Roche Could Be Worth $52 On These Drivers

Pharmaceutical companies have had a nice run in the last few months as their stocks have jumped by 20-30%. Owing to its relatively low exposure to patents expiry and a strong pipeline, shares of Roche Holdings (PINK:RHHBY), have also climbed. With the stock price near our$47 price estimate, we find it prudent to look at the company’s business model and see what factors could trigger upside to our current price estimate. One observation is that if the company is able to exceed our expectations for revenues from oncology drugs and market share in in-vitro diagnostics division, the stock value could surge by about 10% from our current price estimate.

See Full Analysis for Roche Holdings Here

1. Revenues from Oncology Drugs: This represents Roche’s revenues generated worldwide in the U.S. Dollar from the sales of oncology drugs. Roche’s oncology segment includes drugs such as Avastin, Herceptin, MabThera/Rituxan, Xeloda, Tarceva along with some pipeline drugs like Zelboraf and Erivedge.

2. Roche’s Market Share in In-vitro Diagnostics: This represents Roche’s net global sales from in-vitro diagnostic products as a percentage of total worldwide spending on in-vitro diagnostic products.

10% Upside Scenario | $52 Trefis Price Estimate

1. Higher Revenues from Oncology Drugs  (+5%):

Roche has a range of commercially successful oncology drugs like Avastin, Herceptin and MabThera. Rituxan/MabThera was the world’s best-selling cancer drug in 2011, with over $6 billion in sales, following Avastin. Following the success of its drugs, Roche’s overall oncology drug sales increased from $19.3 billion in 2008 to $22.5 billion in 2011.

We expect Roche’s oncology drug sales to increase further at a good pace and reach $32 billion by the end of Trefis forecast period due to number of factors.

Several of Roche’s drugs have found additional indications over the ones they were manufactured for. For example, Zelboraf, a medicine for treatment of melanoma, is being tested for additional indications like metastatic melanoma and papillary thyroid cancer. There are 6 additional indications in the oncology segment for which Roche will file in 2012 for approval, relating to Avastin, Herceptin, Tarceva and MabThera/Rituxan. Further, Roche has a formidable pipeline in the oncology drug segment and more than 10 other pipeline drugs are expected to be ready for filing in the next 2-3 years.

Oncology drugs have enjoyed high pricing due to absence of products that safely treat cancer, and prices are perceived to have not reached their ceiling yet. While we expect the growing competition and healthcare reforms to keep drug prices in check, the company may be able to materialize its market leadership position into higher drug prices. Further, Roche recently acquired Genentech to fuel its biotech innovation as biotech companies have been instrumental in oncology innovation. This may lead to more successful drug discoveries and further indications in the future. If all these factors pull the company’s oncology sales to $35 billion (more than 10% from our current estimate) by the end of Trefis forecast period, it would lead to more than 5% upside to our price estimate. As the segment is the largest revenue contributor and constitutes more than 50% to our price estimate, even a small out-performance with respect to our expectations will have a huge impact on the company’s valuation.

2. Higher Market Share in In-vitro Diagnostics (+5%):

Roche has a formidable presence in in-vitro diagnostics. Some of its best-sellers are immuno assays, blood glucose monitoring system, advanced tissue staining and tests for HIV and Hepatitis B & C. Roche’s diagnostic products had a market share of 20.5% in 2008 within this segment, which increased to 22% in 2011 due to strong sales of immuno assays.

We believe Roche is well-positioned to benefit from rapid growth in in-vitro diagnostics in fast-growing emerging markets like Latin America, the Middle East and Asia Pacific and it continues to focus on expanding into these markets. Further, it also has plans to launch several new diagnostics products in the near future. Accordingly, we expect the company’s market share to cross 25% over the next few years.

However, Roche is looking to acquire companies in genetic sequencing to strengthen its diagnostics division. This is evidenced by its $5.7 billion bid for Illumina, a company offering genetic analysis services, earlier in 2012, from which it later backed off. In addition, Roche is adapting a strategy to combine pharmaceutical pipeline projects with the development of companion diagnostics in order to make treatments more effective. The strategy is based on developing differentiated drugs and diagnostics in areas of high unmet need. This could provide significant growth opportunities, bringing an additional stream of revenue. All these factors could boost its market share to more than 30% by the end of Trefis forecast period, leading to 5% upside to our price estimate.

Combining these two scenarios – 5% upside from higher revenues from oncology drugs and 5% upside from higher market share in in-vitro diagnostics – we arrive at 10% upside or a price estimate of more than $52 for Roche Holdings.

Submit a Post at Trefis Powered by Data and Interactive Charts| Understand What Drives a Stock at Trefis