Executives
Severin Schwan – Chief Executive Officer and Director
Daniel O’Day – Chief Executive Officer of Roche Molecular Diagnostics and President of Roche Molecular Diagnostics
Roland Diggelmann – Chief Operating Officer of Roche Diagnostics
Alan Hippe – Chief Financial Officer and IT Officer
Analysts
Matthew Weston – Crédit Suisse AG, Research Division
Tim Anderson – Sanford C. Bernstein & Co., LLC., Research Division
Andrew S. Baum – Citigroup Inc, Research Division
Sachin Jain – BofA Merrill Lynch, Research Division
Keyur Parekh – Goldman Sachs Group Inc., Research Division
Michael Leuchten – Barclays Capital, Research Division
Tim Race – Deutsche Bank AG, Research Division
Richard Vosser – JP Morgan Chase & Co, Research Division
Vincent Meunier – Morgan Stanley, Research Division
Roche Holding AG (OTCQX:RHHBY) H1 2014 Earnings Call July 24, 2014 7:00 AM ET
Operator
Ladies and gentlemen, good morning or good afternoon. Welcome to the Roche Half Year Results 2014 Conference Call. I’m Stephanie, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it’s my pleasure to turn over to Dr. Severin Schwan, Chief Executive Officer. You will now be joined into the conference room. Thank you.
Severin Schwan – Chief Executive Officer and Director
Good afternoon, and welcome to our Roche half year briefing. We had a strong performance in the first half, mainly driven by our new oncology products in the HER2 area, with Perjeta and Kadcyla, also Avastin growing very strongly with 6%, and we see continued double-digit growth for immunodiagnostics driving the diagnostics division as a whole. We’d increased our core EPS earnings by 7% at constant rates, ahead of the sales growth, and we made significant progress in terms of our product pipeline. We almost lose the oversight in terms of priority reviews, breakthrough therapy designations or fast track designations. Actually, in the first half alone, we have 5 of those, and Dan or Dave will cover this in more detail later.
With this progress in the pipeline, we have now 66 new molecular entities in our clinical portfolio, and we moved a number of those into late stage, where we have now 12 new compounds.
Both divisions are growing in all regions, particularly strong performance in the United States, where we have a 5% growth, despite the patent loss of Xeloda earlier this year.
Operating margins are up at 41% on a group level. Operating core profit, up 7%, and this is also very much reflected in our core EPS result, which is up at 7% versus previous year. If we take a deeper look into the development of the core EPS versus previous year, you can see there is a number of one-off items affecting the results. But putting all those one-off items together, actually, they net out overall, so really, a very strong growth of the underlying business for the first 6 months.
Looking forward, there is a number of important clinical data to be presented at upcoming congresses. Let me highlight ESMO, where we will present overall survival data for Perjeta. We’re very excited to share those data. And we are also looking forward to presenting data on the combination of Zelboraf and cobimetinib in malignant melanoma.
Based on the strong results, we are confident to meet our full year targets to grow sales at low to mid-single-digit rates, our core EPS ahead of sales, and on that basis, we should also be able to further increase our dividend. And with this, I hand over to Dan O’Day, head of the pharmaceutical division.
Daniel O’Day – Chief Executive Officer of Roche Molecular Diagnostics and President of Roche Molecular Diagnostics
So good morning, good afternoon, everyone. Pleasure to go over the pharmaceutical results for the first half of the year. Beginning right into the pipeline first, because I think that explains a little bit about the future prospects as well. We had a really terrific first half year in terms of data readouts and regulatory designations. I just want to cover a couple of them here. And throughout my presentation, I’ll be speaking about different medicines here.
But first of all, all of these key data readouts and actually regulatory designations happened in the second quarter. I think the key theme around oncology is that we continue to innovate in terms of new molecules, new medicines in this area. Secondly, we have a really strong immunotherapy, cancer immunotherapy program that I’ll cover in more detail. And of course, the combination strategy is coming together, including the 4 combinations we presented at ASCO and the many more we have in our development labs.
I’ll cover the crenezumab a little bit later as well. I just want to make a point on 2 other compounds here. One is on the ACE910 hemophilia program. This is an opt-in product from Chugai that we now have within our Roche organization. It’s a bispecific antibody that mimics factor VIII for hemophilia. The data were recently presented at the World Society of Hemophilia, and we’re also planning to present this also at ASH. But the data look extremely interesting. And what we saw is in patients, we saw a significant reduction in bleeding in a number of patients within our Phase I trial. And now we’re progressing on with a Phase I/II trial with that compound as well.
On oral octreotide, we had some additional Phase III data plus some regulatory interactions in the second quarter. And we decided to not move that program ahead, so we’ll be removing that program from our Phase III list.
It’s one thing to look internally at the program, but I think as Severin mentioned, when you think about the regulatory perspective on our portfolio, it’s really been a very, very successful quarter. In fact, in July alone, we had 2 priority review designations for Avastin in the United States: one for the ovarian cancer and one for cervical cancer. As you know, we had the breakthrough therapy designation from PDL1, and we just recently received a fast track status for our LptD antibiotic that is in a Phase II currently. And the Phase I data were really quite encouraging relative to our Gram-negative approach here, and particularly for Pseudomonas aeruginosa, looks quite promising at an early stage. So we’re looking forward to also move that product ahead in a Phase II trial.
So with all that data, we had a strong first half for the Pharma division with a 4% increase, this, despite the fact that we have significant erosion from Xeloda going off-patent. The United States’ 5% growth is strongly driven by the oncology franchise, HER2, Avastin and also Actemra. In Europe, strong growth, 3%, really driven again by the oncology franchise and Actemra. And we also had a Tamiflu order in the first quarter. So you can see the sales are moderating a bit as we expected for the half year when you see the effect of the Tamiflu play out over the course of the year.
Japan at 7%, really all the oncology products growing well there, as well as Actemra. And we did also have the effect in the first quarter in Japan of the VAT change. That was quite a large first quarter, moderated a bit in the second quarter, but we see continued growth in Japan for the remainder of the year.
And the international at 2%. We saw increase in the international sales overall in Pharma in the second quarter from the first quarter, and we expect that to continue to accelerate in the second half of the year. Brazil is growing at 11%. In the Middle East, we have a variety of challenges going on with the political crisis in the Middle East and also the nature of some of the tenders there. And in Asia, in China in particular, we have our strategic products growing nicely. We had a Tamiflu effect in the first half of last year that didn’t repeat itself this year, and we also have some local competition in one of our small molecules, Tarceva as well, but we expect that entire international growth and China to continue to accelerate growth in the second half of the year as well.
Now that strong sales performance led to a good increase in the core operating profit at 9%. I just want to take you through a couple of items in the P&L because it’s a little bit different than most years because of some one-off items. First of all, in the royalties and other operating income line, we’ve got, in addition to strong royalties from Lucentis and other products, we have a one-time effect of the return of the Neupogen product to Amgen, which accounts for about CHF 428 million in the first half of the year. You can see the effect that has when you exclude that.
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