IPSEY Ipsen SA (PK)

Massive restructuring charges and slowing sales in the U.S. and Europe hit Roche Holding AG's (ROG.VX) 2010 earnings, but the world's largest maker of cancer drugs Wednesday said it was confident to grow sales and profits this year as its pipeline remained strong despite recent setbacks.

The Basel-based company said full-year net profit rose 11% to 8.67 billion Swiss francs, or $9.03 billion, from CHF7.78 billion in the year-earlier period, which was weighed down by CHF2.4 billion in expenses for the takeover of Genentech. The 2010 figure undercut analysts views of CHF9.66 billion as Roche took a CHF1.3 billion restructuring charge for its ongoing revamp, including nearly 5,000 job cuts and unit divestments.

Sales also missed already-subdued market expectations. Revenue dropped 3% to CHF47.47 billion from CHF49.05 billion, hurt by the absence of revenue from flu drug Tamiflu, which in the year-earlier period benefited from brisk demand linked to the flu pandemic, and as the strong Swiss franc, its reporting currency, shaved off part of the company's sales. In local currencies, sales remained flat.

While Roche's key cancer drugs Avastin, Mabthera and Herceptin were able to grow between 7% to 9% worldwide, overall pharma sales were held in check by the U.S. healthcare reform and austerity measures in European countries such as Greece and Spain. Thanks to a strong performance in emerging markets, which make up around 25% of the company's drug sales, Roche was able to cushion the hit from price cuts in industrialized countries.

"The group results are solid despite an increasingly challenging environment", Roche chief executive Severin Schwan said, noting that the company's core pharmaceuticals division outperformed the overall pharma market. Schwan said that the company's late-stage experimental drugs "form a strong base for the company's future success," giving Roche confidence to achieve solid sales and profit growth in 2011.

Roche targets low single-digit sales growth and high single-digit core earnings per share growth in 2011. But analysts said the targets were somewhat disappointing, reflecting the company's cautious stance. Some analysts had expected Roche a bolder outlook, as cost savings from ongoing restructuring should have a marked effect on earnings.

Roche was under pressure during much of 2010 as pipeline setbacks, increased regulatory scrutiny and global austerity programs hurt its business, prompting the Swiss drug maker to launch a multibillion dollar restructuring that should be completed during the next two years.

Despite these setbacks--which have pushed Roche's stock more than 20% lower during 2010--the company still owns a strong pipeline and expects to submit as many as 10 new medicines by the end of 2013. In January, the company said that late stage trials showed its experimental skin-cancer drug RG7204 to be effective.

Some analysts, however, were cautious about Roche's bullish stance after the company Wednesday said it has decided to stop the development of diabetes drug taspoglutide and return the rights to Ipsen (IPN.FR). Although the experimental medicine already last year ran into problems due to side effects in late-stage trials, it was once touted by Roche as a potential blockbuster drug. Analysts also said that its expensive eye drug Lucentis could suffer from future sales declines should tests show that Roche's own drug Avastin is also effective in treating certain eye diseases.

Given the increased regulatory scrutiny and growing reluctance from governments and insurers to reimburse expensive drugs, analysts believe Roche will face an uphill struggle over the next two years, which could intensify once some of its key drugs such as Mabthera lose patent protection. Also, concerns about the use of Roche's Avastin to treat breast cancer patients in the U.S. are set to weigh on the company, which will have to speed up its revamp to win back shareholder trust, analysts say.

Roche, meanwhile, lifted its dividend by 10% to CHF6.6 per share, mimicking other industry players such as AstraZeneca PLC (AZN) and Novartis AG (NVS), which have also raised dividends and launched share buybacks in a bid to appease and hold investors, increasingly disappointed about a sector which traditionally produced high sales and profit growth.

Shares of Roche, which closed at CHF144.5 on Tuesday, were indicated to open 2.1% lower on the Swiss bourse.

-By Goran Mijuk, Dow Jones Newswires, +41 43 443 80 47; goran.mijuk@dowjones.com

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