Roche Holding's (RHHBY) CEO Severin Schwan on Q4 2015 Results - Earnings Call Transcript

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Roche Holding Ltd ADR (OTCQX:RHHBY) Q4 2015 Earnings Conference Call January 28, 2016 10:00 AM ET

Executives

Severin Schwan - CEO

Roland Diggelmann - COO Diagnostics

Alan Hippe - CFO

Daniel O’Day - COO Pharmaceuticals

Analysts

Michael Leuchten - Barclays

Richard Vosser - JPMorgan

Sachin Jain - Bank of America

Matthew Weston - Credit Suisse

Vincent Meunier - Morgan Stanley

Alexandra Hauber - UBS

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the Roche’s Full Year Results 2015 Conference Call and Live Webcast. I’m Shayi, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it’s my pleasure to hand over to Dr. Severin Schwan, Chief Executive Officer. You would now be joined into the conference room. Thank you.

Severin Schwan

Good afternoon, everybody. Welcome to our year-end briefing here in London. Let’s get right into the results. Sales up 5% at constant rates. You’ve seen earnings growing by 7%, excluding filgrastim higher-end sales and the board proposes to increase the dividend to CHF8.10.

So, we delivered on our targets we have set ourselves at the beginning of last year, but what I’d really like to highlight for 2015 is the progress of our product portfolio. You see here, important readouts across different therapeutic areas, oncology of course, immunology, very much so neuroscience with Ocrelizumab and that puts us into a position today where we have the potential to launch up to 8 new molecular entities within a timeframe of only 3 years. That is absolutely unprecedented, certainly during the time I’ve been with Roche, pretty amazing and obviously, the base is for a longer-term growth and success.

In this context, and I’ve inserted this slide here, it’s nice to see that the level of innovation is also recognized by health authorities. You can see that we now account 11 breakthrough therapy designations by the FDA, the last one literally coming in overnight with Venetoclax in AML, also leading the pack on that front.

If we go back to the numbers, pharma up by 5%, very much driven by oncology. I’m also very pleased about Esbriet after the InterMune acquisition, which we did end of 2014, so the first full year now with Esbriet, good start in the US in particular, diagnostics up by 6%, ahead of the overall market, driven by immunodiagnostics on the one hand, but also very good growth on the molecular and on the tissue side.

So, medium single digit growth over the last quarters and I find this slide actually quite interesting, where you see the growth across the various regions, interesting from two perspectives. One is, we see solid growth across all regions, you can also see that the international region is picking up again. We’re now at 7%, there’s been some acceleration in the second half of the year and then what we also see here is the importance of the US, both in relative size, driven by the strong pharma business in the United States and you see the robust growth in the US. So this is certainly good news, also if you look at it from a profit mix point of view. You have seen however that has also impacted the tax rate and I'm sure Alan will comment on that in more detail. I would rather have this way than the other way around with a weak performance in the United States and some tech savings below the line.

So core operating profit up by 5% as reported, 7% if we exclude filgrastim. So you can see a pretty stable slightly improving operating profit margin, a solid strong performance from an operational point of view. EPS growth in line 4%, again 7% excluding filgrastim effect. And on that basis Board proposes to increase the dividend and what I like to point out is the payout ratio. So you use the payout ratio going from 56% to 60%. So this is a significant increase and of course it is related to the fact that we paid a dividend in Swiss francs but we do our business in local currencies. I should also point out that this is core results. So if you look at IFRS side, actually the payout ratio is 80% just to put things into perspective as far as dividends are concerned. Here is the bridge for the EPS growth.

Let me turn to the outlook. In fact one slide I’d focus on it’s this one that’s summary of what we should expect over the next three years and again eight new molecular entities to come -- to potentially come over this period of time. And it's pretty derisked, I mean two of them are already approved Alecensa and Cotellic just at the end of last year. We have pivotal trial date in front, there is atezolizumab of course, Ocrelizumab, venetoclax looks I mean better by the day, very confident on that opportunity.

We will soon get data for Lebrikizumab, so this of course is very important opportunity. And then we are waiting for lampalizumab which would open up again a huge opportunity if data were positive. So this is pretty unprecedented. And I would say we don't even need every trial to read out positively. There's been a considerable derisking over the last year in terms of patching the impact of the biosimilars which are coming in the mid-term. And on top of it, of course we have a number of very important line extensions. To close, sales expected to grow low-to-mid single digit, it is again ahead of sales and on that that is intent to increase dividends in Swiss francs again. Thank you very much.

And with this I hand over it to Dan.

Daniel O’Day

Thank you. So good afternoon from my side everybody. Looking forward to presenting the pharma results to you for 2015. Really three key parts I wanted to go. One is the financials, the commercial performance for the last year. The second thing is the really pipeline and we’ve had a – also in my experience with Roche, really an externally year of readouts that I want to cover in a bit of detail. And then the third component is really I think some proactive longer term stats that we took this year in terms of looking at how we take the strength of Roche organization, the science based and our personalized healthcare strategy and look to kind of shape those into the future with a couple of key strategic collaborations that we did last year with companies like FMI and Flatiron. So hope to put that into a bit of context and how I think that will help us continue to stay ahead of the curve.

So, first on the 2015 results, I mean solid 5% sales growth for the Pharma division in local currencies, United States with strong growth in the HER2 franchise Esbriet far outpacing the loss of sales still with Xeloda and Valcyte last year which accounted for around a little over CHF400 million and that's despite a relatively weak flu season in the United States, actually no flu season in the ’15, ‘16 time period. Europe at 4% despite the pricing headwinds very, very solid volume growth with HER2, with Avastin with Esbriet also contributing significantly to do that. Japan really across the board both immunology and oncology franchises and I will come back to this, but really good launch of our ALK inhibitor Alecensa in Japan our front line label, but that contributed really nicely also to the results there.

And then finally, on the international region, 5% growth, some good growth in countries like Brazil, Argentina, Turkey and I am really pleased to see that China has now returned to some solid growth, 4% for the full year last year with our strategic products really now picking up some steam in the Chinese market and a good approval with Avastin in lung cancer which is a significant medical need in China as we all know.

Happy to say that that sales line did result in a profit, nice profit contribution. Excluding filgrastim, 8% growth, including or excluding, our margin increased in pharma this past year. That despite some significant investments really because of the efforts that I think we continually have. Some of you attended our Pharma Day and we went some detail on this around efficiencies and around ways of looking at making sure we're only pursuing the most significant, the most impactful opportunities and I will come back to that in our portfolio for the future.

You do see some increase in cost of sales. We talked about this at the half-year. If you would actually exclude the incremental investments that we're doing in the biological manufacturing capacity which for me is a good new story, it’s really driven by the portfolio, we would be growing slightly less than sales. M&D and R&D as you see, and a good management control of the G&A line with the NIM in the negative territory.

So this slide obviously is one we always focus on to look at is the innovation outpacing what we're losing in terms of patent expires. And basically that’s a story that you see here. I am going to go into detail on these in the ongoing slides. But I would say a couple of things. As I said before, Tamiflu has not really had a flu season in the U.S. and Japan where we are really having a seasonal Influenza business in the 2015-2016 flu season. That contrasts to a very large flu season in the 2014-2015 timeframe.

And I would also mention that, well, I think I am going to go into the rest of the products actually in the next slide, so let me go that here. First with the oncology franchise, had an 8% growth, HER2 franchise growing at 19%, very strong uptake of Perjeta and Kadcyla in the United States, in Europe, now in other markets which really brought along the Herceptin growth. The Herceptin growth last year was 10%, in the United States 13%. So we really had some very, very strong growth of Herceptin as well and I think that speaks to the advantage of the combination therapy obviously and the increased duration of treatment, but also the significant increased life expectancy with the combination.

Avastin 9% growth; MabThera/Rituxan doing well at 4%. I would just say on Tarceva, obviously we had both in-class and out-of-class competition. I am encouraged by the Tarceva/Avastin data that we filed in Europe and we expect an approval next year and I will come back also to Zelboraf, because we now have the Cotellic approval which allows us to compete in the combinations space.

So, again, here on the HER2 franchise, Herceptin growing 10%, Perjeta 50%, Kadcyla 36%, and the outlook is that we will continue to see obviously growth in this franchise as we move forward. Importantly what I would say is that we're at market shares with Perjeta of around 60% to 65% in the United States and in Europe in the metastatic setting likewise with Kadcyla around those same market shares.

In [indiscernible] we have a market share with Perjeta of around 80% in the United States, but because we're just starting to get it going now in Europe, still a significant amount of potential there, because we had a market share of around 10%, so we're just getting reimbursement approvals and rolling that out in Europe in a significant way.

And then I would just remind you that the AFFINITY trial is still expected to read out this year towards the end of the year. Our models are in line with what we're seeing in terms of event rates, so we would expect that and that's Perjeta in the adjuvant setting to read out towards the end of 2016.

One of our strategies is clearly and we have multiple strategies, the most important one is to the change the standard of care obviously with products in the HER2 franchise with MabThera and with Avastin. But one of them is to also provide significant advantages for patients and healthcare systems with Herceptin subcutaneous. So we are now launched in 48 countries with Herceptin subcutaneous in Europe and the average market share in those 48 countries is around 40% for the subcutaneous delivery system. MabThera was launched a bit later, and this is just an example of where we stand in non-Hodgkin's lymphoma, but you can see essentially the same market share curve in the countries where we have launched MabThera subcu. So one of the important differentiators as we think about the introduction of biosimilars, which we expect in Europe, in the latter half of 2017 for MabThera and Herceptin’s first launches, obviously later in the decade in the United States and for Avastin globally.

So Avastin growth in various indications clearly cervical cancer, ovarian cancer, very strong drivers of growth. You see 11% in the United States, the 5% in the EU, International 7%, so our ability to create access programs in many of our international markets is gaining speeds, doing very well in China, very well in Brazil, and other markets, and you can see that growth. And as I mentioned before, the lung cancer indication in China should be important for us.

So in 2016, continued uptick of ovarian and cervical. We do have the Avastin and Tarceva indication that we expect approval on in the second half of the year. And if I just take a mention, there is Avastin and – Avastin particularly will receive price decrease in the Japan market this year in quarter two as well. And Japan accounts for around 10% of our overall Avastin sales.

Immunology growing full year at around 24%, I mean, a really strong portfolio of products. Xolair 22%, still a combination of the allergic asthma and CIU. Actemra performing very well in monotherapy with a 25% growth, subcu accounts for about a third of the Actemra turnover at this stage. And you can see the MabThera indications in immunology still growing very, very nicely. I’ll get back of course to Esbriet as well, which is a significant contributor here as well.

Lucentis, we see some stabilization in the reduction I would say in the competition and leveling out in AMD and DME. We would expect a moderate decline still next year, but essentially we see the market kind of positioning out relative to market share between the different competitors in the wAMD market in the United States.

Esbriet, off to a very good start, total sales of over CHF500 million last year, about CHF350 million from the United States, really strong underlying launch, market share leadership in this category of around 60% to 65%. And we’re still at the beginning of really being able to assist and support the patients with IPF, so only one out of four patients in the United States receives a treatment specific for the disease and it’s about one out of three in Europe. Clearly, the objective, particularly with the mortality data that we have with Esbriet, to have this medicine used earlier in the treatment cycle for disease that is chronically disabling [ph] and leads to death, obviously you want to try to get that earlier in the treatment cycle and we are certainly focusing our efforts on that as well.

So the first half of my message, 2015 very strong year and good momentum on the key products, all products that will help us also grow through the years to come.

In terms of innovation, I think the scorecard this year on what we expect to deliver on the key milestones was really terrific from a pipeline perspective, without a doubt I mean, get to his ocrelizumab, atezolizumab, the additional data we had on ACE 910, I mean, these are really highlights of the year in terms of the portfolio. Couple of things that happened since the third quarter, so we now have Alecensa or ALK2 inhibitor approved on an accelerated basis in the United States, that was approved just before year-end, and we also have Cotellic plus Zelboraf approved in both US and Europe since the third quarter.

And Phase III starts, we do now have – we started enrolment of our ACE 910, it’s now called Emicizumab for those of you that want to now gravitate towards the new name. Emicizumab has patients enrolling in the inhibitor trial, I’m sorry and enrolling very nicely, I can get back to that as well. And then the last two things I would say, we have data in-house on the Perjeta PHEREXA trial and also our AKT inhibitor. We would expect to be making the announcements on those and submitting those to ASCO for this year. So we will be able to give you updates on those two programs around that time.

Well, it certainly was a busy year for the immune-oncology portfolio. I’m really pleased to say that when we look at the cancer immunotherapy cycle, we added now two new molecular entities in immunology into our late stage development trial, the bispecific antibody, anti-CD20/CD3 and another aisle to the anti-FAP-IL2v was also added. So two new immunotherapies into the late stage portfolio and you can see we’re also obviously doing and bringing some additional molecules in from the outside here.

I thought the best way to show the progress, because you’ve seen a lot of charts on this, and frankly, it's getting more and more complex to put this into a short presentation, I thought I would show you graphically where we stood at the beginning of 2015 and on my next slide, I'm going to show you where we stood at the end of 2015 and just to orient you to this slide, basically, what we have is we have two circles, the darker gray circle is really the pure immunotherapy products and then the lighter circle is really our targeted agents outside of immunotherapy and the blue lines are things that have been approved and the orange lines are clinical trials that we have underway.

So if you just watch, I'm going to switch now to the end of the year and you can see a lot of advancements in a short period of time and a significant amount of science and thought has gone into this portfolio. I’m going to highlight a couple of things. First of all, the two new agents, so you now see nine green boxes in the dark grey areas, so two new agents that are being tested in an immunotherapy portfolio.

We have two new approvals like I said, Alecensa and Cotellic and the other thing you’ll graphically notice about this is the importance of Atezolizumab in the entirety of the portfolio. So we have every single one of our major nine marketed agents being tested in some way, and in some cases in many ways with Atezolizumab. And I think it shows really the cornerstone nature of PDL1, but also the fact that in combination, we really do expect to be able to make a significant difference to the vast majority of patients that are not responding from single-agent therapy today.

You can also see in the grey boxes down at the bottom that we don't just think internally at Roche, although we have a tremendous internal advantage in terms of the number of medicines, we also of course partner with compounds outside as well. So I mean terrific progress for the portfolio. This is the more standard side on what we have in Phase I, Phase II, Phase III. From read-out perspective, those things in red are the things that we would expect results in 2016.

Quite a bit here to study, I would just point out a couple of things. The first red box on the left hand side atezo plus chemo is -- includes both lung cancer and renal cancer and the Cotellic combination is in colorectal cancer as well. So this will be a really important year for our read-outs for both Phase Ibs, as well as some later stage trials in cancer immunotherapy and I think will give us a good chance on which of these immunotherapy agents are most promising to take forward into late stage trials.

In terms of Alecensa, as I said, we have the approval in the United States. We are now up in Japan because of the CNS effect on this and the ability to bring this into earlier line therapies already in Japan up to around the 60% to 65% market share in Japan from Chugai, they have a broad label, it’s first line, it's not just in second-line and I think it shows the effect of what you see here is that when you have CNS meds and even in [indiscernible] patients, we’re getting very, very good response rates for positive lung cancer patients, which is extremely exciting for such a devastating disease.

And then, likewise with Cotellic, the results you've seen before, I’d just remind you that we've got in addition to Cotellic and Zelboraf rolling out now in Europe and the United States, I think this will continue to be an important combination; the good news is there are lots of different opportunities for patients with skin cancer now. I mean, if you went five years ago there was basically nothing. Now, we've got immunotherapy there, we've got targeted therapies and clearly we believe that the targeted therapies and the targeted combinations will still provide an important options for BRAF positive agents as recognized also by NCCN guidelines. There will be different treatment strategies that go on here but clearly these will play an important role particularly for those patients with larger tumor burden to be able to act quickly with confidence about the results on overall survival and progression free survival with that combination.

Ocrelizumab, you've seen the results we’re thrilled about the opportunities at this first t-cell therapy, you can provide to MF patients on a twice yearly dosing schedule, first with RMS and PPMS. We are on track to file in the first half of this year and we look forward to working with the regulatory authorities to bring this medicine to patients as quickly as possible. And then also obviously preparing within our commercial organizations ramping up with expertise in MS and getting prepared to do a very professional launch with the product in 2017 in the first markets.

Emicizumab, ACE910 continues to do well. As you know we had the nonintervention trial that had around 80 to 90 patients, which is allowing us to recruit quite quickly the first Phase III trial. We’ve expanded that nonintervention study to include inhibitor and non-inhibitor patients for the trials that will start shortly in the non-inhibitor segment. So we’re recruiting very well, we started recruiting in December and that trial is recruiting well and as you can see here in addition to the inhibitor, the non-inhibitor and the pediatric studies. We will also pursuing, we have plan to pursue a Q four week dosing opportunity in parallel, which particularly when we talk about the need of these patients and moving to more prophylactic therapy that already has a significant advantage on the dosing time but to improve that potentially every two weeks, every four weeks and it could make a big difference to these patients. We want to make sure we test the dosing limits of this.

And the other really exciting thing I have to say I know this is a single patient but I think it’s quite dramatic, I mean many of you may have seen ASH in 2015 that there was a patient was treated with ACE 910 and in fact underwent surgery for an appendectomy and basically had no one of the most obviously invasive oblivion trauma that you can cause a patient and the patient really had no bleeding events and did very well. So I think it shows the promise that this medicine holds. So the pipeline very strong. And the third component I want to say is I think we’ve been very proactive in 2015 in shaping the future environments of personalized health care and how we think that's going to impact both our research and development in patient care.

And in that context, we've sort of leaders in their fields, foundation medicine clearly the leader in comprehensive genomic profiling, which all we have to do is think back to that that map that I showed you about immunotherapy and the complexity there and the number of potential markers that could help guide treatments to know that comprehensive genomic profiling and the molecular information that goes along with that is going to be fundamental to determining what research hypothesis to pursue and how to treat patients. That combined with our Roche clinical trial data and now tapping in, in a more systematic way into real-world data and oncology with our collaboration with Flatiron.

Flatiron is clearly today the leading company in the United States and they have collaborations with Varian outside the United States. In the field of oncology EMRs and what they do is they are able to clean that data make it meaningful. And they really a strong market share today of more than 20% of the EMRs and that will continue to grow as well. So this is important to us because we know that patients in the United States is only about 4% of patients that ever experienced a clinical trial. So 90% of the patients now there are experiencing our medicines in the real world setting and mostly in community oncology setting.

So the power and the ability to have strong validated good data combined also with good comprehensive genomic data will allow us to take the next step in terms of our precise healthcare, make better research hypothesis, accrue clinical trials in a totally different way than we're looking at accruing clinical trials today. And very importantly be able to help physicians make the best patient care decisions and be able to put on medicines in the right perspective for those care deliveries. So this is admittedly a longer term play. This will develop over many years, but we wanted to be at the cutting edge of this and have these collaborations to make sure that we can help drive and shape this environment.

And then finally on the outlook, I would complement what Severin said that we have now 17 kind of just the major readouts as we see it over the next three years, arguably some of the line extensions are even larger than some of the new molecular entities, but they are all medium to large size opportunities and the other thing I would note here is we are now up to 11 breakthrough therapy designations. We had just yesterday a new breakthrough therapy designation for venetoclax in AML, acute myeloid leukemia. So we have the most number of breakthrough therapy designations in the industry. That’s a reflection I think on the quality of the portfolio, but it’s also a reflection of how we might be able to move these medicines more quickly to the regulatory process and get them to patients.

I would also point out that in addition to oncology franchise we now are really expanding into other areas of large unmet medical need whether that’s hemophilia, whether that's severe asthma, obviously MS that we've talked about or AMD which basically does not have treatment options today. So I am very enthusiastic about this. This is why for those of you that came to the Pharma Day that I remain more and more confident that we can growth through our biosimilar entry that will start to happen in 2017 and years on and replacing that, really replacing the standard of care and replacing that with new and innovative medicines that in many cases are targeted and - to patients and also to key unmet medical needs.

So this year we again have an important year of readouts for the hematology franchise, for the HER2 franchise, for the immunotherapy franchise and for the severe asthma franchise. We expect to get the lebrikizumab data in shortly. We will also have some data on some other indications with lebrikizumab and particularly atopic dermatitis that there is the Phase II data and that will allow us to help make some decisions on some of the line extensions for lebrikizumab as well. So you see them here and I would mention one point because on Alecensa we have it here in 2016, this will be the top line results for the first line setting. The fuller results would come in 2017, so on the previous slide you also saw the indication of where the fuller results will come out in 2017.

What that, I thank you very much and turn it over to Roland for the diagnostics.

Roland Diggelmann

Thank you, Dan. Good afternoon, everyone. So from my side Diagnostics. You have seen the results before. Here we go. It’s been a very good year, very good sales performance for Diagnostics, 6% overall. It’s been an exceptionally good year in terms of the laboratory diagnostics with an 8% combined between professional diagnostics, molecular and tissue diagnostics. Diabetes Care, a challenge was minus 3, I will get back that. But with this I think we are 6% and what you can see here, we continue to continue to grow above the market. I would just to remind you that the business model that we operate that is typical for the industry is that of closed system, so I would test run in our instruments only which means they install base, they install the instruments in the market. The commercial presence are extremely important in terms of the ability to leverage new and novel assays that we bring to the market.

Geographic distribution continues to evolve well. Emerging markets performed very well led by Asia Pacific, Latin America, the Middle East. We had very strong performance ongoing in China with more than 22% growth, but other markets also like India, like Turkey each performed well and which are able to offset maybe some more volatile markets like we've seen in Russia in 2015.

And then also the large, the continuous large businesses in EMEA doing actually very, very well, 6% excluding Diabetes Care, 6% also in North America, excluding Diabetes Care. So those two business continues to do extremely well.

I am not going to go too much into some of the highlights, so I will touch more on the portfolio in the latter part of the presentation. Here, just wanted to highlight Virology, and the ongoing growth in Virology, HPV being a part of it where we continue to grow and you can see 27% year-over-year taking share. And then broad Virology menus, which typically are the HCVs, HBVs, HIV launch pad or test that continued to do very well, and also on the basis of our newly introduced instrument.

The P&L, we’ve flagged earlier last year that this is going to be a year of investment of 2015 and it has been. We have in particular invested and acquired five companies, four of them in sequencing and I think you see this here also. In the context, these are early technologies that we brought on board and we are of course – there is a R&D requirement, so this is what you can see here in the line. M&D as well, some of the acquisitions that required promotional investments and then on the cost of the sales and mix of also the instruments that we bring to the market and service fees that is in this line as well as some of the pricing impact on diabetes in the United States.

I’d just like to summarize for this slide that of course for 2016, you won’t see the same picture and diagnostics will get back to contributing to the overall group guidance.

Moving to the portfolio, here is the success story of immunodiagnostics, which is the biggest part of our professional sales and you can see here, 15 years double-digit growth and this is based both on leading menu, so the largest number of test that can be run on our proprietor instruments. We continue to invest, we invest in the capacity, we have expanded our manufacturing sites in Germany, we are building a new plant in China, and we also have and you can see here the e801, which is the large throughput module that we will introduce later this year, which will again strengthen the franchise in immunodiagnostics.

Beyond this, it’s also about the test, it’s about bringing the test to the market that have a high medical value and I just wanted to highlight this one, not because it’s a new test, it’s been on the markets outside the US for many, many years, but the fact that it is now being recommended by the European Society for Cardiology to be brought on to the guidelines is really meaningful. We have conducted a large study, we can demonstrate that with this high sensitive Troponin T test you can actually receive the answer that you need within an hour in the most cases, and this of course is absolutely important as high medical value in terms of ruling in, ruling out acute myocardial infarction, so really important message, really important medical value that we contribute with diagnostics.

Switching to Molecular, we introduced the largest highest throughput platform, highest degree of automation in late 2014. 2015 was the year of the two launch, very pleased with the progress, both in terms of installing instruments, but also in terms of expanding the menu. This has been the case for outside of the US, so everywhere India, APAC. And we have also received the approval now in December for HBV, HCV and HIV for the US. We are waiting for the FDA approval for blood screening, which will then again give us more opportunities in the US market, but this again going very well.

And the other franchise was a new launch, Tissue Diagnostics, which here you can see a picture of the primary instrument that we are just launching now this year, again, following the same principles providing highest throughput, safety, but also high automation to our customers. Here of course the primary detection in Oncology for primary staging.

Diabetes Care, I would say a tale of two stories. We have seen pressure on the prices in the US. On the other hand, the positive note here is that we have also seen actually volume increase also in the United States, the volumes have grown 5%. So it’s about both managing the efficiency, then you see one example here Guide, which will launch this year, which will provide universal strips for most of our leaders in platforms of manufacturing and efficiency, at the same time, also providing higher accuracy and here again meeting the increased standards of the FDA. And then on the other side, we will provide innovation in terms of the senses and the continuous glucose monitoring, which will be launched at the end of this year in the European markets.

So 2015 has been an exceptional year or so for diagnostics in terms of bringing products to the markets, both instruments and you can see here the full list that we disclosed as well as tests and the only one that I maybe would want to point out is liquid biopsy, the EGFR plasma, which you can see here, second from the bottom. Not so much for itself today, but for the potential that liquid biopsy can have and could have going forward in terms of contributing to new diagnostics means.

And then ’16 will be a very exciting year as well. We have a host of new products coming to the market, the most important one I mentioned already, which is e801, the high throughput immuno platform, then more and more menu on the existing platforms on the molecular side, 6800 and 8800 and then, last but not least, of course, also the contribution to our personalized healthcare. At the bottom, you can see the PDL1 franchise in the companion diagnostics that we will deliver both for bladder and for non-small cell lung cancer.

So good outlook here for diagnostics as well and I’d like to thank you for your attention and hand over to Alan.

Alan Hippe

Thanks, Roland. Welcome from my side. Before I start digging into the numbers, let me say, as Severin, Dan and Roland pointed out, I think it has been a very exciting year. As you've seen, I think we have potentially eight products to launch in the next three years, which I think is really historic level for us, also a challenge, I will come to that. And the second point is, we are investing heavily into diagnostics to really maintain the momentum that we’ve seen over there and I think when you put that together, you see that we came up with pretty solid results in 2015, I'm happy to lead you through that.

But not just that, I think when you look at the guidance for 2016, where we have said that the EPS growth is higher than the sales growth, I think it also underlines that we’re committed to productivity and efficiency because while this will be a year where we invest into ocrelizumab, where we invest into Lebrikizumab, where we invest into a pipeline, a rich pipeline that we have to maintain, that we want to build further and nevertheless you see, I think it's really packaged to fulfil that guidance.

So I think really quite a challenge ahead and happy to deliver on that. And when you look at the highlights for 2015, don't want to be too redundant here. The sales growth we've seen, core EPS growth, 7%, excluding filgrastim because that has been the guidance that we have provided to you and core operating profit up by 5% and Severin talked about the dividend already.

And what we have not talked about so far is the cash flow generation and when you really look at the operating free cash flow at a level of 14.9 billion and I will come back to that, I think we have really reached a pretty high level despite the fact that we have invested heavily, and when you look at the reduction compared to 2014 of roughly 900 million, then you will see 627 million is an increase of investment into PP&E and the other increase of 265 million is going or is coming from investments in intangible assets.

So it's really just investment driven. All the rest in fact has either improved or kept stable. Accounts receivable in Southern Europe, I’ll come back to that later on, it's an ongoing story and helped us quite a bit on the cash flow side and then the debt restructuring, I know it’s second year in a row. We have introduced a significant debt restructuring effort in 2015, which was a burden on the IFRS net income, it's a non-core section, it’s a burden of 381 million negatively contributing, but certainly I think it gives us a nice benefit in the years ahead and just to prove that this is a nice thing to introduce and when you look at the interest expenses in 2015, they have been lowered by 61 million actuals compared to 2014 despite the fact that we had a much heavier average gross debt in 2015 of 24 billion, compared to 21 billion in the year 2014.

In fact, what I can say is we brought the effective interest rate from 4.4% in 2014, down to 3.7% in 2015. So it really pays off and gives us good momentum and we’re happy to enjoy that in the years ahead.

Good, let me make a couple of points on this comprehensive picture here when you look at the group performance. Sales, core operating profit, I think speaks for itself. I think when you look at core net income and you compare that with IFRS net income, you see there is a difference of $2.8 billion. This quite compared to what we have had last year. Last year about CHF3 billion, this year CHF2.8 billion. And I think this year very different elements compared to what we have had last year. So on one hand certainly the debt restructuring that I've mentioned already is in that. I think certainly we have Esbriet, the amortization, the planned amortization for the Esbriet intangible asset in there which is CHF1.1 billion admittedly. And the second point I mentioned about Esbriet is the inventory wind down. The inventory wind down is CHF539 million and also contributes into non-core section negatively. And then I would like to mention the restructuring charges which are significantly higher than last year at CHF1.0 billion roughly, CHF1.62 billion to say precisely. And that certainly will contribute with benefits in the years ahead.

The major piece to it is the pharma manufacturing and restructuring that we have you know we are building our capacity on the biologics side and at the same time we are reducing our capacity on the small molecule side. So I think these are measures we have taken that will help us in the years ahead to drive efficient efficiencies and productivity. Operating free cash, I would come back to that there is an interesting point to make because I know there are lot of voices about the currency impact, I will talk about it. But the currency impact, we are I am very convinced that we have a nice natural hedge in the company because we have really our costs in fact in countries and locations where we also have our major sales. So when you look at the cash flow, where everything comes together, there is no non-core, core or whatsoever I think the cash flow that’s really, that’s the truth.

And when you look really at the operating cash flow and differences and changes in Swiss francs compared to constant rates, you see there is minor difference between the two. And that means here really the currency impact balances out and that's really what we have available, really to invest into our business. So I think that's the major point her. It's hard to explain in my opinion currency impacts when you solely looked at the P&L, but I'm happy to do that later on. So cash is king and I think it really counts when it comes to currencies. The free cash flow, you see really the free cash flow I want to make a comment here, reduced by roughly CHF2 billion. So I think on one hand we have the CHF900 million reduction coming from the operating free cash flow. So what is the other trigger here and if it’s really a sustainable trigger which I think is important.

The first thing is to mention is taxes and I’ll come back to that anyway to the tax rate. But we have really cash out for tax was CHF700 million. I can tell you CHF300 million of that is base effect, we had prepayments of taxes in 2013 but base is down by CHF300 in ‘14 and certainly now shows up in the comparison to ‘15. So really here CHF300 of the CHF700 million that's the base effect, so CHF400 million is really in the higher cash out that we have had. Second point is the dividend CHF200 million dividends. I mean that's obviously and then the rest really comes from the treasury outflow.

With that to the P&L, I think my colleagues let through already. I think when you look at the royalties and upper operating income, the minus 10% basically is driven by the lack of gain of the sale of filgrastim rights. So when you exclude that I think you would have seen that the royalties in the upper operating income would have increased by 10%. Cost of sales triggered -- the increase is triggered by the investments that we have done into our manufacturing network which is not just applying to pharma it’s also applying to diagnostics. M&D I think despite the fact that we had significant investment into Esbriet, I think there is a reasonable development and the same applies into R&D. I cannot emphasize enough that we have really eight products close to the market, so we’re really here in the R&D section. And we still I think we do everything to bring this product very fast to the market.

Nevertheless I think we come up with a very reasonable spend. And then you have G&A with a minus 12% and to put more transparency into it, you know we have booked the US pharma fee last year twice, so really that was an impact of CHF233 million. I think when you adjust for that G&A still goes down by 3%. So I think we have done really a good deal on G&A in the year 2015 and showed really what we can do when it comes to efficiency and productivity. I think about the margin development, I think we can debate that excluding filgrastim you see the margin going up for the Group; you see the margin going up for the pharma division. The diagnostics division, certainly on one hand we have done the acquisitions and the acquisitions really require additional investment into R&D, Ronald has talked about that and the other point is diabetes care to mention here.

The financial results and the core net financial results, I had a couple of points to explain. I believe that first you see a deterioration of 300 million and where does it come from? So the positives, on one hand, we did less on the debt redemption side. We did it really in the non-core section as you know as a major debt restructuring, so that's really start applying here. Then the interest expense went down by 61 million, I explained that already as we brought the effective interest rate down.

And then you see really the gains and losses coming from currency. And here we have applied the devaluations in Argentina as well as in Venezuela at the year end. For Venezuela, minus CHF235 million, for Argentina minus 89 million. Don’t get me wrong, I think these are very sustainable businesses for us and very profitable businesses over the years. I think over the years that makes a lot of sense, but I think that’s really a one-time hit that we have taken. And then when I look into 2016 relatively comfortable and I think we have taken a rather conservative approach here.

Net income from equity securities and you know what that is, I think in 2014 we had the opportunity to benefit from gains which in fact came from the Roche Venture Fund and the Roche Venture Fund we hold minorities. So when Alios and BioFire were sold, I think we were part of the approval process that we want to able to trigger it. So these are gains which are coming and a little bit – not by surprise, but it’s not like that you can counter that as we hold minorities in the venture fund. It helped us out in the year 2014 as you know and certainly it didn’t reoccur in the year 2015.

Tax rates, here we are. Let me make a couple of comments on the tax rate. First of all what you are seeing here are the actuals. And the actuals I think what you see is the tax rate goes and this is the group core tax rate, it goes from 24.1% up to 26.6% which is quite a shift. So let me explain first this in two steps.

When you look at constant currencies development, what would be the first step? Really it goes 24.1% to 25.5%, so then the increase is 1.4 percentage points. And this is really driven by the good business development and the great dynamics that we enjoyed in 2015 in the U.S. So we had great dynamic. As you might have seen, Dan has presented it, and we had a 6% growth in pharma alone and in the U.S., in the pharma section when you look at Swiss francs, it’s even 11%. So really, really a huge dynamic in the U.S. So I think that’s one part of it.

The second part is currency, because and that’s what I have outlined, what I said about the branch U.S. business and when you look at the currency, 1.1 percentage points of the increase were triggered by the appreciation of the U.S. dollar. The U.S. dollar appreciated 5% against the Swiss franc and that’s basically what you are seeing here with the increase of the tax rate. So, okay, hard for me to project how the U.S. dollar will develop in the year 2016, but I think with the 25.5% that we have really as a tax rate in concentrate that I don’t feel uncomfortable with even when I look at 2016.

Let us take a quick look at the balance. The balance sheet, the cash and marketable securities went down by 2.5 billion which in fact reflects the development of some noncurrent liabilities. In fact, what we have done is we've taken cash to bring the long term debt down. So that’s one element here. Other current assets went down and I think we did a great deal on receivables. When you look at the receivables in the balance sheet, we brought it down by 700 million despite the fact that we had a [indiscernible] of 5%. So I think really a great work over here. Noncurrent assets went up by 3.2 billion and that’s the investment activity. PP&E is 1.3 billion, goodwill is 1.2 billion and intangible assets is 1.1 billion here.

When we look at the current liabilities going up by 700 million, in fact a positive for cash flow because the payables went up, so that's really the major trigger here. Noncurrent liabilities I talked about and you see really equity went up and the equity ratio is now at 31%. Operating free cash flow, I’ve talked about that at the beginning. The decrease compared to 2014 is solely driven by the increase of investment in PP&E as well as in intangible assets, that’s it, that’s more to say to that.

And then the story about the receivables in Southern Europe, and you see where we came from, we came from CHF2.5 billion in December 2011 and now we are below a CHF1 billion, really in an area and in a region, where it is not so simple on one hand to maintain and to make this business sustainable and this is what our business is in that region and on the other hand, to bring the exposure talent, and I can just congratulate the teams in the region of Dan and Roland, because they have done a fantastic job to maintain what’s expected over the years.

Group net debt development. Net debt CHF14 billion at the end of 2014, slight increase to CHF14.1 billion at the end of 2015, and let me lead you through this. First operation cash flow, I talked about this, CHF14.9 billion, talked about the free cash flow, I could see really what happened on the dividends, the tax and the treasury, I talked about this. And then on top of it, it’s the business combinations. The business combinations was CHF2.1 billion, and what we have invested in all the assets that we have acquired during the year 2015. So in fact what I can say is, we invested more than CHF4 billion really in PP&E and intangible assets. On top of that, the acquisitions was CHF2.1 billion and we were able to keep the net debt stable.

Currency, and currency, you see the two effects and this is really the impact on sales growth. You see the two effects in the US dollar, which has been – which has appreciated against the Swiss franc, you see the euro, which has weakened against the Swiss franc and then you see the other currencies, which also have weakened against the Swiss franc and that certainly reduced our momentum when you look really at Swiss franc growth.

And the same applies basically when you look at the core operating profit and the core EPS, and let me lead you through this. And when you look at sales, the 4% as explained in the previous slide or the 4 percentage points, the core operating profit of minus 6 percentage points, and by the way that’s exactly the impact that we had forecasted in Q3. And then the core EPS was a minus 10 percentage points, which is a slight deviation to what we have said in Q3, we said a minus 9% and we came out with a minus 10%.

The acceleration here is basically driven by the US dollar when you look at it, because the major difference between the core operating profit was minus 6 percentage point and the core EPS was minus 10 percentage point, the reason is roughly 80% of our financing costs is in US dollars. So when the US dollar appreciates and goes up, it’s only we have a larger impact on EPS.

Interesting point in 2016. As you know, what our extra slide and other modeling looks like, and we look at, how should I say, the future developments, we do a simple thing. We keep all the spot rates stable, and that’s what we did at year-end 2015 and project them stable through the year 2016. I am going to ask us, what would it mean for our results? Well, that’s really that’s the assumption here. And what you’re seeing is, we would have no impact on sales based on that. We would have a minus 2 percentage points on core operating profit and up to 5 percentage points on core EPS.

As we are here today, I can tell you the effect with today’s spot rates, would even look more positively. So it’s really driven by the assumptions that you take on currencies. My major message here, it’s really you can worry a lot about the P&L. I think what we all have to worry about is really the cash flow and I think the year 2015 was another year where have proven ourselves that our belief in the natural hedge which I think is the best protection, worked out because of the minor deviation that you have seen in constant currencies development, through development in actuals when it comes to the operating free cash flow. So I think really for the year 2016, we can speculate about the currency impacts, I think, in case of cash flow, I think we’re quite confident and we will see how the year turns out.

Good, and with that to the outlook once again. I mean, it looks a little bit the same as last year and I think there is a major difference, there is no adjustments, so we have not excluded anything. This is clean here and what we want to deliver is really sales growth and lots of mid-single digit EPS growth ahead of sales growth and that the dividend to further increase, if not the dividend in Swiss franc.

And with that, we are happy to take your questions. Thanks a lot.

Question-and-Answer Session

A - Severin Schwan

Shall we take the first question then? I will start here, please.

Unidentified Analyst

[indiscernible] My main question is really on the R&D investment for 2016, because I thought that at the CMD in November, you were really hinting at a significant potential rise in R&D spend, which makes a lot of sense when you look at what's happening in the immune-oncology space generally and how you are leading? So, but your guidance implies a very strong pharma margin, so I was just wondering, should we expect a significant rise in absolute R&D spend or on the R&D to sales ratio in 2016. If so, what is the offsetting factor? And would you expect the mix of R&D spend to change significantly in the sense that immune-oncology is going to be a bigger proportion of R&D spend and maybe some of the non-oncology assets might just progress a little bit more slowly. If you need to make some savings there?

And the other question is just a quick one on diagnostics. I mean, you're obviously investing very much into next-generation sequencing. I was just wondering whether you see any other technologies emerging that could potentially have a disruptive cost position and whether you're investing into them either through external acquisitions or internal investments? Thank you.

Severin Schwan

Right. Perhaps I'll start off with the first question on R&D and then hand over to Dan for more color on that question, and certainly Roland can take up the next sequencing question. You're absolutely right, it’s pressure in the system, there is tension. You see the portfolio evolving, there is a lot coming through, and it’s true that in particular in cancer immunotherapy, we have a broadening portfolio and on top of it, the compounds are coming into later stages, which are of course more expensive.

So there is pressure, but I do believe at the end of the day, it's good to have some pressure because if you keep it contained, that's the underlying assumption, there is a need to allocate the resources to the most promising opportunities. So I would bring it back to the overall guidance, I don't expect major changes in the structure of our P&L. I see this much more evolutionary, but bottom line, we want to increase productivity, bottom line, we want to leverage the bottom line by the respective productivity gains, increasing our efficiencies and also the allocating resources to the best opportunities. Dan, you want to add a bit of color?

Daniel O’Day

I’ll just add a little bit more that, but I couldn't agree more. I think one has to remember the structure of our R&D expenditure. About half of our approximately 9 billion spent on the research and early development groups and our philosophy around that is we generally keep that pretty well capitated year-to-year and we let the late stage fluctuate with the opportunities overall. So I think, first of all, when you look at the growth in R&D line, you have to kind of remember, we're talking generally about half of that in terms of the fluctuation and then you have the natural cycles of ocrelizumab finishing the major trials and new trials coming, so you have the ins and outs.

What I can tell you and it’s consistent with the Pharma Day is, I don't think, we’ve kept the bar high, which I think is the right thing to do, but we certainly are not afraid to invest in the right opportunities and we will continue to invest in those. So I think as I look specifically to immune-oncology for 2016, it's going to be an important year for Phase Ib read-outs in terms of the combinations and that will mean that we’ll decide in an even more broad sense, we have already with atezolizumab, what other immune-oncology agents we will take forward, but from a cost perspective, those decisions will not all occur in 2016.

Some of them will come into ‘17, we will have the natural evolution. But clearly we do continue to increase as a percentage of spend, the investment on immune-oncology as a proportion of the total oncology and oncology, relative to non-oncology is also increasing slightly. So we don't guide specifically on that line. But back to severance point, I mean, we've looked at all aspects of the P&L, and with efficiencies and with looking at -- taking things of the plate, we continue to be confident in the budget that allows us to deliver the EPS ahead of sales next year.

Roland Diggelmann

Maybe on the technologies and diagnostic side I think. Next-generation sequencing is certainly the area that gets the most attention and unforgivably since we like it also because we believe its complementary to what we’re doing, I mean this is all about DNA analysis, we’re leader in TCI, we have a very strong tissue franchise and we think it's going to be complementary to that. So this is one area where we indeed have invested significantly in trying to go end to end solution as we know it other areas of diagnostics. There are some other areas that we continue to look into close to our business. I think we want to be focused on. There is areas around automation and IT connectivity, there is technologies around microfluidics, there is robotics those are areas that are fairly close to our core business. And then I would probably also point out to the acquisition we made in 2016, a company called GeneWEAVE which is really a novel way of looking into microbiology and to looking into specifically into antibiotic susceptibility testing which we all know resistance to antibiotics is a huge topic for healthcare systems and increasing in importance. So that’s one other areas that I would want to point out for the rest, I think we are very much driven by core technologies and how we can advance those.

Severin Schwan

Thank you very much. If we go back into the second row here, I’ll try to work my way back, Kyle how much time do we have for the Q&A here? Please go ahead.

Michael Leuchten

It's Michael Leuchten from Barclays. Two questions please. One on guidance again, because of the currency hits I 2015, the guidance can imply some or quite some margin expansion in 2016. So does the guidance imply allow 2016 to be a margin expansion year on not. So that's question number one. And question number two, just on the dividend, I can’t remember last time, where Roche was talking about the payout, I think you’ve been quite consistently talking about growth when it comes to the dividend. So why did you choose to flag the payout ratio today?

Severin Schwan

Perhaps on the guidance I think we can quickly clarify that, Alan if you could comment on that because we take everything related to forex out.

Alan Hippe

That’s the point; I think the guidance is really in constant currencies. I think just to make that very, very clear because we cannot really project and speculate on currency development in 2016. So I’ve seen really it’s really a guidance in constant currency and on the margin expansion, I think that speaks for itself. When you look at it, we want to grow EPS more than sales.

Severin Schwan

So the point is, I think what you suggest that if I understood your correctly, there is kind of a windfall, because the base is lower due to the currency fluctuations in 2015 but it is not the case because it is from the method, of course there was forex impact but the way we presented the results the core EPS growth in 2015 over 2014 excluded the forex impact. So as we give the guidance at constant rates, you can just forget about that that's like below the line. So it's not a – as such it’s not a windfall, so let’s assume we don't have the same write-off on forex, this doesn't create a windfall, because it’s taken out at the guidance and the extras which we give in terms of EPS at constant rates. So it’s just out of the picture on every line from the top to the bottom. Perhaps we can clarify off record again.

Alan Hippe

We can clarify that later on but the point is really, when you look at Venezuela and Argentina if that’s the question really behind that. That’s also excluded because we say every significant currency impact, now that is a currency impact. It’s not applying to constant rate content. So it really goes out that’s the point behind that. Other companies I know put it in the non-core section for example, we don’t do that we just exclude it when it comes core EPS growth.

Severin Schwan

So that’s an important element that you understand the method behind it.

Alan Hippe

[indiscernible] in the year 2016.

Severin Schwan

Are there follow-up questions on that specific one, okay good because then I have to get [indiscernible]. You ask the question and then we come back to that.

Richard Vosser

Richard Vosser from JPMorgan. Is the base guidance, is base ’15 does that exclude any FX related losses from Venezuela.

Severin Schwan

Yes.

Richard Vosser

So the basis is not the 13.49.

Severin Schwan

The basis is really hard to – so 2015, when you look really at the concentrates in fact, it’s excluded, same concept.

Richard Vosser

I was just doing comparison ‘15, ‘14 and it’s out in the comparison ‘16, ’15.

Severin Schwan

Just forget about it. If it goes in constant rates and in terms of guidance if it didn’t happen, because it happened and unfortunately in actual Swiss franc terms it helps, but for the guidance you can forget it.

Richard Vosser

So just 100%, so the EPS that you reported, we need to adjust that down and then apply your guidance for ‘16 of that, because that’s what I am understanding, I don’t –

Severin Schwan

Are we fine on that one? Not yet. Okay, now [indiscernible] you take the mike. Let’s clarify that for once and for all.

Alan Hippe

The early stage for ‘15 is the core EPS of 13.9 upped by the FX losses, so it’s a higher phase.

Richard Vosser

[indiscernible] And that’s the pace which you use going forward.

Severin Schwan

You can put it the other way around. We don’t have a windfall because we had the loss last year. Correct. You are now clear, because there were so many -

Alan Hippe

But the point is of course the EPS will be adjusted and it will go up for 15 based on the currency impacts from Argentina and Venezuela. As I said, it’s roughly 300 million little more and then you calculate that on the number of shares and then I think that’s the number you have to adjust, but we will clarify that so that everybody has the same number.

Severin Schwan

So those of you who got it wrong, they know now that the guidance is even tougher than you thought, right. Okay, I come back here to the second row. Sachin, you had a question. Sorry, that was dividend question. You are right, we guide the market in absolute Swiss francs, that’s what we did and we increased the dividend in Swiss francs. I mean, basically what we did is we have put in a floor, but still you look at the various components and the payout ratio is one of the elements which you take into consideration. There comes a point when this gets a barrier to what you can do in a sustainable way over the long term. I mean if you have the payout ratio of 300%, then people will start asking, put it in extreme terms just to make my point. Then people will start asking so is this sustainable for the long terms. So, yes, we keep that in mind. Then you look at the dividend, you look at your cash capacity. And don’t forget, I mean the whole industry including Roche has this kind of core, non-core concept where certain items like intangible assets are excluded by definition.

However, at some point you pay for all of that. There is cash outflows and if you consider those on top of it, I mean you see that we have a payout ratio of about 80%. So is it something where we are fixated around because you see it fluctuating over time, but you have it in the back of your mind and I think it’s relevant for the shareholder point of view because those shareholders who are outside of the Swiss franc they potentially also benefit from the floor which we put in Swiss franc. I think that is also, how shall I say that, it’s something positive in for shareholders if we say we guarantee the dividend in Swiss francs. I mean we could have said we guarantee a dividend along local currency profit development. We’ve put in a lever beyond that. So from that perspective it places a hole, but there is no hard rules if this was what you meant. Does this clarify the question? Very good. Back to you.

Sachin Jain

Sachin Jain, Bank of America. Just a couple of financials. Just firstly on FX. You commented that the spot rates impact will be slightly better, I am guessing, you have a number in mind, so I wonder if you could share that? Particularly, I guess given the Swiss franc dollar has gone from sort of 0.9 at the end of the year to 1.81 so just have an impact EBIT versus below the line FX, given that’s where a lot of them got confused.

Secondly, on tax rate, US growth is going to be a constant feature one would guess, so just on a mid-term perspective on that. And thirdly, just to clarify the comment on leverage within the guidance, any color on the degree of operational versus financial leverage would be helpful. And then just one on IO for Dan, could we expect chemo combo PFS data in lung this year? Thank you.

Severin Schwan

Alan, over to you.

Alan Hippe

And when I say slightly, I think remember, we did a calculation last Monday, I think for last Monday and they in fact say we were neutral on the core operating profit already, I think that’s what you can say that we had a change of 2 percentage points to all those things that I have mentioned in the presentation already. So last Monday spot rates, you keep them stable until year-end and see – and improve what already of 2 percentage points compared to what I have shown in my presentation. Don’t know whether it helps a lot, but I think I am just saying in fact, everything goes in favor of us.

Severin Schwan

And the EPS, about most of the impact?

Alan Hippe

EPS also 2 percentage points, I think that’s really I would say and we – I said, up to 5% negatively and it would go then to minus 3%, okay that’s what I can say. Tax rate US dollar, first of all, let’s take it. I think I want to bring that point across. I think it’s fantastic when we have an outstanding growth in the US, I think that’s the point, I am not so worried about the tax rate thing as far as I am seeing which comes along with it. But the question is what is our dynamic in 2016 as a business and what’s the dynamic of our businesses outside of the US. Evidently, year 2015 was really, really outstanding and because the appreciation of the US dollar came on top, so I think that’s one element, which I think is very important and what tried to outline. I think I hope that all of our businesses will develop in 2016, hope that the US keeps the dynamic that we are having and you see the US dollar, I think that effect even mitigate already as you’ve outlined. So we will see what’s going to happen. But I said it, I think really the 25.5% in constant currencies on the tax rate is nothing I feel completely uncomfortable about when I look at 2016.

Severin Schwan

At stable tax rate that’s what you’re saying right Alan.

Alan Hippe

Yeah, I think really a stable – I can just say for 2016, I think for the future, we will see what the future brings, certainly it’s natural, I think as the better our goes in the US and if it were growing over proportionately, but the same would apply to [indiscernible] if that were the case. Everywhere where we have a higher tax rate and compare to our average tax rate, certainly it brings the average up. That’s the mechanism.

Severin Schwan

The leverage question, operational.

Alan Hippe

I think we have our guidance, EPS grows higher than sales what sets the guidance. And you can say, if there are a lot of financial leverage, I think it validates to have some financial leverage in the year 2016, but can it do the trick completely, certainly not. So I think really we have to come up here with a good mixture, with a good portfolio and how we can do that, I don’t expect the same situation in the financial results that we have had in 2015, so I think there will be some contribution, is that really enough to bring EPS growth to a level, which is higher than sales growth, I have my doubt. So we have to come up with a mix.

Severin Schwan

Okay. Chemo combo, he was asking for the first line, Phase I or ?

Severin Schwan

Phase I, we will update on the Phase I this year and may include PFS, we will see, but as you know the Phase III’s readout next year. Okay, so now I got a bit further back and work my way back, so if we go in the fourth row. Okay, good. So let’s try to keep our answers very concise. If we start here.

Matthew Weston

Thank you. It’s Matthew Weston from Credit Suisse. Three questions, if I can, I am afraid the theme is going to be similar and it’s one of confusion, because I am confused on a number of different things. The first is on sales growth. Alan, you did a fantastic job in your opening section I think highlighting the product growth last year. You also highlighted some drugs, but most of those go away. You called out Lucentis, but said it was moderating, you called out Avastin, Japan, but we can figure that impact out. So if Roland’s business is growing strongly, your business continues to grow strongly, how do we get to low single-digit, what is adjusted occasion for the bottom end of the sales growth guidance I guess, because I don't understand.

Alan Hippe

The guidance was not low, it was low to mid-single.

Matthew Weston

I know, but it has to embrace low.

Alan Hippe

Note that we have a new confusion in the book. I just wanted to make sure.

Matthew Weston

Thank you. But there is an end, which is low.

Alan Hippe

And there is also an end, which is mid, right? On the other hand?

Matthew Weston

But last year, you grew at 5 and you had $1 billion of revenue drag from generics, which you don't have this year and some of your other drags were called out to be moderated? So I don't understand how it goes along…

Alan Hippe

I just wanted to avoid confusion. That's all. But I'm sure Dan can give you more color.

Matthew Weston

I’m confused on tax I'm afraid, Alan, because, at the -- let's work on the 25.5% number, which is the X. At the middle of the year, you said that it was 24 to 25 was the guidance for the full year, but now it ends it up at 25.5. So that's at least a percentage point of incremental tax that changed. So I guess my question is what changed and then how confident are you on the 25 to 25.5 and then the final thing is atezo filing in lung. At the Pharma Day, it was imminent. It's now very nearly the end of January, it's still not done, what's the delay?

Alan Hippe

Dan?

Daniel O’Day

Terrific. Thanks, Matt. I’ll try to clarify I hope. One clarification point, you mentioned 1 billion in generics offset this past year, I think it's closer to 450 million to 500 million in ’15. Okay. So just what's 500 million, but it's quite a bit. I would say first of all, nothing dramatically is going to change to the business next year in terms of the key growth drivers. I mean we are going to continue to see growth in the HER2 franchise, we will continue to see growth in Esbriet, we will continue to see growth in Avastin, but a couple of things.

I mean, we always have the Tamiflu factor at this time of the year, and I would say we had an extraordinary flu season in the ‘14 to ‘15 and it was roughly balanced between what came in in ‘14, and what came in in ’15. It wasn't early, but also a long and a high flu season. So far, we had no flu season in ‘15 and ‘16, and that’s a swing factor of 500 million to 600 million, just to give you a rough idea.

So at this time in the year, if we don't get any flu season this winter, which is a high probability at this stage, I mean, we’re almost at the end of January and there is no inflection point in Japan and the US and then it's a real question of what happens, do we get an early season next year, do we get a late, so we always have this debate around the growth rates, which is important to point out.

And then the only other thing I would say is, and it's really building I think upon the success, I mean, we start to get to 60%, 70% penetration rates in the US with Perjeta, 80% penetration rates with Perjeta and new adjuvant. You have the base effect and Esbriet, from a pure launch year to growing at a more normal pace comes in about. So the growth rate could alter a bit, as you go into it, particularly when I look at the US business as I go into next year, not that it's not still exciting, but it could alter a bit as we look at ‘15, not because of any dramatic change, just because you’re getting to a penetration point.

And then there is another inflection point that comes as you enter into ‘17 with positive affinity read-outs, getting into the adjuvant setting with Perjeta, obviously launching ocrelizumab, potentially getting ACE 910 and Lebrikizumab on. So you can see this kind of evolution in the sales growth, which is the natural evolution of when products come in and how we grow it. In no way do I want to talk down the year next year, plus there is a variety of factors that affect the growth rate from ‘15 to ‘16 that have to be factored in I think as you look at it.

I think you know, but just to clarify, bladder cancer is complete, of course, we started rolling filings on both bladder and lung back in the fall of 2015. Bladder is complete as of January 14, 15, something like that. Lung cancer, we will complete in the first quarter. It's just an issue of when the data came in, how it got cleaned, what the agency is asking for in terms of data cuts, so I would say, even today, the vast majority of the lung cancer filing is in, but we call a complete when the last document is in, when we start it. And that’s really where we are at right now, so there is no resting on our laurels there I can assure you.

Severin Schwan

Alan, there was the question of 25 and then coming out with 25.5.

Alan Hippe

Correct. And it’s correct, I said between 24% and 25% in constant rates for core. The point is we ended up at 25.5% and the 0.5% on 4.289 billion represents 21 million, okay and as long as the 21 million. I think really and to be honest here, I think when you look at the U.S. business and how it did, we did get it a little bit better than I originally expected. I think 1% more in the U.S., we have a business in pharma alone of 17.6 billion, so the percentage point is 176 million more, okay. That’s, I think, this is just to put things into perspective. I was wrong with 21 million on the tax rate and then tax expense of 4.289 billion.

But I think I can even drill a little bit more down here. I think - and you can also look really at the effective tax rate here on the IFRS net income. And as you hear perhaps, this is more important when it comes to cash outflow for taxes and here you see really that we had a slight deviation, we had 23.8% compared to 24.5% in the year 2015. All I want to bring across here and I understand here, there is a bit of a confusion about the tax rate thing, but when you really look at the bottom line and what has happened with our business, I think basically it’s a pretty positive I can say. I am happy to pay this additional taxes on the back of really dynamic business that we are having.

Severin Schwan

Good, so let’s go back here into the middle if we may. Thank you.

Vincent Meunier

Vincent Meunier from Morgan Stanley. So the first question is on the cost of goods. Can you give a bit more granularity and color on what we should expect with regards to the manufacturing capacities build up and if you think that now the drug is down or you need more. And the second question is on Prejeta in second line. You have the data in-house, this is apparently not a priority for you in the slide, what should we expect from this? And the last question is the use of cash. Are there any opportunity currently in the biotech space for you of interest given the market conditions and your cash position.

Severin Schwan

Dan, you want to start?

Daniel O’Day

Absolutely, again, the manufacturing investment more than 1 billion in CapEx is going into expanding our facilities to prepare for the biologics that are coming, I mean those eight medicines that you see up there in three years are good news story. But we are basically very close to capacity to-date. The investment started last year and they will start to come online more so in 2016 and this is the natural evolution of the cost of sales impact upon that. Of course as you open new facilities or expansion facilities, you are no longer using those facilities at optimum capacity to begin with. You are using them in a lower capacity while you ramp them up. That affects your standard cost, affects your cost of sales.

So I do expect that as we think about ‘16 and we think about ‘17, that we continue to see the overall cost of sales line bear the impact of some of that new manufacturing capacity [indiscernible] of course, then as you increase your volumes, successfully selling products out there in the marketplace, you get back to a capacity level which brings your standard cost down here. So that’s the dynamic you see and we will see a bit more of that in 2016.

Having said that, we are very focused on finding other ways that we can do to try to offset some of that impact through efficiency programs, through complexity reduction programs, through finding a lot different ways to try to offset that. And that’s why we don’t guide specifically to the P&L line, but we take a lot of responsibility in trying to obviously manage each one to its optimum. I hope that helps.

On Prejeta, I mean, simple I mean TH3RESA data as we know is not material, so we didn’t release an announcement in the results like we wouldn’t do with a non-material thing. Then, of course, you have the fact that you want to submit this to a conference and therefore, we can’t get ahead of the game on those results coming out. But I do expect that we’ll be able to communicate those results and the results at ASCO. I mean, we’ll submit those to ASCO and have a good dialog and discussion around that.

Alan Hippe

Right. To shortly comment on the use of cash question, opportunities in the biotech space, I mean I don’t see a fundamental change in our M&A approach. You’ve seen that on the number of acquisitions last year, as usual, bolt-on acquisitions smaller, mid-sized acquisitions, I don’t see a change in the pattern here. And don’t forget, I mean, yes, it’s true, biotech prices have come down more recently, but don’t forget how much they’ve gone up for a long period of time. So we still struggle with the economics. So I don’t see a major change in our pattern here.

Severin Schwan

Right. Can we take the question? Okay, we take two more questions. One here.

Unidentified Analyst

[indiscernible] Now that you’re more specific on the timing for Affinity, I wonder if you could also be any more specific on the timing of Goya or is there a time for that, which you may become more specific?

Severin Schwan

For Goya, we still expect in 2016, I don’t think I can be a lot more specific than that at this stage. Yeah, more mid to second half, I would say at this stage for Goya is what I see. And Affinity again, both are event driven. So we just have to keep you up the sleeve, we get updates from the DSMBs on the number of events that are coming in and we’ll certainly update you should those events come in slower than expected or faster than expected to kind of look at those timelines in more detail. One more question. Alexandra, please.

Alexandra Hauber

Thank you. Alexandra Hauber from UBS. But I actually have two questions. And sorry for coming back to the question of tax at least conceptually. I always thought that the reason why we’re having a situation is because Genentech is a standalone company, they have the tax optimized, the only IP is incorporated in the US, and I think at least that is true, but -- and I don’t know whether that is true that the new products which have been developed later will not be, the IP will not be incorporated in the US and so therefore, ocrelizumab, Lampalizumab, Atezolizumab, are they going to give you any relief on the tax rate because it’s going to be somewhere else or are they not. So that’s question number one.

Question number two is on Perjeta Herceptin pricing in Europe. If you look at the various countries, are there any markets where you currently do not get to the metastatic one plus one, where you have some more combination pricing and if so, what kind of pricing moves are you thinking when hopefully in a year, you will be negotiating access for Perjeta in the adjuvant setting?

Severin Schwan

Alan

Alan Hippe

Well, on the taxes in general, actually, you’re right. I think that’s what’s going to happen. But don’t forget I think today, it’s really about Avastin, Herceptin still where we have really at least a vast majority of the IP in the US. So I think you’re right. I think there might be an opportunity overtime, we will see, but it will take time. It’s nothing which I think you will see really how should I say, it happens soon. Certainly, that’s an opportunity.

Severin Schwan

Well, I think there are even others that are there. But as I said, I think it will take time. Until this really washes out and this is how should I say that heritage that we have from Genentech. Because you’re right, I think the IP at least for these three products majorly is based in the US and hinders us how should I say to do more to optimize taxes so to say. But you’re right, there might be an opportunity in the future.

Let me clarify one point here, perhaps, this 26.6%, that’s the number I feel comfortable with for the year and 2016 I said 25.5, I looked into my notes, 26.6% is the number I’m comfortable with, when it comes for the core tax rate for 2016, but I encourage everybody to look really bottom line and to look at the IFRS results and the tax rate applied over there, because that’s the most relevant one when it comes really to cash out.

Alan Hippe

Yes. And on the combination based pricing and also the indication based price in Europe, yes, we are doing it today, so Perjeta and Herceptin in particular, we are doing in a couple of the smaller European markets, Switzerland, but also we have pilots going on in certain hospitals in France on that.

And to your point about Adjuvant coming up, I mean, we also do indication pricing as you know for Avastin in Italy in some other questions, I would say, as I stand here today, and I think that three to four years ago, we were in a completely different place about countries being prepared in terms of collecting data in the markets to be able to engage in discussions around combination pricing and in indication based pricing. I mean, every market is slightly different. But I would say more than 50% of the European markets are capable of doing it today, which is good news, and many of them piloting it right now. And one can imagine where we combine those scenarios where you have combination based pricing from metastatic like you say and in different combination price for Adjuvant based upon the value. I mean, that’s really where we want to get to at the end of the day, because arguably, I mean, medicine or combination of medicines in the Adjuvant study and the Curadev study for the both the patient and healthcare system is extraordinarily more valuable than in late-stage disease. So it’s a work in progress, but we are doing it today and we will continue to do it as we approach the Adjuvant setting as well.

Alexandra Hauber

[indiscernible]

Severin Schwan

How much of European revenue, it’s relatively small today, because the smaller countries or the major countries, the UK is in discussions with us about doing this. But I think today it’s relatively small and it’s manageable on the metastatic setting. I think when you get into the numbers of the Adjuvant, and when the -- if you like the pressure increases on healthcare budgets and looking for more creative ways to price, then I think they will be able to trigger this. So it will be a much bigger part of our business, particularly the immunology, immuno combinations, particularly outside or just in chemo combinations then I think we will get a lot of attention from payers around Europe and frankly elsewhere in the world to engage in serious discussions and activate it.

Alexandra Hauber

Good.

Severin Schwan

Thank you very much. It will be break out now.

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