Roche Ends H1 with Dynamic Sales Growth But Heavy Losses from Genentech Acquisition

Swiss pharmaceutical giant Roche has had a turbulent first half, with solid sales growth and the resurgence of demand for Tamiflu (oseltamivir) countered by a heavy dip in net profits on the back of its acquisition of U.S. biotech Genentech. Group sales gained 9% y/y in Roche's reporting currency, to reach 24 billion Swiss francs (US$22.3 billion), split between 19.1 billion francs in pharmaceutical sales (up 11% y/y) and 4.9 billion francs in diagnostics turnover (up 3% y/y).

Roche's spending on operation costs such as marketing, distribution and research and development (R&D) continued to expand over the first six months of the year, with the completion of the Genentech acquisition in March playing a considerable role (see Switzerland: 12 March 2009: Roche Wins Genentech Over with Raised Bid of US$46.8 bil.). Of the 2.4 billion francs in exceptional operating expenses booked during the first half, 2 billion were directly as a result of the Genentech takeover, while the remainder went towards covering the cost of various legal cases. These expenses had a direct impact on Roche's net profit, which tumbled by 29% y/y to just over 4 billion francs. Spending on R&D, at 18.5% of sales, grew by 10% y/y to 4.5 billion francs, reflected by the 10 new molecular entities that are currently in planned or ongoing late-stage clinical studies.

In spite of this, Roche's operating profit still grew by an impressive 16.1% y/y, when calculated by IHS Global Insight as group sales minus cost of sales, marketing, distribution, administration, and R&D. This allowed for a slight increase in the company's operating margin, which now stands at a healthy 28.6%. Roche's debt, however, now stands at 32 billion francs, and its equity has been reduced by 47 million francs to just 5 billion francs, again as a result of the Genentech purchase.

The big story of the first half of the year, with respect to Roche's pharmaceutical portfolio, has been the resurgence of influenza (flu) drug Tamiflu. Sales of the anti-viral pill began to mushroom shortly after the initial outbreak of A/H1N1 flu (commonly known as swine flu), as national health providers around the world sought to secure supplies of drugs in the absence of a vaccine. The end result is that global sales of Tamiflu rose by more than 200% y/y to 1 billion francs during the first half. Looking back at the first three months of the year, Tamiflu's sales had also performed strongly then, by gaining 38% y/y, but the emergence of the A/H1N1 flu crisis from April arguably gave the drug a boost towards the end of the first half. Roche says it will be able to supply up to 400 million packs of Tamiflu per year by 2010, and has production licences set up for active ingredient oseltamivir with generic producers in China, India, and several developing countries.

Sales of Roche's other treatments followed much the same pattern in the second quarter as the first, resulting in little overall change in Roche's first-half drug rankings by sales. MabThera/Rituxan (rituximab) managed to recapture the top spot from Avastin (bevacizumab) as the company's biggest drug by sales, with an 8% y/y rise to 3.1 billion francs. Oncology treatments remained the company's most successful in terms of sales growth, while older drugs such as weight-loss medication Xenical (orlistat) continued to lose market share. Following U.S. patent expiry for anti-transplant rejection drug CellCept (mycophenolate mofetil) in May, U.S. sales of the drug slumped by 13.5% y/y to 927 million francs, causing a global downturn of 8% y/y (see United States: 11 May 2009: Mylan and Others Enter Generic CellCept Market as Patent Expires in the U.S.).

Outlook and Implications

Buoyed by its prospects in the United States following the Genentech acquisition, and taking into account the resurgence in demand for Tamiflu, Roche has raised its full-year guidance for 2009. The company now expects sales in both of its divisions to be above the market average in their growth, with pharmaceutical sales growth reaching the high single digits. The group is aiming to find synergies worth 1 billion francs in the integration of Genentech between now and 2011, but remains adamant that Genentech's innovative research operations will remain independent and untouched in order to keep its excellent track record of developing new drugs.