Roche Holdings (PINK:RHHBY) reported its full year earnings on January 30, and as expected, the drug maker bucked the trend of declining revenues shown by big pharma companies (Read Pfizer’s Emerging Markets Growth And Newer Drugs Mitigate Lipitor’s Slide and Merck Earnings Preview: What We Are Watching). Suffering no major patent expiries, Roche reported a 4% increase (at constant exchange rate or CER) in total revenues in Swiss franc.  Continued strong performance from key oncology drugs including Rituxan/Mabthera and Herceptin, supported by a jump in Virology drugs’ sales drove the growth. The diagnostics franchise also registered moderate growth.
However, a relatively weak Swiss franc against the U.S. dollar, resulted in negligible growth in sales in terms of the dollar.  Also company operating profit jumped following stringent cost effective measures taken by the management.
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Strong Sales Of Oncology, Virology Drugs
(Growth percentage are in Swiss franc terms at constant exchange rates)
In the pharmaceuticals segment, sales rose by 5%, as a result of strong performance by key oncology drugs such as Herceptin and Mabthera/Rituxan, due to their preference as first-line treatment in the U.S. and a strong uptake in emerging markets.  Herceptin sales were boosted by Roche’s strategy to combine drugs with companion diagnostics.  The company’s other largest selling cancer drug, Avastin, also outperformed Roche’s overall pharma growth with its extension to treating ovarian and lung cancer. Sales from Western Europe were particularly encouraging as Avastin gained significant market share for ovarian cancer in the region and this trend is expected to continue.  These three oncology drugs now contribute nearly 40% to the company’s total revenues.
A spectacular 48% jump in worldwide sales of Tamiflu  was largely due to a flu pandemic in the U.S. during Q4, but this kind of growth will not be sustainable going forward. The other constituent of virology drugs segment, Hepatitis C vaccine Pegasys, also exhibited double-digit growth, following a strong demand in the U.S. due to its use in triple-combination therapy. However, patients seems to be going off the therapy, and this should result in decline of sales going forward. 
Pharma sales in the U.S. grew by mid-single digit while the European market saw a decline due to ongoing pricing pressure. Sales in Japan grew because of higher volumes and despite the price cuts. Double-digit growth in emerging markets was driven by China and Brazil. 
Moderate Growth From Diagnostics, Overall Operating Margins Jump
Roche’s diagnostics segment also met our expectations, as revenue from this division grew 4%.  Professional diagnostics, molecular diagnostics and tissue diagnostics, all witnessed strong demand from hospital and private clinical laboratories. But decline in diabetes care and applied science businesses offset the growth to some extent. Diabetes care business is experiencing pricing pressure, coupled with reimbursement cuts. 
The company had been aggressively cutting costs during 2012, to mitigate the impact of pricing pressure it has been facing in several markets, and the results were visible in a significant decline in total marketing and administrative costs, and R&D expenditures as percentage of revenues. 
Strong Pipeline Presents Opportunities
Roche has invested heavily in R&D for oncology drugs, including breast cancer treatments (Read Roche Defends $47 Value With Strong R&D Pipeline), and the results should begin to reflect in 2013. While Roche has already launched Perjeta in several markets, it has filed approval applications for Its T-DM1. Both of these drugs target mainly HER2-positive breast cancer. We are particularly optimistic on the prospects of T-DM1, a drug that could garner more than $1 billion each year for original indication.
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 Alzihmers also looks promising.
In addition, Roche’s strategy to combine pharmaceutical drugs with the development of companion diagnostics should pay off. The suitability of some of the unique drugs developed by Roche, are ascertained by tests conducted by Roche’s diagnostics division. This helps both divisions to grow together.
Owing to these factors, the stock has already appreciated close to 35% in a short span of time since we launched the coverage on the company. We are revising our $46 price estimate for Roche Holdings to reflect the earnings and recent developments.Notes: