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Nothing wrong but sentiment in a dull stretch

  • 25 Oct 16

Roche’s Q3 sales were marginally shy of the estimates at CHF12.48bn (vs our estimate of CHF12.56bn and the consensus estimate of CHF12.64bn), primarily due to the uninspiring performance of the mature drugs in the US. Nine months’ revenue came in at CHF37.5bn. These numbers represented (at CER) growth of 3% for the quarter and 4% for 9m. Forex had a positive impact of 150bp in Q3. The Pharma segment was up by 2% (vs 5% in Q2) to CHF9.7bn while the diagnostics business continued its robust performance at 8% growth (vs 8% in Q2) to CHF2.8bn. Of the main drugs in Pharma, while Herceptin (+4%), Lucentis (-1%), and Perjeta (+24%) came in ahead, Avastin (-3%), Tarceva (-18%), Xolair (+13%), Kadcyla (+5%) and Tamiflu (-23%) fell short of our expectations. The US market (+1% vs 5% in Q2, 3% in Q1) was hamstrung by MabThera (-3% vs 6% in Q2 and flat growth in Q1), Herceptin (flat vs +6% in Q2 and +4% in Q1), and Avastin (-9% vs flat in Q2 and -2% in Q1). While Europe (+5%) remained stable (vs 6% in Q2 and 5% in Q1), Japan languished in the second consecutive quarter (-3% vs 1% in Q2 and 4% in Q1), primarily due to price cuts in Avastin (although the 10.9% price-cut was narrowed to a decline of 6% at the sales level due to support from the volumes). The Diagnostics business saw a healthy Asia Pacific (+17% growth in 9m was marked by 24% growth in China) drive the 9% growth in the professional diagnostics sub-segment (~58% of diagnostics sales). The new high-volume testing immunoassay solution, Cobas E 801 (launched in June 2016) was reported to be ramping up fast on the back of the productivity and efficiency gains it offers. The second biggest sub-segment, diabetes care (18% of diagnostics sales), continued to reel under pricing pressure and the continued run-off of the lower Medicare prices to private plans. Management expects the turnaround by 2017. The remaining two segments – molecular diagnostics (16% of diagnostics sales) and tissue diagnostics (8% of diagnostics sales) – grew by 6% and 15%, respectively during the quarter. Sales guidance for the year was maintained at low-to-mid single-digit at CER, while the core EPS growth is guided to remain ahead of sales growth. The dividend is likely to increase from the 2015 level of CHF8.1 per share (we expect it to increase to CHF8.3 per share).

Investment-heavy H1 while top-line remains strong

  • 26 Jul 16

After two consecutive quarters of 4% yoy growth, Roche reported 6% growth in Q2 16 to CHF12.6bn, coming in ahead of our as well as consensus estimates. NB All sales numbers at CER, unless mentioned otherwise. The quarter was driven by 5% growth in Pharma (to CHF9.7bn, +7% in CHF) and 8% growth in Diagnostics (to CHF2.9bn, +8.2% in CHF). The weak Swiss franc against the Japanese yen, Brazilian real and the euro boosted reported sales by another percentage point during the quarter. The 6% pharma growth in the US during the quarter resulted from a strong performance by MabThera (+6%), Xolair (+17%), Herceptin (+6%), Perjeta (+16%), Esbriet (+32%) and Actemra (+23%), though partially offset by a flat Avastin (market saturation), and lower sales from Lucentis (-10%) and Tarceva (-17%). Europe’s 6% growth was on the back of an impressive performance by Perjeta (+56%), followed by Actemra (+21%), and MabThera (+5%). China (+8% for H1) swung back to strong growth, leading the 5% growth in International pharma business. The Diagnostics business grew by 8% to CHF2.9bn, fuelled primarily by Asia Pacific (+18% in CHF), although growth was seen across the regions. By service line, strong growth in professional diagnostics (+11% in CHF, driven by immune-diagnostics and clinical chemistry), molecular diagnostics (+6% in CHF) and tissue diagnostics (+13% in CHF) was offset to some extent by anaemic diabetes care (+0.9% in CHF). Profitability details are disclosed on a half-yearly basis. The underlying operating profit growth for H1 was slower than the sales growth of 5%. It grew by 2% (in CHF) to CHF8.1bn (reflecting a margin decline of 140bp, predominantly in the diagnostics business), in line with our expectations. The company reported an earnings benefit from a one-time cash gain of CHF426m (pertaining to pensions) but we remove this item because of its one-off nature. The company maintained the guidance of low-to-mid single-digit growth at CER and a higher growth in core EPS. Management has acknowledged getting hit by the biosimilars from 2017-18. Several candidates for the Herceptin biosimilar, including from Amgen and Allergan, Mylan and Biocon, have already shown comparable efficacy and safety profile (in fact already launched in some markets, including India), indicating that generic erosion can come in ahead of the official US patent loss in 2019. In terms of M&A, the company maintained its strategy to stick to small/early-stage bolt-ons rather than mega mergers.

Robust top-line pulled down by substantial one-offs and investments

  • 17 Feb 16

Roche’s Q4 sales increased by 4% at CER (-1% in CHF) to CHF12.6bn, driven by 3% growth at Pharma (CHF9.6bn, -1% in CHF) and 7% at Diagnostics (CHF3bn, flat growth in CHF). For the full year, sales increased by 5% (+1% in CHF) to CHF48.1bn – Pharma +5% (+2% in CHF) and Diagnostics +6% (flat in CHF). The growth was fuelled by the oncology and immunology portfolios, and by the immuno-diagnostics business within professional diagnostics (+8%). These numbers were slightly ahead of our expectations; we had estimated sales of CHF47.9bn (vs CHF48.1bn in actuals). Geographically, the US did a better job than our expectations with 6% growth (+11% in CHF) in pharma and 3% growth (+7% in CHF) in diagnostics (where it is reported as North America), while Europe (+4% CER and -7% CHF growth in pharma) languished. The adjusted gross margin decline was steeper than our expectation at 370bp, due to higher manufacturing and sourcing costs, amortisation of Esbriet-related intangibles (acquired as part of the InterMune acquisition) and inventory write-offs (worth CHF539m for Esbriet) in the pharma business. Operating profit in the diagnostics business was also impacted by higher research expenses in professional diagnostics and on-going investments in the sequencing business along with price erosion in the diabetes care business. Net income came in far behind our expectation, further run down by higher-than-expected restructuring costs (CHF1.1bn vs our expectation of CHF300m) and an unforeseen forex loss of CHF470m booked within net financial income. The company ended the year with a net profit of CHF8.9bn (vs our estimate of c.CHF11bn). The company's reported core net profit came in at CHF11.6bn (core EPS 13.49). As a reminder, the company defines core numbers by excluding restructuring charges, amortisation, impairments, legal charges, business combinations and pension plan settlement, etc., from the reported numbers. This is a general practice followed by Big Pharma; however, we exclude only the restructuring charges to arrive at adjusted numbers, which explains a substantial difference between our core/adjusted numbers and the company's reported core numbers. The restructuring cost exceeded our expectations, following the decision in November 2015 to reorganise the manufacturing network for small molecules. Of the targeted CHF1.1bn, CHF301m pertained to the Diagnostics business and remainder to the Pharmaceutical division. The programme involves upgrading the manufacturing capability towards producing specialised medicines in lower volumes to keep pace with the future technological requirements; in effect four manufacturing sites – Ireland, Spain, Italy and the US – are being closed. Management's guidance for 2016 stands at growth of low to mid single-digit for revenue and a slightly better core EPS (taking without forex - devaluations in Argentina as well as in Venezuela - the EPS number as the base). The dividend of CHF8.1 per share represents an increase of 1.3% yoy, lagging behind our estimate of CHF8.6.