Roche Holding AG
Q4 2013 Earnings Call Transcript

Published: 30 Jan 2014

[Executives:]

Severin Schwan - Chief Executive Officer and Director 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

[Analysts:]

Sachin Jain - BofA Merrill Lynch, Research Division Andrew S. Baum - Citigroup Inc, Research Division Richard Vosser - JP Morgan Chase & Co, Research Division Alexandra Hauber - UBS Investment Bank, Research Division Luisa Hector - Crédit Suisse AG, Research Division Keyur Parekh - Goldman Sachs Group Inc., Research Division

[Severin Schwan:]

Good afternoon, ladies and gentlemen. Welcome to our year-end briefing. 2013 has been a very good year for Roche, both in terms of financial figures but also very much in terms of our pipeline progress. So let's get right into the 2013 performance. We achieved all our financial targets

[Daniel O'Day:]

So good afternoon from my side, everybody. It really has been a terrific year for the portfolio this year. I think the numbers, and I'll get into some of the detail, but just before I get into it, there's been significant, I would call, medical practice-changing type products that we entered into the market here this year. Just to remind you, I mean, first of all, with Perjeta and neoadjuvant, really paving the way for potentially a new regulatory path for products with a significant PCR effect in patients, up to 40% of patients treated before surgery really had no evidence of tumors by the time they hit surgery. So when you think about the period of time it took for Herceptin to go from metastatic to the first use in adjuvant setting, that was close to 8 or 9 years. And this was 1.5 years, so pretty phenomenal. Secondly, the Gazyva head-to-head trial -- I have a slide on that, but going head-to-head with gold standard of care and showing a really significant difference in CLL. And thirdly, I mean, this is really the year when the antibody drug conjugates were fully launched into the marketplace in HER2-positive breast cancer with Kadcyla. So there's a lot of rich news here, but I just want to say that those 3, I think, really will fundamentally shift the way that cancer is treated in those 3 different areas, and plenty more to come. So just to review the 2013 results in a bit more detail, from the Pharma division side, we had a 7% sales growth overall in constant currency exchange. I would call it a really outstanding growth in the United States, with 10%, driven by, of course, the oncology portfolio -- the established oncology portfolio, the newly launched oncology portfolio with Perjeta and Kadcyla, and also driven by the ophthalmology, immunology portfolio, Actemra as well as Lucentis. Europe, with a 2% growth, significantly ahead of the market. In austerity-strapped Europe, to see a 2% growth is really a very good performance and I think shows the value of innovative products. In Germany alone, we had an 8.5% growth last year, obviously offset by some other European markets. But 2% in Europe, really strong performance. Japan, at 2%, that also needs to be put into perspective because Evista, which was a product that Chugai had, was given back this year. And also there were some price -- management price declines in Japan. If you take those 2 things out, actually, Japan would be growing at 8%; really strong growth in Avastin and Actemra in Japan. And then finally, the international region growing at 8%. If you look at the E7 markets, they are growing at 12%. Very strong growth in China overall, 21% growth; in Brazil, 9%. Also demonstrates, I think, again, sustainability of the strategy of taking highly innovative products into the emerging markets with innovative access programs to penetrate both the private and public sector. On the P&L, the core operating profit grew in line with sales. I want to explain a couple of these line items. You see most of the aspects of the P&L are growing less than sales. Cost of sales, obviously, we had a robust volume growth on the pipeline. But in addition, we're investing now in our -- particularly our biologic manufacturing network to be able to prepare for the future of all the new biologics that are coming out and meeting the increased volume demands there. Let me talk a little bit about the royalty and other operating income, as well as the R&D. The operating income was really -- had the biggest effect from the disposables of product that occurred in the second half of 2012 that did not repeat in 2013. So you see here Ostac, Rocaltrol, Vesanoid, Rohypnol were divested in 2012, and that really offsets about CHF 130 million of the pharma income from disposals and other royalty income. I would just point out that it's public knowledge now that we have a deal with Amgen on Neupogen and Neulasta to return that product to them, and that obviously will mean, in 2014, we'll see some additional income in this line moving forward. On research and development, it was a 5% growth. I'm going to talk about the pipeline. We had significant evolution from Phase II into Phase III last year. And it really splits out in 3 major categories, somewhat equally, actually. The first one is the high number of projects that came into the late-stage portfolio that required investment to either start Phase III or prepare for Phase III. Secondly, the increased technical developments. The more we become creative with our biologics, particularly when we look at armed antibodies or bispecific antibodies, the technical development to produce those products is actually quite sophisticated and it takes significant resources. So, I think on the one hand, I mean, it's good news because we have new products coming into the pipeline and, of course, the technique and the know-how that goes into that also allows those products to be quite robust for the long term. And then the third major bucket is really the investments in Phase IV trials, with some of the accelerated approvals we've had and the faster review times. From a regulatory perspective, that puts some demands on our Phase IV spend. And in addition to that, compliance standards are increasing everywhere in the world in terms of pharmacovigilance, safety reporting, and we need to increase resources to meet those demands as well. So those are the 3 major impacts on R&D in 2013. Really strong sales, you can see here, across the region for all the products across our line. Obviously, the 3 major oncology products continue to produce robust growth

[Roland Diggelmann:]

All right. Thank you, Dan. Thank you, and good afternoon, everyone. It's a pleasure to be here. And it's a pleasure to report on the Diagnostics results. Could I maybe add the slides, Dan, here as well, if possible, or I'll go through here as well. Anyways, Severin already mentioned a good year in Diagnostics as well, 4% growth overall, which puts us above the market growth. And you can see here, led by a very strong franchise in Professional Diagnostics, growing 8%. Molecular Diagnostics, the underlying growth, if we exclude for the Sequencing performance, which is largely playing in a niche only, is a very healthy 6% growth. And then 7% for Tissue Diagnostics. So together, the Lab Diagnostics franchise is growing 7%, which is a very good result. And of course, you can see here, an ongoing challenging environment in diabetes care, minus 3%. Here, too, we see some encouraging signs in that Latin America, Asia-Pacific and EMEA actually contributed to positive growth. The negative performance coming from the U.S., where we had, as you all know, massive reimbursement cuts on strips, 72% mandated by the CMS on the public sector. So this is what affected the result, minus 15% in the U.S. Other than that, growth in diabetes also in the rest of the regions. So with that, turning over to the regions and the breakdown. And you can see here good growth, very strong growth in emerging markets in the E7. 14% in Asia Pacific here, led by China with a 27% growth. Very good growth as well in Latin America. And I'd like to point out the positive performance in a flat market in EMEA, 2% from a market-leading position, capturing market share in the European setting. And then also in the U.S., 1% here including diabetes care, excluding 4% growth again here, the Professional Diagnostics franchise allowing us to drive ahead of the market. On the P&L, a couple of comments. The 4% growth translating in the 4% operating profit growth. You can see at the different line items here. The COGS was over proportional gross, which is driven by a couple of factors, will be on one hand, a price decrease that we see that averages out at about 3%. But on the other hand, also positive in that we were able to continue to place instruments in the market, where we'll actually fuel future growth, and we had a higher proportion of cash sales of instruments as opposed to amortizing over 5 years, which has an impact on the COGS. You can see as well, the R&D line, investing in new platforms, which is across the different segments, and also in addition into our new franchise in hematology. G&A, one-time affect or the initialization of the medical device tax, first time it hits our P&L, and then also internal programs in advancing IT and other investments. That all compensated by cautious spending on the M&D line, also an effect of the restructuring that we undertook in diabetes, but also in integrating our Applied Science business in Professional and into Molecular. So this is just a rundown on the P&L. We had a good year as well on the pipeline. On the launch, 11 out of 13 products launched in time. The 2 missing will be launched in the first quarter of this year and the second quarter this year. So overall, good launch. Accuracy, and I think this also speaks very much to us continuing to pursue our strategy. You can see on the top, the instruments the platforms, which is really looking at driving testing efficiency in the laboratories. And here the most important one, Severin mentioned it earlier, is the cobas 8100, the fully automated workflow system. So testing efficiency on one hand, and then high medical value tests on the bottom end, which actually fuel the largest menu through this instrument base. And with that, a couple of highlights for the fourth quarter. I'll touch separately on Professional Diagnostics. On Molecular, what you can see is a very good performance on HPV, 90% growth in the HPV franchise. And also what you can see is that we start to complement this with other tests. Our cervical cancer testing is the most comprehensive. We have HPV for primary screening, which is a molecular test. We have the CINtec PLUS, which you can see at the lowest line, which is a histology testing largely for triage. And then we have a confirmation test, which is again a molecular test, which is the CINtec test. So a comprehensive suite of tests that we offer in cervical cancer and certainly, the most comprehensive. On diabetes, we see good uptake of differentiated products, which are aimed at free testers, which are aimed at people who like to test more in a more structured way. So the Accu Chek Mobile here is one of these examples, growing nicely at 40%. And finally, on tissue on the advanced staining, low growth in the U.S., which was expected; a reimbursement reduction in the U.S. and then also the CAP guidelines that actually make some of the negative testing obsolete. So that it has a negative impact on the number of tissue tests performed. So this was a base effect and we expect this year to be faster growth in tissue. And we also had a very, very strong growth, 14% in EMEA, and 34% in Asia Pacific, expanding our customer base in histopathology. I'd like to touch on a couple of highlights. And as we move beyond the instruments and as we focus more on workflow and rendering laboratories more efficient, of course, laboratory IT becomes very, very critical. It's a means of integrating and connecting the instruments. This new system is called Infinity. It can connect individual instruments in a laboratory setting, from pre-analytics to analytics to post-analytics. It can also connect third-party products and it's modular in its nature, so it can also connect to a laboratory or a hospital information system. So with that, we're trying to consolidate the offering in the lab, driving loyalty as well and, of course, helping the labs to become more and more efficient. Fantastic engine for us for growth in Professional Diagnostics, which as you seen grew 8% last year, is immunology, 14% growth across all the regions, way ahead of the market. A leading franchise in cardiac menu, but also in woman's health, vitamin D, 30% growth. And we have now approximately 60% market share in Europe on vitamin D. So immunology continues to be very, very important. The engine of growth for us and we see good momentum along with the increased placements of instruments. I'd like to move to Molecular with this example, which are 2 tests, which are actually not new in being completely new tests. But what they are, they are high medical value tests, which we bring on to an existing platform. So again, increasing the efficiency opportunities for a lab. And on the other hand, providing high medical value assays, which really can make a difference. MRSA, being the first one, which is a test that can literally save lives, in that it has a screening or diagnosis potential for hospital-acquired infection. And as you know, a hospital-acquired infection, growing increasingly with the resistance to antibiotics, 1 out of 20 patients in the U.S. at risk of acquiring a hospital infection. So this is a test that can make a huge difference. And then at the bottom, the herpes simplex, which consolidates our offering, on the first place. Also allows to put that offering on the same system and provides, again, a huge medical value, in that compared to the current standard where you do a cell culture, you would have a result in 4 days. Here, you'll receive a -- you'll obtain a result in 4 hours, which obviously allows you to move much faster into the treatment options. So with that, a brief outlook. We believe that we're well positioned. We will continue to provide our installed base into the market, complement with the largest menu in the industry. We have an exciting pipeline, which I'll talk a little bit about of new products and platforms. We have a leading franchise in emerging markets, which we'll continue to expand on, and of course, we need to continue to address, adjust and restructure the operating model around a Diabetes Care business, which continues to have very, very good fundamentals if you think of nearly 400 million patients -- or 400 million people affected by diabetes in -- and looking to be tested. And of course, last but not least, being an integrated part of the Roche Group, our contribution to the strategy in personalized healthcare and continuing to develop companion diagnostics, we have more than 250 projects internally between our Pharma and other diagnostics entity. So really advancing here and with all the associated bio-market programs. We've had 2 launches already, which I touched upon, MRSA and HSV. Good coming out of the gate. This is the launch table for 2014. I will just point out the top 3, which are new platform coming this year. And on the top, you can see the cobas 68 and 8800, which is our new molecular platforms. Two platforms, same system approach, modular in nature, the highest throughput that you will find in the industry and the highest degree of automation. We believe this will have a huge impact in how molecular tests are performed. Then, the entry into hematology, the acquired company from last year, CMI, that we are now bringing into the market towards the end of this year, in the CMI [ph] countries and then in the end of next year, for the United States. So here, coming from the central lab, moving into the specialty testing, an exciting opportunity to actually contribute to the existing customer base by providing a new and innovative platform. And then finally, urinalysis, same approach, serum work or work area approach was a modular approach here also to drive efficiencies. And then, of course, driving all this with the menu and you can see here a host of new assays that are in development, and that will hit the market to complement the menu that we have. So with that, I thank you for your attention and I will hand over to Alan.

[Alan Hippe:]

Roland, thanks a lot. Yes, a warm welcome from my side as well. Great opportunity to give you a little bit of an overview about the financial results. And I would like to start, yes, really with a couple of highlights, yes, that we have seen this year. First of all, the strong core EPS growth of 10%, and there were different elements to it and I will explain them. And the other point is really a point I'm really excited about is the strong operating free cash flow of 5%. And you might say this 5% is -- what's the deal about it? And you might remember last year, we got a cash-in from the Montoro plan from Spain of CHF 700 million. So really, overcompensating this inflow in the year 2013 was quite an achievement, and I will show you later on why that was and why that happened. And that also leads to the point that the free cash flow went up 6%. So also, we overcompensated the increasing dividend from last year and showed some growth in the free cash flow. The improved financial result, positive development of the core net financial result, 11% lower expense, quite significant, you will see it later on, was quite a boost for our core EPS growth. And what we have done is, we had an early bond recall of CHF 1 billion with CHF 168 million in costs in December. In total, we have called back CHF 1.4 billion in the course of 2013 with the related costs of CHF 248 million. When you look at the net debt, net debt down by CHF 3.9 billion and the ratio of net debt to total assets went to 11%. I think it's not really telling the story about 2013 because what we have really done is we have reduced the gross debt by CHF 5.9 billion. And that was also the major trigger why the interest expense went down so significantly, but I will get to that. Good. Let's talk about the performance first. Here is the whole set of numbers, just to give you an overview. And I would like to start certainly with the sales Severin has talked about, its 6% up. He has explained already the difference to the Swiss franc increase of 3%. And what you're seeing is, there is kind of a box here with a dotted line around it. And these are the effects for PSI and 340B, and I will explain that on my next slide. But I think, you should see, really, how our performance has been when we put that out. Because you know our guidance has been that EPS growth is higher since sales growth, excluding these effects, and this target we achieved. When you go through it line by line, I think you'll see the core operating profit CHF 17.9 billion, 8% up even when you exclude PSI and 340B, 5% up. And here you see, the margin went a little bit down. But I would talk, really, about stable margins here. You see then, the core net income, plus 10%. Question is, where is the additional momentum coming from when you compare it to the up 8% in the core operating profit? It's not coming from taxes, but we're able to keep the tax rate relatively stable. The major point is here, the financial results. And the financial results went down and gave us the boost on the core net income, which translates very nice into the core EPS growth of 10%. And when you exclude the effects, up 7%. Operating free cash flow, I've praised already to a certain extent, CHF 16.4 billion and the free cash flow at CHF 5.4 billion. Good. That leads me to the 2 effects I would like to explain again. I think we've made some transparent to you during the course of the year already. I think the first one is really the 340B resulting from the year 2010 ObamaCare Affordable Care Act and the law was passed, passed in 2010. And in fact, it said that we have to give discounts here to certain hospitals for the so-called 340B hospitals, normally public hospitals, and in fact, for patients who are either under or uninsured. At that time, it was not clear whether this is for all indications. And also from a timing point of view, it was not so clear. We took a conservative stand, admittedly, at that time and started to reserve, and this was sales provisions that we have taken at that time, for these discounts. There was a ruling then in 2013 in July from HRSA. And the ruling said that the discounts are applicable for non-orphan indications October 1 onwards, so not retrospectively. And that really led to the point that we could release these provisions. And as you can see on the sales side, CHF 182 million just affecting Pharma. And you see on the cost of sales lines, these are the collaboration expenses which go with that. Then we have on the G&A line, and solely on the G&A line, the PSI, and that's the past service income. We have changed a couple of our pension plans. Evidently, it led to the point that the pension liabilities went down. And it gave us a positive impact on the P&L of CHF 302 million for the group and then you see it’s splitted up between the divisions and corporate. It has a tax effect to it here and then you see the net income was boosted by CHF 330 million based on these effects. Good. That leads me to the P&L. And in fact, a lot is said already from -- a lot said already, from Dan and from Roland. Sales 6% up. The royalties and other operating income down, minus 4%. And really the point this year, we have had less product disposals. And especially, the effect is obviously when you look at the second half of the year. The cost of sales line, plus 8%, higher volumes evidently. We had very good volume growth in both divisions that triggered once a year. And the other point is, really we started to invest in the network that we want to build, a manufacturing network in biologics, where we have announced to the market that we would like to spend CHF 800 million in CapEx over the next 5 years. M&D, pretty reasonable. R&D, as said, 15 NMEs in late-stage now. So more activity in the late-stage pipeline, more projects than ever. We have the Phase IVs, which are really related to the launch of the new products. And they're accounted here on the R&D line. So that's another point here. And also, development, health and work a little bit on the early stage and helped to boost the pipeline there as well. Good G&A in total. Let me say when you really put -- really look at G&A, all in, and you'll first it's a minus 3%, certainly triggered by the PSI effect. When you exclude it, I would say, 2 effects basically

[Severin Schwan:]

Alan, thank you very much.

[Severin Schwan:]

And with this, I suggest we go right into your questions. Yes, please here. Can we have the mic here in the second row?

[Sachin Jain - BofA Merrill Lynch, Research Division:]

I'm Sachin Jain from Bank of America. Three questions

[Severin Schwan:]

Okay. Dan, you want to start with the product-related questions?

[Daniel O'Day:]

Right. Crizotinib, first of all, that's the name of the product I was forgetting. Thanks very much, Sachin. I'll try to do my best on some of these. I'm not trying to be evasive, but I just have to say that on the PI3 kinase and 79b, the data is pretty fresh. And in-house, we're evaluating this right now. So I'm not going into a whole lot of detail, but I'll give you a little bit of color. And on the PDL1 side, the reason that I may come across without all the details, is because it's a highly competitive field. So -- but on the PI3 kinase, as I've tried to articulate a bit before, we've got this beta-sparing PI3 kinase. I mean, that should give you a little bit of an indication for how we're approaching that. And that's for PI3 kinase mutants. There's probably in hormone receptor-positive breast cancer, we think there is about a 45% representation of PI3K mutants. So it's a significant size of the breast cancer population. The data is early yet. We're still going through it. But certainly, we're going to look at an ability to look at this possibly in a future metastatic trial. And then we'll take a look as well as what role this could play in adjuvant as well. I believe what we're really -- because it's -- really, that's an early one. I mean, we're really working with Phase I data there, just so you know. And we're kind of digesting that and deciding how to go. On a quarterly basis, I'll do my best to try to keep you updated on that. The other one is a little bit further ahead, the pan-PI3 kinase. We have Phase II results for that. Again, we think this could be differentiated in the field in the wild-type setting that could be complementary in nature. And we may look at this pan molecule also in combination with other products within our portfolio. We also have already on this pan molecule some Phase I combinations that we've already done. So we know -- I won’t get into the details yet, but we know there is tolerability with some other agents within our portfolio, which encourage us in terms of moving a bit more rapidly into Phase II or directly into Phase III depending on the nature of that. So it's probably all I'm going to say. I'm going to let the teams digest it, work on it and try to inform you as time goes on. On the anti-79b, ABC, as you know, we had again pretty early data here. And we do have the data in-house on the Romula [ph] study on Phase II. This also, we also had anti-CD22, which we're still evaluating, but the 79b looked encouraging, something we wanted to try to move ahead in the field. We're still trying to figure out exactly how and what indications. But as you would expect in this field of hematology, we'll try to look at potentially some faster market indications. And then look at doing a bit more derisking in Phase II with some other chemotherapeutic combinations to try to determine how we best proceed along those lines. So again on -- that's early days. I'll inform you a bit as we move ahead. But it's a really -- I think one other, if you like, tool in the toolbox relative to our strategy for working on the backbone of the CD20, in addition, to the biological modifiers like the Bcl-2 inhibitor. And then finally, on the PDL1, your question was around immune doublets and time line versus the competition. I'm afraid I can't give you a lot more at this stage on that. Obviously, when we can, when we begin some of these trials, they'll also be public on different websites and we'll inform you at that time or before that. But as I -- what I can tell you is we're looking at immune doublets both within our pipeline, so you can articulate some of the things that I talked about here today that we just recently brought in. We have other check inhibitors in our pipeline that we're looking at in terms of can they combine and how do they combine with PDL1. And as I said before, we may be also looking outside at other immune agents from other companies and looking at those types of combinations. So what I could assure you is that as the year goes on, there will be more and more data released, but particularly where we think we have a significant competitive advantage we want to be a little bit careful about data release in this area.

[Severin Schwan:]

Dan, thank you very much. Your third question was on cash allocation and you made, in particular, reference to M&A. Our M&A policy as such has not changed. As you know, we are not into mega matches [ph] we have never been. We are looking for hold-on acquisitions both for products and technologies in both divisions, Pharma and Diagnostics. It is true that we have not done a big deal of later-stage acquisitions in the recent past. We did one or the other, for example, in Diagnostics when we acquired CMI in the field of hematology. And indeed, it is very much related to the evaluations, we just can't make the numbers for many of the assets, in particular, late-stage assets in the biotech sectors. But what we have done is we have focused very much on early-stage deals. Because when you work together with an external partner on the early-stage opportunity, typically it is not -- it's also but not so much about the money. It is much more about the capabilities we can bring to the table as a company and then move together with this partner, move the asset together with this partner to the next inflection point. So no change on the M&A side. I just wanted to make sure that this is clear. We have a question here in the fourth row, please.

[Andrew S. Baum - Citigroup Inc, Research Division:]

It's Andrew Baum from Citi. Three questions please. I'm delighted that Roche is now recognizing the promise of immunotherapy a little bit more openly than, perhaps, they've done historically. So 2 questions. Number one, you referred to an undisclosed hematite that you're going to be presenting later in the year. Is your observation for efficacy in the PD1 or PDL1, you believe, a reflection of the unique activity of the PDL1 or do you think it's simply a reflection of the patients you have selected within that indication, who may have been treated in order to bring that benefit? Secondly, with regard to the CD40 which, Dan, you highlighted, should we assume this is ready to go straight into Phase II or are you going to engineer the antibody? And then separately, do you actually have enough supply of this antibody, given you acquired it from a third-party? And then finally, just on capital allocation to Severin or Alan, Novartis has been pretty clear in its thought process regarding its stake in Roche. What would it take for you to become interested in that stake? And if you were, what are the restrictions on you in dealing with the nonvoting shareholders if you brought it back? If you could clarify that from a legal perspective that would be helpful.

[Severin Schwan:]

Okay. Dan, if you take the questions on the cancer side, perhaps, I can directly comment on Novartis stake in Roche. Really, I have to refer you here to Novartis, because Novartis are the owners of the shares and they have to decide what they do with the shares, rather us telling them what they have to do with it. But certainly, we're always open to look at that. But I wouldn't speculate about something which has not yet been brought to our attention. Again, I think the addressee for this question is really Novartis, as the other owner of the shares. Dan, you want to comment on...

[Daniel O'Day:]

Right. I'm afraid, Andrew, you might me disappointed with additional information that I'll give you on the PDL1 immunotherapy. Thank you for acknowledging that we're providing some additional information. I think that is directly in line with the data maturing and I'm actually being more prepared to provide it. But relative to the new cancer type, I really can't comment on your question right now. I think it will be released in the first half of this year and I think then we can have a good discussion around -- rather, that's mechanistically-based or some other advantage when you have that. But I think it would be better to see the data before I infer on that. On the CD40, it's Phase I right now. It's been brought into our pRED unit in Basel. So it's being evaluated now. It'd be a little bit premature to discuss exactly how that will progress, how quickly that will progress. But certainly as we evaluate it and as it comes more deeply into the integration of the portfolio, I'll keep you informed.

[Severin Schwan:]

We can have the next question here in the same row. Let us turn on the mic here. Thank you.

[Richard Vosser - JP Morgan Chase & Co, Research Division:]

Richard Vosser from JPMorgan. A couple of questions please. Firstly, on MetMAb, I noticed you're starting Phase III trials in first-line lung, just wondering what you've seen in Phase II that you can tell us that increases your confidence to start now, or is there anything we can read into the MetLung trial and its potential for success? And when can we see the data, more specifically? Second question, just going back to the dividend. Obviously, the dividend was in line, as such, inside [ph] with core EPS growth. Is that how we should think of the dividend going forward? Obviously, the corridor for -- you're well within the corridor now, so should we think of further dividend increases ahead of core EPS going forward? And finally, the third question just on R&D ratios. Clearly, there's a lot to be done. Presumably, the R&D is increasing ahead of sales this year in '14. Is that how we should think of it going forward? Or can we see some sort of offset from the fact that the CNS pipeline has had some disappointments, would we see maybe less investment there?

[Severin Schwan:]

Okay, thank you for your questions. First, on the dividend. We wouldn't give any guidance on how much we increased, but what we really do is we put in a floor. And we give you a guarantee that we increase the dividend in Swiss francs, as we did last year. So irrespective of currency developments, we put in a floor and you can count on a dividend in a strong currency if you like. And then at the end of the year, we -- when we get to the decision, we will inform you as usual. Now on the R&D side, you should expect to grow -- to see R&D grow roughly in line with sales. Now I'm always careful in giving a precise guidance because it also very much depends on how the portfolio develops for the opportunities that come along during the year. But in rough terms, that's how you should think about it. Dan, on MetMAb.

[Daniel O'Day:]

Right. On MetMAb, you're right, we have started. The first patient in was in quarter 4 last year on the Phase III first-line. The second-line travel readout in the first half of this year. The intention with this program was always to look at both different tumor types, but also different stages of small cell lung cancer. We don't have any readouts yet on the second-line. But we should get that in the first half, and that'll be the readout that I also indicated that will be a regulatory readout if it's positive as well.

[Severin Schwan:]

Okay. Can we move on the mic in the same row? And we'll work our way backwards. Thank you.

[Alexandra Hauber - UBS Investment Bank, Research Division:]

Alexandra Hauber from UBS. Three questions please. Coming back to the beta-sparing PI3 kinase inhibitor, I think the interesting thing when we saw in San Antonio that we got responses with the molecule rather than just stable diseases the other PI3 kinase inhibitor. And things seem -- tend to happen in oncology pretty fast these days, so would it be fair to assume you're also going to pursue a faster market access large Phase II with this agent? And if you do, can you just confirm us -- confirm or explain to us how much work you need to do on the companion diagnostic, which only existed as a footnote in research using the olden's [ph] presentation for something that is -- that has -- where you would pursue a faster access strategy or potentially sort of looking for breakthrough designation? So the question is really how much work do you need for a brand-new companion diagnostic? Second question, coming back to the R&D. I wasn't surprised to see an acceleration of the R&D spend, but I was a bit surprised about the explanation you provided or the components of that. I think one component was this technical, I can't remember exactly the term, technical development. In order to make -- for technical development to make in early, to make a real dent, are we really, for us, visible in the Roche R&D budget and you need spend to the tune of $100 million? And that's a big number for technical development, in my view. Is that -- am I'm thinking about this as the right thing because if you need to spend that kind of money in this area, we're always getting to the point we can talk about realistic barriers to entry for smaller players? And the final small question I have, Alan, on the 6% bond where you have, 2 times exercised an option to call some of the principal early. Can you remind us whether you can -- the remain principal, can you call it at any time you like, or is there a special timeline to that?

[Alan Hippe:]

When the bond is due or what? What's the maturity...

[Alexandra Hauber - UBS Investment Bank, Research Division:]

I know when the bond is due, but since you had twice exercising option to call some of the principal early, can you just -- can you call the entire principal early at any time you like and so keep that...

[Alan Hippe:]

Yes. We can call it anytime we like. And just to answer this question right way, we can call it anytime we like. We have such a clause in our terms and conditions if you like. And the bond is due 2019. So it's really a stretched out impact that we are going to see.

[Severin Schwan:]

Perhaps I can just make a comment on the technical side, I mean, what we are talking here at CMC. So it's ramping up the material which we need as we go into the clinics.

[Alexandra Hauber - UBS Investment Bank, Research Division:]

So it's not in COGS that we are seeing right now?

[Severin Schwan:]

No, no. This is still in R&D. It goes into COGS, into cost of sales, when we have a product on the market. So when we do the ramp-up of material for Phase I, Phase II trials then it goes into R&D. And what really happened was that we had these fall-offs [ph] of Phase II trials. And that, of course, you see now being translated moving into Phase III. That's why we have now 5 -- 15 new molecular entities in Phase III. But first, we had to get there. And that required that we ramp up CMC. So we had to expand resources in that area, and that is expensive. This is not cheap. And if you like -- this is a hurdle of entry for many players. And actually what we also see is very often if we have collaborations with third parties, smaller companies, typically this is an area where we have to catch up and do a lot of work to get this ready for pivotal trials. So this is quite something. That was -- perhaps, Dan, you want to add to that? And then we had an additional question.

[Daniel O'Day:]

Just to add to that, I mean, I think it is a competitive advantage for sure, the knowledge in CS [ph]. Beyond the cost, just a simple knowhow and expertise associated with biologics is significant. It's an integral part of our product development piece. It happens earlier and earlier these days, particularly in oncology, where you're moving programs from Phase I to potential label-enabling Phase IIs or Phase IIIs. And it's not uncommon for that to be on critical path, too. So the investment is fundamental. I think the complexity of these molecules, we talked about Kadcyla in the past. I mean, what it takes to put an antibody, a linker and the chemotherapy in just the right balance so that the chemotherapy isn't released before it hits the tumor cell. I mean, this is really, really a significant competitive advantage. So it's -- sure, it's -- there's a cost hurdle, but I think there are many more hurdles beyond the cost hurdle that we have to consider. So -- and the exciting news is when you have products like Gazyva, that have breakthrough status and the agency is moving so quickly. It's all supposed to put real demands, not just on the clinical supply, but on the commercial demand side. And with Gazyva, we were able to work with the agency, the FDA, to all see you a similar clinical supply for early launch, which allowed us to get that out into the field. So it's really fundamental. We could have a whole separate discussion on that. In terms of the beta-sparing PI3 kinase, again, you have seen some of the Phase I data on this. We're pretty excited by what we see in terms of the biomarker. We have been working on that for a while now. This came out of Genentech research and our colleagues in Genentech and molecular diagnostics in Pleasanton that have been working on this PI3 kinase assay for quite some time to fine-tune it, to get the cutoffs right. Clearly, we have more work to do on this. But as you said, it's a very competitive area. We think we have unique differentiated complementary PI3 kinase in the mutant in the pan. I'm going to let the teams dig into it, but I think we're going to move as quickly as we can with this.

[Alexandra Hauber - UBS Investment Bank, Research Division:]

I said this is not in the traditional language of the time line from catching one another program... [indiscernible]

[Daniel O'Day:]

You mean, the companion diagnostic itself? I mean, I think we're in pretty good shape on this project. It can be. I mean, it can be that you need a validated assay to go into, similar to what we just talked about in CMC, to go into label-enabling trials. But I feel on PI3 kinase, we're in pretty good shape on this one. So I wouldn't expect that to be a stumbling block for us, at this stage.

[Severin Schwan:]

Okay. If we can just move on in the same row. Yes, please. Thank you.

[Luisa Hector - Crédit Suisse AG, Research Division:]

It's Luisa Hector from Crédit Suisse. I've also got 3 questions. The first one, if we look at the full year '13, we can see that margins were flat if you strip out the 340B effect. And we also saw that we had a boost from the net financials that then helped you see the earnings growth ahead of sales. And so looking now to the guidance for 2014, with earnings to grow ahead of sales, and we've got the similar potential effect on the net financials, a booster there. Can you give us any confidence that we will see margin expansion in 2014 especially given the generic effect that you're likely to see within Pharma? And the second question would be on the CD20 franchise, and just whether you got any early comments on the Gazyva launch and the competitive landscape with the first oral launch, just any early commentary on that. And if we look at Gazyva and the approval that you have so far, is it fair to assume a fairly low sales potential, because it's quite limited in the CLL, especially with the chlorambucil combination? So we shouldn't get too carried away with sales forecast until you have more data in the 2016 time frame. And third question, hopefully, quite quick. You had a comment on the EMA investigation, so I think there was a reinspection in November and that brought up some issues. So I just wondered what they were, and what you need to do to fix them?

[Severin Schwan:]

Okay.

[Unknown Executive:]

[indiscernible]

[Severin Schwan:]

Yes, please. Okay.

[Alan Hippe:]

Yes. First of all, I think the guidance is the guidance. I think that's the first point I have to make here. I mean, we don’t have some margin in the guidance. I think that's, how should I say, it's a formal point I have to make. But having said so, I think very clear. I've been at JPMorgan and I said, I think that we are expecting rather stable margins moving forward. And I think that's a little bit -- I think the area we're in. I am very clear. I think we don’t expect a margin deterioration. Are we clear? But I also wanted to, how should I say it, flag to the market. That the steps we have had in the past, and especially in the past years, which were very significant. That this expectation might be a little bit overdone.

[Daniel O'Day:]

Right, then let me try to get -- I think I'll answer the numbers 2 and 3 together, but the CD20 and the chlorambucil-type question. I mean, maybe just to frame it, just take a step back from MabThera first of all. I mean, there are a lot of companies in hematology that are going for fast to market strategies right now in this area. And it's essentially today of course in CLL, which is about 18% -- 17%, 18% of total MabThera revenue. Just to put that into context. And in terms of real competition in non-Hodgkin's lymphoma, either [indiscernible] or aggressive [ph], which is 70% of the MabThera sales. We think people are either pursuing this strategy where they're adding on top of the CD20 backbone, whether its MabThera or Gazyva in the future. Or perhaps going head-to-head, but those would be at least 5 years out. I mean, just to put that into context. So let me concentrate a little bit on CLL, where there -- clearly, it's a competitive environment. We feel good about our position in CLL both with Gazyva and the data I presented here, the additional studies we have going with Gazyva with the biologic modifiers including the Bcl-2 inhibitor and the ability to combine those two. And you'll see, even within CLL, we see companies looking at using the CD20 backbone. But specifically, what could we look at for Gazyva in the United States? You're right. I mean, the label in the United States now is for a chemotherapy back component of chlorambucil plus unfit patients. And we obviously are continuing to work to move that up and to expand the chemotherapy backbone. But I think we can be successful in the early days so far that we have in the market are that it is being accepted and endorsed in that patient population, and potentially starting to be experimented and used beyond that patient population. So I hope that gives you a bit of an idea. I think for both for Gazyva and for other -- some of the competitive products, I think we should let a little bit of time go throughout this year and keep you updated in the first and second quarter and see how things are moving. I would just make one other comment on Gazyva is that we've priced that product in the United States with an intention to replace eventually the MabThera franchise. And also, with Gazyva, it's a set course of therapy versus some of the other competitors there that treat through to progression. So I think that's something, too, that you would take into your potential future estimates as well.

[Severin Schwan:]

Dan, you also want to make a comment on the EMA orders?

[Daniel O'Day:]

Yes, sorry. So EMA, we did have a reinspection, as you may now recently. We -- first of all, I would say that we have been working very hard on our CAPA [ph]. And in fact, now for 19 medicines that have been reviewed both by us and by EMA, there has been no difference to the safety, benefit-risk profile of the product based upon this additional safety data that's being processed. And I think, that's very encouraging and in line with what we expected as well. So we do have additional observations with the audit that we're continuing to work on. We've got the infringement procedure, which is still ongoing in Europe. And we would expect, over the first half of this year, for EMA to be working with the commission to progress that infringement procedure -- we don't want to anticipate what that could or could not be. But we'll get answers, I think, in the first half of this year. The important thing is, I think, we're very clearly committed to working with the authorities to make sure that we've got the data that's -- that they're requesting for all the products.

[Severin Schwan:]

Thank you, Dan. But let me reemphasize, I mean, the safety profile of the all these medicines, which were concerned by these audits has been reconfirmed, and publicly reconfirmed by the EMA. Can we have the next question please? If we work our way up, perhaps over there. Yes, please.

[Unknown Analyst:]

Mary Anne [indiscernible], Prime Avenue. Two questions, please. One is, what sort of growth emphasis should we expect in 2014 and maybe medium term from patient access programs in China and maybe some other Asian markets? And I think it has been a very significant growth driver for some products in the past, and it's just very difficult for us to gauge the dynamic there. I mean, are the new patients sort of phasing in at a regular rate, or is there a certain lumpiness? Just any thoughts you could share with us there on how to model that. And my second question is on HER2-positive adjuvant breast cancer. Just wondering if all the Phase III trials that you now have ongoing with the newer agents were to come out positive, then what do you think you would need to do in terms of ancillary trials, in terms of patient numbers in order to convince physicians that really the vast majority of patients who are currently on Herceptin would in the future be getting one or both of the newer agents, and what sort of the time lines around that? I mean, the reason for the question is that I think on the one hand obviously looking at the Herceptin adjuvant program where you had about 12,000 patients, if you multiply that through for Perjeta and Kadcyla and the combination, you might be hitting some feasibility issues. But I'm also wondering, I mean, with all of the trials that you now had also in the metastatic setting where -- that were positive irrespective of the chemotherapy, do you really have to do a full trial with every chemotherapy and every patient population look at hormone receptor co-positive breast cancer again? Or is there somehow, I don't know, sort of a cut-off where you can say, "Okay, with the program of this size, we can probably switch 80% of the -- or 90% of the current Herceptin franchise and adjuvant to one or both of the newer agents?"

[Severin Schwan:]

Dan, you want to give it a try?

[Daniel O'Day:]

Sure, I will. I'll do my best. So first on the patient access programs, I don't think they're really lumpy. I think they're relatively constant and consistent. Probably the most successful one so far that we've had is in China, in particular. And what we're seeing in China is a pretty consistent uptake when you look at the growth rates of products like Herceptin. I don't have it right in front of me, but I think it's in the magnitude of 60% last year. That's really driven -- really completely by the patient access programs. So as you know, the way they work is that there's a certain component that's private pay. There's a certain program that's funded through a charitable contribution. And we make sure that patients get the entire Roche-sponsored treatment, of course. Now what I would say is what's interesting is for the patient portion of the contribution. We've now had 2 provinces that are starting to offset some of the costs that the patients would have. Now this is a province-by-province decision, but we're encouraged by that. If you like it, it's semi-reimbursement at the government level, some oncology products in China. So I think that we continue to see good strong robust growth with those programs in China. In other countries where that's appropriate, it doesn't work in all countries, and it's not appropriate in all countries. But we also had other strategies, of course, in other countries where we work with, second brands, or we work -- second brands that are priced differently in the public markets in some country where that's appropriate. We have a big private/public split. And all of those programs are leading to the growth numbers that I showed before. I mean, the 21% growth in China this year is really driven predominantly by the oncology portfolio in these programs, just to give you a feeling for that. Relative to the HER2, well there's a lot of forecasting in that, I guess. The fundamental thing I would say is like everything in oncology, it's data-driven, right, and data-dependent. I think what we do feel pretty comfortable with is that we have a very comprehensive program in the adjuvant setting with Kadcyla and Perjeta. I mean, you know it, you've seen it in different combinations. I can't tell you today which combination in the adjuvant setting is going to be the very best. I can't even tell you what combination in the first-line metastatic center is going to be the very best on Mary Anne [ph]. But we certainly have, I think, thought through both the biologic treatment regimens, as well as chemotherapeutic treatment regimens. And our full expectation is that if we have a significant advantage like we had in the metastatic setting and adjuvant, that we will see patient conversion because, particularly in the adjuvant setting, when you're talking about potentially moving in HER2-positive breast cancer from Herceptin today, which is a 50% curative rate almost, patients that do not go into progressed disease. If you were able to increase that by 60%, 70%, whatever it's going to be, I think in a curative state you would certainly want to give every patient the very best chance of being cured. So it's even more compelling, I would say, in the adjuvant setting than it is in the metastatic setting. But I wouldn't want to forecast exactly what that data will be. Other than to suggest, I think the program is comprehensive enough to answer the questions that you pose.

[Severin Schwan:]

Perhaps, can I add one point on the bumpiness [ph] in terms of access programs and increasing access to the public segment. China is a case where you have a pretty decentralized decision process and, as such, there is the first city, the first province stepping in and you have a pretty gradual development. There are other emerging markets where you have a much, much more central decision-making on a national level where you can have 1 or 2 tenders for the annual demand of a certain medicine. And even though in the longer term, of course, you can argue this is an evolutionary development, what we do see is a very bumpy development on a quarterly business. And have seen this over the last year. You remember in one quarter, you asked, "Why is international market so low?" And we said, "Yes, because the tender didn't come in." And then in the next quarter, you said, "Can we predict that this goes on like this?" And we said, "No, no, be careful." There was this one-off tender in Russia, for example. Or there was this one-off tender in a country like Algeria, other countries in North Africa. So you can have a bit of a bumpiness when it comes to public tenders for the public segment.

[Daniel O'Day:]

Yes, that's a good point. I would, too, restrict the one-patient access program. Those are public tenders that really are not connected with the patient access, but they have a lot of lumpiness.

[Severin Schwan:]

Good. Can we have a question there? And then, we'll have one more question before we break out into the divisional sessions. And next question?

[Daniel O'Day:]

Yes, please.

[Keyur Parekh - Goldman Sachs Group Inc., Research Division:]

It's Keyur Parekh from Goldman Sachs. And I've got 4 questions, please. Two for you Severin, 1 for Alan, and 1 for Dan. Starting the first one for you, we've heard Roche recently talk a lot more about annual pricing or price caps across therapies. Can you just help us think about what -- how this might actually be implemented especially from a U.S. perspective as we look at the next kind of 3 to 5 years? Secondly, just trying to get a sense of triangulating different things, you've given us a net debt to assets corridor on the balance sheet. Cash generation is growing at 5% to 10% per year. And you're telling us you won't do large M&A and bolt-ons. If you triangulate the 3, you get to bolt-ons that are going to be somewhere in the region of $30 billion to $40 billion over the next 3 years. Are those still bolt-ons? Alan, on the margin side, if I look at any large-scale Pharma company that's going revenues at 6% per annum, it's very difficult to see why margins won't expand. Can you -- especially given the geographic mix you have, the product mix you have, and if R&D is going to stay roughly flat as a proportion of sales, what is going to go up? And then lastly for Dan, on the 79b program, the Phase II that you did was in combination with rituximab, is there a chance that you can do the next stage of the program directly in combination with Gazyva, or do you need to do early work on that end?

[Severin Schwan:]

Okay. I'm not sure whether I got the first question right. But if I understood you correctly, you were referring to the pricing and how pricing develops across different regions, in particular the U.S. Was that the question?

[Keyur Parekh - Goldman Sachs Group Inc., Research Division:]

No. What I was talking about was we recently heard Roche talk about moving to a per patient per year or the per cost of therapy trial, I think, using multiple...

[Severin Schwan:]

Okay. Thank you, I misunderstood, yes. Yes, very much so. Our current pricing in the industry as a whole is very much based on a price per vial on milligrams, if you like. And we feel that we should develop more sophisticated pricing models as we go forward. Also in the developed markets, in particular, in cancer. If you look at Avastin, for example. It is used for different cancer types and we know that effectiveness of Avastin is different for the different indications, and the question becomes even more critical as we have more and more combination therapies where we stack biologics one after another. So our aim clearly is that we come to more sophisticated pricing models where we can link the value of the medicine closer to the price rather than having an average price across indications and across combinations. Now from what I see in our discussions with the various national health care systems is that payers, as such, are pretty open to that concept. They want to pay for the value rather than just for a vial or for milligrams. That the trick or, let me say, the hurdle is the implementation. Because if you do, for example, indication pricing, what you need is an IT system which tracks which vials has been used for which indication. And that is in many countries today, not the standard. They have only systems, which tracks how many packs of Avastin have been used, not necessarily for which indications. And it gets even more complicated if you then look at the outcome because then you do not only need the data for which indication it has been used, then you'll also need the data of what has been the clinical outcome for a specific patient group. But having said that, we are closely working together with governments and with payers to develop more sophisticated models as we go forward. But I think, Dan, it's fair to say, it's still early days, right?

[Daniel O'Day:]

Yes, yes. I mean there are some countries that are further ahead than others. I think we're paving the way here. We're reliant upon a lot of other stakeholders. But Italy, U.K., couple of markets are quite advanced. And we know this is the future, so we have to keep pushing it. I would say the U.S. is not at the cutting-edge of this, currently, to your question before.

[Severin Schwan:]

Right. Then we had a question on the margin side. Alan, you want to take another shot at it?

[Alan Hippe:]

Yes, sure. Yes. And I think Keyur makes a good point here, and sort of I expected it. And you've seen it. I think when you really strip it out, in fact, it's really -- it's a thin line between stable margin, margin expansions, et cetera. And admittedly, I think this year we have invested in a couple of things, and I think rightly so. And when I look at the Phase IV, so I think that's something and potentially that stays a little bit with us. More late stage is evident. So I think R&D is an element here. Before I said, okay, there is just flatting, but give us a little bit of flexibility, we need it. I always made this point. And I think very clear this year was a year, where we had to take that credit and use it. And I think we did well with that. The other point really I'm looking at is a little bit cost of sales. I think higher volumes are -- it's evident. And on the diagnostic side, we have price pressure, admittedly. I think that's a little bit of a driver that we're finding over here. And really, we are going to build the manufacturing network. So when you put that into perspective in 2014, where we have said the guidance for the sales is low to mid single, that's very -- that's the point here. I think really that puts things a little bit into perspective. I think going forward, we will see what that means and whether there is more momentum. It looks like that there might be more momentum. But okay, the guidance is the guidance for 2013 -- '14. And let's see how that goes. I've never said the margin goes down or significantly or whatever. I think we're talking really about here, how should I say, relatively small amounts.

[Severin Schwan:]

Dan, there was a question on 79B...

[Severin Schwan:]

We can pretend they all start to articulate. We've moved the 2 PI3 kinase and the 79B in the late stage development. But we did that in a fairly aggressive early way, and for good reasons because we want to get quickly into labeling enabling trials. But at the same time and specifically with 79B, the Phase II trial still continues. We have a final readout of it in 2014. And the team is looking at a variety of combinations, certainly looking at Rituxan with potentially other chemotherapy combo backgrounds. Probably, a little bit early to think about Gazyva with this age and at this stage. But we'll know more as the year goes on. And we'll also have the final conclusion on the CD22 as well, which is still -- we're still getting data on the Phase II on. So I would say, 2014 for this compound will be a year where we're planning, where we're trying to decide exactly how to move this product forward, getting some additional data on it. And then being prepared to move with speed in the future years. So I'll have to keep you updated on that.

[Severin Schwan:]

I must say they have to...

[Keyur Parekh - Goldman Sachs Group Inc., Research Division:]

One more question on the evaluation of the balance sheet, guidance, the M&A guidance.

[Severin Schwan:]

Yes. Time is advancing, so I'll keep it very short before we break out into the divisional sessions. And I think the Finance session is here. Carlos [ph], just correct that. Yes, what I can say? We have given you a range. We have now entered that range. I think there is still some flexibility. As I said beforehand, there is no change in our M&A strategy. We have clearly stated that we want to increase the dividend. And we'll see how the cash flow develops. I agree with you. There should be a strong cash flow as we go forward. I think it's a good problem to have. And we'll cross the bridge when we get there. Now I'd like to ask those of you who have additional questions on the balance sheet to stay here. And then, we have 2 breakout rooms. One is...

[Unknown Executive:]

The old one up [ph].

[Severin Schwan:]

The old one up [ph] for Diagnostics and for Pharma. And may I also remind you that after the breakout sessions, we are happy to meet you again for some cocktails before -- and some, perhaps, a bit more informal discussion before we go home. Thank you very much for your attention.