Basel, 21 July 2004
Half-Year
Media Conference 10.00 am CET
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 Major progress on strategic,
operational and financial level in 1st half of 2004
Ladies and
Gentlemen,
Welcome to Roche’s Half-Year Media Conference.
In
the first six months of 2004 we continued to make significant progress on all fronts — strategically,
operationally and financially — and met every one of the goals we set for the interim period. In
fact, we outperformed our most important targets.
• The strategic decision — announced
two days ago — to sell our OTC business, Roche Consumer Health, means that we will now be able to focus
entirely on our highly innovative Pharmaceuticals and Diagnostics businesses, where we see a growing
potential for synergies.
• Our operating results for the first half were very good —
and that applies to operating profit as well as to sales.
• And on the financial front,
we achieved another substantial reduction in the Group’s outstanding debt thanks to our strong operating
performance and the conversion and redemption of debt instruments.
Allow
me to say a little more about what we’ve accomplished in each of these areas.
First
of all, why are we selling a flourishing, profitable business like Roche Consumer Health? How does the
sale fit in with our strategy?
Roche is actively shaping
its future by acquisitions and disposing of non-core businesses
In recent years
we have steadily built the Roche Group into a highly focused healthcare company by supplementing organic
growth with moves designed to advance our strategic objectives. The spin-off of the Fragrances and Flavours
Division in 2000 is a case in point, as is last year’s sale of the Vitamins and Fine Chemicals Division.
But divestments are not the whole story. At the same time we’ve made our Pharmaceuticals business even
stronger by acquiring Chugai and we’ve continued to strengthen Roche Diagnostics by acquiring AVL, Disetronic
and Igen. To complement our internal research and development capabilities, we have concluded numerous
alliances with biotech companies over the past few years, thereby securing access to additional potential
products and new technologies.
The sale of Roche Consumer Health is a
logical extension of previous strategic moves aimed at tightening our focus on our high-value-creating
businesses.
Here are the most important details of our agreements with
Bayer and GlaxoSmithKline (GSK).
Clear focus on pillars
of high value creation and optimising value of other businesses
On Monday we announced
that we would be selling Roche Consumer Health and the five Roche manufacturing sites in Grenzach (Germany),
Gaillard (France), Pilar (Argentina), Casablanca (Morocco) and Jakarta (Indonesia) to Bayer and that
we would be out-licensing the US non-prescription rights to orlistat, the active ingredient of Xenical,
to GSK. We expect to close the sale of Roche Consumer Health towards the end of this year, following
approval by the antitrust authorities. The combined purchase price for the transactions totals
about 3.7 billion Swiss francs. In addition, the agreement with GSK allows for future milestone payments
and royalties related to the marketing of OTC orlistat in the United States.
These
transactions will create a ‘win–win’ situation for everyone concerned. For decades Roche Consumer Health
has been building products like Redoxon, Supradyn, Bepanthen, Aleve and Rennie into strong OTC (= over
the counter) brands. But we have not been a major player in the global OTC market. In a consumer-driven
industry like OTC, however, size and market power have become increasingly important in recent years.
We are convinced that Bayer is the right company to continue the job of successfully growing Roche’s
OTC brands. The combined Roche/Bayer OTC business will be one of the world’s leading OTC companies,
with strong brands delivering annual sales of better than 3.6 billion Swiss francs and with 6,700 employees
worldwide.
I turn now to our results for the first half of 2004.
1st
hafl 2004: Sales growth above market in both divisions
Both Roche divisions expanded
significantly faster than the global market and reported additional market share gains in all regions.
In the Pharmaceuticals Division (excluding Roche Consumer Health) sales
advanced 16% in local currencies — twice the market growth rate. Once again the strongest contribution
to growth came from our oncology franchise, which increased its sales by over a quarter. Following the
approval of Avastin in the United States and the very good data we’ve obtained from clinical trials
of Tarceva, we now have five anti-cancer medicines that have been shown to extend patients’ lives. This
is a claim no other healthcare company can match, and it underscores our leadership in this disease
area.
Our Diagnostics Division, the clear market leader in its industry,
also posted strong growth as sales rose 9%, which was also twice the market growth rate. Sales growth
was driven primarily by the division’s dynamic diabetes care, molecular diagnostics and immunochemistry
businesses.
We can see a growing potential for synergies between our
Pharmaceuticals and Diagnostics businesses, particularly in the key area of oncology. Today Roche is
already the leading supplier of molecular diagnostics for cancer. Over the next several years our efforts
to advance more personalised approaches to cancer will include the launch of a number of highly innovative
assays for the early detection of malignancies and DNA chip products (tumour marker) that will enable
physicians to make more informed cancer diagnoses.
Operating
profit before exceptional items grows at double-digit rate in local currencies – strong improvement
in margins
Thanks to excellent sales, we again strengthened our earnings performance.
Operating profit from our continuing businesses was up by roughly a third before exceptional items to
3.7 billion Swiss francs.
Both divisions reported another strong increase
in their operating profit margins before exceptional items. The margin in the Pharmaceuticals Division
increased by 3 percentage points to nearly 27%, and the Diagnostics Division reported a rise of almost
3 percentage points to more than 24%.
Group results 1st
half 2004: Further considerable improvement
Our EBITDA performance is another measure
of the success of our operating activities during the first half of this year. EBITDA from our continuing
businesses was up by a quarter to nearly 5 billion Swiss francs.
As expected,
our interim financial statements show a net financial expense; however this figure is significantly
lower than the net expense reported for the first half of 2003. Our interest expenses, while still high,
will continue to decline this year following the conversion and redemption of several debt instruments
in the first half.
The Group’s net income doubled compared with the first
half of 2003, reaching 2.9 billion Swiss francs. Exceptional gains (totalling over 700 million Swiss
francs after tax) on bond transactions contributed to the increase. Even without these exceptional gains,
however, net income would show an increase of 46 % thanks to our very strong operating results.
Significant
progress in finance
Thanks to the very strong cash flow from our Pharmaceuticals
and Diagnostics businesses and the initiatives we have taken in finance, we have reduced Group debt
by a further 4.1 billion Swiss francs. This will lower our future interest expenses by more than 200
million Swiss francs annually.
We continued to make significant progress in improving
the Group’s financial position. Net liquidity increased, reaching 6.7 billion Swiss francs; and the
Group’s equity-to-assets ratio (including minority interests) rose from 49% to 54%.
Pipeline
again significantly enhanced: A very successful 1st half 2004
This year we will
be investing roughly 5 billion Swiss francs in research and development. The money will be spent on
accelerating the pace of development of new products and on acquiring additional licenses and entering
into new alliances.
The first half of this year saw us make significant
progress on development projects in the therapeutic areas of oncology, anemia, rheumatoid arthritis,
diabetes and asthma. Our pharmaceuticals pipeline currently includes 63 new molecular entities. Over
the next five years we are planning to submit approximately 25 marketing applications to the regulatory
authorities.
In addition, our Diagnostics Division has 70 products in
the pipeline and plans to launch 20 new products in each of the next five years.
As
previously announced, over the next three years we will be building new manufacturing facilities for
biopharmaceuticals here in Basel and at our Penzberg site in Bavaria. These projects, representing a
total investment of 800 million Swiss francs, will help to ensure that we remain a global leader in
biotechnology and that we have the manufacturing capacity to meet the expected demand for our new medicines.
Outlook
We
have met or exceeded all of the sales and earnings expectations announced at our Annual Media Conference
in January. We are therefore confident that we will achieve our full-year objectives.
•
We expect local-currency sales by the Pharmaceuticals and Diagnostics Divisions to outpace global market
growth in 2004.
• In the Pharmaceuticals Division we expect our operating profit margin
before exceptional items to reach approximately 26% for full-year 2004 and to stay broadly in line in
2005, despite additional spending on the development and launch of new products and despite increased
generic pressure on the antibiotic Rocephin.
• We also expect to see a significant rise
in our net income for the full year.
• At the beginning of this year we announced that
we would meet our goal of achieving a 22% Group operating profit margin before exceptional items by
2005, a year earlier than previously anticipated. In the first half of 2004 we did a good deal better
than this, and the Group’s operating profit margin for the full year will also be above 22% — putting
us two years ahead of our plans.
• As for the Diagnostics Division, it remains committed
to achieving an operating profit margin of around 23% before exceptional items by 2006. Experience shows
that the division’s results tend to be stronger in the first half than in the second.
Ladies
and Gentlemen,
To remain a successful, independent company, we need a strong balance
sheet and sufficient liquid assets. We have both.
Our positive numbers
and our progress on a number of fronts indicate that we have charted the right course for Roche’s future
as a leading independent healthcare company. Looking further ahead, we firmly believe that, because
of its combined strengths in pharmaceuticals and diagnostics, Roche is in an exceptionally good position
to contribute to the medical advances of tomorrow.
Erich
Hunziker Good morning Ladies and Gentlemen
First
half 2004: Excellent interim results
In the first half of 2004 all activities of
the Roche Group made progress in line with our plans: The core businesses Pharmaceuticals and Diagnostics
generated excellent cash flows which stand up to any industry comparisons. By selling Roche Consumer
Health, Roche is now one of the most focused high tech companies in Health Care. The excellent performance
of the operating business facilitated a further improvement of the financial situation: We reduced debt
by 4 billion Swiss francs and further strengthened the balance sheet.
Focusing
on our core businesses Pharma and Diagnostics
On Monday this week we announced
several transactions in the field of Roche Consumer Health: They will increase sales growth as well
as margins on a sustainable basis. Upon closing – which is expected for the end of this year- these
transactions will generate considerable one-time effects: We anticipate a book gain on disposal of above
2 billion Swiss Francs. Moreover the net cash received should be above 3 billion Swiss Francs, which
can be used for the further development of our core activities (we will give you all the details of
the divestiture accounting with the full year figures 2004).
Total
Group operating performance
Including Roche Consumer Health, and in the 2003 figures
Vitamins and Fine Chemicals, the total Group operating result is significantly above half year 2003.
In addition, the first half of 2004 was not burdened by any exceptional impacts, whereas in the first
half of 2003 we had to take an impairment charge of 375 million Swiss Francs on the pending sale of
the Vitamins- and Fine Chemicals business to DSM.
Group
continuing
If we look at the operating performance of our core businesses Pharmaceuticals
and Diagnostics, it increasingly shows the positive effects of all the measures we have taken over recent
years: While our innovative products gain market share, we have kept our cost basis under control –
its growth is significantly below sales growth. There was an increase in other operating income and
expenses: On the one hand we had to pay higher royalties for our successful products, on the other hand
we had income from new PCR-licenses and the sale of a Pharma product called Soriatane. Both effects
nearly balance each other and therefore do not have a material impact on the impressive operating profit
increase of more than 30%
Group debt further reduced by
4 billion Swiss Francs
Based on the excellent operating earnings power we were
able to further reduce debt – especially since the effective interest rates of these historic instruments
are no longer competitive: We therefore initiated the following steps: the “LYONs IV”, a convertible
based on Genentech shares, was called in the first half of 2004. Apart from a debt reduction of 1.2
billion Swiss Francs this call had two major effects: on the one hand we handed over some of our Genentech
shares to the investors of the Bond, therefore reducing our shareholding in Genentech by 2.45%. Our
shareholding, which was 55.6% at 30 June 2004, is still well above the strategically important minimum
level of 50%. On the other hand, since these Genentech shares had a very low book value, the transaction
generated a one time exceptional gain of 1.1 billion Swiss Francs. This gain helped to significantly
improve the balance sheet of our US Holding company.
The “LYONs III”,
a convertible into Roche Genussscheine (non-voting equity securities), had a call-date which we activated
to eliminate debt with an effective interest rate of 6.91%.
The “Chameleon”
is a straight bond with an effective interest rate of 6.77% running until 2009. We offered the investors
the possibility to sell it back now, and managed to get 51% out of the market.
The
three activities together will reduce interest expenses by about 220 million Swiss Francs on an annualised
basis.
Capital market debt instruments
This
chart shows the debt reduction over the last 18 months. We now have a debt situation in line with our
peers in the health care industry.
Financial income
On
this chart you see the major factors influencing our financial income: We managed to further reduce
our interest expenses. In line with our intention to lower the risk exposure in the financial field
considerably, we had reduced our foreign currency exposure in the second half of 2003: We therefore
also show a lower net income from foreign currency transactions. On the other hand we had to absorb
a significant impairment of equities in the first half of 2003. Since now only around 10% of our cash
and marketable securities are invested in equities, there were only minor impairments in the first half
of this year.
Total Group net income
Based
on the excellent operating performance and the exceptional income from bond conversion and redemption,
in particular from the Genentech convertible, we achieved a significant increase of net income.
Group
continuing net income
The net income of our core businesses Pharmaceuticals and
Diagnostics followed the Group development and, even after excluding the exceptional income from bond
conversion and redemption, increased by 46%.
Development
of equity
Equity increased by 8% due to the attractive net income, which covered
the record dividend payments by a factor of two.
Net liquidity
Despite
the utilization of cash for the acquisition of Igen and the dividend payment, net liquidity increased.
Free
cash flow
Both core businesses Pharmaceuticals and Diagnostics show a significant
increase of EBITDA. Despite further increases of sales and our commitment to innovation we kept working
capital development under control, so that we show an attractive “free cash flow”. Since there were
no longer large cash payments for historic issues, as we had to absorb them in the past years, we are
able to fully invest the free cash flow into our future: The free cash flow financed the Igen acquisition,
paid the dividends and helped to reduce our debt.
Balance
sheet
Based on the earnings power of our core businesses and the debt reduction,
we increased our equity ratio to 54%. With this strengthened balance sheet the reality of Roche is becoming
aligned with our strategy of a focused high tech health care company – still facing the inherent innovation
risks of our industry, but no longer being exposed to the volatility of global capital markets.
Outlook
Let
me close with our outlook:
Barring unforeseen developments, Roche expects:
•
For 2004: Above market growth for our core businesses,
• a Pharma operating profit margin
of 26%,
• conditions in place for a balanced financial income by the end of this year,
•
a tax rate around 29%,
• and overall a significant increase in net income.
•
For 2005, a Pharma operating profit margin broadly in line with the one in 2004.
• For
2006 a Diagnostics operating profit margin of around 23%. |
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