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Investment Overview for Roche Holdings (OTC:RHHBY)
Below are some key drivers of Roche's value that present opportunities for upside or downside to the current Trefis price estimate:
Biosimilar price competition intensifies
- Revenues from Oncology Drugs:
The threat of biosimilars is very real. The biosimilar version of J&J's Remicade has been approved in Europe and, in early March, Novartis' Zarxio became the first biosimilar to be approved in the U.S. by the FDA. Needless to say, a big chunk of Roche's revenues (more than 60%) comes from biologics. This puts the company in a vulnerable position should the competition from biosimilars intensify in the next few years. Currently, our forecast assumes that biosimilars will be priced roughly 30% below the regular prices for patented biologics, and that Roche will be able to defend its primary franchises to some extent (Rituxan and Herceptin) by targeting adjuvant therapies. But it is plausible that we are underestimating the future impact from biosimilars and overplaying Roche's competitive position, which is very strong right now. The evolving competition may bring the prices further down. In fact, some competitors are offering discounts of as much as 70%. Also, there are around 11 biosimilars under development to compete with Abbvie's Humira, which loses its patent exclusivity in the U.S. in 2016. If a few of these come to the market in the next couple of years, competition can drive down biosimilar prices more than we expect. If the discounts extend to as much as 60%-70%, Roche can potentially lose $5 billion in annual oncology sales by 2021, which would imply a downside of about 10%.
Phase 3 pipeline fires
- Oncology Drugs Revenues, Neuroscience, Metabolism and Other Drugs Revenues and Autoimmune Drugs Revenues: Roche has a strong $120 billion oncology business (our valuation estimate) primarily built around biologic cancer drugs such as Rituxan/MabThera and Herceptin. However, its pipeline is quite strong and the company continues to invest in the growing area of immuno-oncolgy. Looking at the programs under phase 3 trials, we find that the company is giving a strong push to Perjeta, Kadcyla and Avastin for early, second line and adjuvant therapies in breast cancer, ovarian cancer and lung cancer. We currently expect the drugs in the pipeline to drive incremental annual revenues of $6 billion by the end of our forecast period, but our estimate may turn out to be conservative. If a few of the current phase 3 trials are successful and Roche expands much in adjuvant therapies, revenue from the pipeline drugs can easily cross $12 billion, resulting in a 10% upside to our price estimate. This would imply more than $6 billion in additional annual revenue by the end of our forecast period with more than 70% of it coming from oncology drugs.
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 oncology 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 around 60% of the company's value according to our estimates. Its in vitro diagnostics segment, which accounts for roughly 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
The fast growing pharma market in emerging economies or referred to as the 'Pharmerging' 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 profits in the long run. Roche's drugs could face potential threat from biosimilars in future, which are generic versions of biologics.
Loss of patents
Several blockbuster drugs lost their patent by the end of 2013. These branded drugs are set to lose over $100 billion in revenues in the next few years and thus pharmaceutical firms 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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