Investors/Analysts Conference London, July 2010 Ian Bishop

Transcription

1 Investors/Analysts Conference London, July 2010 Ian Bishop

2 This presentation contains certain forward-looking statements. These forward-looking statements may be identified by words such as believes, expects, anticipates, projects, intends, should, seeks, estimates, future or similar expressions or by discussion of, among other things, strategy, goals, plans or intentions. Various factors may cause actual results to differ materially in the future from those reflected in forward-looking statements contained in this presentation, among others: 1 pricing and product initiatives of competitors; 2 legislative and regulatory developments and economic conditions; 3 delay or inability in obtaining regulatory approvals or bringing products to market; 4 fluctuations in currency exchange rates and general financial market conditions; 5 uncertainties in the discovery, development or marketing of new products or new uses of existing products, including without limitation negative results of clinical trials or research projects, unexpected side-effects of pipeline or marketed products; 6 increased government pricing pressures; 7 interruptions in production 8 loss of or inability to obtain adequate protection for intellectual property rights; 9 litigation; 10 loss of key executives or other employees; and 11 adverse publicity and news coverage. Any statements regarding earnings per share growth is not a profit forecast and should not be interpreted to mean that Roche s earnings or earnings per share for this year or any subsequent period will necessarily match or exceed the historical published earnings or earnings per share of Roche. 2

3 US Healthcare reforms Free Cash Flow Hedging and collateral arrangements Appendix 1: Core EPS 3

4 US Healthcare reforms Main impacts Pharmaceuticals Division 2010 Medicaid rebate increase Increases in rebate rates to 23.1% from 15.1% Retrospective to 1 January Managed Medicaid expansion Increased eligibility for Medicaid rebates. Effective 23 March Financial impact on 2010 results HY 2010 effect, 122m USD (132m CHF) from sales and operating profit. FY 2010 effect estimate of up to 350m CHF, from sales and operating profit. Impacts of reforms will be ongoing into 2011 and beyond, and are subject to trueups as the assumptions are refined and application guidance is issued, and will also change with the development of the business. 4

5 US Healthcare reforms Main impacts Pharmaceuticals Division Change to Average Manufacturers Price definition Changes to definition of AMP, which impact rebate calculations. Applies from 1 October 2010, minimal impact in Medicare Part D - Donut Hole Eliminates coverage gap. Effective 1 January Currently estimated to have minor impact. Branded Pharmaceutical Manufacturers Fee Beginning 2011, annual fee imposed on Pharmaceuticals Manufacturers to 2.5 billion USD (to increase in later years), based on prior year s sales. Not tax deductible. Accounting treatment still being clarified as to whether this is a deduction from sales or an expense, and at which point the accrual should be recognised. 5

6 US Healthcare reforms Main impacts Diagnostics Division and Group Diagnostics Medical Device Excise Tax Excise tax of 2.3% of sales. Effective 1 January Currently Roche understands that diabetes testing equipment is exempt. Retiree Drug Subsidy Impact on tax provisions on company OPEB plans One-time adjustment to recorded deferred tax balances. Deferred tax expense of 11m USD recorded in first half of Longer-term positive impacts Increased patient access to innovative healthcare products. 12 Year exclusivity for biologic products from bio-similars. 6

7 US Healthcare reforms Free Cash Flow Hedging and collateral arrangements Appendix 1: Core EPS 7

8 Free Cash Flow Net Working Capital CHF millions H H Incremental change between H1'10 and H1'09 (Increase) decrease in net working capital Accounts receivable (533) (768) -235 Inventories Accounts payable (627) (1,518) -891 Other (14) (45) -31 (1,168) (2,298) -1,130 8

9 Free Cash Flow Income tax, interest and dividend payments CHF millions H H FY 2009 H Incremental change between H1'10 and H1'09 Cash outflow Taxes paid 486 1,281 1,767 1,564 +1,078 Interest paid ,529 +1,410 Dividends paid 4, ,395 5, ,958 1,952 6,910 8,307 +3,349 9

10 Free Cash Flow development HY 10 vs. HY 09 Decrease of Free Cash Flow of -3.7 bn due to special factors CHF bn FCF HY 09 Ongoing business (comparable basis) Payment of Tamiflu royalties & certain other liabilities accrued at year end Dividend increase Genentech transaction related cash flow changes: GNE retention plan, severance Palo Alto & Nutley, inflow GNE stock options -1.1 Tax benefit on settlement of GNE stock options -1.2 Interest payments relating to 2009 over and above HY 09 payments FCF HY

11 HY 2010: Group cash flow Net debt increase driven by dividend and currency effects CHF bn 0 Operating free cash flow margins (% of sales) Pharma Division 31.6 % Diagnostics Division 10.6 % Group Taxes -1.6 Treasury -1.2 Dividends % Net debt 31/12/09 Operating Free Cash Flow Non-op. FCF -1.6 Free Cash Flow -2.7 Hedging and collateral arrangements FX gain on hedged debt Currency translation and other Currency translation, fair value & other movements Net debt 30/06/10 11

12 US Healthcare reforms Free Cash Flow Hedging and collateral arrangements Appendix 1: Core EPS 12

13 Overview Financing and Hedging All foreign exchange exposures hedged with derivatives Bond Investors Banks Bonds USD + non-us currencies FX hedges Collateral Mgmt Hedge Accounting RHI * IC - FX hedges Finance Company DNA Genentech RIU IC loans USD IC loan USD * Roche Holdings, Inc. (US holding company) 13

14 Hedging and collateral arrangements What are these, and why is Roche doing this? Debt issued to finance Genentech transaction Roche issued 40 billion USD of debt in early 2009 from its US holding company. Debt was issued in USD to the US markets, but also in EUR, GBP and CHF to access European markets. Hedging Proceeds of non-usd debt were swapped to give the debt economic characteristics of USD debt in the Roche financials. Repayment rate has been fixed to the forex rates prevailing at issue in Similarly interest costs have been economically hedged to US interest rates. How is this done? Shorter-term debt is hedged using Forward Contracts of 1-6 months, which are periodically settled and rolled over. Longer-term debt is hedged using Cross-Currency Swaps, which are only settled on maturity of the debt. Collateral payments are exchanged between Roche and the banks to mitigate counter-party risk on the Cross-Currency Swaps. 14

15 Hedging and collateral arrangements Mechanics Forward Contracts Accounting treatment of derivative No recognition at inception. During course of contract fair value of derivative fluctuates due to forex rates. This movement is recorded to financial income Gain/loss on foreign currency derivatives. On maturity of contract, cash settlement is made, a true-up is recorded to financial income, and a new contract is set-up. Accounting treatment of hedged debt Carrying value of debt (which is EUR/GBP/CHF denominated in a USD reporting company) fluctuates due to forex rates. This movement is recorded to financial income Foreign exchange gains/losses Hedge Accounting Although economic hedging is achieved, there is no hedge accounting. 15

16 Hedging and collateral arrangements Forward Contracts CHF billion H H FY 2009 H Forward contracts - Foreign exchange gains (loss) in income statement (0.3) - Cash inflow (outflow) Carrying value of derivative asset (liability) in balance sheet for current contracts 0.1 (0.2) (0.2) 0.0 Underlying debt - Foreign exchange gain (loss) in income statement (0.7) (0.3) (1.0)

17 Hedging and collateral arrangements Mechanics Cross-Currency Swaps Accounting treatment of derivative No recognition at inception. During course of contract fair value of derivative fluctuates due to forex rates, and also interest rates (due to longer duration compared to forward contracts). This movement is recorded to equity in the hedging reserve. Accounting treatment of hedged debt Carrying value of debt (which is EUR/GBP/CHF denominated in a USD reporting company) fluctuates due to forex rates. This movement is recorded to equity in the hedging reserve. Hedge Accounting No impact on income statement, due to hedge accounting. Residual amount remains in equity, due to interest-rate differentials. This will unwind on maturity. In addition to the forex entries, there is an interest element recorded to income. 17

18 Hedging and collateral arrangements Cross-Currency Swaps CHF billion H H FY 2009 H Cross-currency swaps - Foreign exchange gain (loss) recorded in equity for the period (2.5) - Carrying value of derivative asset (liability) in closing balance sheet for swaps (0.8) Underlying debt - Foreign exchange gain (loss) recorded in equity for the period (1.8) (0.2) (2.0)

19 Hedging and collateral arrangements Mechanics Collateral arrangements Why is this done? The Cross-Currency Swaps involve counter-party credit risk for both parties. The carrying value can be quite high (for example at 31 December 2009, 1.7 billion Swiss francs in Roche s favour). Book value. The collateral arrangements cover both parties for the risk (for example at 31 December 2009, 1.5 billion Swiss francs in Roche s favour). Cash. Process Once a week a cash transfer is made between Roche and its counterparties. This is recorded as a balance sheet movement. There is no impact on income. As the underlying debt is repaid, the volume of the collateral will reduce, until it becomes zero when all debt is repaid. Future volatility Currently the collateral balance moves by 200m USD if the EUR/GBP/CHF all move by 1% against the USD. As the debt is repaid this will reduce to less than 100m USD by mid

20 Hedging and collateral arrangements Collateral arrangements CHF billion H H FY 2009 H Opening balance Cash inflow (outflow) Closing balance (0.5) Reported as - current assets accrued liabilities (0.5) Total (0.5) 20

21 US Healthcare reforms Free Cash Flow Hedging and collateral arrangements Appendix 1: Core EPS 21

22 Earnings per share Which one to use? Diluted EPS Best suited for reporting to shareholders on actual results. - Includes everything. Core EPS Best suited for reporting to shareholders on actual results. - Focuses on the underlying business. - Excludes historic irregular items (discontinuing businesses, exceptional items) and items that reduce comparability to peers (intangible asset amortisation and impairment). 22

23 Core EPS What does it mean and how can I model it? What is Core EPS Not an IFRS defined term, so everyone may have their own definition. At Roche: - Includes only continuing businesses. - Excludes exceptional items. - Excludes intangible asset amortisation and impairment. - Consistently applied since many years and fully reconciled. How do I model Core EPS? Develop your model of Pharma and Dia operating profit before exceptional items. Back out amortisation and impairments of intangible assets. Add in net financial income, tax and non-controlling interest impacts. Use ROFIS (Roche Finance Info System) at the investors section of Roche.com. 23

24 Intangible assets amortisation for Estimates based on status at 30 June 2010 CHFm Amortisation Income taxes (211) (197) (184) Non-controlling interests Assumptions Does not include impairments. Includes Medingo acquisitions (2010) but no other additions. Does not include transfers to 'in use' from 1 July 2010 onwards. Tax rate assumed at 35%. Foreign exchange rates assumed: USD 1.08, EUR 1.44, JPY

25 Core EPS target at constant currencies What does it mean and how can I model it? Our target Core EPS to grow at double digit, in local currencies. What does it mean? Core EPS in 2009 was CHF. The target is for 2010 Core EPS to be at least 10% higher, assuming that average forex rates in 2010 are the same as those in How do I model the forex effect? Look at the published Roche forex rates average 2009 (page 18). Compare these to your own assumptions for To the extent these are different, model what the impact is on operating profit using the table at the top of page 19. For any US dollar effects, consider the impact on interest expenses on debt. Then add in tax effects and (for income at Chugai) non-controlling interests. 25

26 We Innovate Healthcare 26