Roche Holding AG Management Discusses H1 2012 Results - Earnings Call Transcript

 |  About: Roche Holding Ltd ADR (RHHBY)
by: SA Transcripts

Roche Holding AG (OTCQX:RHHBY) H1 2012 Earnings Call July 26, 2012 6:00 AM ET


Ladies and gentlemen, good morning or good afternoon. Welcome to the Roche Half Year Results 2012 Conference Call. I'm Selena, the call operator. The conference must not be recorded for publication and broadcast.

At this time, it's my pleasure to hand over to Dr. Severin Schwan, Chief Executive Officer. Please go ahead, sir.

Severin Schwan

Good morning, and welcome to our presentation of the first half results for Roche. Roche delivered strong operating results for the first 6 months. Sales are fully on track to meet our guidance for the full year, Pharma up by 4%, Diagnostics up by 5%, both divisions clearly outgrowing their respective markets. I'm very excited about the excellent progress we made in our pipeline. And let me just highlight at this point the launch of Perjeta.

We recently launched in June Perjeta in the U.S. after record-approval time, and there is no doubt that this medicine will shift the standard of care in the treatment of HER2-positive breast cancer.

Based on the positive topline development in combination with the various productivity measures ongoing, we were able to increase core operating profit by 7%, that is faster than sales, core earnings per share are up by 8%. And on the basis of those results, we confirm the financial outlook for the full year.

Pharma up by 4%, driven by a solid performance in the U.S. and continued double-digit growth rates in the emerging markets. Diagnostics is driven by Professional Diagnostics, Molecular Diagnostics and a double-digit -- continued double-digit growth in Tissue Diagnostics. We are facing a more challenging environment in Diabetes Care and Applied Science, and Dan will comment on this in more detail. But overall, also in Diagnostics, strong results.

As I said, operating profit up by 7%, driving our margins again, which stands now at 38.5% relative to sales. That is also reflected in our operating free cash flow with a margin of 32% relative to sales; and as I said, core EPS growth with 8%.

I'm in particular excited about the progress we made on our pipeline. And on the slide, you can see that over the last 18 months, 22 late-stage clinical trials delivered positive results. 22 out of 27 trials. So this is not only amazing in terms of the sheer number of positive trial results, but also in terms of the success rate with over 80%, which is clearly at the very top of the industry.

So our strategy remains clearly focused on innovation, on developing better medicines and diagnostic tests as we go forward. But at the very same time, we continue to work on our productivity, not only in R&D, but across the organization. My colleagues will comment on the various productivity initiatives we have in diagnostics, also in group functions such as IT. And we have also given a special focus on our networking capital where we made good progress over the last 6 months.

Let me just take a moment to put the decision to close our Nutley site into perspective. As you can see, our clinical development pipeline is expanding. We have now 72 clinical -- new molecular entities in clinical development. Certainly, one of the leading pipelines in the industry and then, of course, in turn is feeding our late-stage pipeline. 10 new molecular entities already in pivotal trials, and we expect at least another 3 to enter late-stage development.

The decision to close our Nutley site and to consolidate the respective research and early development activities in Europe allows us to free up expense -- free up resources and funds the various promising projects in this expanding clinical pipeline. This move also allows us to reduce complexity. We have now the pRED management team co-located in Switzerland, in Basel, and of course, we can take advantage of cost synergies. We have savings from the relatively expensive site infrastructure in Nutley. And at the same time, we can leverage the existing support functions in Basel, namely chemistry and nonclinical safety.

Again, all in all, a very solid performance for the first 6 months. And on this basis, we are confident to confirm the financial outlook for the full year.

And with this, I hand over to Pascal for Pharmaceuticals.

Pascal Soriot

Thank you, Severin. Good afternoon, good morning. It's really a pleasure to present this second quarter half year results to you all and a great pleasure because we made enormous progress on the portfolio front, on the sales front, but also from a profitability viewpoint.

The portfolio, as you saw from Severin, we've had a tremendous success rate in terms of our clinical trials. I'd just like to highlight the most important achievement I think and it's the approval of Perjeta. And I'll come back to this one in a few minutes. From a sales viewpoint, just highlight 2 points to you. One is, a great success in the emerging markets, then I'll come back to this in a few minutes, but also the tremendous progress we are making with Actemra RoACTEMRA monotherapy segment.

So if I start with sales, as you saw before, the sales grew by 4% on a global basis. This is a number that you need to contrast with the market evolution. We estimate that the market will grow by 0% to 1% on a global basis. So clearly, with 4%, we're far ahead of market growth rate. I'd just like to highlight here the growth in the United States, which is really remarkable at 6%, considering the environment in the U.S. and of course, the growth in the international markets.

On the profitability side, we certainly managed our costs effectively and our operating profit is growing by 9% on a constant currency basis. This is driven by the 4% sales growth that I mentioned a few minutes ago.

Now if I look at the sales development on a product basis, you can see here the major growth drivers are products that you usually see drive our sales. But it is really exciting to see products like Herceptin grow by 11%; MabThera/Rituxan by 9%; Pegasys, 31%, Actemra, 39%. So tremendous growth rates throughout the portfolio. Of course, we are impacted by patent expiries, in particular with Bonviva and CellCept, But certainly, our core products are growing tremendously.

Just a couple of things I'd like to attract your attention to. One is the blue path, as far as Herceptin is concerned, that represents the international region. And it really shows you the growing importance of the emerging markets as far as the growth of our co-products, and certainly Herceptin.

The second point I'd like to highlight is the green path for Pegasys, and that's the United States. And essentially, for the first 6 months of this year, the Pegasys growth is driven by the U.S. market because teleprevir and boceprevir are reimbursed in the U.S. already. We certainly expect that when we achieve reimbursement in Europe and the rest of the world, Pegasys will grow to the same extent in those geographies as well. Lucentis is slightly declining, and I'll come back to this in a few minutes.

Now if I look at it by region, the United States, as I said grew by 6%, which is really tremendous, driven by Pegasys, Rituxan, Herceptin, Xeloda. Very nice growth across the portfolio. Very good success so far with Zelboraf and Erivedge. And Perjeta, I'll come back to it in a couple of slides.

Only one note of caution for the second half, and it is that Lucentis, of course, is declining and that will have an impact in the second line -- in the second half of this year. And Pegasys, Pegasys is still growing, and we expect growth in the second half, but of course, we will be comparing to a second half of 2011 that was a higher base. So the growth rates for Pegasys in the second half in the U.S. will be lower than what we saw in the first half.

Europe, you can see here good growth rates across a variety of products, MabThera, RoActemra, Herceptin, even Avastin and also Zelboraf is doing extremely well in the countries where it has been launched. In fact, in volume, the growth of these products is even more remarkable. So in the context of the European markets and the difficulties that we all know about, the economic difficulties we know the payers are facing, the kind of growth rate we see for our core products is certainly very encouraging. And we are impacted certainly by the patent expiries of CellCept, Bonviva and a few other products.

Now move onto the emerging markets, we've seen very strong growth across our key markets. And this is here the so-called E7, the major 7 emerging markets that we intend to focus on. And you see here a tremendous growth in countries like Brazil, in China, Turkey, et cetera. In Mexico, we are facing some difficulties, but we expect to grow in the second half of this year and certainly very much into next year. And also in Russia, you see here a growth rate in Q2 that is -- actually a decline, but it is due to the timing of tenders in Q3 -- we expect Q3 in Russia to be extremely strong. But important point is if you look at -- if you compare quarter-to-quarter, the top E7 countries grew by 22% in the second quarter compared to the second quarter of last year.

And even more impressively, I wanted to share with you those data out of China. You can see here in gray the market is growing by 16%, 17%. The first quarter, as we can see, reported by IMS, was a bit higher, 24% growth. And you can see that we are certainly outpacing the market growth very substantially; 32% last year, quarter 4; 36% quarter 1. And when I reported to you on the quarter 1 sales, I mentioned that to you. In fact, I did mention that we expect the quarter 1 end markets of growth of about 30% if you remember. In fact, we are above that with 36%. And in the quarter 2, we are still tracking around the 30%, I would expect, end market.

Looking at it from a product viewpoint and starting with oncology. As I mentioned earlier, we have very strong growth rates across major products, Rituxan, Herceptin, Avastin. And the growth drivers here are those that I have mentioned before. Still, CLL is driving Rituxan maintenance. So essentially, things that we have discussed before. I think what is really interesting to note is the growth of Avastin. And it's interesting to mention this because in the U.S., we are now I would say bottoming out and we hope to stabilize in the second half. But we do experience growth in Europe and certainly very much so in the emerging markets. So we have good hopes for Avastin, and it is really a product that is now turning around.

If I look at Lucentis for a second, minus 5% for the first half of this year compared to last year. But as you can see on this graph, last year, we were certainly growing very rapidly throughout the whole year and therefore, we are comparing to a 2011 that was quite strong. We have lost share, of course, to Eylea. What I can say there is that we see Eylea from a treatment -- number of treatments viewpoint, we see the Eylea's growth rate to slow down as we observe it. Certainly, though, we still expect Eylea to impact Lucentis a little bit more in the second half.

On the other hand, we have the RVO indication is stable, and we certainly look forward to the approval of immune [ph] indication that certainly will drive our growth rate. And next year, the .5-milligram PRN approval should really help us further drive the growth of Lucentis. But all in all, we have to accept that it is suddenly a challenging situation for Lucentis with, as I said, some hope on the horizon.

Actemra. The ADACTA data are certainly extremely exciting comparing ACTEMRA to Humira. And you see them represented here. On the lower left-hand side of the graph, the ACR results are very substantially different. And on the right-hand side, you'll see the DAS28 score, just like to attract your attention to the DAS28 remission score. 40% for ACTEMRA, 10% for Humira, and this is suddenly really exciting for the monotherapy segment. And we have presented positive -- or communicated positive results for SUMMACTA first subcu study. And of course, we are looking forward to the approval of the first-line biologic indication in the United States.

Now if I look at ACTEMRA in the monotherapy segment, first of all, you have to remember 30% of patients are treated with monotherapy. And with a good monotherapy treatment, I would even argue that this 30% could possibly increase. And you can see here on the right-hand side the rapid progression we're making in terms of patient share with ACTEMRA, 16%, as you can see here in the European markets. In the U.S., we see the same trend. We are a bit below. We are at 13% in the United States, but certainly the same upward trend, extremely rapid progression in the monotherapy segment. So monotherapy is, of course, a very positive development for ACTEMRA. Subcu is the other positive development. Remember, 70% of patients are treated with subcu formulations. So imagine what the subcu formulation next year will do to ACTEMRA, and on top of this, the first-line indication in the United States. So really a lot of pretty good news for ACTEMRA moving forward.

Perjeta, I mentioned a bit earlier that it is certainly the most remarkable development in our portfolio for patients to start with. The clinical results are absolutely outstanding. And I think with Perjeta, we have a new opportunity a few -- 10 years after Herceptin to write a new page in the medical books as far as the treatment of breast cancer is concerned. You can see here on this slide, note that the NCCN guidelines endorsed the use of Perjeta as the preferred therapy in combination with Herceptin for metastatic breast cancer. What is not written here is that they gave Perjeta category 1 classification, which is the highest you can achieve. And the other thing that we need to keep in mind is that this guideline endorsement was achieved extremely quickly. So that gives you a sense for the level of support that exists in the medical community for this product. And so far, launch is going very well. We're very much on track and with our predictions, in fact, slightly above our internal budgets. So we are extremely pleased with the early development. And there's more clinical data, of course, to come later.

First of all, the overall survival data that will be presented later this year, and we have now ongoing the MARIANNE study in combination with T-DM1. That will be a landmark study as well, which we expect to file in 2014, and the APHINITY study that will be running in adjuvant breast cancer. In terms of the news floor, these are the data that we intend to present in the second half of this year. First of all, our 2 subcu studies, SUMMACTA and BREVACTA for ACTEMRA, and we look forward to those. The ROSE study in lupus, rontalizumab, which helped us make the decision to move this product forward in its staged development. We'll also share the overall survival data of the CLEOPATRA study for Perjeta, we'll share the subcu MabThera results and importantly, of course, the HERA 2 results for Herceptin.

Moving to hepatitis. Essentially, we made a decision with danoprevir to focus this agent in the emerging markets. We thought outside these countries. First of all, we were behind in terms of being competitive and differentiated. It was too late. And secondly, the patients population is in those market, in particular in China. So our focus is really going to be on the Chinese market developing danoprevir in combination with Pegasys. The second part of our hepatitis approach is the ANNAPURNA study that will help us decide, from a pure overall combination viewpoint, what is the way forward for us in that indication.

Finally in closing, I'd like to share with you this graph, which is representing the clinical news flow for us and the regulatory news flow for us this year. And really, I don't know, it is really exciting to show you this graph. Almost everything has a green dot. There's one red dot, of course, and that is dalcetrapib and we are all very disappointed about this one. But if you look at the totality of the news flow, it is extremely positive throughout the whole year so far this year. And there's only a few studies that -- or news that we are expecting between now and at the end of the year.

Thank you so much, and I'll had over to Dan.

Daniel O'Day

So thank you, Pascal, and good morning and good afternoon, everybody, for my side as well. As the world-leading company in diagnostics, I'm pleased to say we once again grew faster than the market in the first half of this year. And I think it says something about the value that diagnostics bring to an ever-constrained health care environment. And I'll try to give some examples on that as I go throughout the presentation.

So as Severin mentioned, we had 5% constant currency exchange growth in the first half of this year. The growth was driven significantly by Professional Diagnostics, by Molecular Diagnostics and by Tissue Diagnostics, and I'll give a little more color on those, as well as the market challenges that we're facing in Diabetes Care and Applied Science, and the proactive actions were taking to address those challenges and continue to grow those businesses for the future.

On the profit side, I would like to take a minute to explain the difference on the margin between last year and this year. It's really explained by 2 factors predominantly. And the first factor is that in the first quarter of this year, about 1/2 of that, from a magnitude standpoint, is due to some bad debt write-offs that we had in both Turkey and Brazil, as a result of some distributors going out of business there. And that has been taken care of in the first half. And the other 1/2 of the difference in the margin from last year is actually a rather positive effect in terms of our forward business because it's due to the increase in instrument placements versus the same time last year. And if you remember, at the half year last year, we were just coming out of the effects of the Japan earthquake and then our largest business Professional Diagnostics resourced those instruments from Hitachi in Japan and essentially had no instrument placements in the second quarter of last year.

The good news for the forward business is that our instrument placements year-on-year are actually 41% up from last year, which as you can imagine leads to us continuing to benefit from that in the marketplace and increase our share position in those markets. So on the P&L lines, what you see is the instrument placements coming into the period cost and the cost of sales line. So that's growing faster than the previous year due to those instrument placements because obviously of the depreciation costs of those instruments, and those instruments are just now getting up and going and we'll have reagent pull-through in the second half of this year. And then we see the bad debt write-offs in the M&D line. Excluding the bad debt write-offs in the M&D line, our M&D line would be growing commensurate with sales.

Maybe 2 other comments on the P&L. We had some effects of acquisitions in our R&D line. If you remember, we had 2 acquisitions last year: PVT, in our Professional Diagnostics business; and mtm, in our Tissue Diagnostics business, both which came in, in the second half of last year and therefore, from a phasing effect, have a greater impact on the R&D line in the first half of this year; they'll be moderated in the second half.

And G&A, some rather positive aspects there. We are consolidating some of our service cost centers in the finance side, and that's driving the G&A costs for the first half of this year. We'll see the benefits of that moving into the second half of this year and into 2013. Excluding those costs for the service cost center, G&A would also be growing in line with sales growth. So overall, I'm quite encouraged by the robustness of the P&L on the Diagnostics Division and expect improvement for the second half of the year.

Now turning back to sales and looking at the regional breakout, pleased to say, we made progress. Since the first quarter, every region is growing faster, is growing and faster than the market. When we look at the growth in particular, in Asia Pacific at 17%; we had a 32% growth in China; Latin America, very strong; Japan, 4x the market growth rate. And actually, and I'll speak about it, but if you exclude the market challenges that we're having in Diabetes Care, North America would be growing at 7% and EMEA at 4%, clearly both ahead of the market, both growing in our core and central lab business in terms of share.

Now drilling down a bit on the businesses, Professional Diagnostics, our largest business, growing at 9%, and I'll speak a bit to that more about what's driving that on the next slide. Diabetes Care, we clearly have and the market has reimbursement challenges particularly in Europe, where we've seen several countries reduce the reimbursement for type 2 diabetics. That's clearly had an impact upon the business. We've improved since the first quarter, and we are launching new products in that segment. So the mobile product is launching now in many European markets. And I'm really pleased to say just a week ago, we received our second major approval in the United States market, our largest market there, with the Accu-Chek Combo, which I'll speak about.

Molecular Diagnostics growing at 6% is really strong growth for the market-leading company Molecular Diagnostics driven by blood screen and in virology. Applied Science is clearly affected by the research market, and we continue to invest very importantly in our genomic solutions. And I'll speak about that as we get towards the end of the presentation.

And finally, Tissue Diagnostics, strong growth, 17%, 2 new instrument launches there. Overall, as Severin mentioned, 25 launches between menus and instruments in the first half of this year.

Now just to give you some example of those growths in the different businesses, I'd like to focus a bit on our largest business, Professional Diagnostics. The immunoassay business is SWF 2 billion of that business on an annualized basis, which is now almost 22% of our total diagnostics turnover. And we're entering, I'm happy to say, our 15th year of consecutive double-digit growth in this business. This is due to the large differentiated install base we have out there and then applying new menu and new assays onto that with high medical value.

One example of that, that I just want to point to is Troponin, high-sensitive Troponin. It's one of the higher priced, higher value immunoassays that we have on our system of about 100 immunoassays. And just recently, there was an article published in JAMA about another utilization of this assay. It's normally used in more of an emergency room setting. And this study, with more than 15,000 noncardiac surgery patients, demonstrated a correlation between our assay, our high-sensitive Troponin assay and 30-day mortality post-noncardiac surgery. So you can see the significance on this slide. And really what this leads to is again another example of what we mean when we say medical value in diagnostics and how diagnostics can bring solutions to patients and health care systems. Because if a physician or a health care system can identify those patients most at risk, post surgery, they can treat those patients differently and have better patient outcomes.

Now as I said, we're very excited about the second launch in our Diabetes Care business in the United States. This product has been very successful, and it is a large and growing market, both in the U.S. and outside the mark -- U.S. So we've had very good success with this outside the U.S., and we're looking forward to bringing this to our customers, and to patients in the U.S.

And this is the Accu-Chek Combo System, which essentially combines an insulin pump with a blood glucose meter to allow for high insulin-dependent patients a much better patient outcome by providing a good basal cell dose of insulin and being able to measure conveniently a blood glucose meter -- your glucose levels to adjust that accordingly to your daily activities. So I know the sales team in the U.S. is looking forward to rolling that out in the second half of this year, and it represents the second major product launch in the U.S. in Diabetes Care for this year.

And then the last, really, highlight I wanted to point out for the first half of the year is actually in our Tissue Diagnostics business growing at 17%. Continuing to innovate, we launched 2 new instruments this year -- this half year. The first one is a BenchMark Special Stains instrument, which is specifically designed for more complicated oncology diagnosis, fully automated. And the second one is our VENTANA iScan HT, which is a digital pathology product, which really represents the future where pathology is moving, from taking what is normally done on a slide in a microscope putting into a digital imaging, allowing better diagnosis with algorithms and the sharing of that information across experts across many sites. So we're excited about the advances this brings to cancer diagnosis and cancer care, and feel this will continue to drive the growth of our Tissue Diagnostics business overall.

Now as we mentioned, we clearly have 2 businesses that are facing market challenges, and we've taken proactive actions to shape those businesses for the future. First, let me talk about Applied Science. We've focused that business to the assets we have in there that are most promising for the future. That includes sequencing; our qPCR business, where we have a significant leadership position; and custom biotech and reagents. And during this process, we've actually increased our emphasis on sequencing. As you know, since we've walked away from alumina, we've turned back to our own products to our collaborations that we have in sequencing, which today are moving forward with DNA Electronics and IBM. And as you know, our objective is to be a major player in diagnostics and sequencing in the future with these programs and with other potential programs that we'll look at throughout the environment.

And the second major restructuring we did was in our Diabetes Care business. And here, based upon the market challenges, particularly in the blood glucose monitoring segment, we've taken some decisions to streamline that portfolio to make it more amenable and adaptable to the types of reimbursement situations we have in the marketplace today, while still significantly investing in the future of Diabetes Care, which we see as continuous glucose monitoring and our insulin pump business similar to the combo product that we just had approved in the United States.

So proactive actions to make sure that those businesses respond to their market realities and drive themselves for the future.

And finally, in terms of the scorecard that we have for this year and the dedication to our customers into the market, we're doing quite well. I would like to make a statement about one approval that we just received after the publication of the announcements last night. We got it about 8:00 Basel time, but very happy to state that we have the vitamin D approval now in the United States. This is a significant approval because it completes our bone market panel on our Professional Diagnostics platform in the United States. This is about a USD $300 million globally, of which, 1/2 of it resides in the United States. And with this total vitamin D assay, we can now put this on to the large installed base that we have out there in the U.S. marketplace starting the second half of this year, so we could put a green check on that as well. And we remain committed in Diagnostics to growing above the market through the end of the year as committed.

With that, I would like to thank you for your attention and turn it over to Alan for the financial review.

Alan Hippe

Okay, good. Thanks, Dan. Yes, wonderful to be here having the opportunity to dig a little bit into the financials and let's do that right away. I will talk about -- a little bit about the highlights; then optimizing the value streams; and last but not least, certainly about the cash flow.

When you look at the highlights, core EPS has grown by 8% at half year. And the strong operating free cash flow is certainly something we'd like to mention with a 7% growth and certainly driven by all the things we have done in Southern Europe. And as Severin said, the productivity improvement initiatives are well on track and are also contributing to our results.

When we look really, overall, at some more specific numbers here, I think a lot has been described about the sales, I think about the core operating profit has been talked. But when you look at the group level, I think on one hand, we were able to improve the core operating profit by 7%, but on the other hand we are also able to bring the margin up from 38.1% to 38.5%. The core net financial income was pretty stable, and I will talk about that later on and we'll describe where that comes from, as well as about the core tax rate. And as you've seen, it went up from 22% to 22.8%. I will touch on 2 -- under 2 of these topics later on.

Core net income, you see really went up by 6%, as well as the margin and core EPS I've talked about already, and I've also mentioned the operating free cash flow. The free cash flow itself, it deteriorated by roughly CHF 340 million and there are 2 effects I would like to mention. One is, we paid more dividend, roughly CHF 160 million more compared to the last dividend payment and that certainly showed in the first half. And the other point here to mention is taxes. And on one hand, certainly we paid more taxes, but on the other hand, we also did some prepayments of roughly CHF 200 million, which certainly will help us in the future.

And when you look at the group operating performance overall, I think when you look at the royalties -- well, we had higher royalty income from Lucentis as well as from Humira. The cost of sales I think really show how much progress we have made on the productivity side. It also shows the lower royalties we have paid for Boniva, Tamiflu and CellCept, which, to a certain extent, ran out of patent.

And then we have M&D. And M&D, let me mention here the success we have had in Southern Europe collecting the receivables also came with a certain cost for the fourth heading that we have done, and this accounts for CHF 32 million in this line.

R&D, pretty much on track. And that leaves me with with G&A. And when you look at G&A, we have an increase in administration by around 4%, triggered by really things related to HR procurement, et cetera. But the major bulk here is IT costs. And what we're doing is we have 2 fields we're investing in at the moment. One field is here, really the whole area of regulatory things. We are doing equity value facts, CR [ph] compliance. So we're doing something here. And the other point is with the commercial operations in the U.S., e-marketing, social media and all that comes up, I would say it adds more phasing effect, as mentioned on the slide there, and it will normalize in the course of this year. Leaves us still with the core operating profit increase of 7%.

When you look at the margins, just to put it straight, I think I've talked about the group already. Nice improvement over there. You see the increase in the Pharma Division and you also see the Diagnostics Division, and Dan has given you quite some explanations about that. Let me mention once again that 0.8 percentage points in diagnostics are based on the bad debt write-offs we have done in Turkey and in Brazil.

Well, optimizing the value streams, let me go through that. And I think that's perhaps the most important part of my section. Reallocating the R&D resources into expanding pipeline; the closure of Nutley, and I will talk about the restructuring costs in a second; and focus in the portfolio, and that also comes into play on the next chart.

The Diagnostics business set-up, reposition of Applied Science and address the tougher environment Diabetes Care has also shown in our numbers.

And then certainly the cost structure, finalize the remaining part of operational excellence. And we can say from today's point of view, we're well on track here to realizing the CHF 600 million in the full year of 2012. And also, we're optimizing the IT infrastructure, which will also lead to savings in the future.

And then, we have certainly the continuous focus on the net working capital, and I've digged into that a little bit already but we'll have more specifics coming on.

Well, this slide is a very central one. And let me really first go with you through the methodology that we have applied. You see on the left-hand side restructuring costs that we have booked in the half year 2012. And you'll find here a number in total of CHF 1.196 billion. When you look really -- yes, and I think it's Page 16 in our half year report, you will find the number of CHF 1.677 billion. And the difference between the 2 numbers is on one hand, dalcetrapib was CHF 242 million and on the other hand, its operational excellence was a charge of CHF 239 million, come back to that on the next slide. But that's the difference to the CHF 1.196 billion. Then you see the full year 2012 and also little bit onwards restructuring costs because it will ramp up still a little bit. And then you'll see the cash outs coming with the full restructuring cost of around CHF 810 million. So you see we have quite some write-offs, and I will dig into that in a second.

And the net savings of all these actions are CHF 580 million, and these are ongoing savings. So not one-time savings, these are ongoing savings for the next years to come. But what we're also doing certainly with that, we're reinvesting the money. And when you go -- then go into this orange box, you'll see really a CHF 430 million. And the 430 is on one hand CHF 240 million we're putting into the pipeline. And you see in addition CHF 190 million, and this CHF 190 million goes to Diagnostics and would really substantiate the current business case and the current intentions we're following there, leaves us with a P&L saving of CHF 150 million.

And now let me go really through the divisions. And when we once again go back here on the left-hand side, you see that light blue and the dark blue. And the light blue is Diagnostics. You see a CHF 289 million. The CHF 289 million is driven by a goodwill impairment that we have done for NimbleGen of CHF 185 million and CHF 94 million of employee-related costs, in fact, severance costs that we have implemented over there. The ramp-up to the CHF 410 million, full year 2012 onwards, is very much driven by employee-related costs. Then you see the cash out of CHF 190 million, yes, which then also let's say shows in the net savings. And then you'll see really the CHF 190 million, which is on one hand, helping us offsetting the price impact we are having in Diabetes Care and also triggers and helps for reinvestment in the Applied Science business.

When we go back to the left-hand side and go really to the Nutley case, because this is the dark-blue section with CHF 858 million, then there are a couple of things to mention. The employee-related costs in here are CHF 194 million. And this is a net impact that we are showing here. Because in fact, let's say on one hand, employee-related costs, but there's also a benefit coming from curtailment of pension plans and benefit plans, which was roughly CHF 90 million.

We have on top of that, environmental costs of CHF 242 million booked into that section. And then certainly the write-offs of CHF 367 million for the Nutley site. And we have a couple of smaller intangible asset impairments here of below CHF 50 million. Then you'll see really it ramps up very much employee-related costs to CHF 920 million, goes to CHF 510 million cash out, and then you'll see the net savings of CHF 370 million, and then you really see the reinvestments that we're going to have.

On the next slide, I would like to explain a little bit the non-core items that we're having. And when you look really at the half year 2012, you'll see the core operating profit of CHF 8.6 billion and then we have non-core items of CHF 2.3 billion and an operating profit -- a resulting operating profit of CHF 6.3 billion.

When you go into the bar, you'll see the dark blue, the CHF 1.196 billion that I've explained already. You'll see operational excellence charges, I've talked about the CHF 600 million savings we would like to realize in the course of 2012, and the related costs are CHF 239 million coming from operational excellence.

And then we have dalcetrapib with CHF 242 million in that section. And CHF 130 million is related to clinical trials and clinical trial costs, which are still ongoing. And on the other hand, we have a CHF 112 million write-off an intangible asset. Then we have the CHF 310 million of intangible assets impairment and one major part of that is Mercadia with CHF 160 million write-off, and then CHF 103 million write-off for an NTPGLF antibody that we have dropped in the course of this first half.

Legal and environmental, just one point here. We have a site relatively near to this location where I'm standing at the moment here, near to Granza. And we ramped up the provisions, environmental provisions for this site by CHF 74 million.

With that, I would like to dig into and go into the cash flow. Well, we have had a very strong operating free cash flow, not just by the absolute number, but also by the margins that we can show over here. And what you see really is that this is triggered really pretty much for every division. We're stable in the Pharma division and Diagnostics has a real uptick coming and it's majorly driven by the collection of receivables in Southern Europe.

When we look really at the core financial, net financial result, and I've said it at the beginning when I showed the highlights, this is a pretty stable situation. I think you'll see positive impacts from the bonds redemption. We did less bonds redemption in the first half 2012 compared to the first half 2011. And also, interest expense showed positively because we have reduced our debt. I think the negative impacts come, compared to the first half 2011, come from currency. And we had a positive effect last year coming from Venezuela. So it shows here with a minus 66 lower equity gains. Well, we did lower trades over here and lower transactions over here. And then, certainly, net interest came down to a certain extent because well, we have lower returns on our cash. Though a pretty stable situation, I would say.

And when you look really at the group core tax rate, also a situation we would like to explain. We have a ramp-up from 22% half year 2011 to 22.8% at half year 2012. And the higher impact is driven here certainly from the higher profits we have in high-tax countries like the U.S. You have seen our sales growth in the U.S., Pascal has talked about it. So I think evidently, that had a trigger on our tax rate. The other part is very much driven by the U.S. tax credit that we have not implemented so far in our calculation that expired at the end of 2011, but we expect it to come in, in the course of 2012.

When you look at the core net financial result, it's pretty much a summary of what I've said already. You'll see the financial income coming down. You'll see the financing cost also coming down, leads to a pretty stable situation, nevertheless. Net debt has improved from CHF 17.3 billion half year 2011 to -- sorry from CHF 18 billion half year 2011 to CHF 17.3 billion at the half year 2012.

With that, let's have a look at the receivables situation in Southern Europe. And I think that is a tremendous effort the group has done and I think a tremendous achievement that we can bring in here into the presentation but also in our numbers. And you see that the exposure in the accounts receivables in Southern Europe has reduced by 24% or let's say the absolute number by roughly EUR 500 million in total. So you see it coming down from EUR 2 billion to roughly EUR 1.5 billion. And you'll see also the 2 sections and the 2 countries. This was driven by on one hand from Spain, with a reduction of roughly EUR 400 million; and also by Italy, a reduction of roughly EUR 100 million.

Well, I think that when you look at the balance sheet, we are gaining and we are trying to achieve and get into a range of 0% net debt on total assets, between 0% and 15%. We are 29% here at the moment, and you see our equity ratio of roughly 20%.

I think just a quick remark here on the currency impacts. When you look at half year currency impact, very small. Very small on sales, minus 1%; core operating profit, a minus 2%; and in core EPS, a minus 4%. And I think the exciting point is, when you really look forward and it's assuming that everything remains stable and all the rates that we have had at half year are really stabilized -- and well, let's say remain stable until the end of the year, you'll see -- it could be an uptick of plus 3% in sales, plus 3% in cooperating profit and a plus 1% in core EPS.

Well, increasing shareholder value. I think you've seen in the P&L, the increasing profitability that we can provide. You see that we deliver on the pipeline in Perjeta, and Pascal has talked about it as well as Severin. We have VCT T-DM1, very exciting. We see ACTEMRA. And I think we also see the increasing cash generating coming from our business.

And with that, just confirming the outlook here in all aspects in case of sales growth; in case of the operational excellence savings, will stick to our commitments; as well as when it comes to the core EPS growth target that we have in mind; and also, we would like to continue with our attractive dividend policy.

And with that, I would like to thank you for your attention and hand it over to Severin.

Severin Schwan

Thank you, Alan. I suggest that we directly go into the questions. Can we have the first question, please?

Question-and-Answer Session


First question is from Mr. Tim Race from Deutsche Bank.

Tim Race - Deutsche Bank AG, Research Division

Just a few product questions, if I can. First of all, on Lucentis, obviously, a change in market dynamics. Could you just discuss what you're seeing in terms of patients that are new to the drug in terms of market share and how that's changed, and also in terms of the switch rate to Eylea in AMD? Also, just what you expect for the growth for the year, remainder of the year? Then with the launch of Perjeta, I know it's very early days, but could you just discuss how doctors and payers are viewing the drug so far? And perhaps just talking about the price point, obviously, your pricing based on the medical value but has this been a barrier thus far? And what are perhaps your plans to make this more affordable to some patients in the U.S. and also perhaps for the x U.S. launch? Then just on the Avastin U.S. sales. You've talked in the report of lower wholesale inventories in June. Could you just talk about what sort of a level we're talking about there? Is it a big number, small number? And should we see that rebounding again in July?

Severin Schwan

Thank you. Pascal, can you take those questions, please?

Pascal Soriot

Yes, let me maybe start with Lucentis, Tim. And you asked a few questions. First of all, the switch. The switch, as we see it, comes from of course, Lucentis for the new prescription -- sorry, going to Eylea come from Lucentis and Avastin, and about 45% come from Lucentis, 40% come from Avastin. Now in terms of development of the prescriptions, what we look at is the number of treatments. And treatments that are initiated in the share received for Lucentis -- for Eylea, sorry, as I mentioned before, we see it as stabilizing. In fact, it's gone through a rapid phase of growth, and we now see it more stabilizing. It may start to grow again of course, depending on what they do. But so far, we see it stabilizing around 16%, 17%, and Alora is going of course to Lucentis at about 30% or 32% or 33% and the balance to Avastin. So that's Lucentis. In terms of the second half, I don't want to give a guidance here for Lucentis. Just want to repeat what we said at the beginning of the year, we see Lucentis decline this year. Certainly, the trend you will - the trend you see in the first half , you'll see in second half. But we don't see an acceleration of the trend. In fact, we see a stabilization. And as I said before, we have good hope with DME and next year, the PRN indication. Perjeta, as you said, it's a little bit early to comment. Maybe just a few things. First of all, the pricing doesn't seem to have been an issue so far. I guess the NCCN guideline endorsement is certainly a very precious support there, and especially the fact that we got a category 1 endorsement, which is extremely strong. So far, we do not experience specific challenge around the pricing of this product. We're making very good progress in terms of listing reimbursement throughout the country. And as I said, the response from doctors is very good. Sales are very good. Very, very early days, I must say. So you probably will have to wait until the quarter 3 call, so we can give you more color on this, but very encouraging. Avastin U.S., the decline in quarter 2 was -- there was a decline in quarter 2 that was due to these inventory movements as you mentioned. In fact, without those inventory movements, sales in quarter 2 would have been flat for Avastin in the U.S. And in terms of what that means from an inventory viewpoint, it's only a few days. A few days of inventory at the end of the year -- at the end of the quarter can influence its growth quite substantially. And we have a range that we target in term of inventory level in the marketplace, this is low. And that range is 13 to 16 or 17 days. And as you can imagine, 3 -- 2, 3, 4 days of movement here can have an influence on sales. But other than that, sales would have been flat and we have good hope that we will see a similar picture on the second half of the year.


Next question from Mr. Tim Anderson from Bernstein.

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

As you show on Slide 47, growth in operational spending was ahead of sales growth in the first half, but that was offset by flat cost of goods. And you cite various reasons for the growth in operational spending. My question is whether the drivers of that cost inflation are going to persist throughout the rest of this year and beyond? Or was some of this unique to the first half and not likely to persist going forward? In R&D, for example, it seems to me like you're going to have a hard time containing costs. I know you'll probably cite the pending closure of Nutley as one example of an offset, but I'm wondering how many more Nutleys there are. And then in emerging markets, your performance, your 2 biggest markets are China and Brazil. They seem to make up about 2/3 of your emerging market sales. Can you tell us what the top few revenue generators are, and whether there's portfolio breadth in terms of what you sell in those markets, or whether it's really being driven by a small number of products? In the bar chart on that Slide 22, it seems to say that sequentially in China from Q1 to Q2, your sales have contracted even though they were up year-on-year. I'm wondering what would account for this?

Severin Schwan

Okay. Pascal, if you can take the question on emerging markets and if I can just comment on the overall P&L, the Slide 47 you referred to. I mean really what I'd like to confirm is that we are fully on track for the full year guidance for this year, which we have indicated to be in the high-single digits for core EPS, and I think that sets the frame. More specifically, I think it is very possible to keep R&D stable for the time being. You're absolutely right that with the expanding pipeline, we had a need to reallocate resources. We had the need to leverage all synergies possible within the organization, and that was certainly a major trigger point for the closure of Nutley. But at the same time, this is exactly the savings which will provide the ability to keep R&D stable as we go forward. Specifically for G&A, I mean here you see a strong increase in the first half of this year with 11%. There is certainly a phasing here, and we would expect this to wash out for the rest of the year. Equally for M&D related to the specific cost items we discussed, in particular, the bad debt provisions in Turkey and Brazil, we should expect a certain washout for the full year. But overall, again, fully on track for high single-digit core EPS for 2012. And, Pascal, if you could comment on the emerging markets, please?

Pascal Soriot

Yes, the emerging markets, first of all, again, for Q2, we grew by 14%, 1-4, across the entire region. And of course, China and Brazil had a substantial impact there, but many, many countries grew very substantially. 14% for the quarter is pretty substantial. Now you asked a specific question about China and Brazil. And in fact, the growth comes from almost every product across the portfolio. If I take the example of China, we have growth rates of 30% to 40% for all our products, Xeloda, Pegasys, even Avastin, which is a relatively expensive product is growing by something like 40%. We have also started in China to identify all the products, [indiscernible] is a good example, that have potential for growth and we are promoting them, and they are growing as well. So it's really across the entire portfolio. The product that for the first half of the year in China was growing a bit more slowly is Herceptin, simply because we are still impacted from an x factory viewpoint simply because we are still impacted by the first quarter impact, the base effect of quarter 1 last year, which I described at the end of the first quarter call. But in-market sales for Herceptin are growing tremendously. The patient access program, which I have discussed before, is extremely successful. So great success there. And Brazil is similar, very much driven by MabThera and Herceptin of course, because we intend to focus our efforts on those products that have pretty substantial potential. Our flexible pricing policies have been focused on those products, and we really want to treat as many patients as possible because those 2 products make a very tremendous difference to patients. But again, most of our portfolio is growing.

Severin Schwan

Thank you, Pascal. We do not only get questions in by the telephone but also from our webcast audience.

I have here a question for Pascal placed by Brad Lanker [ph]. "You mentioned in your release today the 2 subcu MabThera trials have met their primary endpoints. When do you plan on releasing the data? And do you still intend to file for regulatory approval sometime this year?"

If you could take that, Pascal?

Pascal Soriot

Yes. So the -- yes, we just got the results for the second study BREVACTA, and we will -- sorry?

Severin Schwan

We're talking MabThera.

Pascal Soriot

Oh, I'm so sorry. I thought you talked -- I didn't get it. So sorry, I thought you were talking about ACTEMRA. So you're actually talking about MabThera.

Severin Schwan

They want some good news on MabThera, but...

Pascal Soriot

There are so many good news, tend to get a bit mixed up. So MabThera, yes, we will actually present those results at ASH. Since we're talking about the subcu, by the way, ACTEMRA, we'll also present those results a bit later this year and then we will file this year very positive news.

Severin Schwan

Can we have the next question on the phone, please?


Next question is from Mr. Sachin Jain from Merrill Lynch.

Sachin Jain - BofA Merrill Lynch, Research Division

Sachin Jain from Merrill Lynch. Just a few pharma questions if I could. Firstly, on European pricing. I think you cited in the press release for 42% price pressure. That seems to be substantially over the peer group between 5% and 7%. So I wonder if you could provide a bit more color. Are there any specific countries where you haven't been impacted? And do you expect this divergence versus the sector in terms of pricing to continue? And secondly on Pegasys, just a bit more color on sales trajectory, please? I think you've flagged a potential uplift in Europe, rest of the world on into Victrelis approval. I wonder if you could just comment on whether you see warehousing ahead of interferon free regimens impacting within the next 12 to 18 months. And then related on Pegasys, just any cost offset salesforce rationalization that could come through in U.S. or Europe, if you could quantify that to some extent? And then a couple of pipeline questions. Just very quickly on the Alzheimer's Phase I/II portfolio that you got any impact from limited news flow in the sector recently? And then finally on Aleglitazar, I know it's just that the ALENEPHRO study isn't listed on the pipeline news flow chart. I understand that's a fairly important -- for gauging the Phase III date to that. So just any comments on that.

Severin Schwan

Thank you, Sachin. Perhaps I can just make a general comment on the pricing in Europe because you rightly point out that the pricing impact for us with 2% is lower than in the industry, probably less than 1/2 of the pricing impact which we see across the industry. And I think this really confirms what we have been saying over many calls and since quite some time that when the environment gets tougher, then the price pressure gets more challenging. It is not the expensive and innovative drugs which suffer first, it is the less-differentiated drugs which suffer first. If resources get more constrained, then health care authorities pay us more and more, allocating their resources to those solutions, including drugs and diagnostic tests, which really provide the biggest incremental medical benefit for the money spent. This is the very reason why we believe that it is the right thing to focus on innovation and to focus on our 2 core businesses. Perhaps with this, Pascal, if I can hand over to you on the various questions for the products and pipeline projects?

Pascal Soriot

So, Sachin, the European price decrease was a little bit below 2% and you want to say that it is less than many of our peers in the industry, many, many companies have been impacted pretty substantially and I think it great part it comes from what Severin was describing. In terms of what countries, it is sort of spread across the region the country where we are the less impacted -- the least impacted. In fact, not impacted for the first half from a pricing viewpoint is Germany. And in many ways, it's because we've gone through those challenges in the last 2 years already. And Germany has looked at, as you know, looked at a series of prices over the last 2 to 3 years, and we had some impact. But for the first half of this year, we didn't have anything. We had maybe a bigger impact in France, which is the result of the price decrease we had on Avastin late last year in September or something like this. A bit of an impact in Spain. So it varies country-to-country, and the average across the regions is about a little bit below 2% as we communicated. In terms of Pegasys, I think the question was about...

Severin Schwan


Pascal Soriot

Yes, the [indiscernible] looking forward. Well, as I mentioned, essentially, we are now waiting to see reimbursement for boceprevir, telaprevir through the markets in Europe. We have started to see an uplift of Pegasys in Germany in combination with those 2 oral agents. And in the other countries, it will really depend on reimbursement. It is clear in Europe, in the circumstances we are in without reimbursement, it is very difficult to make any inroad. So I really think this is a 2013 event, sort of late this year and into next year in terms of getting a major lift throughout Europe. The Alzheimer's data, I really think it's too early to judge and then to -- I think it is difficult to read across from the Pfizer, J&J, Elan BAPI study across to certainly our products. First of all, this study, everybody or most people, will expected it be negative, as you know I guess. It was in ApoE carriers. It was with a lower dose. We're not even sure that dose has demonstrated that it's removing the plaque. And it was in patients with more advanced forms of Alzheimer's. Our program is in the so-called [indiscernible] Alzheimer's, and we're using a dose that has demonstrated its ability to remove the plaque. Of course, we don't know whether that translates into a clinical benefit. That's what we're trying to demonstrate. But we are in a different place. So first, we have to wait for the additional BAPI study and to, I think, in the end, the proof will be in the pudding of our own study, so we have to wait. The last study, I think, I'll ask Alan to answer it because I'm not even sure I heard it. So what was -- I didn't hear for a while. Sorry. Okay, cool. Thank you, Karl. So I guess the question was what is the -- what are the endpoints in the [indiscernible] study? So just for memory and therefore, compares Aleglitazar with pioglitazone. And it looks at the effects of those agents on the GFR the Glomerular Filtration Rate on those patients who have mild kidney dysfunction. And essentially, we will measure the EGFR at the end of the study. And if there is more -- if there is less than 20% EGFR reduction, I guess we will be in the clear and we'll potentially unlock additional studies, which we are still considering, and then we'll have to make a decision with what we do at that point. If there is more -- sorry, there's 2 things: one is, we need to have an EGFR reduction of less than 20%; and two is, we have to have reversibility of the effect. And even if we have less than 20% EGFR reduction, but we have tremendous variability from one patient to another and some patients experience a non-reversibility of the effect and substantial EGFR impact, then we'll have to consider what we do. And if the EGFR reduction is more than 20%, we will share those data with the DSMB of the ALECARDIO study. And together with them, we will decide what we do moving forward. So I hope that's clear enough.

Sachin Jain - BofA Merrill Lynch, Research Division

Now if I can just get back to Pegasys, all right? The question was when do you expect warehousing ahead of interferon free regimens and any plans to rationalize the sales force in U.S. and Europe?

Pascal Soriot

Yes, good question. Sorry, I missed that one. We haven't seen any warehousing so far in the U.S. In fact, we did expect some, but we didn't see any so far. There's no evidence that physicians are warehousing patients. The pure oil treatments are still couple of years away. And in fact, with the combination of these new oral agents and Pegasys you get pretty good SVRs, and so physicians are treating patients still today. We expect some effect next year. So in our forecast, we expect 2013 to -- we expect Pegasys to be negatively impacted in 2013 in the United States because of the beginning of this warehousing effect. But we haven't seen any of that so far in 2012. In terms of the sales force, we haven't made any decision at this point to downsize it. Remember, it's a relatively small sales force anyway, and Pegasys, we believe, still has a place for some time to come so there's no intent to restructure this at this point.

Severin Schwan

Thank you Pascal. If we can have the next question, please?


The next question from Mrs. Alexandra Hauber from JPMorgan.

Alexandra Hauber - JP Morgan Chase & Co, Research Division

I have 3 questions, please. Firstly, back to the center. If I add AVA sales reported yesterday by [indiscernible] to your sales, you give about 600 million, and that would add -- that would correspond to a 35% to almost 40% growth of the branded anti-VEGF market. Is that plausible that the market grows that much? Or is that actually -- does it actually reflect a lot of stuff that not sitting in the channels or in doctor's offices? Moving onto hep C, is it correct to understand that the ANNAPURNA study is the make-or-break study whether you -- for mericitabine and potentially also setrobuvir? And if so, what are the timelines for that? Because if it's a Phase II, it could probably to be out relatively shortly. And on the danoprevir emerging market strategy, is there any reason to believe that there will be a competitive edge of over that triple combination compared to Incivek and Victrelis based on things like genotypes? Or is this just because you think you could be there first or at least there's not much of a gap to the others? And the final question is on that Slide 51. And you spent quite a lot of time talking about that slide, but you didn't talk about the orange box of CHF 150 million PLF savings, which is probably what interests us most, given that the other is reinvested, how should we think about that box? Is that going to be not reinvested, and we should see it really coming through in form of lower SG&A next year? Or is that just not yet decided how that's going to be reinvested?

Severin Schwan

Okay. If we can start with Lucentis, Pascal?

Pascal Soriot

Okay. So Lucentis actually, Alex, on how we look at those sizes and in fact, the only way we can reconcile the sales with the prescriptions, number of treatments as we see them, is by using an average number of injections for the quarter of about 2.6, 2.7 injections. Now that makes sense because as you know, the label states that Eylea should actually be injected every month for the first 3 months. So 2.6, 2.7 injections is in line with this. So I guess the question is moving forward, what impact would it have on sales of Eylea because it's 3 injections for 3 months in the first quarter, and then you move to one injection every second month. And so of course, you see -- unless the number of patients increases -- patients treated increases rapidly and tremendously, which is possible. We don't see signs of that at this point. So unless this number of patients increased tremendously, then sales will be impacted we believe. In terms of the total market, we are still trying to explore this further. But so far, we haven't seen signs that the market is growing by more than 2% to 3% in totality. So I think that the strong sales you see are really related the number of injections. And of course, again, it will have an impact over time. Hep C, ANNAPURNA, yes, you're absolutely right. This is sort of the make-or-break study for us this whole segment. And -- this should study should read out next year on 2013. In terms of China -- yes, so China Pegasys and danoprevir we think that there is a potential in China because in the end if you develop a Pegasys combination with danoprevir and you get an SVR of about 90%, 12 weeks treatment, and you have a right cost, then I think you have a place. Just keep in mind that there is almost 30 million patients, Hepatitis C patients in China. It's an enormous number of patients, and they need to be treated. It's really a public health issue for China. The question is, there's not enough money in the system to treat them all of course. And in fact, today, with Pegasys, we are looking at screening patients and finding patients that have hepatitis C. And in some areas, we're finding that authorities are pushing back a bit because in the end, the system doesn't have enough money. So if we find patients and they want to be treated and there's no money, it creates an issue. So we have to pace ourselves in terms of how do we -- the speed at which we identify those patients. So net-net, today, very few patients are treated when you look at it, and there's an enormous pool of patients who need our help. We believe that a well-priced, well-marketed combination of Pegasys, danoprevir with an SVR of 90% should have a place. For all treatments, they will be in the U.S. market. That may be $70,000, $80,000. Now I'm not really sure you can sell this in China. And even if you try to reduce your price, how far can you go -- how low can you go in relation to the price you sell at in U.S. and Europe. So there's a limit there in terms of price flexibility.

Alan Hippe

Yes, to your last question about the P&L savings, I think it gives me a great opportunity at first to say that certainly these savings will ramp up. So the first affect you will see in 2013, CHF 500 million, as mentioned on the slide here in the footnote. And the rest of the savings, additional CHF 80 million, 2014 onwards. And I would say you can project that. They are pretty much also on the CHF 150 million. Certainly, the CHF 150 million or let's say the effect for 2013 will be part of our guidance for 2013. And as you know, we give our guidance always for the full year results. So really, when we do our full year results for 2012, and then certainly this number will be incorporated into the guidance for 2013.

Severin Schwan

Thanks. Do we have another question, please?


The next question is from Mr. Keyur Parekh from Goldman Sachs.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

I have 3 questions, if I may please. First, Pascal, just going back to the MabThera subcutaneous Phase IIIs, if you can give us some color around the highlights of the data? I realize you are going to present the data at ASH, if you can just help us think about why that might be beneficial. Secondly, confirm if where you stand with Herceptin subcutaneous in Europe? And how do you see the marketplace evolving for that over the course of 2013? And lastly, for Mr. Hippe, if you look at some of the phasing issues around the costs and the top line continuing to be what it is, I'm surprised that you don't get to a higher EPS number than single -- high-single digits on a CER basis. So just wondering what part of the equation am I missing as we get into the second half of the year?

Severin Schwan

Okay. Pascal -- Alan, can you start with the question on the core EPS, even though, I'm not sure whether you can add much?

Alan Hippe

No, I can't add much. I think, Severin, you made a point here. I think our guidance is the guidance, and we have said high single-digit growth for EPS. That's it. And we have said we're working on all fronts. And well, and we will see then. What the outcome is our guidance, it's the guidance.

Pascal Soriot

Okay. So in terms of MabThera subcu, I'm afraid that you'll have to wait until we present those data. I can only tell you at this point, the study met its end point. But for -- to get more color, you'll have to wait unfortunately. Now the benefit of this product is relatively simple and you're turning an IV infusion that lasts for hours into an injection that lasts a few minutes. So you immediately see the benefits for the patient, but you also see the benefit for the health care system freeing up nursing time, hospital time and of course, reducing total cost. So there's a very clear benefit. There's also a benefit for Herceptin subcu basically we would hope to get approval in Europe this year. We are waiting to -- we're waiting eagerly to see what the conclusion of that is. And in the marketplace next year, essentially, it is a little bit of a complex marketplace because not every country is the same. And inside a country, not everything is the same because you have some clinics that, like in the United States, basically, are influenced by the drug they use and IV infusions are paid for. And hospitals or physicians make money out of infusion. In some other countries, it's not the case. And in fact, even in a country like France, you have the 2 systems that coexist. So clearly, we would have to demonstrate to the health care system that the subcu formulation will save the system money and will have to show patients and physicians the benefit of a subcu injection with Herceptin. So it's our work next year -- our job next year to show those benefits.

Severin Schwan

Thank you, Pascal. If we can have the next question, please?


The next question is from Mr. Marcel Brand from Cheuvreux.

Marcel Brand - CA Cheuvreux, Research Division

Two questions actually. First, can you please share your latest views of the potential impact of HERA and also the far [ph] data on your HER2 franchise as a whole? And then the second question is related to the Pharma royalty increase. Is it correct to assume that this is not related to the underlying rest of the world sales growth of Lucentis, but rather a step-up clause in your Lucentis agreement with Novartis? And whatever the answer is, could you let us know what we should expect for royalty income in the feature in Pharma?

Severin Schwan

Yes, perhaps if you can start with the HER2 far question and then we'll switch to the royalties?

Pascal Soriot

So I guess one -- the first question was with HER2 in far as when do they read that. We expect to have the results of the HER2 next month, and we expect to present them following those results. Far to be honest, we don't know. We don't control the timing of those -- the presentation of those data. Our best guess at this point is that far would be presented at the San Antonio Breast Cancer Congress, but it's still possible that they make it -- it makes it to a small -- we believe it will be San Antonio, but it's hard to be sure because this is not our study as you know. So this is the one thing. First of all, the timing; and two, in term of the impact, it really depends where the -- there are many scenarios there. I mean, HER2 could be positive in which case, of course, the use of Herceptin will increase. HER2 could be negative, meaning, it doesn't show 2 years is no better than 1 year and far shows that 6 months is far better than -- is better than 1 year, in which case, there's a downside for Herceptin. And the other scenario is that HER2 is not positive but far doesn't show that 6 months is as good as 1 year. In which case everybody stays with 1 year. So those are the 3 scenarios. And it's really hard to speculate what the outcome will be. I think we just need to wait for -- to see the data. We only have to wait another 2 or 3 months. So pretty soon we will know.

Marcel Brand - CA Cheuvreux, Research Division

So would that have any impact on the ongoing development programs? The adjuvant development programs with the HER2 franchise?

Pascal Soriot

Not that we can think of at this point.

Severin Schwan

Okay. Your second question was on the royalty income. We don't have a detailed split with us here. We would have to come back to you. But it's not out of line. I mean, the royalty income has increased by 5% for Pharma versus the sales growth of 4%. Off my head, I know that we have important royalty income from Humira and Lucentis, so that makes sense given the growth, which we see with those products with the various partners. And of course, it is a consolation of many, many products. It's also including royalty expenses, which are offsetting that royalty income here. So we would have to come back for more details -- no? I'm just told that this is wrong.

Alan Hippe

This is just royalty income. Royalty expenses...

Severin Schwan

It's good that we have a CFO. Thank you, Alan, for that comment. But it seems not out of line, and I'm not aware of any step-rate agreements here.

Marcel Brand - CA Cheuvreux, Research Division

So in other words, the 16% increase that we see in royalty income is sustainable for a longer period? Or is that what you're saying? Because I see 16% increase in constant exchange rate for royalty, pure royalty income.

Severin Schwan

Okay. We would have to come back to you with details. We'll come back to you. Thank you. Can we have the next question please?


The next question from Mrs. Luisa Hector from Credit Suisse.

Luisa Hector - Crédit Suisse AG, Research Division

I've got a few questions please. First of all, on manufacturing. Can you update us a little bit on this, specifically with pertuzumab because you had -- you have enough for the launch phase, but issues of a low yield. So you have you made any progress on that? And then continuing with manufacturing, obviously, we've had the problems with MabThera, and MabThera going into Europe with the infection. So just a quick update there and just to check there's nothing else we should be aware of on manufacturing. Secondly, on pricing, and your strategy with the cancer drug pricing in emerging markets, because we've seen a couple of moves in India and South Africa from you recently. So just to check whether those are fairly isolated examples of a pricing strategy or whether there's a bit of a change going on to your original global flat pricing plans that you'd always talked about? And then maybe just quickly to check on the operational excellence. I may have missed this, but where -- can you tell us where you've got to in the CHF 2.4 billion of savings that was targeted to the end of this year?

Severin Schwan

Okay. If I may just take the last question on operational excellence. We guided you for CHF 1.8 billion savings last year and CHF 2.4 billion of savings this year. So there's an additional savings coming in from the operational excellence program of CHF 600 million this year, and then we will keep those savings on an annual basis, the total of CHF 2.4 billion. And what we can confirm is that we are fully on track to achieve those savings from the operational excellence program. On manufacturing, that looks very good. For pertuzumab, perhaps, Pascal, if you can give us more color and Mircera as well.

Pascal Soriot

Yes, I think, as you just said, Severin, I think the bottom line to keep it really simple is we will be able to supply. We think at this point it looks good. Of the batches that are running at this point, the yield looks good, so touch wood of course but so far so good it looks like we've supplied pertuzumab without any new problems. In terms of Florence, just as a quick reminder, the 2 products that are impacted are Mircera and Xenical. We can still supply Xeloda. But -- and on top of it, Mircera and Xenica are only impacted in Europe. As a reminder, authorities for many, many countries around the world including the Japanese authorities and many others have actually allowed us to keep releasing products out of Florence. So it's really a European issue. We've been in close contact with the CHMP, and we believe at this point that we should be able to start releasing again. We're still trying to figure out precisely actually the timing, but it's -- my guess -- my best guess is over the next 1 month, maximum 2 months we should be able to start releasing those 2 products in Europe. And so in terms of your broader question for manufacturing, I can't see any other issue. But I can tell you that we have an internal -- a very substantial internal effort to ensure that what we experienced in Florence doesn't happen again. And we've made enormous progress already. This is an effort that will take us until the end of the year. But certainly, we're making good progress here. As far as the pricing of the emerging markets, I have described this before. Essentially, we've focused our approach here on Herceptin, MabThera and Pegasys. And that's the first thing I should say. And because we believe there's an enormous need to treat patients with hepatitis or NHL or lymphoma in general or breast cancer with Herceptin, and therefore, we thought we should really try this new strategy with those 3 products. And essentially, what we've said is we will implement a flexible pricing policy in those emerging markets. We defined a framework for our countries around the world to operate, and then we basically asked them to come up with ideas. And so as you can imagine, everybody has come up with different ideas based on their circumstances. And those ideas vary tremendously from -- in the Philippines, we invoiced patients based on their income level. In China, I've talked about it before, we have a patient access program where patients pay for the first 5 month of Herceptin and then they get 7 months free. In other countries we've done it differently. It just happens that in India, we introduced a different brand of Herceptin partnered with a local company called M Cure and adjust our price downward to ensure that we could give more patients access. So the Indian case is a specific case indeed, but in the context of a framework, which is we will become more flexible with our pricing for those 3 products that have potential for greater access.

Severin Schwan

Thank you, Pascal, we are approaching the end of our session, but still have time for one more question. Can we please have the final question?


Last question is from Mr. Andrew Weiss from Bank Vontobel.

Andrew C. Weiss - Bank Vontobel AG, Research Division

I have 3 of them. One again on the manufacturing with Perjeta. I just wanted to hear that you -- if you can confirm that are no issues with the master cell line batch that, that thought up, whether there any issues with that and that therefore they won't run into problems? Number two, with regards to your revenue guidance, your second quarter low currency growth is 6%. You're looking for low- to mid-single, can you help us reconcile what you think are risks in the second half that could make you materialize at the low end of your guidance and not at the high end of your guidance? And number three, on Zelboraf, Pascal, in the past, you said that you first wanted to see the GSK data before you would make your guidance as to what revenues could be for Zelboraf. Now that you've seen the GSK data, are you willing to make any guidance?

Severin Schwan

Perhaps I can just make again a comment on the manufacturing. So what we actually did is when we saw that we had a low yield with some of our cell lines, we actually ran back to the master cell line. So the problem was never with the master cell line. We had the derived cell line, and because we had low yields, we went back to the master cell line. And when we created a new cell line based on the master cell line, actually we resolved the issues. And that is also why we are so confident that we can fully supply Perjeta. There should be no issue, whatsoever. On the revenue guidance perhaps, Pascal, if you can take that up, and I think it very much relates to the sales development in the U.S., which you have already mentioned in your presentation.

Pascal Soriot

I was just going say -- absolutely, Severin. I was going to say I've mentioned it in my presentation, essentially the difference between first half and second half is the U.S. where because of the base effect for Pegasys, second half of last year, the growth rate of Pegasys will be lower, is 1 and 2. Of course Lucentis declined, but those 2 effects are basically impacting the U.S. for the second half of the year, and therefore, we expect a lower growth rate in the U.S., and that's basically the reason why we basically stick to our guidance at this point in time. In terms of Zelboraf, so far we're doing very well. We're not giving any specific guidance. We've said before Zelboraf is a product that has a potential of about $0.5 billion to $1 billion, depending on whether we do or not -- or do not include they are driven indication. And that's -- for the time being, I will stick to that.

Severin Schwan

Thank you, Pascal. Thank you very much for joining us today. Have a good day.

Pascal Soriot

Thank you.

Alan Hippe



Ladies and gentlemen, the conference is now over. Thank you for [indiscernible] the call facility, and thanks for participating in the conference. You may now disconnect your lines. Good bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!