- Roche reported impressive results almost in line with our expectations.
- The company’s revenues were up 6% on the back of strong cancer drug sales. Tamiflu provided an unexpected lift to revenues as its sales jumped 84%.
- The company’s three top selling drugs — Herceptin, Avastin and MabThera/Rituxan — continue to perform well.
- Meanwhile, new cancer drugs are witnessing positive momentum. Diagnostics, however, is an area of concern as its sales increased by only 1%.
The Roche Group (OTC:RHHBY) reported an impressive performance in 1Q13, much in line our expectations. The group’s overall sales increased by 6% to reach 11.6 billion Swiss francs, on the back of a strong performance of its pharmaceutical division (+7%). While oncology drugs were the main drivers of revenue growth in this segment, a surprise increase of 84% in the sales of Tamiflu also contributed to the overall upside.
However, the results of Roche’s diagnostic division were lackluster as the division’s sales grew by only 1%. The Diabetes Care (-5%) and Applied Science (-10%) segments within this division continue to face challenging market conditions and were a drag on the company’s overall performance.
More importantly, the company’s new cancer drug treatments are growing at impressive rates and uplift our confidence that the company will be able to avoid a decline in revenues when its bestselling drugs start losing patent protection in 2016.
The company has confirmed that it expects its revenues to increase in line with its 2012 sales growth, at constant exchange rates. This guidance is almost in line with our estimates for the year. Our current price estimate for Roche is around $58 and we are in the process of updating our model to fully incorporate the data released during the earnings call.
Pharmaceutical Division: Established Drugs Continue To Grow
The pharmaceutical division accounts for around 86% of Roche’s value and continues to perform well. Specifically within the pharmaceutical division, the company’s oncology portfolio grew by 10% as three of its top selling cancer drugs – Herceptin, Avastin and MabThera/Rituxan — reported y-o-y sales growth of 11%, 11% and 6% respectively.
The sales of Herceptin, a drug for treating HER-2 type of breast and stomach cancer, increased by 17% in the U.S. due to its increased usage in the region. The sales of this drug also grew in the emerging markets – specifically in Brazil (27%) and China (37%) – in part due to the company’s efforts to expand patients’ access to these drugs within government funded programs.
The emerging markets were also responsible for pushing the sales of MabThera/Rituxan upwards. MabThera/Rituxan is a drug used for several types of lymphoma and leukemia, and continues to see increased demand from China.
Roche’s third blockbuster drug, Avastin, is used for treating advanced cases of colorectal, breast, lung, kidney and ovarian cancers, and its sales increased over 15% in Europe after it got approvals for ovarian cancer in the continent.
The pharma division sales were also supported by an 84% growth in the sales of Tamiflu, which witnessed abnormally high demand in Q1 due to a severe flu season in North America. The flu season, however, ended in February and sales of the drug are likely to moderate in the coming quarters.
New Drugs Are Promising
We mentioned in our pre-earnings article that the company’s future prospects depend significantly on how some of its new drugs perform because two of Roche’s best selling drugs (Herceptin and Rituxan) will soon lose patent protection and the company must find alternative sources of revenues before that happens.
Fortunately, the company recently received timely approvals for Kadcyla (T-DM1) in the U.S. and Perjeta in the E.U., and these drugs seem to be doing well. The company’s HER2 franchise, which includes Herceptin, Kadcyla and Perjeta, grew impressively by 15% in the first quarter. Perjeta was approved in the U.S. in June 2012 for people with HER2-positive mBC who have not received prior anti-HER2 therapy or chemotherapy for metastatic disease. Roche will file Perjeta in the neoadjuvant setting in Q2 in the U.S. We believe that Perjeta will be on its way to become the next blockbuster cancer treatment from Roche if it gets approved in the U.S. and shows similar uptake.
Another new cancer drug called Zelboraf, which is used for the treatment of melanoma, also had a good Q1 as the company reported a y-o-y growth of 154% in its sales, although on top of a small base. The drug is currently also being tested for additional indications like metastatic melanoma (a type of skin cancer) and papillary thyroid cancer (the most common thyroid cancer) and we remain optimistic about its prospects as well.
In all, the performance of Roche’s new drugs is promising and strengthens our belief that the company’s oncology sales will continue to increase even when some of its top selling drugs lose patent protection.
Diagnostic Market Remains a Concern
Roche’s diagnostic division grew by a dismal 1% and remains a drag on the company’s overall performance. While the company’s professional diagnostic segment (the largest segment in diagnostics) grew by 5% at constant exchange rates, the Diabetes Care (-5%) and Applied Science (-10%) segments within this division continue to face challenging market conditions and were a drag on the company’s overall performance.
The diabetes care segment was impacted by ongoing austerity measures, reimbursement changes and continued pricing pressure in all regions while the applied science segment was impacted by discontinued products and lower research funding. Going forward we believe that these divisions will continue to underperform even though some of the recently launched diabetes products have seen positive market uptake.
Finally, we wished in our earnings review article to hear from the company’s management about their plans for acquiring Life Technologies. However, we did not hear anything on that front.
Disclosure: No positions