Roche: defining priorities for a high tech healthcare company

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1 Roche: defining priorities for a high tech healthcare company Erich Hunziker, CFO and Deputy Head of the Corporate Executive Committee June 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 All mentioned trademarks are legally protected 2 1

2 Performance up-date Ventana Our priorities 3 Q1 2007: Industry leading More than CHF 1.5 billion organic growth CHF bn % change in USD Q1 06 Q1 07 CHF local growth Pharmaceuticals Diagnostics Roche Group

3 Consistently outgrowing peers Group normalised sales - Constantly outperforming World Pharma Market Q1 '04 Q2 '04 Q3 '04 Q4 '04 Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Q4 '06 Q1 '07 Pharma World market (IMS) 35% 30% 25% 20% 15% 10% 5% 0% Quarterly local sales growth, Pharma vs. World Market Q1 '04 Q2 '04 Q3 '04 Q4 '04 Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Q4 '06 Q1 '07 Pharma World market (IMS) 5 Performance up-date Ventana Our priorities 6 3

4 Ventana Acquisition Company Overview Changing the practice of medicine in tissue-based cancer diagnosis Company facts Founded 1985, based in Tucson, Arizona 952 employees (year end 2006) 2006 Financials Revenue `06: $ US 238 m Rev. CAGR 04-06: ~20 % Operating Margin: ~19 % Leader in tissue-based diagnostics Leadership in advanced staining segment Large installed base in pathology labs Strong U.S. presence Source: Ventana Investor Presentation 7 Ventana Acquisition New Market Potential Histopathology; ~1 bn market, growing 10 % p.a.* Market size and growth Key growth drivers m USD 10 % CAGR 1,600 CAGR 11 % High need for test automation and standardisation Increasing incidence of cancer Advanced / ISH/IHC Stains 11 % Targeted cancer drugs requiring companion diagnostics Primary/ Special Stains Tissue Prep 2005 A 2006* E2011* Source: Analyst reports, Roche Analysis * Analysis of the histopathology market based on Analyst forecasts 3 % 8 4

5 Roche and Ventana Clear Market Leaders Maximising each companies market strengths Advanced Staining Market 2006 Total: 576 m USD (+19 %) Abbott 5% Vision 9% Others 8% Ventana 41% others; 39% IVD Market 2006 Total: 32 bn USD (+5 %) Roche; 19% Abbott; 12% Dako 37% Dade B; 5% Beckman C; 6% JnJ; 10% Bayer; 9% ex- Nth Am. 28% Ventana Sales 2006 Total: 238 m USD (+20 %) Nth Am 72% RoW 19% Roche Sales 2006 CHF 8,747 m (+5 %) Nth Am. Japan 28% 5% EMEA** 48% Source: Analyst reports, Roche Analysis All growth rates in local currency * Analysis of the histopathology market based on Analyst forecasts **Europe, Middle East and Africa (excl. Iberia) 9 Ventana Acquisition Providing Medical Value Better diagnosis & therapy selection in oncology Influence on medical decisions by pathologists Diagnostic Process (e.g. Oncology) Pre-Disposition Screening Diagnosis Therapy Selection Therapy Monitoring Serum-based: Protein DNA/ RNA Tissue-based: Marker in situ (IHC/ ISH*) Marker extracted Existing Roche Dx segment Source: Roche Analysis * IHC = Immunohistochemistry; ISH = in situ hybridization Existing Ventana segment Emerging innovative Dx segment 10 5

6 Ventana Acquisition Complementary Technologies Complete tissue-based diagnostics capabilities for customers Pathologist Testing on Tissue Testing after Protein / Nucleic acid Extraction IHC protein markers FISH/CISH/SISH NA markers DNA mutation RNA expression via microarray RNA expression via multiple RT-PCR or mutation detection RNA expression via multiple RT-PCR or mutation detection Protein expression via IC system AmpliChip LC480 TaqMan Elecsys Ventana technology capabilities Roche Diagnostics technology capabilities 11 Ventana Acquisition Companion Diagnostics Strong oncology drug portfolio, combined with full diagnostics capabilities uniquely positions Roche to lead in PHC Roche Roche Capabilities Oncology Pipeline PCR Elecsys/ Others Herceptin Ventana Capabilities IHC/ I SH Late Development/ Market Tarceva / Rituxan Pertuzumab R7204 Early Development R7112 R1507 R7160 R

7 Transaction Financials Summary Deploying capital for the right strategic purposes 1 Offer of $75 cash per share, representing an attractive value to Ventana s stockholders Roche committed to maintain operations in Tucson, Arizona and further invest in the business Deal accretive to operating profit/ EBIT within next 2-3 years and to Core EPS within 4 years. Marginal dilution (<1 %) to Core EPS prior to this Strategic flexibility of the Roche group not significantly affected 13 Performance up-date Ventana Our priorities 14 7

8 Roche Challenge # 1 Achieve above peer level sales growth for both divisions 1 Can we constantly gain market share in both divisions? Q1 2007: Growing more than three times the market Execution of assets on hand Local sales growth Top 10 products as % of pharmaceutical sales Division Europe North America Latin America Japan -2% 4% 6% 8% 13% 11% 20% 21% 21% 24% Roche IMS MAT Jan '07 80% 70% 60% 50% 40% 30% 20% 10% 0% 2.2% 5.5% 7.1% 0.9% 2.7% 5.3% 6.0% 8.4% 9.4% 6.9% 2.1% 4.2% 0.9% 6.3% 6.4% 2.2% 3.1% 4.5% 5.9% 6.9% 7.8% 2.7% 2.9% 2.9% 4.4% 5.2% 5.7% 9.5% 8.7% 10.1% 11.1% 12.8% 15.0% 15.1% 14.8% 14.3% Tarceva Lucentis Xeloda Pegasys CellCept NeoRecormon/ Epogin Tamiflu Herceptin / Rituxan 16 8

9 Focus on differentiated medicines pays off A young and growing portfolio Pegasys Molecular Dx CellCept Tamiflu CHF 1 billion or more CHF 2 billion or more CHF 3 billion or more CHF 4 billion or more Rocephin RoAccutane NeoRecormon/ Epogin Centralized Diagnostics Diabetes Care CellCept Centralized Diagnostics Herceptin Diabetes Care Value drivers Sales (CHF bn) Our oncology strategy: Setting new standards of care New tumor types, new combinations, new lines of intervention Clinically differentiated product Example target all tumor types target all possible combinations target earlier (adjuvant) intervention Superior outcome for patients 3 rd line 3 rd line 3 rd line 2 nd line 2 nd line 1 st line 1 st line GIST Pancreatic 2 nd line Ovarian Adjuvant Prostate 1 st line RCC Adjuvant BC Adjuvant Completed NSCLC Ongoing CRC In preparation 18 9

10 : Building standard of care, defending leadership Effectively maximizing an asset Main Indication Status Main Indication Status NSCLC 1st line nonsquamous 1st line squamous 2nd line in Lung* ATLAS AVASQ BRIDGE BETA Lung Data completed, Initiated Q4 05 Initiated Q3 06 Pilot initiated Q2 06 Initiated Q2 05 mcrc Adjuvant CC Adjuvant rectal Ca 1st line NO16966 AVANT NSABP C-08 E5204 Positive results Q3 06, Fied 07 Recr. to complete H1 07 Recr. completed Initiated Q1 06 Adjuvant NSCLC mbc Adjuvant BC 1st line HER2- negative 1st line HER2- positive 2nd line HER2- negative ECOG 1505 AVADO RIBBON-1 AVEREL RIBBON-2 E2104 E5103 To initiate H1 07 Recr. to complete H1 07 Initiated Q4 05, Global recruitment launched Initiated Q3 06 Initiated Q1 06 Positive data Q1 07 To initiate 2007 RCC Pancreatic Ca Ovarian Ca 1st line 1st line 1st line 2nd line AVOREN CALGB AVITA GOG 218 ICON7 GOG 213 Positive results Q4 06, Flied 2007 Awaiting results Recr. completed Initiated Q3 05 Initiated Q4 06 In preparation HER2- positive BO R/B-31R To initiate 2007 In preparation Prostate Ca Hormone refractory CALGB Initiated Q2 05 * Formerly called AVAIL Xeloda/ Tarceva/ / Herceptin: Maximizing across the portfolio Main Indications Status Xeloda Adjuvant CC Combo AVANT Recr. to complete H1 07 Combo oxaliplatin NO16968 Recr. completed, Final analysis end 07/early 08 Adjuvant BC NO Recr. completed Tarceva NSCLC 1st line maintenance Combo chemotherapy SATURN TITAN Initiated Q4 05, Recr. to complete 07 Initiated Q4 05, Recr. to complete 07 Combo ATLAS Initiated Q4 05 NSCLC 2nd line Combo BETA Lung Initiated Q2 05 Adjuvant NSCLC RADIANT Initiated Q3 06 NHL maintenance 1st line After induction PRIMA Initiated Q1 06, Recr. to complete H1 07 CLL 1st line ML17102 Recr. completed CLL relapsed REACH Recr. to complete end 07 Herceptin Gastric Ca ToGA Initiated Q3 05, Recr. to complete H2 07 Adjuvant BC 1yr vs. 2yrs treatment HERA Final analysis 2008/

11 The key goal of all our efforts in oncology: moving from extending life to potentially saving life Filed or to file soon Ongoing ADJUVANT MAINT. 1 st LINE 2 nd LINE Xeloda adjuvant BC Xeloda adjuvant CC combo adjuvant rectal Ca adjuvant CC Tarceva adjuvant NSCLC Tarceva & NSCLC maintenance inhl maintenance Tarceva pancreatic Ca Xeloda gastric Ca Herceptin mbc combo hormonal RCC pancreatic Ca ovarian Ca Herceptin gastric Ca & Herceptin mbc 1 st line ext. NSCLC Xeloda mbc 1 st line ext. mcrc 1 st line combo mcrc 1 st line ext. NSCLC 1 st line ext. 1 st line CLL Tarceva NSCLC 1 st line mbc relapsed CLL prostate Ca Tarceva & NSCLC 2nd line Xeloda mcrc 2nd line combo mbc 2nd line To start soon adjuvant NSCLC adjuvant BC 21 Dramatic improvements when moving up the adjuvant status Cost per QALY UK NICE assessment Herceptin adjuvant - agg NHL <60y - agg NHL >60y Gemzar - Pancreatic Cancer Taxotere - 2nd line NSCLC Taxol / Taxotere - 2nd line BC Taxol / Taxotere - 1st line BC Campto - 2nd line CRC Glivec - vs INF-alpha CML Herceptin 1st line * (range: 7-19) * (range:7-24) (range:11-27) * (range:17-28) (range:14-52) Campto - 1st line CRC Temodal - Brain Cancer GBP in (000) Source: NICE Technology Appraisal Guidance Documents Rounded figures * Average of range 22 11

12 Oncology is still dramatically under funded Compared to other disease areas Mental disease 25.3% Total disease burden in DALYs Other 26.3% Cardiovascular 17.1% Cancer 16.7% Injuries 8.7% Resp. 5.9% Total healthcare costs Cancer 6.4% Cost breakdown in oncology (example: Germany) Inpatient hospital care 67% Drugs 8% Ambulatory 16% Other 9% Source: A pan-european comparison regarding patient access to cancer drugs, Karolinska Institute DALY: Disability-Adjusted Life Years, figures from 2002/3; Commonly used measure of the burden of disease 23 Roche has a low exposure to generics Long-term sustainable business Sales erosion due to generisation (% of 2004 sales) 100% 80% 60% Average European peers 40% 20% Roche Source: citigroup 0%

13 Roche has a unique investment case Roche: Unique geographic risk diversification USA (Greater) Europe Japan Asia China Latin America Roche: Unique pillars of value risk diversification Tamiflu Boniva Actemra in CRC Mircera Herceptin Pegasys Tarceva in RA Xeloda CellCept NeoRecormon Diabetes Care in NSCLC in BC JTT- 705 (R1658) Immuno- Diagnostics Molecular Diagnostics GLP-1 R 1583 FUTURE PILLARS 25 The short/medium term sales perspective Challenge # 1: Achieve above industry-standard sales growth Conclusion # 1: Roche wants to maximize assets on hands and to translate value opportunities into reality 26 13

14 Challenge # 2 Turn attractive top line into attractive bottom line 2 Can we achieve an attractive top-line and still deliver strong EPS growth? Doing the right things right Three focus areas People are key! Activate potential and constantly educate: to learn faster than our competitors is the only sustainable factor of success! The right quantum size for Roche? Fixed cost versus variable cost Operational productivity 28 14

15 Activate our employees potential Constant education to overcome fear of change Number of employees To achieve our ambitions we have to activate the potential of our 72,000 employees! Our leadership and communications efforts have to concentrate here low Readiness for change high 29 Organizations do not grow linearly Fixed cost base grows in quantum steps The highest profitability is achieved at the top of a quantum step 30 15

16 What is the right quantum size for a sustainable Roche? Even if costs grow considerably slower than sales, there is risk that we build up too much infrastructure / fixed costs! Sales 31 Constantly improving operational productivity Operational productivity is an important key enabler for the Roche Group We must become better and cheaper in whatever we do! 32 16

17 Focus on differentiated products paying off Sales doubling, operating profits tripling Group sales 1 (CHF bn) Group operating profit 2 (CHF bn) 27.9% % 22.9% % 20.2% % Pharmaceuticals and Diagnostics 2 before exceptional items 33 Core EPS rising steadily CHF Core EPS CAGR 1 ('02 '06): 23 % Compound Annual Growth Rate

18 Economic success translated into shareholder returns Again a substantial increase in 2006 CHF Dividend CAGR 1 ( 91-06): 18 % Compound Annual Growth Rate 1995 including centenary bonus 2006 Dividend: Proposed by the Board of Directors 1 compound annual growth rate 35 Short/medium term bottom-line perspective Challenge # 2: Achieve above industry-standard value creation Conclusion # 2: Roche has many programs running to ensure above industry standard EPS-growth 36 18

19 Challenge # 3 Filling the strategic gap Can we produce enough internal and external innovation to maintain the Roche Group s Leadership position? Sustainable leadership How can we constantly provide benefit to customers? Innovation Research Development Production Marketing & Distribution Customer benefit Which degree of innovation (= medical differentiation) is necessary to jump regulatory and reimbursement hurdles? 38 19

20 The potential is there: unmet medical needs in many age-related diseases Met medical needs Unmet medical needs Alzheimer s Dementia Parkinson s Depression CNS RA / MS Osteoporosis CHD / Dyslipidemia Hypertension COPD Incontinence Diabetes T2 Cancer Stroke Inflammation/ Cardiovascular Injuries Respiratory Urology Endocrine Tumors Accidents/ Bone AGE-RELATED DISEASES 39 Roche focus area Current and future key sources of growth (Adjuvant use) In-house R&D Collaborations In-licensing (Metastatic use) Herceptin (Oncology ) Autoimmune portfolio Mircera (Renal & oncology) Diabetes portfolio CETP inhibitor (Dyslipidemia) Illustrative 20

21 Rheumatoid Arthritis/ Auto Immune Major indications in phase III development Main Indication Rheumatoid arthritis Status Main Indication Multiple sclerosis Status MTX - inadequate responders MTX -naive SERENE, SUNRISE MIRROR IMAGE Recr. completed Initiated Q1 06 PPMS RRMS OLYMPUS HERMES Recr. completed Q4 05 Met primary endpoint Q3 06, presented at AAN 07 Actemra Ocrelizumab Combo Enbrel MTX (DMARD) - inadequate resp. or -naive Anti-TNF inadequate resp. MTX inadequate responders MTX inadequate responders TAME OPTION, TOWARD, AMBITION RADIATE LITHE Phase III Initiated Q2 06 Recr. completed, Final analysis by mid 07 (OPTION January 07) Recr. completed, Final analysis by mid 07 Recr. completed Initiated Q4 06 Ocrelizumab RRMS Lupus nephritis Ocrelizumab CellCept Phase II or III LUNAR Phase III Phase III In preparation To complete recr. H2 07 To initiate Q2 07 Recr. completed, Results (inducation phase) H1 07 Anti-TNF inadequate responders X-ray study Phase III Phase III To initiate H1 07 To initiate H1 07 SLE Ocrelizumab EXPLORER Phase III To complete recr. Q1 07 To initiate in Q2 07 ANCA ass. vasculitis RAVE Initiated Q4 04 Metabolic and vascular diseases Major decision points in 2007 Main Indications Type 2 Diabetes R1440 (GKA) R1583 (GLP-1) R1439 (PPAR α/γ) R1579 R1511 Phase II Phase II immediate release formulation Phase II sustained release formulation Phase II Phase I Phase I Status Initiated Q4 05 First phase II data available 2007 Filing 2009 Presented at ADA 06 Initiated in Q Initiated Q4 06 Ongoing Ongoing Dyslipidemia R1658 (JTT-705) Phase II efficacy Phase II safety Encouraging data obtained H1 06 Results by mid 07 Go/ No go decision for phase III in 2007 Filing

22 Roche 2015 This program provides strategic direction and aligns our priorities to fill sustainable long-term growth gap Roche: Innovation Is Our Core Scope of Innovation Innovation Capabilities Choices around where we should focus to ensure advantaged participation Choices around how we will run our Innovation Model Innovation Investment Choices around how much resources to allocate and deploy 43 Access to Innovation is key - competition growing Costs of third party innovation is raising steeply! Average cost of in-licensing (Rx), $m Early-stage Late-stage Average cost of in-licensing deals rose 40% (CAGR) since 2000 By 2010, 40% of Pharma peers revenues expected to come from external sources of innovation

23 Roche internal R&D: 5 Disease Biology Leadership Teams responsible for the start of the value chain Today s model New model NMP TA LI LO Ph 0 Ph 1 Ph 2 Ph 3 Reg. NMP TA LI LO Ph 0 Ph 1 Ph 2 Ph 3 Reg. Site Management Committees R&D Committee LCC Disease Biology Leadership Teams (DBLT) (x5) PPG BDC Strategic Portfolio Committee Non-Clinical Drug Safety Committee Drug Safety Committee Non-Clinical Drug Safety Committee Drug Safety Committee Decision Making Committees Decision Making Committees & Peer Reviews 45 Long-term perspective Roche 2015 is a crucial platform Challenge # 3: Filling the value gap Conclusion 3: With Roche 2015 we have the right platform in place to identify the right priorities 46 23