April 22, 2009 / 3:19 PM / 10 years ago

WRAPUP 1-Clinical failure, generics hit Roche and Glaxo

* Roche’s Avastin fails to stop colon cancer after surgery

* Avastin a key asset behind Roche buying Genentech

* Glaxo Q1 earnings fall short as generics hit margins

* Pharma companies struggling to maintain growth

By Ben Hirschler, European Pharmaceuticals Correspondent

LONDON, April 22 (Reuters) - Two of Europe’s top drugmakers were hit by clinical failure and margin erosion due to generics on Wednesday, highlighting the hazards facing investors in the apparently defensive sector.

Roche Holding AG ROG.VX stock tumbled 10 percent after cancer drug Avastin — the prize asset behind the Swiss group’s acquisition of Genentech — failed to prevent the recurrence of colon cancer after surgery in a major study. [ID:nLM274295]

Britain’s GlaxoSmithKline Plc (GSK.L) lost 4 percent as its quarterly earnings fell short of expectations, with loss of patent protection on former blockbusters for epilepsy, depression, migraine and Parkinson’s savaging profit margins. [ID:nLL98519]

Healthcare is traditionally one of the last areas where consumers cut spending in a downturn, but the sector is not immune to the economy.

Rather, it is a late-cycle responder, Morgan Stanley analyst Andrew Baum said.

“Rising U.S. unemployment is translating into a reduction in healthcare utilisation as patients struggle to afford monthly premiums and drug co-pays,” he said in a research note.

In the meantime, companies are grappling with the perennial challenge of carving out fresh markets for their medicines to offset the business lost to cheap generics and rival interlopers.

Roche was sitting on effectively the year’s biggest clinical trial bet in Avastin — and came out on the losing side.

“It was always the toss of a coin,” Roche’s head of pharmaceuticals, Bill Burns, told reporters.

He argued the failure did not mean Roche had overpaid for Genentech but Deutsche Bank analysts said the news was a “big disappointment”, after Roche paid $46.8 billion last month for the 44 percent of the U.S. biotech group it did not already own.

Roche has been trading at more than a 35 percent price/earnings premium to the European sector, reflecting its strength in cancer. This could now fall to 20 percent, valuing the stock at about 130 Swiss francs, Deutsche said.

CENTRE OF STORM

Roche, with a heavily reliance on complex biotech medicines, is less exposed to generic competition than many of its rivals.

Glaxo, however, is right in the centre of the storm as the pharmaceuticals industry faces the biggest “cliff” of patent expiries in its history.

Chief Executive Andrew Witty said it was always clear Glaxo would have a tough first half in 2009 and the situation would improve as the worst the of impact from generic competition washes through.

“This first quarter performance marks what we always expected to be a year of two halves,” he told reporters.

Glaxo’s pre-tax profit in the first quarter fell 1.5 percent to 1.93 billion pounds ($2.81 billion), equivalent to earnings per share before major restructuring of 26.3 pence. Industry analysts had forecast earnings of 28.4p.

Sales, which were helped by the weak pound, were in line with forecasts at 6.77 billion pounds, as vaccines sales grew well, non-prescription medicines proved resilient and Glaxo’s top-selling lung drug Advair held its own against competitors.

For the sector as a whole, the first quarter of 2009 has turned out not to be quite as healthy as many investors had hoped.

U.S.-based Merck & Co Inc (MRK.N) fell more than 6 percent on Tuesday on disappointing earnings, while Genzyme Corp GENZ.O was down 4 percent on Wednesday as its profits also missed forecasts. [ID:nN21449400] [ID:nN21128434] (Editing by Andrew Macdonald)

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