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Strong 1H13 at Roche, View Backed

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Roche Holdings Ltd.’s (RHHBY - Free Report) core earnings came in at $2.02 per American Depositary Receipt (ADR) in the first half of 2013, compared with $1.85 per ADR reported in the year-ago period.

All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.

Roche’s revenues in the first half of 2013 grew 5% from the year-ago period to CHF 23.3 billion, driven by solid demand for its cancer drugs and increased sales of diagnostic tests to clinical laboratories.

Half-Year Details

Roche reports business in two divisions: Pharmaceuticals and Diagnostics.

Sales of the Pharmaceuticals division increased 6% to CHF 18.2 billion, driven by strong sales of Avastin (+12%) and MabThera/Rituxan (+3%) along with solid uptake from the HER2 franchise (+11%). The sharp rise in Avastin sales was due to its increased demand in the ovarian and colorectal cancer indications.

We note that HER2 franchise includes Herceptin and recently launched drugs like Perjeta and Kadcyla.

Roche launched Kadcyla in the U.S. in Feb 2013 while Perjeta obtained approval in the European Union in Mar 2013. Perjeta was launched in the U.S. in Jun 2012.

Sales of rheumatoid arthritis (RA) drug Actemra/RoActemra were up 33%.

Lucentis, indicated for wet age-related macular degeneration (AMD), was up 9%. Moreover, strong sales of Tamiflu (+79%) due to a severe flu season in North America further boosted sales.

However, sales of drugs such as Pegasys (indicated for hepatitis B and hepatitis C) declined 20% due to the expected launch of triple-combination and interferon-free therapies by 2013 end/ early 2014.

Revenues from the Diagnostics division went up 3% to CHF 5.1 billion driven by solid performance of the professional diagnostics (+6%) unit. Tissue diagnostics (+6%) also performed impressively in the first half. However, diabetes care was down 5% due to reimbursement cuts in major markets and intensified pricing pressure.

2013 Outlook Backed

Roche continues to expect sales in 2013 to increase in line with 2012 growth rates. Roche expects core earnings per share to grow at a higher rate than sales in 2013. Roche expects to further increase its dividend in 2013.

Pipeline Update

We remind investors that Roche has stopped developing aleglitazar due to safety signals and lack of efficacy following a regular safety review. Roche was developing the candidate to treat acute coronary syndrome (ACS) in patients suffering from type II diabetes.

Nevertheless, traction in the company’s hematology franchise was encouraging with positive data on obinutuzumab (GA101) and RG760, which are being developed to treat non-Hodgkin’s lymphoma (NHL) and chronic lymphocytic leukemia (CLL).

GA101 was recently accepted by the U.S. Food and Drug Administration (FDA) for priority review and an approval is expected by end Dec 2013. The candidate has also been filed for approval in Europe.

Meanwhile, Roche plans to move RG7601, which is being developed in collaboration with AbbVie, Inc. (ABBV - Free Report) into late-stage development after reporting positive phase I data in Jun 2013.

Additionally, Roche is moving ahead with its novel non-small cell lung cancer candidate RG7446 following promising phase I results.

Roche is also seeking FDA approval for the use of Perjeta regimen before surgery (neoadjuvant treatment) in HER2+ early-stage breast cancer patients.

Our Take

Given the solid performance in the first half of 2013, we believe the company is likely to achieve its annual targets.

Roche currently carries a Zacks Rank #3 (Hold). Right now, Jazz Pharmaceuticals (JAZZ - Free Report) and Johnson & Johnson (JNJ - Free Report) look attractive. While Jazz Pharma carries a Zacks Rank #1 (Strong Buy), Johnson & Johnson carries a Zacks Rank #2 (Buy).

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