Roche’s Double Drug Failure Is Meaningful

December 24th, 2014 by Trefis Team
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Roche Holdings‘ (NASDAQ:RHHBY) two drugs recently failed late stage clinical trials for certain conditions, which resulted in more than 5% decline in its shares. These drugs include an experimental Alzheimer’s disease drug, gantenerumab, and an already marketed cancer drug, Kadcyla. The decline in the stock price is significant considering that the company’s market capitalization is nearly $237 billion. This means that the market was valuing these drugs at roughly $12 billion. What does this imply in terms of the future cash flows lost? Based on our estimated weighted average cost of capital of 8.5% and terminal growth rate of 2%, the decline in the market price implies that the market estimates a loss of annual future cash flows of roughly $2.7 billion. This is not surprising considering that Alzheimer’s disease hasn’t seen a new medication for a long time and a lot of hope was riding on these trials. Additionally, Kadcyla’s failure to demonstrate added benefit in breast cancer does hurt Roche’s image as a leader in oncology market  and reduces its changes of expanding sales.

Our current price estimate for Roche stands at $38.54, implying a premium of more than 10% to the market.

See our complete analysis for Roche

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Kadcyla was launched in 2013 and its sales for the year totaled $234 million. However, the uptake was very strong this year and the drug’s revenues grew by 148% in the first nine months of 2014. As far as Alzheimer’s disease is concerned, Roche currently does not have any drug in this area. The progression in the clinical trials for this disease has been one of the key advancements that the company was making in neuroscience segment. Despite the recent blow, the company remains committed to find a treatment for this disease. The estimates peg Alzheimer’s disease global patient count at 44 million, and this figure is expected to triple by 2050. [1]

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Notes:
  1. Double blow for Roche as breast cancer, Alzheimer’s studies fail, Reuters, Dec 19 2014 [↩]