Roche reported 2012 results that were roughly in line with our expectations, as the firm’s core EPS of CHF 13.62 per share came in only slightly below our CHF 13.76 estimate.
Roche expects 2013 sales growth at constant currencies to rise a similar 4% level as they did in 2012, which could prove conservative given the accelerating sales growth in 2012 (6% growth in the fourth quarter at constant currencies). Our 2013 core EPS estimate of CHF 14.65 implies roughly 8% earnings growth for the year, which is in keeping with the firm’s relatively vague guidance (to exceed top-line growth). However, we do expect to slightly raise our fair value estimate as we roll our assumptions forward by one year.
Revenue grew to CHF 45.5 billion in 2012, representing 4% growth at constant currencies, with pharmaceuticals growing 5% to CHF 35.2 billion and diagnostics growing 4% to CHF 10.3 billion. In pharmaceuticals, Western Europe remained a drag on growth, with a 2% decline in sales; however, management noted that this was significantly better than the 5%-6% overall pharma market declines in that region). Outweighing this pressure, the U.S. grew strongly at 7% and Latin America and Asia grew at a doubledigit pace (pharmaceutical sales in China, for example, grew 27% in 2012). Roche’s cancer drugs Rituxan, Herceptin, and Avastin all grew well in 2012 on a global basis, and Avastin benefited from a full year approved in the new ovarian cancer indication in Europe (the application has yet to be filed in the United States). In addition, newer cancer drugs such as Zelboraf, Erivedge, and Perjeta all contributed to pharmaceutical growth. In diagnostics, Roche captured market share in the relatively weak U.S. and European markets, and exhibited strong 17% growth in emerging markets. Professional diagnostics, Roche’s largest diagnostics segment, grew at 8% in 2012, double the market rate.
Looking into 2013, while Erivedge is only a niche product and Zelboraf has already fully penetrated the U.S. market and is poised to see significant competition from Glaxo by 2014, we think Perjeta likely adds another eventual blockbuster drug to Roche’s breast cancer franchise. We expect T-DM1′s upcoming approval (expected in February in the U.S. and by the end of the year in Europe) will have the most dramatic impact on 2013 sales among newer products.
Perjeta’s launch in Europe will also help offset the pressure we expect to see from continued declines in U.S. sales of Lucentis and the potential start of sales declines for Pegasys, as hepatitis C patients delay treatment while awaiting all-oral treatment regimens. For Avastin, we expect mid-single-digit sales growth in 2013, as new indications like ovarian cancer and colorectal cancer maintenance therapy should allow the firm to defend against new competition from the likes of Sanofi and Regeneron’s Zaltrap and Bayer and Onyx’s Stivarga.
Core EPS grew 10% in 2012 to reach CHF 13.62, in line with the 10% operating cash flow growth to CHF 15.4 billion. Core operating margin improved 210 basis points to 37.7%, as a 310-basis-point improvement in pharmaceutical gross margins outweighed the impact of price pressure on Roche’s diabetes products in its diagnostics arm. Roche’s board of directors has also proposed a dividend of CHF 7.35 per share, an 8% increase over last year’s dividend but below historical growth rates (dividends have increased an average of 18% annually over the past eight years).
This relatively conservative dividend increase, combined with lower debt levels (CHF 10.6 billion in net debt versus CHF 15.6 billion at the end of 2011) leaves room for the firm to take on the larger debt repayments that are coming in 2013. With Illumina apparently off the table, we think Roche is focusing on deleveraging and less likely to pursue a large deal, partly because of the CFO’s emphasis during the conference call on Roche’s financial discipline. In terms of newsflow, 2013 is a weak year for late-stage catalysts, particularly as bitopertin data in schizophrenia is now delayed until 2014 due to slow trial enrollment. We do expect to see data for GA101 in CLL, which should give us some insight into the product’s ability to extend the firm’s hematology franchise beyond Rituxan biosimilar competition.
However, we won’t see data in the larger lymphoma indications until at least 2015, and Roche management now forecasts that Rituxan biosimilars will be delayed until 2016, putting less pressure on the outcome of this particular trial, in our opinion. There will be quite a bit of Phase II data in 2013, allowing us to begin to gain more clarity around the firm’s pipeline potential in the long run. In 2014, we will see data from the MARIANNE trial, which will give us a sense of the benefit of using both of Roche’s newest breast cancer therapies–T-DM1 and Perjeta–in combination in first-line metastatic patients.
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