Roche Unveils Welcome Show of Earnings Strength

Includes: ALNY, RHHBY
by: EP Vantage

The first details released on Roche’s (OTCQX:RHHBY) “operational excellence” review are a step in the right direction. Bigger than expected cost savings always go down well with investors and shares in the company climbed 1.5% Wednesday, to SFr144.50.

Unsurprisingly, job cuts are falling heaviest on the US sales force, an area where many of its peers have already cut back; in Roche’s case pipeline failure rather than patent expiry is the trigger. Few shifts therapeutically were announced, other than a decision to exit research into RNAi. Details were thin on the ground but were enough to prompt the shares of long-term partner in this field, Alnylam Pharmaceuticals (NASDAQ:ALNY), to test five-year lows.

Strategic alliance

Roche would not comment further on the decision to exit RNAi beyond details released in the press release, which said RNAi research would end in Kulmbach, Germany and in Nutley and Madison in the US.

The Kulmbach plant was acquired from Alnylam as part of the strategic alliance the two entered into back in July 2007. Roche bought a non-exclusive license to Alnylam's IP and technology platform in four therapeutic areas: oncology, respiratory diseases, metabolic diseases and certain liver diseases, with the right to expand the number of therapeutic fields in the future. The companies were collaborating on RNAi drug discovery for one or more disease targets in these therapeutic areas.

Wednesday, Alnylam put out a press release saying it was disappointed at the news, but expressing confidence in its technology platform. Although not explicitly announced by either party, it seems this two year relationship is about to end.

It is unfortunate this news follows so closely Novartis’ (NYSE:NVS) decision, in September, to walk away from an option to take a broad license to Alnylam’s technology. Instead, Roche’s cross-town rival selected 31 specific targets identified under their own collaboration with the RNAi specialist, taking a potential $100m signing fee off the table.

Alnylam shares fell 2% to $11.31 in early trade Wednesday; the stock has lost a third of its value this year. Although many see RNAi as holding significant potential and Alnylam as a clear leader in the space, progress has been slow and the company has yet to get a molecule into late-stage trials. The firm has a number of ongoing collaborations with large pharma companies, including Sanofi-Aventis (NYSE:SNY), GlaxoSmithKline (NYSE:GSK) and Takeda (OTCPK:TKPHF), but Roche’s decision rather underscores dimming hopes that this field is going to produce a commercial success story any time soon.

Delivering growth

In this context the Roche decision is perhaps understandable. The company is not facing a patent cliff like many of its peers but it has its own challenges – essentially delivering stellar growth rates and blockbuster products that investors have come to expect.

Pipeline disappointments, in particular diabetes drug taspoglutide, the Avastin set back in breast cancer and the omnipresent but as yet shapeless biosimilar threat are pressuring the former pharma darling.

The measures announced Wednesday, which will strip out Sfr2.4bn ($2.4bn) of costs by 2012, will significantly boost earnings growth, analysts believe. The table below shows that Roche is already ranked highly amongst its peers on strength of earnings; investors clearly believed Roche could do better.

Still, although the news managed to initiate a share price rise, Roche stock is still down 18% on the year, one of the worst performances from the world's biggest drug-makers this year (Novo leads big pharma recovery in third quarter as Roche tumbles, October 1, 2010).

This review should help confidence recover, and with the storm clouds of biosimilars and pricing pressure gathering on the horizon, was long overdue.

Big pharma earnings growth Normalised EPS (diluted, $m)
2010 2016 CAGR
GlaxoSmithKline 1.51 2.57 9.27%
Abbott Laboratories (NYSE:ABT) 4.16 6.47 7.63%
Roche 12.51 18.88 7.09%
Johnson & Johnson (NYSE:JNJ) 4.71 6.84 6.41%
Novartis 4.41 6.11 5.58%
Pfizer (NYSE:PFE) 2.20 2.54 2.39%
Bristol-Myers Squibb (NYSE:BMY) 2.14 2.33 1.44%
Sanofi-Aventis 9.04 9.60 1.02%
AstraZeneca (NYSE:AZN) 5.86 5.72 (0.39%)
Eli Lilly (NYSE:LLY) 4.60 3.33 (5.25%)
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