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Edited Transcript of ROG.VX earnings conference call or presentation 25-Jul-19 11:00am GMT

Half Year 2019 Roche Holding AG Earnings Call

Basel Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Roche Holding AG earnings conference call or presentation Thursday, July 25, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Hippe

Roche Holding AG - Chief Financial & IT Officer

* Karl Mahler

Roche Holding AG - Head of IR

* Michael Heuer

Roche Holding AG - CEO of Roche Diagnostics

* Severin Schwan

Roche Holding AG - CEO & Executive Director

* William N. Anderson

Roche Holding AG - CEO of Roche Pharmaceuticals

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Conference Call Participants

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* Eric Le Berrigaud

Bryan Garnier & Co Ltd, Research Division - Managing Partner Equity & Research

* Jo Walton

Crédit Suisse AG, Research Division - MD

* Keyur Parekh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Mark Douglas Purcell

Morgan Stanley, Research Division - Equity Analyst

* Peter James Welford

Jefferies LLC, Research Division - Senior Equity Analyst

* Richard J. Parkes

Deutsche Bank AG, Research Division - Director

* Richard Vosser

JP Morgan Chase & Co, Research Division - Senior Analyst

* Sachin Jain

BofA Merrill Lynch, Research Division - MD

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Presentation

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Severin Schwan, Roche Holding AG - CEO & Executive Director [1]

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Good morning, good afternoon. Thank you for joining our half year briefing. A strong set of results entirely driven by the demand for our new medicines. Based on that, we are even more confident on the continued momentum for the future. We have raised, as you know, the outlook for the current year. We expect to grow in 2020 and beyond through this transition when biosimilars enter also the U.S. market.

Let's get right into the figures. You've seen overall sales up by 9% at constant currencies. Pharma up by 10%, again, driven by the strong demand for new medicines. OCREVUS continues to deliver strong results, HEMLIBRA, very good start. PERJETA in the adjuvant setting, KADCYLA, Tecentriq now in new indications, offsetting the decline we are already experiencing as expected from the entry of biosimilars in Europe.

Diagnostics, 2%, and actually, an acceleration in the second quarter. You remember in the first quarter, we had no growth due to some specific factors. We have now seen 4% growth. So coming back to our continued growth rate in this business.

Now let me turn into Slide #8, where you can see that growth, very much driven by the United States, 14% up in Pharma and actually by the International region, mainly driven by China.

In Europe, we can see the impact of the biosimilars, but in spite of the full impact now from Altera and Herceptin, only a 4% decline, and again what we already see here is a strong offsetting effect of the newly launched medicines.

Here in absolute numbers, Slide 9. You see that we added just in the first 6 months, another CHF 2.5 billion sales for the newly launched medicines, which account now for 28% of our total portfolio. And you see a significant impact from the biosimilars with about CHF 800 million outside of the United States and the respective net increase on a Group level of 9% in sales.

Continued strong operating results, core operating profit up by 11%, earnings even up by 13%. There is some one-off effect, positive and negative ones, but if you look at the underlying growth, very strong and actually ahead of sales.

The pipeline continues to deliver, we add additional Breakthrough Therapy Designations and we are entering on the band, one hand new franchises with multiple sclerosis, hemophilia A. More and more opportunities in CNS, SMA, most imminent. And we have recently launched 2 new cancer medicines, Polivy in the United States and (inaudible) actually the first country here is Japan.

Now turning to the outlook, really it's a lot of course about the many medicines we have more recently launched, where we see continued growth and continued momentum. But I'd just like to highlight that there is a lot coming through in the pipeline as well. Risdiplam for example in SMA, the filing in the U.S. we look here in the second half of this year, we have seen promising data in GAZYVA, in lupus nephritis, where so many attempts have failed not only within Roche but across the industry. So that would be really exciting to see the first medicine actually working in this very difficult-to-treat disease. And there is a lot coming through on the oncology side. Perhaps just to highlight Tecentriq, where we now expect Phase III results in liver cancer which in itself would be a huge opportunity. So it's not only about the success of the already launched medicines, it's very much about also about the progress we have in our product pipeline, which gives us this confidence to continue to build our business and grow in spite of the impact of the biosimilars. You have seen the increase of our guidance. So mid-to high single digit sales growth, core EPS to be in line with sales and on that basis, a further increase of our dividends for the current year. Thank you very much, and with this, over to you, Bill.

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [2]

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Thanks, Severin. Yes, I'm really pleased to have the opportunity to provide more information about the results that Severin highlighted. It's I think remarkable financial results, but I think what's more profound yet is the considerable progress in just a 6-month period that we've made with the pipeline. And I'm very proud on behalf of the tens of thousands of talented and dedicated women and men around the world who are working on this, on behalf of patients to share these results with you.

So let's start with the financials. So 10% growth overall the U.S., another very strong showing, again based on launches, primarily in Europe. I think it is quite remarkable, that despite MabThera and Herceptin essentially sort of going away, that they are able to deliver 96% of the level of sales as a year ago, and I think that's indicative of the strength of the pipeline and the power of these new products and the demand they are generating to basically offset the biosimilar losses.

In Japan, another strong showing from the team there, Avastin is the #1 product in Japan now -- #1 medicine in Japan, and again, I think a testament to their skill. And then in the International region, led by China, with 17% growth.

If you look at it from a P&L standpoint, I think it's a well-managed P&L with a 10% sales growth, and delivering 11% in core operating profit despite the loss of CHF 280 million in Cabilly, royalty revenues, that's in net royalty and other operating income line. Cost of sales going up 10%, but that's with volume growth of 14% and also increased cost of sales on royalties and profit sharing. So a very tight control of manufacturing costs. This is the investments we've made in lean production, really paying off now, we're about 2.5 years into implementation, and I think there's more gains to come there.

In marketing and distribution, an 8% increase, but that's not indicative of what the year will look like. We just had a particular lot of launch activities in the first half, but we expect growth for the full year will be lower in that category.

R&D 5% increase, and that's on top of basically productivity gains -- considerably productivity gains, so I would say the actual pace of work in R&D is accelerating faster than 5%. And good control on G&A as well.

This is the product viewpoint and again, no surprises because this looks similar to what we've seen in prior quarters with OCREVUS leading out, but you can see the blue reflecting the U.S., but Europe, now with OCREVUS, adding a large contribution and then international starting to kick in. HEMLIBRA, again, it's a strong showing. Tecentriq, in that #3 position in terms of growth drivers with 141% increase, and a broad geographical-based impact for Tecentriq, PERJETA and so on. So I think if you look at the bottom, what's impressive is you see products like Herceptin, MabThera with large losses, and nevertheless, we are able to deliver 10% growth.

Here's a little deeper look in oncology. I won't go through the individual products here, but I think you can see even products like ALECENSA continuing to grow at 50%; Tecentriq starting to figure more, and I think there's a lot more where that has come from. The HER2 franchise, so a little bit of change in dynamic here because now with the approval of KADCYLA in early breast cancer -- in adjuvant breast cancer with the KATHERINE study, we're starting to see an acceleration of KADCYLA sales in adjuvant. That'll take a little bit away from the growth of PERJETA in adjuvant, but it's -- I think that's -- it's a welcome development for patients. And it's good for our franchise in the long term because we anticipate patients will see H plus P or KADCYLA and in some cases, in multiple lines of therapy.

In hematology, this is not the total picture because it doesn't show VENCLEXTA, where AbbVie book sales worldwide for VENCLEXTA and we have a profit share, but strong progress here with anti-CD20. We'll talk a little bit more about some of the approvals. The first one being Polivy. So Polivy has now been approved in the U.S. You all know we've been talking about potential agents in our pipeline that have a chance to go beyond where CAR T has gone and principally to go beyond by delivering a combination of high efficacy, but something you can put in a vial and that patients have immediate access to, rather than having to wait to see whether they're eligible and waiting for their cells to be manipulated. And so as a reminder, this molecule it targets the CD79b protein on the surface of malignant B cells but it brings a very potent toxic payload along. And this is the really fantastic OS data we saw, 40 -- 0.42 hazard ratio. But we have been saying molecules like this can go where CAR T doesn't because of patient eligibility, because of immediacy, and I guess here is our first results to show that. So Polivy was approved just a couple of months ago, and just for the historical perspective, CAR Ts, when they were launched, in the first 5 months, we estimate about 150 patients were treated with CAR T in 5 months. Well, we treated 150 patients with Polivy in the first 5 weeks and I think that's a real testament to the potential of a product like this, both for efficacy and sort of usability. So I think, you could look for much more from Polivy in the years ahead as we pursue first-line indications and go into other settings.

Another one in the hematology franchise that's very important. This is the VENCLEXTA plus GAZYVA combination in first-line CLL, the CLL14 study. And what's unique about this is you have a chemo-free combination, which is attractive for a lot of patients. In this case, we studied patients, who were not seen as good candidates for stronger therapies. And so we studied VENCLEXTA plus GAZYVA, versus GAZYVA plus chlorambucil. And you can see the PFS chart and essentially, you get 12 months of therapy in either case, and then you can see a wide separation in the response. So you have really long durable responses with this chemo-free combination and the best thing about it is that patients have 12 months of therapy and then they're done. And so we just received approval in Q2 in the U.S. Approvals will be coming around the world. And we think this is going to be a very potent combination in first-line CLL.

Tecentriq, a lot of news to share here. But the growth is really widespread both geographically as well as by indication. We have seen sources of growth in things like first-line, non-small cell lung cancer. The big use here is in patients with liver metastases, a lot of small cell lung, sorry non-small cell lung cancers, they present with liver metastases and that's a critical issue because if the liver is not functioning, the patients don't survive. And doctors are seeing that the combination of Avastin plus Tecentriq plus chemo has a remarkable effect on response in liver metastases in particular. And so based on that, there's a broad use. We're also seeing use increasingly in second-line in many geographies. In small cell lung cancer, where we were first approved in Q1 in the U.S., and we anticipate further approvals around the world on small cell lung cancer. But we're now getting about 25% of the total business from small cell lung cancer, 50% from non-small cell lung cancer and then 20% from bladder cancer and 5% from triple-negative breast cancer, which is the newest indication. And here, there's sort of 2 elements to penetrating use: first is the patients need to be tested and we're increasing the rate of testing, we're up above 70% now in the U.S. and then once they're tested, if they're PD-L1 positive, then they are eligible for Tecentriq. So we'll be basically going around the world with both the testing and the therapy. And we're very pleased at the progress.

Moving on to immunology. So really quite strong growth across a variety of products, including Esbriet and IPF and ACTEMRA, which is approved now in, I think, 7 indications. XOLAIR is hanging in there strongly despite a lot of new competition. The growth on XOLAIR is primarily driven by use in chronic urticaria and, again, we're pleased to see just continued delivery for patients from these products and we think they'll continue to grow for some time.

I wanted to mention a little more. Severin referenced it, we decided to do a Phase II study of GAZYVA in lupus nephritis and those of you who have been around the biotech industry for many years know lupus nephritis has really been a graveyard for molecules. In fact, I started in the field about 23 years ago, and the first program team I was assigned to was studying a product in lupus nephritis. And it failed and in fact, there is no therapy approved specifically for lupus nephritis. We ran large Phase III programs with Rituxan and then with OCREVUS and those showed no benefit. And our scientists, they were adamant, like there's 1 more try here, which is a molecule, GAZYVA, which has the same target as OCREVUS and same target as Rituxan, but has a different type of cell-killing ability. And based on this, we decided to take GAZYVA into a Phase II study in lupus. We announced recently that we had positive results. We'll be sharing those at a major medical meeting later this year, but we are encouraged that we may have the world's first lupus nephritis drug, and so more to come on that.

Moving onto the Neuroscience franchise. OCREVUS is continuing, I think, to impress patients, and their families and to impress physicians. And I think, this is quite a remarkable chart because what this shows is the new-to-brand patient share, which is actually increasing. I think, many folks thought that 30% would be quite remarkable, given there's about 15 products approved in MS, and the next best product is in the teens in terms of this figure and we've actually gone from about 33, 18 months ago up to now almost 40 patients out of 100 receiving OCREVUS when they are either new or changing therapies. So over 100,000 patients treated globally. Again, the experience continues to build and the stories of remarkable results for patients both with primary progressive, with relapsing disease, and with secondary progressive disease with active MS is again, it's inspiring. And we think, we'll see continued growth from OCREVUS for many quarters to come. Here's the results in terms of sales, and again you can see, U.S. obviously, very strong with the earliest launch, but Europe and International beginning to kick in. Also just a note that the U.S. label has now been updated to include active SPMS and clinically isolated syndromes. So the FDA had looked at all our data in its totality and agreed that this was warranted.

Now let me just say a few words about the hemophilia A area with HEMLIBRA. As I think you know, we have been approved in inhibitor patients for some time now, and have been receiving the approvals in non-inhibitor. We have very high levels of penetration in inhibitor patients. They're only about 5% of the total, but now we have more than half of those patients in most of the major markets. So now really the growth you see and you can see it accelerating on this curve is driven by growth in non-inhibitor patients. And again, the data continues to build, we recently shared at ISTH, a major hemophilia meeting, this pooled data on HAVEN, and what it showed is that 87% of patients have no treated joint bleeds in the second 6 months of therapy. And the way to think about this is, hemophilia patients when they have a bleed, or when they have an incident, let's say, they have a small cut, or they banged their elbow, or do something to cause injury, they're used to having bleeds and so they're used to treating them with factor VIII. And so what's a novel concept is, they are on HEMLIBRA and they have an incident, that they don't have a bleed. So in the first 6 months, they tend to treat themselves and then they realize, "hmmm, maybe I don't need to treat myself." So what we're seeing is as a patients stay on HEMLIBRA longer, they're treating less because they are realizing, "Hey, I'm not going to have a bleed, I don't need to intervene." And again, I think it's just a remarkable testament to the power of this product. Also, worth noting now, many patients are choosing the once a month approach. So they're moving from multiple infusions per week and having bleeds to having basically 1 subcu injection per month and it's quite a change for them in terms of their lifestyle.

Ophthalmology, really pleased to have some things to say about ophthalmology, both in the U.S., but globally. So in the U.S., LUCENTIS had 10% growth in the first half, another strong showing for the product, it really pioneered the area of treatment of AMD and other VEGF related optical disorders. But now actually we've got a couple of things that are new and I think very significant. So first our Port Delivery System and you can see it pictured there. It looks almost like a grain of rice that's sort of inserted into the vitreous of the eye and it's essentially it's a reservoir that the physician refills every 6 months or every 12 months, and then basically have a continuous diffusion of anti-VEGF of LUCENTIS into the eye to really preserve that visual function. And just to recall from the Phase II study, we showed that 15% -- sorry, 50% of patients went out to 15 months between refills, which was really remarkable result considering that typically patients need injections either once a month or every other month. So what's new on this is twofold: first off, we had been codeveloping this with Novartis, but they have decided to go a different path, and so we've secured the rights to the Port Delivery System for LUCENTIS around the world. And we will be preparing, we hope, to be launching it in every country in the world when the Phase III is done, and then in terms of the Phase III, we commence the Phase III accruals in Q4 of last year. We thought it would take us about 18 months to accrue, but this device has been extremely popular with retinal surgeons, retinal specialists, and we have now accrued the whole Phase III study about a year early. And so by next -- middle of next year, we should have a Phase III result and be preparing to go to regulators for filings. So very exciting for, I think, for patients around the world, who are looking for a better option, recall that the issue is not only that patients need frequent injections, it's also that they don't get the injections frequently enough and they lose their vision. So they get a gain when they first start therapy, and then over time, their vision is going away. And we hope with the Port Delivery System, that we can really fix that and help these patients maintain their vision.

I'll just say, briefly, we also have a VEGF/Ang-2 bispecific antibody, that's now in Phase III, it's also accruing very rapidly. This is probably our best shot at something that could bring superior efficacy above and beyond what's been seen with LUCENTIS and other anti-VEGF therapies. And we had promising Phase II results. We look forward to bringing the world results in Phase III.

So just bringing it back to sort of the summary of the portfolio impact. Here's a slide that just shows by quarters, over years, the growth in sales of the new products. So these are products launched in the last 7 years and you can see in Q2, we are up to 29%, you can see that rate is accelerating, and this is really the slide and the information that gives us that confidence that we will continue to grow through the period of biosimilars and so, I think we're very well-prepared and excited to take on that future.

I just also wanted to give a quick summary on the pipeline and this is one way to look at it. We took a look at what are the most significant molecules and new indications in terms of patient benefit, in terms of potential for the company and for growth. And this is actually a list of 19, and what really is amazing to me, is that 16 of these will be either approved or filed in the next 18 months. And so for example, if you look in the orange column -- orange columns, this is all the oncology sort of either molecules and indications, or new molecules. And if you add up the patients, this is up to 800,000 patients that could benefit from these indications and molecules. So I think, the story for Roche Pharmaceuticals is very much an end story. We are pioneering and we're changing the world for patients with hemophilia, patients with MS and other serious neurological diseases, people with ophthalmology conditions, with lupus, on the one hand, but we're definitely on track to maintain our leadership in oncology, both scientific and medical leadership, and ultimately, in the business.

Now I'll just close by inviting all of you that can make it to London in mid-September. So it will be on September 16, we're having a Pharma Day and we will be going deeper into a lot of what I've shared today, both in terms of commercial activities around the world, but especially in the pipeline and the science and how we see the future. So again, thanks for your attention. And I will now pass it over to Michael Heuer

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Michael Heuer, Roche Holding AG - CEO of Roche Diagnostics [3]

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Good afternoon, good morning, everybody. I'm really happy to present to you the first half-year results of diagnostics. As Severin already mentioned at the beginning, we had a start, which was rather slow in the first quarter. In the second quarter experienced significant acceleration, resulting in 4% growth in the second quarter. All in all, sales were 6.3 -- let me just move to the next slide. Sales were just CHF 6.3 billion in the second half, grew at 2%, especially increasing sales in the centralizing point-of-care solutions, part of our business, the most -- the major part of our business with 3% growth, and Molecular Diagnostics, maintaining the growth rate of 5%, 6% also in the second quarter in the first half-year.

Diabetes Care, stabilized with 1% growth as indicated already in the last year and also in the first quarter. And we have seen for the stabilization major -- major reasons, for example, in Diabetes Care, as it continues good adoption of the new products like Accu-Chek Guide and as well as in the centralizing Point of Care Solution is a great adoption of our Immunodiagnostics products. And it's worth mentioning that for the rest of the year, we expect a normal growth going forward, and an acceleration of growth in the second half.

With this, I would like to move to the countries and the regions. And as you can see, we have experienced further growth in line with the first quarter in EMEA, also in Latin America. In Asia Pacific, which used to grow at 0% in the first quarter, grew now together in the second half -- in the first half, 5%, which indicates that the second quarter had a rather high growth rate of close to 10% in Asia Pacific, mainly driven by China. And China has experienced growth of 10% in the second quarter, which is basically derived from this resolution and the clarification basically of the situation with the distributors in the first quarter, which I had indicated already. The patterns of sales into the market in China have resulted back to double-digit growth, which is a good sign for the further development of this business in the second quarter -- in the second half, which also at the end results in 6% growth for the E7 countries, a major area of focus of our division, where we have improved growth from 0 in the first quarter to 6%, basically supported by great adoption of our products in China, also in Turkey, and South Africa -- Africa in general, and also other major emerging markets.

North America, the sales were impacted still by the effects of what I had indicated in the first quarter with the coagulation monitoring recall we had. And the results then with the buildup of the inventories in the distributor channel in the U.S. as well as the effect of the Tissue Diagnostics, where we are now in the process of after having resolved and found out the root cause, as I had indicated in the first quarter that was planned for the second quarter, we have now resolved the issue and we are now ready to rework those instruments. We are in the process of filling up again the demand that we have accumulated over the year. And we expect for Tissue Diagnostics to be back to normal, resulting in a major completion of the demand that we have by the end of this year.

With this, we see that in -- from a division -- a business higher perspective centralized in Point of Care Solutions, we continue to grow. Immunodiagnostics, with 7% in the first half, already double-digit in the second quarter. We will continue the development of double-digit growth for Immunodiagnostics in our business for the 20 -- 21st consecutive year. And this gives us a lot of confidence that the guidance that we have given for the second half will be met.

Molecular Diagnostics continues to grow rapidly, especially with big successes in tissue -- in blood screening, for example, the win of major blood screening tenders in Thailand, in Turkey, in Middle East. And this will also provide further growth going forward. Microbiology, you see also tremendous growth. Molecular Diagnostics point-of-care our lead line also being adopted very well in the markets. With glucose monitoring, we won major deals with big distributors in the U.S., which is contributing to the positive stabilized development in blood -- in Diabetes Care. And Tissue Diagnostics, already I mentioned that before. Well, what is important now is what this -- that means in the bottom line? We see that the growth of sales is 2% in the first half. Results in core operating profit increased higher than sales growth as we have given the guidance in the past were 4%. We have been able to diligently work on the efficiencies -- the productivity that is required to achieve these results also going forward. And in research and development, you will look at this 4% decline, which is basically only due to the successful completion of 2 major projects, 1 in Diabetes Care, the other 1 in Microbiology. Other than that, we continue to spend more in innovation, in R&D than all 3 competitors together in absolute terms. In marketing and distribution, we are flat but this is a shift from the more established markets, and efficiencies we increased in the established markets to more the investments into the emerging markets as we have also indicated before, for example, also in China.

Well, the basis for our business, as I always mention, is the installed base. And the installed base has continuously increased. We have now covered 1,000 as one of our largest analyzers in the serum work area integrated core lab with now 21% growth of the installed base in the first quarter -- in the last year. And this is continuously achieved also in this year. And we have a growth also in placements of our bread-and-butter serum work area system cobas 6000 where in fact, with the launch of cobas e 801, where we have now achieved 2.5 placements already in this year. And we expect, since we are placing these instruments by the hundreds every month to reach more than 3,000 by the end of the year as well as the very successful launch of cobas pro in the markets and the extreme positive adoption also with our customers that this development of our installed base will continue positively.

Well, now moving into Molecular Diagnostics. As you know, we have one of the most automated and easier to use platforms in Molecular Diagnostics for cobas 6800 and 8800. We were able now to add 2 important sexually-transmitted diseases test, TV/MG, which is, in this sense, is extremely important because what in the past the customers were asking for was, "Can you do Chlamydia trachomatis, Neisseria gonorrhea and this 2 TV/MG test out of 1 sample?" And this is now possible on a fully automated system only with our Roche systems. And this was recently launched. We expect this to further continue the positive development of the cobas 6800, 8800 molecular business, you see already more than 700 placements. And the basis for this is we need to further expand our menu to have the broadest menu available also now our molecular integrated solutions. And as you can see, with these launches of TV/MG and the 5 additional launches that we plan for this year, again, we will have the broadest menu in the marketplace on fully automated Molecular Diagnostic systems.

And now I want to move to Ventana, and our Tissue Diagnostics business, we have launched the VENTANA HER2 Dual Immuno In Situ Hybridization DNA Probe Cocktail which is the first assay for HER2 that allows to use brightfield microscopes, just a microscope that every pathology has in their lab, instead of having to use a fluorescence immunohistochemistry microscope, which is much more complicated and also takes more time. With this device you can now run an -- a HER2 test in just 1 day and this is for -- especially for our business in -- with Herceptin also the emerging markets, extremely important.

With this, I think we contribute also to the companion diagnostic, PHC strategy of our organization, of our company. And to come to an end, Navify Tumor Board. We had indicated that we have this collaboration with GE Healthcare on the area of Navify and also on decisions -- clinical decision support systems in the market and with a new launch of Navify Tumor Board 2.0 which is a version that now integrates also imaging into the tumor board for the clinicians. This will now enable the radiologist to have the patient records uploaded into the same dashboard as the patient files are already available from other disciplines, a major improvement in how the tumor boards can be run in the future. And with this, the launch of the Tissue Diagnostics, HER2 test, the TV/MG microbiology test and as well as the NAVIFY version 2.0, we can take 3 more key launches that we have announced for 2019. And we're very confident that also in the second half of this year, we will complete our portfolio as we have announced before. And with this, I want to hand over then to Alan for the financials.

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Alan Hippe, Roche Holding AG - Chief Financial & IT Officer [4]

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Thank you. Hello everybody from hot Switzerland. Thanks for joining. Yes, very confident about -- that we go through the period of biosimilar and penetration. I think you will see a very well-managed first half sales up, I think costs are in check as well as the biosimilar impact. And I think I have to highlight a couple of developments in the second half and I will do so.

Right at the beginning a couple of highlights, I see my colleagues have done a great job in explaining the sales growth. I think results in the core operating profit growth of 11%, core EPS was a higher momentum, I will talk about that. We had a tax impact there. Then you look at cash flow, cash flow down. Don't be worried about that. I'm confident, I think that we can deliver really on the full year basis a pretty good number. Why is that? I think CHF 1.2 billion higher accounts received on the Pharma side really in the U.S., so I think really here is an opportunity to turn that into cash quite quickly. And the other piece is really higher inventories on the diagnostic side of roughly CHF 270 million. And I think that will turn into cash as well because we have high demand there.

The net financial results, I will come to that and explain it, and the same applies to the IFRS net income, which has even a higher momentum than the core EPS growth.

Good, here is the set of number and let me lead you through this. I think sales, as said -- explained, the core operating profit up 11% I will have on the next slide, the opportunity to go through the P&L and explain that. And then you'll see where the increase to the core net income which -- and the core net income has a higher dynamic than the core operating profit growth. So why is that? Major point here is really coming from a tax impact and that's a tax dispute which results from long ago, 15 years ago, so that's really not related here to our current business. So -- and that gave us a positive CHF 242 million here and boosted a little bit the core net income, certainly won't reoccur in the second half.

Core EPS, up 13%, you might ask yourself, "How can the core EPS growth be lower than the core net income growth?" And there are 2 elements to mention, one is well, sugar is quite successful. So the minorities -- so they have evidently a higher dynamic than we have in their profit growth. So that's 1 element, yes that's basically half and then we have at the time when we finalize the figures, all the stock options have been in the money. So we have a dilution effect coming in here as well, which accounts for the second half of the difference.

The IFRS net income, up 19%, and you see the difference between the core net income and the IFRS net income, so there was another boost here and this is another tax effect that I would like to mention, and this is something which is related to the Swiss tax reform because whenever was such a reform happens and you have seen that as well with the U.S. tax reform, what you have to do is the remeasurement of your deferred tax positions. And that's what we have done. You might remember, when we had the U.S. tax reform, we had an impact in the non-core area. And that's the same which is happening now based on the Swiss tax reform. To avoid misunderstandings, we're not going to pay less taxes in Switzerland here from now on, either we pay the same or a little bit higher. So that doesn't mean that the effective tax rate is really impacted by that. It's a pure accounting move for -- related to our deferred tax assets.

Cash flow, I will come back on a later slide.

Yes, here is the promised explanation on Slide 51 about what has really happened in that first half. And what is the underlying momentum that you're really seeing here, and let me lead you through this, you see the core EPS development here, and you see half year 2018 on the left-hand side; on the right-hand side, you see the half year 2019 result; and then you see in between the 13.1% that we have reported.

So let me lead you through this and it starts with the gains and product disposals. And you see that there has been a positive compared to the first half 2018, why that? And I'm really here to say is that we had higher gains, roughly CHF 130 million more higher gains compared to the first half 2018, so that gave us a positive here.

When you look at the royalty income and the other operating income, that's the red one, yes, beside with the minus 2.6 percentage points. And here is Cabilly. That's Cabilly, that's Cabilly with a minus CHF 280 million and Bill has talked about that. So that's the next impact here. Then we have the gains on equity securities and there are 2 elements to mention, 1 element is Avexis, yes, we had a CHF 100 million gain last year in the first half, you know that Avexis has been acquired by a company not so far away from here and that gave us a positive gain of CHF 100 million, which we certainly miss now in the first half of 2019. And the other piece to mention is Allakos. Allakos is a company, where we have a minority stake in and certainly based on the new IFRS accounting rules, that has to be a market-to-market accounting that we have to do here. So we have fluctuation and that was a negative of minus CHF 42 million. And then we have the resolution of the tax dispute here that I have outlined already, a tax dispute which resulted here of a conflict 15 years ago, which has been resolved now and the tax department as you can see, I think with a lot of persistence, yes, drove that to the right decision at the very end. That gave us a positive of CHF 242 million and certainly I think, that's not going to reoccur.

Let me go through these effects now and let me give you a little bit of a hint for the second half about them. I think the gains on product disposals, nothing significant to expect in the second half. The royalty income and other operating income, well we've always said, the Cabilly impact for the full year should be between CHF 600 million and a CHF 700 million net negative on the operating profit. So I think really now we have -- went through a CHF 280 million negative. So there's a little bit to come in the second half. Gains on equity securities, okay, we won't have the CHF 100 million fund of access. We will see what's going to happen to Allakos and certainly the resolution of the tax dispute is another one which is not coming back. What I would to mention though is when you take the full effects together in the first half, this is a plus of 0.7 percentage points, yes. And you see really then that's the large green bar, how we have performed in the first half with an underlying momentum of 12.4 percentage points. So I think really that puts everything into perspective, and will certainly help you to get to the right perspective when it comes to full year.

With that let me go through the P&L, very quickly, I think my colleagues have given you a lot of color already. I think royalties, other operating income stories told, higher gains on product disposals Cabilly with a CHF 280 million against that and that's the minus 1 at CHF 59 million. You see the cost of sales, huge momentum for the group, 12% volume growth for Pharma alone, 14%, M&D, plus 6%, the launches, I think, drove that. R&D very reasonable 4% increase, and then G&A very reasonable cost management here supported by a very small business tax effect.

So when you look at it, 9% sales growth, 11% core operating profit growth. When you look at the margins, I don't want to give you a long story here. I think margins really developed into the right direction. You see really in CR, an increase also on the diagnostic side, so really things are going here in the right direction.

Core net financial result. I think the [key] duration is clear. I reflected on that already. Equity securities, and that's once again, Avexis and Allakos. Interest expenses, yes, I didn't create a lot of hope here, I think we've done a lot of debt restructuring, we said now we will go through a period where interest expenses will go up. And you see it's really a slight increase. So we're very happy about that and all the rest is pretty small impacts.

Good, group, core, core, core, core, core tax rate. And what you see here on the left-hand side, we had 20.1% in half year 2018, then we have a decrease and now we are at 16.7%. And the decrease is 3.4 percentage points, and 2 percentage points of that is the resolvement, the resolution of the tax dispute, yes, that I've mentioned before which resulted from this, 15-year ago conflict. The other piece is really well, I think, well our lower tax rate is trending a little bit lower, so really for the full year, I expect a tax rate to be slightly below 20%.

Good, non-core items, asset, when you really look at the global restructuring plans, when you look at the amortization of intangible assets, the impairment of intangible assets, you see slight increases here, and we have a positive on M&A, and alliance transaction which results from the release of contingent considerations, a relatively small difference compared to last year. No difference when it comes to legal and environmental. And you see really when you look at the core operating profit momentum of 11%, the IFRS operating profit has the same momentum, yes, with 11%. And then certainly, I think the 2 tax cases, yes, come here together and bring us the difference of CHF 359 million positive and as said, one is the resolution, yes, from this 15-year ago case and the other one is related to the deferred tax positions that we have looked into related to the Swiss tax reform. Brings us to IFRS net income of CHF 8.9 billion, increase of CHF 1.4 billion, and an increase in constant rate of 19%.

Good, quick points on cash. I think really when you look at group, as said, I think you see Pharma does well despite the fact that the accounts receivables have increased quite significantly on the Pharma side. And when you look at diagnostics, a couple of points to mention here, I think I talked about the inventory increase already of CHF 270 million, which certainly is reflected here in the cash development, but as said, I think here I expect a soon turn, yes, into cash so that should help us in the second half. On PP&E investment, an increase of CHF 140 million basically driven by -- because we bought a location in the U.S. In intangible assets, an increase of CHF 240 million. So if we're active and that's a positive diagnostics, broadening the technologies that we can provide there and then a couple of outflows for transformations here. But certainly, expectation is in the second half that we have better momentum here as for the business in total.

Good, now you see the group development here, you see really the CHF 8 billion, yes, that we had at half year 2018. You see really we do well when it comes really to the underlying business and the operating profit net of cash adjustments CHF 1.4 billion up and then you see really the net working capital and as said, 2 major effects here, the accounts receivables and the diagnostics inventories.

Small point on investments in PP&E, well less in Pharma, a little bit more on the dia side, then the lease liability is paid. It's quite interesting that IFRS 16 now, realized, if you like. So that's a number that we had in our cash flow in the past as well, but now we have to outline it and I think here it is. And then you see really the investments into intangible assets, and that is basically half on the Pharma side, half on the diagnostic side, and as said, that's just really investments into new opportunities moving forward, leaves us with CHF 7.5 billion for half year 2019 and as except -- as said I think, we expect a better momentum in the second half.

Good, group net debt, slightly up, compared to the end of 2018. And this is really our normal development because in the first half, we pay the dividend, and we have increased the dividend, and I hope you like that. So I think really you see the momentum here. What you also see is when you look really at net debt at 30th of June, and that we're down compared to last year. We had last year half-year 2018 CHF 11.7 billion, now we're down to CHF 8.4 billion. I would say the sole reason for that is really that we didn't do significant M&A in the first half. We will close Spark in the second half and that will bring us back to the same level playing field compared to last year.

Good, when you look at the balance sheet, very quick comment on that one. Cash and marketable securities, I would say we paid the dividend. Other current assets, well it's clear, accounts receivables is up, for the company as a whole by roughly CHF 2 billion. The noncurrent assets here, IFRS 16 kicks in, so the write-off of use of assets CHF 1.1 billion here adding to that, and that's pretty much the difference compared to last year.

When you go to the liability side, current liability is pretty stable. The noncurrent liability is here, the pension liability is moved a little bit up by CHF 700 million so that explains the difference. Why that? Because discount rates went down and that leaves us with a pretty healthy equity ratio of 39% that we are certainly eager to increase further.

Good, outlook, I think major point certainly the currencies and what you see is that half year dream situation, no impact here from the currencies and why is that? It's pretty simple. You see that the U.S. dollar, you see on the left-hand side, the U.S. dollar contributed positively by plus 3%, if you like. And then you really look at the euro, there is a minus 3% and that balanced out. And the currencies from Latin America gave a little bit of momentum to that as well. So I think we are pretty balanced at half year. When you look at full year, you see really on the left-hand side, that the impact from the U.S. dollar goes a little bit down, goes from plus 3% to plus 1%. So I think, that's 1 element here. And basically the impact from the euro stays the same with the minus 3% and this is certainly just true if all the interest rates that we have had at 30th of June remains the same until year-end 2019, which won't happen. So that's very clear. That's a very much assumption driven and base here as you well know. But you see, based on that assumption, the impacts for full year would be rather small.

Good, I think Severin talked about the outlook already, very happy that we were able to increase the outlook. I hope you like that as well. Yes, and we're looking forward to your questions. Thanks a lot.

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Severin Schwan, Roche Holding AG - CEO & Executive Director [5]

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Thank you, Alan. Great. So let's go into Q&A. Can we have the first question, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes on the phone comes from the line of Sachin Jain.

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Sachin Jain, BofA Merrill Lynch, Research Division - MD [2]

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Sachin Jain from Bank of America. Just a couple of questions, please. Firstly on Tecentriq, any color on penetration in triple negative and small cell. I think your comments were, what percentage of the franchises or what are the penetrations into those individual indications? And then secondly on biosimilars, wonder if you can give any color on the biosimilar burden we should expect into '20. I mean I can frame it as follows: I think that pressure was roughly CHF 1 billion in '18, we're expecting just over CHF 1 billion in '19, and consensus model is roughly CHF 3.5 billion for '20. Obviously, a significant step up. So any color on that and how to think about U.S. erosion rates? And then final question is on attempts to remove the Amgen approved biosimilars from market, just any color there and your level of confidence?

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [3]

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So on Tecentriq and I'll just talk about the U.S. because the approvals of small-cell-lung cancer in TNBC in Europe are too current to draw any conclusions about penetration. In the U.S., there was actually some significant uptake in small cell lung cancer actually before the approval came in Q1. So I think we're relatively more penetrated there, probably somewhat over 50%. In triple-negative breast cancer, the testing rate is just now reaching sort of low 70%, and obviously, you can't get treated if you don't get tested. So it's really a two-step thing. We think that today we might be at about 70% testing and 70% use. So call that 50%, or a little less than 50% penetrated.

And I think, oh sorry, on the small-cell-lung cancer, I think there is probably some considerable room to go because there's some question around eligible population and I think -- we think that may be expanding. So I think, we still have quite a ways to go.

And then on the other questions about biosimilar. I guess in terms of the activity, the legal activities, I don't think we're going to say much about that, I think -- we think we have some remaining IP and we're appealing the court's decision where they over -- or they didn't accept our request for an injunction but we're requesting -- we're appealing that and also asking for a temporary halt on commercial activities in the meantime. In terms of the magnitude of the impact, I don't know Alan do you want to comment on that?

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Alan Hippe, Roche Holding AG - Chief Financial & IT Officer [4]

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Yes, happy to do so. Well certainly, I think we give our full-year guidance at the end of this year, it's very clear. I think we've said, we are confident to grow through the biosimilar impact. I think but it's pretty clear, I think the penetration in the U.S. has started now and I think that's really that's the fact so we will see momentum in 2020. We will still have Europe in the games, no question about that. But having said that, I think very clear. I think we intend to grow in 2020, and I think that looks very promising.

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Karl Mahler, Roche Holding AG - Head of IR [5]

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Thank you, Alan. Thank you, Bill. Sachin, you have a follow-on question?

No, okay. Sorry, I misunderstood. I actually got in a question here by e-mail from Luisa Hector which is related to the biosimilar ones. And I'll just read it. Did Amgen launch earlier than expected? And can companies with whom you have settled now launch?

So of course, we have tried to agree on a settlement with Amgen, and Amgen decided to launch at risk. So now the courts have to decide on the further course but with the other companies, with whom we have settled and therefore, we would not launch earlier based on Amgen's decision to launch on risk. Can we have the next question, please?

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Operator [6]

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Next question from the phone comes from the line of Richard Parkes, Deutsche Bank.

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Richard J. Parkes, Deutsche Bank AG, Research Division - Director [7]

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Firstly, on HEMLIBRA. I wondered if you could give us an update on where you are in terms of reimbursement access discussions in Europe in the noninhibited setting and when you might start seeing sales in that setting? And then secondly on PERJETA, you highlighted sort of slowing trend in the U.S. in the second quarter, given switching to KADCYLA. But could you help us with some modeling? Can you walk us through where you are in terms of penetration rates for PERJETA in the adjuvant setting in the U.S. and where you might hope to get to?

Then, third final question, just on OCREVUS. Given there's a potential capacity with monthly in products in development, could you talk broadly about how you might go about defending the franchise in the situation where competition materializes? I noted you have initiated a study of subcut formulation. So maybe you could discuss how that might fit into that?

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Severin Schwan, Roche Holding AG - CEO & Executive Director [8]

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Bill?

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [9]

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Yes. Sorry, could you clarify that the last question, just the last part of it, I didn't -- I just didn't understand what you said.

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Richard J. Parkes, Deutsche Bank AG, Research Division - Director [10]

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I noted that you'd initiated a clinical study of a subcut formulation of ocrelizumab and just wondered how that might fit into your strategy should competition emerge?

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [11]

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Great. Yes, thanks. Okay, so first on HEMLIBRA, we're very early on the noninhibitor reimbursement discussions because, the -- well, the wheels of reimbursement grind slowly in most of the European countries. So I don't think we have any particular concerns there, but we're -- in particular because as you know I think the indication statement was for severe hemophilia, and we think there's a high unmet need there as well.

In terms of PERJETA penetration, in the U.S., you asked about with the advent of the KATHERINE study being approved with the KADCYLA. So yes, so now basically patients who don't get a complete pathological response in neoadjuvant setting are now eligible to receive KADCYLA whereas some of those patients might have received a continuation with PERJETA or PERJETA and Herceptin. So we are seeing some, basically, movement in the patient flow from patients who would have gone on H plus P now getting KADCYLA instead. The growth in PERJETA is -- in the U.S. is still ongoing, and we think there's a continued penetration but it's definitely going to be slowing down because of KADCYLA getting the uptake and from a business standpoint, that's fine because it's a high-value product and -- so we expect to see continued growth in HER2. But now we'll see more of the growth happening in KADCYLA and a little less on PERJETA.

In terms of OCREVUS, I think in medicines, maybe you can say the best defense is a good offense, and OCREVUS is just an amazing molecule and part of the thing that's very attractive is that it's dosed twice a year, and patients will typically see the neurologist about twice a year. So now they get to go in, have a checkup, have their dose and they're done for another 6 months. And we actually showed data at AAN. I think it was quite compelling about the importance of the dose, the importance of a complete depletion of B cells and that the dose actually matters. And I think also though, the dose can have important applications for safety. So the fact that we have 100,000 patients now who've been on therapy, the fact that we've had some thousands of patients for significantly longer than 2 years, we have the early trial patients, some of those patients have been on for 5 or 6 years. So I think a really large safety database is certainly an important advantage for physicians and patients.

And then you mentioned a subcu program, we are looking at a subcu route of administration, but I think, again it's pretty hard to beat the IV with a short infusion time, well-tolerated, a very good side effect profile, and we'll look forward to additional competition.

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Karl Mahler, Roche Holding AG - Head of IR [12]

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Thank you, Bill. I got here by e-mail, again follow-up questions on HEMLIBRA. One is from Luisa Hector. A split between the inhibitor and the noninhibitor settings on a global level?

And then additionally questions from Marietta Miemietz on HEMLIBRA who is interested on the dynamics specifically in the U.S., noninhibitor space, namely do we mainly get severe patients that is more than 6 bleeds per annum? And secondly, what is the number of HEMLIBRA patients, which were previously prophylaxed?

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [13]

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Okay. Let me start with the split, and let me just -- I can simplify. Outside of the U.S., most of the business is inhibitor patients because the noninhibitor population is more recent approval, so I don't think it's -- yes, I guess most of the businesses there, the growth outside the U.S. will be almost entirely in noninhibitor patients. In the U.S., we have 14% total share of hemophilia A and we have about 60% of inhibitor patients, and inhibitor patients are about 5% of the total. So if you have 60% of 5%, that's 3%. So basically 3 percentage points of the 14% is inhibitor, and the other 11 percentage points approximately, is noninhibitor. I'd say at this point in time, probably by July, August, it'll be about a 4 to 1 ratio, and that's just going to continue over time to be more and more noninhibitor patients. So probably something like 20% inhibitor, 80% noninhibitor. And again, growing on the noninhibitor side.

In terms of the dynamics, it's really, it's quite a mix. We don't have a lot of insights into the exact sources of business because you'll recall that the inhibitor population has only been approved for less than a year and most of the detailed information on share and uptake is sort of lagging. But we're -- the anecdotal reports is that the patients are -- it's a higher than average proportion of prophylaxis patients because patients that are already motivated to have prophylaxis are the same ones who would be very motivated to switch therapies and to go on a product with the clinical profile of HEMLIBRA with a really strong prophylactic effect, and that probably something like 3 out of 4 patients are severe and 25% might be moderate. So it's -- that's probably the best we have right now.

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Operator [14]

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Next question comes from the line of Richard Vosser, JP Morgan.

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Richard Vosser, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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First question, just clarifying on the 2020 growth and beyond. So we've obviously seen this year your ability with biosimilars to preserve the margin despite the erosion. So can you just confirm that we should think about the future growth as topline growth and EPS moving in tandem going forward, or how else should we think about it? Second question just on healthcare reform. Obviously, we've seen some steps in the last few weeks around U.S. healthcare reform, perhaps you could give us your -- maybe some idea of an impact from favored nations proposals and maybe the PE -- the proposal by Senator Grassley on the bipartisan proposal. How you see those in the context of Roche?

And then the final question, just to go onto Tecentriq and think about one of the readouts, say, adjuvant lung cancer readouts, how should we think about the timing of that readout. I know it's in the next 18 months, but when abouts should we think about it, and how do you see that coming relative to the competition?

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Severin Schwan, Roche Holding AG - CEO & Executive Director [16]

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Thank you, Richard. So I suggest I take the easy question on the margins for next year. And then, Bill, you can take the healthcare reforms in the U.S. right in adjuvant lung.

Yes, we don't see a structural change due to the biosimilars. So it is true that if you come to the end of the life cycle that you don't have marketing and distribution investments to the degree you would have if you launch a product, but if you look into gross profit margins, they are on a very similar level for our new medicines, and you've seen that we keep M&D under control. You have seen a bit more of M&D investment in the first half of this year with 8%, we expect this come down in the second half. So without preempting the guidance for next year, but on the basis that we grow sales also in 2020 due to the strong momentum we have with our new launches, you should expect that we can also grow profitability. And with this, Bill, if you can take over for the U.S.

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [17]

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Sure. Let's see. Okay, so on healthcare reform, it's obviously a situation that's very much in flux. I guess what we would say is on the question of most favored nation or frankly foreign reference pricing at all, we think it's quite bad policy. The U.S. has had a long track record at being willing to support innovation, pay for innovative new therapies, in many ways, that's led to a lot of the progress that we're seeing in the whole world of medicines. But it's also been a huge economic factor for the U.S. and there's a reason why the majority of the innovative biotech industry is headquartered in the U.S. and I think that's also not lost on policymakers and politicians. So while it's popular to bash medicines companies, it's also -- there is a reality, and a known reality, that this is actually a very important enterprise for the health of the nation.

So I think we remain positive that -- and confident, that the ultimate landing place for healthcare reform or changes around prices will be one that does continue to support innovation. And I think that brings us to things like the Senate finance proposals, which are actually being debated today in Washington in terms of amendments and such. We think that there is some parts of it that are reasonable and some good ideas, but probably the hardest thing is that there's a lot of so-called pay force that are being asked of the pharmaceutical industry that are not actually going to solve the basic problem. The basic problem is high out-of-pocket cost for patients. I think it's already been pretty probably demonstrated that while list prices can be quite high in the U.S., the net prices result in basically going back in insurance pools or paying middlemen, and so patients suffer while the healthy people actually have maybe lower premiums. And so this really does need to get fixed.

We've spent a lot of time in Washington, continue to do so, to say, "Hey, how can we work together to solve this issue of cost for the patients in need?", and I would just say that Roche, Genentech in the U.S., the pharmaceutical industry, is signaling a willingness to be a big part of that solution but we need to see the packages coming out of Congress or from the administration are really going to solve patient issues and not just end up as sort of solving government budgets or paying for other things beyond medicines.

And I think, again, stay tuned in this issue, but I think the proposals again are not -- they're not something that's catastrophic for the industry, but we'd rather see them going more towards paying for patients and lowering patients' out-of-pocket costs.

Let's see, the other question was around Tecentriq adjuvant and in lung cancer in particular. We moved very rapidly into the adjuvant setting. We hope to see data in 2021 or 2022. It's very much driven by events, and event rates, but we do believe we have a chance to be first because of the early studies we ran and the things that allowed us to move in very rapidly. So again, I think it's another area where we feel really strong about our immuno-oncology portfolio and Tecentriq.

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Karl Mahler, Roche Holding AG - Head of IR [18]

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Thank you, Bill, I have 2 follow-on questions on products, 1 from Manasi Agrawal. Have you seen any impact on the number of patients on OCREVUS post launch of Mavenclad and Mayzent? And then another 1 on risdiplam, in particular, when will we see the filings for risdiplam?

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [19]

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Risdiplam. Yes. Okay. Yes, so the first 1, the impact on OCREVUS of the launches of competitor drugs. Yes, we have seen an impact. The impact is that OCREVUS' share goes up. So yes, we hope there are more competitive launches like that.

In terms of risdiplam, the filing for risdiplam is -- will be based on, basically 4 data sets. So there's part 1 of the SUNFISH program, part 2 of SUNFISH, and then part 1 and part 2 of FIREFISH. The discussions we've had with the FDA, we believe that we'll be able to put together a package that would allow for an initial approval based on part 1 of each. And in the EU, we think that it's probably -- they're probably going to prefer that we wait until we have part 1 and part 2 to file. So then the timelines for those, respectively, are -- we think we'll file with the FDA in the second half of 2019, and then we'll follow on shortly thereafter with EMA in the first half of 2020.

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Karl Mahler, Roche Holding AG - Head of IR [20]

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Thank you, Bill. A question here from Luisa Hector on the tech side, Alan. Tax benefited by CHF 242 million in the first half of the year, more specifically, what tax disputes were settled? And secondly, was this included in the original guidance at the start of the year?

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Alan Hippe, Roche Holding AG - Chief Financial & IT Officer [21]

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Yes, let me -- look, I don't want to go into that because it's really an old case, and it was more related, yes, to diagnostics than really to Pharma at the very end. But honestly 15 years ago, I think, there is no relevance of that case to our operation of business anymore. You could argue, so as said, I think it's really persistence, just to be very clear, nothing to do with the biosimilars or whatsoever. It's really something really very, very old case. Has it been related, or let's say included in our guidance beginning of the year. Look, I think we have so many impacts, yes, during the year that I would say our guidance is the guidance, yes. That's what we have in here, I think we have given a clear outlook. Certainly that fact is not coming back in the second half. I think we have increased our guidance, yes, and not just on the sales side because implicitly as you all know, also on core EPS growth side, if you like. We have still the broadly in here. So I would way we have great momentum. Yes, that effect is not coming back in the second half, so a little bit of a dilution of that effect. So -- and we have a great run.

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Karl Mahler, Roche Holding AG - Head of IR [22]

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Thank you. Before we go on, on the questions on the telephone, a diagnostics question from Charles Pitman, actually, Redburn. That's for you, Michael. You mentioned you have resolved the Tissue Diagnostics shipping delays, are you confident that this is a one-off negative so by when will we catch up again?

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Michael Heuer, Roche Holding AG - CEO of Roche Diagnostics [23]

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Yes, a very good question. I mean, we have been very transparent about this topic. We have found the multifactorial root cause for the problems, it's resolved. We are now refurbishing a huge number of instruments that we have not shipped to customers due to this issue. We do this at a maximum speed, and we are confident that during the second half of the year, we will be coming back to normal in the shipments of this instrument. No further comments on this that I need to share with you. We are back to normal in the second half.

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Operator [24]

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Next question comes from the line of Keyur Parekh, Goldman Sachs.

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Keyur Parekh, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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One question for Alan on tax longer term, and then 2 on the pipeline. First for Alan, how should we think about the longer-term tax rate? You're clearly guiding to something below 20% for 2019. But as you see the mix of business changing going forward, what should we think or should we think of it as a continual downward pressure on our models from the 2019 grade? Or should we think of it as being flattish below 20%?

And then on the pipeline, 2 questions, please. First, kind of Slide #33 talks about the Huntington’s assets, latest filing as being 2022. What should we assume as a more realistic filing date rather than the latest and what are the various scenarios under which you can do a filing either before 2022 or in 2022?

And then secondly, on the fixed dose combination for Herceptin PERJETA. Can you just help us think about how we should think about the commercial opportunity for this molecule or for this combination in the context of biosimilars for trastuzumab, both in the U.S. and in Europe?

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Severin Schwan, Roche Holding AG - CEO & Executive Director [26]

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Thank you, Keyur. On the tax, Alan, if you start off.

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Alan Hippe, Roche Holding AG - Chief Financial & IT Officer [27]

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Yes, sure, and Keyur, my assumption is that you talk about the core tax rate, yes, for the group because there is still the effective tax rate, we have seen that going down to 14% due to the tax effects that I have described before. But I think when it comes to the group core tax rate, as I've said, I think slightly below 20% and that, I think, that's the flattish development also moving forward, yes, from -- to what I know from today. But I think we went now through the reforms in the U.S. and I think that has an impact and I think it's showing now.

So I think we are really -- I think we are on a good platform, yes, now moving forward.

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Severin Schwan, Roche Holding AG - CEO & Executive Director [28]

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Thank you, Bill?

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [29]

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Right, let's see. So on Huntington’s, let me just -- I'll just try to lay out the facts and then we could talk about what's realistic in terms of assumptions or filing timelines. But basically, we've got a Phase II study that we have already published the results on 46 patients from an open label extension of that study, I think those were 9-month results. We'll -- later this year, we'll have 15-month results from the same study. And in parallel to that, we are doing 2 other things. We have a natural history study, where we have basically patients that are matched in the relevant characteristics to the patients who are in the Phase II study and these are being followed to see what is the progression of their disease. And we'll have results from that study in the first part of 2020. The other thing that's happening is we have a Phase III study that's accruing, looking at dosing every 2 months and every 4 months. So that's the full Phase III that would readout in time for us to file in 2022, okay? So 2022 is sort of the latest date and that's based on filing with the full Phase III data.

The discussions we're having with regulators in both the U.S. and Europe is what might be fileable based on the open label, well the Phase II data, the open label extension, the natural history study and then also the data that we're collecting on suppression of Mutant Huntington’s protein. And so those have been positive conversations. As I said, we'll have both the longer term data, open label data from the Phase II, as well as the natural history study, we'll have all that information in early 2020, and so there could be a filing in the first half of 2020. But that again depends on the willingness and continued progress in those discussions. So I hope that gives you, at least, the range of filing timelines, and I think it remains to be seen exactly when it will occur.

Let's see, in terms of the other question you had was about the fixed dose combination for H plus P. So we will finish our study of that study in the second half of this year, and we would hope to file in the first half of 2020. And you asked about the potential. And I think a couple of ways to think about it. So for example Herceptin subcu has had limited uptake in the U.S. but part of the reason Herceptin subcu has had limited uptake in the U.S. is because most physicians are using Herceptin plus PERJETA and if they have to infuse PERJETA with an IV, then it's not that useful to have a subcu Herceptin and an IV PERJETA. So the fact that we would have the combination, there is an immediate benefit in terms of convenience. It also affords opportunities to consider the value proposition of the 2 combined and what the right price is for that. And that's actually true, both in the U.S. and Europe. So I think there's interesting potential for the fixed dose combination and we look forward to getting the results later this year. And hopefully having a product approval in the quarters ahead.

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Operator [30]

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Next question comes from the line of Jo Walton, Crédit Suisse.

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Jo Walton, Crédit Suisse AG, Research Division - MD [31]

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I've got 3 quick questions. Firstly, I wonder if you can help us on how much biosimilar Amgen may have released into the market. Sometimes with these launches, you see several months' worth of potential sales release, so just some help there would be useful.

Secondly for Alan, once again, we've seen quite a substantial restructuring set of charges. Just wonder whether you could help us on what you think the full year restructuring charge will be, and what sort of payback you're expecting and which line items we might be able to see benefit from that restructuring? And on a similar theme but just longer-term, one on costs. You've told us very helpfully that you're expecting to see both sales growth next year and continuing development in profitability. As you transition from a generation of Avastin, Herceptin and Rituxan, to a newer generation of products, just wondering where we should see that leverage. Is it the gross margin of this new portfolio will be better than the old portfolio? Or that the SG&A demand from this new portfolio will be less than the old portfolio? One assumes that you'll continue to spend R&D at more than 20% of sales.

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Severin Schwan, Roche Holding AG - CEO & Executive Director [32]

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Thank you, Jo. Perhaps I can just qualify a bit on the last question and perhaps I was not precise enough. What I really wanted to say beforehand is that first of all, we expect to grow next year. And that structurally, I don't see a difference in the profile of biosimilars versus the new products, really because our new launches are equally specialized with a comparable structure. So I was not necessarily talking about increasing profitability. I was talking about growing earnings, also for next year.

And we'll see how things develop for the end of the year, and then give as usual more precise guidance when we come into the beginning of next year. So I was explicitly not suggesting that, for example, the gross profit margin or other line items would necessarily improve versus the biosimilars. Also having in mind that -- sorry, versus the mature portfolio, having in mind that those medicines are actually medicines with a high gross profit margin. Now Alan, there was a question on restructuring expenses and Bill, if you could comment on the biosimilars and how much stock Amgen has released.

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Alan Hippe, Roche Holding AG - Chief Financial & IT Officer [33]

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Yes. Jo, let me comment on your justified question, yes, on the restructuring costs, yes, that we have in and especially -- certainly in the non-core section, which is not different too much compared to what we had last year, yes. So CHF 52 million difference. So I would say, we have a constant stream of things that we do in the company. And certainly, we always work on our productivity, there's no question about that. I think we have to do that. I think we're going through a period of digitalization, where we're really using digital, yes, really to streamline our processes and where you see transformations ongoing, and where we want to be a better organization serving patients moving forward. I think that's really the underlying task that we're having. But having said so, I think really even when you look at the CHF 477 million and you go back a couple of years, we always have around CHF 1 billion. Now that's really, that's the ballpark figure. That does not mean that I expect that figure to happen in the second half because it's a little bit opportunistic. We will see it's not like that we guide these programs from the top. I think that's really something which is emerging bottom-up. But I think the experience tells it's roughly, yes, the figure that we're basically having in our accounts for the last couple of years.

When we have a program in, let me emphasize that, I think we don't want that people just dump, yes, costs into the non-core section. We have complete governance around that, we have a clear policy around that because it's very important to us that you can compare our results over time, yes, and that the ingredients, yes, of our accounts are not really changing so that we are straight on that.

So what I can say is that what we require, yes, for these programs is basically, yes, a payback period of about 2 to 3 years. That's really what we're expecting from these programs or with -- and that's what we're checking it against. So I think that really shapes your expectations, I guess, yes, from the things moving forward. And when it comes to margins, let me say that and let me say that very openly, I think we're a company which is investing on a high level and we will keep that. And we have always used the term that we want to defend the margins. That's really -- that's what we have said, and sometimes we succeed, and I think most times we succeed, and we do very well in the last years. And what I think certainly, it also gives us room to invest because when you look really at what we have done for FMI, what we do for Flatiron, I think all these things certainly need support, also from a financial point of view. And to provide that, I think we do these things, which increases the productivity, but also gives us opportunity to invest into new things.

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [34]

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And Jo, I'm afraid in terms of your question about stock released into the market, I really don't have any information on that. We haven't seen any major disruptions at this point. And so I think, you'd better have to ask them.

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Severin Schwan, Roche Holding AG - CEO & Executive Director [35]

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Thank you. Yes. And perhaps from my side, just to add on the margins and the longer term outlook. I mean, my experience is at the end of the day in this industry, it all depends on the pipeline. As long as you are able to rejuvenate your portfolio, as long as you are able to come out with really, really differentiated medicines, then you will be able to defend the premium, you will be able to defend your margins. The moment your pipeline doesn't progress, the moment you're not able to launch differentiated medicines, you see the impact on the P&L. So on a higher level, if you like, I'm, therefore, so pleased about the good momentum we have seen with this wave of new medicines coming through the pipeline and with the opportunities, which are still ahead. On that note, can we have the next question, please?

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Operator [36]

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The next question comes from the line of Eric Le Berrigaud, Bryan Garnier.

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Eric Le Berrigaud, Bryan Garnier & Co Ltd, Research Division - Managing Partner Equity & Research [37]

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Three questions, two products related and one more general. First is on the OCREVUS, could you maybe comment on the dynamics between the 2 main indications on APPMS and RMS. The data in PPMS, 1 more question. So do you see with time difference in use, in terms of market share penetration, lengths of stay of patients and so and so forth between the 2 main indications or not?

Second, among the very, very few trains that are not arriving on time among products, maybe one is GAZYVA. We see more and more evidence about GAZYVA being a strong drug, more and more indications, more and more use in combinations also in clinical trials, and sales are quite disappointing sequentially. So could you share with us may be your confidence in seeing GAZYVA still becoming a very significant product in the context of the CD20 franchise?

And last question, a more general one, we've seen in the past and maybe also right now, some companies either facing patents' expiry and then using more capital gains through product disposals to offset profit decline but also companies having a lot of innovative products coming through, and less attention to pay to small drugs also using product divestment to focus the portfolio. And you are facing both, i.e. patent expiries and rejuvenation. So how should we think of product disposal and small product in let's say, '19, '20, '21 as a way to maybe mitigate the profit loss from all the products, but also to change the structure of the portfolio?

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Severin Schwan, Roche Holding AG - CEO & Executive Director [38]

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Okay, perhaps I can just comment on your last question, in terms of how we look at the portfolio, what we add and what we dispose and really this is really decisions, which we take product by product, and when it comes to the disposals, really, if we feel that somebody outside of Roche can put more focus on it, can generate more value with a tail end product, then we would consider disposal. We would offer it. And if the economics work out, we would actually do disposals on a regular basis. And you've seen again, we did some disposals in the first half of this year. But it is really product by product, and it's unrelated to the overall development of the company. And frankly, also the amounts we are talking, and if you look back in terms of the relative magnitude of the product disposals we have seen in the past, I mean, it's literally marginally compared to our overall operating profitability and cash flows. So that is really looked at asset by asset. And you know in terms of small products, I'm just -- it creates a reaction because we don't look at small or big products, we look at the level of differentiation we potentially have and the value we can bring to the healthcare system. And we're agnostic about whether it is more for a rare disease like SMA, for example -- or also HEMLIBRA, or whether it is a disease where many patients are impacted. Let's say for OCREVUS for example, what really matters in our portfolio decisions is what is the medical differentiation, what is the competitive positioning, and how much value can we provide to the patients concerned? So size of a product, or the number of patients is not a primary criteria for us.

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Alan Hippe, Roche Holding AG - Chief Financial & IT Officer [39]

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May I add something important?

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Severin Schwan, Roche Holding AG - CEO & Executive Director [40]

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Please.

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Alan Hippe, Roche Holding AG - Chief Financial & IT Officer [41]

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Because we had last year gains on product disposals of CHF 320 million and we have outlined that in the finance report. And you see that also now in the half year report on Page 20. As said in the first half, we had CHF 436 million now, we don't expect major moves now in the second half. So I would say that underlines the point these are not very significant numbers. And I would say the numbers we are seeing this year and also last year were not unusual.

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Severin Schwan, Roche Holding AG - CEO & Executive Director [42]

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Right, absolutely. So you have 1 new product performing well and you can just forget about potential product disposals. Now one of the products performing well, OCREVUS, there was question here on the split, PPMS and RMS. Bill?

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [43]

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Yes, so at the end of 2018, we think we had roughly 30% of our business was coming from PPMS and 70% from RMS. Primary progressive MS, we believe, is something just shy of 15% of the total patients, and we think we have a very high share of that, but we don't have figures on it. So basically, what it means is -- I'm sorry and we have, we're at 17% of the overall market of the total market. Now the last piece of the dynamic is we're getting 39 out of 100 new or switching patients. And we think the vast majority of those are RMS patients. So I think, what you're going to see is over time, more and more of the share of our business will be coming from relapsing MS, we're getting 39 out of 100 patients. I don't -- I can't think of another large chronic therapy area that has a single product with that sort of commanding of a lead, and I think that's clearly the dynamic that we hope to maintain as we move forward.

Then you asked about GAZYVA and whether we're disappointed with GAZYVA, and I would just say, since we started developing GAZYVA in lymphoma and leukemia, a lot of other things have also entered that space. And I think that's part of the reason we've had less uptake than we might have originally hoped. But with indications for GAZYVA like CLL14, where, again, we have really deep, deep complete responses in these patients -- first-line patients, fixed duration of therapy, no chemo, and the alternatives really are chronic therapy that goes on and on, we think we've got a really good shots at growth. And then as I mentioned, lupus is another really promising area that frankly wasn't on our radar screen. We thought it was very much a long shot and now it's going to become part of our formulation -- our plans going forward. And I think that's -- the -- some of things like that are the largest reasons why we're so confident that we can grow and continue to grow through the biosimilar penetration.

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Operator [44]

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Next question comes from the line of Mark Purcell Morgan Stanley.

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Mark Douglas Purcell, Morgan Stanley, Research Division - Equity Analyst [45]

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I have 3. The first one on biosimilars. I wondered if could help us understand what proportion of Rituxan, Avastin, Herceptin in the U.S. go through 340B from a volume perspective? And then just on the same theme, Amgen are not launching the end market form of biosimilar Herceptin, 150 mg dose form. How much do you think that actually matters?

The second one on the Port Delivery System, interesting to see such rapid development given this has largely been probably overlooked by myself and others. Is this now a platform opportunity through which you can introduce the bispecific and possibly other treatments to augment your ophthalmology portfolio?

And then thirdly, just returning to Bill, I guess, in terms of [moonshots]. Could you help us size the opportunity and the likelihood of file acceptance for GAZYVA in lupus? And the subset of patients in multiple myeloma within VENCLEXTA, where I think you've suggested there's a tremendous benefit?

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Severin Schwan, Roche Holding AG - CEO & Executive Director [46]

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Bill?

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [47]

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Okay, yes, could you just clarify your question about the dose, the dose or formulation launch on the biosimilars?

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Mark Douglas Purcell, Morgan Stanley, Research Division - Equity Analyst [48]

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Yes, sure. I mean Roche in the second half of '17 converted the Herceptin market to the 150 mg dose file and Amgen have only filed on the 420 mg.

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [49]

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Got it.

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Mark Douglas Purcell, Morgan Stanley, Research Division - Equity Analyst [50]

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That's their approval, they haven't got on filing on 150 mg.

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [51]

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Yes, okay, let's see, first on your question about the rate of use in 340B centers. We think it's about 25%, and that's important for the fact that those centers might be more apt to continue to use an innovator product, but we'll see.

In terms of the dosing, the vial configuration on Herceptin, that's pretty hard to say. We did switch over for several reasons to the smaller vials that was basically something that was driven by a combination of market preference and regulatory preference, and so I don't know, I think we'll have to see how that plays out in the market.

In terms of the Port Delivery System, for ophthalmology, we definitely see this as a platform opportunity. We've felt that since we started investing in these alternate delivery approaches over 10 years ago. In terms of the bispecific, so the Ang2 VEGF antibody will not fit in the Port Delivery System, nor will other antibodies, for example, other anti-VEGF programs will also not fit in it. LUCENTIS is antibody fragment, and that's why we're able to concentrate it to a level that allows it to be delivered through the PDS, but we also have an antibody fragment in development, that is Ang2 VEFG. So if it turns out that Ang2 VEGF delivers superior efficacy, we have promising data in Phase II but if this is backed up by the Phase III, we have a program in the works that would allow us to put that also in the Port Delivery System. So very excited about it.

GAZYVA lupus, you -- I think you asked about potential for a regular -- or an early regulatory approval. We haven't had a formal discussion with regulators about that. We've shared the data, there is a lot of excitement. It's a critical -- it's a disease that's very critical, but it's also chronic. I think it's really hard to call. I think we just have to stay tuned on that. We will do everything possible to make GAZYVA available to these lupus nephritis patients with all speed. And then you asked about VENCLEXTA and multiple myeloma, subset of patients in the studies, a certain biomarker subset that seem to get quite a profound benefit. We will, again, we're going to be working through this with regulators and experts in the field. And so we'll come back with more on that in subsequent months.

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Severin Schwan, Roche Holding AG - CEO & Executive Director [52]

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Thank you, Bill. We are running a bit over on the time. We can perhaps take one last question and then we're going to close.

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Operator [53]

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The last question is from Peter Welford from Jefferies.

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Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst [54]

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Just firstly on the COGs, Bill made a comment, I think the fact is tightly controlled here about 2.5 years into an integration that is ongoing. Just wondered if Alan can give any sort of visibility as how much further can we go on this? Should we think about this as being halfway done or perhaps even just at the start and so just thinking about how much further we have the efficiency within the manufacturing footprint?

And then secondly just very quickly on the Spark acquisition. I think the comment was made, you expect to close it in the second half with regards to the net debt. Just curious therefore if you can just update on that? I think recently obviously, the timelines have pushed back on that quite a bit potential into 2020. I guess what leaves the confidence in the second half of this year? And if could you give any visibility at all on what is leading to a delay?

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Severin Schwan, Roche Holding AG - CEO & Executive Director [55]

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Right, so perhaps I can quickly comment on Spark. We would not comment on any specifics as this review is ongoing, but again I would like to reiterate that we are very confident to close the transaction by the end of this year. And on the manufacturing costs, Bill, Alan, you want to quickly comment?

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Alan Hippe, Roche Holding AG - Chief Financial & IT Officer [56]

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Yes, I can take it very quickly. Point is certainly these programs are running, and I think we're perhaps still benefiting from them. I see they are still part of the restructuring costs as you can see. At the same time, I have to say, well, you know we're also benefiting from the fact that we're filling up capacity that we have built for in the last years. And we're filling it up quite quickly, I have to admit, which I think is great certainly with the volume growth that we're seeing. So honestly, I think now, to come up and say, "Hey, something significant will happen upwards or downwards for the gross margin." Honestly, I have to say, I'm not in a position to say that. I think we said we want to defend the margin. I think the gross margin is hovering around 80%, yes, sometimes a little bit more, sometimes it's less at 79% or whatever. But I have to say I think that's a pretty comfortable number, yes, to move forward, and I hope that we can defend that, yes.

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William N. Anderson, Roche Holding AG - CEO of Roche Pharmaceuticals [57]

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Yes and I would just add that on -- in terms of productivity, I think we will continue to see gains in manufacturing productivity, but also in marketing and sales and G&A, in R&D, and there's a huge amount of momentum right now in the company, and it's not based on, I'm sorry to say this for the financial community, it's not based mostly on cost savings, it's mostly based on all of our people wanting to make a bigger contribution to change in the world for patients. And this is really a powerful rallying and cry within the company, and we are seeing this in really every part of the company: global functions, in countries around the world. So I think, you should expect to see us continuing to deliver more and more with the given resource investment and I'm very confident that's going to happen.

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Severin Schwan, Roche Holding AG - CEO & Executive Director [58]

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Bill, thank you very much.

Thank you for your interest. Look forward to catching up next time. Thank you.