Roche Holdings (OTC:RHHBY) will report its Q2 2014 results on July 24th. We expect mid single digit growth for its pharmaceutical business assuming that the overall currency impact remained minimal. Additionally, we expect continued strong growth in diagnostics segment which is one of the reasons why Roche has not shied away from investing in this area and acquiring smaller competitors. As always, major cancer drugs will steal the show due to continued adoption for additional indications. Roche has excelled in developing and marketing biologics specifically targeting different types of cancer. This bodes well considering that oncology is one of the key growth areas for pharmaceutical companies as other therapeutic segments get flooded with generics.
Our current price estimate for Roche stands at $39.25, implying a premium of little less than 10% to the market price.
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Expect Continued Success Of Major Cancer Drugs
Even though Roche suffered in the first quarter due to the strengthening of Swiss Franc against major currencies such as U.S. Dollar and Japanese Yen, its top line growth stood at 5% excluding the impact of currency movements. This can be attributed to the continued growth of its major cancer drugs including including Avastin, Herceptin and Rituxan/MabThera. This trend is likely to continue in Q2 2014 as well. The recent launch of new products such as Perjeta and Kadcyla will also aid the company’s pharmaceutical business.
Roche has one of the strongest and most profitable drug portfolios in cancer therapeutics market. Three of its major drugs Rituxan/MabThera, Avastin and Herceptin are used for treating a variety of cancer forms including blood cancer, breast cancer and colorectal cancer. The combined sales from Oncology drugs accounted for around 62% of Roche’s total pharmaceutical revenues in Q1 2014. Any decline in sales of off-patent, maturing products is being compensated by the growth in the current portfolio and new launches. We expect Avastin to perform well considering notable adoption in ovarian cancer treatment in Europe and growing use for treatment of colorectal cancer.
Roche has several promising drugs in late stage trials in its pipeline. The company has distinguished itself due to its focus on biotechnology research and development (R&D) and leadership in oncology (cancer therapeutics). It stands to gain due to the shift towards targeted therapies and is already working on promising drugs that can replace its major blockbusters.
Acquisitions To Strengthen Market Position
Revenues from Roche’s diagnostics division have been increasing at high single digit rate. This is impressive considering that one of its biggest competitors Johnson & Johnson is witnessing flat sales growth. The company strengthened its already enviable market position in this segment with couple of acquisitions in the second quarter. While the organic impact of these acquisitions will be minimal this quarter, they are important if we take a long term view. We estimate that diagnostics business constitutes roughly 15% to the company’s value, and is the second largest division after oncology drugs.
In early April, Roche announced the acquisition of IQuum, which is involved in developing point-of-care molecular diagnostics systems. Roche stated that it will make an upfront payment of $275 million and additional payments of upto $175 million on achieving certain development milestones. In early June, the company announced another acquisition. This time it was Genia Technologies. Roche believes that by leveraging Genia’s technology, it will be able to bring the cost of DNA sequencing down and at the same time, improve its speed and sensitivity. DNA sequencing refers to the process of determining the accurate order of nucleotides in a DNA molecule. This helps in recognizing new genes and their association with diseases, and also helps in identifying drug targets. Targeted therapies are much more effective in treating diseases, and DNA sequencing can help boost advancements in this field. While the direct value addition from this move will be small in comparison to the company’s market value, indirect long term implications cannot be ignored. If DNA sequencing helps Roche in developing 1-2 targeted drugs for cancer and other serious illnesses, the incremental sales could be significant.
The broader idea is to strengthen the diagnostics portfolio to continue growing in a market that’s witnessing pricing pressure due to competitive bidding. Consolidation will allow for greater pricing power and protect Roche’s profit growth