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Roche Misses 2013 Earnings Estimates

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Roche’s (RHHBY - Free Report) core earnings came in at $3.88 per American Depositary Receipt (ADR) in 2013, up from $3.69 per ADR reported in 2012, but missed the Zacks Consensus Estimate of $4.05 per ADR.

Revenues of $50.9 billion also missed the Zacks Consensus Estimate of $51.7 billion. 

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

Full-Year Details

Roche’s revenues in 2013 grew 6% from 2012 to CHF 46.8 billion driven by solid demand for its cancer drugs and increased sales of its clinical laboratory diagnostic products, especially immunoassays.

Roche reports business in two divisions: Pharmaceuticals and Diagnostics.

Sales of the Pharmaceuticals division increased 7% to CHF 36.3 billion, driven by strong sales of oncology drugs.  Both the U.S. and emerging markets reported solid growth while Europe and Japan were sluggish.

Sales of the HER2 breast cancer franchise, which consists of Herceptin, Perjeta and Kadcyla, increased 14%. The franchise was further boosted by key approvals in 2013 – Kadcyla in the U.S. and EU and Perjeta in the EU. In Oct 2013, Perjeta was approved for use in treatment of HER2-positive breast cancer prior to surgery (neoadjuvant setting) in the U.S.

The sharp rise in Avastin sales (+13%) was due to its strong demand for the treatment of advanced ovarian cancer in Europe, and colorectal cancer in the U.S. and Europe.

Demand for blood cancer and rheumatoid arthritis drug MabThera/Rituxan (+6%) was also strong. Roche's hematology franchise was boosted in 2013 by the approval of Gazyva in the U.S. for the treatment of chronic lymphocytic leukemia (CLL). We note that Gazyva is being studied for additional indications such as non-Hodgkin’s lymphoma (NHL) and has also been filed for approval in Europe.

Sales of rheumatoid arthritis (RA) drug Actemra/RoActemra were up 30%. Lucentis, indicated for wet age-related macular degeneration (AMD), was up 15%. However, sales of drugs such as Pegasys (indicated for hepatitis B and hepatitis C) declined 19% due to the expected launch of triple-combination and interferon-free therapies.

Revenues from the Diagnostics division went up 4% to CHF 10.5 billion driven by solid performance of the professional diagnostics (+8%) unit. Tissue diagnostics (+7%) also performed impressively in 2013. However, diabetes care was down 3% due to reimbursement cuts in the U.S. and intensified pricing pressure. Molecular Diagnostics grew 2%. New introductions in 2013 include cobas 8100 and a new HPV test for cervical cancer.

2014 Outlook

Roche expect sales in 2014 to increase in the low to mid-single digits. Roche expects core earnings per share to grow at a higher rate than sales in 2014. Roche expects to further increase its dividend in 2014. We note that the Board of Directors has proposed a 6% dividend increase to CHF 7.80 per share.

Pipeline Update

In 2013, Roche received positive data from eight candidates which have now moved into late-stage development – six candidates in oncology, etrolizumab for inflammatory bowel disease, and lampalizumab for the eye disease geographic atrophy (an advanced form of dry AMD).

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.

Meanwhile, Roche expects to file Avastin for the indication of cervical cancer in the EU and the U.S. in 2014.

Our Take

2013 results missed our estimates. Roche expects to face generic competition for key drugs -- Valcyte and Xeloda in 2014.  The loss from the entry of generics for the overall portfolio in 2014 is estimated at CHF1 billion.

Nevertheless, the oncology portfolio looks solid as ever and we expect further traction in 2014. We are also impressed by the company's efforts to grow its portfolio beyond oncology to immunology and ophthalmology. 

Roche currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the pharma industry include Allergan (AGN - Free Report) and Forest Laboratories and Salix Pharmaceuticals . All three carry a Zacks Rank #1 (Strong Buy).

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