Roche Holding AG (ROG) Earnings Call Transcript & Summary

So good morning, good afternoon, everybody. My name is Michael Leuchten, pharma -- I'm one of the pharma analysts at UBS in London. Welcome to this fireside set with Roche. It's my pleasure to have CEO, Severin Schwan, with us on the line as well as Karl Mahler, Head of IR. Severin's going to make some opening remarks, and then we're going to jump into Q&A. There is an ability for you to submit questions if you want to that I can see on the screen. If we have some time, I'm more than happy to circle back to them. But without further ado, Severin, over to you.

Thank you, Michael. I'll keep it very short on my end so that we can quickly go into your questions. You have seen Q1 results with plus 7%, and that's really very much the result of the new product launches, which continue to overcompensate for the biosimilar erosion. Obviously, we have also been very much impacted by the COVID-19 crisis. On the one hand, they -- I brought charts. So for OCREVUS and LUCENTIS specifically, patients have been delaying appointments, and as a result of that, we see the impact on those 2 brands. And on the positive side, we have seen strong demand for Actemra actually ahead of the readout of the COVACTA trial, which we expect in early summer and June, and we could also compensate for the declines in the routine testing, with the COVID-19 testing, where we launched both the pCR molecular test and, more recently, an antibody test. Of course, there's a lot of uncertainty, how things will develop for the remainder of the year, how quickly economies will recover and, as such, how quickly patients will really return to their doctors and to hospitals. But overall, we confirmed our guidance. We feel confident that we will grow in the low to mid-single digits for the full year and also broadly in line with the sales growth, grow the earnings per share. Perhaps on the pipeline, just to conclude, I mean, 2 product launches with risdiplam, satralizumab. That's on track. And we have really a number of important readouts. You might just have seen that we got FDA approval now for Tecentriq in first-line non-small cell lung cancer as a monotherapy. We filed Tecentriq in a number of indications, including liver cancer. Importantly, we have readouts in ophthalmology. We expect soon a readout for the Port Delivery System for LUCENTIS, and we should also midyear see the first trials reading out for etrolizumab. Important news flow. We always said this is going to be an important year in terms of readouts and filings. So it's now starting over the next couple of weeks and months. So overall, so far so good. Let's see how the rest of the year develops. Shall we start with the first question?

Okay. Fantastic. So the first question is about the image change that you may be benefiting from. So the corona pandemic seems to have changed that significantly. Things like -- or topics like drug pricing are no longer headline news. Do you think this is a permanent shift? Or do you think we're going to return to health care reform debates relatively quickly? And partly the reason I'm asking is obviously, there's going to be a payer shift in the U.S. with the high unemployment rates. So do you think that's going to be a short-lived benefit to the pharma industry from an imaging perspective? Or are, for once, we going down a path where the world recognizes what pharma brings in terms of innovation?

I think it will be short lived. I think politicians will soon forget. We will have to deal with budget deficit. And I don't think that the pharmaceutical industry will ever be loved by societies. I wish it was the case, but I'm afraid it's soon returning to the more normal rhythm we are used to.

Okay. And you've been very vocal about how some countries have chronically underinvested in their health care systems, which has been -- almost brutally been revealed by the virus. So what structural changes do you expect will happen both for the pharmaceutical industry and for you particularly, obviously, also on the diagnostics side?

I do believe that on the diagnostics side countries -- and a number of countries will invest into their testing infrastructure. I think this is already happening now and countries have realized that structural deficit. So for that specific area in particular, in the area of molecular testing, I do believe that there is a bigger awareness and that people will shift to a better infrastructure. But beyond that, I'm not expecting fundamental shifts, right? I think at some point, societies will go back to other topics and we will have the same discussions that we -- as we had in the past: How much additional value can we provide with our solutions? What is the right price for it? And I -- even though it might feel like it in the moment, I think in a year's time, unless something dramatic happens, that's something else. If we have a big second wave, if a new virus comes up or something of that kind. But I think the more likely scenario is that things will normalize over a certain period of time and then societies and, as a result of this, politicians will move on. I don't expect a big structural change.

Okay. Very clear. Now the one thing that I think the pandemic has also flagged, which is not really a surprise, is that the R&D model, the incentives that are set at the moment are just not fit for purpose for certain areas. So vaccines, for example, maybe we can throw antibiotics into the mix and maybe even testing in a way because a lot of labs don't make that much money or profitability out of testing. So do you think there is a potential for rethinking that? Is there a way to get not-for-profit organizations more better funded that can go after this? So again, do you think this is just going to be forgotten once things normalize?

I think that probably it will be forgotten. I'm sorry that I'm so pessimistic about it, but I think that's just reality. But the fundamental issue which you described is indeed that for antibiotics, for example, the same as vaccines, the prices are too low. It's as simple as that, right? And as a result of that, there is little incentive for companies to invest in these fields. Now if things really turn bad, then probably people get more aware of the value, and then they start to honor this value. But I mean look at vaccines. Now vaccines, I mean, they are a business, but they are not a huge business, but the upfront risks are very high. And we are not in vaccines, as you know. But a couple of days ago, one of the companies said they will give the vaccines to those who pay for it, right? And there was an outcry. And the tone was that vaccines are a public good. And so everybody what politicians are signaling to the industry is listen, we all want your vaccine, but we don't want to pay for it. And if you find one, give it away for free and to everybody in the world. And this will not work, right? And then you have some NGOs and some governments who say, well, vaccines are anyway a public good, so this is not for the private industry. So this should be done by some -- it should be nationalized and academia or countries or NGOs should develop all of that. Then I say good luck. Reminds me of the former Eastern Germany. There, they are -- they tried, I don't know how many decades, to develop a medicine and nothing came out of it. So we have this fundamental issue that a lot of people see health as a public good and forget that somebody has to take the risks and that you need financial rewards to make it happen. And unfortunately, there are some areas like antibiotics and vaccines where that -- this is even more the case than in other areas. And until we see a fundamental shift in the attitude here, I don't think a lot will happen.

And is there a logic or conclusion from that? Because there are countries who, I guess, like the U.S. are seeing more value in innovation than maybe European countries. Is there a risk of nationalism here? Is there a threat that, especially when it comes to fitting medical need, that, like you said, countries that are willing to pay get stuff quicker or easier and that then ultimately leads to nationalism?

Yes. I think there is one thing which is special about our industry, is that you are really -- I mean, no country is independent, and I don't think it's realistic to believe that you can be independent with hundreds of medicines and you depend on each other, right? So if -- I mean, look at this. When 1 or 2 countries started to play with the thought to close the border for COVID-19-related products, I mean, the day after, the other countries were saying, you do that and you don't get this and this and this medicine. And the discussion was stopped immediately, I mean, literally immediately. And interesting enough, by the way, this was not only between developed countries, this was also happening between developing countries and developed countries because some of the developing countries have generic medicines, right? So I mean if you close your borders, then you have retaliation immediately. And I think it is unrealistic for any country in the world to cover the supply chain for every medicine. I mean this is just -- I mean, for the foreseeable future, this is not possible. And I cannot see even the U.S. getting to such a stage. So -- and if you look at this COVID-19 crisis, I mean, the one thing which really worked well, if you like, and it was also a concern I had personally, was international supply chains. They really worked well. I mean there was -- the borders always remained open for the supply of medical devices and medicines exactly because of this interdependence. And sometimes, you had to charter a flight because the normal flight was not available anymore. But it was not about countries closing their borders. This did not happen at all. And -- anyway, I think people will return pretty fast to normal. But because it's not feasible, I don't think that any country will seriously try to nationalize their medical supply chains. I cannot see that.

Okay. And maybe more practically for Roche. If we think about your pCR tests, you have the ability to produce 3.5 million a month. Your antibody test will be closer to 100 million, I believe, from June. But presumably, there's extreme demand for those products. So how is that allocated? Is it first come, first served? Is there an allocation process? How do you allocate those products?

Now it's different for molecular tests and for antibody tests. For molecular tests, first of all, we started off in the low single digits, but we're already in the high double digits. Not high double digits, we're in the double-digit millions already for pCR tests. So we have massively increased already the capacities for molecular diagnostics. But still, the demand is much higher than the supply for molecular diagnostic testing. And the most limiting factor for our offering is existing infrastructure. So the allocation was very much driven by there, do you have the infrastructure to actually run a test. Because you need instruments, you need very qualified personnel. And some countries had the issue that the infrastructure was not in place, and therefore, it was very difficult to get the number of tests going. That was really the biggest constraint, and it continues to be the biggest constraint. And then, of course, we follow also the medical need. I mean it started off in China. Then of course, the need in China went down. It moved to Southern Europe. And of course, it went to the U.S., to the respective hotspots. So that's where we try to bring all the factors together. And in the meantime, the situation has already much improved. As far as antibody testing is concerned, I'm much less concerned here because immunology is a broadly used technology. There are many, many existing tests out there on literally thousands and thousands of platforms around the world. Roche alone has 40,000 immunology platforms out there in the lab. And antibodies can be scaled up very quickly. So we will soon be in the 3-digit millions here. And therefore, it's less of a constraint, and that's a different story. Molecular testing is really where the bottleneck is.

Okay. Great. And I guess staying with the testing a little bit, I think the value of diagnostics has really been shown with this very clearly. From my perspective, the market tends to chronically undervalue the Diagnostics business within Roche. Is there any particular reason why you wouldn't consider a spin out, at least partial, to allow the market to value that independently, that business?

Yes. It really comes down to the question of how much synergies can you achieve between Pharma and Diagnostics and I should say in the future also between Pharma, Diagnostics and all our digital programs which are underway. And I do believe there are synergies. I do believe that we can develop a competitive advantage by offering more integrated solutions for providers, for health care ecosystems, and we're actually investing into that. And it used to be very much around companion diagnostics in the past, and now it's much more shifting to real world data, advanced analytics tools, clinical decision support, et cetera. But combining all these elements, I think, provides us with a potential competitive advantage. Now this is still out and that's not our business today, but I do believe there is an opportunity. And therefore, it might release some value in terms of short-term share price. That might be possible. But fundamentally, I think it would weaken us in our competitive position.

Okay. Very clear. Now going into sort of your top line momentum, your profitability. You did allude to the high single-digit track record that you've had. In 2016, you decided to change the way Roche was doing business. So there's been a fundamental change in the setup of organization. When we think about what that did for R&D productivity, when we think about how that is reflected in the nimbleness of the business, what are the things that you would point to that demonstrate why that was the right decision? And also, what triggered it in 2016 to do that?

Yes. I mean there are really 2 questions. One is R&D and how we work on R&D productivity. And then there is this overall question around transformation and adapting our organization, our cost structure, et cetera. And yes, 2016, of course we went through a phase where we had shifts in our portfolio. I mean we were entering new areas like with OCREVUS, with Hemlibra. And on the other hand, of course, we knew that some big cancer brands would be exposed to biosimilars, right? So there was really a major shift in the portfolio, one element. And then the second element is that back then, we really started to get also into this digital opportunities. We had the start of our strategic collaborations with Flatiron, with FMI, 2 companies which we bought out. And later, we had the start of a number of initiatives running in Pharma and in Diagnostics in this area. And all of that, I guess, on the one hand, the portfolio shift and -- on the Pharma side and, on the other hand, the digital dimension, which became very evident, and, by the way, the overall strategy which I just touched on in bringing Pharma, Diagnostics and digital together, that also led to the question of are we structured in the way we need to be structured for the future. Are we investing the money into the right areas, et cetera? And we started off a number of what we call transformation initiatives where we adapted the organization in a number of functions. And that was actually ongoing for a couple of years, and it's still ongoing. And -- yes. I think we'll start seeing also the benefits of what we initiated back then. R&D, I should just say I really believe R&D is less a matter of scale but much more a matter of quality. And at the very core of it, it's about people and creative people, and it's the question of what kind of environment do you need so that creative people come up with great medicines at the end of the day. And I think it has a lot to do with our management model and with basically freedom we give to our scientists. And that's also reflected in our structure. As you know, we have the so-called RED, research and early development unit, with gRED, with pRED. Chugai is independent. We have Spark now in the area of gene therapy. And they operate independently and they feed the late-stage pipeline, if you like. And I think that is something that we really differ versus other players. And some -- I think in this extreme form, I think no other peer has such an approach, which provides you with some complexity on the one hand but, on the other hand, with a lot of diversity, freedom, which attracts great talent, and you can retain great talent. It gives you a bit of an advantage when you recruit people from academia typically because it feels -- they like the independence to start with, and if they see this reflected in a company like ours, I think that's another attraction point. You see this also reflected in how we do our partnerships, how we deal with third parties, where we give them typically also a lot of freedom and -- which I think is beneficial in terms of driving innovation. So yes, you can't program innovation, and there is no guarantee. And you can always be surprised by setbacks or a series of setbacks, but you can work on the environment to increase the chances of success. And I do believe this approach where we give a lot of freedom to our scientists, where they operate in independent units, is an advantage in the long term.

Okay. And in your slide decks, you normally have a very nice chart that shows your growth track record. I can't remember how many quarters it now has been where the growth has been high single digits. So compared to your plan back then, I'm assuming that was actually better than you had anticipated. But I was wondering if you could talk about like how much better has that turned out. And has that been because OCREVUS and Hemlibra had more success but unexpected? Or was it a coming together of many things?

I think Hemlibra and OCREVUS is part of it. I mean that surpassed our expectations without any doubt. What also helped is that biosimilars eventually came later than we originally thought. So when the first biosimilars came into the market, they underestimated the regulatory hurdles, and that gave us a bit of time. And I think the combination of biosimilars coming in later and the success of some of the new medicines like Hemlibra and OCREVUS certainly helped. I mean Tecentriq is also doing very well. Perjeta did very well. So it's several things coming together at the end of the day. But yes, at the end of the day, what really counts is your pipeline, right? I mean the biosimilars of course they -- there's a lot of headwind now these days and this year in particular as we have a lot of pressure in the United States. But at the end of the day, what really counts in the long term is how is your pipeline progressing, how many new medicines do you bring to the pipeline. And then we are back to the discussion we had beforehand about our R&D model. I think that's what really matters in the long term.

Okay. And in terms of operating leverage, you had some strong beat in the top line. And I appreciate there was the Cabilly patent that went away that sort of had to be made up from a profitability perspective, but you've been very modest with your expectation for margin progression. As the top line continues to deliver, what's stopping that top line to drop down more to the bottom line as we go forward?

Yes on a very high level, of course, it will all depend on the pipeline again because if we don't bring out new medicines, eventually margins will come down. And if we are successful to bring out new, differentiated medicines, that's always an opportunity to also drive the bottom line. That's very clear. So I say this because this year in particular, we have a number of very important readouts still to come, I mean, beyond all the stuff which is already filed where we expect the pool very soon like risdiplam or satralizumab or the various Tecentriq indications. But we have etrolizumab, for example, which comes up. Now if etrolizumab works in Crohn's disease, so you see -- I mean, you can immediately see what that would mean not only in terms of top line but also in terms of bottom line. It's clear. Or if you look at our Port Delivery System for LUCENTIS, where we also expect readouts rather soon, I mean, if we are successful of bringing LUCENTIS, if you like, to a new level with the Port Delivery System on top of it, we would have worldwide rights here. I mean that could really be a very important opportunity for us. And those kind of opportunities, of course, help enormously to not only protect the bottom line but to potentially improve margins. And the other way around, it's also true. If all these products fail, it will get more difficult. But for the time being there, we say we keep EPS growth in line with sales growth. It's probably a reasonable approach given the information we have today, and then we'll see how it really develops. And don't forget we start already on a high level. I mean it's not that we come from a very low base. So therefore, we are probably a bit more careful here to not overpromise.

Yes. Okay. I'm going to take 2 questions that have come in on the screen. So one, just a follow-up on biosimilars. "You maintained the guidance for the erosion this year at CHF 4 billion, and I think foreign exchange has gotten worse against you. So is the erosion not as bad as you expected? And if so, is -- do you think that's a temporary pandemic-driven thing? Or is there something else to it?"

No. I mean the -- on the biosimilars, the erosion is what we -- I mean, we gave you the number at the beginning of the year where we said we think it's approximately CHF 4 billion, and we continue to say that it's CHF 4 billion. So it's perfectly in line with expectations. So I don't expect -- I mean, for the time being, I don't expect another number here. So I think it's still a reasonable estimate. And what was your second question, sorry?

No. Yes. I mean if it's not changed, the question was if there was any change, whether this was pandemic related or not. But is there...

No, no, no. I think the CHF 4 billion is still the best estimate.

Okay. And then the second question that came in as a follow-up is going back to diagnostics. "Point-of-care testing, do you think this is becoming more popular in a post-COVID world? And the background of the question is, is there a potential softening of the barriers to entry in this market if point-of-care testing becomes more interesting for players than in the past?"

I mean my personal view is that you need both, the core lab and point of care. And typically, the core lab is much more efficient and costs are much lower. So you need a good reason why you do point-of-care testing, right? And typically, you have point-of-care testing because you need the result immediately, I mean, literally immediately. For example, with blood gas, I mean, if you're in shock room, I mean, you need it now. Now not in half an hour. You need it now. And that's why you do point-of-care testing for blood gas, for example, if you get a patient into the shock room. Or if you have a cardiac infection and the ambulance is coming, I mean, they cannot send a sample to the lab and wait 2 hours. They need the result now. And now means now, not in 2 minutes. And therefore, you have point-of-care testing in cardiac. So one of the reasons can be really the medical need. And those areas are very well defined, right, and those are established segments. And the medical need, I don't think, will fundamentally shift or change. There are certain areas they have point-of-care testing for medical reasons. And then the second area where you might have a reason is convenience. And that typically has 2 prerequisites. First of all, that the quality is good enough; and the second one is that the price is low enough. And these are 2 really big hurdles because for point-of-care devices, I mean, it's just the difference of what you can do in terms of quality typically versus a central lab system. And you see this. If you look at the antibody tests, I mean, the quality of those tests compared to lab tests is really lousy. Part of it is also medical reasons, by the way, because if you work with arterial blood, it's more difficult than if you work with an intravenous blood draw. So there are limitations there. And that typically needs then technologies which overcome that. And we are actually working on those, but we will see how far we get. And then the second one is price because the payers, they need a really good reason to pay more for a point-of-care test than they would pay for a lab test. And that can be also a huge barrier. So we'll see how far we get there. And now it could well be that you have point-of-care testing for specific settings where the value is high enough, but it's not necessarily broad-based. And yes, we are working on that, but I do believe that it will never replace the labs. I mean you just don't get to the performance in a lab. That's just not possible from a throughput point of view and from a cost point of view.

Okay. That's very clear. And then the last block of questions I'd like to go into is around sort of where we are on the risk curve in the pipeline. So you acquired Spark, which, I guess, is best described as a platform acquisition. Tell me if you think that's an unfair or an accurate description. And then when we look at things like Huntington's disease, when we look at things like adjuvant treatment in cancer, those are riskier propositions than maybe an etrolizumab would be. So on average, where are we on the risk curve for Roche now? And what does that mean for platform acquisitions like Spark?

Yes. I mean I think at the end of the day, what you look at is the overall portfolio, and I feel quite comfortable with the risk we take. There are some really high-risk assets in this portfolio in particular in CNS. If you look with Alzheimer, for example, very high risk. Also, Huntington has risk. And I would say there are some areas where I feel very comfortable about. I mean I mentioned the Port Delivery System for LUCENTIS. I mean we know that LUCENTIS works, so it's not unlikely that LUCENTIS also works when you deliver it versus this -- with this specific device. And then you have the stuff in between. I mean I would put some of the oncology assets and, say, etrolizumab into this bucket. So I think it's relatively balanced. In terms of gene therapies, here, of course, we are still at the very beginning, and we do believe that this is an important platform in particular for monogenetic diseases. We'll see whether gene therapies can also play a role for more complex diseases in the future. And as far as Spark is concerned, yes, it was also about the platform and the know-how and the capabilities, but it was also about the portfolio, right? It was not only the platform. So yes, it's -- and it was also not that we were not in gene therapies. I mean we had the first partnerships. We had the first internal projects. But we came to a point where we thought now the field is getting interesting enough and the technology is advanced and now we took the biggest step, and that's why we eventually persuaded ourselves to go for this acquisition.

And just sticking with gene therapy for a minute, a lot of the innovation in gene therapy comes out of academia. When pharma companies take on these assets and bring those products to market, there tends to be a high price tag attached to it, which I think health economically can be easily justified. But from a political perspective, from an image perspective, is that a headache that you end up getting something in that comes out of something that's publicly funded and then you're seen as charging these high prices?

Yes. It's clearly a risk, and, I mean, we have seen it with one competitor. Even though it's a good value proposition, this -- I mean, the headline price is very difficult to defend in the public. I mean personally, we would very much hope that we get more to a model where we are paid over time so that payers only pay when you see positive outcomes of the gene therapy and, of course, you don't get paid if there's no positive outcome or if a gene therapy doesn't work anymore. That would help a lot, I think, also in -- from a reputational point of view because you would link the price with the value over time rather than to have this one upfront payment. So that's a concern, and I think we have to manage that. But in substance, of course, it can be an extremely good value proposition, and the interesting thing is the payers know that and the payers have never criticized the prices. I mean if you observe the discussion, they are very quiet, the payers, because they know they get a good bargain.

Okay. And then maybe as the last topic before we need to let people go to the next meeting, I was wondering if you could touch on China briefly. There was a significant price headwind in China in Q1 for Roche because of what -- the disruption and the price that you need to offer to get on to the list. But how do you think about China now? And what's the best model in China? Is it go on your own? Do you think a model like you have with Chugai is worth thinking about? How do you think about the growth perspective and the setup in China?

I mean the good news in China is that finally, China is very interested to bring new, innovative medicines to the market and to patients much faster than this has been the case in the past. Typically, it took several years until you got an FDA-approved medicine also to Chinese patients. So this has dramatically changed over the last couple of years. And that has literally opened up the market for us because we are not playing in generics or branded generics. We are in the innovative space. And now we see approval time lines. You can easily get now a medicine within a year to China after you got approval in the U.S. or in Europe. So that's really good news. And as far as reimbursement is concerned, there was a special focus on oncology. The Chinese government was very interested to do something in oncology, and we were very much at the forefront. And our first medicines which we made available for the Chinese systems were, of course, those where we expected biosimilars anyway. So it was also, from a business point of view -- not only from an access point of view but also from a business point of view, a very reasonable strategy to give generous discounts here to expand access. And that works very well, and our volumes have really gone up pretty dramatically. And if I look at prices in China, people always say China is so cheap, but it is not necessarily the case. If you look into prices in some European countries, they can be pretty low as well to a degree that we don't even launch a medicine anymore. So I think China will be a very attractive and increasingly attractive market because our medicines get there earlier and because we get reimbursements and because we have huge volumes. Now in terms of partnering, I don't see a fundamental change or difference to other economies. If there is an interesting opportunity which comes from a local Chinese company, we would always be willing to either in-license that or partner that with the company. If it was an interesting asset, we might also acquire the asset. But I -- the reality also is that China is only building up. When it comes to innovation, it will come. But compared to the opportunities you have in Europe or in particular in the United States, it's still at a very early phase. So there are just not so many partnering opportunities as you have in Europe and in the United States. But as the industry develops in China, which it does at high speed, I think there will also be more opportunities for us, but I don't see a fundamental structural difference to other countries.

Okay. Fantastic. So I think we will...

Michael?

Yes?

I'm afraid we have to come to an end because we need to hop on the other meeting now. Severin, we need to go on Zoom again. We need to...

Okay. Great.

Yes.

Michael, thanks a lot.

Thanks for your interest in Roche.

Thanks for the opportunity.

Yes

Thank you.

Thank you...

Thank you for participating.

Michael. Thank you all. Bye-bye.

Bye.

Bye-bye.

Okay. Thanks.

Thank you. Bye-bye.