Roche Holdings (PINK:RHHBY) is a Swiss healthcare company with a global presence. The firm operates in two main segments: Pharmaceuticals and Diagnostics. It has a formidable presence in the global oncology (cancer treatment) drug market, holding the largest market share in the segment with a range of successful products such as Avastin, Herceptin, Mabthera, Rituxan. It also has a leading market position in In Vitro Diagnostics. Roche’s pharmaceutical segment operates through three sub-segments – Roche Pharma, Genentech and Chugai, while the diagnostics division operates through 5 sub-segments – Applied Science, Molecular Diagnostics, Tissue Diagnostics, Professional Diagnostics and Diabetes Care. It competes with the likes of Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Abbott Labs (NYSE:ABT).
We recently launched coverage of Roche Holdings with a price estimate of $47, about 5% ahead of the current market price.
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In 2011, Roche recorded revenues of more than $49 billion and net income of more than $9 billion. Roche is planning to strengthen its diagnostics division by acquiring companies in the genetic sequencing space. It recently made an attempt to acquire Illumina for $5.7 billion before ultimately backing off. Roche’s pharmaceutical and diagnostics divisions are very integrated, working together on about 200 projects across all therapeutic areas.
Roche’s Business Segments
Roche’s product offerings are organized into two major segments:
- Pharmaceuticals – The pharmaceutical segment produces drugs in various therapeutic segments, namely Oncology (Cancer drugs); Autoimmune; Virology; Respiratory; Metabolism and Bone; Renal Anemia; Ophthalmology; and Cardiovascular.
- Diagnostics – The diagnostics division includes In Vitro Diagnostics and Applied Science diagnostics. It offers devices and diagnostic equipment for the detection of diseases such as like diabetes, HIV and Hepatitis B & C.
Oncology to Drive Growth
Roche manufactures some of the world’s best-selling oncology drugs, such as Avastin, Herceptin, Mabthera/ Rituxan, Xeloda and Tarceva. The oncology segment accounts for more than 50% of the company’s value according to our estimates. Roche has invested heavily in R&D and has a range of pipeline drugs in addition to highly successful products already available in market. Most of its pipeline drugs are capable of being commercially successful if approved, which would help the company maintain its market leadership in the segment.
Rapid Growth in In Vitro Diagnostics
Roche’s In Vitro Diagnostics segment, which accounts for 15% of our price estimate, has displayed rapid growth over the past few years on growing demand from emerging markets such as India, China and Latin. Secondly, the suitability of some of the unique drugs developed by Roche for patients are ascertained by tests conducted by Roche’s Diagnostics division. This helps both of its divisions grow together.
Roche’s Operational Excellence Program to Improve Profitability
The details of Roche’s Operational Excellence Program (OEP) were disseminated in late 2010, which included the restructuring and divestment of several of its business units. The company estimates the total cost of the OEP to be 2.8 billion Swiss francs (CHF). It incurred charges of 1.3 billion CHF and 900 million CHF in 2010 and 2011, respectively. Of the charges recognized in 2011, 850 million CHF were for the pharmaceutical division. The OEP is intended to improve operational efficiency and productivity while reinforcing the company’s focus on research and development. The OEP appears to have already begun to make an impact, as evidenced by recent improvements in the company’s Pharmaceutical EBITDA margin.
Key Trends in Pharma
Emerging markets key to growth
There is tremendous growth potential for pharmaceuticals in emerging markets like India and China. However these markets are marked with intense pricing pressure and it could be difficult for a global branded drug maker to establish its presence. There are also concerns about intellectual property laws in some emerging markets. Moreover, the insurance and reimbursement policies in some of these markets are generally not comprehensive in nature, leading to higher cash outlays by citizens for medical purposes.
Competition from Generics/Biosimilars
Many of the company’s drugs will lose patent protection in the coming years. As soon as a drug goes off-patent, prices fall substantially due to stiff competition from cheaper generic drugs. This can cause declines in sales of up to 80% for the branded drugs. Many pharmaceutical companies have countered this issue by producing branded biosimilars themselves, which sell at a premium to the unbranded generic. This helps in combating the steep revenue declines from the branded drug.
Personalized healthcare is becoming more common, as targeted therapies have proven to be relatively more effective for select patient groups. Some drugs that have shown discouraging results in clinical trials have later proved promising for treatment in some patients. These targeted therapies are prepared by analyzing the genes of the patients under treatment, including close scrutiny of family history and environment. This is improving the efficacy of medical treatment. Roche is a frontrunner in executing personalized healthcare, especially in Hepatitis and cancer treatment.