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Roche's 1H14 Earnings & Revenues Up Y/Y, Outlook Reaffirmed

Zacks Equity Research

Roche’s (RHHBY) core earnings came in at $1.06 per American Depositary Receipt (:ADR) in the first half of 2014 compared with $1.01 per ADR reported in the year-ago period.

Roche’s revenues in the first half of 2014 grew 3.2% from the year-ago period to $25.7 billion, driven by solid demand for its cancer drugs and increased sales of diagnostic tests to clinical laboratories.

Revenues in the second quarter of 2014 came in at $12.8 billion, up 3.6% from a year ago but missed the Zacks Consensus Estimate of $13.2 billion.

Half-Year Details

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

Roche reports business in two divisions: Pharmaceuticals and Diagnostics.

Sales of the Pharmaceuticals division increased 4% to CHF 17.8 billion. The oncology portfolio showed solid growth in all regions. Sales of HER2 breast cancer franchise (+20%) were driven by strong demand for new drugs Perjeta and Kadcyla along with legacy drug Herceptin in combination with Perjeta.

Sales of Avastin were up (+6%) due to its increased demand in the ovarian and colorectal cancer indications. Sales of Rituxan/ MabThera (+4%) were strong in Europe driven by increased market share in both follicular lymphoma, as well as a first line treatment for chronic lymphocytic leukemia (CLL.TO).

Meanwhile, the immunology and ophthalmology portfolio also performed well in the first half. Sales of rheumatoid arthritis drug Actemra (+22%) were strong in all major markets. The new subcutaneous formulation of the drug showed good uptake in the U.S. (approved in the EU as well). Ophthalmology drug, Lucentis (+6%) also continued to grow with increased adoption for the treatment of diabetic macular edema.

However, sales of chemotherapy drug Xeloda were lower (-34%) due to the generic competition in the U.S. and Europe.

Revenues from the Diagnostics division went up 6% to CHF 5.1 billion driven by solid performance of the professional diagnostics (+9%) unit, which was propelled by immunodiagnostics business (+12%). Tissue diagnostics (+9%) also performed impressively in the first half. However, diabetes care sales were flat due to a challenging and a volatile market environment. Molecular diagnostics sales increased 4%.

2014 Outlook Backed

Roche expects sales in 2014 to increase in low to mid-single digits. The company expects core earnings per share to grow at a higher rate than sales in 2014. Roche intends to further increase its dividend in 2014.

Pipeline Update

The pipeline progress in the first half of 2014 was encouraging. The FDA granted Breakthrough Therapy Designation to cancer immunotherapy candidate anti-PDL1 (MPDL3280A), which moved into phase III for the potential treatment of lung cancer.

The subcutaneous formulations of Rituxan/ MabThera (for blood cancer) and Actemra (for rheumatoid arthritis) were approved in the EU.

The Committee for Medicinal Products for human use (CHMP) of the EMA recommended the approval of Gazyvaro (trade name Gazyva outside the EU) for the treatment of chronic lymphocytic leukemia and Avastin for platinum-resistant recurrent ovarian cancer. Earlier in the month, the FDA granted priority review to Avastin for the treatment of cervical cancer, as well as platinum-resistant ovarian cancer. Alecensa (alectinib) was approved in Japan for the treatment of ALK-positive non-small cell lung cancer (enjoys Breakthrough Therapy Designation in the U.S).

The FDA approved Xolair (indicated for allergic asthma) for an additional indication. Xolair is now approved in the U.S. for the treatment of chronic idiopathic urticaria (CIU). We note that Novartis (NVS) licensed Xolair from Roche. Roche markets Xolair in the U.S.

Our Take

We are encouraged by Roche’s performance in the first half. The oncology portfolio looks solid as ever and we expect further traction in 2014. We are also impressed by the company's efforts to grow its portfolio beyond oncology to immunology and ophthalmology.

However, generic competition for Xeloda will negatively impact sales in 2014.
Roche currently carries a Zacks Rank #3 (Hold). Investors may consider other large cap pharmas like Allergan (AGN) and AbbVie (ABBV). While Allergan carries a Zacks Rank #1 (Strong Buy), AbbVie is a Zacks Rank #2 (Buy) stock.

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