Luisa Hector PhD, CFA
Roche reported solid 1H12 figures with a sales beat and EPS in-line plus a reiteration of FY12 guidance. Key drugs and emerging markets all showed strong growth in 2Q12, and pharmaceuticals saw underlying sales growth of +6% (vs. +2% in 1Q12, +3% in 4Q11, 0% in 3Q11).
Roche benefits from a very limited patent-expiry burden in 2012-15E. Whilst some investors seem concerned about longer-term threats from bio-similars, Roche has multiple strategies in place to protect its core franchises. We believe that this defensive outlook should underpin Roche’s ability to return incremental cash to shareholders in the form of dividends (circa $31 billion of [free cash flow] remains unallocated from 2012-15E).
Karen Andersen, CFA
Roche’s top line grew 4% at constant currencies in the first half to reach Swiss franc 22.4 billion (US$ 22.9 billion), and the firm’s core EPS grew 8% to Swiss franc 6.94 (US$ 7.10), as costs of goods sold remained flat due to lower manufacturing costs and lower royalties owed for declining products like Tamiflu, CellCept and Boniva.
In the pharmaceutical division, sales grew 4%, thanks to strong growth in the U.S. (6%) and other international markets (8%), despite a 3% decline in European sales, where continued growth of key cancer blockbusters Herceptin and Rituxan was countered by generics pressure and a 2% impact of pricing pressure.
As the market leader in both biotech and diagnostics, Roche is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Key acquisitions, such as Ventana Medical and Genentech, complement this firm’s innovative offerings, and we’re confident in the sustainability of Roche’s competitive advantages.
Bottom line: Watson Pharmaceuticals remains our top pick. We continue to like WPI, because it has a superior growth profile among major generics companies, driven by a generics business with a favorable product mix characterized by several non-commodity products that bring better margins and durability than standard generics.
The pending Actavis acquisition is compelling strategically and financially, as it transforms WPI into a global generics leader with new strength in attractive markets, bolsters long-term growth and creates substantial value.