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Executives

Severin Schwan – Chief Executive Officer

Pascal Soriot – Chief Operating Officer, Pharmaceuticals

Daniel O'Day – Chief Operating Officer, Diagnostics

Alan Hippe – Chief Financial and IT Officer

Karl Mahler – Head of Investor Relations

Analysts

Sachin Jain – Merrill Lynch

Amit Roy – Nomura

Andrew Baum – Citi

Roche Holding Ltd. (OTCQX:RHHBY) Q4 2011 Earnings Call February 1, 2012 1:00 AM ET

Severin Schwan

Good afternoon ladies and gentlemen. 2011 has been a very good year for the Roche Corp, both from a financial point of view, but also in terms of the significant progress we’ve made in our late stage pipeline. Let me get directly into the overview of the financial results. We achieved all our targets we have set ourselves at the beginning of 2011. Overall group sales were up by 2% at constant rates, Pharma, up by 1% in spite of the expected decline of Avastin in the metastatic breast cancer indication in the U.S., diagnostics again outgrowing the market with an increase of 6%, primarily driven by our immunology business and also by our strongly growing tissue-based diagnostics.

Operational excellence is fully on track. We delivered 1.8 billion Swiss francs in savings as expected and as announced one year ago; core EPS, up by 11% at constant rates and based on these results, the Board proposed a dividend increase of 3%, which in fact is the 25th consecutive year of dividend growth. One year ago when I presented here, I stressed that on the one hand, we are going to continue to drive innovation and growth to drive our pipeline, but on the other hand, we have to equally work on our productivity.

So let me quickly show on a high level where we stand after one year, and let me start on the efficiency and the productivity side. Again, we have increased our operating margins. We now stand at 36% relative to sales and as you can see on the following slide, this is very much linked to our operational excellence program. You can see that we lost 600 million due to healthcare reforms in the U.S. and Europe, also Japan. We lost over 1 billion due to the expected decline of Tamiflu of Avastin metastatic breast cancer and also the patent expiries for Boniva and CellCept.

We had an underlying profit growth of about 1 billion and you can see that we added another 1.8 billion due to the Operational Excellence program. So that has been key, that has been crucial to achieve the results we achieved in 2011.

As to the dividend, as I said earlier, the 25th consecutive year of dividend growth, an increase of 3% in spite of the strengthening of the Swiss franc and that represents a payout ratio of 55%.

Now let me switch to the other dimension, driving our pipeline. And it’s been really an impressive year for Roche in terms of pipeline progress. Just to give you an overview here, we had 20 late-stage clinical trials leading out in 2011 alone and 17 of those delivered positive results.

So that is really outstanding, not only from a Roche perspective, but I think also from an industry perspective and that of course spills over into our late-stage pipeline. We have now 12 new molecular entities in our late-stage pipeline and we made very good progress in 2011. In fact, we filed three new molecular entities: Zelboraf malignant melanoma, Erivedge, we just got the approval in the U.S. two days ago for basal cell carcinoma and we filed pertuzumab in breast cancer with very impressive data and Pascal will in a moment give you more details in particular on those three filings.

Also worthwhile to mention is that six out of those twelve new molecular entities that is half of our pipeline is now developed in combination with the diagnostics, with a companion diagnostics. So personalized healthcare is now really moving from the labs to the patients. It’s getting reality and certainly, the highlight was the launch of Zelboraf last year, which was launched simultaneously with our BRAF test from the Diagnostics Division.

Let me just share a few words on the proposed Illumina acquisition. One of the key success factors in diagnostics was the most important reasons why we have outgrown the market year-over-year over the last couple of years is the complete solution, we can offer to our customers. We can provide them a wide range of diagnostic tests based on a number of different human samples. And in order to be able to provide this wide range of tests to our customers, it is important to have the key technologies to perform those tests.

Now we work on those technologies of course, internally we have developed many of those technologies in-house, but if you look back over the last 20 years, occasionally, we have acquired key technologies to get them in-house and to build our platforms and our portfolio.

So in the beginning of the 90s, we bought the PCR technology, which is today the basis for molecular testing. So there were no tests at the time. Today, this is a multi-billion segment and we continue to be the leader in this segment.

Later on, we bought [IHN], which is the basis for our growth in immunology with the ECL technology. As you know, we have entered tissue-based diagnostics a couple of years ago with the Ventana acquisition and we do believe that gene sequencing will be one of these key technologies as we move forward to be this provider of a complete solution for our customers in diagnostics.

So let me now conclude with an outlook for 2012 and let me start on the sales side. Really, the message here on this slide is that both for Group and for Pharma, sales are going to accelerate again as we go in to 2012. There is a base effect on Avastin of course. We expect continued growth in diagnostics in our key franchises in pharma and of course, we have a number of product launches, Pascal will touch upon in a moment.

We will equally continue to work on our productivity. There is still another 600 million to go in terms of operational excellence. So we achieved savings of 1.8 billion in 2011 and we intend to increase this on an ongoing annual basis to 2.4 billion for 2012 and this is exactly in line with what we announced already in 2010 and we are fully on track to achieve that.

So with this to conclude, sales growth expected to be in the low- to mid-single digits on the Group and on the pharma level diagnostics again to outgrow the market, operational excellence savings as I said of $2.4 billion and we intend to increase our core EPS in the high single digits.

Let me also state very clearly that we will continue our attractive dividend policy and I emphasize irrespective of the planned Illumina acquisition. So on this positive outlook, Pascal if I may hand over to you for Pharma.

Pascal Soriot

Thank you Severin. Good afternoon, it’s really a pleasure to be here. About a year ago, I think I stood here at this very place, I think I saw you were sitting almost in the same seat in fact and I was telling to you about 2010 and the setbacks we had in the portfolio and I was trying to tell you the pipeline looked good and the future was good, but of course, we didn’t have much to show for it.

So hopefully, you’ll agree with me, we’ve made tremendous progress with that pipeline. I have to say though 2011 was still a transition year. I think we made enormous progress as Severin just told you a minute ago, as far as the portfolio for raising our pipeline; there is more to come in 2012 and beyond. It was also a transition year from a sales viewpoint.

We had to deal with Avastin breast cancer; we had to deal with the remaining decline of Tamiflu coming from the disappearing pandemic sales. We had a couple of patent expiries still with CellCept, with Bonviva. We had the Japanese earthquake that impacted our Chugai friends in Japan. So quite a number of events we had to manage and also of course, very much to the austerity measures throughout the world, but particularly in Europe.

So if you look at sales, you’ve seen the press release, you won’t be surprised here. Now this is the reflection of this transition. We grew by 1% overall. I have to say we are in line with the market. We just have to accept that until two years ago, we had a pharmaceutical market that was growing by 10% a year and now we’re talking 0% to 2%. So 1% is very much in line with the market.

The U.S. grew by 3% based, Western Europe declined essentially because of the austerity measures, price reductions, but also very much through utilization controls, and Japan was impacted by the earthquake as I said, in the international markets actually grew quite nicely. In fact, in Brazil, in Russia, in China that are the three biggest emerging markets that we focused on, we actually grew faster than the market; in many cases more than twice the market growth rate.

The good news is that in the quarter four, we saw an acceleration of our growth rate. As you can see here, the impact of the austerity measures in Europe is starting to decline a bit. We still experienced negative growth, but better than the previous quarters and you’ll see here, an acceleration in the international region and the United States, as we leave behind as the effect of the Avastin breast cancer decline.

As you look at it on a product level, it is quite striking to see the impact of the international markets on Herceptin, as you can see here in blue. Those markets represent the majority of the Herceptin growth. And it is exactly what we told you about a year ago, we wanted to achieve through various strategies, in particular pricing, increasing access, et cetera, and you can see here that it is starting to pay. Not surprisingly, but suddenly, the decline of Avastin is very substantial here, 600 million mostly due to breast cancer again, because in colorectal, we did quite well, we are stable, modest and in lung cancer, modest, stable as well. So essentially breast cancer impacts here.

What I should tell you, you can see a nice continued growth for Actemra. You don’t see here on this slide Pegasys. Pegasys was declined slightly in 2011, but we had growth in the quarter four, in particular on the U.S., as we started the combination therapy promotion and we expect more growth for Pegasys in 2012.

The P&L, Severin has commented on it from an overall company viewpoint and what you see here for pharma reflects very much the corporate picture. We certainly managed our costs very actively in 2011. The impact of the operational excellence program was very substantial on our M&A cost, but also R&D and cost of goods.

In fact G&A declined as well. At face value, we see an increase, which is the excess tax. The reality is that G&A declined by 6%. If I look at the main franchises now, first of all, oncology of course, MabThera and Herceptin grew and both of those were very substantially, as I said earlier, are influenced by the emerging markets in particular, Herceptin and I would come back to this a little bit later when I talk to you about the emerging markets. Herceptin is also fueled by a new indication, gastric cancer. MabThera/Rituxan still influenced by the maintenance indication and the uptake in CLL.

The Avastin decline I have commented on and you can see also quite nice growth for Xeloda and Tarceva. Xeloda very much influenced by the emerging markets, China grew tremendously. We also had some help in the United States linked to insufficient supply of [five issue] in the marketplace.

Lucentis grew by 23%. In fact what is interesting to note maybe was, Lucentis is that in AMD, our share declined in the first part of the (audio dip) and in fact in quarter four, our share of patients was higher than quarter three. So we experienced an increase in share. I mean we had the initial effect of the [custody], which I think we managed pretty well in fact. And after the events that surrounded the – in September, it surrounded these eye infections, suddenly, we saw an increase in our share of AMD.

The [AVEO] share development, you can see it here in quarter four. We also grew over versus quarter three by a lesser extent. As far as 2012, our expectation is that we will grow through DME, of course, but that will only impact the second half of 2012 and we will be negatively impacted by VEGF-Trap in AMD and to a lesser extent in AVEO.

Actemra, we have made pretty good progress throughout U.S., Europe and the rest of the world. In U.S., we are still without the first line indication. We just filed in December as its rate down here and as soon as we can get the approval for that indication, we believe it will make an impact, because we would be able to promote that indication of course. We’re looking forward to the head-to-head (inaudible) results and we plan to file the subcu formulation, which is a very important development for Actemra in particular in the U.S. market as you all know.

Now the most exciting product we told you is the portfolio and I must say it doesn’t happen to many of us in industry to have so many products to launch in such a short period of time and we’ve launched Zelboraf in the U.S. We are looking forward to getting approval in the EU and launching it and everybody is getting ready for this.

We just got approval for Erivedge. We have to change the slide the last minute because we got it [very small] and we knew we could get it there Erivedge, because we’ve got approval for advanced basal cell carcinoma, which is a pretty good label in the U.S. and our shareholders’ meeting in Las Vegas this week and as you can imagine, they are very excited and they want to go home and start promoting Erivedge, which they will do as of Friday and next week. And we filed pertuzumab in the U.S. and Europe and hopefully, this is a launch for the second part of 2012, at least in the United States.

In the U.S., Zelboraf started very nicely. We have together with accolades from diagnostics; the U.S. teams have done a tremendous job actually establishing the testing of BRAF. Our test did extremely well and 61% of patients have now been tested and of those that are tested positive, if you remember, over 50% of melanoma patients are BRAF positive. So of those who have BRAF mutated, so 78% receive BRAF already. So tremendous launch and very exciting results so far for this product.

Erivedge and this is basal cell carcinoma, as you know is a terrible disease, I mean if your are metastatic of course, it is really bad, but even at the advanced cases that are not yet metastatic really representing a terrible disease for patients who have no options. And those patients who are no longer candidates for surgery are really in a very difficult situation and Erivedge would be a very nice, a new option for them.

As you can see here on the left hand side from the top to the bottom, the effect of the drug on these tumors can be quite spectacular and some patients have experienced 100% response. You can see here, we estimate it’s a very difficult estimate actually to make I must say, but we estimate that there’s about 20,000 patients who are potentially benefiting from this product in Europe, Australia and United States.

And finally, pertuzumab, I know you’re very familiar with these products and you realize the significance of this data. But just let me just remind you six months of PFS benefit is really substantial in a metastatic setting when we introduced Herceptin on top of chemotherapy, Herceptin brought six months of PFS benefit and we know what that meant to patients in the adjuvant setting. we’ve saved thousand of lives of women with HER2 positive breast cancer treated in the adjuvant setting and we basically hope to be able to do the same always, pertuzumab in combination with Herceptin.

We have, as you know a study that is ongoing in combination Herceptin/pertuzumab in the adjuvant setting that hopefully will be positive and certainly, we expect to have same impact on breast cancer with pertuzumab than we had with Herceptin, it’s a very, very substantial benefit.

I may say a few words about the emerging market. First of all, you can see here we accelerated our growth rate in the last couple of years. We are growing by 13%, 14%. A couple of notes here as I said before, in China, Russia, Brazil, we are growing faster than the market, in some cases twice as fast as the market. So the people who actually doubted that our portfolio could succeed in those countries, because of the nature of our products and the price of our products, hopefully, those people will now agree that we can succeed with innovative drugs in those markets.

Maybe another comment is, you can see here, India is relatively small. We’ve had a very successful, profitable business in India, but too small. And what we are now doing, planning to do is to expand it. We are planning to partner locally to manufacture the late stage manufacturing of Herceptin, MabThera and Pegasys. We will adjust our price and increase our promotion and certainly, hope to grow our volume and assets in India.

And in China, we’ve also expanded tremendously the sales force. Growth rate was in excess of 30% last year. So just to say a few words about what are we trying to do; because I know sometimes people get a little bit confused as to what it is we’re trying to achieve in the emerging markets. First of all, I think it’s important to understand that in many of those countries, there are really kind of two or three segments.

In the western world, in Europe, essentially there is one segment, which is the public market, the drug is reimbursed, own out by the government and that’s it. In many of those countries, you have a public segment that exists. You have an out-of-pocket segment that exists and you have private insurance; private insurance segment that exists. And this is a schematic representation, as you can imagine those three segments were addressed dramatically from one country to another.

In China, the out-of-pocket segment is very big. We hope to grow the private insurance segment. In Brazil, private insurance is bigger. In all of those markets, the public segment is very large potentially. But we haven’t really penetrated that segment very much with our products. We have penetrated the private market and we penetrated some of the out-of-pocket market, but there is still a lot of room for us in the public segment.

So what are we trying do is create a private insurance market and we have them wayward in China for instance, 1.4 million policies issued in China around catastrophic illnesses, very much cancer actually and very much influenced by us and the effort, our effort in this private insurance segment. And of course, also we’re trying to get into the public segment and shrink the out-of-pocket segment, which is of course, more difficult.

So what are we trying to do there? First of all, I mean the first thing is that there is a wide range of activities or options depending on the product, the country we are in. So there is no one thing I can tell you that we do that works everywhere; the world is very fragmented and so we have to adapt to every country.

But for instance, we have Patients’ Assistance Programs. in China, we’ve launched that in August last year and essentially, patients pay for the first few months of treatment and we give them the following few months of treatment for free. And the reason is, typically they take their drug and then they stop because they can’t pay anymore. And so we now will help him complete their treatment.

We have another option, which is to create is to launch a second brand to access the public market at the different price point. I know it sometimes sounds a little bit contra-intuitive that you could have the sample of product in our country with two brands at different prices, but in many of those countries, it is possible to do.

And finally, I have got here what I would call the Tailored Models, which is a wide range of things, for instance in the Philippines and Morocco and a number of countries. We actually price on the basis of income. So we do income tested pricing. So you pay different prices according to your income level.

So this is China, for instance, we launched this program in August and you can see here that the increase in the number of patients is very substantial after we introduced that program. And essentially it is because physicians are less reluctant to initiate patients, because in many cases, they saw that if the patient takes the drug for four-five months and then stops, in many ways, they have wasted their money, because they don’t get the full benefit and now they’re initiating more patients. So we have seen a very substantial impact, tremendous growth of our Herceptin surge in China last year. Pegasys is example of a second brand in Egypt. It’s a small example, but Egypt is very substantial country for us for Pegasys.

And you’ll see here the introduction of the second brand called Pegferon that is targeted exclusively the public market, the government and has generated tremendous amount of additional sales and lots of volume and of course many more patients being treated for their hepatitis.

Let me conclude with this table that shows you the major news that we expect in 2012 and it will be through 2013. I won’t go through every single project here, but just like to give you a few thoughts. First of all, we started very well. You see we have succeeded with TML. We had pretty good results with that study. And I think that study will actually influence Avastin not only in colorectal cancer, but potentially also influence the perception of Avastin and its efficacy and Erivedge got approved.

So you can see here, a large number of potential good news for our 2012. The approval of Zelboraf in the EU of course; T-DM1, is in the second line setting, but those data will be really critical. Herceptin, two-year data will be critical. The subcu programs for Herceptin, MabThera will be critical and also Actemra subcu will be an important one. So you can see here also, potentially a lot of opportunities for us to keep building the strengths of the pipeline.

Thank you very much. Daniel?

Daniel O’Day

Thank you. Well, good afternoon everybody. It’s a great pleasure to see so many faces that I also saw here at the Diagnostics Day in September this year. So I know there is a real diagnostic expertise in the room now. So I can accelerate right through these slides.

But it is a great pleasure to show you what’s happened since September as well. We had a very strong year in 2011 in Diagnostics. You’ve seen the results, but we grew at 6% overall in the Diagnostics business, in a market that was growing 4%. I’ll remind you again, we’re the world market leader in Diagnostics with slightly over 20% share and the next competitor at 12%.

So you can see each business made contributions particularly in terms of the progression of their portfolio and I’ll talk through each one in a bit of detail. But the Professional Diagnostics business, our largest business and Tissue Diagnostics were the main drivers of the absolute growth amount as well.

I’m pleased to say as well, also with some encouragement from all of you, we continue to increase our margin performance as well in 2011 with the 14% improvement in the core operating profit margin brings us to 22.4%, which given the mix of our businesses is clearly at the top-end of the range for margins in this industry.

We continue to focus on our efficiency programs within the division and I’m particularly pleased with the cost of sales line here, because it’s something we’ve systematically been looking at in terms of how do we drive a sustainable cost of sales that goes slower than the sales line.

And that allowed us also to do some disproportionate investment in some of our growth lines, the R&D line, the M&D line to drive some of our new launches and some of the exciting projects in our portfolio as well as and I’ll get to it, three acquisitions that we did in 2011 are also contributing to some of the growth in those lines.

Now just to give some context of how we’ve been growing vis-à-vis the markets, I could go back four or five years and the trend would be similar. But systematically, we have then quarter-by-quarter growing faster than the marketplace. The quarter four is an estimate of around 4%. We think the full-year for 2011 will be around 4% compared to our growth of 6%.

And one of the ways, we were able to do this is obviously our large economies of scale out there. We have the largest footprint of instruments of any company out there. We are operating in more than a 130 countries and we are able to supply to that large instrument base more than 60 new assays and instruments that were launched in 2011; just to give you an idea of the magnitude of the number of new assays, high-medical value assays that were launched on those instruments and are driving both our sales and our margin mix as well as we move forward.

On the regional side, we grew at or above the market in each one of the regions around the world. They obviously have different dynamics. In North America, we grew at 4% and I will get to this in a little bit, but actually we had been waiting for some product approvals as you know in Diabetes Care in North America. We now have those, but they came at the end of the year.

So, actually our North American Diabetes Care business declined by around 4%, the rest of our business actually grew by 7% in the United States, which is well above the market. And particularly in our professional diagnostics business, we grew at 9% or continuing to grow and capitalize on market share in our number one business in North America. So there is some good momentum in North America and I’m convinced also with Diabetes Care, we’ll continue that.

EMEA, obviously the largest region was the story of different countries with different challenges. Clearly, we had some countries that were significantly challenged by the economic environment, others that grew quite nicely. But overall 3% was a growth above the market in EMEA and it also contributed to our growth.

Japan in a year that was clearly challenging, I hope that most challenging year for Japan that I will see in my lifetime. The market growth was around flat and we grew at 6%, which is a real tribute to the team there.

Latin America at 15% and then that Asia-Pacific growth at 17% just to give you a little more color to that. We’re by far the number one company in Asia with a 23% growth and one of the countries that’s really fueling that growth is China.

And you can see here, I wanted to give you some perspective over the past five years, five to six years. We’ve grown two times the market growth rate there, a CAGR of 36% over those five years, and I firmly believe that with the continued spend on infrastructure in China, we can continue to have significant growth.

In fact when we look at our plans for the future, we look at taking our installed base, which is in the larger cities in China now to more than a 150 cities that have more than a million populations per city. So there’s plenty of expansion potential opportunities in China. We are doubling our workforce at a pretty steady pace there and I think there is still a lot of exciting growth out of China as we move forward that will also contribute to our Asia-Pacific growth.

So that’s the regional look. If I just focus a bit on the businesses, Professional Diagnostics as Severin mentioned 9% growth. The immunoassay portion of that business is more than a 2 billion Swiss franc business grew at 13% last year. And if you look at the past 10 years, it has a CAGR of around 13%; continue to have innovation of new assays on those tens of thousands of instruments out there in immunoassay. It’s really a strong business model and it’s also one that we lead in today.

Diabetes Care, we had strong growth in the emerging markets. We had the slight decline in North America like I said before. But the good news is new products now coming through to the North American market. Molecular Diagnostics where we are the world leader there grew nicely in virology. We had some exciting new launches there as well with HPV being launched in the United States. Good initial uptake, good influence on physicians that are more and more demanding genotype 16 and 18.

And also the exciting news in Europe, we had the first tender in Sweden for primary screening for HPV that we exclusively won with Roche also in large part due to the importance of genotype 16 and 18, and to move a foot in some other countries to begin to look at primary screening as a route for HPV. So although this is a journey for us in terms of changing medical practice in cervical cancer, we’re starting to get some take up in the countries. I’ll get a little bit to the companion diagnostics as well.

Applied Science, clearly a challenging year for most companies in the life sciences sector; the research market was challenged, the funding market. In addition, we had some one-off effects from 2010 to 2011 with some H1N1 sales when that virus was circulating, that has not been re-circulated in 2011.

And then finally Tissue Diagnostics, 15% growth, more than 20% growth outside the United States, which will also become important when I talk about the transaction rationale for Illumina. But it demonstrates the advantages of the Roche global network and being able to drive those products also globally very well in addition to 29 new antibodies launch in the system last year.

So just to give you a picture of what this new product looks like in the United States. This is the Nano, which is sleek, new, no coding meter for the United States Diabetes Care market, the largest diabetes single country market in the world. This will allow us along with other products that we now have in regulatory review to be able to get momentum going again in our North America’s Diabetes Care market.

This was clearly the year as you have heard from both Severin and Pascal, where personalized medicine at Roche left the labs and came again with new launches to the commercial, to our patients and to the physicians out there. And that was certainly true. This is just one example, one of our businesses. We have other products that were launched in our Tissue Diagnostics business and others.

But within Molecular Diagnostics, the three most common types of mutations that are looked for in cancer, we now have tests on the market place. So BRAF, EGFR, KRAS, highly reproducible tests, very strong mutation coverage, which is important with these particular assays and very importantly we got off to a very good start with the launch in the United States with our two sales forces with BRAF and Zelboraf and we will be repeating that now around the rest of the world and looking forward to the other companion diagnostics to come to market as well.

We had three acquisitions last year in the Diagnostics business, two that were supporting our largest business in Professional Diagnostics. PVT is the supplier of front-end automation for our very largest lab customers and Verum Diagnostics, a small company that produces a platelet coagulation function testing, which again to this breadth of technologies will allow us to be have an even wider breadth of technologies in the coagulation space vis-à-vis the competition.

And very importantly, in Tissue Diagnostics, an acquisition of a company in Germany, in Heidelberg, Germany, called mtm, which has the unique biomarker called p16, which essentially works hand-in-hand with our HPV-16, HPV-18 assay in molecular. The 16, 18 assay is a screening assay, whereas p16 is a diagnosis and a monitoring assay with very high specificity and high sensitivity.

The combination of the two has the potential to essentially replace Pap smear and significantly reduce the number of women that would be exposed to cervical cancer by both identifying them early through a screening program and then ascertaining which ones are likely to go on to disease with what rapidity and good monitoring. So this is something we’re very excited about and it’s the second acquisition we’ve had within the Tissue Diagnostics business in not so many years.

So with that, I want to move to the Illumina acquisition, I’ll give you a little color for why we’re very excited about this, why we feel the combination of the two organizations is really gives strength to where this technology can go into the market place.

Many of you maybe familiar with Illumina; it’s the world leading company in sequencing today by far and also in microarrays. It’s a company that has about a $1 billion turnover in revenue. It’s a company that has strong revenue generation, strong profit generation, strong cash generation and a very good track record of delivering continual upgrades in technology to the marketplace.

It’s also a company that’s predominantly focused today in the U.S. marketplace with more than half of its sales in the U.S. marketplace and it is a company that’s been focused on the large genome centers, the large academic centers around the world. And you can see 80% of their growth or their business today comes from that as well. It will be important when I talk a bit about the rationale for how we can expand that.

But the question is why is this the right acquisition and why is this the right timing? There are four major reasons that I just want to touch base on here. The first one is this is a very attractive, exciting market in diagnostics. It’s a $1 billion market today. We expect that to go to $2 billion in 2015 and what’s driving that are two different things.

One is deeper penetration into the research marketplace and that’s really the short to medium-term opportunity and the medium to longer-term is the transition from research into clinical care, into the hospitals, into the patient bedside and both of those are interesting to us, both of those are things that Roche can contribute to.

And the reason that that is being driven into those two segments is twofold. Number one is that the technology has come now to prime time basically. So it used to take 13 years and $3 billion to map a whole genome of one’s body, the instruction manual for your body and today we can do it in one day in several thousand dollars.

So I mean there’s a huge advance even in ten years from 2003 to today and that rapidity of technology, the ease of use of this technology is what it allows now to go from the large genome centers into the bench top lab of every research center around the world and it’s also that same advancement in technology that allows us to look at using this more in a clinical setting.

And of course the full ended demand from the clinical setting is the greater understanding of the genetic variation of the disease and the ability to have therapies to actually do something about it once you identify those mutations. So these are the types of dynamics that are driving the market growth.

The second major rationale is that our portfolios are very complimentary, but complimentary in terms of the sequencing in the microarray business. Today our focus has been on long read business, which is appropriate for de novo sequencing, some amplicon sequencing, certain aspects of sequencing and the alumina technology, the short read technology for high throughput, whole genome or whole exome sequencing and these two things combined can work very well together, just to give you one example within one of our technology areas.

And then of course the other advantage is that the technologies we have at Roche work together. So sequencing will in the future work with tissue diagnostics because it will still be important to look at cells in context, morphology in context, works together with molecular, works together with the protein expression in a professional diagnostics business. So the more and more mosaic nature of understanding the nature of disease is benefited by the technologies we have within Roche.

I told you a little bit about Illumina. Unlocking the commercial potential has two different aspects to it. One is a geographic aspect, taking it from more of a U.S. focused business to a more international business. You’ve seen the results also with Ventana since 2007. We can immediately put it into our broad geographic networks.

The second thing is to dig deeper into different customer audiences. First as I said deeper into the research audience, small to medium size research labs where we have a presence today and eventually to go into the clinic, into the hospitals and into the physician world, where we have a very large field force around the world. So this will come in stages, but there is a tremendous ability to take this technology and really accelerate its up take into different aspects of the commercial world.

And then finally entry into IBD and this is no small task as we know within Roche, we have more than 30 years of experience of taking technologies from the research setting into the highly regulated environment and it’s a challenge and it’s not a static challenge because the regulations continue to increase. This is an ongoing challenge that requires a great deals expertise, everything from the way you develop the product, the way you manufacture the product, to get it to the regulatory authorities and into the commercial setting.

So again that’s why I believe that uniquely Illumina and Roche had the best potential to take this technology that has matured and it is really ready to go into these new segments together. So that’s what I want to say about a Illumina. You know also that we intend to combine our applied science business with Illumina and put the new headquarters in San Diego, which is where the core of the business will be. But we will continue to have our operations also in Pennsburg, Germany, which is an important diagnostic site for us as well.

So to close I just want to close on the key launches for 2012, we intend to launch again around 40 instruments and assays in 2012. We selected about 16 that we think are important to monitor and we’ve already have two launches. In January we had, as I mentioned before the Accu-Chek Nano launch, that’s the Diabetes Care launch in the U.S.

And just today, we announced that we have CT/NG also now available on our cobas 4800 System in United States. This is the same platform that we run our HPV on, also our oncology menu on and it’s an important menu edition to our U.S. offering for our cobas 4800 and will also help us to accelerate the HPV launch, because there are some customers that use both of these assets together. So having a broad menu is important. And again, we reiterate our guidance of continuing to grow faster than the market also in 2012.

So with that, thank you very much. I’ll turn it over to Alan on the finance side, over to you.

Alan Hippe

Yeah, thanks Dan. Thank you. Now, I guess two challenges. And the first challenge is presenting after Dan is a challenge for itself and you may know what I’m talking about. And the second point is you guys did tremendously well, yeah, because evidently the market perceived to your messages very positively, so let’s see what I can bring to the table.

I think the financial performance in 2011 and let me give you some highlights. And one-hand, certainly the Core EPS went up by roughly 11%, 10.6% to be precise. And it wasn’t one-hand driven by the operating performance, as you’ve seen already presented by Dan as well as by Pascal. But the other point was also the financial results. And we will take a little bit of look at this and later on.

Second point is operational excellence. So the year 2011 was certainly characterized by the good pipeline progress, but it was also a year of tough decisions and strict implementation and that worked very well. And as you’ve seen also, I think (inaudible) and with operation excellence. We would like to deliver the 2.4 billion and that’s what we are committed to and I think we’re well on track.

Operating free cash flow, and while Illumina was mentioned quite a couple of times to answer the question about what can we bring to the table in case of cash flow is an evident question.

And I think when you look at it, I think the operating free cash flow came up quite significantly, I will talk about that. And it also allowed us here to early buyback bond of 3.2 billion Swiss francs, which was quite helpful as you can see later on.

And the dividend point is a very important one and I will have later on the outlook. You’ll see the dividend here and that’s a proposal to the AGM. If the AGM approves this proposal, it will be increased for the 25th consecutive year and will result in an increased payout ratio of 55.3%.

Pretty busy slide, admittedly, but I think it tells a lot of the story. I don’t want to take too much into sales, but when you look at the core operating profit coming up 6% and 14% increase in Diagnostics, 6% increase on the Pharma side. So that’s one side of the story.

The other side of the story is in core net financial income. And you see there that in fact the cost burden that we have had and that line came down quite significantly. And in fact this was done due to that we really reduced it and therefore its interest expense and this roughly accounted for roughly 400 million. The other point was really a little bit of currencies that helped us, roughly 200 million.

And the other point was we had less cost for one buyback, which helped us with about 100 million. So, I think that delivered us quite some momentum and when you look at the core net income, that came up by 11%, this really was a driver for the Core EPS growth of 11%.

The next two lines are also pretty important because when you look at the operating free cash flow and the re-free cash flow itself also look at the growth rates, and a plus 14% for the operating free cash flow and for the free cash flow itself plus 21%.

The P&L, and when you look at the P&L, I think you’ll see all the characteristics coming from operational excellence. And there is one thing we have to mention in G&A, that’s the excise tax. The excise tax accounts for USD 168 million related or let’s say, equaling 149 million Swiss francs. So, that’s once when you deduct that, G&A would have come down by minus 3%. So, I think that’s also an achievement of core operating profit up by 6%.

I now want to dig into this slide. I think Severin has done that job already, with the 1.8 billion in saving. And what I would like to refer to is the head count. And as I said it has been a tough year of strict implementation and in OpEx reduction we have said when we introduced the program that we would like to reduce the head count by 4,800 people.

And one of the status at the end of the year is 3,850 people have left the company and 690 are notified already. So we end up with a number of 4,540 as you know OpEx is not finalized. OpEx is still running. We have 600 million still to deliver. So the 4,800 seems to be quite a pragmatic number here.

The head count development overall just to make that transparent, what happened was that head count overall and see on one hand we had the reduction. On the other hand, we have increased head count quite significantly. And I guess in the areas for our head counts, in Pharma in China plus 770 people.

I think Pascal had shed some light on this one and the tremendous growth we are enjoying in that region. And then we have Diagnostics and Dan has spoken about the acquisitions already and acquisition account for roughly 300 people out of these 1,500 mentioned on the slide.

The margins, 35.6% for the group and you’ll see the margin for the Pharma division being at 48.9% and I think here we referred at some point about slowing momentum in the second half and I think we have a relatively simple explanation for that one.

I think everybody has heard what happened to Chugai and the earthquake. And you can imagine, when you look at the margin in the first half, the margin for Chugai improved quite significantly, why? [through its feed stocking], yeah. After the earthquake there was quite a little bit of feed stocking, not a little bit, quite significant feed stocking. And then the margin came down in the second half and there for obvious reasons and all the supply changes that Chugai had, and I think that is really the reason why you see a certain slowdown. I think everything else really went into the right direction and you see the Diagnostics Solutions at 22.4% really heading into the right direction and then as explained why that happened.

Yeah, cash flow, and I will come back to the cash flow thing quite a couple of times and you see here the cash flow margin came up quite significantly to 32.3% equaling 13.7 billion Swiss francs, for the operating free cash flow, an increase in constant exchange rates by 14%. Why do I mention this, a couple of times? We have a lot of questions about, dividend, financial flexibility and so on. And so we thought okay, we take two years and explain it a little bit what we do with this cash flow.

And when you look 2010 and 2011 let’s stipulate first and this is all in constant exchange rates for the year 2010, and let me mention this because you won't find these numbers in the financial report, but we have mentioned here once again the number for the operating cash flow for 2011, 13.7 billion Swiss francs, it’s mentioned on the slide. But let me start with 2010, you see the 14.1 billion Swiss francs, then you see the dividend of 5.3 billion Swiss francs and then you see the resulting free cash flow of 4.7 billion Swiss francs.

When you look at 2011, operating cash flow yeah, went up quite significantly by 14% to 16.1 billion Swiss francs as said, at constant exchange rates 2010; the dividend 5.8 billion Swiss francs, yeah, if it’s going to be approved by the AGM. Then we have tax and treasury and then we have a resulting free cash flow of 5.7 billion Swiss francs and you might remember when you look in the actuals here, it’s 3.9 billion Swiss francs, but there is a lot of currency effects as you can imagine.

But I think what is that slide telling us? It’s telling us that there is enormous financial flexibility and I think what Severin has pointed out right at the beginning it is very clear. The Illumina transaction is not impacting our attractive dividend policy, not at all.

The core net financial results, I made quite some remarks about that already. And you see what has happened on the financial income or on the financing cost and I should mention here that in fact that the income and the cost for pensions are netted here in this slide. But what you see here is quite a significant improvement that we have had in case of the financial result and certainly this is driven by the lower debts that we have on our balance sheet and that helped us quite a lot, so you see really we use the free cash flow to reduce the debt.

Payout ratio, what I can say, 2010, 51.6% and was an increase of the dividend to 6.8 Swiss francs per share so an increase of 3%. We bring the payout ratio to 55.3% quite a significant increase in case of the payout ratio and certainly the strong Swiss franc is contributing to this one.

Improving financial strengths and in fact my whole presentation is well focused on this one, and I think a pretty good example is the Genentech transaction. And you might all remember what a massive transaction this has been and at that time it was about 48 billion Swiss francs additional debt on the balance sheet of Roche. And when you look at it today, you might ask yourself, what has been repaid in the period since the transaction was done; and repaid is 42%, which equals 20 billion Swiss francs.

So off the 48 billion Swiss francs, 20 billion Swiss francs are paid back, so 28 billion Swiss francs remain with us and if you look in the balance sheet you might find 26.7 billion Swiss francs in case of that, while the difference is certainly currency. So that’s what fluctuating here; this is at the rates at the date of issuance when the transaction was done. But I think it very clear, I think the debt reduction is something we are after and you’ll also see for 2011 the early buybacks that we have done, which equaled and expense in the cost that we have had in the P&L of 172 million Swiss francs and when you compare it to the cost we have had for bond buybacks in 2010 at that time we had 255 million Swiss francs. These are the 83 million Swiss francs that I have mentioned when it came to the financial result.

And what we are aiming for? What is the right leverage? And I get this question, we get this question, really on a constant basis, so we thought we’ll think about it and we did a relatively simply thing, we did the benchmarking in the industry; and let me raise one point; I think Roche has one of the highest leverages in the industry. No doubt about that, and when you look at Big Pharma, I think we have the highest one.

So definitely bringing the debt down and using the deleveraging effect, which brings momentum to core EPS growth, I think it’s a natural thing happening to us. And when you see it in 2010, we have been and the ratio is net debt on total assets at a ratio of 31% and we brought it down to 25% in 2011, and then we will see how we move and where we would like to be is between 0% and 15% net debt on total assets.

Now you might ask yourself how is that fitting together with this net cash positive target being net cash positive in 2015 and there are two things to mention. I think the first thing is certainly we are after the cash flow, yeah and we want to be efficient and we would like to drive that cash flow generation of the group to pay debt down. On the hand, there is the cost of capital argument. No doubt about that one. And that’s also what we are looking at and therefore we said being between 0% and 15% that might make sense and I think is well in the region where the whole industry is.

Balance sheet, not a lot to mention; when you look at cash and marketable securities still at roughly 11 billion Swiss francs, which tells you a little bit, and also in case of the Illumina transaction the other point is and the equity and the equity ratio increase from 19% to 24%.

And when I talk about the balance sheet, I have to talk about the receivables. And certainly also the situation in Southern Europe; we have been in the media and I think Severin started it off raising that topic. And well, you know the media and the press was not just positive about it, but we saw that’s really something we have to work on, and we did. And I have to really, I have to say my colleagues because, well they, we all, this is a joint effort that we have done and we have started a journey and you see what happened to group receivables overall in the year 2011, we have had an increase of about 6% and admittedly that’s highest in sales; I think that’s the first thing that we have to stipulate; growth rate for receivables higher than sales.

So I think it’s quite evident for us that that’s something we have to work on. When you look at the receivables in the Southern European countries, they came down by 4%. Certainly, we had some help from forfeiting. We had some help from the Greek bond here that we got and that we sold here with a discount of 26% that helped a lot. But, I think for us, the most important thing is that we have really a very consistent program now that we have installed. It’s very rigid, no credit limits, with the forfeiting deals that we take care of and suddenly there was also new commercial policies that we have introduced and that we follow up very consistently and continuously and I think it really pays off and goes into the right direction.

A couple of comments on Illumina; I guess I have set the ground for the financial flexibility already. I think that’s pretty much done. So let me really just raise a couple of things here. The financial terms, you are aware of that $44.50 per share that’s our offer and we’re seeing that’s a very, very attractive offer for Illumina shareholders. We have started with the tender offer; Illumina has to respond within 10 business days and we will see what their answer is and that’s will lead into the next steps of the process. And what we’ve also started is the Proxy Fight and we have proposed new directors for the Board of Illumina and we’ll see how this process is going to progress.

With that, let’s come to the outlook. And I have to do some housekeeping first; when you look at the currency rates, and you might remember for the year 2011, I think our predictions were not so bad, but certainly thanks to the Swiss National Bank keeping the interest rate relatively stable, so that helped. And so we saw it okay, well we can take a look at 2012 and we do a simple thing.

In this slide here, we’re just assuming that the exchange rates, at the end of 2011 remains stable during the course of 2012. And if this is going to be the case, well we’ll see and it looks like a relatively calm year, in case of currency impacts, but let’s see, yeah, I think one thing is for sure that our assumption is wrong, but nevertheless I see it’s quite valuable to make the statement and let’s see.

The priorities for 2012; and as I said, this improved efficiency thing is not over and operation excellence is still ongoing and we have generated 1.8 billion Swiss francs in savings and I think Roche’s are here just can congratulate; I am very impressed by the implementation skills and capabilities of Roche and still we have 600 million Swiss francs to deliver, but that looks quite promising and we will definitely have a continuous focus on productivity improvements and also on the net working capital as I tried to illustrate with the trade receivable situation.

Let me drive innovation and growth goes without saying and the progress in the pipeline and the three enemies and certainly all sorts of launch of the 16 key diagnostics products is something, which will drive our growth momentum, but we have to bring both things together efficiency, innovation and growth and when we do that I think we will have a great future.

The outlook for 2012, I think Severin said everything, so there is nothing else to mention. Once again, when you look at the dividend outlook, let me say it once again, we are really committed to our attractive dividend policy and the Illumina transaction is not going to harm this. Thanks a lot for your attention.

Question-and-Answer Session

Severin Schwan

Thank you, Alan. And with this I suggest we go directly into your questions. Can we have the first question please? Sachin?

Sachin Jain – Merrill Lynch

Hi, it’s Sachin Jain from Merrill Lynch, a couple of financial and then a couple of therapeutic area questions please. Firstly on the dividend, I know you have continuously reiterated attractive and I guess attractive means continued growth in dividend in absolute terms, but does that also leave scope for increasing the PAT ratio from here. Secondly, you've mentioned net working capital is one of the key priorities for this year. In the interim results, you put up a slide of free cash flow conversion as a percentage of sales related to peer group. I wondered if you would provide a bit more color as to where you see potential for improvement and how much is the scope there and then for Pascal, a few questions on the Hep C space if I could.

First on Pegasys, how do you view the risk longer term from interferon-free regimens and secondly two dynamics, they have dropped mericitabine. I see it still within your slide pack just what's the difference there, and then finally you have a Phase II study interferon-free called INFORM-SVR. I noticed in the slide that you are adding a third arm to that study, which is undisclosed yet, but just more details there please. Thank you.

Severin Schwan

Alan you want to start off for the financial questions?

Alan Hippe

Yes, sure. I think when you look at net working capital, I think it’s quite, quite evident, should we sit here, Severin how are you doing?

Severin Schwan

I feel free to stand up. How you fee basically it’s up to…

Alan Hippe

Just to give you guidance.

Severin Schwan

It’s okay.

Alan Hippe

No, I think when it comes to net working capital I think one thing is straight receivables, I mentioned the topic and we work on this continuously. We have a good program, we will follow it up and let's see where we can get to. Another point to mention is inventories we look at and even the payables is something we can address in a better way and we have a lot of procurement programs running in the company. Honestly, I cannot give you a good number on this. You have seen when you look at our numbers that in fact we have not improved here in net working capital, so that's definitely something we can in 2012.

The point I would like to mention is it is just one element. When you look at our operating free cash flow generation overall, it has been quite tremendous. So I think with my all messages, we can still improve, that’s my message. And the dividend, yeah I think very clear as we’ve said. I think we want to stick to our attractive dividend policy. That’s what we are going to do and Illumina is not going to hold us back from this attractive dividend policy and that’s what we are going to do.

Severin Schwan

I mean also you know we have a certain tradition here. I mean we have increased the dividend 25 years you know whole and we are committed to continue with an attractive dividend as we go forward, but remember back last year, we gave a more concrete guidance and then it fell all over because of the currency developments. So in few of the uncertainties and volatilities we have these times, we said we gave you as investors the commitment that we stick to an attractive dividend policy, then we’ll see how things develop and we will adapt accordingly. I hope this gives you a bit of flavor how we think about it. Good we had also questions on the Hep C franchise. Pascal, feel free to stand up.

Pascal Soriot

So the Hep C franchise, great question. It is a fast moving ground as you can imagine. Everything is changing very rapidly. The good news first, we have reached 90% market share with Pegasys in the United States 90. And nobody thought we could ever achieve that in new patients. So really fantastic results and in Europe we are still growing, but we are still behind, we hope that we will grow as the new DAs get reimbursed and launched. And so that’s the good news today.

The question, I would not say (inaudible) don’t know yet. The question in the long run is what would happen to Pegasys. Number one, we need to know what comes out of the Pharmasset Gilead study 7977 in combination with Ribavirin. We know it works in genotype 2, 3. We have to know whether it works, and what that means in genotype 1. We need to know what kind level of SVR and we know that the two 1a, 1b genotypes don’t respond the same way to this agent.

If the SVR in genotype 1a and 1b is very high, that will be a game changer, no question. It would be a game changer, I would say at least in the United States, because then the next question will be pricing. And if you think of countries like China, price will remain an issue and there is I believe, still even if 7977 ribavrin worked very well, there is still a place for a combination of Pegasys with possibly danoprevir [tomorrow] and danoprevir was superior today, danoprevir tomorrow and the other condition that pricing is right.

There is also probably a place for this combination in some countries in Europe. In fact what we find is that with Boosted Danoprevir in Italy, Spain et cetera is that they rapidly achieve reimbursement on a national level, and then you go to a hospital and we promote Pegasys in combination with those agents of course, but the hospitals have no money. So you have technically a reimbursement at the national level, no money in the budget in the hospital. So they want to keep using Pegasys. So I think in price sensitive markets or at least regions in some countries including in Europe, there will still be a place for Pegasys, declining but certainly a place.

Now so that’s if 7977 ribavarin works. If the SVR is lower, 60% to 70%, then we have to wait for what happens to the other combinations and you’ll be looking for two DAs, 3 DAs combinations. The whole of interferon will still have to be defined, so the picture will be a little bit less clear I guess, yeah.

So, I think, I know Paul will tell us a lot about external data like 7977, other combinations, our own combinations. We would present the [dolphin] results, Pegasys, Danoprevir will present some of our studies, PROPEL et cetera. And so that’s one step and then SLD later in the year will be another milestone. I think by the end of the year, we should all have a very, much clearer view of what the future looks like. But today, it’s still fast moving.

Last question was mericitabine. It’s still in our pipeline. It’s still in our portfolio and they are still at Amplicon, so we are still working on the design. So we will be able to communicate that at a later stage.

Sachin Jain – Merrill Lynch

I don’t know where you can dry color and why did you go in and drop mericitabine?

Pascal Soriot

Well, they have their own priorities of course and there is a number of our products that they have decided to not take forward at this point because you saw their margins are squeezed and they have to prioritize clearly their portfolio and there are so many products in our own portfolio that they can’t develop at this point (inaudible).

Operator

Thank you Alexander please. Can we have the Mike in the second row, yes.

Unidentified Analyst

Thank you, a couple of questions. Could you just give a little bit more color on really how that Japan effect affected your pharma margin and possibly the line items because frankly at face value, it is really hard to find the operational excellence savings and it is probably most obvious when you look at things like say pharma sales and marketing which declined by 6%, that’s about 400 million in local currency. Yet you were supposed to save 900 million and specifically I do understand that was supposed to offset some headwinds, but none of the headwinds I would have expected to affect the absolute level of sales and marketing spend.

And then on that notion, what are the headwinds you’re having in 2012 because I am quite surprised you are not factoring a greater extend of margin expansion in your bottom line guidance given that we should see the same level of deleveraging contributing to the earnings growth this year. So is that Japan affect extending into 2012 and what are other possible headwinds apart from pricing in Europe, and also I was quite surprised that the TML study didn’t feature more prominently either in your press release or even the presentation apart from your very brief comment on that. It may have read across into other indications. Should we really interpret that may be despite an overall survival benefit, the clinical effect was not that impressive.

And the final question is just I noticed that you were writing off about 20% of the intangible of your 2007 acquisitions in Microarrays and Sequencing, which I guess highlights the technology risks in that area. Now you are proposing an acquisition that’s more than 10 times that. So I’m just wondering how many billions of technology risk you’re prepared to put on the balance sheet?

Severin Schwan

Perhaps I can start with some of the questions before I hand over to Pascal, in particular for Japan and then also a bit of advertising for TML. So the write-off we took in sequencing even though it sounds speaking in relative terms, it was a relatively small amount. I don't even know the amount anymore. It is in annual report, but it’s very small, a couple of million Swiss francs.

Unidentified Analyst

That was just because the assets were a lot cheaper back then.

Severin Schwan

Yeah, 59 million, just to put it into perspective. So it’s a bit of a different dimension and in our business, we do lots of licensing deals, we do lots of acquisitions and you do have regular write-offs on certain technologies, on certain assets which we get in. This is part of our business, so I wouldn't overestimate that too much. Perhaps, Dan you can then also comment a bit how this relates.

Unidentified Analyst

So you are saying that today that your uncertainty on the technology value is smaller than 20%.

Severin Schwan

Yeah, perhaps Dan you can then comment a bit more on the technology and the importance of the technology. Let me then also cover the question on the 2012 outlook and the margin expansion. Look I mean it’s so early in the year and there are so many factors, which can come in over the years, really volatile times and what we provide you is with an overall guidance for the full year and then of course you can dig into each of those effects and I am happy Pascal if you comment a bit more on Chugai, but that's the guidance we give, we give an overall guidance.

We are not giving a guidance on a product level, on the line item level. At the end of the day there are surprises, there are ups and downs and we will see where we will come up and if there's a necessity to update the guidance over the year, we will do this as we did in the past.

Unidentified Analyst

So what are the big swing factors then?

Severin Schwan

There are no specific big swing factors, which we could point out at this point otherwise we would already recognize it, I mean if I knew there was another earthquake somewhere in the world I would pull it in, I don't know. If I knew what was happening to the euro I would fill it in, but I don’t know. If I knew how exactly our franchises develop and how our competitors develop and what is happening in the Hep C franchise, and what is happening in other franchises then I would be more specific. This is the nature of a guidance that at the beginning of the year you have more uncertainty, and then as you progress we can tighten it up as we did in the past. With this Pascal start-off with TML. This is the most exciting part of your question.

Pascal Soriot

Yeah, TML I think you make a very good point actually at Pharma and I think what you see here is a reflection of the fact that Roche Genentech is fundamentally a science driven organization. People are really make decisions based on the science, and if you look at this, essentially what the TML study tells you is that the patients who have received Avastin in the second line sitting after receiving it in the first line sitting did better on those who didn’t receive it in the second line sitting, only in the first line setting, right.

It doesn’t tell you that patients would do even better if you treated them on the continuous basis. So you have two side course of treatment and the gap in between. So on that basis you conclude, well, we already have indication in the second line sitting so that will help us a little bit but the expansion is limited. And that’s what the science tells you, that’s what the data tells you and we have another couple of studies that will fill the gap showing that continuous treatment may help. So that’s what you see here.

Now if you ask me, my belief and it’s only a speculation and a belief. I don’t have anything to prove it, but and as you put together the preclinical data, we have the registry data, we have in colorectal in particular if you put, if you add to this GOG, the ovarian data, if you put together CML now.

I think what you see is a picture emerging that when you start Avastin you should not stop and patients should be treated on a continuous basis. And as soon as you conclude this and you think you can change physician’s behavior and they will actually do this indeed because today what they do is that after six months of Avastin treatment colorectal, they stop together with the chemotherapy. If you can change that treatment, that behavior also in and convince them to treat on a continuous basis, then the upsides are a lot more.

But we have to do two things to be able to unlock this. I think, first of all, we need more data and secondly, we need to find a niche solution to this economic issue that is going to emerge, because when you talk to physicians in particular, in Europe today, and you say why did you stop after six months, they all come up with some reason, logical reason. The reality is that cost is becoming suddenly an issue for them.

So we are going to have to develop a solution to have them also match that cost, because if patients are no longer treated six months for the whole duration of treatment, of course we have to find solutions to this. But overall, I think the opportunity in the long run is quite substantial. I completely agree with you. In the short-term based on the data we have its probably more limited. So that’s CML.

Unidentified Analyst

So you need another study. You need to continue the study.

Pascal Soriot

We have two studies running now. [K-ORAL III] and another one that are looking at, the question I’m raising now which is, this gap which is probably two, three months on that region between two courses of treatment and also beyond the second line, you could treat patient. In fact, you should treat them forever really. If you have metastatic colorectal cancer you should be treated almost forever.

It may also well be that it is what emerges with Herceptin by the way and it may be a pattern with this monochrono antibodies. We know that patients who get Herceptin stopped and get retreated to do better. So, that tells us that we have reasonable chance to hear our HER2 story will be positive, in which case we treat longer. So, that’s CML.

I mean, mid-to-long term, it is a great opportunity also because it will change the perception people have over Avastin in different indications. In the short-term though, that what you see reflected is the fact that the science only tells us second line treatment.

The first question about Japan, I can only repeat what Alan told you is that, when the earthquake happened, a lot of hospitals basically sort of wondered whether we could continue to supply and they ordered more and we also wanted to make sure they had enough. So, the first half they ordered more, the sales were higher. In the second half, essentially they used what they had bought from us and bought less.

In the meantime, we maintained our investment and our expenses because we needed to kind of keep investing in our future and we have a portfolio and we need to sustain the business. So the margin declined. The impact you see is mainly Japan, but I have to say we invested in China. You saw this number of 717 more staff in China. It’s a huge increase. We’ve invested, we are expanding rapidly and we’re talking about further expanding in China. It’s an amazing country. We’re now talking about expanding to small cities of about a million people in it. So, that’s where we are at and so that cost.

And we also invested in the pre-launch and the launch of new products in the United States. I think we have to realize now the portfolio is gaining momentum and becoming stronger. But of course, we have not to launch those products and we can’t completely, constantly only redeploy expansions from other products to new products, there is some additional investment that is needed.

Karl Mahler

Thank you. Perhaps if we can take one of the questions there, yes.

Unidentified Analyst

A few please, the 2.3 billion of receivables from Southern Europe that you have, how much does that represent just as a multiple of the sales in those relatively small countries and realistically, how much chance have you got of getting that money back? You talked about intense conversations with your customers and your report in your way of trying to get that money back, but I wonder if you could give us some sort of guide as to when we could start to see that come back?

And looking at your acquisitions, it’s terribly easy with the low cost of finance to get anything to be earnings accretive. But of course that isn’t the measure I’m sure that you use. If we used Ventana as a good diagnostics acquisition that you’ve made sometime ago and is now embedded in, can you give us some sense of the return on investment that you’ve made and how you see return criteria for looking at these acquisitions.

And a final quick one, when you talked about having two different brands in countries like Egypt, the two brands of Pegasys. How much cheaper do you have to make the brand that you sell to the public market versus what you have in the private market, just to give us some sense of what the price reduction for volume uplift might be?

Severin Schwan

Okay. Perhaps I can start off in terms of how we look at acquisitions. There are of course, many criteria you would apply, when you go for an acquisition and there's a lot about the strategic fit, there's a lot about the synergies.

In the case of Illumina, it is really about synergies of bringing this technology into our global network of moving this technology in the longer-term from the research into the clinical setting. But eventually you are right, it’s not a question of is it accretive or not. If you look at the specific transaction, if it comes to the financials what you look at is what are the expected cash flows, and based on the expected cash flows you calculate back and say this is what we believe is still attractive for our shareholders. And we do believe that with the synergies we can create by combining the two organizations we can make this extremely attractive to both shareholders, to the shareholders of Illumina and to the shareholders of Roche.

As far as Ventana is concerned, it was certainly a successful acquisition and a lot is due to the fact that we integrated it very successfully that we invested into the business and as a result of this, of course that we could grow the business both from a geographical graphical point of view, but also in terms of new applications and broadening our offering.

Your second question on the accounts receivable in Southern Europe, actually our days outstanding are pretty high, because most of our business if not the entirety of our business to public hospitals. Our business in Southern Europe to the private channels is very, very small. Due to the specialized nature of our products we really sell into public customers and unfortunately the payment [morale] of the public customers is not the best in Southern Europe. So it is relatively high.

Alan, if you have the exact data perhaps you can share it with us. I don’t know whether we published it in detail, but it is high. It is relatively high.

Now the question is, how big is the risk associated with that, and I think here we have to differentiate. In Greece, it was a pretty severe situation and we could really mitigate the risks there with the government bonds. I mean, that’s in [bond gold] brought down the accounts receivable, that needed a little bit of discount, but it brought down the risk quite dramatically.

If you’ve compared it with countries like Spain or Italy the situation is very different because here you have to differentiate. You have many customers, who pay very well. But you do have certain customers, you do have certain regions where payment morale unfortunately is not very good and this is where we are working very closely with the customers. This is where we try to find solutions to keep cash flows coming in and actually this is working quite well.

We see progress here and of course, it’s also a matter of insisting on credit terms those customers who haven’t paid for a long time and that can be up to three or four years. We are getting very strict and we’re insisting on our credit terms.

So I believe it is an important area to monitor, there is no doubt. We have certainly tightened our policies to be sure that we don’t accumulate risks here. Overall, I see good progress. Yes, please.

Alan Hippe

Well, okay. What we disclose is in fact the over due assets, that’s what we are doing here. So the analysis of the over dues here for loans and receivables and I think you see here the pattern that we’re having, its on page 126 in the financial report that you see a little bit of uncertainty. This is not all Southern Europe, yeah let me say that first; certainly not. The situation in Southern Europe is one, yes that reflect here, but I would also say that’s the same token that we are seeing now really progress since a couple of months. And even when you look for example at Greece, I think we can definitely say that our cash wins, that we are having at the moment really are coming in at the right level.

So, I think we are really progressing and when you look really at the over dues on this page 126, you see really the pattern. In the last two years that has not changed massively. I think the other point is more than one year has reduced quite significantly and that certainly comes from the Greek point. So that helped us and we moved really into the right direction.

So what I would say is there risk, yes. Are we doing everything at the moment to mitigate that risk, bring in the direction; I would say so. And I think we are really a front runner here in the industry.

Severin Schwan

Okay. Your other question was on the pricing for second brands like in Egypt. Alan, you have still another comment?

Alan Hippe

Yeah, there was one. Did you get the answer to acquisitions completely?

Severin Schwan

Yes, I think so.

Alan Hippe

Okay, fine.

Pascal Soriot

And just adding maybe one thing about these receivables; I mean, in Europe today as a country the biggest risk is Greece. For us, it’s not a big risk, because in fact, I have to add to what we did in Greece, because it was not as simple as selling those bonds. We’ve also been working very hard to reduce our receivables and in fact for several months we’ve been collecting more than we were selling. So beyond the bonds sales, we have also been able to reduce the receivables and today Greece is relatively small as an exposure. The other countries are bigger.

In term of the pricing of the second brands; I can’t answer that question for two reasons. First of all, for competitive reasons, I would not want to comment and secondly, it really varies dramatically from one country to another. So there is a whole range. I think the one thing I’d like to tell you though, is that typically it is basically pure additional sales that we achieved. Because we get into a public segment for instance, and what we sell, the price we agreed to sell at is incremental to the existing sales.

And so, it never really impacted our existing business negatively if you want. Including China for instance, you know some people are wondering, okay, are you dividing your price in half. The reality is that, most patients didn’t get treated more than six months. So by giving the second six months a bit more free of charge, we don’t lose anything. We just make sure patients are properly treated. And as a result, we also initiate more patients, because as I said earlier, physicians feel more comfortable convincing patients to pay for five or six months of treatment, because they know they would get the whole course that they need for their disease, so in fact, it generate additional sales.

And essentially, what it’s going to do is that aggressively decrease our average price if you want overtime, but the volume increase will far more than compensate in any case over the next three to four years Bevacizumabs will be coming price impact. But by the time they come up, price would slowly have been expanded. And you see the impact on actually [Xeloda] sales is very substantial. We had tremendous goals for Herceptin, MabThera in the emerging markets last year.

Unidentified Company Representative

Thank you, Pascal. Can we have the microphone further back in the last row?

Unidentified Analyst

Thank you. Two questions on financials if I can. Alan, slide 70, you showed us the analysis that you’ve done on balance sheet leverage and you’re reasoning for why Roche should target 0% to 15% leverage. I guess, my interpretation of the picture is slightly different, it basically says, irrespective of leverage pharma is a AA credit industry. So given the advantages there could be to shareholders of returning more cash, why don’t you stick with 30% leverage and just give the money back?

And I guess a follow-up question to that. We had an earlier question about dividend payout ratio. The question I think was asked was would it go up, could I ask you it in another way? Is there any circumstance where the payout ratio could go down given your attractive dividend payout ratio?

Severin Schwan

On the second one, I wouldn’t comment specifically. If I would, I think I would have been able to write right into the guidance in the first instance. So be assured, our dividend policy will remain attractive. As to the second one, Alan can you give you a small flavor on the leverage and your thinking about that?

Alan Hippe

Look, I think first of all, I think we can all stipulate it’s a AA in our case, AA minus industry and I have to say I’m happy to also to say into state that both rating agencies keep our rating at the same level, and despite the fact that we have announced that we really go after Illumina. So that’s perhaps the first point I can make here.

And look, I think we can always debate, there is 0% to 15% and what the right leverage is and whatever; the fact is, we are 25%. The fact is that we are doing actions at the moment to increase the debt in fact and also fact is that we are trying to be pretty effective when it comes to cash flow generation to bring that debt down and to generate a lot of cash.

So I think we are pretty much doing everything as that you are asking for, and I think things are moving in the right direction. We can debate that 0% to 15% I think that's really something where we said, this is the right way to go, this is the right area to be in and we just try for that.

Unidentified Analyst

Thank you.

Unidentified Company Representative

Yes, please. We’ll start here in the second row and then, we’ll move to the fourth row.

Amit Roy – Nomura

Yes, Amit Roy from Nomura. A couple of questions on pertuzumab and then, a follow up question on TML. On the pertuzumab study, I guess the question as they say; you have – touched this one earlier. The typical HER2 positive first when I studied breast cancer patient would have had Herceptin in early stage typically, because most of those patients would have progressed from adjuvant therapy?

In the CLEOPATRA study only 88 patients actually had Herceptin before and it was about 10%. Do you think the regulators are going to have an issue with the fact that study doesn’t really reflect the types of patients and at least in the development work there was an emerging market study?

Secondly, in terms of the patient characteristics in CLEOPATRA; if not full, approximately half of the patients were double positive, that’s a HER2 positive and ER positive, which is a bit odd normally it’s about 20%. And so my question related to that is, did all of the patients receive prior hormone therapy in metastatic. I can’t find in the right, but I can only see if they got a good adjuvant; they would have –typically in hormone therapy first before receiving Herceptin or was that a case for CLEOPATRA?

And then in terms of TML, as you rightly say, the TML study proved second line of Avastin works which we already know from the labeled information. In order to get more physicians to prescribe Avastin shouldn't you be having a line in that study which has no Avastin in first line, but Avastin in second line, the test whether giving Avastin first and second is better than giving it either first or second that they are not essentially missing? Thanks.

Unidentified Company Representative

Pascal?

Severin Schwan

Yeah the first question is pertuzumab that two sub questions here; and the answer to the first one is, no we don't; I mean I am not aware of any concern that we have internally our team, the regulatory teams are relatively optimistic as to how fast we would get approval in United States, so there is no specific concern there.

As far as the second question, I must say, I can't answer that one. We will have to get back to you unless Pascal, do you have the answer, but otherwise we will get back to you and I’ll give you some more details on this one. But no, I mean in fact, everybody is very optimistic we should get approval in fact we may even have approval fast I mean hopefully, maybe not where we would see. So, I mean all scenarios are there.

Amit Roy – Nomura

Is there a penalty, do you have a penalty so far?

Severin Schwan

We don’t know yet, that’s why I am saying maybe yes, maybe no, but I mean, this (inaudible) of the data is making us optimistic is what I am saying. We don’t have any other information other than that. And the other question TML, yeah, no, I think the more interesting question is what happens that we need to test is what happens if you start with Avastin and never stop; that is what you do today. That’s really what we need to demonstrate in all our studies what we need to consider is basically longer treatment duration results in Avastin.

Amit Roy – Nomura

Thank you.

Unidentified Company Representative

We can take the question Andrew.

Andrew Baum – Citi

It’s Andrew Baum from Citi. Three questions, the first one, should I assume that the percentage of patients with metastatic colorectal who currently see Avastin in multiple lines is somewhat less than 10%?

Second question, in terms of your guidance for next year what are your assumptions for Lucentis given the dynamic with ELA; and then the third question is, the two larger short duration Herceptin trials announced for the accrued and will presume any report out very soon, what do you think it would take to change clinical practice towards adopting six months duration of Herceptin; is one trial sufficient and do you think there will be a difference in the dynamics between the U.S. and the European markets?

Unidentified Company Representative

Pascal.

Pascal Soriot

Okay. The first question yes, the answer to the Avastin question yes, that’s correct. Second question Lucentis, you know it is, we’re still early in the year in terms of assessing the impact of ELA, but what we see is relatively are to just take response from physicians to the use of that product. So our expectation is that it will have an impact of course. As I said, we will grow with (inaudible), but only in the second half of the year, because we need to get approval first and we will have an impact on AMD and RVO, essentially AMD, a little bit less RVO, so we are modeling an impact on the AMD and a smaller one on RVO.

AMD, we grow our share in Q4 versus Q3 as I said before. But we have to assume, we would be impacted. So overall assumption for 2012 for Lucentis is a flat to moderate decline and that’s the best I can say at this point. In a few months when we have more experience with the ELA launch, we could be more specific, but that’s basically where we are at this stage. And your third question…

Andrew Baum – Citi

That question was on the duration of Herceptin Trial?

Pascal Soriot

Yeah. Well, I think really there the HER2, we’ll add soon, so we will have those data and in all likelihood we will have those data before the short-term duration. I mean the fast study in France is delayed, as we can see and so our assumption is that HER2 we’ll add before the shorter duration study, so we will have the answer there.

As I said earlier, we are relatively hopeful it will work even though, I can’t say anything else. I can only speculate at this point, I don’t know. But, we have data showing that when you retreat, when patients are retreated they do better, they are not being retreated. So that’s kind of a hint that you get that hopefully HER2 would work. But in any case that will come out before the other smaller studies.

Severin Schwan

Okay. So if we have perhaps one last question here in the [plan] before we go into the breakout sessions?

Andrew Baum – Citi

I was just curious the Illumina acquisition, it seems to have some competitive aspects coming up with other companies introducing a chip technology which would be at a substantially lower cost. So I wanted to just understand how do you think about that in terms of your timing of the offer and why that’s not a question of when and how?

Unidentified Company Representative

Okay. Dan.

Daniel O'Day

Two aspects of that. I mean first of all, obviously, we believe that the Illumina technology is really, it’s a market leading technology. It’s significantly advanced. The other technologies out there of this nature are more in a feasibility stage. I mean, I think we feel very confident that will continue and we also feel confident that we will continue to invest in the Illumina technology to keep it up with other technologies out there. So I don’t want to comment specifically on any one particular competitive product, but we certainly looked at the competitive landscape and are confident that Illumina has the right technology for now, but also for the medium and longer term in terms of how we progress.

Unidentified Company Representative

Thank you, Dan.

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