Biotech/Health Care: Growth Drivers

At the operating profit (pre-exceptionals) level, Roche's (RHHBF, RHHBY) results were 5 percent better than we expected (+11 percent CER [coupon equivalent rate]). The benefits of productivity initiatives (including Genentech restructuring) are clearly apparent, with the main cost lines (Marketing & Distribution, R&D and General & Administration) better across the board.

The outlook for the year has been reconfirmed: 2010 sales (ex-Tamiflu) for Pharma and Group to increase in mid-single digit range (CER) with double-digit growth in core EPS (CER).

In conclusion, these are strong results (Core EPS: +11 percent CER) that overall are in line with our expectations, although better at the operating level. They leave the company well positioned to deliver this year's target of double-digit underlying EPS growth.

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Alexandra Hauber
J.P. Morgan Cazenove
[email protected]
+44 7742-6655

Roche reported solid first-half results circa 5 percent ahead on the operating line with a small underlying increase of the fiscal year guidance.

Guidance was left unchanged but increased on an underlying basis: Core EPS is expected to grow at double digits despite a negative 2 percent impact from a (Swiss Francs) SFr 144 million (~ $151 million) charge in first half 2010 for the early redemption of the March 2012 $2.5 billion bond to be repaid in September 2010.

Sales guidance was left unchanged despite a reduction of Tamiflu sales by SFr 200m ($210 million). Early repayment of the March 2012 bond should have a positive impact on core EPS in 2011 of 1%.

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Karen Alexander, CFA
Morningstar
312-696-6000

Roche's second quarter reflected increased pressure from global measures to reduce drug spending, and we have lowered our 2010 sales growth figures for several of Roche's top products, particularly in Europe. However, we still think that the firm is capable of achieving its forecasted mid-single-digit top-line growth and double-digit bottom-line growth, and we're maintaining our fair value estimate.