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Roche Launches Cost-Cutting Plan
  SEPTEMBER 3, 2010, 7:46 A.M. ET
ZURICH - Roche Holding AG said Friday it has launched a cost-cutting and efficiency plan in the wake of increased price pressures in the U.S. and Europe and a series of drug-development setbacks.
The plan's details will be announced before the end of the year and implemented in 2011 and 2012, Roche said. It will include operational process changes and possibly job reductions, the company added. "We will focus our resources toward investments that will drive innovation and ensure the company's long-term success, while at the same time protecting our profitability so as to safeguard our financial flexibility," Roche's Chief Executive Severin Schwan said, adding that the company is maintaining its full-year outlook.
Roche has come under pressure during the past few months as health-care reforms and austerity programs in Europe and the U.S. hurt the company's margins and sales. Roche also struggled with a series of drug development setbacks that raised analyst and investor concerns about the company's drug pipeline. Due to the company's takeover of Genentech Inc, Roche's inflated debt levels have also triggered concerns.
"We have launched this initiative from a position of strength," said Mr. Schwan. "By contrast with many of our competitors, we are only marginally affected by patent expiries. Furthermore, despite the recent setbacks, we have one of the strongest R&D product pipelines in the industry," he said.
Roche's key blockbuster cancer medicines Avastin, Mabthera and Herceptin—which generate the bulk of the company's annual sales of around 50 billion Swiss francs ($49.36 billion)—are protected by patents for the next few years. Roche also has more than a dozen of promising experimental drugs in its pipeline, which, if approved, could each generate sales of more than one billion francs a year.
ZURICH (Dow Jones)--Roche Holding AG (ROG.VX) is likely to come under pressure to slash costs after a string of drug development setbacks has raised doubts about the Swiss pharmaceutical giant's product pipeline and its ability to boost future sales and profit, investors and analysts said Monday.
Concerns about a necessary and imminent revamp rose over the weekend after Swiss weekly Sonntag on Sunday reported Roche is evaluating a massive cost cutting program that could lead to thousands of job cuts. Roche said it was too early to specify the size of potential job cuts that could come as part of its efficiency efforts.
Although Roche doesn't face immediate patent expiries like many of its peers, its shares have dropped more than 20% since the start of the year due to setbacks such as the discontinuation of experimental drug ocrelizumab in rheumatoid arthritis and the failure to extend the use of cancer drug Avastin in areas such as gastric cancer.
"This is a new situation for Roche," said Stephane Dutu, asset manager at Geneva-based Vernes & Associes. "Although Roche has still a comparatively strong pipeline, the recent setbacks will make it necessary for Roche to react. It will be important for the firm to strike the right balance between cost management and keeping healthy R&D operations," Dutu said.
Roche has already started to curb costs but has so far abstained from making deeper cuts. "Roche has outlined at the half year that there is room for improvement as far as productivity is concerned and that these improvements are important to secure our long-term success," said Roche spokesman Alexander Klauser. He said "it's too early to provide details on the size and structure of these improvements."
The cost cuts, however, won't trigger a change in the company's strategic outlook and its push to develop new drugs. "The ultimate goal is to dedicate resources in a more focused way to science and projects in our pipeline. We are standing by our strategy of innovation," Klauser said.
Roche has one of the industry's highest R&D budgets, having spent nearly 10 billion Swiss francs ($9.72 billion) in 2009. Its product pipeline includes blockbusters such as cancer drugs Avastin, Mabthera and Herceptin. The drugs' patent expiry is years away. Its late stage drug pipeline also includes more than half a dozen experimental medicines that, if successful, could reach annual sales of more than CHF1 billion.
But the recent failure to receive priority review from the U.S. Food and Drug Administration for experimental breast cancer drug T-DM1 and the delay of the U.S. approval filing of experimental diabetes medicine taspoglutide has put doubts over the health of its pipeline and Roche's effort to broaden its franchise.
As a consequence, Roche shares, which had traded at a premium to the sector in recent years, are lagging the market. Roche shares currently trade at a price-earnings ratio--which reflects a stock's relative value and profit growth potential--of 12.15, compared with a European industry average of 16.63, according to Reuters data. At 1421 GMT, the shares were up 0.4%, or CHF0.6, at CHF138.4.
On top of the pipeline setbacks, there are growing worries that government health care reforms and austerity programs in the U.S. and Europe risk shaving off sales and profit. The recent rejection of Roche's Avastin in bowel cancer by the U.K. regulator due to cost concerns has increased the urgency to act. "The recent product delays and drug development failures have put pressure on its share price," said Andrew Weiss, analyst at Bank Vontobel. "The question now is, whether Roche wants to cut these costs because of shareholder pressure or if the recent drug development failures and pricing pressure need to be counteracted."
"Roche needs to reduce costs significantly after the recent development disappointments," said Karl-Heinz Koch, analyst at brokerage Helvea. "Cost cuts are possible in R&D as well as in sales," he said, adding that "the cost cuts are also needed to reduce Genentech-related debt."
Roche's $47 billion takeover of Genentech in 2009 has inflated the company's debt. The company's net debt stood at CHF27.5 billion at the end of June. Although Roche has been able to pay back part of its debt pile quicker than planned, analysts see room for a faster repayment. Due to overlap with Genentech in the area of R&D and sales force, some analysts say Roche could save between CHF2 billion to CHF3 billion in costs.
"Pressure from governments to save costs will force all companies in the pharma sector to reduce their cost base," said Robert Scholl of asset manager Aargauische Pensionskasse. "Roche is no exception to this. But the cuts should only go so far as not to endanger their R&D efforts. Roche is fully aware of the importance of a strong R&D."
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