Roche First-Quarter Sales Drop on European Pricing, Franc

Roche’s First-Quarter Sales Drop
Herceptin, a medicine used to treat breast cancer. Source: Roche

Roche Holding AG, the world’s biggest maker of cancer drugs, said first-quarter sales declined 1 percent, hurt by pricing pressure in Europe and the strength of the Swiss franc.

Sales dropped to 11 billion francs ($12 billion) from 11.1 billion francs a year earlier, the Basel, Switzerland-based company said in a statement today. Analysts predicted 11.1 billion francs, the average of eight estimates compiled by Bloomberg. Roche, which doesn’t release quarterly earnings, reiterated its forecast for the year.

Roche indicated it’s willing to raise its $6.7 billion hostile takeover offer for Illumina Inc. The bid is a “more than reasonable starting point for negotiations,” Roche said in a letter to Illumina shareholders late yesterday. In a separate statement today, Roche said publicly available information doesn’t justify a higher price.

Roche will consider “all options” for Illumina and negotiations remain “the preferred way,” Chief Executive Officer Severin Schwan said on a conference call with reporters today. Roche spoke with several of Illumina’s main shareholders before raising its bid, Schwan said.

Pharmaceutical revenue dropped 1 percent to 8.6 billion francs. Sales of the Rituxan cancer medicine, Roche’s biggest-selling product, rose 7 percent at constant exchange rates to 1.61 billion francs, while the cancer drug Avastin climbed 1 percent to 1.39 billion francs. Diagnostics revenue was unchanged at 2.4 billion francs.

‘Solid’ Sales

“Overall, these are a very solid set of 1Q 2012 sales numbers,” Jeffrey Holford, an analyst with Jefferies & Co., wrote in a note to investors today. He recommends buying the stock.

The strength of the Swiss currency cut 3 percentage points off Roche’s sales growth. Drug sales in western Europe, where governments have been trying to rein in health spending, fell 4 percent on continued pricing pressure.

Roche shares rose 1.6 percent to 156.70 Swiss francs in Zurich. The stock had returned 22 percent including reinvested dividends in the past year, compared with a 20 percent return for the Bloomberg Europe Pharmaceutical Index.

Roche reiterated that it expects percentage sales growth this year in the low- to mid-single-digit range at constant exchange rates for the company and the pharmaceutical division. Drug sales should accelerate, driven by new products and expanded sales of existing products, the company said. Roche also expects diagnostic sales to outpace the market. Core earnings per share should increase by a high single-digit percentage, it said.

Refusal to Negotiate

Illumina has rejected Roche’s offer as inadequate and refused to negotiate. Roche raised the bid to $51 a share on March 29 from $44.50 a share on Jan. 25. It also proposed that Illumina shareholders oust four directors at the April 18 annual meeting, expand the board and elect six Roche nominees, giving the Swiss company a majority.

The Swiss drugmaker said last week it is willing to study “additional value” in its proposal after a proxy-advisory firm recommended the target company’s shareholders reject the offer.

“There is no reason for us, whatsoever, to increase our offer unless we get into negotiations,” Schwan said on a conference call with analysts today.

‘A Signal’

Investors in the genome-sequencing company “should have the right to choose between Roche’s $51 all-cash offer, plus any increase to that offer that negotiations between Roche and Illumina may produce, and an uncertain future amid increasing headwinds for Illumina and the broader sequencing sector,” Schwan wrote in the letter yesterday.

“That kind of says you could get $51 and then some,” Les Funtleyder, a fund manager who helps oversee $100 million at Miller Tabak & Co., including Illumina shares, said in a telephone interview. “It’s at least a signal that Roche would be willing to increase its offer.”

Spokesmen for Illumina declined to comment on Roche’s letter.

Roche said in its letter that Illumina’s future as an independent company is “far from certain,” disputing a comparison Illumina cited recently between itself and Apple Inc., the world’s most valuable company and the maker of the iPhone and iPad.

“Apple’s revolutionary products were huge and instantaneous commercial successes, appealing to a seemingly endless consumer base around the world,” Schwan said in the letter. “Illumina’s products on the other hand, although ‘revered by genomics researchers around the world,’ serve a much smaller and highly regulated market.”

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