Committed to innovation and growth Alan Hippe, CFO Roche Group London, September 2012
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. For marketed products discussed in this presentation, please see full prescribing information on our website www.roche.com All mentioned trademarks are legally protected
Our strategy R&D productivity - general considerations R&D allocation and governance at Roche Continuous productivity improvements Focus on cash and outlook
An increasingly challenging environment Where do we go from here? Regulators Medical benefit-risk ratio Efficacy (clinical endpoints) Safety ( zero tolerance) Payers Economic benefit-cost ratio Constrained funding capacity Demanding real outcome evidence Investors Economic risk-return ratio Declining Returns Declining Growth 4
Roche strategy: Focused on medically differentiated therapies Premium for innovation Generics OTC Pharma Dia MedTech Focus Regulators: Optimised benefit / risk ratio Payors: Optimised benefit / cost ratio Differentiation 5
Roche strategy: Leveraging Pharma & Diagnostics Through-out discovery to market Pharmaceuticals Research Development Commercialisation Unrestricted know-how and IP exchange More efficient development Faster adoption of PHC solutions (medicine and test) Research assay Diagnostics Technically validated IVD assay Clinically validated IVD assay 6
Roche strategy: Tailor made access options for high value products Established Markets Emerging Markets Value based pricing Tiered pricing Universal access and coverage -> Negotiate prices for new medicines Limited patient access -> Enable access to public funding 7
Our strategy R&D productivity - general considerations R&D allocation and governance at Roche Continuous productivity improvements Focus on cash and outlook
R&D productivity of Pharma industry: average returns 1 falling to critical levels Return on R&D investment 25% 20% Bernstein KPMG Deloitte McKinsey 15% 10% Cost of Capital: 8%-10% 5% 0% 1960 1970 1980 1990 2000 2010 1 Different methodologies (e.g. IRR, economic returns) Sources: Bernstein Research 2011, McKinsey 2011, KPMG 2011, Deloitte 2011, Roche analysis 9
R&D productivity differs substantially among players Average annual NME peak sales (2001-10) 1 US$ bn $ 710 m Peak Sales (per $1 bn R&D) 4 x Roche $ 165 m Peak Sales (per $1 bn R&D) Average annual R&D investment (1997-2006) 1 US$ bn 1 Peak sales and R&D calculated pro forma to account for major M&A Source: EvaluatePharma; BCG analysis; Roche analysis 10
Implications of R&D productivity challenge Segregation will continue as only true innovation will be rewarded low Medical differentiation high Generics No / limited differentiation Me-too players?? High differentiation True innovators low Willingness to pay for added value high 11
Our strategy R&D productivity - general considerations R&D allocation and governance at Roche Continuous productivity improvements Focus on cash and outlook
Solid margins with a high risk / high reward model Core operating profit margin (%) 1 45% R² = 0.6198 Pfizer Astra Amgen 35% Sanofi GSK Merck BMS Eli Lilly 25% Abbott Novartis Bayer 15% 30% 40% 50% 60% 70% 80% 90% 100% Branded pharma sales as % of Group 2 Source: Company reports, Roche analysis; 1 Based on average of fiscal years 2009-2011 financials; 2 Based on 2010 data 13
The P&L reflects Roche s innovation based strategy Low on Marketing, General and Administration Eli Lilly Amgen Roche BMS Merck Novartis Astra Sanofi GSK Pfizer Abbott Bayer Eli Lilly Novartis Pfizer Bayer Merck GSK Astra Abbott BMS Sanofi Roche Amgen R&D % sales 21% 20% 19% 18% 17% 16% 15% 14% 14% 13% 10% 8% M&D+G&A % sales 33% 32% 29% 29% 29% 29% 28% 26% 24% 24% 23% 18% Pfizer Astra Amgen Roche Sanofi Merck BMS GSK Novartis Eli Lilly Abbott Bayer Core operating profit margin % sales 17% 23% 27% 27% 39% 37% 36% 34% 34% 33% 31% 43% Source: Company reports, Roche analysis; Figures based on fiscal year 2011 financials 14
Return on R&D: Historically Roche has delivered Required peak sales per NME (CHF bn) Actual Launches 2001-2010 CHF 2.1 bn Required performance to breakeven 1, at actual R&D expenses (1996-2005) 1.1 Average # NMEs per year 1 Incl. recovery of cost of capital, Roche Pharma. Criteria includes: late stage portfolio, risk adjusted revenues, average profitability assumed, standard erosion curves 15
R&D productivity: Our plans tell us that we will also be delivering in the future Required peak sales per NME (CHF bn) Illustrative Planned launches 2011-2016 Required performance to breakeven 1, at actual R&D expenses 2011 onwards Average # NMEs per year 1 Incl. recovery of cost of capital at planning exchange rates, Roche Pharma. Criteria includes: late stage portfolio, risk adjusted revenues, average profitability assumed, standard erosion curves 16
Roche R&D: Allocation of funds Decides overall risk appetite Invest proportionally more into R&D as compared to peers Cap / keep R&D stable in view of the overall market risks Corporate Executive Committee (CEC) Sets total* budget by unit (Total CHF 8bn) Diagnostics (CHF 0.9bn) REDs (CHF 2.5bn) Late stage (CHF 3.9bn) Chugai (CHF 0.8bn) (arms length) Reviews allocation Oncology Neuroscience Immunology Virology Metabolism Approves LIP decisions e.g. MetMAb 17 * Refers to actual 2011 figures
Roche: R&D well balanced from a risk & disease point of view 2012 Roche budget Oncology Metabolism Inflammation CNS Virology 0% 5% 10% 15% 20% 25% 30% Industry average probability of success Phase 0 to Registration Source: Bernstein Equity Research, Tufts University and Roche analysis 18
R&D spend: Balance between short and long term R&D spend by phase ~50% ~50% Invest for the future Invest for the near term Research/ Discovery Phase 0 Phase 1 Phase 2 Phase 3 Filing Phase 4 Note: Based on 2012 budget 19
Our strategy R&D productivity - general considerations R&D allocation and governance at Roche Continuous productivity improvements Focus on cash and outlook
Productivity improvements: Through Innovation AND continuous Efficiency programs Innovation Efficiency Illustrative return Efficiency Innovation Base Base Increase success rate Reduce time to market "Innovation" Reduce cost base Innovation + Efficiency Source: Nature Reviews (Eric David, Tony Tramontin and Rodney Zemmel (McKinsey & Co.), Vol. 8, 609, Nature Reviews Drug Discovery), Roche analysis 21
Example: Optimise research at pred Nutley Reduce complexity Close R&D centres (Nutley) Co-locate management TCRC Optimise resource allocation Increase investment in late stage Leverage support functions 80 60 40 20 0 New Molecular Entities 8 8 16 18 35 36 11 11 21 23 11 23 47 42 38 2009 2010 2011 HY 2012 before R&D Phase I Phase II Phase III + Registration prioritisation HY 2012 after R&D prioritisation Refine infrastructure Reduce infrastructure costs (support functions / site infrastructure) Unify sites for non clinical safety and chemistry Welwyn Penzberg Basel Schlieren Shanghai Strategic sites Support Centers 22
Example Development: Productivity initiative in development Completed efficiency initiatives Roche Genentech Integration Transactional Outsourcing Ongoing RETHINK D initiatives Improve probability of technical success / reduce risk in trials read outs (ex: use predictive endpoints) Using modern tools to speed up processes and bring trials closer to patients (ex: collect data directly from patients etc.) -15% Jan 2010 Cost/LIP 2011 Cost/LIP 2012 Target Cost/LIP 2015 Plan LIP refers to Lifecycle Investment Point 23
Example: Roche Diabetes Care securing longterm profitability RDC sales Growth (CER*) 6% 4% 2% Restructure and consolidate R&D organisation "One Global Operations" structure 2009 2010 2011 Optimise M&D investments Blood Glucose Monitoring (bgm) Insulin Delivery Systems Streamline Portfolio Maximise market uptake Invest Insulin pumps and CGM CER=Constant Exchange Rates 24
Our strategy R&D productivity - general considerations R&D allocation and governance at Roche Continuous productivity improvements Focus on cash and outlook
High operating free cash flow and margin Group operating free cash flow (CHF bn) and margin 31.6% 32.0% 28.2% 26.1% +7% at CER 21.8% 7.17 6.78 6.43 6.86 4.81 HY 2008 HY 2009 HY 2010 HY 2011 HY 2012 CER=Constant Exchange Rates 26
Managing risks: Accounts receivables in S. Europe 27
Credit Management & Receivables: Managing risk Spain learning from the past to reduce future risk History Action Impact AR balance meur DSO Public debt AR balance meur AR rose significantly with an increase in sales, plus bias of portfolio to hospital sector Growing delay of payments from public accounts No issues with private accounts Escalation of tools used, including Individual regional account plans Change of commercial policy (CoD) Forfaiting (local banks and international funds) Significant reduction in AR due to Montoro Plan (June 2012) Focus: avoid future build up 28
Continuous increase in dividends and pay-out ratio historically Dividend per share (CHF) 8 6 4 2011 Payout ratio of 55.3% 3.40 5.00 4.60 6.00 6.60 6.80 6% 5% 4% 3% Dividend yield (%) 2 0 2.50 2.00 1.65 1.45 1.30 1.15 0.18 0.20 0.28 0.37 0.48 0.55 0.64 0.75 0.83 0.87 1.00 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 2% 1% 0% Pay-out ratio calculated as dividend per share divided by core earnings per share (diluted) 29
Expanding into selected therapeutic franchises LIP candidates 2012 target: 3 out of 5 Larger (> 1 bn) Smaller (up to ~1 bn) 2012 2013 2014 2015 2017 onwards Non risk-adjusted 30 Perjeta T-DM1 GA101 bitopertin ocrelizumab onartuzumab aleglitazar danoprevir mericitabine lebrikizumab rontalizumab etrolizumab anti-pcsk9 Bcl-2-sel inh MEK 0973 Potential Filing Year 2016/17 Oncology Neuroscience Metabolism Virology Immunology
We will continue to show strong commitment to Innovation AND Efficiency Innovation Efficiency Sales growth Profitability Cash Value 31
Summary: Focus on innovation and growth 1 Strategic focus on innovation and driving Personalised Healthcare 2 Strong growth in Emerging Markets facilitated by innovative access models 3 Leading product pipeline providing value for the future 32
We Innovate Healthcare