Roche Sales Hit by Strong Swiss Franc, While Profits Beat Market Expectations and Outlook is Improved

Swiss biopharmaceutical major Roche has announced its financial results for the first half of 2011, which show a 12% year-on-year (y/y) decline in net sales in Swiss franc terms, to CHF21.671 billion (USD26.4 billion), while in local currencies, sales were flat. Net income was down 5% in franc terms, to CHF5.259 billion, while in local currency terms, it was up 10%. The Roche group's results were affected considerably by the appreciation of the franc against other major currencies, which made its results as measured in franc terms appear less favourable than they in fact were. Indeed, the results exceeded analysts' expectations, with predictions for the group's net income coming in at under CHF5 billion. Nevertheless, the 13% y/y decline in the sales of the group's pharmaceutical division, in franc terms—precipitated largely by the 15% y/y decline in sales of its formerly top-selling product Avastin (bevacizumab) in the United States over concerns about its benefits, not to mention the 58% y/y drop in the sales of influenza drug Tamiflu (oseltamivir phosphate)—stand in stark contrast to the 3% y/y growth in sales in the equivalent period of 2010.

Another important factor in Roche's first half results was the group's reduction in costs, which is shown by the 11.2% y/y reduction in cost of sales and the 15.5% drop in marketing and distribution expenses; this reflects the significant reductions in the group's employee headcount in recent times, and has helped to bolster its core profitability.

Emerging Markets Give Cause for Hope

Although sales of the group's pharmaceutical division were down 1% in local currencies, if data on Tamiflu sales are not included, sales of Roche's pharmaceutical division were up 1% y/y in local currencies. Taking regions separately, there was a marked contrast in the group's fortunes between different regions: in Western Europe, it suffered a 4% y/y decline in sales during the first half, with or without Tamiflu sales factored in, while in the US, it was able to increase sales by 2% y/y. Furthermore, when Tamiflu sales are excluded, the group's sales in Latin America and Asia-Pacific were up by 13% y/y and 16% y/y, respectively.

Cancer Drugs Continue to Dominate, RoActemra Shines

Cancer drugs continued to dominate Roche's top 20, with MabThera/Rituxan (rituximab) maintaining its leading position, with 6% growth in global sales in local currencies, to CHF3.056 billion, and Avastin's sales declining 8% y/y globally to CHF2.726 billion, largely due to worries over the drug's benefits in the US. Asthma drug Xolair (omalizumab) was a good performer for Roche, with a jump in sales of 11% y/y to CHF300 million, while rheumatoid arthritis drug RoActemra/Actemra (tocilizumab), which was just outside the top 10, recorded a growth in sales of 99% y/y in the first half, to CHF277 million.

Outlook and Implications

Roche has revised its predictions for 2011 from single-digit growth in earnings per share to 10% y/y on the strength of its first half results, which it is presenting in a positive light, focusing on the core operating profitability and the prospects for the future, with positive data on seven clinical trials published during the course of the first half, which it hopes will help to push forward regulatory submissions for new drugs or extensions on existing ones. Indeed, it could be argued that the group is undergoing a process of restructuring, and with more jobs to go and factories to close in the course of the next two years, more efficiencies are likely to be achieved.