Earnings Call Transcript - ROG Q2 2022

Operator, Operator

Ladies and gentlemen, welcome to Roche's Half Year Results Webinar 2022. My name is Henrik, and I'm the technical operator for today's call. Kindly note, the webinar is going to be 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's my pleasure to introduce you to Severin Schwan, CEO of 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 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. I am nominated to succeed him as Chairman at the next general assembly in March 2023. At the same time, Thomas Schinecker will take over as CEO, my current role. I am really pleased with how things are coming together. My colleagues at the corporate executive team and I very much look forward to 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, a 3% growth for Pharma, which is pretty remarkable. You will see this in later slides as we still have significant erosion due to the entry of biosimilars. If you look at the underlying growth, if you correct for Ronapreve and the biosimilars, actually, the new portfolio is growing in double digits. 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 COVID testing, that 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 the really solid growth of our routine business, excluding COVID tests. We are well positioned for the future here. Now on the product portfolio, I'll come back to that in a moment, but we see not only very strong continued growth with the newly launched medicines, but we could launch new medicines in the first half of this year. I just want to highlight Vabysmo here, where we have seen an extraordinary launch, with very good demand from the community for this novel medicine against eye diseases. If we move forward to the specific numbers, again, Pharma is up 3%; Diagnostics is 11%; overall, 5%. In the quarterly development, you can see the impact of COVID-19. While we are still seeing strong growth in the first quarter, you see here a negative development. As a result, on a group level, we have experienced flat growth, very much as we expected. This is 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 6 months, which compensates for the erosion experienced with Avastin, Herceptin and Rituxan, which is roughly CHF 1 billion. It's good to see the impact of the biosimilars will further slow down over the coming years. You see this also reflected on the right-hand side of this slide, where AHR is now a minor part of our overall portfolio. You may remember that not so many years ago, it accounted for almost half of our total sales. The portfolio has rejuvenated a lot over a relatively short period of time. Looking at what is happening on a quarterly basis and in our underlying business, both in Pharma, I think it's a useful slide. 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. Looking here at the underlying business, we see a positive momentum, with 4% sales growth in the second quarter. More importantly, if you exclude the effects of the biosimilars, we are actually in the high single digits for Pharma. In Diagnostics, we also see a significant impact, with the declining growth due to COVID-19. There is a bit of a dip in the base business in the second quarter due to temporary impacts in China because of lockdowns; we expect that to pick up. We already had 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 is a bit of a special year with a number of special items. Core EPS is up 11%. This is also a result of the accretion due to the repurchase of the shares from Novartis, along with a patent settlement in Japan that helped the core earnings per share as well. Overall, a very good development, both in profit margins and cash flow. I mentioned Vabysmo. That's certainly a highlight in the first half of this year, off to a very good start. However, I must not forget about Lunsumio and Polivy, which has been recently launched. It is now available in Europe for follicular lymphoma regarding Lunsumio and for the first-line aggressive form of lymphoma for Polivy. It's great to see, and we see strong initial demand for these medicines as well. For the outlook, as I discussed regarding recent launches in Pharma, there’s also a lot going on in Diagnostics. We had a very successful launch, particularly of the cobas 5800, our midsized molecular platform, and the cobas pure. These platforms are now expected to receive FDA approval in the U.S. so that we can also enter this important market. We have a number of other platforms and diagnostic tests in the making, which Thomas will comment on in more detail. This is a slide we showed you at the beginning of this year, and it remains accurate. As you have seen, we have confirmed the outlook for the full year. Good growth is expected, both with the new products in Pharma and the base business in Diagnostics. We do have the drag from biosimilars, and we also expect lower sales for COVID-19. I must say, all of this is based on the assumption that we do not see new and, importantly, more dangerous variants of the COVID-19 virus. A new development on that front would, of course, impact our sales for the full year. Summarizing, we anticipate stable to low single-digit growth in group sales. As far as EPS is concerned, we expect low to mid-single-digit growth. Alan will later lead you through the specific items that influence that picture. On that basis, we should be able to further increase our dividend in Swiss francs. Thank you very much. I now hand over to Bill.

William Anderson, CFO

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. So fasten your seatbelts. Here we go. Overall growth is 3%, which we find encouraging. 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's pluses and minuses roughly cancel out. You can think about this as a 3%, including the biosimilar effect, and I think that's back squarely in the black, and we intend to stay there. You can see that Europe is down a bit; Japan's way up, mostly related to sales of Ronapreve. Without Ronapreve, we would have been plus 4% in Europe. In Japan, we would have been at 8% instead of 34%. But they roughly wash out, and the 3% is pretty close to actual without the pandemic. From a P&L standpoint, the royalties and other operating income were affected by the large settlement that Chugai had on Ultomiris, which was a driver there. The cost of sales, COGS, and period costs were up about 9%. Volume was up 8%. So it increased a little more because we were slightly lower in capacity utilization, having basically been at 100% for the last 2 years. M&D reflects a bit of extra spending on launches. R&D is down a bit because of really high spending last year, including a couple of extra hundred million for Ronapreve and AT-527 that didn’t recur this year. G&A reflects some tax effects and our continued emphasis on savings. Core operating profit is up 8%, and we are glad to bring in that result. From a product standpoint, I like the shape this is taking. If you look at the top 8 lines, #8 is Vabysmo, the newest entrant on the list. It's excellent to see that the top 8 lines are basically products we will have for a while and really part of our core portfolio. Hemlibra and Ocrevus each contributed more than CHF 800 million annually of incremental sales, accompanied by strong results from Evrysdi, Phesgo, and we'll talk more about some of the others. I would point out that Actemra was down a couple of hundred million, reflecting very little sales for COVID in Q2. Hopefully, it will stay that way, meaning that hospitalization rates will remain down. But that remains to be seen. Also, with Herceptin and MabThera, we're starting to find the bottom, with losses of minus 16% and minus 21%. We're looking forward to the post-AHR biosimilar era and getting there quickly. We're encouraged to see our 2 biggest oncology franchises show growth. The HER2 franchise now, where Perjeta, Phesgo, and Kadcyla are all outgrowing the losses in Herceptin. Strong performance is up over CHF 9 billion annualized in HER2. Tecentriq is performing well. We'll come back to that. In hematology, we've been very busy. We now have, as Severin mentioned, the POLARIX regimen approved in Europe. It's been filed in the U.S. and will be approved later this year in August in Japan, with approvals around the world right now. We think this can generate more than CHF 1 billion of additional revenues due to its potential for rapid adoption among patients, where 1 out of 7 or 8 get cured from this therapy. Lunsumio, also mentioned by Severin. This is expected to rapidly become standard of care in third-line and later follicular lymphoma, as you can see from the waterfall chart, indicating 60% of patients with a complete response, and 80% responding. It doesn’t require hospitalization as some other therapies do. We also want to mention glofitamab, our other T-cell bispecific in DLBCL. At ASCO, we presented data showing a 39% complete response rate, and the responses appear to be quite durable. This is fixed-duration therapy, and many patients are going for months and years without relapse. We think this is a superior alternative to CAR T therapy. These initial approvals for Lunsumio and glofitamab represent just the beginning. These are both monotherapy approvals, with real key combinations as we’re already the leader in hematology. We have numerous studies teed up, including 3 Phase III studies: glofit in combination with chemotherapy in relapsed/refractory DLBCL, Polivy with Lunsumio in relapsed/refractory DLBCL, and Lunsumio with lenalidomide in second-line follicular lymphoma. We have a lot of bases covered and are looking forward to great results in the future. Hemlibra is a fantastic growth story. The combination of convenient dosing and high efficacy is leading to continued adoption in every country. We are seeing very strong growth in the U.S., Europe, and internationally, including continued growth in Japan. We still get the question of the top for Hemlibra, and while we are not sure where it will land, we certainly haven’t found it yet. More approvals are coming, with label expansions to include mild to moderate patients soon in Europe and the results for infants in HAVEN 7 coming soon. Immunology is mostly affected by Actemra declines due to COVID reductions, while Xolair is holding strong at 13%. Despite the talk about new asthma agents, people tend to forget that Xolair is still the market leader in asthma and is growing strongly in urticaria. Esbriet is facing challenges from multiple generics entering the U.S. market. For Ocrevus, we see nice growth with more than 250,000 patients, maintaining #1 market share in new and total in the U.S. and #1 in new market share in Europe. We have high levels of persistence, which allows us to attain higher total market share. The Phase III study for subcutaneous Ocrevus commenced, with results expected in 2023. SMA is another strong picture with Evrysdi, continuing to expand in every country due to its convenient dosing and strong efficacy. We’re seeing high levels of switching from Spinraza, with 90% of our patients staying on Evrysdi. The trajectory remains optimistic as we expand our label and geographic reach. Finally, on DMD, we showed exciting data from the ENDEAVOR Phase Ib study, with 20 patients demonstrating increases in functional scores that wouldn’t typically be seen in nontreated patients. And we will finish our Phase III accrual this year with results next year. Vabysmo is showing significant momentum, with over 80,000 vials administered. In June, we achieved a CHF 500 million annual run rate. Japan has come online in May with a positive uptake. We received simultaneous approval and reimbursement from NICE in the U.K., which is unusual. As of now, 60% to 70% of our patients are switching from Eylea, while a smaller number switch from Lucentis. In the U.S., 80% of payers are covering Vabysmo, with a permanent J code coming on October 1. I believe Vabysmo will be an important medicine in the retina space and for Roche. One last update before I turn it over to Thomas, we had a negative study with Tecentriq in adjuvant RCC, where we did not achieve a statistically significant benefit on disease-free survival. We’re continuing with the adjuvant head and neck study for Tecentriq, and it will be analyzed in 2023. We've also received feedback that the adjuvant study for Alecensa is likely to readout in early 2023. A lot of good progress for the pipeline and launches. I’m excited to answer your questions later, and I will turn it over to my fantastic colleague, Thomas.

Thomas Schinecker, CEO, Diagnostics

Thank you very much, Bill. I'm excited to take you through the Diagnostics results. Let me start with the first slide. With almost CHF 10 billion in sales, we had a growth rate of 11% at constant exchange rates. This was driven by good growth momentum in the base business, but I'll get into that in more detail shortly. Additionally, we had CHF 2.1 billion in COVID testing sales. One point to highlight on this slide is regarding Diabetes Care. I pointed this out in Q1 and every quarter last year. We did have a one-time positive effect last year in Q1 due to a settlement agreement. Without this, Diabetes Care would actually be flat, which shows that it is holding up quite well. Looking quickly into the different regions, North America grew at 34%, due both to rapid antigen tests and good growth in the base business in North America. In EMEA, we see a decline, driven solely by COVID-19 sales going down, with the base business growing at 6%. Latin America also shows declining COVID-19 testing sales, but the underlying base business would grow at 16%. In Asia Pacific, it's a mix between rapid antigen sales and base business growth. Now I promised to give you more details on the different areas of our business. Let me start with Core Lab. There are basically two impacts affecting growth in Core Lab: one is the China lockdowns. You see this, particularly on the immunodiagnostics side; a big part of our sales in China comes from immunodiagnostics and clinical chemistry sales. This will grow close to double digits in immunodiagnostics and clinical chemistry. The underlying growth in Core Lab is doing extremely well, in high single digits overall. On the Point-of-Care side, this is where we report rapid antigen test sales and also point-of-care molecular tests, showing strong growth. However, if you back out COVID-related sales, the base business is doing well at 7% growth. In molecular, we're seeing a 1% growth, but PCR testing is declining due to COVID-19 impacts. People are no longer required to quarantine or get tested before flights, which has likely contributed to rising infections. The underlying business is performing significantly, with more than 16% in molecular. I have already commented on Diabetes Care, and pathology is showing fantastic growth at 10%. Now on to our performance in Q2 '22. We had lower COVID-related sales than in Q2 last year, and the base business is growing at 3%. If we exclude the effects from lockdowns in China, the base business would actually be growing at 6% in Q2. Looking into Q3, we have observation for a couple of weeks where we see strong pickup again in the base business due to easing lockdowns, so we’re optimistic. From a P&L perspective, core operating profit is growing in line with sales, and our margins are stable. The cost of sales is increasing faster than sales due to a product mix effect, with a lot of rapid antigen sales in the first half of the year, resulting in lower margins than the rest of our business. M&D is growing at 3%. If we look at M&S, excluding distribution, it is actually flat, driven by distribution of our rapid antigen tests, so we should not expect it to impact our P&L going forward. Research and development is growing at 11%, showing our commitment to innovation, while G&A is flat. We have a P&L that's very much controlled on the cost side and the right investment allocation. Now we're pleased with these results. Let me give you more details on some product highlights. Let's start with the Elecsys interferon gamma release assay for SARS-CoV-2. We launched antibody assays to measure antibody levels, but over time, antibody levels decrease. There is a second path where our immune system can defend us against SARS-CoV-2 infections through T-cells in T-cell memory. Now we can combine these two tests, really understanding which patients will progress to severe disease and how much protection they indeed have over time. We have a tube with 189 SARS-CoV-2 specific antigens. These proteins incubate with the blood of the patient, and we then measure the release of a cytokine called interferon gamma, determining how strong the immune response is triggered by the T cells. I’ve shown this slide because it’s becoming significant as new variants continuously emerge. Currently, BA.5 seems to be dominating. With our genotyping assays, we possess over 10 different assays, which accurately measure the genotypes becoming dominant in a much shorter time frame than sequencing. The monkeypox assay was developed quickly through our team; we supplied it to the WHO to help track the virus spread. We also have tools for HPV, a known cause of cervical cancer, and we have a self-sampling solution available. An estimated 600,000 women get diagnosed with cervical cancer every year, with over 90% of those deaths occurring in low and middle-income countries. By providing self-sampling solutions, we aim to increase access to valuable tests. Regarding hepatitis C, 58 million people are infected, but 80% are unaware. This curative test will help improve outcomes and support WHO's elimination strategy for liver cancer. On the systems side, we launched the BenchMark ULTRA PLUS for pathology, showing fantastic growth. It includes features such as shorter turnaround times and joins more than 200 assays. We also launched the digital slide scanner, DP 600, which offers immense potential for digital pathology. This new slide scanner functions efficiently for larger cancer centers, scanning 240 slides in just 4 hours. AI image analysis will enhance diagnostic capabilities, ensuring patients receive better outcomes. I will be at the AACC next week, and of course, I would love to welcome as many of you as possible at this event. We’ll provide more details about our portfolio and will be available for Q&A with some of my leadership team members. We've had many launches this year and have more to come. Everything is on track, and we are excited to show ongoing progress in Q3 and Q4. Recently, on Tuesday, we received breakthrough device designation for the blood-based Alzheimer market. It's thrilling to see how our pathology and other areas are progressing in terms of the portfolio. Thank you very much. Now I’ll hand it over to Alan to take you through the financials.

Alan Hippe, CFO

Thanks, Thomas. My pleasure to wrap it up a little bit and lead you through a couple of effects that we experienced in the first half of 2022. You see the highlights here, and I will address them throughout my slides. Before digging deep, it’s important to discuss our H2 performance because I anticipate questions on guidance. Let me give you some background around that. When looking at our guidance, it is all about how we factor in COVID. The current assumption is that we are losing COVID sales in H2 compared to H2 2021. Last year in H2, we had a significant release of a tax provision of CHF 601 million, boosting core EPS that is non-recurrent this year. Secondly, I will mention the Ultomiris licensing agreement with Chugai, and there is a positive impact of CHF 765 million. That reflects a clear shift from what we initially communicated. We have always been uncertain how COVID would play out. Some may forget how Ronapreve positively impacted our royalty and other operating income line last year by CHF 654 million. So we balance them. You see Ultomiris in H1; the second half is uncertain without Ronapreve royalty income, which came from U.S. sales of Ronapreve. The full year accretion from our share buyback of Novartis shares is a moving target; we now project a 5% effect on core EPS. The sales grew by 5%. Thomas and Bill framed that well: 11% on the Diagnostics side, 3% on the Pharma side, impressive overall. Core operating profit grew about 9%, influenced by the Ultomiris in-licensing agreement with Chugai. Core net income grew by 7%, but we see a bit of a slowdown. This isn't due to taxes but because of our equity securities in the Roche Venture Fund. Given the downturn in biotech, we've experienced impacts here, but hopefully, this has bottomed out, and we have seen positives already in July. The free cash flow is at CHF 9.8 billion, supporting our deleveraging process. In Q2, sales reached CHF 32.3 billion. The Diagnostics base business increased by 6%, with COVID-19 sales showing growth of 24%, quite remarkable. The Pharma division has experienced CHF 1.6 billion up by new products, while we continue to see erosion from AHR at roughly CHF 1 billion, with solid underlying growth. Core EPS shows an 11% increase, with several impacts including Ultomiris. However, our effective tax rate projected to be low means we would have been at 18.5%. With all that in mind, we expect to see results of 5% sales growth, with no significant exchange rate impacts across the board. For full year guidance, we anticipate a minus 1 percentage point impact on sales, core operating profits, and core EPS. I appreciate your attention.

Operator, Operator

Thanks, Alan. I think we’ll come to the Q&A session. The first question would come from Jo Walton from Credit Suisse.

Severin Schwan, CEO

Jo, can you hear us?

Jo Walton, Analyst

Apologies. Yes, I can hear you.

Severin Schwan, CEO

Great, Jo. You have a question?

Jo Walton, Analyst

Yes, I do. Can you provide some sense of when you’re able to present the TIGIT non-small cell lung cancer PFS data? I think many thought this could be at ESMO. Would it be possible to see this ahead of possible OS data, which I assume we’ll see in 2023? Following up from what Bill said about 100% capacity and the ability to move back a little bit from that, what would happen if gantenerumab were successful? That's got quite a heavy manufacturing burden, I assume. Finally, if I could just ask Alan, there was a write-off of CHF 336 million of Flatiron in the half. Can you provide any updates as to what’s gone wrong with Flatiron and is this an opportunity to elaborate on what success Flatiron and Foundation has for your business?

Severin Schwan, CEO

Very good. Over to you, Bill.

William Anderson, CFO

Great, thanks for the questions, Jo. In terms of the SKYSCRAPER 1 data in non-small cell lung cancer with tiragolumab, the team is considering the best timing for the data release. As you can appreciate, it’s an ongoing study with an OS component, and there's much competitive sensitivity involved. I can’t provide a fixed date at this point for presentation. Regarding gantenerumab success and our capacity, we had begun gearing up for gantenerumab production capacity and other crucial medicines before COVID hit, which fortuitously led us to engineering runs with Actemra. Now we expect demand for those products to lower, freeing up the plant for gantenerumab. It may indeed require significant protein, yet it's a relatively efficient process for our team. On the Flatiron matter, yes, it's largely an accounting issue because we are satisfied with their sales developments this year. However, in comparing it to the original business plan we had, we were overly optimistic when we acquired it. We’ve reset expectations and are optimistic about the current momentum. Our insights approach remains strong. Real-world data is a vital topic, and we are committed to it strategically.

Severin Schwan, CEO

Right. Thank you, Alan. I just want to confirm from my side our commitment to leveraging real-world data and advanced analytics. It presents a significant long-term opportunity and is very synergistic with our core businesses in Pharma and Diagnostics. Can we have the next question, please?

Operator, Operator

Next question would be from Wimal Kapadia from Bernstein.

Wimal Kapadia, Analyst

So first, can I just ask about the Vabysmo launch? It's clear you cannot be specific; however, should we consider this a Lucentis-type revenue product of CHF 4 billion or more of an Eylea-type closer to CHF 10 billion? Should we expect 2023 to be a blockbuster year for the product? On Polivy in the first-line DLBCL, can we expect any momentum for the product in the U.S. without OS data? Previously you referred to CHF 1 billion; can you provide more clarity on share expectations for this DLBCL setting?

Severin Schwan, CEO

So Bill, I wonder how much you lean out of the window. Over to you.

William Anderson, CFO

Well, see. Where’s our crystal ball? I think I can't give you a number, but I can certainly talk about how we're thinking about it. The reasons to believe in Vabysmo are clinical efficacy data. We have seen how patients who previously haven't had thorough drying are exhibiting this post-injection. The 4-month dosing interval for more than 60% of patients is notable. The biggest issue is about dosing, with missed doses leading to vision loss. The J code will surely drive broader usage. For Polivy, it’s been a long time since R-CHOP launched; it is curing an ailment in people’s prime. We appreciate the unpredictability but think adoption will occur, especially as we see maturing Kaplan-Meier curves. Beyond CHF 1 billion is a more realistic expectation. Severin, what do you think?

Severin Schwan, CEO

To reflect on my CEO tenure, there have been 2 instances where I was more optimistic than the investor community: Perjeta and Ocrevus. I think Vabysmo is in the same conversation. It’s a fantastic product, and I'm more optimistic than is reflected. We aim high, but we can't predict the particular impacts of biosimilars or the pricing changes we may face. Bruno, next question, please.

Operator, Operator

So, Wimal, have we answered your questions?

Wimal Kapadia, Analyst

Yes, great.

Operator, Operator

Next question would come from Sachin Jain from Bank of America.

Sachin Jain, Analyst

A big picture question first: Investors are concerned about growth profile if TIGIT and gantenerumab both fail, as well as COVID pressures. Given the strength in the Pharma launches and Diagnostics, how do you balance this in the next 2-3 years? Do you have an ambition to grow based on COVID's decline? Also, regarding gantenerumab, do you still see it as 50-50? Lastly, about TIGIT, can you clarify if missed PFS was a disappointment?

Severin Schwan, CEO

On the guidance, it depends heavily on COVID. Losing all COVID-related sales would pose challenges. The underlying business does look strong, providing positive growth opportunities, and I maintain my cautious stance on gantenerumab. Regarding TIGIT, we experienced a setback and were disappointed by PFS results. While it means we lost some time, if we hit OS in the end, we salvage value in the project.

Operator, Operator

Next questions would come from Richard Vosser.

Richard Vosser, Analyst

On Tecentriq and your adjuvant trials, could you clarify confidence levels regarding head and neck given the delays? Also, in Diagnostics, do you think margin in H2 will decline significantly given constraints from COVID?

William Anderson, CFO

Regarding adjuvant studies, they fall in line with metastatic settings. Tecntriqu’s IDMC pushed to continue the trial, which should provide assurance. For Diagnostics, we will remain above 20% for this year, and expect investments in R&D to shape future progress. So margins have improved in significant ways since 2019.

Thomas Schinecker, CEO, Diagnostics

To address your COVID information request, rapid antigen sales in Q2 made up over 2/3 of sales, showing higher volatility while PCR is more stable. This will provide a safer base going forward as we navigate post-COVID environments.

Operator, Operator

Can we have the next question, please? Next question would come from Andrew Baum, Citi.

Andrew Baum, Analyst

A couple of questions for Bill. Can you provide qualitative insights on response rates in the tiragolumab trial? Also, on the prophylaxis market, why hasn't Roche entered the antibody prophylaxis market for high-risk patients given the tools you have?

William Anderson, CFO

I can't disclose any more on tira at this point. The antibody prophylaxis market presents a challenge with variant mutations complicating effective longevity; while we're evaluating these opportunities, I'm unable to promise a timeline on market entry.

Operator, Operator

Next questions would come from Emily Field, Barclays.

Emily Field, Analyst

I’d like to follow up on guidance. Has any component of the business fundamentally deteriorated since you last provided guidance? Also, should we expect erosion to accelerate for AHR given the first half performance?

Severin Schwan, CEO

The answer is no; the underlying business is strong. Until we reduce the impact of COVID, we believe we can maintain growth. We see AHR erosion sitting closer to CHF 2.5 billion, and that is a pivotal point.

Operator, Operator

Next question would come from Steve Scala.

Steve Scala, Analyst

On tiragolumab, firstly, can you confirm you’ve seen the curve? Management's tone suggests trends are barely there. Should we acknowledge your trend is the best metric until we see data? For Hemlibra, does recent competitive data from Sanofi or Novo concern you?

William Anderson, CFO

We can’t fully answer your question at this time. However, we can say that we are cautiously optimistic, interpreting the trend in survival as positive. Regarding Hemlibra, we see the modified factor products as potential shared competition, but we are confident in Hemlibra's performance, especially among current users who are satisfied with their treatment despite recent introductions in the marketplace.

Operator, Operator

Next questions will come from Mark Purcell, Morgan Stanley.

Mark Purcell, Analyst

On the Vabysmo launch, can you outline share gaining expectations?What's driving initial patient switches, and should we expect another uplift with the J code rollout? Secondly, can you summarize the experience from SKY-01 regarding tiragolumab? Are you considering combinations to enhance outcomes? Lastly, can you provide a breakdown of COVID sales in Q2?

William Anderson, CFO

For Vabysmo, the initial momentum arose from reimbursement clarity. Switching has been encouraged for patients needing less frequent dosing and breakthrough treatments. The J code is set to generate further momentum and drive broader usage. On tiragolumab, we aim to analyze the experience from SKY-01 rigorously and consider the introduction of combinations to enhance effectiveness. For COVID testing, more than 2/3 of Q2 sales came from rapid antigen tests, with PCR sales being more stable.

Operator, Operator

Can we have the next question, please? Next question would come from Keyur Parekh, Goldman Sachs.

Keyur Parekh, Analyst

Severin, as the future Chairman of Roche and as you look at the next decade, what critical changes do you foresee in the global industry structure? Are we looking at fewer or more pharma companies? And what's Roche's role in this structure? Speaking to Bill: Given the expanded potential for bispecific antibodies, how confident are you that Roche retains a differentiated asset in that landscape? Finally, can you comment on the trajectory of Roche’s R&D investment returns over the past ten years?

Severin Schwan, CEO

Looking ahead, I believe that maintaining our power to innovate will be crucial as it drives long-term growth in Pharma and Diagnostics. There is substantial complexity in human health that is yet to be overcome. Regarding the level of companies, I don't see a major structural change due to innovation being the primary driving force. I do believe smaller companies can flourish through ingenuity and solving specific challenges. Bill, would you like to add on differentiators in bispecific antibodies and R&D trajectories?

William Anderson, CFO

Sure, Keyur. The bottom line is that while many companies increase R&D spending, we focus on ensuring those investments yield high returns. We're building foundational systems that enhance the predictability of success. We’re also shifting our spending trends to get better ROI, which helps differentiate us in the crowded field.

Operator, Operator

Next questions would come from Andrew Baum from Citi.

Andrew Baum, Analyst

Can you elaborate on recent qualitative comments regarding tiragolumab's efficacy? What do you expect around durability of responses? In a related manner, does Roche intend to develop antibody prophylaxis given your capacity and the observed market need?

William Anderson, CFO

At this time, we are not able to provide further information regarding tiragolumab's trial results. With regards to the antibody prophylaxis for COVID, while we are evaluating our position, the competitive landscape remains challenging due to evolving variants.

Operator, Operator

Next questions would come from Emily Field, Barclays.

Emily Field, Analyst

On guidance, could you clarify if there are any components that have fundamentally deteriorated since your previous guidance? Has the pandemic impacted your expectations for the second half?

Severin Schwan, CEO

No fundamental issues have emerged. The underlying business remains sound even amidst ongoing COVID impacts. Any erosion in the future will likely reflect these challenges, but we believe we can navigate them effectively.

Operator, Operator

Next question would come from Stephen.

Stephen, Analyst

For ongoing adjuvant studies with Tecentriq, can you clarify the confidence levels while head and neck results get delayed? On diagnostics' margins, should we expect significant erosion?

William Anderson, CFO

For adjuvant studies, we expect confidence to remain depending on how results play out. Our diagnostics margins should hold this year with a stable outlook as we invest for future improvement, with P&L performance remaining consistent.

Operator, Operator

Can we have one final question, please? Next question would come from Mark Purcell, Morgan Stanley.

Mark Purcell, Analyst

I'd like to revisit the Vabysmo launch: can you summarize share expectations? What’s driving initial patient switches and should we expect another uptick with the J code rollout? Could you compress the tiragolumab experience from SKY-01? Lastly, how did you break down COVID sales for Q2?

William Anderson, CFO

The Vabysmo launch continues to drive early growth with great potential. We're observing significant patient-switching based on injection burden and efficacy. The J code will further amplify this trajectory. For tiragolumab, we’re utilizing our learnings effectively and strategizing combinations. In terms of Q2 sales, rapid antigen tests dominated, over two-thirds, reflecting high volatility, while PCR tends to remain stable.

Operator, Operator

We are running over time, so I’d like to thank you for your interest. We have more questions in the queue; I suggest you follow up with Bruno and his team. Wishing you a good day. Thank you very much. See you next time.