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Investment Overview for Roche Holdings (PINK:RHHBY)
Below are some key drivers of Roche's value that present opportunities for upside or downside to the current Trefis price estimate:
- Revenues from Oncology Drugs:
Roche has a range of commercially successful oncology drugs. Rituxan/MabThera became the world’s best-selling cancer drug in 2011, with over $6 billion in sales, following Avastin. We expect Roche to continue to hold its market-leading position in oncologics, driven by MabThera (Rituxan), Avastin, Herceptin, Tarceva, and NeoRecormon/Mircera. Oncology drugs have enjoyed high pricing due to an absence of products that safely treat cancer, and prices are perceived to have not reached their ceiling yet. Moreover, Roche’s diverse locations of research (Genentech in the U.S., Roche in Europe and Chugai in Japan) helps in better patient outreach and partnering.
Roche has an extensive pipeline in the oncology drug segment. Several of Roche’s drugs have found additional indications over the ones they were manufactured for. There are 6 additional indications in the oncology segment for which Roche is going to file in 2012 for approval, relating to Avastin, Herceptin, Tarceva and MabThera/Rituxan. There are more than 10 other pipeline drugs expected to be ready for filing in the next 2-3 years. With the highest market share in the global oncology market, Roche has the most diversified and established portfolio of products. We expect Roche's revenues in this segment to increase from $22.5 billion in 2011 to over $32 billion by the end of the Trefis forecast period.
Other companies are also advancing in oncology therapeutics and could eat into some of Roche's oncology drug market share. Additionally, NeoRecormon is facing competition from generics and simultaneous cannibalization from Mircera. If more competitive drugs come into market, revenues may only increase to $25 billion by the end of the Trefis forecast period, which would result in a downside of about 8% to the Trefis price estimate. However, if the company is able to overcome the competition with successful drug discoveries and further indications, its revenues could increase to $36 billion by the end of the Trefis forecast period, which would lead to a 6% upside to the Trefis price estimate.
- Roche's Market Share in In vitro Diagnostics: Roche should benefit from rapid growth in in vitro diagnostics in emerging markets like Latin America, Middle East and Asia Pacific and has focused on expanding into these markets. Accordingly, it is well-positioned to gain share over the next few years. China showed a compound annual growth rate (CAGR) of 36% in the 2005-2011 time period.
The company focuses on research and product development, which should help enhance its pipeline. Roche has a formidable presence in in-vitro diagnostics. Some of its best sellers are immune assays, blood glucose monitoring system, advanced tissue staining and tests for HIV and Hepatitis B & C and Roche has plans to launch several new diagnostics products in the near future.
Roche is looking to acquire companies in genetic sequencing to strengthen its diagnostics division. This is evidenced by the company's $5.7 billion bid for Illumina, a company offering genetic analysis services earlier in 2012, from which it later backed off. Alternatively, Roche’s Pharmaceutical division works together with the diagnostics division in about 200 projects across all therapeutic areas. If Roche can leverage its existing expertise in In-vitro diagnostics, its market share may increase to 32% by the end of the Trefis forecast period, leading to a 5% upside to the Trefis price estimate. However, there lies a 2% downside if Roche fails to grow organically or inorganically and stays at its current 22% market share.
Established in 1896 and headquartered in Basel, Roche is a healthcare company with a global presence. The firm operates in two main segments: Pharmaceuticals and Diagnostics. The pharmaceutical segment produces drugs in various therapeutic segments, primarily Oncology (cancer drugs), Autoimmune, Virology, Respiratory, Metabolism, Renal Anemia and Ophthalmology.
Roche has the largest cncology drug market share in the world with a range of successful products such as Avastin, Herceptin, Mabthera, Rituxan.
The company also has a leading market position in in vitro diagnostics. It reports its in vitro diagnostics segment into four categories: Professional Diagnostics, Tissue Diagnostics, Molecular diagnostics and Diabetes care. Some of its best selling products are CoaguChek, Accu-Chek, Immuno assays, blood glucose monitoring systems, advanced tissue staining and tests for HIV and Hepatitis B & C. Roche plans to acquire companies in genetic sequencing to strengthen its diagnostics division.
Roche operates through its subsidiaries including Genentech and Ventana in the U.S. and Chugai Pharmaceuticals in Japan. Chugai's sales and profits were severely affected in 2011 due to the earthquake in Japan.
Roche manufactures some of the world's best-selling drugs, including Avastin, Herceptin, Mabthera/ Rituxan, Xeloda and Tarceva. Its oncology segment is the most formidable in the world with a host of pipeline drugs ready to make up for lost revenue after patent expiries. The oncology segment contributes more than 50% of the company's value according to our estimates. Its in vitro diagnostics segment, which accounts for over 15% of our price estimate, has displayed rapid growth over the past few years as a result of demand from emerging markets such as India, China, Latin America and Middle East.
Oncology to drive growth
Roche’s personalized healthcare and focus on cancer treatment has made it a leader in the oncology segment. It has a dedicated R&D and a range of pipeline drugs in addition to its highly successful products already available in the market. Most of its pipeline drugs could potentially be very commercially successful and would help the company maintain its market leadership position.
Expansion in emerging markets to drive growth
Emerging markets are likely to grow at a faster pace compared to developed markets going forward, particularly in terms of healthcare as per capita incomes increase and the overall quality of healthcare improves.
Rapidly growing emerging markets
Per capita income levels in many emerging markets are rising rapidly, which provides an immense opportunity for growth in these markets. Also, new studies and increased access to information have led to rising health consciousness in these markets. However, many of these markets have less effective patent laws which can ultimately limit Roche's growth potential there.
Growing threat of generic products
Many companies in the fast-growing pharma market in emerging economies have the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate healthy profits in the long run.
Lack of approval for Biosimilars by FDA
At present the Food & Drug Administration (FDA) does not have a process to grant approvals for Biosimilars. Though it is difficult to predict when such a process would be initiated, the potential impacts would be severe for any big pharmaceutical firm, as it would likely result in a drastic reduction in Biologic pricing.
Loss of patents
By the end of 2013 over 10 blockbuster drugs are expected to lose patent exclusivity. These branded drugs are set to lose over $100 billion in revenues in the next few years and thus companies such as Roche will need to develop new drugs to offset these losses.
Global healthcare reforms
Governments around the world have been undertaking significant healthcare reform programs. Some of these programs could effectively cap drug pricing with rebates and other mechanisms.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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