By Goran Mijuk
ZURICH—Roche Holding /zigman2/quotes/206324342/delayed CH:ROG -0.54% AG opened the European pharmaceutical industry's reporting season on Thursday with a 9% drop in first-quarter sales, hit by volatile currency markets, cuts in drug prices and declining sales of the blockbuster cancer drug Avastin.
The results from the Swiss drug company are expected to set the tone for what is likely to be a weak start to a tough year in the sector.
Many pharmaceutical companies face hurdles such as drug-patent expirations and increased regulatory scrutiny that are making it difficult for them to maintain sales and profit growth.
Roche, which doesn't publish quarterly earnings, said it still expects to reach its full-year targets despite the sector's challenges. The company's sales fell to 11.12 billion Swiss francs ($12.41 billion) for the first three months of 2011 from 12.25 billion francs a year earlier. That decline was steeper than the 7.5% sales decline, to 11.32 billion francs, predicted by a survey of analysts.
Roche attributed the revenue decline largely to the strong franc and the steep drop in sales of flu medicine Tamiflu. Government stockpiling during the flu pandemic spurred Tamiflu sales in previous quarters.
Analysts highlighted the weak performance at Roche's key cancer-drug franchise. Roche is the world's largest producer of cancer drugs.
Sales of Roche's blockbuster cancer drug Avastin fell 6% to 1.42 billion francs, amid uncertainty over the future use of the medicine in treating breast-cancer patients. The U.S. regulator plans to revoke the use of Avastin in this indication because it is uncertain about the drug's benefits, but will give Roche a hearing opportunity in June.
Pascal Soriot , the chief operating officer of Roche's pharmaceuticals division, said the company wants to prove that Avastin is a valid treatment option for many breast-cancer patients. Some U.S. breast-cancer interest groups have called on regulators to allow the use and reimbursement of the drug.
The drop in Avastin sales was partly expected, with Roche earlier this year curbing its peak sales expectation for the medicine to about seven billion francs from a previous nine billion francs. But the company's other blockbuster medicines—such as cancer medicines MabThera and Herceptin—also failed to achieve the high growth rates of the past, as price cuts and lower reimbursement and insurance coverage hurt sales.
Analysts said European austerity measures and U.S. health-care changes combined with the strong franc to reduce Roche's top line. While the adverse currency effect shaved off about 9% of Roche's sales, drug-price cuts in the U.S., Europe and Japan triggered a sales decline of slightly more than 2%.
Chief Executive Severin Schwan said he expects the impact of price cuts to ebb during the year's second half, when the comparison base will be easier. He also expects Roche to feel only a limited impact from Japan's earthquake-triggered disaster.
Many governments had already introduced price cuts late last year. Concerning the franc, Mr. Schwan said "there is little we can do against these swings as far as sales are concerned." He added, however, that because the bulk of the company's costs are generated in markets such as the U.S. and Europe, the company was able to hedge itself on the cost front.
Analysts were pleased by the strong sales growth of eye-care drug Lucentis, which still may come under pressure in the U.S. A soon-to-be published study that compares the expensive drug with less-costly Avastin may trigger a sales drop if regulators opt to discontinue reimbursement for Lucentis.
"Whatever the outcome on Lucentis, we are confident about the company's prospects," Mr. Schwan said. He added that Lucentis makes up only about 3% of Roche's overall sales. In the first quarter, Lucentis sales rose 35% to 392 million francs.
Analysts welcomed the company's outlook. "The fact that they reiterated their sales and profit guidance is positive. This may help build trust," said David Kaegi , analyst at Bank Sarasin.
Roche said sales, excluding those of Tamiflu, are expected to rise at low single-digit-percentage rates in local currencies, while the company aims for earnings per share to increase at a high single-digit rate at constant exchange rates this year.
Other European drug companies may be forced to cut their outlooks for 2011 and beyond amid the challenging industry environment, which has prompted many companies, including Roche, to restructure. Novartis /zigman2/quotes/203243705/composite NVS -0.65% AG is to report earnings Tuesday, followed by GlaxoSmithKline /zigman2/quotes/209463850/composite GSK -0.55% PLC on April 27 and Sanofi-Aventis /zigman2/quotes/206928357/delayed FR:SAN +0.87% SA, Bayer /zigman2/quotes/210533053/delayed DE:BAYN +0.46% AG, Merck /zigman2/quotes/200605022/delayed DE:MRK +0.04% KGaA, Shire PLC and AstraZeneca /zigman2/quotes/200304487/composite AZN -0.84% PLC on April 28.