Roche Holding AG

SIX:ROG

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, welcome to Roche’s Half Year Results Webinar 2021. My name is Henrique and I am the technical operator for today’s call. Kindly note that the webinar is being recorded. I would like to inform you that all participants are in listen-only mode during the call. After the presentations, there will be a short question-and-answer session. You are invited to send in questions for this throughout the entire session using the Q&A functionality of Zoom. In addition to that, you may also raise your virtual hand to address your questions verbally. For participants joining via phone to raise your hand use star 9 on your phone’s dial pad. When you then get selected to ask your questions, please follow the instructions from the phone and press star 6 to unmute yourself. One last remark, if you would like to follow the presented slides on your end as well, please feel free to go roche.com/investors to download the presentation.

At this time, it is my pleasure to introduce you to Severin Schwan, CEO Roche Group. Mr. Schwan, the stage is yours.

[Severin Schwan, CEO]

Thank you very much. And welcome to our half year briefing.

Before I get into the financials, let me just summarize again, the leadership announcements we made this morning. As you have seen, Christoph Franz has decided to step down as Chairman of the Board and I’m nominated to succeed him as a Chairman at the next general assembly in March 2023. At the same time, Thomas Schinecker will take over as CEO, my current role. And, yes, I’m really pleased how things come together. My colleagues, at the corporate executive team and myself, we very much look forward working with Thomas. We are going to prepare for a smooth transition over the coming months. But for now, let’s get back to business. Let’s get right into the half year results.

It’s been a solid set of results. You have seen a 5% growth on a Group level, 3% growth for Pharma, which is pretty remarkable. And you will see this in later slides as we still have a significant erosion, due to the entry of biosimilars. So, if you look at the underlying growth, if you correct for Ronapreve and the biosimilars, actually, the new portfolio is growing in the double digit. So, this is really a very positive and dynamic evolution on the Pharma side.

Diagnostics continues with a strong growth momentum. We have seen additional momentum in the first quarter for the COVID testing. This has decreased in the second quarter and is supposed to decrease further for the remainder of this year. But what is good to note is a really good, solid growth of the underlying our routine business excluding COVID tests. So, for the future, I think, we are well-positioned here.

Now, on the product portfolio. I’ll come back to that in a moment, but we see not only, a very strong, continued growth with the newly launched medicines, on top of it, we could launch new medicines in the first half of this year. And let me just highlight Vabysmo here, where we have seen really an extraordinary launch with very good demand from the community for this novel medicine against eye diseases.

Now, if we move forward to the specific numbers, again, Pharma up 3%, Diagnostics 11%, overall 5%. And if you look now here on the quarterly development, you can immediately see the impact of COVID-19. So whilst we have still seen a strong growth in the first quarter, you see here a negative development. And as a result, on a group level, we have grown only -- I mean it was only a flat growth, very much as we would have expected.

I think that’s a really interesting and pretty exciting slide. If you look at our new Pharma products, you can see CHF 1.6 billion growth in just six months, and that is more than compensating for the erosion, which we see with Avastin, Herceptin and Rituxan, which is roughly CHF 1 billion. So, that is really good to see as the impact of the biosimilars will further slow down over the coming years.

And you see this also reflected on the right-hand side of this slide, where EHR has now -- is now a minor part of our overall portfolio. And you will remember not so many years ago, it accounted for almost half of our total sales. So, the portfolio has really rejuvenated a lot over a relatively short period of time.

And here, if we look a bit what is happening on a quarterly basis and what is happening with the underlying business, both in Pharma, I think that is a useful slide. So, what we did here is, on the left-hand side for Pharma, we excluded Ronapreve, that had quite some impact, still a positive impact in Q1 and a negative one in Q2. So, if you look here at the underlying business, you see a positive momentum with 4% sales growth in the second quarter. But, even more importantly, of course, if you take out the effect for biosimilars, we are actually in the high single digits for Pharma.

On the Diagnostics side, again, here, a huge impact, with the declining growth due to COVID-19. You see actually a little bit of a dip in the base business in the second quarter. There is some temporary impacts due to China, where we had lockdowns, but we expect that to pick up. We have actually had already a strong start into Q3, so we should see a positive trend for the base business for the remainder of this year.

On the financials, Alan will lead you through in much more detail. It’s a bit of a special year with a number of special items. You see here, core EPS, up 11%. So, that is also a result of the accretion due to the repurchase of the shares from Novartis. And also, we had a patent settlement in Japan, which was helping on the core earnings per share. But overall, a very good development, both on profit margins and also on the cash flow.

I mentioned about Vabysmo. That’s certainly a highlight in the first half of this year, off to a very good start. Let me, however, not forget about Lunsumio and Polivy, which has been recently launched. It’s now available in Europe for follicular lymphoma as far as Lunsumio is concerned and for first-line aggressive form of lymphoma for Polivy. So, that’s really good to see, and we see strong initial demand for those medicines as well.

Now for the outlook. I’ve talked about the recent launches in Pharma. There’s also a lot happening on the Diagnostics side. We had a very successful launch, in particular, of cobas 5800, our kind of midsized molecular platform, and the cobas pure. And those two platforms are now supposed to get FDA approval in the U.S. so that we can also enter this important market. And there’s a number of other platforms and diagnostic tests in the making, and I’m sure Thomas will comment on that in more detail.

So outlook: This is a slide we showed you at the beginning of this year, and it’s still very true. And as you have seen, we have confirmed the outlook for the full year. So, good growth, both with the new products in Pharma and the base business in Diagnostics. We do have the drag with biosimilars. And we also expect lower sales for COVID-19. Now, I should say, of course, all of that is based on the assumption that we don’t see new, and importantly, more dangerous variants of the COVID-19 virus. So, in case we would be confronted with a new development on that front, that, of course, would also have an impact on our sales for the full year.

So again, to summarize, Group sales stable to low single-digit growth. As far as EPS is concerned, we expect low to mid-single-digit growth. And Alan will later lead you through all the specific items which influence that picture. And on that basis, we should be able to further increase our dividend in Swiss francs.

So, with this, thank you very much. And I hand over to Bill.

[Bill Anderson, CEO, Roche Pharmaceuticals]

Thanks, Severin. Hi, everybody. Great to have a chance to share our results. We’re really excited about what’s going on in the Pharma division this year. And so, fasten your seatbelts. Here we go.

3% overall growth, which I think we’re encouraged. It’s solid growth, showing that we’re really starting to emerge from the biosimilar period. As I’ll discuss in a moment, the COVID impact, the pluses and minuses roughly cancel out. So, I think you can think about this as a 3%, including the effect of biosimilars. And yes, I think that’s back squarely in the black, and we intend to stay there.

I’m going to -- I’ll talk about it. You can see Europe is down a bit. Japan’s way up. That’s mostly related to sales of Ronapreve, where we were down in Europe. I think without Ronapreve, we would have been plus 4% in Europe; and in Japan, we would have been at 8% instead of 34%. So, that -- but they roughly wash out, and the 3% is pretty close to the actual without pandemic.

From a P&L standpoint, so the royalties and other operating income was affected by the large settlement that Chugai had on Ultomiris. And so, that was a driver in there. In terms of cost of sales, COGS and period costs were up about 9%. Volume was up 8%. So, it was up a little more because we were slightly lower capacity utilization. We were basically at 100% for the last two years. And so, we came down a little bit, which, frankly, I’m glad to see because I don’t like running at 100% capacity.

M&D just reflects a little bit of extra spending on launches. And the R&D is down a bit because of really high spending -- extra high spending in R&D in the first half of last year, including a couple of hundred million extra for Ronapreve and AT527 last year that didn’t recur this year. And then the G&A reflects some tax effects and our continued emphasis on savings there. So, core operating profit up 8%. And, yes, we’re glad to be bringing in that result.

From a product standpoint, I like the shape of this. You can see, if you look at the top 8 lines, number 8 is actually Vabysmo, so the newest entrant on the list. But it’s really excellent to see that the top 8 lines are basically products we’ll have for a while and really part of our core portfolio. You can see Hemlibra and Ocrevus each contributing more than CHF 800 million on an annual basis of incremental sales and then accompanied by strong results from Evrysdi, Phesgo and we’ll talk more about some of the others.

And then down at the bottom end, what I would point out is you have AH&R and Actemra. So, Actemra was down a couple of hundred million, which basically reflects that in Q2, there was very little sales of Actemra for COVID. Hopefully, it will stay that way, meaning that the hospitalization rates are down and stay down. But that remains to be seen.

And then, I think you can see, for example, with Herceptin and MabThera, we’re starting to find the bottom. You’ve got minus 16%, minus 21%. And so, I think we’re looking forward to being in the sort of post AH&R biosimilar era and getting there pretty quickly.

In oncology, encouraged to see our two biggest franchises with growth. The HER2 franchise now where Perjeta, Phesgo and Kadcyla are all kind of outgrowing the losses in Herceptin. And so, really an excellent result, up about a little over CHF 9 billion annualized. So, strong performance in HER2. Tecentriq, with good performance, we’ll come back to that. And yes, you can see we continue to make gains in the part of hematology that’s not Rituxan.

Coming back to the HER2 franchise. So, Phesgo, this is really proving -- this is our subcutaneous version of H+P. And it’s proving very attractive. When we have countries that are up at like 90% adoption, particularly health care systems where infusion capacity is limited. And we think this will be helpful. I mean, obviously, it offers patients and health care systems that benefit today. But it will also provide a more difficult to challenge product from a biosimilar standpoint when we get to that point with Perjeta.

I also just wanted to share a study that we started. This is on the right side of the slide. I think this is a really neat example of what we can do as a real leader in cancer. So, this is one we’re -- so it’s like the Phesgo use in first-line metastatic HER2-positive breast cancer. But this is for patients who are HER2-positive as well as ER positive. And this time, what we’re doing is we’re running a Phase 3 study to examine the addition of giredestrant to the standard regimen. And giredestrant is our new SERD. And so, we’ve already got metastatic first-line and adjuvant studies ongoing for giredestrant. But now this is a third study and I think signals our confidence in the data we’ve seen to date. But what’s I think especially important about this is for -- in the maintenance setting, this would give patients basically a lower intervention because giredestrant is a pill and Phesgo is a subcu. And so, it’s -- we hope for a more potent, but also more patient-friendly solution for these patients.

As I mentioned, Tecentriq, strong performance. In Q2, we were at 13% and the first half was 11%. And this just reflects getting the washout from the removed indications in TNBC and bladder cancer. That’s kind of getting behind us. Really strong uptake in lung cancer, in the adjuvant setting in the U.S. We’re now up to 80% testing in the adjuvant setting for PD-L1 and then we’re at 60% market share in the PD-L1 positive patients or in the high PD-L1 patients. So, I think a very strong launch there. We’ve just been approved in Europe. We’re going to get approval in Japan probably in the fall.

And by the way, if you look at the growth chart here, what you can see is quite strong growth in the U.S., in Europe and international. And actually, Japan shrunk, and they had a mandatory price cut at the beginning of the year. So, I think the 13% growth isn’t all we’re capable of. And we’re looking forward to continued strong growth as well as some good readouts coming up.

Hematology, another area where we’ve been really busy. We now have, as Severin mentioned, the POLARIX regimen has been approved in Europe. It’s been filed in the U.S. and will be approved later this year. It’s going to be approved in August in Japan, and we’re getting approvals around the world right now. We think this is a potential for more than CHF 1 billion of additional revenues. And we think adoption will be quite rapid, because if you’re 1 of the 7 or 8 out of 100 patients that gets a cure from this therapy, yes, this means all the world. And so, we look forward to bringing that to patients in every country.

Lunsumio, Severin also mentioned. This is the result and this is why we think this will rapidly become standard of care in third line and later follicular lymphoma. As you can see from the waterfall chart, means 60% of patients with a complete response, 80% of patients with a response. It doesn’t require hospitalization as some of the other later-line therapies do, and look for more there.

And then, I also wanted to mention glofitamab, which is our other T cell bispecific, and this one in DLBCL. We presented this data at ASCO. And I think what’s particularly compelling is we had a 39% complete response rate, which is quite a high rate of complete response, but also these were really durable. And this is a fixed duration therapy. So, you have a fixed duration of treatment. And then many patients are going for months, years without relapsing. And we think this is a superior alternative to CAR-T. And so, we’re filing this, looking forward to launching glofit.

I also want to point out that these initial approvals of Lunsumio and glofitamab are really just the beginning for these two molecules. These are both monotherapy approvals, but we think that the real key here is going to be combinations. And because we’re already the leader in hematology, especially in NHL, follicular lymphoma, CLL, we’ve got a lot of studies teed up. And you can see the list, including three Phase 3 studies: glofit with chemo, in relapsed/refractory DLBCL, Polivy and Lunsumio in relapsed/refractory DLBCL, and then Lunsumio plus lenalidomide in second line follicular. So, I think, we’ve got a lot of the bases covered here. And we’re looking forward to some really great results in the future.

Hemlibra is an excellent growth story. It’s just the combination of convenient dosing and high efficacy that’s really unsurpassed in hemophilia. It’s just leading to continued adoption in every country. And again, you can see from the bars, very strong growth in the U.S. and Europe and international, as well as still some growth in Japan. So, we continue to see more growth ahead for Hemlibra. We always get the question, sort of where is the top? And we’re not sure where it is, but we sure haven’t found it. And again, more approvals coming in. We have the label expansion to include mild to moderate patients soon in Europe. And we’ve got the infants results in HAVEN 7 coming soon.

Immunology, this is mostly affected by Actemra declines, as I mentioned, due to COVID reductions. Xolair is holding up strong at 13%. With all the talk about new asthma agents, people sometimes forget that Xolair is still the market leader in asthma, but also is growing strongly in urticaria. And then Esbriet finally, we did lose the patents. There are multiple generics in the market in the U.S. now. And those sales, we anticipate will go away rather quickly.

Coming to Ocrevus. Again, really nice growth here. You can see we have more than 250,000 patients. It’s the number one market share in new and total in the U.S. and number one in new market share in Europe. We have a very high level of persistence, which means that with a given level of -- so for example, with 35% new market share in the U.S., we can actually get higher than that and total market share because the other therapies lose patients faster and we had a longer persistence. So, that’s an extra great feature.

We have now commenced the Phase 3 study for Ocrevus in -- or subcutaneous Ocrevus, and we’ll have results in 2023. So, not far away from an Ocrevus subcu for patients. And then, we also have the extensive Phase 3 program with high-dose Ocrevus and fenebrutinib, our BTK inhibitor.

Moving on to SMA, Evrysdi, another really strong picture here. And again, if you look at the bars, you can see there’s growth in every country or in every region. And this is really because of the convenient dosing, strong efficacy and excellent tolerability of Evrysdi. We’re seeing a high level of switching from Spinraza. Also, there have been rumors about, oh, the patients stay on Evrysdi. Actually, 90% of our patients are staying on Evrysdi, which is pretty remarkable given that there are some very advanced patients, say, with type 2 or type 3 that maybe don’t get many benefit from any of the therapies. And so, 90% retention is quite strong here. And we continue to expand both our label and geographically. And so, we look forward to continued growth here.

This is I think the first slide I’ve shown in -- at least in some time with DMD results, and we’re excited with our partner, Sarepta, to have been sharing these things. So, the Phase 1b study called ENDEAVOR, also called Study 103. So, this is a cohort of 20 patients. And you can see that these 20 patients, the general trend was they had increase in their functional score, which is atypical in baseline. In non-treated patients, you would typically either see in this time period of a year either stable or down. And our external control was roughly stable versus the increase for the boys who receive the treatment. And then, we now have four-year data from the initial cohort of the Phase 1 study. This is obviously a very small data set, but it is good to see that these boys are maintaining their functional gains over time. And it’s going to be -- these will be meaningful contributors to the overall data package.

The outlook remains here that we will finish our Phase 3 accrual this year. We’ll have results next year and we’ll be filing shortly thereafter. But, we’re still exploring possibilities for accelerated approval, but our base case remains Phase 3.

And now to Vabysmo. So, we’re super excited by the momentum here on this launch. We have -- it says 70,000 vials. That was at the end of June. Now it’s 80,000 vials. And this is important because -- so we can assume that most of those vials have been administered. And we haven’t seen any unusual safety signals. This is something that doctors are very closely watching because they want to make sure that when the real-world experience comes in that there’s no surprises. And so far, there’s no surprises, 80,000 vials in. It’s also noteworthy that in June, in the U.S., we actually hit a CHF 500 million annual run rate. So what I mean by that is you basically take June sales and multiply by 12, we were slightly over CHF 500 million. And then Japan has come online in May with reimbursement. They’ve had a really positive uptake, and they’re really excited about what that means for the future of Vabysmo. We now have a simultaneous approval and reimbursement in -- by NICE in the U.K., which is very unusual. And so, we’re launching there, and we’ll be launching in many other countries. So, look for more on Vabysmo.

This is the latest data, which shows that in AMD, that now we have more than 60% of patients, so 59 in 1 study and 67 in the other study, we’re able to extend dosing to 4 months. And this is really unprecedented in this space. And this is why I think Vabysmo is being so well received. We have -- 60% to 70% of our patients are switching from Eylea, a smaller number are switching from Lucentis, and then the least number is patients that are naïve. But now reimbursement is well established. 80% of U.S. payers are reimbursing or covering and have policies for Vabysmo. We’ll have a permanent J code on October 1st. And as I said, I think all indications are this is going to be a very important medicine in the retina space and a very important medicine for Roche.

My last slide, just an update on a few things. And so, one thing I wanted to mention is that we did have a negative study with Tecentriq adjuvant RCC. This was an area where I think our expectations were modest given sort of mixed results from other checkpoint inhibitors in the adjuvant RCC setting. But nevertheless, we were disappointed to see that we didn’t have a statistically significant benefit on disease-free survival. So, that one is coming out. Meanwhile, we’re continuing to final analysis on the adjuvant head and neck study for Tecentriq, and that will happen in 2023. And otherwise, I think we mentioned that Alecensa, the adjuvant study, is likely now to read out in early 2023.

So, a lot of good progress for the pipeline and for the launches and really excited to answer your questions later. And I’ll turn it over to my fantastic colleague, Thomas.

[Thomas Schinecker, CEO, Roche Diagnostics]

Thank you very much, Bill. And I’m also excited to take you through the Diagnostics results.

So, let me start with the first slide. Now with almost CHF 10 billion sales, we had a growth rate of 11% at constant exchange rates. And this was driven by a good growth momentum in the base business, but I’ll get into that more in a separate slide. In addition, we had CHF 3.1 billion in COVID testing sales.

Now just one thing I would like to point out on this slide is around diabetes care. I’ve pointed it out in Q1, but also every quarter last year, we did have a onetime positive effect last year in Q1 due to a settlement agreement. Without this, actually, diabetes care would be flat, which shows that it’s holding up quite well.

Now, just going quickly into the different regions. You see North America growing 34%. This is, on the one hand, due to rapid antigen test. But also, the base business is doing really well in North America. In EMEA, you see a decline. And this is driven only due to COVID-19 sales that are going down. Actually, the base business is growing at 6%. In Latin America, you also have COVID-19 testing sales going down. And here, the base business would actually be growing at 16%. And in Asia Pacific, it’s a mix between rapid antigen sales and also the base business growth.

Now, I promised I would give you a bit more in detail on the different parts of our business. So, first, let me start with Core Lab. There are basically two effects that are impacting growth in core lab. One, the China lockdowns. And you see that basically on the right-hand side, when you look at immunodiagnostics. So, a big part of our sales in China are actually immunodiagnostic and clinical chemistry sales. So, if you look at that, we would be growing either close or around double digit in the immunochemistry and -- immunodiagnostics and clinical chemistry. So, you see the underlying growth is doing really well in the core lab.

You see another element, which is custom biotech. This is a B2B business that we’re doing with other companies. So, that’s not something that’s actually going into the market directly from us. So the underlying business in core lab is doing extremely well, in the high single digits.

Point of care. This is where we report our rapid antigen test sales and also point-of-care molecular, which is our Liat, both showing very strong growth. But again, if you back out all the COVID-related sales, the base business is doing well with 7%.

Molecular, 1%. And here, you see that the PCR testing is going down related to COVID-19. People don’t have to quarantine themselves anymore. You don’t have people getting tested before they get on flights, which probably would be a good idea because that’s probably one of the reasons why we see a lot of infections at the moment. But the underlying business is growing significantly, with more than 16% in molecular. I already commented on diabetes care. And pathology, fantastic growth with 10%.

Now, this is a slide in a bit of a different shape that Severin was also showing. You see that we had flat growth overall in Q2 ‘22. This is because we had lower COVID sales than in Q2 last year and the base business was growing 3%. Now, we were talking about effects like the lockdown in China. Now, if we back that out, the base business would actually be growing at 6% in Q2.

Now, if we look into Q3, we already have a couple of weeks in Q3. And the trends and what we’re saying about the COVID business is actually a reality. So, we see a strong decline of COVID-related sales in Q3. But we also see now with the lockdowns easing, to a certain degree in China, a strong pickup again in the base business. So, we’re really positive to see the strong business in the first couple of weeks this month.

Now, let me take you through the P&L. First, core operating profit is growing in line with sales. So, our margins are stable. Cost of sales is increasing faster than sales. This is due to product mix effect. We have a lot of rapid antigen sales in the first half year. And these rapid antigen sales have a much lower margin than the rest of our business. And that’s why we have higher growth in cost of sales.

M&D is growing 3%. Now, if you look at M&S, so excluding distribution, it’s actually flat. So, it’s all driven by distribution of our rapid antigen test. So nothing that will stick in our P&L in the future.

Research and development, with 11% growth, this just shows our commitment to innovation. And G&A, with 2%, very small numbers here. So, you can see that we have a P&L that’s very much controlled on the cost side and the investments in the right areas.

Now, very happy with those results, but let me quickly give you a bit more details on some of the product highlights. And let me start with something that will come out very soon, and that’s the Elecsys interferon gamma release assay for SARS-CoV-2.

Now, you know we have launched in the past antibody assays so we can measure the levels of entities. So, this is the B-cell response. And we know that, over time, antibody levels go down. But there is a second path where our immune system can defend us in case of an infection with SARS-CoV-2, and that’s through T cells, in T cell memory. And now, we can combine these 2 tests, really understand which patients will progress to secure disease and how much protection really is. And this is through the antibody test on the one hand, but also, this T cell test on the other hand. And the way this works is we actually have a tube with 189 SARS-CoV-2 specific antigens. So, these are the proteins of the virus. And when you add the blood of the patient, you do an incubation step and you then afterwards measure the release of a cytokine called interferon gamma. And with that, we can measure how strong the immune response is that is triggered by the T cells.

Now, I’ve shown this slide also in Q1, and I think it’s becoming also important at the moment because you’ll always have constantly new variants appearing. And at the moment, it looks like BA.5 is the one that’s becoming the dominant variant. And through our genotyping assays, we have more than 10 different assays, we can actually measure which of the genotypes are becoming dominant. It is much faster than doing sequencing. We can do this within hours, where sequencing, it will take you more than a week. And in times of pandemic, a week is a long time to actually monitor the spread, a lot of things happen. So, it’s important that you measure that in a much shorter time period.

Monkeypox is another assay that we released very quickly. You know that on the SARS-CoV-2 side, we were the first company to react. We have a team that constantly monitors the development of new viruses, how are they spreading. And with monkeypox, they realized pretty quickly that it was spreading very abnormally in regions of the world that normally don’t see monkeypox. And so, very quickly, our team started to work to develop a number of assays. We’ve now also supplied these assays, for example, to the WHO, so that we can track the spread of this virus. Although not as infectious and not deadly as SARS-CoV-2, experts do believe and scientists do believe that this virus may also become endemic in the western world, unfortunately.

Now, another virus, but this virus is a virus that’s known to cause cancer, cervical cancer, is the human papillomavirus. Here, we have a test on the market for quite some time. We also have a tissue test that can help diagnose the cancer. But now, we actually have a self-sampling solution also available.

And why is this important? It’s important because approximately 600,000 women get diagnosed with cervical cancer every year, and more than 50% of these women then die, 342,000 to be exact. Now, 90% of these deaths actually happen in the LMICs. And one of the reasons is that these women are not screened. And culturally, to go to a gynecologist to get this sample taken is sometimes a difficult thing. And we believe that we can increase the access to our tests by also providing self-sampling solutions so that people actually get screened.

Another virus that also causes cancer, in this case, liver cancer, is hepatitis C. And there are 58 million people in the world that are chronically infected and 80% actually unaware. The good thing is there is actually a treatment -- a curative treatment available. So, if we would screen the population, we can then treat these people. And then we have a lot less liver cancer deaths per year.

Now, with this test, which is a combination test of the RNA core antigen and the antibodies, we can actually close diagnostic window by three weeks, can diagnose much earlier, and actually can find these patients. And with that, we can support the WHO in the elimination strategy to eliminate liver cancer caused by hepatitis C.

Now on the systems side, we had two launches, and let me start with BenchMark ULTRA PLUS. And you saw that we’re doing really well in the pathology area, 10% growth. Most of our business is in the advanced staining space, so immunohistochemistry and in situ hybridization. Now this is running on the BenchMark Ultra. We’ve now launched the next generation, with features like shorter turnaround times, fewer manual interventions, which is critical because there’s always staff shortages. And we’ve also launched this together with our menu with more than 200 assays, which is the leading assay menu in the industry. So, very excited to continue to drive this forward.

With the digital slide scanner, DP 600, we now actually have an opportunity to really enter the digital pathology space. We already had the DP 200 slide scanner. But this slide is much more fit for purpose for really the big cancer centers around the world. We have a slide capacity of 240 slides, so 40 times higher than DP 200, which we can scan in the matter of 4 hours. And the slide scanner is just the first step. We then have our software, the Navify Digital Pathology, which actually manages the workflow. But the real intelligence comes through the AI image analysis. We have a number of algorithms already on our digital pathology platform. We are partnering with a number of other companies to increase suite of different AI algorithms. But, this really then helps patients to get a better diagnosis, to get a better outcome. And I mean, I can only say for myself, I mean, looking at those slides, I really would want AI to be used because I know that I can trust those results, much more than just when someone looks through the microscope. So, really excited to see how the digital pathology business going forward.

Now, let me just finish with two slides. First, I’ll be in the U.S. next week at the AACC. And of course, I would be very happy to welcome as many of you as possible at this event. We’ll show a bit more details on our portfolio. And then, we’ll also be available for Q&A with some of our members of my leadership team.

Finally, let me say that we’ve had a number of launches this year. We have a number of them to go. Everything is on track. And so, really excited then also to show you all the progress that we’re making in Q3 and Q4. But I can say we are really seeing now the output. Just recently, I think on Tuesday, we received breakthrough device designation for the blood-based Alzheimer market. So, really excited to see how the pathology and all the other areas are really progressing in terms of portfolio.

So, with that, thank you very much. And I hand over to Alan to take you through the financials.

[Alan Hippe, CFO]

Yes. Thanks, Thomas. My pleasure to wrap it up a little bit and to lead you through a couple of effects that we have had in the first half of 2022. And let me get right into it. You see the highlights here. I will address them all anyway in my slide. So, I move forward quickly, and let me give you the overview here.

Before I dig really deeply into that, and that’s another point I will address in the presentations as well, and you will see it on different slides, is I want to make a couple of comments about the H2 performance, because we’re sure, and let’s grab the bull by the horns, that we will get questions on the guidance. So, let me give you a little bit of background for the second half.

One element certainly is, when you look at our guidance and when you look how we dealt with COVID, that we assume it’s just one scenario, and Severin said it. It’s just one scenario, but it looks like that we lose COVID sales in H2 compared to H2 2021. As said, it’s just an underlying scenario but the current assumption, which influences the guidance.

Another one is a fact. Last year in the second half, we had a base effect on the tax side. We had a significant release of a tax provision, CHF 601 million, which certainly was a major boost to core EPS in the second half of 2021, which is not reoccurring.

Another point is I will talk about the Ultomiris in-license agreement a couple of times from Chugai. And you know it had a positive impact of CHF 765 million. And there might be a question, okay, fine, at least this effect should be mirrored in the guidance. So, that is a clear change to what you had in mind at the beginning of the year. Let me say one element here. We were always uncertain how COVID would play out. And some people tend to forget that we had from Ronapreve in the second half of 2021, a positive impact on the royalty and other operating income line. And that effect was CHF 654 million. So, you see a little bit. There’s a balance coming in. So, we have Ultomiris in the first half, if you like. And then, in the second half, we will have a negative impact from not having the Ronapreve royalty and other operating income. And just to remind you, that came from the U.S., everything we delivered to the U.S. And Regeneron reported the sales. So, we got a royalty income from that, and that’s evidently not reoccurring in the second half of 2022 or is at least uncertain.

And then, the last point is the full year accretion from the buyback of the Novartis shares, which is a little bit of a moving target, certainly not in the amount of shares, but when it comes to the profit that you divide through the shares. So, we see that on one element. The other element is that we think that the debt level and the interest charges that we’re going to get from that are a little bit lower. So, the current projection is that the accretion effect for the full year will be 5 percentage points when it comes to core EPS.

Good. And then, that will come back again, but I wanted to make sure that these effects are not going to be lost, and I will mention them when I come to the respective slides.

So, let me lead you through the overall package here. I think sales up 5%. I think Thomas and Bill really framed that well. 11% on the Dia side, 3% on the Pharma side. I think quite impressive. Then you see the core operating profit with a higher dynamic was 9%. Certainly here Ultomiris and the in-licensing agreement with Chugai comes into the game and gives us an additional mantle on the core operating profit side. The core net income, up 7% in constant rates. And what you’re going to see is we lose a little bit momentum. This is not taxes. I will come to that. This is really the equity securities. So, the Roche Venture Fund. We’re also investing in-house into biotech. And as the biotech market came down, we were basically affected in the same way. There is quite some hope that this has bottomed out now, and we see a positive impact already in July. But let’s see what happens until year-end.

Then you see really core net income, you go to core EPS, and you see a 7% growth on core net income. You see 11% in core EPS. And here are two elements, one, certainly, the accretion effect, in the first half of the year, 6%. And there is certainly a great performance from Chugai kicking in here as well and lifting the core EPS to 11%. IFRS net income, I have a slide on that, so basically mirroring the momentum that we’re having there. And then you see really, which I find remarkable, the cash flow that we generated in the first half with CHF 9.8 billion operating free cash flow, which certainly helps us to deleverage. In the first half, as you know, we paid the dividend. We’ll talk about that. And you see the free cash flow with CHF 7.1 billion, was a nice increase as well.

So, let’s dig into these numbers. First of all, the split here in the bridge when it comes to sales growth. And I think Bill and Thomas have done a great job here already to explain that. You see really we get to, on the right-hand side, CHF 32.3 billion in sales. And when you look on the left hand side, you see the Diagnostics base business was an increase of 6% that certainly contains diabetes care, so 6% up here. And then you see the Diagnostics COVID-19 sales. We had a high base last year, but nevertheless, we have grown by 24%, so which I find remarkable as well. And then you see Pharma was CHF 1.6 billion up, very much driven by the new products. And then you really see the AHR erosion with roughly CHF 1 billion. So really good momentum behind.

Core EPS development, in all transparency, you see an 11% increase. Let me explain the ingredients. I think, on one hand, operations, up by 2.9 percentage points. Then you see really the Ultomiris in-licensing agreement with Chugai, giving us an uplift of 3.5 percentage point. Okay. If you do the math, you ask yourself a little bit, how can that be that the effect is so low? The point is we have a high tax rate, a high corporate tax rate in Japan of 30.5%, which is well above the average that we have in the group. I’ll come to that later on. That really brings the effect a little bit down. And then, you see really the net accretion effect of the share buyback of the Novartis shares with 6.1 percentage points. And then, we have a couple of other impacts on other, one is the financial result.

Let me say here very clearly, once again, I think, in the second half last year, we had a major positive impact from a release of a tax provision, which is not reoccurring in the second half. And that will be certainly a drag on the core EPS growth.

Okay. With that, let’s go to the P&L. And when we look at the P&L, I think sales is clear. Royalties and other operating income, up CHF 536 million. One is Ultomiris. What goes against it is the lower divestment gains that we have had compared to the first half 2021. That was a CHF 146 million lower gain compared to last year. If you add that up, I think that explains the difference. The cost of sales, up CHF 1.1 billion. One is volume growth, 10% volume growth, you will see that later. That accounts alone for CHF 800 million. Then we have a couple of other effects I will get to.

M&D, plus 4%. Here, really digital, really on the Pharma side. And on the Diagnostics side, additional distribution costs, as Thomas alluded to. R&D, we have a base effect from last year. We had development costs for Atea and for Ronapreve of exactly CHF 200 million. So, if you deduct that, you see really an increase in R&D. And certainly, we are prepared to invest more in R&D., and you would -- should expect quite an increase in the second half. And then G&A, I think, with a nice saving, leads us to core operating profit growth of CHF 1.1 billion.

Good. With that, let’s go into the royalties and other operating income. You see here the bridge. I’ve mentioned a couple of times already. The major green bar that you see on the slide, that’s really the Ultomiris in-licensing agreement with Chugai, not the CHF 765 million because there are also other effects here from the out-licensing income which play a role here, a minor role. Then you see other operating income, very minor. And then you see income from the disposal of products, which I’ve explained already, down by CHF 146 million. As said, we had last year in the second half royalty and other operating income from Ronapreve in the magnitude of CHF 654 million, which won’t reoccur in the second half of 2022.

Cost of sales, well, you see really quite a significant increase here overall. So, let me lead you through it. I start -- we start with the first half 2021, CHF 8.2 billion. And then you see really we had in the first half a positive impact from a reversal of an impairment that we have done in the past, CHF 184 million here, a positive, which we did not see in the first half of 2022, leads us to roughly CHF 8.4 billion. And then you see the volume increase of CHF 800 million. I think these two figures alone explain it well. And then you see really on the Pharma and Diagnostic sales mix that there has been an impact as well.

Let me mention here that in the second half of 2021, we had quite a negative effect on the cost of sales, which came from Atea and Ronapreve, which was CHF 615 million at the time. We had it on the slide on a -- in the full year presentation. This effect is not going to reoccur. So there is quite some positive momentum coming to the cost of sales in the second half.

The other piece I should mention here is, well, on one hand, we certainly assume that the COVID sales go down, and that plays basically to Diagnostics. And that certainly means we have lower volumes then on the Diagnostics side, which should also be a benefit for the cost of sales.

Okay. With that, let’s get to the core operating profit and margin. I see nice development here. Margin goes up to 39.2%. And as predicted and expected, I think the Pharma division shows an improvement here. And you see really that the Diagnostics division has been able to stabilize the margin on a high level. Certainly, I think once the COVID sales go down, I think it’s very clear that there is not the expectation that this margin can be maintained.

Core net financial results. I said it here, a reduction of roughly CHF 370 million in constant rates. And the major point is the equity securities asset, minority investments into biotech companies, predominantly private ones. We have a couple of listed ones as well. That came down, as said. I think a little bit of light at the end of the tunnel. I think really July looks promising, but it remains to be seen what happens until the end of the year.

Interest expense was a minus CHF 88 million, lower than expected. So, that’s good, lower momentum than expected. But there will be a higher dynamic in the second half of the year. Then we have other, and that’s really a little bit of a sample of topics. One major one is we have an old pension plan in the U.S. with really a defined compensation plan where we had to inject some money into then hyperinflation for Argentina and for -- Turkey plays a role here. So, I think that’s a little bit of a sample of topics.

Good. With that, group core tax rate. So, first of all, I remember very well that I gave you guidance that the tax rate -- the group core tax rate should be around 18% in 2022. And here we are. We look at the left-hand side -- at the right-hand side of the slide, okay, effective tax rate in the first half is 16.1%. So, the deviation is coming from a resolution of a tax case, which gave us a positive CHF 288 million here. So, if you adjust for that, we would have been at 18.5%. So, the guidance was directionally completely okay. It’s very hard to forecast these tax case resolutions because you’re in the hand of authorities and jurisdiction, and very, very hard to forecast this. But nevertheless, I think that helped us. When you compare it with the first half of 2021, we have been at 16.9%. Here, we had a much smaller impact from the resolution of tax cases, in that case, CHF 95 million. I think based on all of that, certainly, I think I have to change a little bit the outlook for the year when it comes to the group core tax rate. And the expectation is now it should be around 17%. Don’t forget that we had in the second half of 2021 the major positive impact from a tax provision -- from a release of a tax provision of CHF 601 million that I’ve mentioned a couple of times already.

Good. Noncore and IFRS income had an increase in the core operating profit as shown of roughly CHF 1 billion. Then you see, a little bit less global restructuring plans, CHF 200 million less compared to the first half of last year. Amortization of intangible assets, a positive impact, positive deviation compared to last year. Why is that? Well, the amortization for Esbriet came to an end. And then, impairment of intangible assets, we have a couple of more impairments here. Nothing of major significance. And that gives us really an uplift in the IFRS operating profit in total of roughly CHF 1.5 billion. Then, you have the total financial result and tax effect on the above-mentioned topics, and you get to an IFRS net income increase of CHF 900 million, which represents an increase of 12%.

Okay. Cash flow, quick comment here. You see really a very nice development, and it comes from both divisions. I can just be happy with that number, really well, how we converted all the sales and the sales increase really into cash. And I think that’s great to see. You see where it comes from, on one hand, certainly higher profits. The other piece is we also worked on net working capital, and we get a CHF 600 million positive impact from that, which is certainly nice to see, very much driven by the accounts receivables.

When you look at the group net debt development, we are at a net debt level now in the middle of the year of minus CHF 20.9 billion, which contains, by the way, the CHF 19 billion from the Novartis share buyback. So, I think really a very good trend. When you look at the free cash flow, it’s the middle of CHF 7.1 billion, which is driven by the operating free cash flow of CHF 9.8 billion. I think it’s remarkable, we paid a dividend of 7.7. And at least the free cash flow is, how should I say it, getting near to this. So the impact of the dividend in the first half was much less compared to previous years.

Quick comment on the balance sheet. Cash and marketable securities go down. We have repaid the bridge financing completely, which means we paid back the CHF 19 billion. And we did that by reissuing new bonds. And the other piece has been cash. So, that’s explaining the reduction here. Other current assets is inventories going up. Noncurrent assets is a reduction in intangible assets. Current liabilities is a reduction in short-term debt. Noncurrent liabilities, it’s an increase in long-term debt. And the equity ratio is at 33% now. And net debt on total assets, and we’re aiming at this range of 0% to 15%. We are now at 24%.

Okay. Outlook really quickly. Exchange rate is clear. I think really, you might have seen it, we basically have no exchange rate impact across the board, you can argue. And you see where it comes from, a weakening euro against the Swiss francs, a strengthening U.S. dollar and impact from Japan. And you see really it nets out quite well and gives us overall sales growth of 5%.

Good. What do you expect? And you know that modeling here, we assume -- when we assume that all the exchange rate at June 30 remains stable until the end of the year, which is certainly very unlikely, but perhaps a good orientation. Then you see really what we expect for the full year, a minus 1 percentage point impact on sales, minus 1 percentage point on core operating profit and minus 1 percentage point on core EPS. As I said, when you look at half year, no impact at all, which is quite remarkable.

Good. I think I talked about the outlook quite a bit already and try to explain in the second half of the year. So, we are very happy to receive your questions now. Thanks for your attention.

[Bruno Eschli, Head, IR]

Thanks, Alan. And I think with that we come to the Q&A session. The first question would come from Jo Walton from Credit Suisse. Jo, please?

[Jo Walton, Credit Suisse]

Could you -- I think could you ask us when -- could we get some sense of when you’re going to be able to present the TIGIT non-small cell lung cancer PFS data? I think a number of us thought this could be at ESMO. Would it be possible to see this ahead of a possible OS data, which I assume we’ll see in 2023? And following up from what Bill said about 100% capacity and the ability to move back a little bit from that. Can I ask what would happen if gantenerumab were to be successful? That’s got quite a heavy manufacturing burden, I assume. And a final question, if I could just ask Alan. There was a write-off of CHF 336 million of Flatiron in the half. Is there anything that you can give us as an update as to maybe what’s gone wrong with Flatiron? And is this an opportunity to update us as to what the success of Flatiron and Foundation held for doing for your business?

[Severin Schwan, CEO]

Very good. Over to you, Bill.

[Bill Anderson, CEO, Roche Pharmaceuticals]

Great. Thanks for the questions, Jo. In terms of the SKYSCRAPER-01 data in non-small cell lung cancer with tiragolumab, that I think the team is still considering what the best timing is for release of the data, as you can appreciate, because it’s an ongoing study with an OS component. And it’s also a competitively sensitive field. I think there’s just kind of multiple complexities there. So, we don’t have a fixed date at this point for a presentation on that.

The question about gantenerumab success and our capacity. Yes, actually, we were gearing up for gantenerumab production capacity as well as other important medicines in our portfolio. When COVID hit, we were just recommissioning the so-called CCP2 plant in Vacaville, California, which is one of the biggest manufacturing plants in the world. And it was -- basically, we were doing engineering runs with Actemra when COVID hit, which was proved fortuitous because that’s the plant where we produced almost all the Actemra and all the Ronapreve that we needed for the pandemic use. But basically, now we expect the demand on those two products to be much lower. And so that -- pretty much that whole plant would be available. And that’s quite sufficient for gantenerumab for quite a while. So, it’s not -- gantenerumab would require quite a bit of protein, but the process is relatively efficient. So, we feel pretty good about our capacity situation. And let’s see. Was it Alan?

[Severin Schwan, CEO]

Alan, yes. Do you want to comment on…

[Alan Hippe, CFO]

Yes, happy. I think it’s well addressed because it’s more an accounting topic, I would argue, because basically, Flatiron, I think we’re pretty happy with the sales development this year. The point is when you compare it to the original business plan that we have had, I think we have been too optimistic. Let’s face it. I think that’s the point here. But I think, really, we went now through a couple of discussions to reset this and where the business is going. And we would argue, the momentum that we are seeing this year is quite satisfying. So really, it’s really going back when we acquired the business and all the expectations we have had. This is not really the point that we doubt in our Incyte’s approach. I think we think Incyte is a great topic to be in. And really working on reword data is a great topic. So, all that strategy is completely intact. The only thing we had to adjust is really the net book value that we had for this asset on our balance sheet because as I said, admittedly, everything is coming a little bit later than originally thought.

[Severin Schwan, CEO]

Right. Thank you, Alan. And I just confirm from my side, our commitment to leveraging available [ph] data and advanced analytics, there’s a huge opportunity in itself in the long term. And I believe from a strategic point of view, it’s very synergistic with our core businesses, both in Pharma and in Diagnostics. Very good. Can we have the next question, please?

[Bruno Eschli, Head, IR]

Next question would be from Wimal Kapadia. Wimal?

[Wimal Kapadia, Bernstein]

So first, can I just ask about the Vabysmo launch, please. So clearly, a very, very strong launch. And I appreciate you cannot be specific. But when we think about the product long term, should we really be thinking about this as a Lucentis type revenue product of CHF 4 billion, or should we be thinking of it as an Eylea type product, closer to CHF 10 billion? So, any context there? And then just tied to that, is it fair to assume 2023 will be a blockbuster year for the product?

And then my second question is just on Polivy first-line DLBCL. The first part is, can we really expect to see any real momentum for the product in the OUS markets without OS data? And then just tied to that, I think, Bill, you suggested at least CHF 1 billion. And previously, you talked about CHF 2 billion. So just curious what assumptions you now make for this first-line DLBCL setting. What share is feasible? And which patients do you think will use the product? Thank you.

[Severin Schwan, CEO]

So Bill, now I’m really wondering how much you lean out of the window. Over to you.

[Bill Anderson, CEO, Roche Pharmaceuticals]

Well, see. Where’s our crystal ball? I think maybe -- I don’t know if I can give you a number. But what I can tell you is maybe how we’re thinking about it and what are the reasons to believe or the reasons to the questioning, whether it gets all the way up into the high single-digits billions. I think the reasons to believe are kind of obvious from the clinical data, right? So, yes. I mean -- and you could say, well, that’s great for patients who don’t get extended dosing on another product. But if you’ve got a product like this, why would you even start with something else because the other thing that we know from the clinical trials is the effect on drying of the eye on central subfield -- subfold thickness, the anatomical impact. It’s very evident. And in fact, we’re hearing all kinds of anecdotes about that from the switching that’s going on in the market now, how patients who really haven’t had thorough drying are -- their doctors are seeing this after one injection. And they’re calling us. They’re calling the investigators. They’re calling and saying, wow, you didn’t tell me, it was this good. And so, we’re that -- the four-month dosing interval for more than 60% of patients, and frankly, the fact that the biggest problem in this field is all about dosing. And the fact that patients don’t get the doses, they don’t come in, and they lose their vision. So, I think for those reasons, we ought to be aiming for the sky.

The reasons to temper that have to do with the fact that there’s going to be biosimilars to both Lucentis and Eylea that are going to be launching around the world. And so, it has a little bit to do with price sensitivity and also the trade-off between price and capacity because in -- for example, in the NHS, I mentioned almost unprecedented that we got approval from NICE the day we got regulatory approval in the UK. I think that’s the first time that’s ever happened for us. And it’s almost the first time it’s happened in the world. And that’s really about -- in the UK, they just don’t have the capacity to do the injections. And so, again, patients lose their sight. So look, I’m bullish and I’m thinking big. But I guess it’s the analysts’ job to figure out what the number is.

[Wimal Kapadia, Bernstein]

I’m going to take that as CHF 10 billion. That’s fine.

[Bill Anderson, CEO, Roche Pharmaceuticals]

That’s great. That’s great. And then, Polivy. You asked about without OS data, will ex U.S. adoption occur? I think so. I mean it’s been a long time since R-CHOP launched. What was that? Almost 20 years ago. But this is curative intent. I mean, we’re talking about first-line DLBCL. These are middle-aged people who have a -- basically a disease that can be cured, or if it relapses, it’s usually going to be terminal. Now, we have better second and third-line therapies that can postpone that. But basically, you have a chance to cure a person in the prime of life, and they’re done forever, or if they have a relapse, then they’re going to have this disease, and they’re probably going to die from the disease.

And so, as I showed you from the Kaplan-Meier curve, you’re talking 6, 7, 8 patients out of 100. As that curve matures and then the OS curve will come in, we should see similar things. And I think the fact that people take this very seriously, it was underscored by the fact that the EMA moved so fast to approve it. Japan is going to approve it in August. We’ll have approval by the FDA later this year, so. And just to clarify, I said more than CHF 1 billion. But I think the total Polivy potential, including the use in later lines as well as the Polarix is probably closer to CHF 2 billion than CHF 1 billion. So, we’ll see.

[Severin Schwan, CEO]

Perhaps I can also add here, now that I get into this phase of looking back of my CEO tenure. There have been two -- I mean, those who know me for a long time, they know that I typically are not -- I’m not super optimistic and I’m careful because I know that many things can go wrong and I’ve seen things going wrong a lot of time. So, I tend to be on the careful side. But, there were two instances where I was more optimistic than the investor community, when I saw the first consensus coming in and where we had debates with investors, and that was Perjeta. This was after the APHINITY trial, where I was really certain. And I also spoke out in a very typical optimistic way about the potential of this medicine. And the second one was Ocrevus. I remember the initial estimates being relatively low. And we all were convinced that this is really a fundamental change in the way MS is going to be treated. And I put Vabysmo into this category.

So, in my discussions with ophthalmologists, of the initial feedback I get from the community, I think this is a fantastic medicine, and it has really a great potential. And to see this now confirmed already so early with the launch in the U.S. and to see the uptick in some other markets where it’s starting to get it out to patients, again, this is one where I’m -- and this is exceptionally more optimistic than the investor community used to be. So anyway, on that note, the next question.

[Bruno Eschli, Head, IR]

Next one would come from Sachin Jain, Bank of America.

[Sachin Jain, Bank of America]

I’m going to kick off with a big picture one first, if I may. So, a lot of investors we speak to perceive risks around the growth profile if TIGIT and gante both fail given the pressures we know, COVID decline, [ph] Lucentis, Esbriet generics. A lot of the presentation -- talked about the strength of Pharma launches and Diagnostics based business. So, the very simple question for me is, how does all of that balance out for you in your mind in the next two to three years, ‘23 specifically? Do you have an ambition to grow given the substantial COVID decline? And how should we think about the next two to three years without any TIGIT or gante launches? So that’s a big picture.

Then two specifics. On gante, Severin, with your cautious hat, you talked about this is 50-50 before. Any shifts in that thought process as we get closer to data? And then the final question also, I guess, for Severin specifically, is on TIGIT. I think investors through road shows, post results have received mixed messaging as to where you sit on TIGIT in terms of the missed PFS for clinically relevant OS possible. So, Severin, from your seat, where do you sit on commercial potential? And how much of a disappointment was it not hitting PFS? Thank you.

[Severin Schwan, CEO]

Okay. So, on the first question, it’s a bit of a difficult one because it will very much depend on COVID. And if we lose COVID-related sales altogether, I mean, you can do the math, then it will be a steep curve for next year. Even though we see fantastic growth with these new medicines, even though there is the Vabysmo opportunity and others, I think it will be tough. If we have some tail business, if potentially COVID goes into next year, who knows. Then I think growth is positive next year. That’s how I would frame it, without making a guidance prematurely.

Now, if you look beyond that, as soon as we have washed out this COVID effect, then I clearly get very optimistic because not only get we over the COVID washout, but also the impact of biosimilars will come down. And I see no reason why we should see a declining momentum for our franchise. On the contrary, there’s a lot getting on line as we speak.

So 2023, we always said this year might be a transition year, the last year might be a transition year. And then COVID kicked in. And then suddenly, we had to start all over again. And now, of course, the success of today is getting the hurdle for tomorrow. If we wouldn’t have had COVID, if there was no COVID over the last two years, I can guarantee you, we will grow next year, right? And I remember I was once saying in ‘23, we will grow, and we would grow if there was no COVID effect. Now with COVID, which we could benefit from and hopefully also made some contributions for healthcare and societies around the world, it’s a bit more of a challenge in relative terms. But certainly, in absolute terms, I’m very -- how should I say, I think we are very well positioned with all the risks, of course, which are always there.

As far as gantenerumab is concerned, no, my view has not changed. I think it is a high-risk project. I mean, I’d say, we plan for a situation where it doesn’t come through. It’s not that we have any more information than you would have, but I think it’s potent and it’s the right thing to do. And of course, if it is positive, that could be transformative and we are in a completely different situation also from a growth perspective. But that’s the more, how shall I say, prudent part of me is dominant, where I say let’s hope for the best, but let’s -- don’t plan on that basis.

As far as TIGIT is concerned, I mean, let’s face it. This was a setback, and we were all extremely optimistic. I was personally very disappointed because when you see Phase 2 results, as we have seen for tiragolumab, then of course, you are confident that it will also be confirmed in a late-stage trial, which was not the case. We didn’t hit statistical significance. And that is a setback, because at the minimum, we have lost a year, right? I mean, if we would have had positive PFS, we would have been to the market probably earlier as a result of it. That would certainly have been beneficial in itself. We would have had a better start in terms of our market share position, et cetera. Now, we’ll see how it plays out. And in case that overall survival is positive, I think we can still salvage a lot of value of tiragolumab. And the reason is simple, because at the end of the day, of course, overall survival will always beat progression-free survival. I mean progression-free survival at the end of the day is a surrogate biomarker. What really counts is, do you live longer? It’s more important if you have both endpoints, then is the tumor growing and at what time is it growing again. I mean, this -- I mean, as a patient, you don’t care. What you care about is how long you live and at what quality of life you live. And we will have those data next year.

So, we have lost time as a result of not hitting PFS in a statistically significant way, even though we saw a positive trend. And that is a setback in itself. And it has certainly also lowered PTS for OS. But the jury is still out. And if we do hit OS, I think this will still be a great opportunity for patients and certainly for our business.

[Bruno Eschli, Head, IR]

Next questions would come from Richard Vosser.

[Richard Vosser, JPMorgan]

So first question, just on the adjuvant trial for Tecentriq. The head and neck seems like obviously delayed, but it seems like there was probably an interim analysis this year. And also, renal cancer, as you said, hasn’t hit. So just thinking about your confidence in the remaining Tecentriq adjuvant trials, and particularly head and neck, given it’s been pushed out a little bit. Second question, just on Diagnostics margins. Margins in first half, very similar to second half. Clearly, COVID revenues going down will reduce the margin, as you say. But should we be thinking about 20% margins this year and then a decline next year, perhaps some shape of the curve there. And I’ll probably stop there. Thanks very much.

[Severin Schwan, CEO]

Thank you. Bill?

[Bill Anderson, CEO, Roche Pharmaceuticals]

Yes. Sure. Let’s see. In terms of the adjuvant studies, so I think the sort of scales with the effects in the metastatic setting. So, for example, one of the readouts we’ll have in the second half is adjuvant liver cancer. And I think the Tecentriq plus Avastin data in metastatic liver cancer was quite unambiguous. Really big impacts on PFS, OS, very clear result. And so that makes us pretty bullish in adjuvant.

In other indications, like RCC, where the data has been a little more mixed, then maybe it’s not as surprising that the adjuvant readout would be, yes, less strong. And I think in head and neck cancer, I mean, basically there, we have an IDMC. They’ve looked at the data and said the trial should continue. So, if they had looked at it and said it was futile, then the trial wouldn’t continue. And so, we’ll have to wait and see what we learn in 2023. So, I think we’ve got -- yes, we’ve got some things ahead of us still with Tecentriq.

And I would say, Severin, if -- you challenge me on this if I get it wrong, but like, for example, when you said we’re not planning for gantenerumab, we’re not counting on it. But we’re definitely gearing up for it. It’s -- that’s what you do when you have a sort of 50-50 thing. From an operational standpoint, we absolutely -- we have teams. We’re working on all the things you work on in terms of health economics and access approaches in different countries, and obviously, manufacturing preparations and things, so. But I think the point you made is right on, that we’re not reliant on gantenerumab. In fact, it’s not even that significant even in a positive case in the next 18 to 24 months because we would just be launching out at the end of that period, so.

And then I would just say on tiragolumab, as Severin said, the OS, that’s a big part of it. That’s why we put most of the alpha on OS. And I think there’s more than 10 cancer immunotherapy studies so far that missed on PFS and hit on OS, which is why we use co-primary endpoints and why we put most of the alpha on the OS, because at the end of the day, that’s the one that counts. So, I think -- I don’t know if the message has been received in a mixed way. But I think, yes, we have reasonable confidence that we’ll have a positive outcome on OS. And we won’t know for sure until we get it. But until then, we’re -- yes, we’re still optimistic about tiragolumab.

[Severin Schwan, CEO]

Thanks, Bill, and thanks for clarifying the important points on gante, very important. There was another question on the Diagnostics side, Thomas?

[Thomas Schinecker, CEO, Roche Diagnostics]

Exactly. The question was on the Diagnostics margins. Yes. I think the way you’re thinking about it is also the way I would think about it. So, that will stay above 20% for this year. And in fact, when we were managing the P&L for Diagnostics, we’re always managing excluding COVID sales, right? Because we know the COVID sales can go up, can go down. And so, we try to manage costs diligently based on the base business actually.

And if you actually look back in, I think, 2019, we had margins of 13.9% in Diagnostics. So, going to 20% excluding COVID would be a huge jump. But what I can say is that we’ve made huge progress in really managing our P&L. And we have significantly improved our margins just excluding COVID. So not quite 20%, somewhere in between where we were and the 20%. And also, I mean, if I look at how our P&L, how much money we’re investing in R&D, I mean, this is the reason why we’re not yet at 20%. But we have so many important programs currently in our pipeline that are really exciting, like mass spectrometry, just to name one of them, and there will be not in the too distant future. And so we really want to see that through to make sure that these products have the impact that they can have.

[Bruno Eschli, Head, IR]

Maybe a question we’ll take from the chat, and it goes to you, Thomas. A follow-on on Diagnostics. Do you have visibility that the additional cobas machines placed for the pandemic are still active and now used for other purposes? This question comes from Luisa Hector from Berenberg.

[Thomas Schinecker, CEO, Roche Diagnostics]

Yes. So, we actually have all of our systems -- or let’s say, 90% of our systems are connected to our T systems. So, we do see the usage of those machines. And we see that they are being used. And what we also see is a lot of consolidation on these kinds of instruments. And why do we see that consolidation? It’s the high level of automation, the high throughput and the menu that we have. So, we do see that this is the primary choice. And by the way, another way I see that is that -- looking at how many systems we placed in the last couple of years, you may think that the demand of these systems is going down, but that’s not the case. We’re still producing more of those systems than we did pre-pandemic times. And now, on top with the cobas 5800 launch, we have even more opportunity in the segment where actually it’s more suitable for, let’s say, countries in Latin America or Asia with the 5800 or smaller European countries in terms of throughput. So, I’m actually very positive if I look at how the instrument placement is continuing.

[Bruno Eschli, Head, IR]

Next question would come from Keyur Parekh, Goldman Sachs.

[Keyur Parekh, Goldman Sachs]

Severin, you kind of mentioned as you kind of look back at your tenure as CEO, I wanted to ask you kind of a slightly more forward-looking statement. As the Chairman -- the future Chairman of Roche, and as you look at the next decade, what do you think are going to be some of the critical changes to the structure of the global kind of industry? Do you think there will be fewer pharma companies than there are today? Do you think there’ll be more pharma companies? And what role do you think kind of Roche will play in that new structure?

Separately, for Bill. Bill, as we look at kind of the bispecific antibodies, and you kind of were very keen to point out that the indications we are seeing in the near term are very much kind of the top of the iceberg, and there’s a lot more to go, I’m just wondering kind of as you look at the broader competitive landscape for agents like this, what gives you the confidence that Roche have a differentiated asset here? And then lastly, for both of you, Roche spends more on R&D than any other company in the industry. I’m curious to hear your thoughts on what the trajectory of returns on R&D investments that Roche have been over the course of the last 10 years. And what justifies you continuing to spend at 500, 600 basis points ahead of industry average?

[Severin Schwan, CEO]

Okay. Thank you, Keyur, for your questions. And I think, actually, the last question and the first one is connected. I do believe that going forward, at the end of the day, what counts is that we maintain our power to innovate. That’s really what drives growth in the long term, both in Pharma and in Diagnostics. It’s all about translating cutting-edge signs into breakthrough potentially life-saving curative medicines in the best case and novel diagnostic solution. That’s what it is about. And we will continue to focus on that.

And I do believe that -- there’s a lot of people who say, well, is there an end to innovation and this tailing off, et cetera? And I really don’t believe so because the complexity of the human body, the complexity of disease is enormous. And we have only scratched the surface. There is so much more we have to better understand. And couple that with this human kind of curiosity. Those two things, if they come together, humans, we are curious to make progress to understand. And having such a complex challenge to solve, like how the human body works or actually doesn’t work if you have a disease, that cries for further progress in science. And that will continue, and we want to be part of that. So, that will be absolutely vital.

I think, there is one component which we can leverage now on top of it, which is relatively new to our industry, and it was touched on earlier. That’s around digitalization. There’s no doubt that healthcare will get more digital. We can leverage data from the real world. We can leverage new advanced analytic tools. And that, again, will help us to innovate and to tackle diseases which we couldn’t tackle in the past.

Now, your question, do we see fewer or more companies? I don’t think that in the pharmaceutical industry, it is about scale. I think it is much more about ingenuity, creativity, resolving a specific issue, discoveries. And you see that over and over again, also very small groups, if these are talented people, they can innovate, they can make progress. And therefore, I also think that there will not be a consolidation, as you see in other industries like in the generics industries where it is much more about economies of scale. In our industry, we will see and we will continue to see smaller companies popping up. And I don’t think that there will be a big structural change. And I’m talking about the innovative industry, right? So, yes, it’s about innovation. It was about innovation in the last 125 years. And I think it will be about innovation as we go forward.

Bill, anything to add on that?

[Bill Anderson, CEO, Roche Pharmaceuticals]

Yes. I think you said it really well. And I think the other thing, Keyur, to remember is that we didn’t just increase R&D spending. We took down everything else. And again, we just think that’s the future. As Severin said, we got to -- we’re going to innovate our way to the future. We’re putting a huge amount of energy into how do we better spend the R&D money. So again, we don’t think it’s just like, oh, we’re going to spend more. We need to make sure that it counts. So, we’re investing in foundational investments, like the Center for Human Tissue by -- what is it? Sorry. Thank you. Human Translational Biology, which is like the organoid center. It’s probably going to be the biggest thing of its kind, which is trying to get to much better models that will be much more predictive of what’s going to happen in the clinic and less reliance on animal models, the work we’re putting into computation and analytics. I mean, these are all things to increase PTS, to decrease cost, to reduce cycle times. So it’s all of that.

You asked about the bispecific antibodies, and I agree. It’s a very crowded field. And I think anyone could be confused in hematology of wondering like, well, how is anybody going to make money here if there’s so many options and so many alternatives? And I think the reason we believe that we can really lead out here and actually make a viable business of it as well is twofold. One is just, in oncology, it’s still first, past, post. If you’re second with some efficacy result, I mean nobody cares. You get 5% market share. If you’re first, you get 70% market share. And we’re first with most of them, and we’re going to be first with glofit. We’re first with Polivy. We have Gazyva. And that comes to the second point, which is combinations. And surely, combinations are going to be the key. And we think we have a lot more faith, for example, in combinations of two or three off-the-shelf medicines versus CAR-T, which requires a much more elaborate process.

So, I agree. It’s a bit confusing if you look at the field, but I’m really positive on us emerging with a really strong business.

[Bruno Eschli, Head, IR]

Next question comes from Andrew Baum, Citi.

[Andrew Baum, Citi]

Thank you. Couple of questions for Bill. Firstly, on tiragolumab and SKYSCRAPER. You disclosed qualitative comments about PFS and OS being numerically great in the tiragolumab arm. You are in possession of the response rate. Could you say anything on a qualitative basis, similarly, on the response rates in the two arms, the depth of the responses and the durability of the responses that would help inform us in anticipation of the maturity of the survival endpoint?

And then, second, Roche has a legacy in infectious disease. Obviously, you are a dominant player in COVID-related diagnostics. You have more biologic manufacturing capacity than anyone else. And where I’m going with this is there’s a sizable market for antibody prophylaxis for patients at high risk of COVID that plays directly into your hematology or solid tumor franchises. Evusheld is the only player out there. Why hasn’t Roche entered this market given seemingly you have all the tools required and a group of patients that’s going to need therapy forever, given the poor response to monoclonals? I’ll stop there.

[Severin Schwan, CEO]

Thank you. Bill.

[Bill Anderson, CEO, Roche Pharmaceuticals]

Sure. I’m sorry to say, I don’t think we can really disclose any more on tira at this point. So, I look forward to being able to share all of that.

In terms of your question about prophylaxis and antibodies, it really has to do with the trajectory of the pandemic and the mutations. So, we and our partner, Regeneron, we’re very far down the path with prophylaxis. We had data out to 8 months from a single dose of Ronapreve, look great. By the way, it might look great again, depending on what the next major variant is, because you remember that Omicron was not descended from Delta. Omicron came from an earlier variant. And so, we had great efficacy against Delta. But then when Omicron came, it kind of wiped this out.

So, the fact -- if you have an antibody that works against the present prevalent strain, then you can get that indication or that application. If we started right now to develop an antibody for Omicron, there’s no way by the time it was out that Omicron is still going to be the thing. So, that’s kind of the problem. I mean, there are some protein engineering approaches to try to design around that. But I don’t think we’re confident enough in that to go whole hog in. It’s not to say we’re not -- we’re still evaluating this with Regeneron, with Chugai. We have -- our scientists are looking at it and working at it. But I don’t want to promise anything in the near term.

[Bruno Eschli, Head, IR]

Thanks, Bill. Next questions would come from Emily Field, Barclays. Emily, please?

[Emily Field, Barclays]

Just a follow-up question on the guidance. I appreciate that there’s a lot of mechanical moving parts. But I just wanted to confirm that, if there was any components of the business fundamentally that have deteriorated since you gave the full year outlook, are you allowing more room perhaps given the volatility of lockdowns in China? Did the lockdowns in China have any material impact on the Pharma business in 2Q also? And then just on the guidance for AHR, annualizing the first half would suggest an erosion closer to CHF 2 billion. Any reason to suspect acceleration there in the second half?

[Severin Schwan, CEO]

Right. The short answer on the guidance is. No, that underlying business is doing very well. But perhaps, Bill, you can comment also specifically on China.

[Bill Anderson, CEO, Roche Pharmaceuticals]

Yes. So in China, we saw some impact in Q2 on the Pharma business, but it wasn’t particularly severe. So, I think maybe because -- well, I would say we worked heroically, our people there. I think we had like 100 people who spent 75 days and nights at the plant, sort of sleeping on cots and things to keep the product flowing. And so, the patients, even if they were on lockdown, they were still able to get their medicines and things. So, the main impacts, pluses and minuses in China, we have growth of new medicines, and AH&R biosimilar impact, which is a drag on things. So, yes.

And then you asked about acceleration, in fact, of AHR and the outlook. I think we’re looking at international. Possibly, China could be accelerating. And so, that’s why we’ve maintained the guidance.

[Severin Schwan, CEO]

But it is -- I mean, it is roughly CHF 2.5 billion. And probably, that is the higher end of the expectations as we see it today. Good. Can we have the next question.

[Bruno Eschli, Head, IR]

Yes. Next questions will come from Stephen Scala, Cowen. Stephen?

[Stephen Scala, Cowen]

So I have two questions. Thank you. First, I apologize. I’d like to go back to the OS trend in SKYSCRAPER. Bill, first, can you confirm that you have seen the curve? And the question is management’s very tempered tone suggests the trend is barely there. There were no optimistic words chosen at all to describe it. Since we have nothing else to go on at this point, would acknowledging your trend be the most accurate metric that we will have until we see the data? And then, the second question is on Hemlibra. Does any of the recent competitive data, either from Sanofi or Novo concern you? And if not, why not? Thank you.

[Bill Anderson, CEO, Roche Pharmaceuticals]

So, Steve, I can’t really answer your question specifically. But what I can say is you’ve probably heard two kinds of things from us about tira. One kind of thing you’ve heard is us explain sort of in detail about co-primary endpoints and allocation of alpha that we put more on OS and that kind of thing. And then you’ve heard from us, say, hey, we’ve not given up on this. And then, the other thing you’ve heard from us is our sort of normally conservative thing that we say about anything that’s uncertain, and as we say, well, it may not happen. It may not work. So I don’t know. I don’t know what else to say. But I think the fact that we’re still talking about it would -- should suggest to you that -- like, for example, if we say, yes, we’re still reasonably optimistic, we could have a medicine here, that means we’re reasonably optimistic that it’s going to be a medicine. And this is Roche talking and translated accordingly.

In terms of Hemlibra and competition, I think the modified factor product, I think, remains to be seen what that’s going to look like from an inhibitor standpoint, because, as you know, if you have hemophilia, you don’t want to develop inhibitors to Factor VIII. And highly engineered medicines tend to have -- be more antigenic. And so, I think probably the field is going to want to see considerable amount of real-world evidence and see what does actually happen in terms of inhibitor formation before that would be sort of like wholesale switching, just like we saw with Hemlibra. There was a cautious uptake. If you’re going to have a condition for your whole life, and you have options currently available like Hemlibra, and I would submit, the patients who have stuck with their factor and haven’t switched to Hemlibra, may not be the ones who are going to rush right out and go with a highly engineered factor products. So in any case, we don’t think they’re going to take Hemlibra patients. It’d be more that there would be competition within the factor space. That would be our read. Congratulations to Sanofi on a good trial and a nice looking product.

The other one you mentioned, it’s just farther out. I mean we’re talking about a launch somewhere out in, I guess, 2025 or 20 -- in that kind of time frame, and a lot can happen between then and now. And when you’re -- yes, when you’re adjusting the level of clotting factor or a pseudo clotting factor, things can go wrong. And you can have downstream effects that are unpredictable.

So I think, again, if we have -- like now, I think we have about 18,000 patients worldwide on Hemlibra, and what we hear from them is they’re very satisfied with their therapy, I think it’s unlikely they’re going to be quick to switch to something else that’s not materially different clinically. And so, by the time those products would come, Hemlibra is going to have two or three more years of penetration. So, bottom line is we feel really good about Hemlibra standing, and I think it’s going to continue to grow for quite a while.

[Bruno Eschli, Head, IR]

Next question would come from Mark Purcell, Morgan Stanley.

[Mark Purcell, Morgan Stanley]

I have three. Firstly, on Vabysmo launch. Now, it’s clear you’re very confident in the potential of the product. And the question is, how quickly should we expect share to be gained that gives us a degree of extra confidence in the products as well? So, could you help us understand the sort of initial patients that are switching, the reasons for that, whether it’s injection burden or whether it’s an efficacy consideration? You talked to the J code coming into effect on the 1st of October. Beyond the net pricing effect, should we expect another uplift there to your analyzing sales rate of CHF 500 million at the moment? And are you seeing any sort of dynamic differences between AMD and DME? So just sort of more color on those would be really helpful. Thank you.

The second one is on tiragolumab. I’m not going to ask you about survival goals and things like that. But could you sort of -- given you’ve got a one-year head start in terms of understanding for the experience to SKY-01, can you help us understand how you’re looking to build on that experience? Are you looking to introduce more combinations to partner Tecentriq and tiragolumab, whether it’s to improve the depth of responses or whether it’s a target sort of T cell exhaustion pathways that could generate resistance by CD226, for example?

And then the last one is for Thomas. Can you provide us a breakdown of COVID sales in Q2 of rapid antigen versus PCR? The reason for the question is to try and understand where the base of the more stable and more durable sales component is, whilst we appreciate the fact that your guidance assumes little contribution from COVID diagnostic sales in the second half of the year. Thank you.

[Severin Schwan, CEO]

Thank you. Bill?

[Bill Anderson, CEO, Roche Pharmaceuticals]

Yes. Thanks, Mark. So yes, let me describe how I would see the Vabysmo kind of dynamic. So, the initial dynamic for the first couple of months was will you get reimbursed? And so that was a period of real hesitancy in the retinal specialists. So, you really only have the kind of leading adopters using it. And there, they were really only using it for patients where they’re really having breakthrough disease and very problematic on efficacy. So, that was sort of the initial.

Then, we started seeing reimbursement coming in. The word was getting out in kind of April that, yes, this drug is getting reimbursed. In the meantime, we’ve managed to get 80% of the commercial payers -- are on board as well. And so now -- then we started seeing switching that was not only where you have breakthrough disease, but also, for example, patients that need monthly dosing. I think looking forward, that we should see basically more patients that are requiring, let’s say, every other month dosing or every three-month dosing or also naïve patients, why would you start them on something else? And so, I think we can look forward to that dynamic.

Finally, the J code will kick in on October 1st, which will mean that the prescribers who use relatively less or treat relatively fewer of these patients, maybe they’re waiting to see that that will kick in as the additional real-world safety evidence comes in, that should also drive momentum and breadth of use. And then, finally, we’ll have international expansion. As I mentioned, Japan, UK, have already launched, and we’ll have many more countries coming on line. So yes, in fact, we should have EMA approval in September. So, we’ll be really covering a large part of the world at that point.

Tira combos, we’re not really discussing that. What other things we would do with tira right now, we’re definitely contemplating that with the data we have. And we’ll look forward to saying more about that in upcoming sessions. I’ll turn it over to Thomas.

[Thomas Schinecker, CEO, Roche Diagnostics]

Yes. So thanks for the question. So in Q2, we still had quite a lot of rapid antigen in sales. So, more than two-thirds of the sales were rapid antigen sales. And I agree with your comment that the more stable business is PCR. And the reason is simple. I mean, if I just look in Q2 alone, one government ordered for CHF 550 million, right? So that was one customer. And if that one customer doesn’t reappear, you’re missing CHF 550 million. So, because governments are currently not investing anymore into rapid antigen test, perhaps will change again in Q4. Let’s see how things develop. I mean, we were talking about potentially new variants appearing, maybe hospitalization going up. But the reality is that you have very few customers with high orders. There is a very high volatility.

PCR, these are, I would say, more normal customers we had pre-pandemic, labs, hospitals, et cetera, and thousands and 10,000 of customers. So, it’s more stable situation. So, I would agree with that assessment.

Now, also keep in mind that now people don’t have to test anymore when they go in quarantine. In some countries, they don’t have to quarantine at all. There’s no more testing before flights. So, there is an impact also on the PCR side from that aspect.

[Severin Schwan, CEO]

Thank you. I think Bruno, we are really running over time. We have to bring it to a close now. I’d like to thank you very much for your interest. I’m sorry for running over time. I know there are still a couple of questions in the queue. I would suggest that you directly get back to Bruno and his team. And I wish you a good day. Thank you very much. See you next time.