Basel, 23 July 2003
Half-Year Media
Conference Basel, 23 July 2003, 10.00 am C.E.T.
Additional
information Speeches English (The
spoken German text is definitive) - Franz
B. Humer
– Chairman of the Board of Directors and CEO Slides
- Heino von Prondzynski
– Member of the Executive Committee
and Head of Diagnostics Slides only - William M. Burns
– Member of the Executive Committee and Head of Pharmaceuticals Slides
only - Erich Hunziker
– Member
of the Executive Committee and Chief Financial Officer Slides
Franz
B. Humer Ladies and Gentlemen, Welcome to Roche’s
half-year media conference. The Roche Group posted a very good result in the first half of 2003. Over
the next hour my colleagues from the Executive Committee and I will be briefing you on the major results.
As always, you will then have an opportunity to ask questions. As you now,
there is more to the Roche success story than just numbers. First and foremost, innovative products
like Pegasys for hepatitis C, the HIV fusion inhibitor Fuzeon, the pioneering cancer medicine Avastin
and the world’s first pharmacogenomic test (AmpliChip CYP450) mean that many people can enjoy a significantly
better quality of life, and often products like these can even extend life. Ladies and Gentlemen, the
personal statements you’ve just seen, from people with first-hand experience with our diagnostic tests
and medicines, will give you some idea of the benefits our company delivers to patients. That is a ‘return’
that all of us at Roche are proud of. We are thus all the more pleased about
our many new approvals, the progress of our development projects and the strong sales of our products
in the first six months of this year. Let me turn now to a summary of our key
activities and results in the first half of 2003. Group results
for the first half of 2003 — a very good operating performance
As usual, we are
publishing not only our consolidated results for the reporting period, but also adjusted results that
exclude special items. This is a practice we introduced in 1999 and which from the start has always
followed the same transparent set of principles. In the first half of 2003
Roche achieved sales growth — on both an as reported and an adjusted basis — that was substantially
above the market growth rate while continuing to improve profitability. On
an adjusted basis — that is, excluding our discontinuing vitamins business — sales in our core Pharmaceuticals
and Diagnostics Divisions totalled 13.9 billion Swiss francs, advancing 17% in local currencies and
6% (as a result of currency impacts) in Swiss francs. The integration of Chugai in Japan contributed
roughly 8 percentage points to the increase in local currency sales. Gross
cash flow (EBITDA) rose sharply, passing the 4 billion Swiss franc mark by a substantial margin. That
is an impressive figure by any standards. Reported operating profit increased
by an even stronger 44%, to roughly 2.5 billion Swiss francs. This large increase is partly explained
by the costs incurred in the first half of 2002 in relation to a Genentech lawsuit. But even excluding
special items, (adjusted) operating profit in our core businesses advanced 15% in Swiss francs and 27%
in local currencies, to 2.8 billion Swiss francs — and that means, it grew faster than sales. Even when
our EBITDA and operating profit show markedly improved growth on an as reported basis — as they do for
the first half of this year — we still like to stress the importance of the adjusted figures, because
they enhance the visibility of our underlying businesses and put you in a better position to evaluate
our performance over time. Financial income was lower than in the first half
of 2002 because of last year’s special gains on the sale of our stake in LabCorp. Without those one-time
gains, financial income would have been virtually unchanged. The financial income figure includes an
impairment charge of 277 million Swiss francs on shares whose market prices fell sharply in the second
half of 2002 and did not recover sufficiently in the first six months of this year to reach the minimum
target amounts we set at the beginning of 2003. As you will recall, movements in the market value of
financial assets are now charged to income whenever the value remains more than 25% below original cost
for six consecutive months. Erich Hunziker will be briefing you in detail about the results of our financial
activities. After our one-time loss for 2002, net income is once again solidly
in the black. Net income as reported in our interim financial statements reached 1.3 billion Swiss francs,
and on an adjusted basis it was 1.6 billion Swiss francs. The decline versus the first half of last
year was due to the gain I mentioned earlier on the sale of LabCorp shares (582 million Swiss francs
after taxes), which was included in net income for the earlier period. Sale
of Vitamins and Fine Chemicals – Closing expected this year
Regarding the sale
of the Vitamins and Fine Chemicals Division, we are now a good deal nearer to closing the transaction.
However, there have been further changes to the terms of the sale. Roche and the Netherlands-based DSM
group signed a purchase agreement on 10 February of this year, and then contacted the antitrust authorities
in all major market regions. In July the parties adjusted the terms of the sale to the new realities
by mutual agreement. Roche agreed to reduce the purchase price by 200 million euros, to 1.75 billion
euros, in light of the unfavourable developments on the global vitamins market. This is reflected in
the interim financial statements by an impairment charge of 375 million Swiss francs against net assets.
In return, DSM waived a number of major closing conditions provided for in the original agreement. We
are now only awaiting approval from the European and the US antitrust authorities in order to close
the sale. Given the good progress we are making on this front, we expect to close the transaction in
the third quarter of this year. Strong sales growth – Both divisions
outperform global market
I turn now to the most important results for the period
in our two core businesses. Sales in the Pharmaceuticals Division were up
by one-fifth in local currencies, reaching a total of over 10 billion Swiss francs. Prescription drug
sales accelerated markedly in the second quarter (from +18% to +24%) and expanded nearly three times
as fast as the market. Sales advanced at above-market rates in North America, Japan and Europe. Even
excluding Chugai, our prescription drug business outperformed the global pharmaceuticals market. It
is important to note that the Chugai effect is not merely a result of ‘acquired revenues’ — the fact
is that the former Nippon Roche makes up a significant part of the new Chugai, and many of the new products
now being marketed by Chugai in Japan originated at Roche. Apart from Chugai and another excellent performance
by Genentech, growth was led by our oncology portfolio, which posted a 36% jump in sales revenues (to
2.9 billion Swiss francs), and by other key prescription products, including NeoRecormon, CellCept and
Pegasys plus Copegus, our new two-drug combination for hepatitis C. Our OTC business also recorded a
noticeable rise in sales in the second quarter. Sales in the Diagnostics Division
once again advanced well ahead of the market, rising 7% in local currencies. The division was thus able
to further expand its global market lead. Sales growth remained strongest in the division’s two most
profitable segments, Diabetes Care and Molecular Diagnostics’ in-vitro diagnostics business. Sales growth
in the Asia-Pacific and Iberia regions was well into the double digits. Here, as in Europe and North
America, revenues expanded far faster than the market. As previously announced
a US appellate court has found that Roche did not violate an implied covenant of good faith and fair
dealing under its licensing agreement with Igen. We are pleased with the court’s decision. Consistent
with this finding, the court set aside an earlier award of $400 million in punitive damages and substantially
reduced the compensatory damages awarded against Roche. In eliminating more that $486 million of the
$505 million judgement previously entered against Roche, the court confirmed the correctness of the
position that Roche has taken throughout the lawsuit. At the same time, the court upheld Igen’s right
to terminate the licensing agreement with Roche. Operating profit
and EBITDA up by double digits in local currencies
Thanks to healthy sales growth
and rigorous cost management, the profitability of both of our Group’s core businesses rose significantly.
Both divisions reported double-digit gains in EBITDA and operating profits in local currencies. In the
Diagnostics Division EBITDA for the half-year was well above the 1 billion Swiss franc mark for the
first time. Profitability in the first half of 2003 – Margin
gains despite higher costs
The continued improvement in our operating profit margins
is especially important to us. Operating profit as a percentage of Group sales
(excluding the Vitamins Division) showed a healthy 1.6% rise from the first half of 2002. Over the past
two years we thus have raised the profitability of our core businesses from 17% to over 20%. The
EBITDA margin — recognised as the most powerful comparative measure of a company’s profitability — improved
by 0.8% to nearly 30%. Both core businesses contributed to this very good result. The
Pharmaceuticals Division saw profitability improve again, despite substantially higher spending on new
product launches (Pegasys, Copegus and Fuzeon) and the many highly promising projects in our R&D
pipeline and despite the impact of continued generic pressure on sales of Roaccutane/Accutane. The increase
was driven largely by sales of Roche prescription drugs, which generated an operating profit margin
of 25%. The division’s EBITDA margin held steady at roughly 31%, a solid performance by industry standards. Roche
Diagnostics also posted another robust increase in profitability. The division’s EBITDA margin rose
by an even stronger 3.2 percentage points and for the first time also surpassed the 30% mark. As a result,
the division’s EBITDA margin is now well within the range reported by pharmaceutical companies. Improving
the Group’s financial structure – Further progress
In finance, the restructuring
initiatives announced early this year are progressing as planned. Thus we have made significant progress
in reducing the share of financial assets held in equities and in restructuring and reducing Group debt. The
measures we have taken — and which Mr Hunziker will explain in detail later — will reduce the volatility
of future financial earnings, lower the Group's interest expenses and improve the risk profile of our
investment and debt portfolios. Milestones in the first half
of 2003 – Pursuing medical advances that benefit patients: Pharmaceuticals
That
Roche had a successful first half this year is reflected not only in our sales and profit figures but
also in a string of regulatory and clinical achievements. With the launch
of Fuzeon, we have introduced the first truly novel anti-HIV medicine in seven years. The product was
available in the United States and Europe within weeks of being approved in those markets. We are working
hard to expand production capacity for the product in order to ensure that the greatest possible number
of patients have access to it within the shortest possible time. At present it looks as if we will be
able to supply the product to up to 50% more patients by the end of the year than originally planned. Pegasys
is now approved in over 80 countries and by the end of the first half of this year had already gained
significant market share. With its high response rates, low toxicity and once weekly dosing, Pegasys
offers convincing benefits for physicians and patients alike. Combination therapy with Pegasys and Copegus
offers very good chances of a cure in hepatitis C, and we hope to see similarly good results in hepatitis
B. The first six months of this year saw us further expand our global lead
in oncology. Sales of our leading cancer medicines MabThera/Rituxan, Herceptin and Xeloda continued
to grow strongly. Because of the complexities of cancer, significant advances in oncology are rare.
That is why Roche is proud to be the supplier of three cancer medicines which have been shown in clinical
trials to extend patients’ lives. And Avastin, which we will be commercialising with Genentech, is another
reason for new hope in the fight against cancer. The data from a phase III trial in colorectal cancer
patients are so convincing that the FDA has included Avastin in its fast-track programme, which is designed
to facilitate the development and expedite the approval of promising new medicines for life-threatening
diseases. Besides Avastin, a number of other developmental products have produced
very good clinical results in major therapeutic areas such as oncology, anemia management and transplantation. We
are especially pleased about signing our first in-licensing agreement with Chugai. MRA, which we will
be developing and commercialising with our Japanese partner, is a highly promising drug candidate for
rheumatoid arthritis. I believe it is fair to say that the advantages of our
strategy of cooperating with a network of strong, highly motivated partner companies are being borne
out more and more clearly by the results. Roche’s own R&D organisation will continue to play a key
role in future. Five of our 10 top-selling pharmaceuticals, I might note here, originated in Roche laboratories. Milestones
in the first half of 2003 – Pursuing medical advances that benefit patients: Diagnostics
The
acquisition of Swiss-based Disetronic has significantly strengthened Roche Diabetes Care, the Diagnostics
Division’s biggest and most profitable business area. By bringing together the global leader in diabetes
management and the number two supplier of insulin pumps, we have done more than just broaden our product
base, which now ranges from meters for glucose self-monitoring to devices for flexible, individualised
insulin delivery. We have also moved closer to our long-term goal of developing a fully automated artificial
pancreas. This will bring about a dramatic improvement in the quality of life of people with diabetes.
We have initiated all necessary steps and are working closely with the FDA to address complaints by
the FDA regarding production processes and documentation at Disetronic. The planned launch of a new
generation of insulin pumps in the second half of 2004 will not be affected. Last
month’s launch of AmpliChip CYP450 marks a major step towards more tailored healthcare. The GeneChip
technology licensed-in from Affymetrix will enable us to develop DNA microarrays for a wide range of
diseases and establish new standards for genetic testing in routine clinical settings. We are planning
to launch a number of additional tests next year — initially for use in research. As we did with PCR
technology in the 1990s, we want to deploy the GeneChip technology in developing and shaping the market
for oncology and genomic diagnostics. Activities in developing
countries – Major strides in first half-year
Innovative products offering major
improvements in the healthcare available to patients worldwide are our core business. As a good corporate
citizen, Roche also accepts its responsibility towards developing countries. In the first half of 2003
we undertook significant initiatives in this area. We updated our pricing policy
for protease inhibitors within the Accelerating Access Initiative with the aim of further improving
access to these WHO-defined essential drugs in countries that are hardest hit by the AIDS pandemic. We
now offer direct supplies of Viracept and Invirase to sub-Saharan Africa and UN-defined Least Developed
Countries at ‘no-profit’ prices — regardless of the quantities required. These prices are 30–50% below
those of generic manufacturers. We also reiterated that Roche will not take
action against infringements of patents it holds on HIV/AIDS medicines or file new patents for such
medications in these countries. However, low prices alone will not solve the
problem. The complex regimen needed to treat HIV/AIDS can only work properly if an intact infrastructure
and a functioning basic healthcare system are in place. Above all, prevention will succeed only where
there is adequate information and education and the political will exists to make it succeed. These
factors are also of key importance in the CARE project, which Roche is funding and supporting in Kenya,
Côte d’Ivoire, Uganda and Senegal. The aim is to provide comprehensive treatment, and Roche is preparing
to launch a similar project in Asia. The donation of the rights and technology
to manufacture benznidazole to the government of Brazil is another example of ways in which Roche is
fulfilling its commitment to good corporate citizenship. Benznidazole is the most effective medicine
available for the treatment of Chagas’ disease, a potentially fatal tropical disease that affects some
18 million people in Central and South America. There are between 5 million and 6 million sufferers
in Brazil alone. Malaria continues to be a major threat. In 1998 Roche began
cooperating with the University of Nebraska to help develop a new, effective and inexpensive antimalarial
drug. A compound with very good in-vitro and in-vivo characteristics was identified, and in 1999 the
project was continued by the University of Nebraska and the Swiss Tropical Institute with support from
the WHO. In May 2003 Roche turned over its role as pharmaceutical partner in the project to an Indian
producer. This will help to ensure that the manufacturing costs are kept as low as possible if the drug
is successfully brought to market. Through these initiatives Roche is contributing
to making life-saving medicines available to as many people as possible in economically underprivileged
countries. Clearly, much remains to be done, and we have no intention of resting on past achievements. Forecasts
being met
Before I proceed to the outlook, let me come back briefly to the projections
we announced at the Annual Media Conference in February. With one proviso, we have met or exceeded all
our sales and earnings expectations. While the Diagnostics Division is growing significantly faster
than the market, growth in the first half lagged a little behind the double-digit rate targeted again
for the year as a whole. However, we are confident that more dynamic sales growth in the second half,
helped by the launch of new products and the integration of Disetronic from May on, will enable us to
achieve our goal by the end of the year. We are well aware of the challenges
that meeting our goals will involve. The challenge of successfully strengthening our pipeline will require
our full attention, as will the tasks of carefully integrating Disetronic and resolving the outstanding
issues in our business relationship with Igen. In addition, we will have to focus considerable energy
on further implementing our strategy for achieving a balanced financial performance by 2004 in what
remains a volatile and difficult marketplace. The task of expanding our collaboration
with Genentech and Chugai and linking Roche, Chugai and Genentech in a network spanning the globe is
another challenge that we are actively working on. Outlook —
Guidance for full-year 2003 reaffirmed
Based on our good results for the first
six months, we expect to meet or exceed the full-year sales and earnings guidance we released early
this year. For the Roche Group as a whole, we thus expect sales and operating
profit to increase by double digits in local currencies. The same holds for the Pharmaceuticals Division
and (including the contribution from Disetronic) for the Diagnostics Division as well. In addition,
we expect the Group’s operating profit margin to at least remain stable compared with 2002. Ladies
and Gentlemen, our regulatory and clinical achievements, our successful market roll-outs and our sales
and earnings figures all attest to the fact that we are successfully implementing our strategy of focusing
on two innovative core businesses — pharmaceuticals and diagnostics. The progress we have made has strengthened
our conviction that as a global healthcare leader we are steering the right course. We will continue
vigorously and independently pursuing a strategy for long-term success that enables us to deliver benefits
to patients, physicians, employees and shareholders.
Erich
Hunziker Good morning Ladies and Gentlemen Major
restructuring underway – Reducing interest expenses and risk profile
All activities
of Corporate Finance in the first half of 2003 were targeted towards achieving conditions for a balanced
financial income by the end of 2004. The top priorities were a reduction of our debt and the further
reduction of the risk profile of our financial investments. Let us start with a look at the operating
results. Operating performance (financial statements) – Influenced
by special items
Including Vitamins we show a considerable increase at operating
profit level: this is - in addition to the strong performance of our core businesses - due to special
items: in 2003 the impact of the Vitamins Division sale to DSM is 375 million Swiss francs, whereas
in 2002 provisions created by Genentech for the City of Hope Medical Center legal case were 778 million
francs. Operating performance core businesses – Significant operating
profit growth
The adjusted figures show the operating profit of our core businesses
without these special items. Although the Group is launching several important new products, the increase
of Marketing and Distribution expenses was kept at reasonable levels. The increase of Research and Development
costs is due to two major factors: the integration of Chugai and the impressive number of promising
development projects including activities to support in-licensed and opt-in compounds. The increase
of administration cost is mainly due to the Chugai integration. The significant improvement of the “other
operating expenses” has primarily three reasons: significantly lower foreign exchange losses on accounts
receivables (mainly in Latin America), a one-time income from a litigation settlement in Diagnostics
and reduced costs for software implementations. In total, operating profit
increased by an impressive 27% in local currencies and 15% in Swiss francs. Compared to the first half
of 2002, the operating profit margin improved by 1.6 percentage points to 20.1%. Net
financial income (expense) – LabCorp 2002, foreign exchange gains equal impairment 2003
On
this chart you see the major factors influencing our financial income: You
can see the massive interest expenses primarily resulting from our convertible debt instruments. Since
their interest charges are fixed long-term, we cannot profit from the historically low interest rate
environment. We therefore intend to repay or re-finance these instruments as quickly as possible. Interest
income is much lower than in 2002, due to a decrease of “cash and marketable securities” and the lower
interest rate environment. On the positive side we can take note of attractive foreign currency gains. In
the first half of 2002 we generated significant gains from the sale of LabCorp shares. So far in 2003
we have reduced our investment in equity securities, while balancing gains and losses. At
the end of 2002 we revised our accounting policy for impairment of financial assets. In addition to
the existing impairment triggers, any equity securities that have a market value of more than 25% below
their original cost for a period of more than six months are considered as impaired. Applying this rule
at 30 June 2003 we had to take an impairment charge of 277 million francs. This results primarily from
equities, which were already below 25% at year-end 2002, but for less than six months. At the end of
June 2003, 150 million francs of our equity securities would fulfill the below 25% criteria, but not
yet the six month one. Cash and marketable securities – Further
reducing investment in equity securities
In line with our goal to reduce the risk
profile of our investments, we have reduced the investments in equity securities by 1.3 billion francs.
Since in parallel to this reduction the overall amount invested in cash and marketable securities declined
from 15.8 billion to 11.8 billion francs, the equity securities still account for 21% of our portfolio. Net
financial income (expense) – Decline equals LabCorp gain in 2002
This chart shows
the details of the net financial result: excluding the one-time gains from the sale of LabCorp shares
in 2002, the 2003 result is in line with the one in 2002. Net
income (financial statements) – Decline due to absence of 2002 LabCorp gain
The
positive developments at operating profit level were not able to compensate the special effect of the
sale of LabCorp shares: the net income decreases by 28%. Net
income core businesses – Decline due to absence of 2002 LabCorp gain
The LabCorp
impact is also clearly visible in the adjusted results. On the positive side we were able to keep the
tax rate within the target range. Capital market instruments
– Maturity profile considerably improved
In the first half year 2003 we were able
to improve our debt situation in a significant manner: by paying back the LYON II and the Bullet, we
reduced debt by 3.1 billion francs. A newly established European Medium Term Notes programme allowed
us to raise 750 million Euro at very attractive conditions to replace existing short-term bank debt. Free
cash flow of 1.5 billion Swiss francs in first half of 2003 – Substantial repayment of debt
During
the first six months of 2003, Roche again generated a positive free cash flow: the core business was
generating a strong EBITDA of 4.1 billion francs. Capex and working capital increased as expected, 600
million francs were paid out to Vitamins customers (these payments had already been provided for in
the past). Whereas the EMTN-program generated 750 million Euro, debt repayment
and the Disetronic acquisition totaled 7.8 billion francs. I will address the transactions involving
own equity instruments in the next chapter. Convertible debt/own
equity instruments – New rules already implemented in 2002
As a matter of principle
Roche in general only holds Genussscheine (GS) underlying convertible debt instruments. To explain the
developments in the first half of 2003, let us look back to 2002: as you can see from the chart, by
30 June 2002 Roche had several convertibles outstanding, backed by 40 million GS. Of these 40 million,
23 million were physical GS, another 17 million were held in the form of forward purchases. During the
second half of 2002 new developments with regards to accounting treatment of such forward purchases
obligations were included in an exposure draft published by the IAS Board: whereas in the past, these
forward purchases were reported as part of equity, they should be reported in the future as debt at
their net present value. In the interest of increased transparency, Roche therefore decided to reclassify
these forward purchases as of 31 December 2002 in a pro-active manner to long-term debt, at their net
present value of 2.4 billion francs. In addition we had to place collateral of 673 million francs with
the counter party financial institutions of such forward purchases. A painful result of the new accounting
treatment is to amortize the difference between final undiscounted forward purchase value and the discounted
net present value: the Roche P+L therefore had to take an annual interest charge of 145 million francs. Convertible
debt/own equity instruments – Developments first half of 2003
In the first half
of 2003 we were able to improve the situation in a considerable manner: in April the “LYON II” was paid
back without converting. The “underlying” GS were used for the Disetronic Acquisition and sold into
the market. The proceeds out of this sale were used to close a considerable part of the forward purchases.
Had we stopped at this point, we would have left the remaining convertibles without underlying GS. Moreover
the counter-parties of these forward purchases would have sold their GS into the market. We therefore
secured these GS by means of Low Exercise Price Options (LEPOs). By 30 June
2003 we only hold 30 million GS under considerably improved conditions: the long-term debt reflecting
forward purchases was reduced by 1.3 billion francs, the underlying collateral by 516 million francs
and the annualised interest charge from 145 to 62 million francs. Equity
increased – Driven by net income
Equity increased due to the net income and the
restructuring in the field of own equity instruments. Balance
sheets – Solid financing, higher equity ratio
The significant reduction of debt
helped us to increase our equity ratio to 44%. Outlook – Guidance
for full-year 2003 reaffirmed
Let me close with our outlook: Barring unforeseen
developments Roche expects for 2003 double-digit local currency growth in sales and operating profit
for our core businesses, at least a stable Group operating profit margin compared to 2002 and a tax
rate of 29% for our core businesses. And thereafter Roche expects a Group operating profit margin above
20% in the medium term, Pharma approaching 25% by end of 2004 and Diagnostics slightly over 20% by 2006.
By 2004, conditions will be in place for a balanced financial performance. |
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