Roche Holding AG’s (RHHBY Quick QuoteRHHBY - Free Report) core earnings came in at $1.84 per American Depositary Receipt (ADR) in 2016 beating the Zacks Consensus Estimate of $1.66.

Revenues of $51.4 billion (CHF50.6 billion) missed the Zacks Consensus Estimate of $52.4 billion.

Shares of Roche have underperformed the Zacks classified Large Cap Pharmaceuticals industry in the last year. In fact, the stock lost 5.1% over this time frame, compared with a gain of 0.1% for the industry.

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.

Sales at the Pharmaceuticals division increased 3% driven by the performance of breast cancer drugs like Perjeta and Herceptin and rheumatoid arthritis drug Actemra/RoActemra.

Diagnostics division sales climbed 7% primarily on the back of strong immunodiagnostic business. 

2016 in Detail

While Herceptin sales improved 4% due to rising demand in the U.S. and Europe, and expanded reimbursement in additional provinces in China, Perjeta sales grew 26% due to the uptake in demand for use before surgery in the early stages of breast cancer.  Sales of Kadcyla (+7%) were driven by increasing demand in the international markets due to expanded access in countries in which the drug was newly launched.

Meanwhile, sales of Avastin were strong in the international region (+18%), especially China where sales were driven by improved access in the lung cancer setting. However, sales in the U.S. dropped 5% due to the increased use of new immunotherapy agents in the lung cancer setting.

Sales of Rituxan/MabThera (3%) contributed to the top line despite competitive pressure due to increasing demand in China, the U.S. and Europe. Growth in Gazyva/Gazyvaro (+52%) was seen in the U.S. and Europe despite increasing competition in chronic lymphocytic leukemia.

Recently launched drugs, Tecentriq for bladder cancer and Alecensa for lung cancer are off for an encouraging start. Initial uptake in the U.S. has been strong. Cotellic plus Zelboraf for BRAF-mutated metastatic melanoma also showed good sales uptake, especially in major markets such as France and the U.S.

Performance of the immunology franchise was driven by increased sales of Actemra/RoActemra (16%), and strong uptake of Esbriet (34%) and Xolair (15%). Increasing use of Actemra/RoActemra as a single agent and in the subcutaneous formulation were the key growth drivers globally.

However, sales of eye drug Lucentis and cancer drugs Avastin and Tarceva declined due to growing use of other therapeutic options. Sales of Valcyte/Cymevene (-17%) and Xeloda (-3%) continue to be hit by generic competition.

Revenues at the Diagnostics division climbed 7% on the back of solid performance of the Centralised and Point of Care Solutions (9%) unit, which was in turn, propelled by Immunodiagnostics (13%). Tissue Diagnostics (14%) and Molecular Diagnostics (7%) also performed impressively. We note that the division added nine key instruments and tests to its portfolio in 2016 – cobas e 801 immunoassay module, the CoaguChek INRange system to monitor vitamin K antagonist therapy, and the Accu-Chek Guide, a next-generation blood glucose monitoring system. However, Diabetes Care sales declined 4% due to continued pricing pressure in the U.S. Sales continue to be impacted by challenging market conditions, particularly in North America.

2017 Outlook

Roche continues to expect sales to grow in the low-to-mid single digits. The company expects core earnings to grow in tandem with sales. The company intends to further increase its dividend in 2017 in local currency.

Pipeline Progress

2016 saw the launch of four new drugs by Roche namely – Cotellic (advanced melanoma), Alecensa (lung cancer), Venclexta (chronic lymphocytic leukemia) in collaboration with AbbVie, Inc. (ABBV Quick QuoteABBV - Free Report) and cancer immunotherapy drug Tecentriq (bladder and lung cancer). The FDA further approved a label expansion of Tecentriq for the indication of previously treated metastatic non-small cell lung cancer (NSCLC).

Roche is also evaluating Tecentriq in combination with chemotherapy for first line lung cancer with and without Avastin. Meanwhile, studies showed that Roche’s Ocrevus (ocrelizumab) increased disease control in both relapsing and primary progressive multiple sclerosis (RMS and PPMS). Roche is seeking regulatory approval for this candidate in RMS and PPMS in the U.S and the EU. A decision by the FDA is now expected by Mar 28. Roche has earlier expected a response by Dec 28.

Roche also presented positive results on emicizumab in patients suffering from haemophilia A. The company provided encouraging data on Actemra from the largest clinical trial ever conducted in giant cell arteritis (GCA). The data showed that the drug when combined with a steroid regimen more effectively sustained remission compared to a steroid-only regimen in people with newly diagnosed and relapsing GCA.

However, Gazyva/Gazyvaro did not reach its primary endpoint in the Goya trial in patients with in diffuse large B-cell lymphoma even though the drug showed positive results in a major clinical trial (Gallium) in follicular lymphoma.

Our Take

Roche beat on earnings but missed on sales in 2016 due to decline in sales of Lucentis, Pegasys, Avastin and Tarceva. Generic competition for Xeloda and Valcyte also continue to hurt sales.

Moreover, diabetes care sales continue to plunge. There were rumors that Roche is evaluating a potential sale of the business but the company did not confirm so yet. Hence, the business will continue to be a laggard for the company.

We note that competition from biosimilars loom large on Roche‘s key drugs like Herceptin, Avastin and Rituxan (expected in the second half of 2017 in Europe). An impending entry of biosimilars in 2017 will adversely impact sales. Tamiflu also faces generic competition in the U.S while competition on persists for Avastin and Tarceva.

On the other hand, new drug launches, such as Tecentriq, Cotellic and Alecensa boosted sales and should continue to do so in the upcoming quarters. However, Roche is facing stiff competition from the likes of Merck's (MRK Quick QuoteMRK - Free Report) Keytruda and Bristol-Myers Squibb's (BMY Quick QuoteBMY - Free Report) Opdivo in the immuno-oncology space. With several read-outs lined up for 2017, investors should keep an eye for new drug approvals and label existing of existing ones.

Zacks Rank

Roche currently carries a Zacks Rank #5 (Strong Sell). You can see the complete list of today’s Zacks #1 (Strong Sell) Rank stocks here.

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