Roche Holding (RHHBY Quick QuoteRHHBY - Free Report) reported sales of $12.1 billion (CHF11.7 billion) in the second quarter of 2016, missing the Zacks Consensus Estimate of $12.9 billion.

In the first half of 2016, however, sales were up 6% year over year in local currency. Growth was primarily driven by pharmaceutical sales in the U.S. and strong demand for immunodiagnostic products.

The company reports results under two divisions: Pharmaceuticals and Diagnostics. All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.

First-Half 2016 Results in Detail

Sales at the Pharmaceuticals division increased 4% to CHF19.5 billion on the back of strong demand for oncology and immunology medicines. Sales of the HER2 breast cancer franchise (+10%) were driven by robust demand for Herceptin, Perjeta and Kadcyla. Herceptin sales grew 5% on the back of higher demand due to a longer duration of treatment in combination with Perjeta.

Sales of Perjeta were strong in both Europe and the U.S. driven mainly by uptake in the neoadjuvant setting and continually strong growth in the metastatic setting. Kadcyla sales increased on account of demand in the international region and Europe.

Sales of Avastin were up 4% due to increased demand in international markets, especially China where sales grew on improved access in the lung cancer setting. Robust sales of Rituxan/MabThera (+4%) also contributed significantly to the top line.

Sales of the immunology franchise were driven by strong uptake of Esbriet (+51%) and increased sales of Actemra/RoActemra (+17%) and Xolair (+19). The new subcutaneous formulation of Actemra, along with its use as a single agent, fueled sales. Demand was strong for Alecensa which was recently launched in the U.S. for a specific type of lung cancer.

However, sales of Pegasys (-49%) were hurt by competition from a new generation of treatments, while Valcyte/Cymevene (-14%) and Xeloda (-12%) suffered due to generic competition.

Revenues at the Diagnostics division were CHF5.6 billion, up 6% driven by solid performance of the professional diagnostics (+9%) unit, which was in turn, propelled by the immunodiagnostics business (+14%). Tissue diagnostics (+12%) and Molecular Diagnostics (+8%) also performed impressively. However, sales of diabetes care decreased due to pricing pressure in the U.S.

2016 Outlook

Roche continues to expect sales to increase in the low-to-mid single digits. The company expects core earnings to grow at a higher rate than sales. Roche intends to increase its dividend further in 2016.

Pipeline Update

Roche made strong pipeline progress in the first half of 2016. The FDA granted accelerated approval to Venclexta for a specific form of leukemia in the U.S. The drug was developed in collaboration with AbbVie (ABBV Quick QuoteABBV - Free Report) . The FDA also granted accelerated approval to immunotherapy drug, Tecentriq, for bladder cancer.

The subcutaneous formulation of MabThera/Rituxan received approval in the EU for chronic lymphocytic leukemia in May. In Jun 2016, the European Commission approved Gazyva for the second-line treatment of follicular lymphoma. Meanwhile, the combination of Avastin and Tarceva received approval in Europe for the treatment of patients with a specific type of lung cancer.

Also, the marketing applications for Ocrevus for both relapsing and progressive multiple sclerosis is under review in the U.S. and EU. The PDUFA date in the U.S. is Dec 28, 2016. Results from the largest trial in giant cell arteritis (GCA) showed that Actemra/RoActemra effectively sustained remission through one year as compared to a 6- or 12-month steroid-only regimen in patients with newly diagnosed and relapsing GCA.

Roche also presented positive data on Tecentriq in the treatment of previously treated lung cancer. Moreover, the company revealed encouraging results on the drug in combination with chemotherapy, targeted anti-cancer medicines and other cancer immunotherapy agents in several tumor types from various trials.

However, Roche suffered a setback when the phase III study on Gazyva in previously untreated diffuse large B-cell lymphoma did not meet its primary goal of extending the time patients live without disease progression.

Our Take

Roche currently carries a Zacks Rank #3 (Hold). Sales in the second quarter fell short of estimates. The company is making efforts to broaden its portfolio outside the oncology space into immunology. New drug approvals such as those of Tecentriq, Cotellic and Alecensa also boosted sales.

However, headwinds in the form of generic competition for Xeloda and Valcyte may continue to hurt sales. Going forward, we expect investors to focus on new drug approvals, as the top line could be marred by the entry of biosimilars (expected in the second half of 2017 in Europe) for key drugs like MabThera and Herceptin.

Investors interested in the health care sector may consider Gilead Sciences (GILD Quick QuoteGILD - Free Report) and Johnson & Johnson (JNJ Quick QuoteJNJ - Free Report) . Both the stocks carry a Zacks Rank #2 (Buy).

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