Basel,
7 February 2007
The Annual
Media Conference was held at Roche in Basel.
Media
Release
Annual
Report 2006
Audio
webcast of the conference
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Speeches English
(The spoken
German
text is definitive)
Franz
B. Humer
Chairman of the Board of Directors and CEO Slides
Severin Schwan
CEO Roche Diagnostics Slides
only
William M. Burns
CEO Roche Pharmaceuticals Slides
only
Erich Hunziker
Chief Financial Officer Slides
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Franz B. Humer
Ladies and
Gentlemen
Welcome
to our media conference on Roche’s full-year results for
2006.
Roche turned
in an excellent performance last year. Operationally, financially
and in terms of delivering genuine medical advances to patients,
2006 was an outstanding year for us. We gained additional market
share and achieved another significant improvement in the Group’s
profitability. In addition, we were reselected for inclusion
in both Dow Jones Sustainability Indexes and the FTSE4Good Index.
Let’s
take a closer look at the figures.
Excellent
sales growth
2006 was the Group’s sixth straight year of double-digit
sales growth in local currencies. Sales in local currencies
advanced 17% to a record 42 billion Swiss francs. The 6.5 billion
Swiss franc increase over 2005 revenues was all organic growth
— none of it was generated through acquisitions.
Our Pharmaceuticals
Division was the main growth driver. Its sales grew three and
a half times as fast as the market, driven primarily by strong
demand for key medicines in our oncology, transplantation and
virology portfolios (including Tamiflu). Very significantly,
sales of our cancer medicines were up roughly 40% for the year,
to 15 billion Swiss francs. Our oncology portfolio now accounts
for about half of our total pharmaceutical sales.
Roche Diagnostics’
sales accelerated over the course of the year, increasing 5%
in local currencies for the year as a whole. This was slightly
above the average market growth rate. The division’s Centralized
Diagnostics unit, which supplies products and services to the
commercial and hospital-based laboratory sectors, was the main
contributor to growth. Once again, sales grew at above-market
rates in all regions except North America. With its 19% market
share, the division remains the global market leader in in-vitro
diagnostics by a wide margin. The market environment has begun
to change in recent months, in the wake of major acquisitions
by Siemens and General Electric. These transactions have given
us two formidable new competitors, and we will not underestimate
them. Our strategy of focused innovation, however, remains unchanged.
Severin Schwan will have more to say about this later during
the conference.
Operating
profit and net income grow faster than sales
Strong sales growth, combined with lower cost growth relative
to sales, had a very positive impact on the Group’s earnings
performance.
Operating
profit (before exceptional items) for the Roche Group as a whole
increased by one-fourth to roughly 12 billion Swiss francs.
Over the last five years we have seen a threefold increase in
the Group’s operating profit.
The Group’s
operating profit margin improved further, to nearly 28%. At
the same, investment in our divisions’ rich research and
development pipelines rose to a combined total of 6.6 billion
Swiss francs. This is also a new record. In addition, we invested
heavily in launch activities, product and technology licences
and the construction of new biopharmaceutical manufacturing
facilities.
Net financial
income was also significantly higher last year.
Net income
totalled 9.2 billion Swiss francs (after income taxes of approximately
3.4 billion Swiss francs). This is a third higher than the net
income posted in 2005 and the highest profit ever recorded by
Roche. Core EPS — core earnings per share and non-voting
equity security — rose 26% to 9.86 Swiss francs.
In view
of these excellent results, the Board of Directors intends to
propose a substantial dividend increase of 36% — to 3.40
Swiss francs per share and non-voting equity security —
at our Annual General Meeting on 5 March. If approved by the
shareholders, this will bring our total dividend payout to approximately
3 billion Swiss francs, compared with 2.2 billion the year before.
So the aim is not only to provide shareholders with their 20th
consecutive dividend increase, but also to distribute a dividend
that truly reflects last year’s record performance. Equally
important, the sharp dividend increase the Board intends to
propose is a reflection of the Group’s strong net cash
position and our confidence in the future.
Given the
considerable public interest in issues relating to executive
compensation, I’d like to call your attention to our expanded
remuneration report for 2006, which you’ll find on pages
50 to 57 of our Business Report. The remuneration report, which
is now a section in its own right of our year-end review, provides
transparent and detailed information about the remuneration
paid to each director on the Roche Board and each member of
our Corporate Executive Committee and gives a detailed breakdown
of my total remuneration, which is set by our Board’s Remuneration
Committee. Let me take this opportunity to add that we do not
have any ‘golden parachutes’ at Roche.
Operating
profit margin up significantly in the Pharmaceuticals Division
The Pharmaceuticals Division’s operating profit (before
exceptional items) topped the 10 billion Swiss franc mark for
the first time last year, and the division’s operating
profit margin showed a significant increase of 4.1 percentage
points, to 31.7%. The margin increase was primarily due to further
productivity gains as well as to average sales growth of 30%
for our 20 top-selling medicines.
Thanks to
strong bottom-line growth in recent years, Roche’s Pharmaceuticals
Division is now also one of the industry’s top companies
in terms of profitability.
The Diagnostics
Division’s operating margin decreased 5.2 percentage points
for the year, partly as a result of various one-time factors.
This decline was more than offset by growth in the Pharmaceuticals
Division, however. At 16.3%, the Diagnostics Division’s
operating profit margin is still well above the industry average,
and the same applies to cash flow, as reflected by a divisional
EBITDA margin of over 28%. The lower operating margin in our
Diagnostics Division was primarily due to further investments
in product launches, continued pressure on prices and the previously
announced impairment charges on intangible assets relating to
Disetronic in the second half of 2006. Royalty income from licences
also declined last year, following the expiry of a number of
patents on polymerase chain reaction (PCR) technology.
At the same
time, a number of product rollouts helped the division to strengthen
its position in all segments. Major new products include a portfolio
of new diabetes management devices and Centralized Diagnostics’
recently launched cobas 6000 series of modular analysers.
Nearly
4,600 new jobs
Worldwide our strong businesses created close to 4,600 new jobs
last year, most of them in the Pharmaceuticals Division. Approximately
400 of the new jobs are here in Switzerland. This brings to
7,500 the total number of new jobs our Group has created in
the last two years. We expect this trend to continue in 2007.
We are very
pleased about Roche having again been named as one of the best
companies to work for by several respected publications, including
the journal Science. Out of a field of more than 300 biotech
and pharmaceutical companies included in the Science survey,
Roche was ranked third and Genentech again captured first place.
Our definition
of innovation
Not only is the world’s population steadily growing larger,
but people are also living longer. As a result, diseases like
cancer, Alzheimer’s disease, diabetes and rheumatoid arthritis
represent an increasing burden on society. Many of these diseases
cannot yet be adequately treated, much less cured. As we see
it, the demand for effective treatments is therefore certain
to continue rising, and our core mission is to deliver a steady
stream of innovative new healthcare options to help meet that
demand. We’re not interested in innovation for its own
sake. To satisfy our definition of ‘innovation’ a
product or service has to help people live longer, healthier
lives and enjoy a better quality of life. Anything less, I might
add, is also unlikely to be accepted by the market as a real
advance and reimbursed accordingly.
Given our
focus, research and development are obviously critical to our
business, and we spent 18 million Swiss francs on R&D every
day last year. In the Pharmaceuticals Division R&D expenditures
totalled about 18% of sales, making Roche one of the most research-intensive
companies in the industry.
Focus
on medically differentiated products – Strengthened business
base
Our success is built on a broad product portfolio. Annual sales
of innovative products like MabThera/Rituxan, Herceptin and
Avastin now approach 5, 4 and 3 billion Swiss francs, respectively.
A few years ago we had six medicines and diagnostics franchises
generating annual sales of over 1 billion Swiss francs each.
Today that total has increased to ten, and by the end of the
year we expect it to increase even further.
Investigating
more effective medicines for a wide range of cancers has been
a major focus of our R&D activities for a number of years
now and has produced important findings. Recent trial data provide
impressive additional evidence of the pivotal role that Herceptin
can play in the treatment of breast cancer, for example. And
in the case of Avastin, data from clinical trials have shown
a survival benefit in four major tumour types — colorectal,
lung, breast and kidney cancer.
Cancer isn’t
the only therapeutic area where Roche has made major contributions
in recent years. We’ve also brought products to market
that represent significant improvements over existing treatment
options for hepatitis, HIV and osteoporosis. Our aim is to achieve
similar advances in additional therapeutic areas, including
autoimmune and metabolic disorders and diseases of the central
nervous system. In 2006 we did just that for rheumatoid arthritis.
New medicines
for rheumatoid arthritis
Rheumatoid arthritis is a very promising new therapeutic area
for Roche — and one that we expect to grow significantly
in importance over the next few years.
In 2006
MabThera/Rituxan received its first marketing approvals —
in the US and EU — for the treatment of rheumatoid arthritis
patients who fail to respond to other treatments. MabThera/Rituxan
is the first medicine shown to significantly slow the progression
of joint damage in this patient population.
We are also
seeing very good results in trials of Actemra, a therapeutic
antibody product that Roche is co-developing with Chugai. Data
from phase III trials in Japan, and more recently also from
phase III trials in the European Union and the United States,
show a significant improvement in rheumatoid arthritis symptoms
in patients receiving Actemra.
2007/2008:
Group well equipped for further growth
Last year Roche received 14 major marketing approvals and filed
13 marketing applications with the regulatory authorities. In
addition, nine phase III studies were successfully completed
(met their primary endpoints).
A look at
our drug and diagnostics pipelines and filing and launch activities
shows how very well equipped we are for further growth. This
year and next we expect to receive a total of 18 product approvals
for new indications or in new markets. Thirty-eight projects
are in late-stage development, with products currently being
tested in more than 45 phase III clinical trials.
At Roche
Diagnostics the focus will be on strengthening our diabetes
care franchise, including the introduction of insulin pumps
in the United States, and on expanding our IT offerings.
We also
intend to consolidate our leading position in personalised healthcare
by intensifying collaboration between our Pharmaceuticals and
Diagnostics Divisions in this area.
New model
for pharmaceutical R&D
As announced this past Monday, we intend to introduce a new
research and development model in the Pharmaceuticals Division
during the course of this year. This is not a cost-cutting exercise.
On the contrary: our R&D spend has increased significantly
in recent years, and will continue to increase in the future.
R&D
activities in the Pharmaceuticals Division will be focused on
five therapeutic fields: oncology, virology, inflammatory diseases,
diseases of the central nervous system and metabolic diseases.
These are all areas of high unmet medical need where we possess
the expertise to make a real difference.
Each of
the ‘Disease Biology Areas’ (DBAs) that will be created
under the new model will combine all activities in a specific
therapeutic field, from research and development to strategic
marketing. The DBAs will be headed by cross-functional Disease
Biology Area Leadership Teams (DBLTs) based in Basel, Nutley
and Palo Alto. These teams will manage the seamless development
of new compounds from drug discovery to proof of concept.
This new
model is designed to ensure that Roche’s steadily expanding
R&D operation is suitably equipped to meet increasingly
complex requirements. By simplifying and accelerating the multiple
decision-making processes involved, the model will be more efficient
and effective in translating research activity in each therapeutic
area into clinically differentiated medicines. It will also
enable the Group’s growing number of clinical development
projects to be integrated more quickly into the portfolio.
The upshot
will be an organisation capable of moving future healthcare
innovations through the pipeline more quickly and efficiently
— for the benefit patients and healthcare professionals.
Outlook
Compared with many of our competitors, our continued success
— both financially and in terms of bringing valuable new
medicines and diagnostics to market — puts us in a strong
position to meet the challenges and capitalise on the opportunities
of today’s healthcare environment.
Our focus
on prescription pharmaceuticals and diagnostics, our biotech
expertise, our global research and development network and the
fact that we don’t have any products that will be going
off patent in the near future are all important competitive
advantages in a changing marketplace.
This year
we expect sales in both divisions to grow faster than the market,
and we anticipate double-digit sales increases in the Pharmaceuticals
Division and for the Group as a whole.
Once again,
we are aiming this year for Core EPS to grow in line with Group
sales – despite significant investments in research, development,
production and distribution.
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Erich Hunziker
Good morning
Ladies and Gentlemen
2006:
Strong operating and financial performance
Building on our excellent operating performance, Roche Finance
made important contributions to the further strengthening of
the Group. We have significantly increased net financial income
and net cash and we have strengthened the balance sheet. As
a result the Roche Group has further increased its strategic
flexibility.
2006
Group results - Sales drive profit and margin increase
Due to the excellent operating results of our businesses and
the strong financial result, net income grew by 2.3 billion
Swiss francs or 34%. This is the best result Roche ever achieved.
2006:
Strong sales growth and improved quality of business drive profit
The clear strategic focus on Pharma and Diagnostics is showing
attractive results at an operating level. While our innovative
products have gained market share, we have kept our cost basis
under control and consequently operating expenses are increasing
at a rate below sales growth. Due to economies of scale and
continuous productivity improvements at our production sites
we were able to keep the growth in cost of sales under control,
despite the significant increase in royalty expenses on our
successful Pharma products like MabThera/Rituxan, Tarceva and
Tamiflu. The increase in R&D expenses underlines our strong
commitment to innovation. Overall the growth rate of the operating
result is considerably stronger than sales growth.
2006:
Financial result - Strong increase due to equity and interest
income
The fundamental changes we have implemented over recent years
mean that the quality of our financial results has improved
substantially. Interest income is now higher than interest expenses.
Equity income was strong in 2006 due to the sale of certain
Pharma and Biotechnology shares.
Net financial
income - Significant contribution to bottom line at reduced
risk
This overview confirms the turnaround of Roche Finance: in line
with the expectations of our investors, we generate significant
contributions to the Roche result with low Value-atRisk.
Core
EPS rising steadily
This important yardstick shows the continuing improvement of
the Roche performance.
Free cash
flow of CHF 4.3 bn in 2006 - Continuously strong EBITDA of both
divisions
Both divisions, Pharma and Diagnostics show a significant increase
in EBITDA. Although we continued our investment into biotechnology
production sites and in the in-licensing of pipeline compounds
and technologies, we show a very attractive “free cash
flow” of 4.3 billion Swiss francs. In total, cash and marketable
securities increased to 24.3 billion Swiss francs.
2006:
Net cash increase driven by Roche – Increase of almost
CHF 5 billion
Based mainly on the strong operating result the net cash position
of the Group significantly strengthened.
2006:
Equity increase driven by strong net income
Due primarily to the very attractive net income, equity increased
further.
2006:
Balance sheet: Very solid with 63% equity ratio and 83% long-term
financing
With this strengthened balance sheet Roche has significantly
increased its strategic flexibility to further strengthen Pharma
and Diagnostics.
Economic
success translated into shareholder returns – Again a substantial
increase in 2006
In the last 20 years Roche has continuously increased its dividend.
Based on the excellent result the Board proposes to the Annual
Shareholder Meeting of March 5, 2007 that we increase the dividend
by 36% to 3.40 Swiss francs.
Our growth
objectives for 2007
Let me close with our outlook for 2007. Barring unforeseen developments:
