Roche’s Cancer Drug Sales Continue To Grow, May Face Competition In Medium Term

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Swiss pharmaceutical giant Roche Holdings (NASDAQ:RHHBY) released its Q3 2014 earnings and nine month year-to-date results last week, and they were not bad. The company’s pharmaceutical sales grew by 4% on constant exchange rate basis led again by its HER2 franchise, comprising key cancer drugs. It was the strengthening of Swiss Franc against the U.S. dollar and Japanese Yen that was a dampener, and resulted in overall net sales remaining flat. On diagnostics side, the company reported 6% growth on constant currency basis which was again mitigated by the strengthening of Swiss Franc. What do we make of this? It is clear that Roche is still dominant globally when it comes to cancer drugs. Despite the fact that this segment brings in more than $26 billion in annual revenues for Roche, the company still managed to grow it by a moderate rate (constant exchange rate basis). However, the threat from biosimilars may become real by 2016 as Roche itself acknowledges, and the efforts from other pharmaceutical firms such as Merck, Bristol-Myers Squibb and AstraZeneca suggest that the competition in the oncology industry can intensify in the near future.

Our current price estimate for Roche stands at $38.54, implying a slight premium to the market price.

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HER2 Franchise Continue To Spearhead Roche’s Growth

The launch of relatively new products such as Perjeta and Kadcyla has strengthened Roche’s HER2 franchise in recent quarters. HER2 stands for human epidermal growth factor receptor 2 and is related to certain aggressive types of breast cancers. This is one of the most common cancer types in women and Roche stands to gain from the continued launch of products in this therapeutic area.

In the first nine months of 2014, the HER2 franchise saw strong growth of more than 20% globally, which essentially offset the decline in sales of Xeloda and Pegasys. The chart below has been taken from Roche’s presentation and shows the magnitude of incremental sales as well as the revenue growth for several key drugs. It is clear that Perjeta has been by far the biggest contributor to Roche’s incremental pharmaceutical revenues in the first nine months of 2014.  However, Herceptin continues to generate significant demand due to strong uptake in emerging markets and the increased duration of treatment for patients taking the drug in combination with Perjeta and Herceptin. We note that Perjeta and Kadcyla have contributed a great deal to Roche and their combined incremental effect almost rivals that of Rituxan, Avastin and Herceptin.

Evolving Competition

Most of the competition in oncology is going to come from immuno-oncology drugs which is where the big pharmaceutical firms are directing their funds.

Merck recently received accelerated approval for its anti-PD 1 drug Keytruda (pembrolizumab) which has been developed to fight against advanced Melanoma. The drug uses a novel technique, under which it leverages patient’s own immune system to fight against the disease. Additionally, Bristol-Myers Squibb recently announced key developments regarding its immuno-oncology drug nivolumab. The FDA in the U.S. has granted breakthrough status to the drug for advanced melanoma and has agreed to review the license application on priority basis. The review is likely to be completed by the end of March 2015. Additionally, the EMA (European Medicines Agency) is going to accelerate the review and assessment of nivolumab for treatment of advanced melanoma as well

While these drugs don’t directly compete with those from Roche because of their different disease focus, the research and application can extend to more cancer types and certainly pose a potential future threat.

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