Roche Holding's (RHHBY) CEO Severin Schwan on Q2 2016 Results - Earnings Call Transcript

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Roche Holding Ltd ADR (OTCQX:RHHBY)

Q2 2016 Earnings Conference Call

July 21, 2016 07:00 AM ET


Severin Schwan - Chief Executive Officer

Daniel O’Day - Chief Operating Officer, Pharmaceuticals

Roland Diggelmann - Chief Operating Officer, Diagnostics

Alan Hippe - Chief Financial and IT Officer


Andrew Baum - Citi

Tim Race - Deutsche Bank.

Tim Anderson - Bernstein

Sachin Jain - Bank of America

Matthew Weston - Credit Suisse

Diana Na - JP Morgan

Vincent Meunier - Morgan Stanley


Severin Schwan

Good afternoon. Welcome to our half-year briefing. We had a good start for the first half 2016. From a financial perspective growth up by 5% at constant rates but very much so from a portfolio progress point of view across Pharma, across the different therapeutic areas and also in diagnostics.

Let me just emphasize that we are really going through a very special phase at Roche. We are in the process of launching five new molecular entities within the short time frame of only one year. This is really unprecedented in the history of Roche and it comes at the right time. We are facing biosimilar entry next year and accordingly we want to maximize the potential of the opportunities we now have at hand.

Five new molecular entity launches in Pharma, investments in cancer immunotherapies and we continue also to invest into molecular diagnostic solutions. I should also say that due to the strong demand and the volume demand we have from the biologics we are expanding as you know our biologics manufacturing network. You have seen that for the first half we had a number of effects, in particular from the PSI. So let me just refer a bit to the outlook for the full year.

First of all the one-off effect for PSI will be diluted on a full year basis. We only have this in the first half, however, what is important to mention here is that we started really with the investments into pre-launch, launch activities and also to a certain degree in cancer immunotherapies in the second half of last year. And the reason for that was that the date that we are coming in, you remember, for [Indiscernible] in June last year. We also got the results for Tecentriq, the first results for Tecentriq, in first line lung cancer. That is when we engaged in the bigger pivotal trials and that is when we started to increase our investment.

So as we go into the second half of 2016 we benefit, if you like, from a base effect on the cost side – as a technical effect with costs growing at the lower extent. I should also say that we continue with our ongoing productivity measures across the value chain from research over development. I mentioned biologics, on the [Indiscernible] let us don’t forget that we are restructuring our small molecule network and of course, also on the commercial side, [Indiscernible] et cetera.

So if you take all of that together we are confident that we will grow EPS beyond sales for the full year. Now let us get into the more detailed numbers, Pharmaceuticals up by 4% at constant currencies, very much driven as in the past by the oncology portfolio, but more and more we see the importance of immunology, which is growing at a very good rate as you will see in Dan’s presentation. Diagnostics division up 6%, clearly above the market, again driven by professional diagnostics and immunodiagnostics, the biggest segment.

So we continue our growth in the mid-single digits for the last quarters. You can see strong sales growth across all regions in the two divisions. Core operating profit up 5%. Alan will show in his presentation a more detailed breakdown with specific effect such as the PSI or the early bond redemption. The same number is reflected on the core EPS growth.

And again coming back to my, I guess, favorite slide, if you turn to Slide 13, where you can see the five new molecular entities to be launched in a year. We have now already launched four of them and we still expect it during this year given the PDUFA date end of December by the FDA.

Now what I should say, it is not only the sheer number of enemies, which is unprecedented in the history of Roche, it is also about the quality of the various compounds and you see it is also reflected by the breakthrough therapy designations we got by the FDA. So four out of those five new molecular entities received breakthrough therapy designation. There is more to come. As you know, we expect further important readouts over the coming months, which hopefully will contribute to the growth as we go forward.

In terms of new molecular entities, I would highlight ACE 910 in Hemophilia, but also Lampalizumab in ophthalmology, geographic atrophy; and then of course, we have important line extensions, in particular, Perjeta, for early setting of breast cancer. And likewise, we are rolling out a number of important platforms in Diagnostics to support the growth in the long-term. I would highlight here the cobas e801. That is really a new platform for immunodiagnostics, which in the meantime has become by far the biggest segment in the diagnostics franchise, and as such, this new platform is really critical to drive the growth as we go forward.

With this I would like to conclude. Again, we confirm the sales growth for the full year with low to mid-single digit. Now given where we stand at the half year - it is probably more on the conservative side. As I explained, we expect core EPS to grow above sales, and on that basis, we should be able to further increase our dividend in Swiss francs.

Thank you and with this I hand over to Dan.

Daniel O’Day

Thank you and good afternoon, good morning, from my side. I think it has been a good first six months for the Pharma division, both in terms of growth across the regions, but also in terms of the pipeline progress and certainly launches. We had a variety of launches that came even earlier than expected, and are beginning to make themselves known in the marketplace.

So let me start with the first half results. We have overall, constant currency growth of 4% across the Pharma division. That breaks down in the United States growing to 5%, driven really by the HER2 franchise, by Esbriet, by the immunology franchise; Europe growing a very strong 5%.

As you will see in my product slide, Perjeta, really driving that growth. The other oncology products as well as Actemra. Japan with a 2% growth. This is good underlying volume. There was a price decrease on Avastin and despite that very good underlying volume growth of 2%. And international at 4% growth with China returning again to good growth with 8% growth for the first half and really overall solid growth for the division.

You can see in the P&L that the growth was very beneficial to the eventual core operating profit we delivered. The three points I really want to make here in terms of the investment side of the P&L are our investment in our biologic manufacturing, our investment in M&D for the new product launches and our investment in R&D based upon the performance of our early development assets and taking them to late stage.

Let me just characterize each one of those a little bit. So in the cost of sales line, you can see relatively flat development there. The cost of goods are in fact growing by around 7%. That is offset by some favorable royalties in that line, but we are looking of course at both increasing significantly our manufacturing capacity for all the monoclonal antibodies that are both growing today that we have in the market, but also the new ones to come, and that investment is going as planned, and our capacity is increasing as planned, which will be needed for even the early launches.

On the M&D side, many new launches, four new launches in the last seven months. Expect a fifth one in the coming months and significant investments to ramp up for the opportunity in multiple sclerosis, immuno-oncology and some of the other medicines. And then in R&D, really looking at expanding the investment in cancer immunotherapy, while continuing to optimize – keep the bar high for many of our programs.

Alan will get through in a bit more detail, but our G&A is benefited by a one-time effect, our NIM expenses are growing in line with sales. And then we have someone off effects in the royalty and other operating income. What I would say is that we expect a deceleration of the growth for M&D and R&D in the second half of the year because of that base effect because we started to invest in the second half of 2015 and continued productivity initiatives as we progress in the year.

So here is the product scope, and you can see really strong growth across the board for our new medicines – our oncology medicines as well as our immunology portfolio. I'm going to talk about most of these. I just want to point out that you can see here from the regional perspective the strong growth of Perjeta in Europe, the strong growth of Avastin in the international region, a lot of that is China and good solid growth across the US.

You can also see – I won’t talk about this later that Activase in the United States really growing nicely, and that is also due to an additional study demonstrating the benefit of Activase in the US market. When we look at the oncology portfolio, you can see the overall oncology business in the half year is growing at 5%; HER2 franchise, good strong growth. I will cover these in subsequent slides. I do want to say something about the CD20 franchise because a 4% growth again in non-Hodgkin’s lymphoma, particularly in the maintenance setting continues to grow nicely. The US recovering after a fairly weak first quarter and the second quarter. Perjeta growing more than 40%. That is despite the fact that we had a significant one off clinical trial effect with – I meant Gazyva [Indiscernible] Gazyva growing at plus 40% in that CD20 franchise despite the fact that we had a significant clinical trial purchase last year.

So good underlying growth for Gazyva, and of course we are just now launching the relapsed/refractory lymphoma indication. We got that off in February in the United States and just received the approval in the EU, and I will talk more about Gallium and Goya in a slide to come. I would say that Cotellic and Zelboraf really now gaining share again with a plus 22% growth share of around 16%.

And we are not seeing a significant impact upon the targeted therapies right now in melanoma. We continue to see relatively stable share vis-à-vis the immuno-oncology activity in melanoma, and gaining share in Cotellic and Zelboraf, and Alecensa just a really terrific start, which I will get back to, but I will mention that we see already market share is nearly 60% in Japan, which has a head start on the launch and of course, the J-ALEX data in the frontline setting, already in place in Japan, and obviously we look forward to bringing that data to the US and Europe in the near-term.

On the Herceptin franchise, this is now switching quarterly growth. So you see the quarterly growth of 35%. In Europe that translates to a growth of more than 50%, United States still around 16% growth. Herceptin benefiting from the longer duration of therapy and Kadcyla still penetrating into the second line setting and beyond.

I have a slide next on the subcutaneous, but really going well and again at the right time. And I would continue to confirm the fact that the APHINITY trial, which is event driven, we expect either late this year or early next year the results of that in the front-line metastatic setting. Here you can see the progress of the subcutaneous in both Herceptin and MabThera. A couple of points, of course the Herceptin subcutaneous was launched in advance of MabThera, so it is a bit ahead in terms of the market share and penetration.

We are now in 53 markets with Herceptin subcu, and excluding some of the launches that were just out the door, we are at an average share of 47%. We have 5 or 6 countries that are above 70% in terms of market share. This continues to be a real benefit for patients and healthcare systems, and that is why I think we see these conversion rates, which are significant.

Now in the MabThera subcu we had the indication in non-Hodgkin's lymphoma. We just recently received it in CLL as well. And it is a little bit late in terms of its penetration, but the same benefit to patients and to the healthcare systems, now at an average share of around 35% with more to grow between now and the entrance of biosimilars.

Avastin, overall good growth given the penetration of the brand around the world, 4% growth on a quarterly basis overall. The international business here is growing at 18%; Europe growing nicely; the US fairly saturated at this stage. As you can see lung cancer is driving that growth and we are just now launching the Avastin plus Tarceva in Europe. We just received that indication. Cervical and ovarian cancer continue to be strong growers in Europe and in Japan, and we are pursuing now the filing for mesothelioma based upon the results of the study that we reported in the last quarter.

So we continue to see good uptake for the remaining part of the year, and as we would expect for a medicine at this stage in its lifecycle, we are going to continue to see stronger growth in the international region, where we are still, penetrating the market based upon availability in our access programs.

Immunology is a really good news story, I mean the franchise is approaching 8 billion Swiss francs on an annualized basis, really terrific growth from each one of the medicines in this segment. We are looking at Xolair growing at 17%, continued to be supported, roughly equally by both the allergic asthma setting, and also the CIU setting. Really pleased to say and it is the first biologic that has a pediatric indication down to the age of 6. so pediatric approval in asthma now in the US, which will serve a really important part of the patient population, and I think continue to benefit the overall image of asthma even in the adult population as well.

Actemra growing nicely at 21%. We are up to around 36% share now in the subcutaneous version of Actemra, and continue to have a really strong leadership in the monotherapy area. I'm really excited to show you later this year the results from giant-cell arthritis. This was a study as you know that we looked at Actemra comparison to steroids at both the six-month and twelve-month standpoint. There has been really nothing for this disease other than steroids. It is an inflammation of the arterial vessels, and it is really a significant medical need. So I think it represents a really important line extension for Actemra in the years to come.

And then MabThera/Rituxan growing nicely here at plus 6%, both rheumatoid arthritis and the vasculitis area. Esbriet more than 50% growth at half year. You can see continued good growth on a quarterly basis in the United States at 32%; Europe plus 9%, of course Europe had a high market share, and now with the entrance of [Indiscernible], we continue to be successful in demonstrating the benefit of Esbriet in that very established market in the severe patient setting, and in the United States we continue to see good market share, 60% to 65%.

We are now penetrating well the severe patient population. We are working on persistence in that area of our business and the real objective moving forward with Esbriet is to take this chronic debilitating disease that progresses and getting patients to be treated earlier, so in the mild and moderate patient setting. And we are certainly targeting that investment and investing in that significantly in the quarters to come. We have increased investments in some of our markets in Europe, and we are certainly looking to increase our investments and if you like expanding the pool of patients that receive a medicine in the IPF patient population.

So that is the half year results. Obviously we have had many other important launches that I didn’t cover that are progressing well, but let us look at some of the things in the innovation session here. So we have got Ocrelizumab, really terrific news, the first medicine to receive breakthrough therapy designation and now priority review in the United States. I will remind you of the results, which are really both from an efficacy standpoint and a safety standpoint really unique in the field of multiple sclerosis. Of course the first medicine ever approved in PPMS, despite the fact that other agents in this setting have clearly attempted to show a benefit in PPMS.

So, we are in a unique position here. We are working very closely with the FDA on what is a very large file to review with lots of important data to be reviewed. The PDUFA is now the end of December, and we are looking forward to launching that presuming approval after the PDUFA date very quickly so that we can bring this really, I would say, new standard of care into the MS marketplace in the United States first, and then of course following up in Europe and other markets around the world.

So I want to spend a bit of time on that hematologic program because I think we have had some really important readouts. In the past basically little over a year with our lead medicine here to improve upon Rituxan and Gazyva, we have had four important readouts and three of the four have been positive. One of those actually coming forward in terms of being read out at the interim results, which was impressive and of course, we look forward to showing you that data later this year as well. Of course, we also recently got the data as you know, for the GOYA study in the aggressive non-Hodgkin’s lymphoma.

And unfortunately that data did not demonstrate superiority over a very robust standard of care, R-CHOP, in the aggressive non-Hodgkin’s lymphoma setting. As we expected and indicated to you that was a high bar. I think we are courageous to go after it with a single agent. We did, and that is an areas that, we did not succeed and that represents around 13% of the overall hematology incidence and around 25% of the current Gazyva business in oncology.

So what are our plans there? Well, first of all, I think we can leverage the other 75% of the data that showed clear superiority over Rituxan in our current CD20 franchise. The second point I would make is all along we have had a really strong overall hematology look to the aggressive non-Hodgkin’s lymphoma area, and as you can see on the slide here we have eight additional medicines that we will be using to change the standard of care throughout our hematology franchise, and five of those as you will see at the next slide we are putting to work in aggressive non-Hodgkin’s lymphoma. So although GOYA did not meet its endpoint, we already have and we begun additional studies on different combinations with different backbones to look to improve the standard of care as well in the aggressive non-Hodgkin’s lymphoma.

And by the way, we won’t rest on our laurels in the other areas where Gazyva has shown improvement. We are also looking for additional combinations to improve, now even upon Gazyva in some of those other settings. The other point I want to make here is that beyond the areas that we have really developed in hematology for Gazyva, so the traditional areas of non-Hodgkin’s lymphoma and CLL, we are also now approaching the other diseases with hematologic malignancies like AML, like multiple myeloma, and like MBM.

And we have as you will see many, many programs underway. So more than 30 trials from Phase 1 to Phase 3 happening now. This first slide, Slide 31, shows you just what we are doing in non-Hodgkin’s lymphoma. And of course now with the Gallium and the Goya results we will be adapting some of these – these studies were designed to be flexible such that based upon those results, we could slightly adjust the CD20 backbone to make sure that we progress ahead. And you saw some data already at ASCO on the [Indiscernible] combination with Rituxan, and we will be showing more of that data as it matures.

While we have five medicines now approaching aggressive non-Hodgkin’s lymphoma. You can see Gazyva, Venclexta, Polatuzumab, Tecentriq, Idasanutlin, as well as as you will see on the next slide the bispecific antibody the CD20/CD3. So in the next slide you see the remaining part of the hematology portfolio with both CLL well covered with a variety of new agents, but then you also see here the emerging areas for us of multiple myeloma, AML and MDS, and down at the bottom you see the bispecific antibody as well that can really play across the entirety of the hematology portfolio. So a very broad, very comprehensive hematology portfolio, which will allow us to continue to change the standard of care in this disease moving forward.

So I am very pleased to say we launched Tecentriq on May 19 in the United States, accelerated approval basis based upon very strong data in the second line bladder cancer setting. It is an all-comers label with a complementary diagnostic and we have got really good take up so far. I mean it is still early days, but 19 million Swiss francs in a little less than a month and a half, and really representing some good underlying demand for Tecentriq. You also saw at ASCO, the cohort 1 data, where we demonstrated the benefit of Tecentriq in the frontline bladder cancer setting and I am pleased to say as a result of this study, we have now initiated our Phase 3 program in first line bladder cancer and actually had first patient in on this trial this past week. So it is progressing and progressing well.

Tecentriq is, of course, the cornerstone of our cancer immunotherapy strategy, but as you know we have a very broad program. I have just covered the lower left hand of this to some degree. I was looking at the bladder cancer, but you can look across the tumor types and in the hematologic tumors, how we are approaching this. I mean today we have more than 20 medicines in cancer immunotherapy, ten of those are in the clinic. One of those ten is approved Tecentriq, and we have more than 50 trials now going on in the cancer immunotherapy space. More than 40 of those are in the combination setting. And that number continues to increase on a quarterly basis as we are informed by data, new hypothesis and as we know what to further invest in. So, I think a really strong program with a number of first with Tecentriq and certainly in the combination space we're in a very competitive position to have our readouts and to determine what combinations might be most successful.

And that's really what I wanted to cover on Slide 35. I get this question quite a bit, which is you know, when are we going to see data on the other nine medicines, the nine cancer immunotherapy medicines. And the answer to that question is you'll get to see some of that this year and in terms of the data but the vast majority will be next year. And you can see from the cancer immunotherapy cycle that we really have a good balance around the different mechanisms on the cancer immunotherapy cycle.

Different mechanisms in different combinations that we continue to explore and to determine which other combinations we might pursue. But at least the initial Phase 1 data will which will inform us on which of these might be most promising in which we would take forward, we will begin to see next year. And of course, the readouts are dependent upon also how the trials continue to accrue and enroll. But we're really looking forward to learning about these medicines and determining how to expand our program.

So, with that, I'll like to close with a couple of outlooks lines, in addition to the medicines I've already spoken about. I want to give you a brief update on vanucizumab now. The inhibitor study is fully enrolled and we expect that to read out by early next year, end of this year or early next year. And the non-inhibitor trials, the pediatric trials and the once monthly trials are well under planning and well underway. And so, we're preparing to expand that program.

We'll also see some additional data on that coming up in Orlando next week at the World Hemophilia Conference, you'll see some additional extension data on those Phase 1 patients that so encourages us to move rapidly with this program, and that were really the rationale for the breakthrough therapy designation on this program. And secondly on lampalizumab, the program is accruing well, we're nearing the end of recruitment and looking forward to the one year data on lampalizumab reading out next year.

A number of important conferences coming up. With ESMO, we've got the triple combination in melanoma, we have the OAK trial, we have the VIGOR date as well and I will just point out also that ASH will of course be updating you on the GOYA and GALLIUM results as well as some information on polatuzumab as well and some additional Venclexta information as part of our broader haematology portfolio.

Finally, in terms of our scorecard for the year, I think you know we have received approval now for the refractory in non-Hodgkin lymphoma with Gazyva. We got the Venclexta p17 deletion launched out there, Ocrevus filing accepted to centric bladder cancer launch. I will say with Lebrikizumab, we have made a decision based upon the mixed ESMO results between the two studies to not pursue that program further. But we will be looking, in ESMO but we will be looking at that programs readouts which ware coming shortly, some of which we have in-house for a topic dermatitis for IPF and for COPD to make further decisions on that program.

I've already talked about Gazyva and GALLIUM which we've added to this list as well as Actemra GCA and of course the readouts that we received so far from Tecentriq in bladder cancer in second-line lung setting and the Venclexta Rituxan in the in non-Hodgkin lymphoma setting. So, overall, a really solid set of pipeline results and when I look at the quality of these results and as we look forward to showing you the quality of these results that you don’t know yet, in the second half of this year. I think you'll see that we've held the bar high in terms of what we expect in terms of changing standard of care.

So, with that I would turn it over to Roland to cover the diagnostics portion.

Roland Diggelmann

Well, thank you Dan. Good afternoon, good morning also from my side. I'd like to cover diagnostics. And as mentioned we've had a good first half year in the sales side, 6% overall, largely driven by gross in the laboratory business. So, if you are looking to professional diagnostics, molecular diagnostics, tissue diagnostics together, also 9% gross, exceeding market gross and very pleased with the gross development and sales developments in the professional business.

On the diabetes side, we continue to see a challenging environment in the United States, largely based on the pricing, the reimbursement. And in Medicare we have seen a slow start to the urine diabetes, we have seen a stronger positive second half or a second quarter I should say was a 1% growth overall. We expect to see also a better third quarter, however we are also going to the second round of competitive bidding in the United States, so we'll continue to see a volatile environment in diabetes care.

But overall, good sales development also supported by a recent launches and by abroad the geographic coverage.

And then looking at sales, we see first of all sales across all the regions are up. Very good sales in emerging markets with Asia Pacific growing strongly, Latin America also growing strongly. China particular, a strong drive for diagnostics up for 24% in the first half and continued E7 gross which is very encouraging as we continue to broaden our testing base. If I then look at the more mature regions, EMEA, excluding diabetes care also growing above the market with 4%, North America was 7% excluding diabetes care. So, all the regions contributing nicely to the sales, gross and progress.

Some of the drivers on the sales side, immune diagnostics which was mentioned and I'll come back to that in relative to the introduction of the e801 and so the haematology or the immuno diagnostics franchise doing very very well. And then mentioned that diabetes care sales already under pressure there from the reimbursement side. And then in the molecular diagnostics, good growth also in virology, the broad panels, HIV, HCV, HBV testing continued to do well. And also, market share gains in HBV on the Women's Health.

And finally, Tissue Diagnostics, our core Tissue Diagnostics business advanced staining. Then also the introduction of a new system late last year, which contributes to the primary staining business nicely. This is the HE 600 instrument.

So, shifting over to the P&L. Obviously, I'd like to take you through the different line items in the P&L here. As you can see the sales line, the 6% does not translate down to the bottom line, was a 1% increase on the bottom. First of all, we will continue to see a progressive reduction in our royalty income, this is largely our PCR licenses. We have plan for that. And then the cost line. The cost of sales line, multiple factors here. One being the pricing in the US on diabetes care, which of course affected the gross profit.

But then on the other hand our volumes. So, volumes growing 11% ahead of the sales line. With that we have new instruments placed in the market, these instruments of course are being placed in the first setting and they need to be serviced and maintained. So, this is also contributing to this. And then in addition to that, what we're also seeing is some supplier increase in terms of costing. And finally we're also investing in the manufacturing capabilities, notably in China which as you've seen is our fastest gross market.

On the M&D line, we are prudent. We're investing specifically into the gross markets, the emerging markets. And then on the R&D line, where you can see about half of this increase is attributed to our ongoing investments in sequencing. This is a multi-program, as you know. And the other part of the R&D increase is attributed largely through acquisitions, technologies and assets that we brought in has which are now nearing late stage in their final development.

So, program such as the point-of-care molecular, solutions such as microbiology, such as haematology and coagulation which were all brought in-house and which will hit the market over the next one to two years. And then finally, in the G&A where you can see there is of course the positive impact of PSI. Going forward for the second half of the year where you should expect is a certain deceleration on the R&D line and also a base effect there so in improving of the core operating profit for the second half year.

Shifting over to portfolio and innovation, very excited to promote and to be able to share the introduction of the e801, our immuno diagnostics module, which is part of the large and very large franchise for the cobas 8000 family serum work area. What the e801 does is it provides us very strongly aligned was our strategy of connecting the core laboratory providing efficiency and automation to the laboratories. It provides us double the testing facility or capability on the same footprint.

It uses less volumes per test. And also what's important here, we're looking at a very modular system, so this e801 can be brought in seamlessly into existing and into expanding platforms in the laboratories. Really looking at the high super'ed laboratories, their need for efficiency gains, this is a very nice edition and core to our future growth.

Then shifting all the way to the other side of the spectrum; patient self-testing. Here in coagulation, this is a CoaguChek is an instrument that we have had in the market that allows patient to test for their coagulation status. What is new here is and this is the first time this is a connected, this is a wireless self-testing device for coagulation testing and it really increases the ability of patients to manage their status. But it also allows physicians, healthcare providers to have access to data and to help managing the status here.

So, we're very excited, we look forward to continuing to increase patient self-testing and this should also be helped by a recent competitive recall in this area.

Further advancing personalized healthcare, what you see here is the first liquid biopsy test that has been approved by the FDA, very exciting here. This is our EGFR plasma-based test for non-small-cell lung cancer and to stratify patients which will go on to then receive Tarceva. What's particularly exciting here is also that was one test we can now perform tissue and liquid biopsy based testing. So, we're using the same standards, it's absolutely reproducible, and of course we can leverage our existing platform which is the cobas 4800.

And finally, the last slide on the innovation. I'm very excited to be able to provide complementary testing capabilities for Tecentriq, advancing the PD-L1 in bladder cancer. And we look at this as an exciting opportunity, we're at the beginning here as Dan mentioned of course of cancer immuno therapy. We believe there will be ongoing opportunities as well for diagnostics.

This brings me to the last slide, which is the portfolio and you can see some good progress on the portfolio together. You can also see I would say in a summary our commitment to innovation to advancing innovation in diagnostics, we have good sales momentum. We'll continue to focus more also on the launch execution here of these products and solutions and then of course continuing to focus also on the bottom line and on the R&D productivity and inefficiencies.

And with that, I thank you for your attention and hand over to Alan for finance.

Alan Hippe

Well, thanks Roland, for handing over. Yeah, welcome to everybody. Thanks for watching and wherever you are. And as said, I think in the presentation it came well across and Severin said it, Roland said it, Dan said it; I think we're investing on a high level. And we're launching five on the NMEs in a 12 months' timeframe. And you've heard about diagnostics. Wherever you have significant launches as well and a fantastic momentum as Roland pointed out.

So, start with a little bit of an overview and here are the points which were mentioned already. Strong sales growth cooperating profit upwards 5%, core EPS growth was 5%. Then you look at the cash flow, I think a significant cash generation with 5.5 billion. Impact of the launch activity is visible, I will talk about that. And then the increase net debt versus year end 2015 due to the dividend I think you know our pattern, as when you look at it half year to half year; pretty stable.

And then the capital markets update new bond redemption, yes, we have introduced a bond redemption once again in the first half of this year or back 857 million of a bond with a maturity March 2019 and a coupon of 6% which certainly gives us a nice opportunity to relaunch that here with a lower coupon. The loss on the redemption in SFr 96 million.

Good, here's the comprehensive picture of the numbers. Talked about the sales already, talked about the cooperating profit and you also see here the first exclusion of the past service income. I will home to that, in fact, I have a specific slide on this. But basically what's behind that is a change of our pension plan in Switzerland. Core net income, you see it up by 5% in constant rates, you see the core APS up by 5% in constant rates. Let me also point out here, on that slide, when you look really at the change in Swiss Francs.

We get even some support now we have from currencies when in our reported numbers which at least I have not seen here in the last years; so that's quite a change. IFRS net income up 3% here and operating free cash flow down 19% in constant rate and I certainly will talk about that and will address that, can't say right away and that's triggered by net rate working capital and pretty much solely. And that is also reflected then in the free cash flow.

Yeah, exchange rates. I've mentioned that already and here it is outlined for sales. And you see really the US dollars, the Japanese Yen and the Euro supported us, against the Swiss Franc. And on the other hand you see really what happened in Lat-Am and we've talked about that already last year. When you look at Venezuela, when you look at Argentina, and you see here the sale growth in Swiss Francs at 6.1% whereby in constant rates at just at 4.8%.

Now, let me dig into the P&L and we will provide you and two pictures if you like, about two slides on the P&L. One is our standard slide, I'd come to that in the second. But first we thought we started a little bit with a bridge to outline all the investments that we have done. And let me lead you through this. On the left hand side you can see, we've really start with the core profit before taxes. Yeah, this is not the core operating profit, this is the core profit and therefore contains the financial result.

So, we start on the left hand side. And you see really these SFr 8.611 billion, that's the reported figure and you find it in the financial report on page four. And then you really go to the right hand side and you find the half year 2016 core profit and before tax was 9.258 billion, which is the figure that you find as well on page four. And then you see the bridge in-between. And we've started really with the point to say fine. Yeah, let's take really and the gross margin that we have had in the first half of 2015, because that allows and certainly to show the changes that have happened in the full-year timeframe.

And here you see really the investments that we have done in the impacts from these investments. So, on one hand, sales manufacturing and I've seen Dan and Roland talked about it. And well, we have a significant volume and significant volume growth in both divisions. We have significant launches in both divisions. And at the same time we're ramping up our manufacturing capacity in both divisions. Roland talked about China and the significant investment we're doing over there and for the China manufacturing and in the other hand, we're working on our biologics network as Dan outlined.

M&D very much characterized by the launches that we have in pharma as well as in diagnostics. And R&D Dan just mentioned, the cancer immunotherapies as well as our investments into molecular diagnostics sale sequencing. And then you see really the royalty income and the other cost of sales and that is a little bit of mix and that will become clear on the next slide but very clear, the royalty income came down a little bit and the other point we make is we got some support you have from expiry of a patent which caused royalty expenses.

And then you see here the net financial results, excluding the bond redemption helped us, talk about that later on. We have lower interest expenses, then the past service income was to 426 million positive. And then you see really the impact on the net loss on the June bond redemptions that I've mentioned right at the beginning and you might wonder why this is now a -94 in comparison to the 96 million that I've mentioned at the beginning. This year is at constant rates, I have to say.

And then you see really the currency impact here. Very important is, you know, we stick to our outlook. Yeah? So, we core EPS growth should be ahead of sales growth at year-end and that certainly are combined with the low to mid-single digit Group sales growth. So on, it's very clear what's going to happen and Severin described it. And in the second half of 2015, we had already a higher cost base, so that's one element here. But the element, the other elements certainly is, is that our momentum on the expense side will be reduced in the second half.

Good. With that, let's go to the standard P&L. Don’t want to talk about the sales growth with the royalties and Dan has mentioned it. We had a little bit lower royalty income here from significant seeing some buy on one hand. I think we had a de-blocking last year of a technology which gave us roughly a 100 million miss here. US helped us last year a little bit, you know, we don’t have these effects again this year.

And cost of sales, I think we talked about that. Manufacturing costs go up, on the other hand we have some relief, you know, coming from the PDL royalty expenses. And M&D; I've mentioned already, R&D; I've mentioned already, and on G&A you seen all the full effect of the PSI, as a positive was 426 million, which leads us to the core operating profit and the nice momentum of a 5% growth in constant currencies.

PSI, so the past service income. And let me talk a second about this. First, what I said really coming from and as I've said, it is triggered by the changes that we have introduced in our Swiss pension plan. And the consideration has been that we looked at the pension plan and asked ourselves, okay, is that pension plan really sustainable in an environment where interest rates go down, which makes it difficult to create adequate returns, and on right the on the other hand real life expectancy just increases.

So, we made an adaption here, we have really brought the conversion rate, which in fact is a calculation factor here for the pension for retirees. We brought that down. On the other hand we increased the contributions to make in the future and on the other hand there will be a moderate cash injection in to the pension fund. So, with doing so, that creates bringing down the liabilities if you like in the balance sheet, on the other hand and that give you an impact, a positive impact here on the income side into P&L.

Which is a pretty technical effect as you can imagine because certainly the life expectancy is not completely reflected in the mortality tables that we are obliged to use, you have to do that calculation. So, okay, that number is in now. You see really the 426 and how it is really divided between pharma, diagnostics and corporate and we have also outlined the margin impact on that slide. Then you have the deferred taxes and certainly it's a Swiss tax rate that we have applied here, with roughly 20%, it's a mixture you know of different statuary taxes here that you find in difference with regions which are impacted. Then you have the net income and then you have the core EPS impact coming from that decision.

Good. With that, let's go to the next Slide 57. And what you see here is really the margins and you see the margins are rather stable. Roland has talked about diagnostics already. Certainly, these margins are supported by the positive PSI effect. When you look at the core net financial result and I've mentioned that very much supported by the lower interest expenses as you can take from the slide. And just to put that into perspective, I think we have reduced the effective interest rates from 5.4% in 2012 to really a 3% or 3.0% in the first half of 2016. And in fact the debt level of these two years, '12 as well as 2016 is pretty much comparable.

And you see really on some slide effects by positive reflects from currency, some slide effect from net income from equity, securities. And then you see really the net losses on the bond redemption that I have explained already. Leads me to the balance sheet, quick remarks here. You see really that when you look at the cash and the marketable securities, that goes down a little bit certainly triggered by the dividend payments, you know, that we have done in the first half. When you look at the other current assets, you see an increase of 1.1 billion. And I can say this is really triggered by receivables as well as inventories. And I'll come to that because that has an impact on the cash flow as you can imagine.

Then on the right hand side, you see the current liabilities going up a little bit and that is an increase of short term debt. When you look really here, the ratios half year to half year and on that slide you have a year-end half year comparison, when you compare half year to half year, you see that we are pretty much stable when it comes to equity ratio and when it comes to net debt to total assets as well.

Good. Cash flow. Operating free cash flow went down by around a billion here. And certainly, this is also a result, you know, of our high investment activity. And let me give you a three reasons. The overall reason is net rate working capital. That's explaining the billion here, pretty much really to the last Swiss Franc. And three elements into it as you know. On one hand is the trade receivables, increase was roughly 700 million. And let me explain this because what happened is we really went into the year and we had a slower momentum and when the momentum picked up, we had a reasonable June.

And but that meant certainly, that we had really our best sales growth very much at the end of that half year. And that means, we have receivables certainly sitting now on our balance sheets that we have to convert into cash. From the 700 million, roughly 300 million apply to the USA loan, where in fact we have the best DSO. So, another piece to smaller piece is coming from inventories and another small equities is coming from the trade receivables.

Now, I have a more formal point to make and it is about our free cash flow reporting. And what we have experienced is that in fact, we are the only one in our industry and compared to our peers, who really includes the dividend payment into the free cash flow. And I have to admit that has been really irritating predominantly to generate investors. And so, we have decided you have to take the dividends paid out of the free cash flow. You see now the comparable numbers here on that slide 61, including the dividends paid, so as reported formally and how the numbers look like when you exclude it. So, that's the whole change we're going to introduce but we think it will lead to more transparency for investors.

Good. That leads me to the net debt development. And this is also a year-end to half year comparison. And you see how it develop certainly, I see we've paid the dividend with 7 billion. That always brings our net debt up when it comes to the half year. You see the operating free cash flow of 5.5 billion, I've talked about this and taxes and treasury is pretty comparable to what we normally do. So, I think that that looks pretty robust. Also, when you compare the net debt with half year 2015, this is a very comparable figure.

That leads me to my last slide, which is really about currency. And I've talked about it for the half year already. And you know what we're doing, pretty mechanically we take the currency rates here at end of half year and just keep them stable, yeah, and then projected on the full year and you see what it means. In fact, the effects are pretty comparable to what we have had at half year. So, for the full year we project sales and +1 percentage points, so still an uplift. Cooperating profit up 1 percentage point and core EPS up 2 percentage points; as said pretty comparable to what you have seen at half year.

And once again, very happy here with the guidance and pretty confident here that we can deliver on this. And with that, thanks a lot for your attention and we're happy to answer your questions now.

Question-and-Answer Session


[Operator Instructions] The first question is from Andrew Baum from Citi. Please go ahead.

Andrew Baum

Thank you. Three questions, please. Firstly, then on Avastin. Could you remind us how much in the US, well, actually US and Europe of Avastin revenues comes from the lung cancer indication. And just outline how you expect that to react following the anticipated approval of the PD-1 agent in the first line setting. And second, two questions for Severin. First, I'd be interested at any recent thoughts on Roche's deserved M&A. If you could say I think you focused on both on deals that 5 billion or less from memory. But if you could remind us, that'd be great.

And then finally, it's not been three years since you revoke of pRED and John rejoining you. It's my impression that there is now evidence to suggest things are moving more in a favorable direction than you would anticipate here. Would you agree that's the case from what you see in your very early stage, connect to our pRED programs. Thank you.

Daniel O’Day

Andrew, thanks for your question. Let me start with your question on R&D and our pRED organisation. Yes, actually I would agree. You know, we have gone through a number of reorganizations in pRED from leadership point-of-view starting with John Reed but also on the next level of the organisation. And actually we have had quite some changes in our portfolio with you know actually going out of metabolism and reinvesting resources in other areas.

And it's, yeah, it's the timing of your question is good. We just recently had a review where the different R&D units were participating; Truggy, Cheret, pRED, of course but also the late stage organization. And there was really very positive feedback about the progress we have seen in pRED over the more recent past and most importantly of course, in what we see coming through the pipeline. So, indeed I would agree I also see a very good development here.

On your second question regarding M&A, really nothing has changed. Our M&A strategy remains focused on bold on acquisitions where we get in specific products or technologies to round off our portfolio. And as you know we have focused really a lot on early stage deals. We had some later stage deals on the diagnostics side but as far as pharma is concerned with the exception of InterMune, it was really a quite a number of transactions but all very early stage preclinical or early development.

As far as later stage opportunities are concerned, they are rare to start with and typically we can't make the economics. We have never come to the conclusion that with such a deal we would really create mainly of our shareholders and I don't see much change as we go forward and as you know we are completely out of mega mergers to start with. Right.

So, with this can I hand over to Dan for the Avastin, question?

Daniel O’Day

Thanks, Andrew. So, for Avastin, I just put the magnitude into effect. Lung cancer is a rather small portion of Avastin sales. In the US, around 15%; the majority of the sales is around 55%. And looking at the totality of the Avastin performance of course we had a 4% to growth for the year as you know and really good growth in the international regions. We saw some softness of course in the US market and I think that's due a number of things. We have seen a minor impact; it's really quite small and the second-line lung cancer setting where we don't promote today, as you know we don't have an indication.

We really haven't seen in affect all in the first-line lung cancer setting. And then I would just remind you that as we look at our immunotherapy program, we think Avastin is a really important part of the combination strategy both in our first-line lung cancer setting but also as you know and renal cell carcinoma and other indications that we are looking at. So that's really how I see the immunotherapy impacting Avastin in the short term anyway.

Severin Schwan

Can we have the next question, please?


Your next question is from Tim Race, Deutsche Bank. Please go ahead.

Tim Race

Hi, Tim. Thanks for taking my question. First question just to Alan, I suppose on guidance. Given the past servicing comment various items, can you just confirm what one of items that we call them are included in your core assumptions for earnings growth this year in your guidance. And could you also sort of confirm that excess one of items core earnings would be growing ahead of sales. And then another question on the financial and the cost, not the royalty part of it but the actual real cost.

And given what we are seeing in terms of rise, how much is that is actually due to the low capacity you traverse in and for the new products versus the increased spent for the partners, which is long term assumption and how do you expect that to evolve going forward. And then, maybe just the last one for Dan if you can. Just on the first-line bladder cancer indication for Atezo. You're looking at that in line with chemotherapy versus where other companies are looking at more of a sort of a approach without the chemo back going, given the sort of toxicity profile of chemo and age of these patients, can you just talk what's to your thinking that? Thank you.

Severin Schwan

Right, Alan. You give it a try on the guidance.

Alan Hippe

Yes, sure. I think first of all I think well let me say this and my colleagues know that I think that the point is really everything is included in that guidance. You know, I think certainly I think we thought that the PSI thing and we have seen that we might have an impact from that because certainly the negotiation started. But certainly there was something where we need the decision and how we go for that. I think very clear, our guidance EPS growth's higher than sales growth is comprehensive and includes all the effects because every year we have quite some effect. I have talked about the bond buyback for example, we have a multiple of effects coming in; positive as well as negative. And as said, the guidance comprises everything.

Roland Diggelmann

Yeah. And the cogs, you know, it's a mixture of a variety of things. It's obviously the investment in our new manufacturing facilities as we've discussed, that's really the largest portion because what's happening right now is back a bill other new facilities we have coming online are starting to hit our cost space but we haven't yet fully ramped up the percentage runs in those facilities at this stage. And you know, that will take some time to flow through.

So I would say it's investment in the new manufacturing facilities, it is some increase cost due to outsourcing working with third party suppliers and it's also frankly product mix. We have different measures on the product mix with some products coming in and out with different royalty rates. So, but we do expect I mean that's a good news investment because you know as we get those facilities up and running and that drives our growth and medicines like Tecentriq, like Ocrevus, like Emicizumab, like hopefully Lampalizumab, I think we have to be prepared for that and it's certainly everything is on track to be able to fulfill those volume requirements.

Secondly, in terms of the bladder cancer, yeah I mean, based upon the cohort one data we presented at ASCO, we are obviously moving into the Phase III. We want to improve upon standard of care. We are looking at the design now of our Phase I trial in terms of both chemo and non-chemo settings. You are right to point out that because of the fitness status in many of these patients, chemo is difficult and so we will be updating you in the near future. We considered a bit competitively sensitive this stage in terms of how we are perusing our first line bladder cancer setting.

But rest assure that we are looking at the entirety of the setting chemo and non-chemo and later in the year I believe we can update you little bit more on the specifics around that strategy.

Severin Schwan

Thank you. Can we have the next question, please?


The next question is from Tim Anderson from Bernstein. Please go ahead.

Tim Anderson

Thank you. A few questions. Going back to Avastin, so the PD-1s are obviously only rolling out in second-line among at this point. And I am wondering, you know, as they move in the first-line lung and they rollout globally, are you confident that Avastin will be able to grow on a total basis on a global basis over the next many years. There is not enough left in the other indications to keep their franchise in positive growth territory? And then second question on because I have an I am just wondering how you think the commercial roll out will play with positive GALLIUM but negative GOYA.

If both trail results come out at ASH position, it's going to potentially lock away with the mix perception with one trial being positive, the other being negative or do you think there just won't be any read through from one to the other. And then last question on AFFINITY, if you just clarify data timing and when you say results out possibly late 2016, I'm imagining that just topline data would be highly unlikely we'd see full results out of something like San Antonio brush.

Daniel O’Day

Great. Thanks for the question. So, I mean in terms of Avastin, I think you are right, you have to look at the entirety of the program, right. So, I mean as you saw, we have very strong growth in the international region; good growth in japan; and also in Europe; and a bit of saturation in the United States. So when I look out in time, I think it will we will have growth in variety of different indications. We are continuing to improve look at the front-line of variant platinum-sensitive resistance indication.

We have got mesothelioma, we have certain indications that they're just starting to grow now in Europe and we also have lots to grow in terms of the international region. So, we don't guide on a multi-year basis on a product but I would say that our and I sure also mentioned the Avastin + Tarceva and our combinations with chemo with immune therapy. So, overall I see certainly Avastin continuing to grow this year and then I think we can give a little better guidance on Avastin as we head into to next year but I certainly think that there is still penetration with Avastin in the near term future.

And then depending on the results of how Avastin plays with immunotherapy, we could see this continue to grow in the future as well. But having said that, we recognize as we enter the end of the decade we will have biosimilars with Avastin. And our goal and objective is to eventually look at the seven cancer types that Avastin has improved in today and look at our broad broad oncology program to reset the standard in each one of those settings. And that maybe with or without Avastin; it could be immune combos; it could be immune with a targeted agent but I feel good about our ability to continue to grow on oncology given the breath of our portfolio.

Now with Gazyva. Yeah, I would say that people will not see a read through and the reason for that is clinicians know that indolent disease and aggressive diseases are really two very very different diseases; and I think it's important we note that, right. I mean, indolent which represents actually a larger proportion on a percentage basis of hematologic malignancies and aggressive is a steady declining disease. Patients are not cured in indolent, they're put into remission for a period of time but they eventually progress.

Avastin, sorry, aggressive is a very different disease. S, essentially with MabThera and shot today, we put almost 60% of patients into curative setting. It's a terrific disease but it made the bar even higher if you like to improve upon. So, I think the fact then you'll have to see the data of course on the indolent setting front-line but the fact that it read out at the interim suggests that relative to what we would expect it at the end of the study; it's even superior to that. And I think certainly well we happen to have a oncologist that specializes in hematologic malignancies as the head of our development and I could tell you that she feels very strongly that the GALLIUM results stand on their own versus the GOYA results.

And I don't think we'll see read over between those two. I think just as you think CLL is a different disease so is aggressive and indolent. So, I have really no concern about that.

And then finally with AFFINITY, yeah, you are absolutely right. I mean I think given our commitment to investigators, we would of course immediately report on the topline results like we always do with our major trial of this sort and then we would decide what the best conference is to for AFFINITY. I think that has quite a bit to do with when the read out occurs. Of course this is event driven, so if it comes into the end of this year we may be looking at certain conferences for next year. If it becomes more in the beginning of next year we may be having to look at conferences towards the second half of next year.

So, stay tuned on that. We'll certainly keep your informed. We are blinded to the progress of the study at this stage. But as we understand better how the events are moving and when we think we can update you and the time near the readout, we could then hypothesis around when those results might be released.

Tim Anderson

Thank you Dan.

Severin Schwan

We move to the next question, please.


Next question is from Sachin Jain, Bank of America Merrill Lynch. Please go ahead.

Sachin Jain

Hi, couple of questions. And first is to the follow-up on then Tim's question on the PSI. Of the $0.40 benefit, you said some was reflected in guidance in beginning of the year. I wonder if you can quantify that just help us understand how much of it is upside today or through the 1H and is a surprise. Secondly, on the CD20 franchise, with the Gazyva data all now in, I wonder if you could just talk to how you think about that franchise growing through the buy similar pressure. Do you think you can grow that franchise every year?

Backhand of the question is consensus you see in CD20 flat declining midterm and within that just the touch on confidence and get on a penetration and HL and given the limited penetration CLL across the piece. And then the final question is on European buy similar. Do you frequently buy a reference pressure it's mid-'17. I just wanted to check that, it looks like you have [indiscernible] in entrant in the middle of '17, Accept in a single entrant, late '17. So, is it fair to thing predominant pressure will be fulfilled year '18. Thank you.

Severin Schwan

Alan, you want to comment on the guidance?

Alan Hippe

I might sound a little bit like the broken record here. Where, but thanks for your question Sachin, yeah, and certainly a justified one. But the point is I think our guidance is our guidance and we have said EPS gross will be higher than sales gross and we are happy and comfortable to deliver that at year end. And I think everything else remains to be seen as had. This is a comprehensive view that we are taking and all the effects that you have seen as that we have described and the effects that will come into the second half a part of that guidance.

Sachin Jain


A - Daniel O’day

Good. Sachin. On the CD20 franchise. I try to kind of break this apart because it's not quite as easy and is straightforward as the HER2 franchise for a variety of reasons. It's a variety of different diseases and I think we have to look at both the aCD20 franchise in this context and also the broader haematology franchise.

So, first let start by saying, I think the HER2 franchise is much easier to get the arms around because here we're really talking about at least in the mid-term, we're talking about Perjeta and we're talking about Kadcyla in combination with Herceptin and chemotherapy. And we kind of know t hose levers. And I would say that, you know, if affinity is positive which we're encouraged certainly about the neoadjuvant results in the other data we see.

I feel quite confident that we grow through the biosimilar erosion curve of Herceptin. When we take a look at the amount, there are erosion curve, you know, first of all you have oncology and you have non-oncology there. So, that's of course one thing to look at. But even with oncology, you have very different diseases with different types of competition and different types of outcome. So, just to kind of point to your statement around limited penetration on chronic lymphocytic leukaemia.

I mean, that is a disease where today there is some readouts whether it's a lot of competition. We continue to believe that the CLL11 results are extremely strong. And that there will be different courses of therapy for CLL patients from more chronic or oral therapies to infusions that allow patients go into remission for several years. And I think both will play out particularly in the CLL setting, which has patients that are sometimes elderly and looking for different treatment option.

So, but that is a very different than competitive market. If we go to the relapsed/refractory indolent setting or the front-line indolent setting, where first of all in the relapsed/refractory indolent setting, that's not an area where MabThera is today. So, that's a new area for us, which has potential. So, you have to factor that in. And then you have the front-line indolent setting, which is I think a very different disease in terms and you have to see the GALLIUM results of course but it's a very different disease from CLL.

So, I want to do a read over from whatever you're seeing in terms of competitive dynamics and penetration and CLL, to the indolent front-line setting, certainly not the relapsed/refractory indolent setting. So, all that in, you know, I think it's there's a number of different scenarios that we can look at for the CD20 franchise moving forward. But I would argue that really the right thing to look at is actually the entirety of the haematology franchise because we've just launched Venclexta and 17p. That won't be the only indication there, so we'll have other indications coming for Venclexta as you all know.

Polatuzumab, later this year will be reporting out on and then we'll look at some of the other medicines in that area. And when I look mid to longer term at the haematology franchise. I have a lot of confidence in our portfolio. I have a lot of confidence and ability to improve on standard of care to enter new areas that we haven’t been in before. By the way, the three areas that I mentioned, AML, MM and MVS, represent around 35% of hematologic malignancies that were not in today with MabThera. So, all in, I think it's a very good new story on the haematology area. And certainly GALLIUM has de-risked our downside if you like with the introduction of biosimilars.

Having said that, I don’t want to forecast what's going to happen next year or 2018 yet with the CD20 franchise. Happy to do that as we get closer to those dates. Now, on biosimilars in Europe, I hope I got your question Sachin but I'll just update you and if I didn’t, let me know but it's the current situation is the following. We have really one global competitors filed with MabThera and Sandoz, that was April of this year, so we would expect that approval in Europe or in countries that are outside the United States that represent the European regulatory area.

I would say about mid to end of next year. We don’t really have a Herceptin filing so far, Celltrion did a bit of a rolling file but given the data we've seen, we don’t expect that in 2017. Having said that, we do expect others to be filing with Herceptin between now and the end of the year. We'll see, but we expect that and therefore we expect both Herceptin and MabThera biosimilar entrance between mid-next year to I would say the end of next year at this stage, at least one entrant and we'll see if there'll be multiple but that will depend of course on the filings as well.

So, I would agree that the at this stage, the main exposure for our business, we'd certainly be more in 2018 and 2017, but we remain of course diligent about how to prepare for that entry. And we just remind you again that in addition to the all the new medicines we have coming out, the subcutaneous strategy is continuing to progress as well as another pillar if you like to the entrance of biosimilars.

Severin Schwan

Thank you, Dan. If we can take the next question, please.


The next question is from Matthew Weston; Credit Suisse. Please go ahead.

Matthew Weston

Thank you, very much. And three questions, if I can. The first, regarding Gazyva. And GALLIUM and GOYA got a huge amount of attention, the GADOLIN results do not. But looking at the very limited sales in second-line indolent non-Hodgkin lymphoma for rituxan, I'm looking at the data and the market size, it appears that that's on its own could be a billion dollar opportunity. Can you just talk to that and whether or not I got my numbers completely wrong?

Secondly, speaking with CD20, you called out the subcutaneous rituxan penetration. Can you just let us know whether that is dominated in the indolent setting and in RA given that obviously in some of the other settings you're also co-administering other chemo, so a sub you may not be as cost effective. But also, should we be concerned that that will impact the GALLIUM rollouts, if we got census for the converted patient the subcutaneous, you now bringing a infusional therapy back to the clinic.

Could they that will push back on GALLIUM as a consequence and do you have plans for subcu Gazyva. And then I guess, finally, Alan, I'm going to have a go up the guidance again but from a slightly different angle. If we look at organic sales growth, it was 5% in the first half. If we look at EBIT growth ex PSI, it was up 1% as a consequence of all the investments that you so clearly set up. Presumably, next year, we're going to have even further investments in the rollout of accrue this an IO and hopefully with AFFINITY and GALLIUM as well.

So, with that in mind, when do you expect that we will see EBIT growth that is at least equal to if not beating top line growth at Roche?

Severin Schwan

Thanks, Matthew. So, yeah, appreciate the more detailed questions on Gazyva. I agree with you, I think Ireland presents a significant opportunity. I mean, let me just play it through, I don’t know that I can exactly confirm your sales figures but I can give you some of our population numbers that may help. You know, what we know or what we think we know in this market is that about 25% of patients relapse in the indolent setting after two to three years on MabThera in the indolent setting.

So, I mean, you can play the patient numbers through at that and get a sense for what kind of market potential that is but clearly and we're just getting, you know, early signals of the market impact because we launched this just January, February, in the United States and we just got the approval in Europe. But we do see some good momentum in that area and hope to dimensionalize that opportunity a bit more as we move on. But hopefully those numbers help you a little bit.

Back to the CD20 franchise, yeah, you're right, I mean the subcutaneous for MabThera were its launched and again indolence maintenance setting, even I would say where you have you know a subcutaneous alone. But also, I would say in many countries, regardless of the fact that it may be co-administered with another infusion. They're not co-administered at the exact same time. So, you can actually significantly still decrease the period of time that a patient sits in an infusion centre because they are done in parallel, sorry, "sequentially" not in parallel. But I would not be overly concerned about that in terms of the GALLIUM results.

Because first at the end of the day we're talking about a certain percentage of patients that have the ability to get on the subcu. I mean this is outside the United States, in Europe and it's a 35% share in about 50 countries or so. But bottom-line is that we think that clinical data will trump convenience. Where convenience is the same, so we have you know our efficacy is the same I should say with biosimilars or perception of efficacy the same with biosimilars. I think then a convenience advantage will benefit.

But where efficacy is not the same or you have an efficacy benefit. And particularly in indolent disease where you know as I said patients progress and the goal of the haematologist is actually to extend that progression as long as possible before they have to go to another course of therapy. I think here the clinical benefit really counts. So, when we're together at ASH, I think we can have this debate with the data in front of us as well, that I feel good about it.

Roland Diggelmann

They are referring once again to the guidance. I think look first of all I think we be we just give guidance on a full-year basis. So, I think, well and fortunately we all have to wait here until year end, once we provide the guidance for next year. And having said this, not so how should I say, discouraged about the cooperating profit momentum and because when you look at your calculations, we have emphasized here a couple of times, that EPS gross should be higher than sales gross at year end, evidently they some momentum needed to bring us here.

And when you look at the impact, the potential impact in our financial result and as well as from taxes evidently, well these numbers are not able to bring us there. So, I think as I've said, I think the momentum, the spending momentum, yeah, should come down in the second half and should enable us, you know, to bring really the cooperating profit in the right direction to fulfil the guidance. And let's see what that means, you know, for the following year.

Matthew Weston


Severin Schwan

I mean, at the end of the day, if I may add, that we'll all develop on the progress of the pipeline. I mean, if you think beyond the quarter if you think meet a longer term, of course the cash flow and the matching depends on how the pipeline develops. And I have to say I feel much more comfortable after deposit, if readouts we have seen over the last 12 months. We have made tremendous progress in a number of areas, work labours of course that will drive matchings in the long term. Of course we have investments in the short term but you know we might have a better picture in the first quarter or second quarter this year, if we did not have had positive or caveous data.

But guess which scenario I prefer in the long term. The same is true for cancer immunotherapy. So, I mean it's fantastic to see how the pipeline progresses and I think it's now the moment to invest and make the most out of those opportunities. And if we are successful, then this will pay off and this will drive operating profit. I should also say that are still important readers to come. You know, if AFFINITY is positive, I mean certainly this will have a positive impact on margins. There's just no doubt.

You can do the calculation on the back of an envelope and it, you know, just this alone is kind of affect us of what we see of the investments which we have done in the first half this year. And then think of haemophilia, huge potential franchise, think of Lampalizumab. If this comes, we are completely alone, it's our product worldwide, no royalties. Of course this will drive the matchings in a very specialized market. Now, you can take doom and gloom perspective, where you say everything as of now fails. And then I tell you, it will be tough for certainly in the long term.

So, you know, I'm less excited about better we spend 50 million more or less these days, at this crucial time where we stand in front of patent expiry. So, some of our key franchises will have really interested, I tell you. That is how does the product pipeline develop and it developed very well over the last quarters. We mitigated a lot of growth risks and are still a lot of opportunities to come. And if we don’t invest now, you know, people will ask us very soon "Why the hell, did you let these opportunities go, huge opportunities." They deserve our full attention, all our management energy but also the right and appropriate level of investment.

Now, of course, on top of that, we continue to work on productivity. And the pressure of course is even bigger as you can imagine as we have to make all these trade-offs because we have this full pipeline and because we have these many opportunities to bring to the market. But overall, overall guys, I mean, that the situation has significantly improved over the last quarter. So, and I'm very confident as we go forward, both in terms of top and in terms of bottom-line.

Severin Schwan

Can we have the next question, please?


The next question is from Diana Na, JP Morgan. Please go ahead.

Diana Na

Hi, it's Diana Na from JPMorgan. Thank you for taking my questions. I have three questions on ACE910, please. First, on the non-inhibitor trial when can we expect to see the detailed trial design and study initiation please? And for both the non-inhibitor and once-monthly dosing trials we were expecting data by mid-2018; I'm wondering if this is still the case.

And then secondly, is the reason why you haven't started the non-inhibitor trial because the regulators want longer-term data? And then, lastly what ACE910 data can we expect to see at the WFH conference next week? Thank you.

Severin Schwan

Dan, over to you.

Daniel O’Day

With the ACE910 program actually nothing has changed since the last quarters. If anything, the recruitment has been good and accelerated a bit. We have as you know a non-interventional program going on that first started with recruiting inhibitor patients, that was last year, and those patients -- a great deal of those patients went into completing the enrollment of the inhibitor study that was completed as I indicated last or recently very recently.

And that same non-interventional study is now recruiting non-inhibitor patients and pediatric patients. And we will be rolling those in to the phase three trials as we open those and we are still on track to do that still this year, on both the non-inhibitor trial and the pediatric trial, which means that assuming good enrollment of those we would still expect those to read out in 2018. So really nothing has changed and we really look forward to seeing the first results of the non-inhibitor trial.

Now at the World Leukemia next week in Orlando, which you would see as extension data on the phase one, so the three year follow up data on the phase one of those patients to demonstrate the success that that we are still having and maintaining those patients from relapse rate perspective, so that's what you are going to see next week.

And in terms of when the non-inhibitor trial will be announced soon. This is a competitive area. I mean plans are under way soon as we start to get ready to open the sites and enroll as with all our studies those will be made public on and you will be able to see more about the trial design at that stage.

Severin Schwan

Thank you, Dan. We are coming to the end of our session. Perhaps one more question please.


The next question is from Vincent Meunier, Morgan Stanley. Please go ahead.

Vincent Meunier

Thank you for taking my questions. The first one is, again, a question on the guidance sorry for that. But can you please tell us if you were aware or not of the PSI effect at the beginning of the year when you disclosed the guidance?

The second question is, on ACE910, is it fair to assume that you have not started to build the commercial infrastructure and this will be more a 2017 item? And lastly, on Tecentriq, will you be in a position to file in first line lung combo on the PFS data when they will be available in 2017, or do you need to wait for the overall survival data in 2018? Thank you.

Severin Schwan

Right. Perhaps I can take final take on the guidance to give a bit relief to Alan on that question. You know you have to look at it in a holistic way. I mean, don't forget we have an operating profit of what is it $15 billion or so, and there are lots of factors playing into this guidance, operational items, ongoing items, some financial items when it comes to financing cost, bond redemptions etcetera. And then you have one of items and every year, every quarter, we have one off items and the way we look at it is as a totality. We look at that and we say, well, what is reasonable? What do we think is achievable? We take certain assumptions on all these various items and that's how we approach it.

So specifically for PSI, we did know that people were getting older, we did see interest rates coming down, so we have started initial discussions with the works council here in Switzerland to find an agreement how we can make our pension plans more sustainable, but we did not know at the beginning of course the outcome of all these negotiations.

We did know that we had some one-off items in the income. You see that if you look at all of this and other operating income, some of them as you have seen in the first half has not have been re-occurring. Of course we watch for opportunities how we can optimize our balance sheet structure in terms of bond buybacks etcetera and we took opportunity when the right opportunity was there. But if you put all of that together, you know we had positive effects and negative effects.

And if you put that into relation, what our overall business size is also in terms of bottom line then that gets part of the overall guidance and don't forget on top of it out guidance is on full year basis and not on a half year basis. So every effect you have seen during the half year is kind of half the effect if you go for the full year, and we will have additional effects as almost both from a operational and non-operational point of view into the second half and I can't tell you exactly today what will happen but I still feel confident with the momentum which we have built in the first half and also with the base effect which we have explained, which will help us from a pure technical point of view that we will make our guidance of core EPS to grow beyond sales and with this Dan over to you.

Daniel O’Day

Thanks, Schwan. ACE 910 yeah as you can imagine, I think you’d want us to be prepared for that launch and given the rapidity in which we are have accrued the patients and short duration of the trial, we are beginning to prepare particularly in the United States for the ACE 910 launch. We want to be very prepared for that, but I’ll remind you, I mean the commercial infrastructure is quite small for ACE 910. I mean this is a focused patient group and a focused group of clinicians, I mean it's not every hematologist whose specialized set of physicians that are treating Hemophilia, and so I think we would be very focused on that approach and certainly be prudent about the buildup but also be smart about the buildup so we are ready for the launch.

Now in the first line lung setting we are in the process of converting some of our trials to co-primary end points of PFS and OS. And obviously by the very definition of co-primary end points, it implies that you can have a successful study on one or the other. And generally we would expect PFS to come first as we know in cancer immune therapy we think and I think the field is training in this direction that OS is really at least today the very best end point we have given the long term nature and survival of patients.

Having said that, we think PFS could be a very good indicator of how it's progressing. So the final answer is it depends. So it depends on the PFS read out. And where it stand at that stage, how close the OS read out maybe but there is nothing that prohibit us from applying for or submitting our application on only one of those two end points. So we will see how it progresses when the data comes in.

And as you know that it's a very comprehensive program in first line lung. The first of those trials we expect to read out in 2017, others in, others in 2018 and we'll see how they read out and then quickly pursue marketing authorization from there, based upon positive results.

I think I'm through.

Severin Schwan

Thanks you, Dan. And thank you all for joining our briefing. Have a good day.


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 lines. Good bye.

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