Roche Holding AG RHHBY reported sales of $12.4 billion in the first quarter of 2015, beating the Zacks Consensus Estimate of $12.0 billion.
Sales were up 3% (CHF11.8 billion) from last year as demand for oncology and immunology drugs drove growth at the pharmaceuticals business, while growth in immunodiagnostics products boosted the diagnostics business.
All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.
Quarter in Detail
Roche reports its business in two divisions: Pharmaceuticals and Diagnostics.
Sales of the Pharmaceuticals division increased 4% to CHF9.3 billion. Sales of HER2 breast cancer franchise (+23%) were driven by strong demand for the Perjeta-Herceptin combination in treatment.
Sales of Avastin were up 6% due to increased demand in ovarian and cervical cancers along with breast and lung cancers. Strong sales of blood cancer drug Rituxan/MabThera (+5%) in the U.S. for oncology and rheumatoid arthritis also boosted sales.
Sales of rheumatoid arthritis drug Actemra (+27%) were strong in all major markets driven by increased use in monotherapy along with significant uptake of the new subcutaneous formulation.
Asthma drug Xolair (+28%) also showed strength as its demand increased after the FDA approved a label expansion for chronic idiopathic urticaria. We note that Novartis AG NVS licensed Xolair from Roche. Roche markets Xolair in the U.S.
Roche also witnessed strong uptake for newly-acquired drug Esbriet for idiopathic pulmonary fibrosis through the InterMune acquisition of Sep 2014 and Gazyva/Gazyvaro for chronic lymphocytic leukemia.
However, sales of ophthalmology drug, Lucentis (-9%) were impacted by competitive pressure in the wet age-related macular degeneration (wAMD) and diabetic macular edema (DME) segments. Chemotherapy drug Xeloda (-53%) and antiviral medicine Valcyte (-41%) were impacted by generic competition. Pegasys, a medicine for hepatitis B and C also declined in the quarter, as a result of competition from a newer generation of treatment.
Revenues at the Diagnostics division rose 6% to CHF2.5 billion driven by solid performance at the professional diagnostics unit, which was in turn propelled by the immunodiagnostics business (+11%) and coagulation monitoring business (+14%). Tissue diagnostics (+14%) also performed impressively. Diabetes care sales were up 1%, while molecular diagnostics sales increased 10%.
2015 Outlook Reiterated
Roche continues to expect sales in 2015 to increase in low-to-mid single digits. The company expects its core earnings to grow at a higher rate than sales.
Pipeline Update
Roche’s pipeline progress in the first quarter was encouraging. Avastin was approved for use in advanced cervical cancer in combination with chemotherapy in the EU.
Roche also reported positive results from the phase III study, GADOLIN, on Gazyva in refractory indolent non-Hodgkin’s lymphoma. The study met its primary endpoint and was consequently stopped early.
Meanwhile, the FDA granted another Breakthrough Therapy Designation for the pipeline candidate, anti-PDL1, in non-small cell lung cancer. The candidate was granted Breakthrough Therapy Designation for bladder cancer in 2014.
Lucentis’ label was expanded in the U.S. to include treatment of diabetic retinopathy in patients with DME. The FDA granted priority review to its candidate cobimetinib, in combination with Zelboraf, for treatment of advanced BRAF-mutated melanoma.
The FDA also granted the Fast Track status to pipeline candidate lampalizumab.
Our Take
Roche currently carries a Zacks Rank #3 (Hold). We are encouraged by the company’s performance in the first quarter. The oncology portfolio looks solid as ever and we expect further traction in 2015 from the HER2 franchise.
We are also impressed by the company's efforts on growing its portfolio beyond oncology to immunology with drugs like Actemra, Xolair, MabThera and Esbriet. However, generic competition for Xeloda and Pegasys will continue to dampen sales. Lucentis expects strong competition in the DME and wAMD space.
We expect investor focus to remain on updates from the cancer immunotherapy program and other pipeline updates – alectinib, cobimetinib in combination with Zelboraf, and ocrelizumab.
Some better-ranked stocks in the broader health care sector are Shire plc SHPG and Valeant Pharmaceuticals Inc. VRX. Both carry a Zacks Rank #1 (Strong Buy).
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