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Growth in the diagnostics division triggered by the pandemic offsets the slightly weaker but much more profitable pharmaceutical business. All in all, the group is still on the right track in terms of budget. An increase in dividends is promised.
A Brazilian laboratory technician evaluates PCR tests at the largest diagnostic center in Latin America.
In the past, the diagnostics business played a minor role within the Roche Group. Although it is also a billion dollar business (2019 turnover: 13 billion CHF), it was always overshadowed by the pharmaceutical division, which is more than three times larger (48.5 billion CHF). However, above all, the diagnostic division is significantly less profitable than the pharmaceutical division. Last year it contributed less than a tenth to the operating profit of the entire group.
But this year, the diagnostics business outshines the rest of the group, if only in terms of volume, and because media interest is huge today. Only thanks to its diagnostics division was Roche able to record slightly higher sales in local currency in the first nine months of this year. Due to the stronger franc, reported sales were 5% below the previous year (see table). As usual, the company did not publish any profit figures for the first nine months.
The temporary change in weight within the Basel pharmaceutical multinational is related to the opposing developments brought on by the corona pandemic. Over the past few months, Roche has been striving to bring more accurate and rapid testing procedures to market to identify coronavirus or antigens and antibodies formed after infection. Since the beginning of the year, the company has launched thirteen new test procedures in this area. Roche is now the world’s leading provider of corona tests, CEO Severin Schwan explained in presenting the quarterly figures.
After increasing sales in the first (+ 5%) as well as in the second (+ 2%) quarter that were registered in the diagnostics area, the third quarter revenues increased significantly by + 18%. The lower demand for routine testing due to the pandemic was more than offset by the increase in testing for Covid-19. Most of this was due to PCR tests performed in labs, which still provide the most accurate results of a virus infection. With them, the genetic makeup of the virus is detected. A PCR test is considered the gold standard in the industry.
Rapid tests have also been used since September, with which it can be determined in 15 minutes if someone has been infected with the coronavirus and has formed antibodies. According to Schwan, the reliability of these tests is “very good”. The hit rate of negative results is 99.68% and that of positive results is 96.52%. Significantly less accurate tests from other vendors have now disappeared from the market, Schwan said. The situation with the new generation of antigen testing has completely changed: “We are in a completely different world.”
Rapid tests are only part of the solution
However, on the crucial question of whether such rapid tests could avoid the drastic quarantine measures, the Roche boss was evasive. It was “a political decision,” he said, whether to order a national closure and close the borders, or to follow a less strict strategy. In both cases, society bears the consequences. According to Schwan, the specific procedure depends on how busy the capacities of hospitals are in individual countries and regions. “It is a conflict of objectives.” Rapid tests are apparently not a panacea for fighting the pandemic. The monthly capacity of currently 40 million tests will double by the end of the year.
Ultimately, all procedures contribute to fighting pandemics. Roche is therefore continually expanding its capabilities for both laboratory testing and outpatient procedures. Compared to the previous year, the company has quadrupled its testing capabilities based on the information. Additional funds for further expansion of PCR testing capabilities are reserved for the next several years, according to a press release. As a result, more than 1,000 new jobs would be created in the United States and Europe.
Resistance to generic competition
Pharma may be a bit less of focus at this point. However, it remains crucial to Roche’s overall development. In the third quarter, the pre-Covid-19 level was reached again, it is said. It is remarkable how well Roche can close losses with new products that compete with counterfeit products.
In the first nine months, several of the top products experienced double-digit sales declines because they lost market share to cheaper generics. Despite a 22% decline, the general purpose cancer drug Avastin remains Roche’s top product in terms of sales with a good 4 billion Swiss francs. The other two cancer drugs, Mabthera / Rituxan (–27%) and Herceptin (–31%), with which the company still generates around 1 billion Swiss francs in sales per quarter, also lost revenue as expected. Thanks to a good supply of new products, Roche can compensate for these failures. In the third quarter alone, sales of new products increased by a third.
Because the opposing trends largely neutralized each other in the reporting period, Roche is able to meet its forecast for the current year. Adjusted for currency, sales growth in the low to medium single-digit percentage range is promised for the 2020 financial year. Operating profit by security should increase by the same amount. Apparently, that’s enough for the company to promise increased dividends. Last year, CHF 9 was distributed per certificate of participation. On the stock market, Roche stocks lost 3.5% on Thursday as part of the general weakness in the share price.
