BIG pharmaceutical shares proved toxic to many people’s wealth last year but Roche, the Swiss company, was a potent tonic, and it expects to eclipse its peers with a double-digit growth in sales and earnings this year.

Roche not only licenses Tamiflu (currently the only treatment for a potential flu pandemic with a long shelf life), its core franchise is in blockbuster anti-cancer drugs, which generated 40 per cent of its record SwFr27.3 billion (£12 billion) drug sales last year.

Sales of Tamiflu all but quadrupled to nearly SwFr1.56 billion as governments stockpiled the drug. Roche’s drug sales rose 25 per cent — four times the global market rate — courtesy of Tamiflu. This year Roche expects governments alone to order Tamiflu worth between SwFr1 billion and SwFr1.2 billion.

But flu is normally curable while cancer is treated with long-term palliative drugs. Oncology is one of the most essential — and profitable — categories of drug discovery and Roche is a market leader. Its innovative anti-cancer drugs such as Avastin, for colorectal cancer, and Herceptin, for breast cancer, soared 42 per cent to SwFr11 billion last year.

Moreover, strong sales of CellCept, for transplantation, and Pegasys, to treat hepatitis B and C, resulted in Roche’s oncology, transplantation and virology franchises beating the competition significantly in their respective markets. Such rich gains more than offset a decline in sales of the group’s blockbuster antibiotic, Rocephin, after the expiry of its US patent in July.

For example, sales of Avastin rose 141 per cent to SwFr1.67 billion and Herceptin scored a 48 per cent rise to SwFr2.15 billion. But the best is yet to come. Roche predicts peak annual sales for Avastin at between SwFr2 billion and SwFr2.5 billion.

Roche has also had positive results from clinical trials in rheumatoid arthritis and breast, lung and pancreatic cancers. Such are Roche’s drug riches, but they are not the only things that I like about the business.

The group has an embedded powerhouse in drug research and discovery via a majority stake in the leading US biotechnology enterprise Genentech, which has generated many of Roche’s new cancer drug products.

Roche also has built-in diversification via its diagnostics business which, despite being hit last year by pricing pressures in Germany and start-up costs and heavy depreciation for a new factory, still claims global market leadership with sales growth of 4 per cent to SwFr8.24 billion, or nearly 24 per cent of total group sales of SwFr35.5 billion.

Roche’s diagnostics division should perform better this year as the next generation of Accu-Chek diabetes management products are launched worldwide. It also has another ace up its sleeve: the drug Cera, for the treatment of certain types of anaemia, a highly lucrative category currently dominated by the biotechnology combine Amgen.

Amgen is challenging Roche over alleged derivative development of Cera. But Roche can be expected to fight litigation and, if it prevails, it should gain rapid market share merely by undercutting Amgen.

Roche’s net profit last year was SwFr6.7 billion on group sales — not far from a record SwFr6.73 billion in 2004, boosted by the SwFr2.3 billion sales of the group’s consumer health business. Operating profit before exceptional items last year increased by 37 per cent to SwFr7.5 billion. Operating profit margin was 2.5 per cent higher at 25.4 per cent.

Roche boasts a credit rating of AA+ from Standard & Poor’s and its balance sheet makes fine reading, with SwFr11.2 billion in net cash at the year end even after spending SwFr5.7 billion, or 16 per cent of group sales, in research and development last year.

The group has proposed a 25 per cent increase to SwFr2.50 a share. That may be a puny yield on Roche, currently priced at nearly SwFr200, but it is the nineteenth consecutive dividend increase.

Roche’s shares are not cheap, but the quality of its business in terms of sustainability, strong science, financial resources and management justify its high rating. I am buying its shares at SFr194.20.

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