Roche’s (RHHBY) core earnings came in at $1.95 per American Depositary Receipt (ADR) in 2014 but missed the Zacks Consensus Estimate of $1.99 per ADR. Revenues of $51.9 billion beat the Zacks Consensus Estimate of $50.4 billion.
All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.
2014 Results in Detail
Roche reports business in two divisions: Pharmaceuticals and Diagnostics.
Sales of the Pharmaceuticals division increased 4% to CHF36.7 billion driven by solid growth across the oncology portfolio (HER2+ breast cancer medicines and Avastin) and the immunology franchise (Actemra and Xolair).
Sales of HER2 breast cancer franchise (+20%) 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 increased demand in the ovarian and colorectal cancer indications. Strong sales of blood cancer drug Rituxan/MabThera (+2%) in Europe were driven by increased market share in both follicular lymphoma and a first-line treatment for chronic lymphocytic leukemia.
Sales of rheumatoid arthritis drug Actemra (+23%) were strong in all major markets driven by increased use in monotherapy and earlier use in treatment for rheumatoid arthritis, with significant uptake of the new subcutaneous formulation. Ophthalmology drug, Lucentis (+2%) was up on its increased adoption for the treatment of diabetic macular edema (DME).
Asthma drug Xolair (+25%) showed strength as its demand increased after the FDA approved it for another indication – chronic idiopathic urticaria. We note that Novartis (NVS) licensed Xolair from Roche. Roche markets Xolair in the U.S.
However, sales of chemotherapy drug Xeloda plunged 46% due to generic competition in the U.S. and Europe. Pegasys was down 20% due to competition from a new generation of hepatitis C treatment. Tamiflu (+54%) grew robustly toward the end of the year as a result of the flu epidemic in the U.S.
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. The company expects to launch the drug in the U.S. in 2015.
Revenues from the Diagnostics division went up 6% to CHF 10.8 billion driven by solid performance of the professional diagnostics (+8%) unit, which was in turn propelled by the immunodiagnostics business (+13%). Tissue diagnostics (+10%) also performed impressively. Diabetes care sales were up 1% while molecular diagnostics sales increased 6%. Roche launched 14 key products in 2014, including the new cobas 6800 and cobas 8800 systems for molecular testing, and cobas 6500.
2015 Outlook
Roche expects sales in 2015 to increase in low-to-mid single digits. The company expects its core earnings per share to grow at a higher rate than sales.
Pipeline Update
Roche’s pipeline progress in 2014 was encouraging. Avastin was approved for cervical cancer in the U.S. and platinum-resistant ovarian cancer in Europe. Positive news flowed in 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 wherein it was observed that adding Perjeta to Herceptin and chemotherapy increased the survival time for treatment-naïve patients by five years.
We note that cancer immunotherapy is a key focus area for Roche with currently seven candidates under development. The FDA granted Breakthrough Therapy designation to cancer immunotherapy candidate anti-PDL1 (MPDL3280A) for bladder cancer and Lucentis for diabetic retinopathy.
Meanwhile, Roche initiated phase III trials on ophthalmology candidate lampalizumab for the potential treatment of geographic atrophy.
However, there were a few setbacks as well as phase III studies on bitopertin for schizophrenia failed to meet primary endpoints. Also, a phase III study on gantenerumab in early-stage Alzheimer’s disease was discontinued after a pre-planned futility analysis. Roche also discontinued the development of onartuzumab in advanced MET-positive non-small cell lung cancer when it failed to show clinically meaningful efficacy.
Our Take
We are encouraged by Roche’s performance 2014. The oncology portfolio looks solid as ever and we expect further traction in 2015. We are also impressed by the company's efforts to grow its portfolio beyond oncology to immunology and ophthalmology However, generic competition for Xeloda, Zelboraf and Pegasys will continue to hamper sales. Lucentis is expected to face strong competition in the DME and wet age-related macular degeneration space.
Roche currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the health care sector include Allergan (AGN) and AbbVie (ABBV) Both carry a Zacks Rank #2 (Buy).
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