Roche Meets Sales Estimates in Q1 - Analyst Blog

Roche's (RHHBY) sales for the first quarter of 2014 came in at CHF 11.5 billion, up 5% from a year ago.  In terms of dollars, sales of $13.0 billion were in line with the Zacks Consensus Estimate.

All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.

Quarter in Detail

Sales in the first quarter were driven by solid demand for its recently launched drugs, Perjeta and Kadcyla, for HER2-positive breast cancer and rheumatoid arthritis drug Actemra/RoActemra.

Roche reports business in two divisions: Pharmaceuticals and Diagnostics.

Sales of the Pharmaceuticals division increased 4% to CHF 9.0 billion, driven by strong sales of oncology drugs. 

Sales of the HER2 breast cancer franchise, which consists of Herceptin, Perjeta and Kadcyla, increased 17%. The franchise was boosted by key approvals in 2013 – Kadcyla in the U.S. and EU and Perjeta in the EU. The sharp rise in Avastin sales (+9%) was due to its strong demand for the treatment of advanced ovarian cancer in Europe, and colorectal cancer in the U.S. and Europe. Demand for blood cancer and rheumatoid arthritis drug MabThera/Rituxan (+3%) was also strong.

Roche's immunology and ophthalmology franchise continue to gain traction. Sales of Actemra/RoActemra were up 23%. Lucentis, indicated for wet age-related macular degeneration AMD, was up 8%.

However, sales of chemotherapy drug Xeloda were lower due to the generic competition in the U.S. and Europe.

Revenues from the Diagnostics division went up 7% to CHF 2.4 billion driven by solid performance of the Professional diagnostics (+9%) unit and Molecular diagnostics (+4%). Diabetes Care sales increased 5% despite a continued challenging and volatile market environment while Tissue Diagnostics grew 4%. The recent acquisition of IQuum will further strengthen Roche's molecular diagnostics market portfolio. 

2014 Outlook

Roche expects sales in 2014 to increase in the low to mid-single digits. The company expects core earnings per share to grow at a higher rate than sales in 2014. Roche intends to further increase its dividend in 2014. We note that the Board of Directors approved a 6% dividend increase to CHF 7.80 per share in Mar 2014.

Pipeline Update

During the first quarter of 2014, the subcutaneous formulation of MabThera was approved in Europe.

The U.S. Food and Drug Administration (FDA) approved Xolair for an additional indication. Xolair is now approved in the U.S. for the treatment of chronic idiopathic urticaria CIU, in adults and adolescents (12 years and above) with inadequate response to H1-antihistamine treatment. We note that Novartis NVS licensed Xolair from Roche. Roche markets Xolair in the U.S.

However, Roche suffered a few setbacks also in the quarter.  Roche's three phase III studies on schizophrenia candidate bitopertin did not meet their primary endpoints and hence were discontinued. Consequently, Roche conducted futility analyses on the three remaining phase III studies on bitopertin and decided to discontinue two of those studies and continue with just one study (NightLyte).

Moreover, a phase III study on lung cancer candidate onartuzumab was also stopped in the quarter due to a lack of clinically meaningful efficacy. Nevertheless, Roche's investigational immunotherapy candidate for lung cancer, anti-PDL1 (RG7446), moved into phase III.

Our Take

We are encouraged by Roche's first quarter performance. The oncology portfolio looks solid as ever and we expect further traction in 2014. We are also impressed by the company's efforts to grow its portfolio beyond oncology to immunology and ophthalmology.

However, Roche expects to face generic competition for key drugs – Valcyte and Xeloda – in 2014.  The loss from the entry of generics for the overall portfolio in 2014 is estimated at CHF1 billion.

Roche currently carries a Zacks Rank #3 (Hold). Investors may consider other large cap pharmas like Allergan AGN and AbbVie ABBV. Both carry a Zacks Rank #2 (Buy).