Roche steps up Illumina bid as sales hold up

Roche spotlighted the potential of diagnostics, traditionally the junior of its two divisions, as sales of testing and other medical equipment last year clearly outpaced the Swiss group’s core pharmaceuticals business.

The change of fortunes came as the group stepped up its $5.7bn hostile bid for Illumina, the US manufacturer of genetic testing equipment, by announcing it has proposed a slate of new Illumina directors to be tabled at the next shareholders’ meeting.

If accepted, along with an increase in the size of Illumina’s board, directors sympathetic to Roche would comprise a majority of the board.

The step came as the group announced that the strong Swiss franc and absence of significant Tamiflu pandemic influenza treatments had pushed down sales at both of its divisions last year. But while group sales dropped 10 per cent year on year to SFr42.5bn (€35.3bn, $46bn) and pharmaceuticals revenues dropped by 12 per cent year on year to SFr32.8bn, sales in diagnostics declined by a more modest 7 per cent to SFr9.7bn.

Measured in constant currencies, pharmaceuticals remained static while diagnostics jumped by 6 per cent – “significantly above the market”, said Roche.

Net group profits rose by 7 per cent to SFr9.5bn, helped by lower financing costs and a lower tax rate.

The healthy annual performance, against an increasingly tough international drugs market, with heavy pressure on pricing amid budget cuts, was broadly in line with market expectatoins. Roche also gave a relatively upbeat outlook for the current year.

Sales at group level and for pharmaceuticals were expected to grow by “low to mid single-digit” percentage points. By contrast, diagnostics is expected to expand “above the market”. Core earnings per share are forecast to rise by a “high single-digit” percentage point.

“We achieved our sales and earnings targets for the year and also made significant progress with our pipeline,” said Severin Schwan, chief executive.

While currency factors played a significant role in damping reported sales, the group noted profits were slightly less affected, as some 80 per cent of costs are incurred outside Switzerland. Analysts predict adverse exchange rate factors should have less impact on all Swiss groups this year, following the decision last September by the central bank to hold down the value of the franc.

Roche said margins had also been boosted by improved efficiency and cost savings, with the core group operating margin up 0.7 percentage points to 35.6 per cent, while the core operating profit margin in pharmaceuticals rose by 1 percentage point thanks to efficiency improvements.

The group said it had completed the bulk of its plan to eliminate 4,800 jobs, although net employment was down only about 2,000 because of new hiring in diagnostics and for pharmaceuticals in China. Cost savings so far had reached about SFr1.8bn.

Financial costs were also down as the group further reduced the $48bn in debt assumed to buy out minority interests in Genentech in the US. By the end of last year Roche had paid off 42 per cent of the total.

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