Roche's Earnings Show Real Progress

Stephen Simpson profile picture
Stephen Simpson

By Stephen D. Simpson, CFA

For much of 2011, Roche (OTCQX:RHHBY) was the red-headed stepchild of the Big Pharma world. Recently that started to change as Wall Street believed that the company had put most of its bad news behind it and was in position to once again deliver lucrative (if not especially torrid) growth. With the recent hostile bid for Illumina (ILMN) distracting investors though, some of that progress is overshadowed by the risk that Roche will overpay and redeploy too much cash away from shareholders.

A Surprising Surprise To Close The Year

Although the fact that Roche produced fourth quarter revenue about 2% ahead of expectations may not qualify as much of a surprise, the fact that it surprised at all is the surprise - a top-line revenue beat has been more than a year in coming. The Pharma business grew about 3% this quarter in constant currency, while the diagnostics business delivered a surprisingly strong 7% sales increase.

Profitability was good, but not quite as impressive. Although full-year core operating profit did increase 6% and Roche's margins came in at 35.6% (which compares well even against highly-profitable drug companies like Pfizer (PFE) and Bristol-Myers (BMY)), this was still below consensus expectation. Pharma profits rose 5%, constrained by higher SG&A spending, while diagnostic profits increased a surprising 14%.

Illumina Could Be Short-Term Pain For Long-Term Gain

Generally speaking, nobody believes that Roche is going to be quick to give up and walk away from its hostile bid for Illumina. Roche was aggressive in going after Genentech and Ventana (diagnostics) and the same is likely to hold true here.

The worry, naturally, is that Illumina will overpay. Still, even with that risk acknowledged, it seems that many are underplaying the potential accretion from this deal. Illumina holds over 80% of the sequencing market and though

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

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