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While the "will they or won't they" battle for Illumina (ILMN) is certainly the biggest headline-grabber for Roche (OTCQX:RHHBY) right now, this Swiss giant is also seeing respectable progress in the business. Though I believe Roche remains one of the best long-term picks in healthcare, the relative performance of the shares no longer leaves it as the cheapest option in the sector.

Q1 - Steady As She Goes

Like many European companies, Roche isn't exactly geared to focus on quarterly performance. Nevertheless, revenue rose 2% in constant currency (down 1% in Swiss francs and up 1% in U.S. dollars) and actually beat most analysts' expectations though different sources report different numbers for the average sales estimate.

Pharmaceutical sales rose 2% (or 3% excluding Tamiflu), as a solid recovery in the U.S. business (up 6%) offset weakness in Western Europe (down 4%). While Roche is seeing some pressure in Europe from generics, reimbursement challenges are a bigger issue and this may be a sign of what's to come from other large international drug companies like Glaxo (GSK), Sanofi (SNY), and Novartis (NVS). Emerging market growth is not exemplary at Roche; hurt, I believe, by the company's reliance on very expensive cancer drugs.

Diagnostics did alright, but there were some interesting moving parts. Overall growth came in at 4%, with strong results in professional (up 9%), tissue diagnostics (up 18%), and molecular diagnostics (up 8%). That bodes well for Abbott (ABT), Siemens (SI), and Danaher (DHR). On the flip side, diabetes care revenue dropped 7%, hurt by pricing pressure and reimbursement challenges.

On the reimbursement side, certain European countries are actually eliminating reimbursement for testing strips for those diabetics who don't inject insulin. That's a risk, then, for Abbott and Johnson & Johnson (JNJ) as well. While I have wondered if Roche is serious about its diabetes business on the long-term, the company does have some upcoming product launches that should help sales.

A Valley Between Two Peaks

Roche today reminds me in some respects of JNJ's drug business a year or two ago - mediocre results in the here and now, but with some potential drivers on the way. For Roche, that means the launch of Zelboraf (skin cancer), priority review status for pertuzumab (breast cancer), and recent strong data on T-DM1 (breast cancer, partnered with ImmunoGen (IMGN)).

That's not all, though. While the Street is pretty down on Roche's Hep C program (at least relative to Gilead (GILD), Achillion (ACHN), Abbott, or Bristol-Myers (BMY)), data on danoprevir has been encouraging and there's a chance Roche could pick up some buzz from the upcoming EASL meeting.

Last and not least is an upcoming (Q2) interim analysis of the company's drug dalcetrapib, currently in a Phase 3 study as a "good cholesterol" booster. This is still a high-risk/high-reward drug, but the Street may well regard the continuation of the study (non-futility) as a positive. If this works out well, this could be a drug on par with Rituxan in terms of sales/revenue potential.

The Bottom Line

Right now the basic theme at Roche is "so far, so good". With the Street having re-awoken to the company's value and quality, it's no longer as cheap as alternatives like Merck, Pfizer, or Sanofi. I've written on all of these relatively recently, and all have their charms.

In the meantime, let's see what Roche ultimately does with Illumina. Roche's recent comments suggest they will go no further with their bid unless Illumina's board enters into negotiations. This may well be a bluff designed to encourage Illumina shareholders to push management to the table, but there is that real possibility that Roche will walk away. Given that there are real challenges to Illumina's business, I'd hope the company would walk before overpaying; if nothing else, there are many other healthcare and medical tech companies that Roche could buy.

At today's prices, Roche still offers a decent prospective return even on the basis of conservative estimates. Add in the potential for positive clinical developments and an already solid dividend, and Roche is still a stock worth a look in the healthcare sector.

Source: Steady As She Goes For Roche