Roche Holdings (PINK:RHHBY) last week reported its Q3 sales update, which was mostly in-line with our expectations. At constant exchange rate (CER), the company’s total revenues in Swiss franc grew by 4% on continued strong performance by key pharmaceutical drugs Rituxan/Mabthera, Herceptin and Pegasys supported by the diagnostics franchise. However, the weakening of the Swiss franc against the dollar in Q3 resulted in negligible growth in the U.S. dollar. 
We are in process of revising our $47 price estimate for Roche Holdings to reflect the recent developments.
Growth At A Glance
In the pharmaceuticals segment, sales increased by 4% to CHF 26.1 billion as a result of strong performance by key oncology drugs such as Herceptin (12%) and Mabthera / Rituxan (10%) due to their preference as first-line treatment and/or continued uptake in their target diseases.  The company’s other largest selling cancer drug Avastin (6%) also outperformed overall pharma growth on the drug’s extension to ovarian and lung cancer. These drugs now contribute more than 30% to the company’s total revenues.
Hypetitis C drug Pegasys (18%) and cancer drug Xeloda (10%) also contributed to the growth. Eye drug Lucentis (-8%) continued to take a hit from increased competition.
Pharma sales in the US and emerging markets grew by mid-single digit while the European market witnessed a decline.
Roche’s diagnostics segment also met our expectations as revenue from this division grew 4% to CHF 7.5 billion. Professional diagnostics, molecular diagnostics and tissue diagnostics, all witnessed strong demand from hospital and private clinical laboratories, but declines in diabetes care and applied science businesses offset the growth to some extent.
Strong Pipeline To Drive Long Term Growth
While the company recently received a setback for its promising under-trial cardiovascular drug Dalcetrapib as it failed to boost good HDL cholesterol significantly, many other promising drugs in its pipeline, particularly relating to cancer, more than offset these concerns.
Roche has invested heavily in R&D for oncology drugs including breast cancer. (Read Roche Defends $47 Value With Strong R&D Pipeline) Its two drugs T-DM1 and Perjeta target mainly HER2-positive breast cancer. We are particularly optimistic on the prospects of T-DM1, which could turn into a blockbuster drug for Roche in time as its current blockbuster breast cancer drug Herceptin could see a decline in revenues, according to PHARE study. The drug could garner more than $1 billion each year for original indication. The recent approval of experimental breast cancer drug Perjeta (pertuzumab) for HER2 positive breast cancer will also lend support.
Further, the company’s experimental cardiovascular drug, RG7652, is moving toward advanced trials after significantly reducing levels of bad LDL cholesterol. The company’s pipeline for Alzihmer’s also looks promising.
In addition, Roche is adapting a strategy to combine pharmaceutical pipeline projects with the development of companion diagnostics to make treatments more effective. The suitability of some of the unique drugs developed by Roche for patients are ascertained by tests conducted by Roche’s diagnostics division. This helps both divisions to grow together.
Owing to these factors, the stock has appreciated close to 20% in a short span of time since we launched the coverage on the company. We will release our updated Trefis price estimate for Roche Holdings soon.Notes:
- Roche Group posts strong sales growth in the third quarter, Roche Press Release, Oct 16 2012 [↩]
- Growth figures (%) are in Swiss franc terms at constant exchange rates [↩]