Roche Reports 22% Y/Y Fall in 2009 Net Income on Expenses Related to Genentech's Takeover

Swiss pharmaceutical company Roche has reported mixed financial results for the full year 2009. Significantly affected by the recent acquisition of its U.S. partner Genentech, Roche’s full year financial results are however positive in terms of growth sales with record annual sales of 49 billion Swiss francs (US$46.6 billion), equivalent to a 8% y/y increase in the reporting currency. Pharmaceutical sales were up 8% y/y in the reporting currency to nearly 39 billion Swiss francs while the diagnostic division grew by 4% y/y, at double the pace of the market growth rate. The group operating income, as calculated by IHS Global Insight, increased by 11% y/y to 12.9 billion Swiss francs, positively impacted by a 7% decrease in general administration expenses to 2.2 billion Swiss francs. In local currencies, total sales grew by 10% while pharmaceutical sales increased by 11%, almost twice the average pharmaceutical market growth rate. As last year, the group net income was down with a 22% y/y decrease to 8.5 billion francs. The sharp decrease in net income is the direct consequence of the US$47 billion buyout of Genentech in March 2009 which incurred restructuring and integration costs of 2.4 billion Swiss francs in 2009 (see United States - Switzerland: 12 March 2009: Roche Wins Genentech Over with Raised Bid of US$46.8 bil.)

In 2009, Roche intensified its efforts on research and development of promising compounds with 111 projects in clinical development programmes at the end of 2009. Research and development expenses were up 12% y/y to almost 10 billion Swiss francs in 2009, reflecting growing investment in Roche’s late-stage pipeline including dalcetrapib, taspoglutide, pertuzumab and T-DM1. Meanwhile, marketing and distribution costs were up 3% y/y in the reporting currency to 9.4 billion francs. General administration expenses were down 7% y/y to 2.2 billion francs while cost of sales was up 7% y/y to 13.6 billion francs thanks to improved manufacturing efficiency.

In 2009, pharmaceutical sales were driven by Roche's oncology portfolio and as a result of the worldwide spread of the pandemic A influenza/H1N1 virus, by the continued demand for Tamiflu (oseltamivir). Excluding Tamiflu, Roche's pharmaceutical division grew by 4% y/y driven by key oncology products including Avastin which generated 6.2 billion Swiss francs, up 21% y/y, benefiting from continued uptake in metastatic colorectal, breast and non-small-cell lung cancers. This strong performance is mainly due to the product's recent approval for advanced colorectal cancer in Japan where sales of Avastin jumped 74% y/y. MabThera/Rituxan comes in second place with sales of 6 billion francs, up 6% y/y, following the recent uptake in Europe for the treatment of chronic lymphocytic leukaemia (CLL). In the meantime, Herceptin continued to penetrate worldwide markets, especially in Japan and emerging markets, with an 8% y/y increase in sales to 5.3 billion Swiss francs. Other growth drivers include ophthalmic product Lucentis whose U.S. sales jumped 24% to 1.2 billion Swiss francs due to an increase in the number of injections administrated in the first years of treatment and to easier reimbursement in the U.S. market.

Sales of influenza treatment Tamiflu soared to 2.3 billion Swiss francs from 609 million francs a year before, reflecting the unprecedented demand from governments and retail pharmacies which followed the H1N1 pandemic outbreak. Meanwhile, some products have disappointed such as immunosuppressant CellCept (mycophenolate mofetil) which brought in revenues of 1.6 billion francs in 2009, down 22% y/y in the reported currency. This is mainly attributable to its U.S. patent expiry in May 2009, which has seen CellCept sales decline by 47% y/y in that region. Anaemia treatment NeoRecormon/Epogin (epoetin beta) also declined, especially in Europe, as sales dropped by 11% in the reported currency to 1.6 billion francs due to increasing competition and global price pressure.

Outlook and Implications

For the year ahead, Roche expects its pharmaceutical and diagnostic sales to grow at mid-single digit rates in local currencies and its diagnostic division to grow significantly ahead of the market. Roche also anticipates achieving double-digit core earnings per share growth at constant-exchange rates despite an anticipated fall in Tamiflu sales from 3.2 to 1.2 billion francs in 2010. When sales of Tamiflu are excluded, the sales growth of Roche's pharmaceutical products amounts to 4% y/y, which is equivalent to the global pharmaceutical market growth rate. Roche's performance therefore falls below expectations as its leading oncology portfolio failed to achieve expected performance.

The multi-billion-dollar buyout of Genentech in March 2009, which is significantly weighting on Roche's financial results, should translate into a success story for Roche, which is expecting a Genentech transaction to positively contribute to its income. The challenge for Roche going forward will be to fully integrate its U.S. subsidiary to ensure medium-to-short term revenue.

In 2009, Roche's oncology portfolio has continued to benefit from a string of regulatory approvals and recommendations, which will further cement its presence and boost market penetration of its lead products. Major regulatory approvals include Avastin (bevacizumab) in metastatic breast cancer in the European Union (EU) and metastatic renal cell carcinoma in the United States, MabThera (rituximab) in CLL in the EU, and Xeloda (capecitabine) in metastatic colorectal cancer in Japan (see Switzerland: 21 January 2009: Roche Clinches European Approval for Rheumatoid Arthritis Drug RoACTEMRA and Switzerland: 23 January 2009: Roche's MabThera Receives European Backing as CLL First-Line Treatment). More recently, the European Commission approved Roche's blockbuster Herceptin (trastuzumab) in combination with capecitabine or 5-fluorouracil and cisplatin for the treatment of patients with HER2-positive metastatic stomach cancer, increasing the commercial prospects of the drug (see Switzerland - Europe: 28 January 2010: EC Approves Roche's Herceptin in Patients with Stomach Cancer). In parallel, a number of regulatory filings could extend key drug indications as Roche has filled and expects to fill regulatory applications for key cancer medicines in 2010, including Avastin, MabThera and Xeloda, boosting forecasts for Roche's lead products worldwide. The marketing of these promising products is key to maintain the good sales performance achieved this year thanks to the exploding demand for Tamiflu.