Roche Misses on Tamiflu Decline - Analyst Blog

Roche Holdings Ltd.'s (RHHBY) earnings increased 7.81% to $3.07 per share for the fiscal year 2010, but fell short of the Zacks Consensus Estimate of $3.22. However, revenues for the year declined 0.8% to $45,642 million and even missed the Zacks Consensus Estimate of $47,844 million.

Despite lower revenues, earnings went up due to a decline in research and development expenses.

Revenues for 2010 experienced a decline due to lower Tamiflu sales, the impact of health care reform and European pricing pressure.

Annual Details

Roche records revenues under two segments – Pharmaceuticals Division and Diagnostics Division.

The Pharmaceuticals Division sales declined 2% primarily reflecting a considerable reduction in Tamiflu (73%) sales, decline in CellCept (15%) sales due to loss of US patent protection in May 2009, US health care reforms, European austerity measures and price cuts in Japan. These factors more than offset the robust growth of Avastin (9%), MabThera/Rituxan (9%), Herceptin (7%), Xeloda (17%) and Tarceva (6%). Sales of newly launched drugs like Actemra/RoActemra (up 177%), Mircera (up 51%) and Lucentis (up 27%) also helped boost revenues in 2010.

The conclusion of the influenza A (H1N1) pandemic, a relatively mild influenza season and the completion of most government stockpiling orders resulted in the fall of Tamiflu sales.

We note that the Pharmaceuticals Division is on track to achieve pretax annual synergies of about 1 billion Swiss francs from the Genentech merger by the end of 2011. Roche has already achieved synergies of over 800 million Swiss francs in 2010.

Revenues from the Diagnostics Division shot up 8%, with an 11% increase in the Professional Diagnostics segment and a 4% growth in the Diabetes Care segment.

Roche's operating profit increased 7%, driven by cost synergies from the Genentech integration and productivity improvements. Operating profit margin increased 170 basis points to 34.9% for fiscal 2010.

The company plans to pay a dividend of 6.60 Swiss francs per share for 2010.

Outlook for 2011

In addition to releasing 2010 results, the company also provided a projection for 2011. For 2011, Roche expects total revenue and revenues from the Pharmaceuticals Division to grow at low single-digit rates. The growth rate excludes revenues from Tamiflu but includes the impact of US health care reform and European pricing pressure.

While Pharmaceuticals sales are expected to grow in line with the market, sales from the Diagnostics segment are expected to surpass the market. The performance of the Diagnostics segment is expected to be driven by the launch of new products.

Roche anticipates earnings and dividend for fiscal 2011 to grow at a high single-digit rate.

Further, Roche expects to reduce debt progressively and return to a net cash position by 2015.

Operational Excellence Program

The Operational Excellence Program is expected to generate annual savings worth 1.8 billion Swiss francs in 2011 and 2.4 billion Swiss francs from 2012 onwards. During the course of the implementation of the program (2010 to 2012), Roche expects to incur restructuring costs of 2.7 billion Swiss francs, which includes cash-related costs worth 1.5 billion Swiss francs.

During 2010, the company incurred 1.3 billion Swiss francs related primarily to severance payments and impairments of intangible assets. Of this, the Pharmaceuticals Division accounted for 1.2 billion Swiss francs and the Diagnostics Division accounted for the balance.

Roche, which competes with companies like Eli Lilly & Co. (LLY), Bristol-Myers Squibb Co. (BMY), Genzyme Corp. (GENZ) and GlaxoSmithKline plc (GSK), currently carries a Zacks #3 Rank (short-term Hold rating).

 
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