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Media Release

Basel, 30 January 2008

Annual Media Conference

The Annual Media Conference will be held at Roche in Basel starting at 10:00 CET.

Speeches English

(The spoken German text is definitive)

Franz B. Humer

Good morning Ladies and Gentlemen. Welcome to Roche’s 2008 full-year results media conference.

The Roche Group achieved outstanding results again in 2007, with sales and profitability reaching new record levels.

Industry-leading growth continued in 2007
For the seventh straight year, Group sales increased in double-digits, to a record 46 billion Swiss francs. The increase of more than 4 billion francs was entirely due to organic growth.

Clearly, the Pharmaceuticals Division was the main growth driver. Its sales once again grew approximately twice as fast as the market. The Diagnostics Division maintained its position as the global in-vitro diagnostics market leader, with sales increasing slightly faster than the market average.

While the first half of the year was extremely good for the Pharma division, the second half proved more challenging, as orders for pandemic stockpiling of Tamiflu declined significantly — as we expected and predicted. If we exclude pandemic sales of Tamiflu to governments and corporations, the underlying growth continued at double digit levels, with the fourth quarter the strongest quarter of the year for sales growth at Roche Pharmaceuticals.

Most government and corporate stockpiling orders have now been filled, and we anticipate a further significant decrease in pandemic Tamiflu sales in 2008. Production levels have been tailored to current demand but can be increased rapidly should the need arise.

Net income up 25%, Core EPS growth twice sales growth
The combination of higher revenues and a variety of programmes to increase productivity had a very positive effect on profitability. Although R&D expenses rose faster than sales, by 16% in local currencies to 8.4 billion Swiss francs — due among other things to continued investment in our strong development pipeline — overall cost growth was below sales growth.

The result, as you see here, was a 22% local-currency increase in operating profit to 14.5 billion francs and the Group’s highest-ever margin increase — 3.5 percentage points to 31.4%. This very good operating performance — which compares very well with that of our competitors — combined with a lower effective tax rate,  boosted net income by 25% to well over 11 billion francs. This record net income includes no exceptional items.

The Group’s balance sheet was strengthened further. The equity ratio increased from 63% to 68%; over 80% of total assets are financed long term.

Core EPS grew by 20% to 11.85 Swiss francs per share and non-voting equity security — double the increase in Group sales.  

Delivering on our commitments
The guidance we issued at the beginning of 2007 indicated continued above-market sales growth in Pharmaceuticals and Diagnostics, double-digit growth for Pharma and the Group and, as a target, core EPS growth above sales growth. As in previous years, we again delivered on all of these commitments.

Committed to continuously raising the payout ratio
In view of these excellent results, the Board of Directors will propose another substantial dividend increase of 35% — to 4.60 Swiss francs per share and non-voting equity security — at our Annual General Meeting on 4 March. If approved by our shareholders, this will result in a total dividend payout of approximately 4 billion Swiss francs, compared with 3 billion last year. We are thus continuing to progressively raise not only the dividend but also the payout ratio.

Board members’ terms, executive compensation
Let me briefly mention some of the other items on the agenda of the forthcoming AGM,

As previously, the annual report includes a separate but integrated Remuneration Report, which goes beyond the required disclosure and gives a detailed breakdown of the remuneration of the Board of Directors and Executive Committee. In accordance with the Swiss Code of Corporate Governance, the Board has decided to ask for shareholder approval of the Remuneration Report as an integral part of the Annual Report

At the forthcoming AGM the Board will also propose that the term of office for board members be reduced from the current period of 4 years to 3.

Targeted strategic acquisitions
In 2007 we continued to invest heavily in external innovation. Over 40 new licensing agreements across Pharma and Diagnostics enhance our portfolio and give us access to new products and technologies.

Among the most significant of these were agreements with Alnylam, for access to their Nobel prize winning RNAi therapeutics technology; with Transgene to develop therapeutic vaccines for cervical cancer and other diseases caused by HPV; and with Toyama to jointly develop a novel rheumatoid arthritis drug

We also stepped up our M&A activity: Therapeutic Human Polyclonals strengthens our therapeutic antibody research in Pharmaceuticals. And Bioveris, 454 Life Sciences and NimbleGen bring critical new technologies to our Diagnostics Division, including ultra-fast gene sequencing and microarrays, making us a leader in this exciting market segment.

Ventana – investing in our future
And, very importantly, a little over a week ago we signed the definitive merger agreement with Ventana Medical Systems. This acquisition will enable us to move into the fast-growing market for tissue-based diagnostics and strengthen our capabilities for developing companion diagnostic tests. Ventana is a significant milestone in our efforts to develop personalised healthcare solutions, including more cost-efficient, differentiated and targeted medicines. I am very pleased that our well-founded persistence has led to a friendly merger.

These acquisitions and alliances open the way to developing better diagnostic tests and treatments for important unmet medical needs. They also complement ongoing in-house initiatives to further improve speed, productivity and quality in our pharmaceutical R&D. The most important of these is the new Roche Pharmaceuticals R&D management model we implemented during the course of 2007. It streamlines decision-making and links discovery, translational medicine, clinical development, diagnostic input and marketing in dedicated leadership teams for each of our five Disease Biology Areas.

Looking to the future from a position of strength
While the healthcare industry faces significant challenges in the years ahead, Roche is in a quite different position to its competitors.

  • We have a global network of alliances around the world and a unique relationship with Genentech and Chugai, of which we are the majority shareholder.
  • We have a portfolio of products on the market with significant additional growth potential through expansion into new indications and earlier use.
  • With the exception of CellCept, which will lose patent protection in the United States in 2009, we are not facing patent expiries on any of our major drugs within the next few years.
  • On the contrary — we are currently launching Mircera outside the US, expect approval for Actemra in rheumatoid arthritis towards the end of 2008 and will be entering new therapy areas such as diabetes and other metabolic disorders in the coming years.
  • We are uniquely positioned to lead the future of healthcare through our combination of Diagnostics and Pharma, as well as through our pioneering role in personalised healthcare.

Our results over the past few years speak for themselves. We can tackle the future from a position of strength.

Our objectives for 2008
For 2008 we expect to achieve a high single-digit increase in Group sales in local currencies, with both Roche divisions continuing to outperform their respective markets. This excludes pandemic stockpiling sales of Tamiflu to governments and corporations. Most of these orders have been filled over the last several years. We therefore anticipate a decrease in pandemic Tamiflu sales in 2008 of around 1.7 billion Swiss francs.

To realise the full potential of our strong development portfolio, we plan to significantly increase research and development spending again in 2008. The main focus will be on late-stage clinical testing of promising compounds such as pertuzumab (for breast cancer), ocrelizumab (for autoimmune disorders), the GLP-1 analogue (for type 2 diabetes) and the CETP inhibitor (in the cardiovascular area), along with programmes designed to expand the use of our leading anticancer medicines into additional indications.

We anticipate continued strong growth in 2009 and 2010 for both divisions, driven by the launch of Actemra, MabThera/Rituxan for rheumatoid arthritis, Mircera, and additional new indications for Avastin and other cancer medicines. Moreover, we anticipate pivotal clinical trial data on the use of Avastin in early-stage cancer (adjuvant therapy) by the end of 2009.

Despite the anticipated decrease in Tamiflu sales and significantly higher R&D spending, we are aiming for 2008 Core EPS — at constant exchange rates — to remain at least at the record level achieved in 2007. In addition, we expect that our high cash generation capacity will enable us to continue raising our dividend payout ratio over the next three years.

In closing, I would like to thank you for the constructive dialogue we have had over the years, which I have always appreciated. I look forward to continuing this interaction with you in my role as active chairman.

Erich Hunziker

Good morning Ladies and Gentlemen

2007: Strong operating and financial performance
Building on our excellent operating performance, Roche Finance made important contributions to the further strengthening of the Group: in a rather challenging environment we kept the net financial income at an attractive level, we increased the net cash and we have strengthened the balance sheet. As a result the Roche Group has further increased its strategic flexibility.
We also continued our proactive disclosure beyond financial reporting standards.

Group results 2007: Highest ever increase in operating margin directly translated into net income
Due to the excellent operating results of our core businesses and the decrease of the Group tax rate, net income increased by 2.3 billion Swiss francs or 25%. This is the highest net income Roche ever achieved.

Group operating performance 2007: Operating profit up 22% due to cost control measures
The clear strategic focus on our core businesses Pharma and Diagnostics is showing attractive results at operating level. While our innovative products have gained market share, we have kept our cost basis under control and consequently most operating expenses are increasing at a rate below sales growth. Due to continuous productivity improvements at our production sites we were able to keep the increase in cost of sales at an attractive level, despite higher royalty expenses for our successful Pharma products like Mabthera/Rituxan, Herceptin and Tarceva. The increase in R&D expenses underlines our strong commitment to innovation and our readiness to invest into our future. This behavior pattern differs quite significantly from most of our peers who are focusing on short-term cost cutting measures. The increase in R+D expenses was almost compensated by higher out-licensing income – which is a result of Roche’s innovation power in the past.
The increase of General and Administration cost is significantly impacted by one-time items like higher restructuring and legal expenses.
Overall the growth rate of the operating result is considerably stronger than sales growth.

Net Financial income 2007: Stable contribution at very low risk
In a challenging environment we were able to keep the level of the net financial income at an attractive level. With regard to the intensive public discussions it may be of interest that due to a very clear risk policy and an efficient risk management Roche was not affected by the sub-prime crisis in a material manner: on the background of managed assets above 20 billion Swiss francs the impairment of 68 million seem to be an acceptable result.
The foreign exchange losses are based on the increased business success in Eastern European and Latin American countries: the excellent results are achieved in currencies which show big fluctuations and can only be hedged with high cost.

Group tax rate 2007
A downside of our unique hub and spoke concept lies in the fact that Genentech and Chugai have to pay quite high taxes in their respective environments. We were nevertheless able to significantly decrease the Roche Group tax rate. Although the current result is also driven by one-time effects such as the reduction of corporate tax rates in Germany or Italy, the Roche’s tax rate excluding Genentech and Chugai is expected to be lower in the future than it was in the past. This is also the result of a multi-year project to optimize our tax structure.

Core EPS continued to rise rapidly
This important yardstick shows the continuing improvement of the Roche performance.

Balance sheet 2007: Very solid with 68% equity ratio and 82% long-term financing
With this strengthened balance sheet Roche has significantly increased its strategic flexibility to strengthen the core businesses Pharma and Diagnostics.

Net cash 2007: Increase by CHF 1.2 billion
Based mainly on the strong operating result, the net cash position of the Group was further strengthened.

Committed to continuously increase pay-out ratio over the next 3 years
In the last 21 years Roche has continuously increased its dividend. Based on the excellent result, the Board proposes to the Annual Shareholder Meeting of March 4, 2008 that we increase the dividend by 35% to 4.60 Swiss francs.

Our objectives for 2008
Let me close with our outlook for 2008. Barring unforeseen developments we expect:

  • High single digit local currency sales increase for the Group excluding government and corporate stockpiling orders of Tamiflu for pandemic use
  • Above-market sales growth in both divisions (Pharma excluding Tamiflu pandemic sales)
  • Core earnings per share at least at record 2007 level despite significant increase in R&D investment and considerably lower Tamiflu pandemic sales
  • Continuous increase in dividend pay-out over the next 3 years