Roche has reported an 8% rise in 2009 sales to CHF49.1 billion ($46.6 billion), driven by sales of its influenza treatment Tamiflu (oseltamivir), its cancer portfolio and the age-related macular degeneration drug Lucentis (ranibizumab). However, the costs associated with its integration of Genentech dragged net income down by 22% to CHF8.5 billion.

Although the company noted that its transaction to acquire Genentech outright has already begun contributing to income, news of Roche's results led to a 1.5% decline in the company's share price to CHF175.50 on the Swiss Stock Exchange on February 3rd following their publication. Excluding the exceptional items relating to the Genentech transaction and integration, income attributable to Roche's shareholders was up by 9% to CHF9.8 billion. The company reported core earnings per share of CHF12.19, up by 10% (+20% excluding exchange effects).

Roche was a major beneficiary of the H1N1 influenza pandemic, with Tamiflu contributing CHF3.2 billion in annual sales, up from CHF609 million in 2008. With sales from pandemic stockpiling amounting to CHF1.9 billion, the company recognises that this growth is unsustainable and predicts a decline in sales back to CHF1.2 billion in 2010.

Pharmaceutical sales grew by 8% (or by 11% when currency effects are stripped out) to CHF39.0 billion, while diagnostics revenues grew by 4% (+9% in local currencies). Pharmaceutical R&D spending grew by 13% to CHF8.9 billion in 2009. Group R&D costs were CHF9.9 billion (+12%).

Roche's Full-year 2009 Top Product Sales (CHF mill)

The company reported particularly strong pharma sales growth in Japan, where its Chugai business was bolstered by Tamiflu, cancer medicines and the biologic treatment for rheumatoid arthritis, Actemra (tocilizumab), which grew by 146% to CHF98 million. Overall Japanese pharma sales were up by 43% to CHF4.8 billion, although excluding positive currency effects growth was 29%. Roche pharma grew by 6% in the US to CHF14.8 billion, 5% in western Europe to CHF10.8 billion and 4% in the rest of the world, to CHF8.6 billion.

Revenues from the anaemia product NeoRecormon (epoetin beta) fell, mainly because of price pressures as new biosimilars entered the market. CellCept (mycophenolate mofetil), for the prevention of solid organ transplant rejection, suffered from the expiry of its US patent in May.

Roche's oncology portfolio grew by 13% (+8% in local currencies) to exceed CHF20 billion in 2009. While growth is slowing for Herceptin (trastuzumab) in western markets, the company believes there is still ample room for further expansion of sales of its key products Avastin (bevacizumab), MabThera/Rituxan (rituximab) and Herceptin, partly in emerging markets, and partly through new indications and increased penetration in certain indications in the west.

Pascal Soriot, COO of Roche Pharmaceuticals, said US sales of Avastin for use in lung cancer had plateaued in the fourth quarter because of a concerted drive by the sales team to focus on increasing the market share in breast cancer. However, he said that going forward the Xeloda (capecitabine) team would help promote its use in colorectal cancer, and the Herceptin team in breast cancer. He added that European markets also provided opportunities for further sales of Avastin: for example, in the US penetration rates in colorectal cancer are around 70% in the US compared with only 40% in Europe, while in breast cancer it has around 55% penetration in the US compared with about 25-30% in Europe, and in lung cancer the US rate of 40-50% contrasts with around 10-15% in Europe. "So there's lots of potential in Europe, and even more in emerging markets," he said.

emerging markets strategy

Speaking about emerging markets, Group CEO Severin Schwan outlined a strategy that differs from many of Roche's big pharma peers. While companies like Pfizer and Sanofi-Aventis are diversifying into generics to access the strong growth in healthcare spending in countries like India and China, Roche "is not following the temptation to go down to low-value mass production", he said. Instead, the company's top-selling products in emerging markets are the same products that it relies on in western markets. "Emerging markets are already very important to us already, and we get over-proportional growth versus developed countries," he noted.

"We have been able to keep the same price levels, and maintain high growth rates with relatively high margins," he declared, noting that both individuals and health systems finance Roche's drugs. In China, for example, the company targeted the top-tier hospitals in the more advanced eastern regions, and is following the economic development of the country westwards to expand its reach.

Genentech effects

After acquiring Genentech outright in March, Roche began restructuring its US pharma operations. Total restructuring and integration costs amounted to CHF2.4 billion, with about CHF1.8 billion of that made up of non-cash items related mainly to impairments of manufacturing assets. The principal actions were the termination of a construction project at a manufacturing site in California, the closure of manufacturing operations in Nutley, New Jersey, and of an R&D site in Palo Alto, California, and consolidating US administrative functions in San Francisco.

The company also reviewed its distribution policies in light of the Genentech distribution, leading it to harmonise downwards wholesaler stocking levels in the US (where average inventory levels for Roche products were cut by 8-10 days and for Genentech products by two days). This exercise also led to the group reassessing its supply chain management around the world, and as a consequence reducing to less than 30 days' inventory stocking levels in several other markets which traditionally have held up to 50 days' or more worth of stock, including Turkey, China, the Middle East and Latin America.

These structural changes contributed to slower pharmaceutical sales growth in the fourth quarter (7.9% in local currencies compared with 10.9% for the full year), but Roche said the effect of the inventory interventions, which knocked 4.4 percentage points off pharma sales growth in the quarter, would be confined to that quarter.

Having raised CHF48.2 billion through bond and note offerings to help finance the CHF52.7 billion Genentech transaction, Roche saw its interest expenses rise substantially, with financing costs exceeding financial income by CHF1.7 billion. The company reported a net debt position of CHF23.9 billion, compared with net cash of CHF16.7 billion at the end of 2008.

However, CFO Erich Hunziker said that the Tamiflu revenues had boosted the company's strategic flexibility, and that demand continued to be high for Roche debt so it could "always go back and offer new bonds" if an acquisition or licensing opportunity arose. "We have factored in for an opportunity should it come up," he declared. He said the company had been prudent in the maturity profiling of its bonds, and was opportunistically buying back bonds on the market.

The company is also reorganising global functions and hopes to achieve pre-tax annual synergies of about CHF1 billion by 2011. In 2009 the company met its synergy target of CHF300 million, and it forecasts CHF800 million in 2010.

outlook

For 2010, Roche expects group and pharmaceutical sales growth in the mid-single-digit percentage range, although this excludes Tamiflu, which contributed seven of the 11 percentage points of local currency pharma growth in 2009.

It foresees a slight decline in R&D expenses after costs peaked in 2009 because of the ramp-up in certain oncology and metabolism trials of Avastin. The cuts following a development portfolio review in the fourth quarter will also contribute to lower costs in 2010.

It plans to reduce its debt progressively and to return to a net cash position by 2015. It has set a target of double-digit core earnings per share growth in 2010, excluding currency effects.