization and the tasks takes themselves becomes self defeated?

Unidentified Company Representative

You see this is an interesting question you ask here because I keep saying that this complexity, the complexity on the scientific font and the complexity on the regulatory form is probably our biggest competitive advantage. If it works so easy, if everybody could do it, I think we wouldn’t have to advance such as we have due to the size of our organization, due to global reach of our organization and due to the know how we have in organization.

And of course, one of the core strategic process we have is that as we better and better understand the complexity of diseases is notion of combining the strength of pharma and diagnostics we get more important. And we believe by having those capabilities in house, we have a cutting edge especially on the early part of the value chain in research and early development because we can freely work together.

We can just focus on the science itself. Our scientists from pharma and research can come together and they can try to get it to mark with the complexity of science. We do not have to worry about an additional complexity many of our peers have, and that is setting a complicated contractual relationships to protect their know how, to protect their IP, to protect the confidential data at the very early stage.

So I believe actually the complexity, which you describe absolutely, accurately. Complexity is if anything only increasing. I think this is actually a strategic advantage, we can belong. Thank you. We have the question in the next row please. Thank you.

Unidentified Analyst

Thanks for taking my question. Given our rapid the product cycles are in the Illumina business. How much consideration are you giving to the ability of the Illumina organization to continue its technology leadership? Are you giving any consideration at all in the offer?

Unidentified Company Representative

Giving any consideration, I acoustically didn’t.

Unidentified Analyst

Oh or how much consideration are you giving to the ability of the organization and Illumina to continue its technology leadership?

Unidentified Company Representative

We have a lot of respect for Illumina. The management and the employees of Illumina have an extraordinary track record in fielding this leading position. In sequencing they have over and over again proven their capabilities, also their capabilities to progress the technology in a fast changing environment.

So for us, it is very important that we can integrate the capabilities of both Roche and Illumina. And for us it’s very important to signal to the employees of Illumina that we count on them when we combine the two organizations. That is also the very reason why we have already announced at this early stage that our intention is to consolidate our headquarters for the life science business in San Diego at Illumina.

Thank you. Are there any additional questions? Yes, in the back please.

Unidentified Analyst

A question for Pascal. Just you were talking about a change in tactics for the Indian market, I was just wondering if you could maybe outline some of the different approaches you are going to use in that market?

Pascal Soriot

Yeah, thank you. It’s, the Indian market is a very interesting market. It’s of course big, it’s a growing economy; it’s a big country. The problem in India is the pricing, and of course the population cannot access medicines very easily. Our business has been very successful but too small, and the problem is we can’t steady that. We can’t steady that because, I mean it would be too complicated to (inaudible), but we rely on a number of issues regarding transfer, in import duties et cetera that limits the volume overall. So we need, and also our prices are certainly too high for the Indian market. So we need to change the model.

And what we’re going to do is we've entered into a partnership with a local organization, we’re going to do late-stage manufacturing locally, and we will adjust our price very substantially and we’re going to do this with different brands so that we don’t have to cope with exports from India to the Middle East et cetera like you often see. And so our intent is really to locally manufacture, adjust the price which we believe will give us access to the public market and we have good indication, it will be the case.

It would also increase our penetration in the so called (Inaudible) pocket market and we will expand our commercial investment. So we’ve been working on this over the last 12 months. The local manufacturing as you can imagine is probably a big effort, so we have a team of people there that have been working there for the last few months.

And then the plan is really to expand the volume very substantially and there is a lot of room for that and.

Unidentified Analyst

Can you say who your local partner is?

Pascal Soriot

Yeah, sorry this is a company called [NQO] locally in India.

Unidentified Analyst

Sorry.

Pascal Soriot

[NQO].

Unidentified Company Representative

Thank you.

Pascal Soriot

Do we have other questions? Yeah, yes please.

Unidentified Analyst

Please explain the (inaudible)

Pascal Soriot

Perhaps, I give you a first answer and then please then if you could comment on this question as well, there is a big difference between pharma and diagnostics. If you’re on the pharma side and you need certain technology say sequencing to do your research. Then you buy in any technology, which is out there in the market and the technology which best suits you to do your research.

So you don’t own, you don’t need, from a pharma point of view, you don’t need to own the technology, you just need access to it. And given the competitive landscape out there it’s certainly no need for exclusive access from a pharma point of view.

Avian Diagnostics is a different, because if you’re in the diagnostics industry then you offer a diagnostic instrument, the diagnostic platform on which your test are running. You cannot go out and say, can I borrow your platform to run my test on your platform, that’s not how it goes. These are typically in the regulated field, in the regulated field these are typically closed systems. And there is a lot of software around it and service around it, you sell a package. This is likely if you would sell, let me use this as a knowledge, this is if you would sell a car, and then you say, buy the engine somewhere else, doesn’t work.

In our business, you need the technology as part of you offering, its physical, you can touch it. And only if you have the technology then you’re able to provide this broad range of diagnostic test because for various human samples you need different technology. If you have tissue you need a different technology. If you have black serum to measure protein, you need a different technology. If you have DNA, you have a specific technology. If it’s a complex biomarker you again need a different technology compared to simple biomarkers. So there is difference between pharma and diagnostics. In the pharma space you just need access to the technology to do our job. In the diagnostics space you need the offering and that complete offering provides you with a competitive advantage in the marketplace, Dan

Daniel O'Day

Just maybe to add to that because I think it’s a nice overarching look at it, I would say there were two other comments I’d just make in relation to your question. One is the pace of technology evolution and sequencing. I mean it has been rapid, particularly in the research setting. It is important to look at multiple variables not just cost.

But I mean everything from workflow to the accuracy rates to the throughput of the systems, all of these things I think need to be looked at, it’s certainly something we have looked at very, very carefully. We have our own sequencing technology and expertise in-house. And we really believe that it is important to stay ahead of the game.

The second thing is when it goes into the diagnostic setting; it has been different competitive barriers to entry. The research setting and diagnostics setting have different competitive barriers to entry and the research [branded] it is very technology based.

When you get into the diagnostic space then you have, its gets back to what Severin was describing before. You have regulatory hurdles, you have the ability to distribute globally and it’s not so easy once you get an IVD diagnostic product for others to follow. You need access to clinical samples. I mean there are many, many hurdles there that work in all of our businesses to allow us to constantly discriminate our business and not constantly come down to lowest price point either because you have different competitive areas in those business.

And ownership I think is quite critical to making sure that you can amortize that and move that quickly into the IVD space so that you can also create these barriers in the mid to longer term, which is what we intend to do as well.

Unidentified Company Representative

Thank you, Dan. We have another question here on that side and then I’ll come back..

Unidentified Analyst

Thank you. I assume the Ilumina deal is not a must do deal, can you maybe talk to us about what you plan will be if you cannot get the deal done?

Unidentified Company Representative

Again, its attractive, it’s compelling and because it is attractive and because it is compelling I am confident that we will close the deal. We had another question just two rows further ahead, yes please.

Unidentified Analyst

One pertains to your dividend, you had said that you have been keeping your attractive dividend policy can I interpret that to mean that you will be potentially increasing your payout ratios by 200 to 300 basis points, as you have done in the last four to five years as a oppose to just increasing the actual amount?

And the second question pertains to diabetes care, I was kind of curious on that front, what are you seeing in the U.S. because in 2012, are you expecting a market recovery in addition to your new product launch to help your recovery?

Unidentified Company Representative

On the dividend policy, Alan, if you can give it another short

Alan Hippe

Yeah, well I think that also lead a little bit to reiteration that we have had already today in other subject, admittedly. But look, I think when you look at the payout ratio here and I cannot give you more comfort than what we have said, but look I think the company has increased the dividend for 25 years in a row. I think that it is clearly a track record.

And the other point, if you see the payout ratio went up quite significantly from 51% to 55% and look we have given in the year 2011 a guidance that say to grow the dividend inline with core EPS growth. If we had done that that would have meant that we have to decrease the dividend in fact, here if you take out really the currency effect that we have had.

So I think really we are quite flexible yeah when it comes really to when we look at the dividend and evidently yeah, we are committed here to attractive dividend policy as we have said a couple of times. I think that’s the only way I can frame it.

Unidentified Analyst

Thank you. Dan, on Diabetes.

Daniel O'Day

Diabetes Care, on Diabetes Care, there are a couple of dynamics going on in the U.S. market place. I mean clearly diabetes continues to increase in the United States and on many markets around the world, so you have the prevalence increasing. And then you have two markets in Diabetes Care. You have the blood glucose monitoring market and you have the pump business, the insulin pump business.

Now in the blood glucose monitoring, clearly in the United States the pressure continue, price pressure continue. There are foreign competitors coming in that are working in the Medicare space and causing continued pressures on prices. So these two I think, to a certain extend will continue to play against each other in the market in the United States.

In the mid-to-longer term, the ability to differentiating Diabetes Care, I think will come clearly from innovative pump devices connected with glucose devices eventually also with continuous glucose monitoring. The ability to really differentiate from a healthcare standpoint, because we know that Type I diabetics are better managed with less events, when they have pumps and [meters] and frequency of testing going on.

So I think that more and more that we can connect those systems together to differentiators just within the U.S. and around the world that’s really one of the key levers that we have within Roche and we’re the patch pump to the previous question while becoming inter-component to that in the midterm as well.

Unidentified Analyst

Thank you. There was a question in the last row.

Unidentified Management Representative

I have a question for Pascal. Couple of days ago you’ve had a – you mentioned that if Pharmasset or Gilead 7977 had good results in genotype 1, it could be a game changer. It looks like we got some glimpse of, what could be a game changer in my opinion. So just curious what your take is on that and if it’s indeed very effective in genotype 1, what’s your backup plan?

Unidentified Company Representative

Yeah, I said that just to them, they still come by what I said. I guess what you’re referring to is the announcement yesterday made by [Gottlieb]. I think we still need to wait to see the full set of data. I don’t business of data. I think they look pretty good, no question about it. But what they presented or what they described I should say, as I understand it, because it was a confront score as I’m told, what they described is RVL four weeks RVL data, so they are not SVL data, that’s a big difference, and those patients are four weeks into treatment.

They are not finished their treatment. We have had experienced assays with medicines that they develop good RVL data, and weaker SVL data. So we still need to see what the SVL 12 weeks look like which would be presented that is all. And I think they also said, they would present SVL four weeks early March of (inaudible). That’s what I can say. We need to wait till we see this SVL data.

7977 looks like a pretty competitive product, no question. And if you need the SVL, 12 weeks are pretty good. It will be probably a game changer. In some countries, I would say, in the United States for sure, where across this, probably less of a limitation, we will also have to see by the way how this SVL data look like and genotype 1a and 1b, because as you know, those are very different genotypes and 1a genotype is more difficult to treat. So still a lot to see, but in the U.S., it would be a game changer. I think in many parts of the world, and I’d like to remind you that our Pegasys sales essentially come from non-U.S. sales, because mast hepatitis patients are outside the U.S. and outside Europe actually. In the rest of the world, I believe, there would still be a place for Pegasys-based or peginterferon-based therapy because of cost reasons.

We see that a little bit in Europe too by the way. And those payers that are cost-sensitive would still want to go with a cost-effective regimen and still accept Pegasys. And then beyond this, I think we’re working (inaudible) on a variety of combinations based on all agents. We have more data to share about these all. We have more data to share about the SLV at the end of the year. And I really think, we need to wait until the end of the year when we have more data with variety of products in development from our peers in the industry from our own portfolio. By the end of the year, we’ll have a better view and be able to tell you more in terms of our long-term biology strategy. And that’s I guess what I can say at this point.

Unidentified Company Representative

Thank you, Pascal. Question here please.

Unidentified Analyst

Thanks. So, based on your answers and your discussion about sequencing and it ties to diagnostics market. It sounds like the desktop sequencing market is really where you see a lot of potential down the road. So what is this actually mean about your view of the high-end sequencing market? Do you believe that big box placements are essentially saturated and essentially this one is setting on a future adoption of the high end of the market today?

Pascal Soriot

Dan, if you can directly take this one please.

Daniel O'Day

Sure, absolutely. I mean, I think there is a certain saturation level at the high-end at this stage. However, I mean, I think, the research community, the clinical community is catching up with that capacity. I think more and more we'll see more clinical trial samples, eventually clinical samples going into these centers. So, I certainly don't believe in anyway, we've compensated growth in the high-end genome centers. In fact, there are many countries around the world that are looking into investing in their own additional genome centers that are untapped market today.

Beyond that I agree with your concern there. I think another great opportunity, and this is to get into the best of sequencing, really to make sequencing available to first of all researchers around the world in small to medium-size labs. And this is again, where I think the combination of Illumina and Roche can immediately take advantage of that with the distribution mechanism we have and the complementarity nature of our portfolio.

And then in the longer term, I think the mid-to-longer term going into the clinical setting with the instrumentation will, I mean that is something I think it's not even begun to be tapped yet. And I think there is tremendous potential for, frankly both analyzers in the clinically setting but probably more and more frequently we would see the MiSeq use in that setting like this.

Unidentified Company Representative

Thank you. Can we take one more last question before we start splitting up in the breakout sessions. Yes, please.

Unidentified Analyst

Just one more question for Alan Hippe. At the end of your presentation you discussed the debt leverage of Roche. And you shortly mentioned that will get with and in your acquisition side that level would go up again. I understand what that was the Illumina acquisition that would go up to 33% or about. So in the future, my question is, do you think there was any chance that dividends would be lowered even temporarily in order to fasten the repayment of any such debts?

Unidentified Company Representative

Look I think we have, I think I cannot answer the question really precisely but we are seeing very clear yeah that the Illumina transaction is not really hitting negatively our attractive dividend policy. So I think that’s very clear to the point in my opinion. While there’s a number, the ratio that you are providing here it’s a little bit of a guessing but certainly it will be higher than 25% and will go in that direction. Therefore, I think that’s the point, but I said I think we are saying Illumina is not really hitting negatively our attractive dividend policy.

Unidentified Analyst

I’m sorry my question wasn’t about Illumina in particular, but more about the dividends and wherever it goes, could go any lower at some point because of your net debts?

Unidentified Company Representative

Let me put it into perspective, only recently we took another $48 billion on our balance sheet and you have seen what we did on our dividend policy. Dividends were increasing pretty solidly and payout ratios were being increased from the 40s into the mid-50s. In a period when we took $48 billion on our balance sheet, so you shouldn’t worry that a couple of years later when we had paid off already $20 billion and when we would add another $5.7 billion on the balance sheet, that that would negatively influence our dividend policy.

Let’s of course this is a very big amount, don’t get me wrong but we also have to put it into the context. And the context is the cash flow generation of CHF14 billion on an operating level and I encourage you to see it in this context. But don’t worry about our dividend policy.

Unidentified Analyst

All right, thanks.

Unidentified Company Representative

Good. With this, I’d like to conclude here the session in the plenum. Helen and myself we will stay here in this room. Thomas, can you give us the logistics. Can we have the mike to be sure that everybody finds the right room; Thomas, please?

Okay. Thank you very much. Have a good day.

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