Roche (RHHBY), a leader in oncology drugs, reported encouraging sales results for the first nine months of 2014.
Sales increased 5% from the year-ago period, driven by growth in both its segments – Pharmaceuticals Division and Diagnostics Division. Revenues in the third quarter of 2014 came in at CHF 11.8 billion, up 5% year over year.
Results in Detail
All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.
Sales of the Pharmaceuticals division increased 4% to CHF 26.9 billion. The oncology portfolio showed solid growth in all regions. Sales of HER2 breast cancer franchise (+21%) were driven by strong demand for new drugs Perjeta and Kadcyla along with the legacy drug Herceptin.
Sales of Avastin were up 6% due to its increased demand in the ovarian and colorectal cancer indications. The strong sales of Rituxan/ MabThera (+3%) in Europe were driven by the increased market share in both follicular lymphoma and a first-line treatment for chronic lymphocytic leukemia.
Meanwhile, the company’s immunology and ophthalmology portfolio also performed well in the first half. Sales of rheumatoid arthritis drug Actemra (+24%) were strong in all major markets. The new subcutaneous formulation of the drug showed good uptake in the U.S. and EU markets. Ophthalmology drug, Lucentis (+5%) also grew in sales on its increased adoption for the treatment of diabetic macular edema.
Asthma drug, Xolair (+24%) showed strength as its demand increased after the FDA approved it for another indication – chronic idiopathic urticaria. We note that Novartis (NVS) has licensed Xolair from Roche. Roche markets Xolair in the U.S.
However, sales of chemotherapy drug Xeloda were down 43% due to the generic competition in the U.S. and Europe. Pegasys was down 17% due to competition from a new generation of hepatitis C treatment.
Meanwhile, the acquisition of InterMune in Sep 2014 added Esbriet to Roche’s portfolio. Esbriet was recently approved by the FDA for the treatment of idiopathic pulmonary fibrosis.
Revenues from the Diagnostics division went up 6% to CHF 7.8 billion driven by solid performance of the professional diagnostics (+8%) unit, which was in turn propelled by the immunodiagnostics business (+12%). Tissue diagnostics (+10%) also performed impressively. Diabetes care sales were up 1% while molecular diagnostics sales increased 5%.
Roche has launched 10 key products in the first nine months of 2014, including the new cobas 6800 and cobas 8800 systems for fully-automated PCR testing. In addition, sales of companion tests for personalized health care and revenues from external development agreements for such tests showed strength, especially those meant for targeted cancer therapies.
2014 Outlook Backed
Roche expects sales in 2014 to increase in low- to mid-single digits. The company expects its 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 nine months of 2014 was encouraging. Avastin was approved for cervical cancer in the U.S. and platinum-resistant ovarian cancer in Europe. Positive news flowed in for Roche when Gazyvaro (trade name Gazyva outside the EU) was approved for chronic lymphocytic leukemia in Europe.
Roche also reported positive overall survival data from the phase III study, CLEOPATRA, on Perjeta in HER2-positive metastatic breast cancer. The FDA granted Breakthrough Therapy Designation to cancer immunotherapy candidate anti-PDL1 (MPDL3280A) for bladder cancer and Roche reported encouraging results from the early-phase trials on the candidate.
Meanwhile, Roche initiated phase III trials on ophthalmology candidate lampalizumab in September for the potential treatment of geographic atrophy. Two phase III studies on Avastin showed that treatment with the drug resulted in significant improvement of progression-free survival in patients suffering from HER2-negative breast cancer.
Alecensa (alectinib) was approved in Japan for the treatment of ALK-positive non-small cell lung cancer. Alecensa presently enjoys Breakthrough Therapy Designation in the U.S.
Our Take
We are encouraged by Roche’s performance so far in 2014. 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 and Pegasys will negatively impact sales in 2014.
Roche currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the health care sector include Allergan (AGN) and Shire (SHPG). Both carry a Zacks Rank #2 (Buy).
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