Roche Holdings‘ (PINK:RHHBY) ophthalmology drug Lucentis has received U.S. Food & Drug Administration (FDA) approval for the treatment of diabetic macular edema (DME). DME is an eye condition in diabetes patients that causes swelling, blurred vision, severe vision loss and in extreme cases, blindness. The drug is the first and only FDA-approved treatment for DME patients, which are treated by laser surgery otherwise.  This comes as a boost for the drug as it faces significant challenges mainly due to its hefty price. Below we take a look at how this event could impact the value of the company.
Lucentis is a prescription drug for the treatment of patients with wet age-related macular degeneration (AMD) and macular edema. The approval officially opens a huge market for the drug as the company estimates that nearly 560,000 of the nearly 26 million diabetes patients in the U.S. suffer from DME. The number is expected to cross 2 million as an estimated 10% of diabetes patients eventually get DME during their lives.  By virtue of being the first FDA approved drug for DME in the last 25 years, we expect it to partially offset declines in the drug’s revenue.
We have slightly increased our sales forecast for Lucentis, which generated about $1.8 billion in sales in 2011. However, its impact on our price estimate is insignificant as the drug contributes only 2% to the company’s value. By tweaking the chart below, you can see how a change in the drug’s sales impacts our price estimate for the stock.
In the longer term sales are still likely to decline as the drug continues to face competition from Roche’s other drug Avastin, which is primarily an oncology drug. Of the two drugs, only Lucentis has been approved by the FDA to treat AMD, but recently a study by National Institutes of Health (NIH) found Avastin to be equally effective.  Therefore, Avastin may eventually get FDA approval as it is already preferred by many ophthalmogists because of the significant price difference. An injection of Lucentis costs nearly $2,000, an exorbitant price when compared with $50 for Avastin. 
Roche holds a strong position in the oncology drug market due to 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 the 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.
We maintain our $47 price estimate Roche Holdings, about 5% ahead of the current market price.Notes:
- FDA approves Lucentis (ranibizumab injection) for treatment of diabetic macular edema, Roche Press Release, August 13 2012 [↩] [↩]
- Avastin and Lucentis are equivalent in treating age-related macular degeneration, NIH News, April 30 2012 [↩]
- Avastin and Lucentis for Macular Degeneration, Which is Better?, EmaxHealth, May 1 2012 [↩]