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Roche (RHHBY) Misses Q3 Sales Estimates, 2016 View Intact

Roche Holding AG RHHBY reported sales of $12.79 billion (CHF12.48 billion) in the third quarter of 2016, compared to CHF11.94 billion ($12.38 billion) in the year-ago comparable period. The reported figure, however, missed the Zacks Consensus Estimate of $12.88 billion by a whisker.

Roche reports results under two divisions – Pharmaceuticals and Diagnostics. Sales at the Pharmaceuticals division increased 2% year over year at constant exchange rates (CER), driven by the performance of oncology and immunology products in the quarter.

Diagnostics division sales climbed 8% primarily on the back of immunodiagnostic products.

All growth rates mentioned below are on a year-over-year basis and at CER.

First Nine-Month Results

In the nine months of 2016, sales were up 4%. Growth was primarily aided by sales growth in both Pharmaceuticals and Diagnostics due to newly launched products.

Sales at the Pharmaceuticals division increased 4% on the back of strong demand for breast cancer drugs Perjeta and Herceptin as well as for rheumatoid arthritis drug Actemra/RoActemra.

While Herceptin sales improved 5% mainly due to rising demand in the U.S. and Europe, and expanded reimbursement in additional provinces in China, Perjeta sales surged 31% largely due to uptake in the neo-adjuvant setting and continually strong growth in the metastatic setting.

Meanwhile, sales of Avastin continued to witness strong growth in the international region (19%), especially China where sales were driven by improved access in the lung cancer setting. However, sales in the U.S. slipped 4%. Robust sales of Rituxan/MabThera (3%) also contributed significantly to the top line. Growth in Gazyva/Gazyvaro (54%) was seen in the U.S. and Europe despite increasing competition in chronic lymphocytic leukemia.

Recently launched drugs, Tecentriq for bladder cancer and Alecensa for lung cancer are off to an encouraging start. Initial uptake in the U.S. has been strong.

Performance of the immunology franchise was driven by increased sales of Actemra/RoActemra (17%), and strong uptake of Esbriet (45%) and Xolair (17%). Increasing use of Actemra/RoActemra as a single agent and in the subcutaneous formulation were the key growth drivers globally.

Sales of Valcyte/Cymevene (-15%) and Xeloda (-10%) were hit by generic competition.

Revenues at the Diagnostics division climbed 7% on the back of solid performance of the Professional Diagnostics (9%) unit, which was in turn, propelled by Immunodiagnostics (14%). Tissue Diagnostics (13%) and Molecular Diagnostics (7%) also performed impressively.

However, Diabetes Care sales declined 2% due to continued pricing pressure in the U.S. Sales continue to be impacted by challenging market conditions, particularly in North America.

2016 Outlook Maintained

Roche continues to expect sales to grow in the low-to-mid single digits. The company expects core earnings to grow ahead of sales.

The company intends to further increase its dividend in 2016 in local currency.

Meanwhile, Roche continues to progress with its pipeline. Regulatory applications for Ocrevus for the treatment of both relapsing and primary progressive multiple sclerosis are under review in both the EU and the U.S. (priority review with a response expected by Dec 28, 2016).

Earlier this week, Tecentriq became the first and only anti-PDL1 cancer immunotherapy to be approved by the FDA for the treatment of metastatic non-small cell lung cancer.




Our Take

Although third-quarter 2016 sales fell marginally short of expectations, performance of both the Pharmaceuticals and Diagnostics divisions were encouraging. New drug launches, such as Tecentriq, Cotellic and Alecensa, boosted sales and should continue to do so in the upcoming quarters.

However, headwinds in the form of generic competition for Xeloda and Valcyte may continue to hurt sales. Going forward, we expect investors to focus on new drug approvals, as the top line could be marred by the entry of biosimilars (expected in the second half of 2017 in Europe) for key drugs like Rituxan, Herceptin and Avastin.

Zacks Rank & Key Picks

Roche currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the healthcare sector include Incyte Corporation INCY, BioMarin Pharmaceutical Inc. BMRN and Geron Corporation GERN. While Incyte and Geron sport a Zacks Rank #1 (Strong Buy), BioMarin carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Incyte’s earnings estimates for 2016 and 2017 were up a respective 10% and 2.8% over the last 60 days. The company has beaten earnings estimates thrice in the last four quarters with an average surprise of 335.16%.

Geron has posted a positive earnings surprise in each of the four trailing quarters, bringing the average beat to 20.78%.

Loss estimates for BioMarin have narrowed from 28 cents to 25 cents for 2016 and from $1.16 to $1.11 for 2017 over the last 60 days.

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