In the last year, Roche Holdings (PINK:RHHBY) has risen almost 30% mainly due to its Oncology drugs franchise. While Roche already owns some of the world’s largest-selling cancer drugs such as Avastin, Herceptin, and Rituxan, the drug maker has scored huge success in its oncology pipeline during the last couple of months. This includes in-time approvals for two potential blockbuster oncology drugs T-DM1 and Perjeta. These drugs should help Roche maintain its formidable presence in the oncology drugs market, despite looming patent expiries of Rituxan and Herceptin. Below we take a look at prospects of the division in detail.
Growth From Current Drugs Will Be Replaced By New Drugs
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Growth in Roche’s Oncology drugs division has largely been driven by established drugs like Avastin (for types of colon and lung cancer), Herceptin (for types of breast and stomach cancer), and Rituxan (for types of blood cancer). Continued uptake in their demand and approval for additional indications have helped these drugs garner over $5 billion in individual sales in 2012. However, growth due to these drugs is expected to remain subdued going forward. Rituxan and Herceptin will see their European patent expiring in late 2013 and mid 2014, respectively  offsetting the growth coming from Avastin’s growing sales in the Western Europe market for ovarian and lung cancer conditions. While Rituxan and Herceptin are seeing a continued uptake in demand in emerging markets,  it will be partially offset by a significant $3.5 billion (around 15% of its total oncology sales) that Europe generated for these two drugs in 2012. 
However, we don’t see Roche feeling the impact of revenue losses due to patent cliff as has been witnessed by other big pharmas (Read Singulair Patent Loss Hits Merck’s Earnings But International Growth Helps and Pfizer’s Emerging Markets Growth And Newer Drugs Mitigate Lipitor’s Slide). Both Rituxan and Herceptin are biologics and generic erosion for biologics could be much slower and more limited than small molecules. Getting approval for biosimilars (generics of biologics) is complicated as clinical trials are required for the regulatory approvals. Further, it is expensive to make biosimilars, thus prices will not be significantly lower than the original biologic. Competition for Rituxan is expected to come only by 2015.  Further, U.S. patents for these drugs are still safe until 2016.
In addition, label extension of the current drugs will lend support. Zelboraf, a medicine for treatment of melanoma, is being tested for additional indications like metastatic melanoma (a type of skin cancer) and papillary thyroid cancer (most common thyroid cancer). Rituxan could also add other types of lymphoma in its indication list. Nonetheless, we believe major growth driver will be recently approved breast cancer drugs Perjeta and T-DM1 (Kadcyla). Both of these drugs target HER2-positive breast cancer. We are particularly bullish on Kadcyla. With the strong efficacy exhibited in clinical trials and the approval as a front-line drug to treat HER-2 positive metastatic breast cancer, we expect the drug to garner more than $1 billion in peak sales.
Pipeline Remains Strong
Despite recent approvals, Roche’s pipeline in the oncology drug segment still remains strong with Obinutuzumab (GA101) being the most promising one. A month back, it showed impressive efficacy in improving progression-free survival in chronic lymphocytic leukemia (a type of blood and bone cancer) patients.  In the first stage of a phase III study called CLL11, the drug in combination with chemotherapy significantly reduced the risk of disease worsening or death compared to chemotherapy alone in previously untreated patients. Further, an additional study suggested that the experimental drug could show superior efficacy compared with Roche’s own MabThera/Rituxan as a first line treatment for the condition. We expect the drug to obtain regulatory approvals in 2014 and add to revenue growth.
Owing to these factors, the oncology segment accounts for more than 50% of Roche’s value despite the patent expiries.Notes:
- US$54 billion worth of biosimilar patents expiring before 2020, GABI Online, Sept 30 2011 [↩]
- Roche Holding AG Management Discusses F4Q2012 Results – Earnings Call Transcript, Seeking Alpha, Jan 30 2012 [↩]
- Roche Finance Info System, Roche Holdings [↩]
- Rituxan And Its Biosimilar Competitors, Seeking Alpha, July 30 2012 [↩]
- Obinutuzumab (GA101) significantly improved progression-free survival in people with chronic lymphocytic leukemia (CLL), Roche, Jan 31 2013 [↩]