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Roche Holdings AG (PINK:RHHBY) reported its third quarter sales figures on October 17, disclosing that revenues for the first nine months of 2013 were 34.9 billion Swiss francs, an increase of 6% year-on-year (y-o-y) at constant exchange rates. For the third quarter, sales grew by around 8%.  As expected, this growth comes on the back of a solid performance from Roche’s pharmaceutical division, which accounts for nearly 80% of the company’s revenue. During the first three quarters of this year, sales in this division rose 7% to 27.2 billion Swiss francs due to strong demand for Roche’s cancer drugs.
Meanwhile, the Diagnostics division, which accounts for the remaining 20% of Roche’s revenue, grew at 4% year-on-year. Within this division, some portfolios such as Professional Diagnostics (+7%) and Tissue Diagnostics (+6%) performed well; however, Diabetes products (-2%) remained under pricing pressure and continued to weigh on its performance.
The company confirmed its full year outlook and said that sales for 2013 are likely to grow at the same rate as last year, about 4%. Compared to the sales growth seen so far this year (about 6%), the outlook seems to be conservative at first glance. However, management says that its Q4 sales last year were unusually high due to a flu outbreak in the U.S. Since the outbreak of flu is a wildcard, they do not count on it to boost sales at the end of this year, and have therefore kept their guidance modest. 
Our price estimate for Roche’s stock is currently around $57, almost 15% below the current market price. We are in the process of updating our model to reflect these sales figures.
Top Cancer Drugs Continue To Drive Growth
Roche owns three of the top-selling cancer drugs in the world – Rituxan (for types of blood cancer), Avastin (for types of lung, kidney and ovarian cancer) and Herceptin (for types of breast cancer). Each of these drugs generates revenues in excess of $5 billion annually, and has been growing at a healthy rate. For the first nine months of this year, the sales of Avastin increased by 13% y-o-y, while the sales of Herceptin and Rituxan increased by 6% each.
We expect this trend to continue at least until the end of 2013. After that, Rituxan will lose patent protection in Europe and its sales could come under pressure if it faces competition from generic manufacturers. The same could happen with Herceptin in the second half of 2014 because its European patent will also expire in mid-2014.  However, we believe that this should not be a cause for alarm among investors in the near term because no generics for these drugs have yet been approved in Europe. Since the approval process is difficult and time-consuming, one can assume that Rituxan and Herceptin will continue to lead in their respective segments in Europe for some time even after their patents expire.
Even if generic competition were to emerge immediately after the expiry of these patents, our analysis suggests that less than 10% of Roche’s total revenues will be at risk. The monopoly of these drugs will still continue in the U.S., their largest market, because the U.S. patents for Rituxan and Herceptin are valid until 2016 and 2019, respectively.  You can read more about this analysis here.
Roche’s Drug Portfolio Is Well Balanced
Another reason why we are optimistic about the future of Roche’s pharmaceutical division is the fact that its revenue sources are well diversified. Other than Avastin, Rituxan and Herceptin, Roche has at least seven other drugs that generate sales in excess of 500 Swiss Francs each year. Some of these drugs are growing rapidly enough to compensate the declining sales from other drugs. Here is a look at some of the top gainers and losers:
Lucentis (+13%): Lucentis is a billion-dollar drug for treating an age related visual problem, called wet age-related macular degeneration (wAMD). Its sales were declining last year. However, it received FDA approval for treating another eye disease called diabetic macular edema (DMA) in August2012, and had has made an impressive comeback this year, with a 13% year-on-year growth during the first three quarters of 2013.
Actemra/RoActemra (+33%): Actemra/RoActemra is a drug for treating rheumatoid arthritis (RA). Last year, it was proven to be a more effective cure for RA than adalimumab monotherapy, an alternative treatment.  Since then, sales have been soaring – for the first nine months of 2013 sales of Actemra/RoActemra increased 33% year-on-year.
Pegasys (-19%): Pegasys is a drug for the treatment of hepatitis B and C viruses. Although its sales grew by 12% last year, demand has declined in 2013 due to the expected launch of next generation therapies at the end of 2013 and the beginning of 2014.
Xeloda (3%): Xeloda is a chemotherapy treatment for colorectal, stomach and breast cancer. Although its sales have not changed drastically in 2013 so far, it is worth mentioning as it is set to lose exclusivity in both Europe and the U.S. in the next few months. The FDA has already approved a generic for the drug, which makes us believe that its sales could come under pressure in the near future. 
New Drug Pipeline Is Also Promising
Roche also owns a few new cancer medications that are growing rapidly. Sales of Zelboraf (for metastatic melanoma) increased 65% y-o-y during the first nine months of this year to reach 260 million Swiss Francs. Perjeta and Kadcyla, two breast cancer drugs that were launched in some markets within the last year, have also seen strong uptake with sales of 186 million and 156 million Swiss Francs over the first three quarters of 2013 respectively.
Roche also has a number of new investigational cancer medications that could become new blockbuster drugs in their respective categories. As of September end, it had 65 new molecular entities in its pipeline, and was developing companion diagnostics for nearly two-thirds of its late-stage compounds. You can read about some of Roche’s most promising new drugs here: All Eyes On Roche’s Oncology Pipeline At European Cancer Congress
The success of Roche’s new drugs is important because they will be the key to its revenue growth after the patents of its top-selling drugs start expiring. You can read our analysis about Roche’s upcoming patent expiries here: Roche Can Weather Europe’s New Approvals For BiosimilarsNotes:
- Press Release, Roche, October 17, 2013 [↩]
- Q3 Earnings Call Transcript, SeekingAlpha, October 17, 2013 [↩]
- US$54 billion worth of biosimilar patents expiring before 2020, GABI, September 30, 2011 [↩] [↩]
- Roche’s RoACTEMRA monotherapy showed superior improvement in rheumatoid arthritis signs and symptoms versus adalimumab monotherapy [↩]
- FDA Approves First Generic of Roche’s Cancer Drug Xeloda, FDA News, September 16, 2013 [↩]