Roche Holding AG Management Discusses F4Q2012 Results - Earnings Call Transcript

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Roche Holding AG (OTCQX:RHHBY) 2012 Earnings Call January 30, 2013 10:00 AM ET


Severin Schwan - Chief Executive Officer

Daniel O'Day - Chief Executive Officer of Roche Molecular Diagnostics and President of Roche Molecular Diagnostics

Roland Diggelmann - Chief Operating Officer of Roche Diagnostics

Alan Hippe - Chief Financial and IT Officer


Sachin Jain - BofA Merrill Lynch, Research Division

Alexandra Hauber - JP Morgan Chase & Co, Research Division

Andrew S. Baum - Citigroup Inc, Research Division

Amit Roy - Nomura Securities Co. Ltd., Research Division

Vincent Meunier - Exane BNP Paribas, Research Division

Michael Leuchten - Barclays Capital, Research Division

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Severin Schwan

Good afternoon, ladies and gentlemen, and welcome to our briefing on the year-end results. 2012 has been a very good year for Roche, so let's get right into the financials.

We have outgrown the market in both our divisions, in Pharma and in Diagnostics, by 5% and 4%, respectively, and we could again significantly improve profitability; core operating profit up by 11%, core earnings up by 10%.

2012, we made significant progress, both on the portfolio side, as well in terms of efficiency with a number of programs which have been completed, and certainly, the highlight last year was the strengthening of the HER2 portfolio with Perjeta and T-DM1. But we're also making actually good progress in securing the MabThera/Rituxan franchise with GA101 and some early-stage products ramping up in the pipeline.

We had some support from the currencies. The Swiss franc has weakened against the U.S. dollar and the euro. As an aside, you see group sales up by 7% in Swiss francs versus the 4% in local currencies. More importantly, you can see an accelerating dynamic in terms of our sales growth over the last 2 years, very much driven by the strength of the oncology portfolio, the new products in oncology, also Actemra, which is doing exceptionally well in the clinical diagnostics business.

From a regional perspective, the trend continues, the trend which we have seen over the last quarters. We see strong double-digit growth in the emerging markets, in Asia and in Latin America; solid growth in the United States, 7% up in Pharma, 3% up on the Diagnostics side; and a continuing, more difficult environment in Europe, with slightly declining sales both on the Pharma and on the Diagnostics sides due to the various austerity measures.

On the base of the strong sales, we could increase operating profit by 11%, and that resulted in an increase of our operating margin by 2 percentage points. Same picture on the cash side, cash flow up by 10% as well, and of course, also an improvement in the respective margin. That resulted all in a dividend increase of 8% in Swiss francs, with a payout ratio still significantly above 50%, very much in the top quartile versus our peers.

Now let's turn to the outlook, and I'd really like to start off with the portfolio. We have today over 70 new molecular entities in clinical development, clearly one of the strongest pipelines in the industry. And 2012 was a particular good year for us, 11 out of 14 late-stage clinical trials delivered positive results. And one of them, of course, importantly, was EMILIA with T-DM1, which we now filed both in the U.S. and in Europe.

And if you look into the resulting pipeline, into the late-stage pipeline, we have 9 compounds in Phase III and we have another 14 compounds in Phase II where we expect data to read out in the current year. So -- I mean I have never seen such a picture in the Roche history. These number of readouts in Phase II, this is unprecedented. Now this is only the Phase IIs where we have a readout, so this is -- there's a number of other Phase IIs where we still expect readouts, and this also doesn't include Bcl-2, which is already under way and being transitioned into Phase III.

So on the base of the results in 2012, on the base of this strong portfolio ramping up, I'm very confident, I'm optimistic about the further outlook, and this is also reflected in our guidance. We expect to keep the sales dynamic. We expect to grow sales in the current year in line with 2012. We expect, again, to increase profitability and to grow earnings faster than sales. And on the basis of these results, we are confident that we can increase the dividend. I think, Alan, it's now the 20 -- that would be the 27th time in a row. So overall, a very optimistic outlook as we go forward.

Thank you very much. And with this, I hand directly over to Dan.

Daniel O'Day

Thank you very much, Severin. So good afternoon from my side as well. It's a pleasure to present the Pharmaceutical Division's results for 2012, and I'll start with saying that having been with Roche now for 26 years, away in Diagnostics for 7 years and back, it's really refreshing to see the progress of the business, but also I have to say the strength of the pipeline. I've been immersed in late-stage portfolio discussions, and it's been robust. And I think the data that you've seen recently and the data that we'll continue to see are very encouraging.

So with that, let me review the 2012 results. On the Pharma Division side, we have a 5% overall increase on the revenue line; global markets, according to IMS and others, is somewhere around 2%, 2% to 3%. You can see that growth is driven on an absolute basis, and most significantly, from the United States and our international markets. U.S. had a very strong year, both on the back of continuing to penetrate our oncology portfolio and also a variety of the new launches in the U.S. marketplace and a stronger-than-expected flu season as well with Tamiflu, which explained some of the fourth quarter growth in the United States. But a 7% growth overall, very strong growth in the United States market.

International region growing at 9%. I have another slide on that a bit later to break that down. But to avoid the suspense, China growing at 27%, with Avastin more than 30% and Herceptin more than 20%; shows I think the adoption of our innovative portfolio also in the emerging markets, particularly when we combine them with access strategies in those markets accordingly.

Now Japan, in 2012, this was one of the years we had the every-other-year price cuts, as you know. And for our product line, on a weighted average basis, it affected our product line with a minus 6% cut in Japan this year. So even with that minus 6% cut for 3 quarters, because it went into effect on April 1, you can see the underlying volume growth overcompensating for that price decline and ending up with a 2% annualized growth. Again, Japan continues to be one of the stronger markets -- strongest markets for some of our oncology products in terms of penetration for products like Avastin and its multiple indications.

And then finally, in Western Europe, because I know there will be questions on the state of the economy, and particularly the economy in Western Europe, and what does that mean to the future of pharmaceuticals, yes, we declined by minus 2%. But if you look at the market in Europe, it declined by minus 5%, minus 6% from a price effect standpoint. And our strategic products, in that case, more than offset the price declines of those products that were going off patent or they were more affected by the price decreases in Western Europe. So overall, proportionately, we did, I would say, well in Western Europe.

Now that strength on the top line fell through to the bottom line, as you see here. The major driver, of course, to the increased core operating profit of 13% is the sales line. It is the strict management of the cost line as well, which you see in the R&D, in the M&D and the G&A. And then also, we had some benefits on the royalty line. This was predominantly driven by increased royalties from Lucentis, Eylea and Humira, and then we also had some disposal of some product assets this year that contributed to the 18% on the growth on the royalty and other operating income line. Overall, that increased our operating profit margin about 3.1 percentage points to around 44%, which is clearly towards the top, if not at the top of the industry.

Now, of course, what's driving all of these growth and these figures is the news in the clinical pipeline, and it was another, I think, very strong year for the news flow and the pipeline at Roche; 11 out of 14 late-stage clinical trials, as Severin mentioned, very positive. And you can see here the number of new entities and also line extensions that were positive. In particular, it was I would call it a banner year for the HER2 franchise, both the data on Perjeta and arguably, unexpectedly positive data in terms of the extreme on T-DM1, showing a 6-month overall survival benefit in very late-stage HER2 breast cancer patients. We look forward to bringing that product, of course, into earlier lines of therapy to see the effect of that accordingly.

The only new news on here from quarter 3, as we had talked about, actually as early as the half year, was the bitopertin recruitment challenges that we're having, particularly on the negative symptom patients. That is continuing, and that's moving along, but we now expect the data in 2014, which would mean a filing in 2015 for bitopertin.

Good. So let me drill down on some of the growth drivers. These will be things that were both headwinds and tailwinds for us in 2012 in a little bit more detail. So to look at, this is a selection of the products that most significantly either brought us forward or held us back in 2012. And you can see that we still have the top 3 products in our oncology portfolio driving a significant portion of the growth. Our oncology portfolio, in general, had a 9% year-on-year growth in 2012, and that was driven significantly by Herceptin, MabThera and also Avastin and of course, some of the new product launches as well.

The good news is that in 2012, Avastin returned to growth after the challenges we had in 2011 in the metastatic breast cancer line in the United States, and I'll get into what's driving that growth on a future slide. Also, impressively, Actemra growing at 33%, and I'll talk about some of the underlying dynamics there as well. Zelboraf also had a good launch in Western Europe. The vast majority of the growth for Zelboraf was driven by Western Europe last year. And Pegasys, which I'll talk about, had a very strong year also in 2012. Obviously, the products that are losing the patent in our portfolio, CellCept, NeoRecormon, Bonviva were obviously weights for us in 2012. But of course, the new and innovative products are more than offsetting those as we head into 2012 and we expect also in 2013.

So to drill a little bit further down into the oncology portfolio. After MabThera growing at a 19% CAGR for the past 10 years, very impressive, still had a 9% growth in 2012, that was driven by first line in the United States, first-line maintenance; and in the emerging markets, the B-cell trend of both an increasing duration of therapy and also an increased share of the treatment population.

Herceptin, 11%, strong growth driven in the United States. It also points to the benefit and the importance of our PHC strategy. Because even at this stage of Herceptin's maturation, with an effective combination of a highly sensitive, highly specific diagnostic like the VENTANA HER2 dish test, we see that we can continue to actually penetrate the HER2 patients more accurately, more effectively and drive our Herceptin share in the markets where we're working together on a commercial basis. This will only become more important with the number of companion diagnostic products we have in our portfolio moving forward.

I would point out that the subcu filing for Herceptin has been delayed now by at least 1 quarter because of ongoing discussions with regulatory authorities in Europe. And I also want to point that the types of questions we're getting on Herceptin, we are not getting on MabThera subcu. Just so you have that for your information as well.

Avastin, strong growth in the ovarian cancer and also treatment beyond multiple lines. Xeloda, 9%, driven to some degree by the lack of 5FU supply, particularly in the United States. And we expect that to normalize and moderate a bit as we go into next year. And Tarceva, plus 2%; first-line share increasing, sometimes at the expense of second line in Tarceva overall.

So Avastin, 2012, a turnaround year for the product, puts us back on track to confidently get behind our peak sales of 7 billion for Avastin. Ovarian was one of the -- actually, not one of the, it was the best launch that we've had in oncology in Western Europe in a very short period of time, achieving 35% new patient shares for ovarian cancer in Western Europe and continuing to grow that with the data -- with the strong data in ovarian.

In addition, the colorectal approvals have now been received in both Europe and in the United States for treatment beyond multiple lines, which helps us secure the franchise in second line and also encourages even stronger use in the first line knowing that the therapy can be retained and continued. It was also a very strong year for Avastin overall in Japan, and that was driven to a large degree by colorectal as well. And China, as I mentioned before, and Brazil also had strong uptakes in colorectal cancer.

On glioblastoma, we'll be filing the data from AVAGLIO in the first quarter of this year in 2013, and we'll be looking for the overall survival data in glioblastoma and discussing that with the FDA when we receive that. I do want to remind you that currently in the United States, we expect about USD 170 million for Avastin in glioblastoma. So it's today quite a small portion of the overall sales for Avastin.

So relative to the new launches, we've got Perjeta, Zelboraf, Erivedge, T-DM1. Perjeta is off to a good start, I'll show you a slide on that weekly sales, and we do expect to receive approval shortly in Europe. We had a positive opinion in December.

Zelboraf has a very high patient share in the United States, and I would say it's fully penetrated in the United States market, still in the penetration process outside of the United States, and that's where you saw that growth driven in 2012. For -- the other point on Zelboraf is we have now initiated the MEK-Zelboraf combination trial, and first patients in have begun for that trial.

On Erivedge, the rollout is beginning in the U.S. We're expecting the approval sometime in 2013, a very powerful product for patients with basal cell carcinoma. We are still learning our way through this product, I would say, because these patients are not always treated by oncologists, sometimes they're treated by dermatologists. And trying to find these patients in the network is something that we're learning, to a certain extent, as we go. But the efficacy of the treatment is helping us to guide us as we progress through that in the U.S. And of course, there are different prescribing patterns as well in Europe that we're preparing ourselves for, for that launch.

And then finally, T-DM1. With the accelerated approval in the U.S., we do expect a final decision from the FDA in the first quarter of this year, very excited about that launch, and then also news from the European authorities in the second half of this year 2013. I would say that the MARIANNE study, as you know, is fully enrolled now, and we expect that to read out in 2014, which of course, we'll be -- I'm very excited to see how the data of Perjeta and T-DM1 in the first-line metastatic cancer proves out. But we're very encouraged by, of course, the T-DM1 data, the EMILIA data in second line.

So Perjeta, just to give you a flavor for what's going on, I mean it's still early days in the launch. We had the third quarter where we had admittedly some product load in, and then we had the fourth quarter where we were getting up to speed. So I thought the best metric to show you on this would be to look at weekly sales and look at the trend accordingly. And you can see the weekly sales through -- this must be the second week of January or so, continued to grow. There's a very nice trend there in terms of the utility of Perjeta in the United States market. We're now up to 75% of physicians having prescribed the drug at least once, and we're looking at a quarter 4 versus quarter 3 increase in demand of 53%. And our patient share continues to increase. Currently, the specifics on patient shares are coming in, so we'll be able to update you a little bit later this year on overall and new patient share as we get that data. But very good trends, and we're also looking forward to rolling this out in Europe in 2013.

Lucentis was a challenging year in 2012. As you know, of course, with the Eylea entry to the marketplace, we did have pressure on our AMD share in that marketplace. You can see that very clearly from the graph on the launch of Eylea with AMD. That was somewhat but not completely offset by the approval we had in DME, and we expect that trend to continue in 2013 as well. By trend, I mean AMD being a bit more severe than our uptake in DME, which means we would expect a slight decline in Lucentis as we go into 2013. We do have the PRN dosing approval that we expect in February, which will also help us in the AMD setting accordingly, and we'll see how that develops over the course of 2013.

Pegasys was a great year, but I want to caution your expectations for 2013 by showing this graph. In the United States, we did have, of course, a tremendous number of patients that came out of warehousing with the triple-combination therapy using Pegasys. What we're seeing now is those patients are off therapy, those patients that were on treatment are now off therapy, and we're already starting to see the new warehousing of patients for interferon-free therapies that are expected to come in the next couple of years.

Now Western Europe is a bit behind that trend, but we do expect to see, and we see it already, a significant decline in Pegasys in the U.S. That will be somewhat offset by the decline of triple-therapy still taking hold in Western Europe and also growth in emerging markets. Overall with Pegasys for 2013, we expect a slight decline in the overall business.

Great news on the ADACTA trial, and you can see now what that's done to our first-line share in monotherapy. But really being -- going head-to-head with Humira in that first-line monotherapy segment and having the results that we saw and all the ACR and primary endpoints that were very significant, you can see that as of the -- well, even before the inclusion of the product in the label in Europe, we started to see share gain and we're now at a 25%. So we're basically sharing the monotherapy segment with Humira and Enbrel at this stage, with an upward trend because of the data accordingly. So that's the first half of the story.

The second half of the story is we received the first-line biologic use in the United States in October, which in and of itself, adds something to our portfolio. But beyond that, because of the marketing restrictions in the United States for being able to use some of the data within our vast development program for Actemra, what it allows to do, this first-line data, is use the vast majority of our data to demonstrate the efficacy and safety of Actemra in that marketplace. So that should also give us some momentum, if you like, in the United States market.

And then finally, we did file the subcutaneous formulation in the U.S. and the EU in December of 2012, and we will progress that this year and expect news on that early next year.

So here is just a quick glimpse of the emerging markets, 27% growth in China, 14% in Russia, 11% in Brazil. I would just say that the access strategies are working here. The products that are driving this growth are the oncology franchise, and that is really leading to further penetrations of our markets -- of our products in this marketplace. And growth rates that we expect will continue as we head into 2013.

So that gets me to the outlook for 2013. It will very much, 2013, be a year where we still have a lot to do on our line extensions with our current portfolio, where we have to take the products that were just recently launched in 2012, bring them into new markets and expand upon them. But in addition, we have a tremendous amount of regulatory news, Phase III news and also Phase II enabling news that will come out in 2013.

I'd just like to point your attention to a couple of these that I think are most prominent for us in 2013. We're already off to a good start with Avastin and TML in the U.S. and Europe. I think that's a very important indication for us for the growth for Avastin. Obviously, the Perjeta news in Europe will be very important; the T-DM1 news in both Europe and the U.S; and the last one is the GA101, which really is eminent. We expect the news on CLL very shortly here and be able to see how that product works, at least for the first stage of that CLL Phase III trial.

And then finally, Severin mentioned these 13 compounds. These are not the entire totality of the Phase II programs. They're just those that have data that will be read out in 2013, and it's a robust pipeline of oncology and outside-oncology programs. Just a couple I would point out that look particularly interesting. The anti-EGFL7 is something that would be used in conjunction with Avastin to extend that product's utility and prolong that product's utility. We also have -- I can't even pronounce this, the P selectin. I'll just call it the P selectin inhibitor in cardiovascular that has a different mechanism of action than some of the other cardiovascular products that we have in our pipeline. And then finally, the anti-PD-L1, which is our immunotherapy in cancer, which we expect to have some data readout hopefully at ASCO this year as well.

So that leaves me with my final slide before I turn it over to Roland. 2013 will be another year for growth in our oncology portfolio. Avastin, MabThera, Herceptin; the newly launched products with Perjeta, Zelboraf, Erivedge, T-DM1; we expect continued growth of Actemra; and we also expect the emerging markets to continue to be a leading growth driver. As I mentioned, GA101 will be coming up here soon, T-DM1, Perjeta and also the additional news on our Phase II late-stage program.

So with that, I thank you very much, look forward to your questions a little bit later, and turn it over to Roland for now.

Roland Diggelmann

Thank you, Dan. Thank you very much. Good afternoon, it's a pleasure to be here. A pleasure to present the Diagnostics results for 2012. And let's go right into the numbers, the sales numbers. Severin mentioned a good year, 4% growth overall, which allowed us to grow above the market, certainly led by strong demand in our laboratory business, Professional, Molecular and Tissue Diagnostics growing altogether 7%. So a good result there. Certainly the highlight, Professional Diagnostics growing with 8% and about twice the market rate.

Challenges in Diabetes Care: Price pressure on one hand, reimbursements cuts on the other hand; and then on the Applied Science business, a consequence of some restructuring, certainly also some slowing of some research funds from the public sector. So overall 4%, a good result.

And right into the P&L where you can see here a slight decrease of the operating profit by 2%, which is largely due to the price pressure that I mentioned in Diabetes Care.

Some lines that are worth mentioning: Some increased royalties, which were actually due in 2011, came back 2012; and then the release of a provision on the G&A line, which actually set the base very low for 2011; plus some investments in IT projects on the G&A line. Other than that, cost of sales continued to invest in the instrument base, continued to invest on the M&D line in the sales force, particularly in the emerging markets, and continuing to invest in our portfolio on the R&D line.

And worth mentioning also that we actually grew a strong effort in net working capital management. We grew our operating free cash flow 43% in 2012, so a strong cash flow generation from the division.

Some key launches, I won't go through them all. Worth mentioning a few in oncology: HE4 for ovarian cancer in the U.S.; CINtec Plus16 Histology, cervical cancer; expanding on the cervical cancer franchise with our HPV test and many other tests and instruments.

On the geographies, strong growth in emerging markets, 15% growth both in Latin America and in Asia Pacific; very strong growth in Japan, about 3x the market growth rate. And I would like to also point out strong growth in EMEA. If excluding for Diabetes Care, we grew 2% in our IVD business in EMEA, which is certainly above the market growth rate. We estimated the markets grew negatively last year in Europe. And a similar picture in U.S., strong growth, actually 5% excluding for Diabetes Care. So there, too, actually capturing market share and being able to expand on our market-leading positions in all regions.

Some of the examples on new products with a focus on fourth quarter. I'd say a strong flow-through of approvals in new product, in particularly in the U.S. market. And then on the Molecular, if I'm -- if I would like to point this one out, on the HPV franchise, good momentum on HPV, 68 contracts signed in the U.S., and we continued to see some good uptakes there. And we'll see the ATHENA data coming through this year which will be 3-year data on the ATHENA trial.

Allow me to focus on Professional Diagnostics for a moment. Our industry-leading franchise growing about twice the rate of the market. At the same time, we continue to invest instruments into the market. As you can see here, we placed 13% incremental instruments into the markets last year, which will continue to fuel our growth for the future. And of course, we also invest heavily in our immunoassay menu, which is now close to 100 assays.

And with that, I move over to immunoassays in a bit more detail, which really is a success story if you think that we've now had more than a decade of double-digit growth in the immunoassay franchise. 15% last year, we'll continue to invest there. We've announced a plan for investments in our facility, doubling the capacity in our German facility over the years. And we also have a very exciting milestone to celebrate, which is 35 years collaboration with Hitachi, who's our partner on the hardware instruments, which we obviously continue to want to take forward and continue to partner with.

Worth mentioning also the point-of-care business, with a broad portfolio, a growing segment. We have a good position in numerous parts of the point-of-care, whether you look at hospital wards, hospital settings, ICUs, ERs, but also physician offices and also patient self-testing.

And here, I think the CoaguChek continues to be strong, continues to grow, 8% last year. And this is despite the new anticoagulant drugs that hit the market, so strong performance on coagulation.

Focusing a little bit more on Diabetes Care, which continues to be a very attractive market actually. It's a market that has 370 million patients worldwide. Patient population growing in both the developed and the emerging markets, and also business with a strong cash flow. We have a good strong portfolio in this area. We want to continue to provide differentiated solutions for the different patients for them to be able to manage Diabetes Care in a more and more sophisticated way. Some integrated solutions, which is one part, continue to differentiate, and on the other side, of course, we continue to look at our cost base. We have already restructured parts of the business, focused the technology centers and we continued to look at our cost base as we go forward to adjust to the new realities in the marketplace.

Applied Science. We have restructured the business, refocused on the areas where we believe we can provide strong growth. Some examples you can see here. Certainly, we have a leading franchise in qPCR, the latest addition to the portfolio in the very important mid-volume segment is the LightCycler 96, which will continue to drive innovative, but also easy access to qPCR.

And then on the sequencing franchise, we continued to invest in our own franchise. As you can see here, some additions on the software, also some panels in neurology, oncology. And we're also investing in the entire workflow, in the entire sequencing workflow, sample preparations, sequence capture and a partnership with PSS, which is a Japanese partner.

One slide on companion diagnostics. And we often talk about personalized health care and companion diagnostics in the setting of research and development. This is an example from China from a very commercial perspective on our HER2 franchise, as you all know, a very aggressive type of breast cancer. So it's important to capture accurately and early. And for this, we have invested in the marketplace. We've trained more than 1,000 labs on the histopathology last year in China, which has allowed actually our pharma colleagues to also have better access to patients, enroll more patients to be treated with Herceptin. And we have, as a consequence, been able to grow our tissue business in China twofold last year. So also here, companion diagnostics, successful also on the commercial side and not just on the research and development side.

A few words on the key launches for 2013. You can see a host of products hitting the market this year, both from the instruments side, supporting our strategy and providing testing efficiency in making the labs and our customers more efficient. But then also, on the assays, on the test side, adding high medical value tests, completing our menu, which is today, the fast -- the biggest menu, excuse me. We have, for instance, more than 55,000 instruments of cobas in the marketplace, combined with a large menu, this will continue to provide growth opportunities.

And that brings me to the outlook. Driven by the leading IVD franchise, certainly continue to further growth our installed base, continue to bring instruments to the markets, continue to expand our menu base and making sure that these menus flows through the installed base, focusing a lot on the emerging markets, continuing to grow or capture growth opportunities, especially in the emerging markets, then stabilizing the Diabetes Care business, and of course, continuing our partnerships, companion diagnostics, 200 programs with Pharma internally, but also wanting to be the partner of choice for external Pharma.

That concludes my presentation, and I'd like to hand over to Alan for the financials. Thank you very much.

Alan Hippe

Fantastic. Thanks, Roland. Yes, a great pleasure to be here. I would like to elaborate about the financials. And what I'm going to talk about is, on one hand, about the profit sections of really the P&L; then the deleveraging, which really goes to the balance sheet; and last but not least, about the cash generation that we have had, and it was quite a good one.

When you look at the highlights of 2012, I think what we really achieved was that the momentum that we had on the top line, we really brought it to the top -- the bottom line and I will show that later on. The productivity improvement that we have installed and since started in 2010, but don't forget about the programs which started half year as well, I think they really contributed to our performance. And when you think about operational excellence, operational excellence, we committed to generate CHF 2.4 billion in savings to achieve that over a multiyear time frame. We achieved in 2011 an amount of CHF 1.8 billion, so CHF 600 million were left for 2012 and we realized this. On top of that, the 3 programs that we have started half year, and I will give you an update in my presentation about it.

Cash flow and balance sheet, we moved well. Net debt on total assets 16%, we'll talk about this. And then you see the operating cash flow and the free cash flow, the momentum we got over there, so we really were able to bring the top line into the cash flow.

Dividend, as Severin said, it's the 26th consecutive year of dividend increases -- potential dividend increases because the board reproposed that to the AGM to approve this. But as Severin also said, yes, in the outlook, there might be also the 27th consecutive year of dividend increases.

We'll go from CHF 6.8 to CHF 7.35, an increase of 8%.

When you look at our major financial figures for 2012, I think we talked about sales already and elaborated here. But when you look at the core operating profit up by 11%, in Swiss francs, even up by 13%, so really quite some leverage which came in here, and I will talk about that in a second. The core net income really in line with that, the growth rate. And then the core EPS in line with that growth. And then you see the operating free cash flow and the free cash flow. Operating free cash flow up 10% in constant rates. And the free cash flow up by 15%, in Swiss francs, even by 19%.

I think that's the major story of 2012. And look here, I think on one hand, we have the core operating profit of 2011 on the left-hand side. And when you go to the right-hand side, you have the core operating profit of 2012. And this is what basically happened in the course of the year.

In the middle, you see the sales growth of CHF 1.7 billion or the contribution of the sales growth to the core operating profit. And we were able to overcompensate the price pressure which we have faced in major markets.

Look at Diabetes Care, look at Japan, 6% price cut. Look at European austerity, we lost pricing in Europe by about 2% to 3%. And on top of that, we had the productivity improvements. When you compare this situation with 2011, this was a complete different picture. In 2011 where we're fully dependent on our productivity programs to bring the core operating profit up. In the year 2012, we could really benefit from our sales momentum.

Look at the P&L. Sales, as I've said, when you look at the royalty and the other operational income, you see we had an increase of 17%, total amount, CHF 363 million. What are the ingredients here, the drivers? One is Lucentis, roughly CHF 80 million up; another one is Eylea. Eylea was a milestone payment, roughly CHF 70 million up. And then we had Humira and [indiscernible] helping us, yes, in that line.

We had a couple of product disposals. Cadrol [ph], we sold Elstech [ph] and the Outlast [ph] income went a little bit down, but good momentum here on this line.

Cost of sales. Well, lower manufacturing costs, really the productivity went up quite significantly. Perhaps one of the areas where we had the major contributions coming from our productivity programs. And we had, well, lower royalty expenses, but we also had higher collaboration expenses, so that netted out a little bit. It really comes down to the productivity gains.

When you look at M&D, a better utilization of existing infrastructure is one thing that we really established. We had lower bad debt expenses, which shows that we really have made progress also in Southern Europe.

When you look at R&D, pretty stable, pretty stable. Certainly, also driven by all the actions that we have taken in Nutley. And then G&A, and let me explain this. G&A, you see administration, yes, we have it in here. Administration up by 2%. To be precise, 1.51%, so I think a pretty reasonable increase. So what is the rest here? The 4 percentage points and 2% is really coming from the provision that Roland has mentioned already, some provision that we released in 2011, CHF 27 million positive in 2011 on the G&A line, so it came back a little bit in 2012, negatively, at least in the growth rate. And the other point is really about IT systems, roughly CHF 30 million that we invested additionally into IT systems and, hopefully, we will benefit from this investment in the future.

Core operating profit up by 11%.

We'll look at the margins, group margin up to 37.7% coming from 35.6%. Pharma up to 44%. And then you see the Diagnostics division, Roland talked about this, the deterioration is majorly triggered by Diabetes Care.

And now the whole restructuring part, and I'll give you an update on the 3 programs that we have initiated at half year 2012 which means, on one hand, Pharma R&D/Nutley, the IT programs that we have started and the third point was really about Diagnostics, means Applied Science and Diabetes Care.

When you look, really, at the 3 blocks here, 1 block describes the restructuring costs in total and the related cash-out, the net savings, and the reinvestment and the P&L impact. The only number, really, which has changed since half year is the first part for the full year 2012. All the other numbers we have presented to you at half year and are completely stable, so really we stick to our commitment to deliver on the programs, nothing has changed here.

When you look at the full year 2012, we came out with restructuring costs of CHF 1.33 billion for these programs. When you look in our financial report, you will find that we had restructuring costs of CHF 2 billion in total. So for the 3 programs, CHF 1.33 billion.

And you see here then the 3 brackets: CHF 396 million going to Diagnostics; one is an impairment of goodwill, CHF 187 million; roughly CHF 180 million for site closure and personnel-related costs.

When you go to IT, pretty much personnel-related costs. And that leaves us with R&D Pharma, which is an CHF 885 million. And this is really, on one hand, the environmental costs, CHF 243 million, no change compared to half year. It is really the PP&E, the impairment on PP&E on the sites, CHF 381 million. And to this, CHF 188 million personnel costs, and we have included here a curtailment gain from the pension plan.

Good. When you look at the financial results, let me explain this as well. And look at the financial results, you see really deterioration coming from minus 1.6 to a minus 1.8. And let's go through the bridge to explain this.

On one hand, we have here the currency impact. And normally you would expect that this is rather flat, a little bit back and forth because, well, sometimes you cannot really match everything here and you have some currency impact.

2 major factors coming from 2011. 2011, we had a gain coming from Venezuela. In 2010, we really took opportunity, yes, of the -- let's say, the possibility to account for a possible devaluation in Venezuela, which didn't come. So this came up as a positive in 2011 with CHF 45 million and certainly, then went against us in 2012. Another point is we had transaction gains in 2011 of CHF 38 million, which certainly didn't reoccur in 2012. In 2012, we were pretty flat, as you would expect. So this, I think, is the major explanation for the minus CHF 109 million.

And then the bond redemptions, we did more bond redemptions in 2012 compared to 2011. So there was one fact that we took, really, opportunity of the market, with positive NPVs and certainly also, you will see that later on, brought our maturity structure, yes, in a more comfortable framework.

Then you have net interest and debt security income. Interest rates went down. So, well, our interest income went down a little bit. Equity gains, we were less and less active on this one. And then interest expense improved by CHF 45 million.

Tax rate. Tax rate went up from 21.3% to 22.7%. In constant rates, would be 22.4%. So what's the major point here? And there is not a lot here to explain. It is the good momentum that we have enjoyed in 2012 in the U.S. And this really was a little bit beyond our expectations and increased the tax rate by 1.5 percentage points.

With that, I would like to go for a point, which we have to deal with in 2013, so this is more a heads-up here and this goes down and comes to pensions and is about IAS 19 and this will be effective in 2013 and will have an impact, and let me explain this.

On one hand, the question about actuarial gains and losses, how you account for that. You know that we have not utilized the corridor method in the past. So really and IAS 19 tells you no corridor method can be applied anymore. We have always booked this in OCI really against the equities, so no change for us, no impact on the balance sheet in 2013.

In the next financial income, we will have an impact. Because when it comes to the return of planned assets, we have to apply the discount rates. In the past, you could really come up with an assumption, reasonable assumption. And well, we did that as well, when I remember, average is 4.87% that we have used, perhaps not so aggressive. And now, we have to bring that down to the discount rate. This will have an impact of CHF 161 million in the year 2013 for 2012, because in 2013, we would certainly adjust 2012 for this effect.

Impact on core EPS absolute number, expected to be less than 1%. So no impact basically on the growth rate. It brings the absolute numbers a little bit down.

Good. That brings me to the balance sheet, deleveraging. When you look on the asset side of our balance sheet, you notice one thing, that cash and marketable securities went up from CHF 11.3 billion to CHF 14 billion, an increase of 28%. So really, cash is piling a little bit. This is, in fact, a preparational action for 2013 because we have a major maturity coming up in early 2013, a Eurobond still outstanding EUR 3.3 billion, which we want to repay. So I think we can really make use of the funds early on. The other point is certainly, we have to pay the dividend. When you look at the equity and liabilities and you see, really, the current liabilities and the noncurrent liabilities. And the current liabilities go up by 27% and noncurrent liabilities go down by 7%.

And here, basically, the only reason is the switch between long-term and short-term debt. So as the maturities pass by, some of our debt is now short-term which has been before in long-term. So that's the only reason why this moves, and then you see the equity going up by 19%. And here is the equity development over the last year.

What we did when we did the Genentech transaction, in fact, we booked the cash out against the equity and that was basically what we have done. And you see really how it developed over the years. We went from 13% equity ratio to an equity ratio of 26%.

How about the leverage? And let me explain this chart first. What we have here is on one hand, the total assets and on the other hand, the net debt. And what we have included here is not just the full year numbers, we also have included the half-year numbers. Why is that? Because at half year, normally, our debt position goes up because we pay the dividend in the first half.

So what you see here is, yes, total assets, net debt and then certainly, the ratio. Let me get to the point here. 2011 compared to 2012 year end. You see in 2011, we have been at CHF 15.6 billion net debt and we went down to CHF 10.6 billion at the end of the year 2012. Thanks certainly to the good cash generation that we have had. We have been at a ratio of 25% at the end of 2011, and we are now at a ratio of 16%, which means we have not reached the corridor of 0% to 15% yet.

And here is the debt maturity profile, I don't want to go through this in every detail. The major point is here, 52% of the debt related to the Genentech transaction is paid back already, so that looks fine. And it also outlines what we have done in case of buybacks. And then let me say, we did a lot of buybacks which were pretty transparent and we did another one, we did a call in December for a bond of USD 1.75 billion due in 2014 that we certainly have to cash out in 2013 then.

Good. With that, let's go to the cash generation.

When you look at the operating free cash flow margin, the operating free cash flow and the free cash flow itself, then let me go directly to the asset figures. And you see development from CHF 13.7 billion, up to CHF 15.4 billion. And what is this driven by? Certainly, on one hand, by fantastic and terrific operation performance that we have had. It comes really through and comes across. The other point is we had a relatively modest increase in net working capital and that is certainly related to what we have done in Southern Europe. We had still an increase but much less of an increase compared to 2011. And the other point is we had a modest increase on the CapEx side. So I think, really, that explains why we went so well.

And then you have the free cash flow. And when you look at the free cash flow, we had, in addition, a relatively stable cash-out from treasury activities and then we had an increase on the taxes, roughly CHF 700 million certainly driven by [indiscernible] driven by the U.S. and certainly a couple of things which we have settled as is normally the case. And you see really the operation of free cash flow margin went from 32.3% to 33.8%.

I want to cut this slide short because it once again goes to the operation of free cash flow, and Roland has mentioned already the point that Diagnostics did pretty well when it comes to the operation of free cash flow margin. They increased from 12.9% to 17.8%. And certainly, that was also driven, yes, by the good net working capital development and by all the actions that we have done in Southern Europe. The group has explained already, Pharma went from 39.4% to 39.9%, so also an improvement over there.

Southern Europe. You might remember, yes, what the numbers were when we presented to you at half year. We had a reduction of 24%, and I have to admit we were all not so confident, yes, whether we can keep that number, that minus 24% until year end, because it was basically driven by all the actions in Spain and the Montoro plan. We benefited from at half year quite significantly. But you see what we have achieved, yes, we told you in Q3 that we have a reduction of 22% and we achieved at year end a reduction of 25%, so quite an achievement.

When you look at the total number, it's a reduction of EUR 500 million which is cash in, EUR 500 million, which is equivalent to CHF 623 million, so I think quite an achievement. It's not about the cash in, not only about that, it's also about risk mitigation. And certainly, this whole thing is not over, we will go on working, but evidently, this is a pretty beneficial action.

Good. And that goes then to the outlook. And first of all, let me talk a little bit about currencies. When you look at 2012, in fact, when you look at averages, the Swiss franc, yes, has weakened against the major currencies, notably the U.S. dollar and the Japanese yen, slightly against the euro, and this is why you'll see positive impact, yes, when you look at the Swiss franc numbers.

When you look at 2013 and you know how we modeled this. In fact, we had to take all the currency rates end of 2013 and, well, we keep them constant until year end, and then we ask ourselves, "What are the impacts going to be?" And you see, in fact, what we're expecting, if you take this assumption, yes, not perhaps the expectation but when you take this assumption, the scenario tells you there might be negative impacts. Having said all this, we know that currency rates, yes, until it was, what, since year end, yes, have moved already quite significantly. So I think this is perhaps a pretty unlikely case but nevertheless, we have shown you this here on a constant basis. It will be more robust as we go through the year.

Yes. And then we come back to the outlook. I think Severin has said everything about the outlook. Let me say 2 things about it. One thing is, this outlook is really a commitment, yes, to work further on growth, but also on productivity and efficiency. And another point is really, it shows also our strong and fundamental belief or, let's say, our strong belief in the fundamental strengths of our business.

And with that, thanks a lot, and we're happy to take the questions. Thank you.

Question-and-Answer Session

Severin Schwan

Thank you, Alan. [Operator Instructions] Can we have the mic here in the third row? Yes.

Sachin Jain - BofA Merrill Lynch, Research Division

Sachin Jain from Bank of America. 3 questions if I could, please? Firstly on EPS guidance, the guidance this year is more open-ended than usual and kind of encompasses anything between mid single-digit and I guess, low double-digits, so I just wondered if you could provide any color on what uncertainties you see this year that drive a broader guidance range than the high single-digit last year and the double-digit the year before? Second question is on the financial expense line. Just any color you can give, Alan, on how to think about bond redemptions for '13. And just some commitment to that line, should evidence that deleverage in the expense number, which wasn't in evidence in '12 even if you x out the FX and redemptions. And then the final question on PD-L1, my understanding is that this is a Phase I study that's driving a decision to move to Phase III, so I've got a very broad question. Any color on your oncology development time lines? And what percentage of your early portfolio do you think you could be able to make a Phase III decision -- move to Phase III decision on from Phase I, I think you did similar with the Bcl-2. And on that note, any specific color on how you think you make the ADC portfolio and timing to move to Phase III?

Severin Schwan

Thank you. So perhaps, I'll start off with the first question on the EPS guidance. Well, let me give you some color. The overall color I'd like to give you is confidence. I am confident of the underlying strength of our business. I am confident in terms of the top line. We've been more specific in terms of the top line than last year. You see a bit of a positive tick on the sales guidance compared to last year. And that certainly is at the side of the momentum, which you have seen over the last 2 years. And I see no reason to believe that we should see a change in this momentum. We have some products, as Dan has mentioned, where it will be more challenging like Pegasys. But then, on the other hand, we have new products coming to the market like the Perjeta which should compensate for that. So overall, I want to convey confidence to you. If I separate a bit on the operational side and on the financial side, of course, on the nonoperating side, on the financial side, and Alan, you will pick up on that. Of course, you always have a fair bit of a fluctuation and you're also a bit opportunistic. You mentioned bond redemptions, I mean we don't plan for bond redemptions. You do them if there's a market opportunity and if you can realize the positive NPV you go forward, so there is always a bit of fluctuation. But in general, my message is, we should have leverage opportunities in the nonoperating field. If I turn to the operating field on the Pharma and on the Diagnostics side, I do believe the opportunity is on the Pharma side, we can build on our existing infrastructure as we roll out the new products. And I'm a bit more careful on the Diagnostics side, that continues to be a very challenging market. We see continued price pressure. And even though we have launched a couple of initiatives to stabilize our margins, in particular, in Applied Science and Diabetes Care, this continues to be a challenging market where we see continued price pressure. I hope that gives you a bit of a flavor. But the overall summary, I think is confidence. With this, Alan, perhaps if you could complement on the financial expenses before we go to Dan for PD-L1?

Alan Hippe

Sachin, I don't know whether I got your question, really. Did you say what's, let's say, the point for bond redemptions next year or what was the question?

Sachin Jain - BofA Merrill Lynch, Research Division

Related, is there any guidance you can give, I guess the answer is no now, not for bond redemptions. And then secondly, any color on the extent of financial expense leverage to look for in '13 given that it was limited in '12?

Alan Hippe

Yes. I think you're completely right. I think I cannot give any guidance on the bond redemptions. As said, I think it's completely opportunistic. So whenever we have an opportunity to generate, really, a positive NPV, I think we go for it, if we have, let's say, the cash space or the cash flexibility. And that's what we have done in the course of 2012, and certainly we'll pay off in other years to come. And I think when I look at the financial expense in 2013, I think I've shown you the maturity slides, so evidently, we will bring the gross debts quite significantly down in the course of 2013. So it could be quite a significant step, something which didn't happen, yes, in 2012 when you look at it. End of the year, we have been at CHF 24.5 billion gross debt, so I think I'd see a significant swing in the course of 2013 starting right at the beginning of the year, and that gives us certainly some leverage and some opportunity in the course of 2013.

Severin Schwan

Thank you. Dan?

Daniel O'Day

So, Sachin, I think you've captured the -- our strategy well, which is when we see a significant effect in Phase I, we're very happy to take the risk and move it into late-stage trial. The ones you mentioned are the ones that we currently have actively moved from Phase I, so it's PD-L1 and it's also Bcl-2. It's very difficult to look at the pipeline and determine which other products may have the data that would be suggestive enough to drive it into late stage. But I can assure you, when we see the type of results that we saw in Bcl-2 or PD-L1, we won't hesitate to take those into late stages. In terms of the whole anti-body drug conjugate, we have -- how many now? I get confused, but I mean -- sorry?

Unknown Executive

Over 20.

Daniel O'Day

Over 20 now in the early stage Phase 1 portfolio. Importantly, by the way, of those, 2 of them are in the leukemia setting, lymphoma setting with now having really 4 programs in Phase II to look at potential successors to MabThera. So we have the GA101, we have the Bcl-2 and we have 2 antibody drug conjugates a little bit further behind that we need to see the data on to determine how promising those could or could not be. And then finally, on the -- any more detail on PD-L1, we expect to give you more information on PD-L1, Bcl-2, and possibly, GA101 at ASCO this year, so I think that would be the time point that you'd get a better flavor on how quickly can we progress these, what's the data and what indications.

Severin Schwan

Thank you. Can we have the mic here on the second row? Start with Alexandra and then we move here.

Alexandra Hauber - JP Morgan Chase & Co, Research Division

Alexandra Hauber from JPMorgan. I've got 3 questions. Firstly, on the diagnostic outlook in EMEA, can you give us some color here? You mentioned IVD has been declining in 2012, and specifically, Professional Diagnostics, I think, went negative in the fourth quarter as well, so is that just going to be just like Pharma, a market where pricing means it's a declining market for years to come, and how long do you see your share gains are compensating for that? Secondly, on the Pharma margins, you already mentioned, it was COGS which was driving a significant proportion of that, specifically the manufacturing improvement, is there more room to improve that? And also on the royalty line, even if you exclude the onetime contributions from the disposal gains and the licensing income, bad royalty line was up significantly. And since you have limited idea about the patent portfolio, can you just give us an idea whether this is going to be up or down, just the royalty itself not before the one-timers in 2013? Finally on Pharma, 2 pipeline questions. For bitopertin, the CandleLyte study, Phase II/III study, you said that was inconclusive because the active comparator did not separate from placebo. Can you just tell us what the purpose of the study was? Did you really try to beat olanzapine or was it just trying to show its efficacy line? And the product which you cannot [indiscernible] some -- one of the 2 Phase II studies will have been [indiscernible] studies, proven study, an event study, which looks at reocclusion coming later this year, is there any reason to assume that troponin would give you the wrong answers? And secondly, how do you really think this is going to be used, is this going to be used in any CABG procedure or just in the ones that use veins rather than arteries? So just to get a rough idea about the opportunity here.

Severin Schwan

Roland, do you want to start with Diagnostics?

Roland Diggelmann

So let me try to give you some color on the IVD market in EMEA. What you've seen for the full year was a minus 1 all-encompassing. I looked up the number for the fourth quarter. So actually fourth quarter growth was overall -- and I don't have it broken down by EMEA. Globally, the growth was 4% in the fourth quarter overall, but we certainly grew positively in EMEA, as well in the IVD excluding Diabetes Care. And I think the comment that I made was excluding Diabetes Care, also for the full year, we were 2% in EMEA plus. We expect the market to be growing negatively for full 2012. This is the preliminary numbers that we have, which would actually mean that we grew market share in the IVD business excluding Diabetes Care in 2012.

Alexandra Hauber - JP Morgan Chase & Co, Research Division


Roland Diggelmann

That is very difficult to estimate. What we have seen now is actually an increase in the negative growth over the last half, that's the preliminary data that we're looking at, of course, driven by the southern European markets, but we expect that to level out eventually, but when that will happen is very difficult to mention.

Alexandra Hauber - JP Morgan Chase & Co, Research Division

[indiscernible] on the Professional Diagnostics?

Roland Diggelmann

On the Professional Diagnostics, we continue to see, actually, a growth in the patient tests in the majority of the markets but, obviously, with some price pressure, especially in southern Europe.

Severin Schwan

I should add that prices in southern Europe, traditionally, are very high. So what you see is a leveling effect, and that should also give you a bit of a feel in the longer term because the moment -- I mean, in the Pharma world, this just doesn't happen. In Pharma, you have parallel traders and you have basically uniform prices in a very small bandwidth within Europe. This has traditionally not been the case on the Diagnostics side, so you see a bit of price difference here between the northern part of Europe and the southern part of Europe, and we see these effects coming through now. Also driven by more international chain labs, so whenever these international lab chains buy up companies in southern Europe, of course, they have central purchasing departments and negotiate on a more global level. So I would see a bit of a leveling out as we go through this phase. But just to put it into perspective, it is a very challenging market in Europe, but overall, of course, we see in Diagnostics, a very solid growth, in particular in Professional Diagnostics. Overall growth in Professional Diagnostics was a healthy 8% and it of course very much driven by the emerging markets where we see solid double-digit growth, and where penetration rates are still very low and their health care infrastructure is developing as we speak and all these new hospitals need diagnostics instruments to get their patients diagnosed.

You had a number of questions on the Pharma side then. I gave you a little bit more time to look up all the details.

Daniel O'Day

My learning process continues. I knew Alexandra will get me on some of these. But let me try and -- let me do the financial one first, then we'll get into the product lines ones, and Alan will help me a bit here. But on the Pharma margins, as I indicated, I mean we're now at core operating profit margins of 44%. Is there room to continue to improve margins? I would say yes. But we have to remember, we do have a large number of products we're launching into the marketplace right now. And of course, the new molecular entities are one thing, but we have close to 10 line extensions that we'll be launching into multiple markets next year. In addition to continue to fund our late-stage development portfolio. So, of course, we continue to work on our efficiency programs. We continue to look at cost of goods. You have to consider the mix effect as we go into next year, too, some products have more royalties than others and have to be considered. But obviously our goal and objective is to continue to improve upon that. The question is at what rate? On the royalty line, I would maybe have Alan comment a bit on how that may develop in '13 and then I'll come back to the 2 product portfolio.

Alan Hippe

And Alexandra, let me frame it a little bit, because you will see there are a couple of unknowns even for us in. The first point is we gave -- when we give, let's say, kind of, how should I say, direction, I wouldn't call it guidance but direction, we say normally 4% to 4.5%, therefore, on Pharma sales; and 1% on the Diagnostics sales, that would be really -- that should be the royalty income. Okay. So having said this, I think when you look at Lucentis and you know how the structure is, and I think there might be a little bit of an additional momentum in 2013. In Eylea, as you've said, there was some milestone payment. So that really something which might not reoccur in 2013. The major open question is really the disposals, and I have to say, I don't have really a good idea here to put a number behind that. Certainly, we have activity every year as we sell tail-end products as we do, but I cannot tell you to what number that really leads here at the year end. It was really a better year of these disposals in 2012, that's what can say.

Daniel O'Day

Okay. Let's go on to the 2 portfolio questions. First on bitopertin and CandleLyte. So, you're right, the results of the CandleLyte study were inconclusive. The details of that will be presented in a yet-to-be-determined medical conference in 2013. So we'll get into a lot more of the details. But I would say that, clearly, in the monotherapy setting, which is obviously different than our primary Phase III program, the SearchLyte program, it does give us pause to determine exactly how to progress with monotherapy indication both in schizophrenia and perhaps other neurological disorders. I would say that it's not uncommon to have a high placebo effect also in this monotherapy setting trial as well. So more to come on that as we elucidate more of the results on CandleLyte. But I would say that it presently doesn't have an effect on our SearchLyte program, and the recruitment in that and the prospects for that program overall. On P-selectin, I just sat down with the key scientists the other day. I'm going to ask if Nina [ph] can give a little more detail. I'm encouraged by the mechanism of action, but Nina maybe you can give a little bit more color on the troponin question and also veins, arteries.

Unknown Executive

So on inclacumab, or P-selectin, the Phase II trials that have been drawn in one of them will be presented at the ACC. These are basically proof of concept studies, and that's why they were done in the surgical setting, where the surgery serves, to some extent, as a surrogate of the potential cardiac event. Going forward, we will still look at the data and decide exactly in which indications to take it to in Phase III, but it's very likely it would be in a more general cardiovascular disease setting rather than just surgical.

Severin Schwan

Can we have the next question. If we go to the fourth row here, yes, please. Thank you.

Andrew S. Baum - Citigroup Inc, Research Division

It's Andrew Baum from Citi. A couple of questions, please. Firstly, I think at the time of the Illumina bid, you reflected the view that for Roche at that time, you saw more value in Diagnostic acquisitions than you did in biopharma, perhaps you could give us an update? And more broadly, given your reluctance to be drawn on payout ratios and given your deleveraging, perhaps you could remind us of the criteria that you look at in terms of screening M&A going forward. And then secondly, and this is not just a question for Roche, it's a more broader industry question, the Department of Justice is clearly very still focused on the industry in terms of pharma fraud, more in the case of providers rather, necessary, in the pharmaceutical companies, with regard to this question. I've seen it quoted that up to 3/4 of Herceptin use is billed fraudulently, to what -- and this is by partial use of bags as opposed -- and billing for the full bag rather than complete use, to what extent do you think this is a potential downside risk to volumes going forward? Is this something which preoccupies you at all? It's obviously an issue for the providers, not for Roche, it's their bad behavior, if you like. But I'm just interested in whether it does actually impact you economically.

Severin Schwan

Alan, you want to comment on M&A? Shall I do...

Alan Hippe

Well. Okay. No, I think it's not a question about M&A, it's about how we deal with opportunities, yes? And I think, look, Andrew. I can just say as I ever did, we are going to be financially disciplined. And what we would really like to do is generating value, and that's how we look at things. So I would not really draw a relation between certain things here. I think we have shown that we are really sticking to this, that we are going to be financially disciplined, and I think that's what we want to do. Dan?

Daniel O'Day

In terms of Herceptin, really, as you suggest in your question, Andrew, it's not a question for us, it's a question for providers. I have to say that every hospital, every country, every physician has their own protocol for how they might utilize a particular volume of Herceptin accordingly, and they do it relative to, presumably, their -- the guidelines in their state. It's not something that is on the top of my mind right now. I don't think we expect a significant change in usage patterns out there on Herceptin because of this. And I would just say that, that's really a decision the provider takes, not just on Herceptin, by the way, but on any number of products that have different volumes that they receive versus they need to deliver.

Amit Roy - Nomura Securities Co. Ltd., Research Division

Amit Roy from Nomura. Just a couple of questions on the oncology franchise. Firstly, on GA101 in CLL, 2 little questions there. Why did you choose to do this in the high comorbidity subgroup of CLL? And what percentage does it represent of the Rituxan's sales or volume, whichever one you'd be willing to disclose? Secondly, you have GA101 in follicular lymphoma, which is a far, far bigger indication. I want to know when would that read out? Your slide doesn't give an indication but clinical trials that go for 2019 so I just want to get a handle of when that might be. And also what -- again, how big is that of Rituxan. And then on subcu Herceptin, you mentioned there's a delay, which we see today, is there -- are you willing to comment as to why that is? Has it anything to do with the treatment-related deaths that we've seen that you presented at ESMO this year, I think it was 1 cardiac death and a septic shock, I believe.

Daniel O'Day

Can you say that last part again?

Amit Roy - Nomura Securities Co. Ltd., Research Division

On subcutaneous Herceptin, you mentioned there is a delay in that, and I was just wondering if you are willing to comment as to why that is? Has it anything to do with the data you presented at ESMO, which is the treatment-related deaths, there was 3, I believe, 1 was cardiac, 1 was septic shock and some increase in FAEs [ph] on that.

Daniel O'Day

Okay, very good. So on GA101, high morbidity population, I need a little bit of help there. So it is, I think, 50% to 60% of the CLL population. And as far as I understand from the protocol development, that was selected to demonstrate a fast-to-market, a first proof of concept, if you like, in CLL. We perfectly recognize that the CLL readout is just one of many readouts we need in GA101 to get confidence that this has the potential to give us a significant advancement on MabThera. But as I said, the data is eminent for the first phase of the CLL trial. There is 2 phases, one compares it to the chemotherapeutic regimen and a futility analysis to MabThera. And then the second stage will be the data specifically comparing GA101 to MabThera, which will only come later this year as well, so that's on the CLL. Yes?

Severin Schwan

[indiscernible] still this GA101 trial which is imminent is very first and important signal of this mechanism working or not. There has been a lot of discussion in the scientific community, in the medical community to which this so-called ADCC effect actually leads to higher efficacy. So even though this is an initial indication, CLL, which is, of course, smaller than lymphoma, it will give us a very important insight in terms of whether we have something in hand or not. If it doesn't work for CLL, then, of course, this would put a big question mark on GA101. On the other hand, if the data are good, that gives us more hope that it will help for substituting MabThera in the long term. So let's don't talk it away. This is an extremely important trial and important data, which we expect to be coming out soon.

Daniel O'Day

Thanks for the support. If I was speaking it down, you've helped me out a lot. But the second one on when will the follicular data become available, I mean, it's only in the '15, '16 time frame. Exactly, it depends on the run rate, accordingly. And then finally -- so of course, we have great hopes, and by the way, the concept of starting with CLL is not a new thing in this therapeutic area. MabThera did that. We're doing it with Bcl-2. It's quite a routine methodology of approaching products in this area. On the subcu, I'm really not at liberty because the discussions are going on right now in the health authorities. In respect of those conversations, I really can't give you more data on that, but as soon as we can, we will.

Severin Schwan

Sorry for adding, all the time, something. I think it's important to put it into perspective because there's a big difference between Herceptin and MabThera. The questions we received and you have referred to the data which we published are specific to Herceptin and that's important to have in mind because on the Herceptin side, the whole question of subcu has become a bit less relevant, let me put it like that. All the time, probably obsolete because we will replace the Herceptin with the new therapies coming up. So I, again, would like to emphasize that it's probably less relevant for Herceptin given where we stand with this franchise and the situation is different from MabThera.

Vincent Meunier - Exane BNP Paribas, Research Division

Vince Meunier from Exane BNP Paribas. The first question is indeed a follow-up on the Rituxan franchise, can you explain to us, what will be the design of the Phase III for the Bcl-2 drug and which will be the comparators, a bit of color on that. And also, I have a question on the dividend policy. When we look at the dividend, the share increase, which is proposed this year, it's slightly below the growth of core EPS. Is it fair to assume that it will be also the same this year, i.e. you say that core EPS growth will be ahead of sales growth, there will be an increase at the EPS level, but is it fair to assume a slightly slower one?

Alan Hippe

Let me first answer the dividend question. Perhaps, Dan, if you can take the Bcl-2 one. Clearly, the only thing we do here is we put in a floor and this is new, because in the past, we have been more general. We said it's an attractive dividend policy. And then, verbally, we always refer to the fact that for the last 25 years, we increased the dividend. And still a lot of people were saying, "Yes, but you are not confirming that you increased the dividend, and this gives us a lot of uncertainty." So, therefore, we reconsidered our guidance and we said, okay, perhaps, let's be more concrete, put in the floor, because we plan to increase the dividend anyway. So why remain more general? But that doesn't say anything about how big the increase would be as we go forward. What I'd like to remind you is because you refer to the fact that the dividend increase was slightly lower than core EPS growth, which is true. I'd like to remind you that last year, we had a negative core EPS growth in Swiss francs due to the currency fluctuations and we still increased the dividend in Swiss francs. So last year, we have expanded the payout ratio pretty significantly. This year, it's slightly coming down. But overall, we feel that we are in a reasonable range as we go forward compared to our peers. I hope this gives you a bit of flavor, and certainly, it should clarify the question in terms of this a floor, not more and not less.

Daniel O'Day

On the Bcl-2, again, I think we can be a little bit more -- give you a little more color on this around the time of ASCO as well. But with our codevelopment partner, Abbott, or I guess we call it AbbVie now, we are looking at both monotherapy, of course, and then we're looking at combinations, particularly with GA101 and we also have an early look at combination with MabThera as well. So that should give you some idea of what our thinking is on that and then as we get a little bit closer to that time, we can be more clear.

Severin Schwan

Can we have the next question, please. There's one in the back.

Michael Leuchten - Barclays Capital, Research Division

It's Michael Leuchten from Barclays. Two questions, 1 for Alan and 1 broader one. Alan, historically, I think you've been saying net debt to total assets 15%, and now it's turned into a corridor where the lower range is 0%, why the change in that language? And then secondly on Rituxan, Severin, I think at the Investor Day, you were standing up saying that the earliest you expect Rituxan biosimilars in 2015, we've seen quite a bit of change in that, what's your view now, has it changed? Is it the same?

Severin Schwan

Alan, you want to start off with the net debt?

Alan Hippe

Yes. I don't know where this perception comes from, but we have always had said, between 0% and 15% was always its range. I think certainly the discussion was a little bit triggered by this 15% and then I think that might have led to this perception, but we have always said 0% to 15%.

Michael Leuchten - Barclays Capital, Research Division

So no change on that side?

Severin Schwan

Rituxan, yes, in fact, you are absolutely right. I mean, every year we meet here, the lines -- the timelines are moving out. It's true, I remember one day, I was saying it's 2013 where we expect biosimilars, then we said it's 2014, it's true. The last time, I said 2015. According to our latest information we have, it is 2016. So yes, I can confirm that since the last time we met, it's yet out another year.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

It's Keyur Parekh from Goldman Sachs. And I have 3 questions, please. Severin, if you look at the dividend chart and you look at the growth of dividends during 2004 and 2012, the 18% CAGR, a large part of that growth comes within '04 and '09. In '09 and '12, we've seen kind of an 8% growth in absolute dividends. As we approach the corridor that Alan kind of was talking about, 0% to 15%, is it fair to assume that dividend growth will go back that we've seen in the first half of that period?

Severin Schwan

I mean you ask, of course, a very legitimate question in terms of cash allocation, and I've always been saying we cross the bridge when we get there. It's true that we are coming closer to the bridge, we are not yet there. And of course, there are different factors which will eventually decide on how we proceed. And really the 2 possibilities or the 2 variables, as we go forward, is, are there any M&A opportunities along the way. And secondly, in which form can and should we return the cash to the shareholders. But I'm sure we'll find ways to return the money to the shareholders, and again, we'll cross the bridge when we get there. I can already see the bridge now.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

So I guess that's perhaps a better question for the end of first half. Second question, kind of a lot of your peers are now going towards providing longer-term visibility on the top line and kind of committing to a bottom line growth target. Given the inherent stability of your business, which is perhaps better than your peers, kind of any philosophical reason you might want to consider doing that?

Severin Schwan

Yes. I mean it's an internal question and we, of course, also internally always ponder about the guidance and what is the best [indiscernible] forward and different opinions internally, there are different opinions out there with our investors. So far, we always concluded that we want to stick to an annual guidance and that's what you see this year again. And really, at the end of the day, of course, it comes very much down to the pipeline development, and experience shows that you can have swings here. If you look at what is coming through in our later-stage portfolio with this, I believe it's 14 Phase II trials where we should receive data now. Of course, if all of those are positive, which will not be the case, I mean this would be a bit too optimistic, I guess, that would drive growth and bottom line in a way we have never seen before. If all of them fail, it's -- and this will also not be the case, then it will be more challenging. So the truth is probably somewhere in between. But there is a range of different scenarios, and perhaps it's a bit of Swiss mentality that we take a more conservative approach as we give our guidance, and we don't lean out too much in the long term. But as you say, it's a bit of a philosophical question. At this point, we stick to the annual guidance.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

And then just lastly on kind of 2013 guidance, I guess to [indiscernible] original question, kind of, if we think about the different cost items, you're kind of committing to greater productivity or ongoing productivity benefits, you're committing to flat or stable R&D, kind of -- is there a reason we should expect the operating leverage you've seen in 2012, not to get replicated in 2013, or kind of the ratio of sales growth to operating profit growth not to get replicated in '13?

Severin Schwan

Well, I wouldn't be specific on what the leverage is, but as I've said beforehand, I'm confident that we do have leverage.

We have another question in the second row, please. I'm reminded that we are coming to the end of the session here [indiscernible].

Unknown Analyst

You had some issue with noncompliance in pharmacovigilance for some of the projects with a potential fine, maybe in April, have you taken any provision for that?

Severin Schwan

No, we didn't. We didn't take any provisions for that. We don't believe that there's a necessity to take provisions. But perhaps, Dan, if you can give us a bit of an update where we stand.

Daniel O'Day

Yes. So I mean relative to the entire procedure, we are, of course, completely cooperating with the health authorities in Europe and the United States. We've now responded to more than 80% to 90% of their data requests. We see no, by the way, change in safety profiles of our products. In terms of the Article 6 [ph] itself, as Severin said, we haven't taken a provision. We will continue the procedure. We'll probably have some information by the half year in terms of understanding how the EMEA authorities would pursue the Article 6, and at that time, we'll have to respond to it accordingly. Again, this is the first time. It's a relatively new procedure in Europe as you know, so it's the first time that the authorities have entered into this, and all I can say is that we're encouraged by the communication and also by the diligence in which we're pursuing the [indiscernible] claims.

Unknown Analyst

And then just on Tamiflu has been -- had a very strong performance in the fourth quarter, I guess it's included in the guidance, which kind of level we should think about, I guess, Q1 has been also quite strong as the flu seems to be very aggressive this year, which kind of level should we think about for Tamiflu in 2013?

Daniel O'Day

Right. So let me just focus it a bit, because it's basically a U.S. issue. Even though flu is circulating in Europe, the utility of Tamiflu for normal seasonal influenza in Europe is very, very small. And we see, generally, normal flu seasons in Japan as well. So where we had the, if you like, the event that wasn't normal or wasn't a routine season, was in the United States. It was an early flu season. Normally, they would come in January and February. This one peaked week 52. So at the very end, December basically. We did see some -- still strong weeks in January but we now see the incidence of flu in the United States predominantly going down and going off. So you know Tamiflu is a very difficult product to predict. It is certainly included in our overall guidance that we projected for the sales growth of the group.

Unknown Analyst

Just my last question on the MARIANNE study, I think that the results were more expected in the third quarter of 2013. Now, it seems to be more first half of 2014. Any reason for the delay in the...

Unknown Executive

[indiscernible] nothing unusual. The trial is fully recruited. We are just awaiting the events to come in. And based on the current run rate, we estimate it 2014. Look, I mean, if it's not 2013 or '14, it's very difficult to say in those circumstances. The good news is it's fully recruited and we just trying [ph] to, let's say.

Severin Schwan

Okay. Thank you very much for your interest. Now, we'll break out for the various sessions. Alan and myself, we will remain in this forum here. And you will find indications outside for the 2 other sessions for Diagnostics with Roland and for Pharmaceuticals with Dan, and you have an opportunity to switch the sessions halfway through. Thank you very much.


Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your line. Bye.

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