Earnings Call Transcript - ROG Q4 2021

Operator, Operator

Ladies and gentlemen, welcome to Roche's Full Year Results 2021 Webinar. My name is Marco, and I'm the technical operator for today's call. Kindly note that the webinar is being recorded. One last remark. If you would like to follow the presented slides on your end as well, please feel free to go to roche.com/investors to download the presentation. At this time, it is my pleasure to introduce you to Bruno Eschli, Head of Investor Relations. Bruno, the stage is yours.

Bruno Eschli, Head of Investor Relations

Thanks, Marco, and welcome. My name is Bruno Eschli. I'm the new Head of Investor Relations, and I wanted to take this occasion to extend a special thanks to my predecessor, Karl Mahler. Karl has dedicated every single day, and I think probably also a few nights over the last 20 years in telling Roche's innovation and investment story to the world. He managed communication on many pipeline ups and downs. Everybody who knows him knows that he kept a close eye on one particular number, which is our share price. When Karl joined back in 2002, Roche shares traded at around CHF 120. Since then, the share price and market cap have nearly tripled, with today's market cap just above CHF 300 billion. We believe we will continue to have exciting times ahead with a record number of Phase III studies reading out in 2022. With that, I would like to hand over to Severin Schwan, CEO of Roche, for a full year '21 business update.

Severin Schwan, CEO

Welcome, everybody, to our year-end briefing. Thanks for joining. Let me also take this opportunity, Karl, to thank you for your many contributions over the last 20 years. You've been a fantastic ambassador for Roche in our financial community. So let's get into 2021. Here's the summary. You've seen the numbers. Sales are up by 9%, driven by, of course, COVID-19 sales, but also a very strong development of the base business in Diagnostics and Pharma, which is growing despite the significant impact of biosimilars last year. Profit and cash are up, with free cash flow increasing into the high double digits, which is helpful given that we just did the repurchase of the Novartis Holding in Roche. What I'd really like to focus on in my opening remarks is the pipeline. It's been developing well over the last year. As you will see later, we have a series of significant readouts scheduled for this year. We initiated 16 Phase III trials and now have 14 new molecular entities in late stage. On the Diagnostics side, we saw notable launches such as the cobas 5800 in the Molecular Diagnostics segment. I'm really excited about the strong news flow expected in 2022. We'll speak about Tecentriq in the adjuvant setting, tiragolumab, giredestrant, and so on. This is an extraordinary year for Phase III readouts along with ongoing launches of important medicines. If we could have the next slide, please. Here again, you've seen the numbers, basically hitting our expectations from last year. Let's move on to sales and operating profit. Starting with sales on the left-hand side of this slide, we endured a year where biosimilar erosion peaked at CHF 4.5 billion, yet we were able not only to compensate but actually outgrow this erosion with new medicines. Diagnostics are up by CHF 4 billion. While part of that is COVID, we also had significant COVID sales back in 2020; a big part vs. the previous year was also due to good growth in the underlying business. Strong performance in Diagnostics. If we move on to core operating profit, what you can see is our significant investments into research and development totaled CHF 1.7 billion — CHF 1.5 billion in Pharma and another CHF 200 million in Diagnostics, reflecting the rich pipeline we want to push forward. We are also working on our efficiency across the board. You can see on the Pharma side, part of the additional spend has been financed by efficiency gains across the Profit & Loss statement. And, of course, we benefit from strong growth in Diagnostics as well. If we move on, looking back over the last seven years, now that we have peaked on biosimilar impact, as it starts to decline, it's worthwhile to reflect on the last year. I'm proud of how our team managed through that long period of biosimilar erosion. If you consider our previous dependency on the three big cancer medicines, Avastin, MabThera, and Herceptin, and how different the portfolio looks today, that’s a commendable achievement. We've also navigated the COVID-19 pandemic quite effectively. Let’s look at the next slide, please. This slide shows two key points. First, you can see the biosimilar's impact versus the overall portfolio on a quarterly basis. The continued robust growth of new medicines is remarkable at 35%. Even if you exclude Ronapreve, which significantly impacted last year, we are still at a level of 23%, which is impressive to see. Furthermore, on the quarterly basis, Pharma is returning to growth, reflecting the declining effect of biosimilars, painting a picture of our future outlook for '22 and the years to come. On the Diagnostics side, we also see strong growth in the base business, reflecting both recovery and underlying growth. Next slide, please. Profitability shows more details. Alan will elaborate further, but in absolute terms, profit is up by 4%. Margins have declined, partly driven by COVID-19 business and investments in R&D. We'll cover more about that soon. Additionally, free cash flow has developed very nicely. In terms of outlook, a lot depends on COVID-19. I'm not going to claim to predict the future accurately. I was mistaken last year, thinking the pandemic would conclude quickly. We forecast moderate sales growth, but there are two scenarios. One is contingent on the assumption that with Omicron, we transition into a more endemic situation and the pandemic recedes by the second quarter. The alternate scenario would involve another outbreak or possibly a winter wave, significantly influencing our sales and business. However, we're basing our guidance on a scenario where COVID-19 slows in the second quarter, and as of now, the demand for our Diagnostics is incredibly high. We have our January figures back already in-house and expect a strong first quarter for COVID-19 testing. But our assumption remains that testing will markedly decline in the second quarter. If we could move on to the next slide, please. My absolute favorite slide shows that every month, we have critical readouts alongside important launches in Ophthalmology like Susvimo and Vabysmo and also plan the launch of Polivy in first-line DLBCL. Exciting times as we approach an important year, particularly for Pharma. We have more to come on the Diagnostics side as well. Next slide please. Let’s focus on sales outlook, offering you two critical numbers. First, regarding the biosimilar entry for Avastin, Herceptin, and Rituxan, we estimate sales at CHF 2.5 billion. Our confidence in this estimate remains strong. Last year, we predicted CHF 4.6 billion, yet we ended up at CHF 4.5 billion. Such predictability increases our assurance regarding the projected CHF 2.5 billion. Now on the COVID side, our assumption stands at CHF 5 billion in sales, representing a decline of CHF 2 billion versus last year. If you combine the CHF 2.5 billion and the CHF 2 billion, this gives us a total of CHF 4.5 billion. Stripping that out reveals the genuine underlying growth in respective businesses, which falls within the high single digits range, aligning with our projections for the second half of last year. Moving to profitability, we again foresee stable to low single-digit sales growth, incorporating those two effects, with core EPS expected to rise higher than sales due to the share repurchase-induced accretion. Alan will address these details. Overall, profitability is growing in line with sales. Even with an assumed higher tax rate in 2022, our core tax rate previously benefited from special releases in 2021 and is expected to return to a more normalized tax rate, necessitating performance on the operational side to align earnings with sales growth, excluding the accretion effect. We anticipate being able to increase our current year dividend based on these projections. With that, I hand it over to Bill.

William Anderson, CFO

Thanks, Severin. It's great to have the opportunity to discuss results with all of you and look forward to your Q&A as well. Let's start with division sales by geography. Notably, we observed growth across all regions except for the U.S. for the year. However, we did return to single-digit growth in Q4. Following several quarters impacted by biosimilars, the outlook seems promising. In terms of the P&L, Alan will detail this further, but I'll highlight a few areas. The royalties and cost of sales lines were considerably influenced by the COVID business, particularly Ronapreve, as royalties encompass profit share income from those sales under a U.S. government contract handled by Regeneron. The cost of sales incorporates our profit share payments to Regeneron, including supplemental costs related to Ronapreve and Atea 527 production. M&D has been kept flat, with some opportunities in Q4 leading to modest incremental investments for anticipated benefits in 2022. G&A cores were self-explanatory, reflecting our commitment to maintaining lean operations. R&D saw a 14% year-over-year increase as we reinforced investment in late-stage opportunities and early-stage technologies. Moving to product-specific performance, the significant blue bars signify U.S. biosimilar impacts, which we expect will shrink markedly in 2022 after a challenging 2021. A diverse range of products is propelling growth across various geographies. In oncology, we have many studies reading out, Tecentriq in the adjuvant setting, among others. The POLARIX results were robust and received well, with our focus on launches occurring across the globe starting with the EU and Japan. The drug development and filing for these new treatments represent our commitment to improving patient outcomes.

Alan Hippe, CFO

Thank you, Bill. Let's dive into the core financials. We saw sales volatility due to biosimilars but both divisions performed remarkably well, resulting in significant growth despite the impact. Core operating profit grew by 4%, driven by our R&D initiatives and strategic investments totaling CHF 1.7 billion, as highlighted by future potential. Significant increases were seen in both Pharma (CHF 1.5 billion) and Diagnostics (CHF 200 million), reflecting our determination to propel our rich pipeline. It's essential to reiterate the ongoing efficiency improvements across the board, evident from the financials.

Bruno Eschli, Head of Investor Relations

We will now open the line for Wimal Kapadia from Bernstein.

Wimal Kapadia, Analyst

The first-line DLBCL filing is now expected in the middle of the year. Can I ask what was the regulator's hesitation? Also, could we see good momentum in the OUS markets without OS data? Regarding tiragolumab in small cell lung cancer, as we approach the pivotal readout, what is your level of confidence? What have you seen from the internal data, and how significant is the chemotherapy component to demonstrating success?

William Anderson, CFO

In terms of Polarix, the FDA is setting a high bar for approvals and wanted additional data on efficacy duration. We're focused on PFS as the key primary endpoint, as this traditionally serves as the approval standard for first-line therapy. We are cautiously optimistic that we can show OS benefit, but for now, PFS will be our goal. The confidence in tiragolumab is measured; while we see promising data in non-small cell lung cancer, small cell lung cancer’s historical challenges cannot be underestimated. We're prepared for varying results, but we hope for a positive outcome.

Bruno Eschli, Head of Investor Relations

We will now take additional questions from Simon Baker from Redburn.

Simon Baker, Analyst

Just on gantenerumab, could I clarify the timeline for the readout? The recent Aduhelm sales seem negligible. As you think about your study, what are your thoughts on the profile that you need to demonstrate and any lessons learned commercially? Also, for glofitamab, can you provide insights on its combo potential?

William Anderson, CFO

In terms of gantenerumab, we remain committed to completing all studies. We expect to have results in Q4 and have structured our trial to maximize efficacy and safety understanding. We believe our thorough preparation will lead to strong results in the market. Regarding glofitamab, the bispecific format allows for diverse combination prospects, and we are exploring several options, including synergies with Polivy. We prioritize the best treatment combinations based on ongoing evidence.

Bruno Eschli, Head of Investor Relations

The next questions will come from Richard Vosser from JPMorgan.

Richard Vosser, Analyst

Two questions; how is your capacity for antigen testing, and what does your PCR demand outlook look like? Also, have you considered your margins for Diagnostics?

Thomas Schinecker, CEO

We have substantial capacity for over 100 million antigen tests per month. Our production greatly scaled during the pandemic, ensuring we're well-positioned to meet ongoing demand, especially as we boost our PCR testing capacity as well. In regard to your margin query, albeit we predict a drop naturally, we expect to remain a few percentage points better than pre-pandemic margins.

Bruno Eschli, Head of Investor Relations

Next, we will take questions from Sachin Jain from Bank of America.

Sachin Jain, Analyst

Do you assume Pharma margin up offsetting Diagnostic's decline in your forecast? Also, can we think about EBIT margins of 20% temporarily in a post-pandemic world? What key indicators do you see for Tekentriq adjuvant lung adoption, and how does that fit into your projected value?

Severin Schwan, CEO

Operating margins have to go up to meet our guidance. Your understanding of the divisions is correct—Diagnostic's drop in margin requires improvement in Pharma. I maintain that our goal for earnings is achievable through proper investments in the pipeline. As for your query on COVID, we're bracing for reduced sales by the second quarter, but underlying growth will likely stabilize.

William Anderson, CFO

Regarding Tecentriq, we're currently tracking tests with optimism. The 70% figure is indicative of higher adherence to testing which could lead to greater utilization. While we have a CHF 2 billion opportunity slated, we believe the peak may stabilize around that amount depending on adoption rates.

Severin Schwan, CEO

Finally, let’s move to the concluding remarks from Alan.

Alan Hippe, CFO

Thank you, everyone. I echo the sentiments expressed for Karl. Let's keep pushing for our key initiatives and focusing on the roads ahead. We appreciate everyone's support—stay tuned for more progress as we move into the new fiscal year.