Roche Earnings Preview: Cancer Drug Growth Will Be Offset By Legacy Declines And Adverse Currency Movement
Roche Holdings (NASDAQ:RHHBY) will report its Q1 2015 earnings on April 22nd. We expect overall revenue growth to remain low. The decline in legacy drug sales and adverse currency impact will offset the growth in the company’s HER2 franchise. While cancer portfolio will generally remain strong, incremental growth will be primarily driven by Perjeta and Kadcyla. The company’s pharmaceutical sales grew by 4% in 2014 on constant exchange rate (CER) basis but currency movement resulted in overall net sales remaining relatively flat. Something similar could happen this quarter as well.
Our current price estimate for Roche stands at $3826, implying a premium of more than 5% to the market.
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Cancer Business Will Still Be Strong, There Will Be Some Negative Impact From Pegasys And Xeloda
Roche’s cancer drug sales account for more than 60% of its pharmaceutical revenues. Although there is looming threat from biosimilars, the company won’t feel any notable impact for the next couple of years. Besides the current stalwarts such as Avastin, Herceptin and Rituxan, growing acceptance of Perjeta and Kadcyla has brought incremental growth to the company’s topline. Perjeta saw its sales jump by 189% in 2014 and was the biggest contributor to Roche’s incremental pharmaceutical revenues that year. Herceptin continues to benefit from uptake in emerging markets and the increased duration of treatment for patients taking the drug in combination with Perjeta. Avastin will find some support from adoption for ovarian cancer treatment in Europe and growing use for treatment of colorectal cancer. However, there will be continued impact of loss of exclusivity of Xeloda as well as Pegasys. Going forward, the impact of generic competition for Valcyte will be visible as the drug lost its patent exclusivity at the end of March. Overall, it appears that the virology division will face some pressure in future but we believe cancer division’s growth will more than compensate for that.
Flu Season Has Been Bad For The Old And The Children
Tamiflu performed well last year with sales jumping 54%. The Centers for Disease Control and Prevention (CDC) states that during the current flu season, the hospitalization rate people who are 65 or older has been the highest since 2005. Children with age less than 4 years also saw record hospitalization. We expect the continued strength in the flu season to boost Tamiflu’s sales in the first quarter of 2015. Tamiflu is a relatively small drug for Roche but at times when the flu seasons is severe, the sales can improve dramatically. Earlier this year, the CDC suggested prescribing Tamiflu and other similar drugs at the first sign of the symptoms to counter the Flu. [1]
Adverse Currency Impact
More than 42% of Roche’s sales come from the U.S. The significance of the U.S. market is growing for Roche which means that the currency risk exposure is also increasing. Considering the total revenue base and the fact that the U.S. accounts for 42% of the revenues, 1% appreciation against dollar will result in sales declining by roughly 200 million Swiss Francs. Looking at the exchange rate chart, it appears that the Swiss Franc dropped against the U.S. dollar significantly in the beginning of the year 2015 due to un-pegging from the Euro. It has inched up since then. We expect overall impact on Roche’s sales (in Swiss Francs) to be negative as despite this drop, the average value of Swiss Franc during the first quarter of 2014 was relatively lower than that in Q1 2015.
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- Roche and GSK set for sales growth in this year’s fast-spreading flu epidemic, FiercePharma, Jan 7 2015 [↩]