How Will Roche Perform In 2015?
Roche Holdings (NASDAQ:RHHBY) may have an interesting financial year in 2015. While on one hand the company’s management will be wary of the slowdown in Europe and growing competition in oncology, they will gather comfort from that fact that their biggest drugs — Herceptin, Avastin and Rituxan — are still growing and will help the company maintain its leadership in cancer therapeutics. Additionally, Roche’s pipeline is reasonably strong, with several oncology drugs in Phase 3 trials including a few at or near the filing stage. Considering its exposure to the U.S., Roche’s sales in Swiss currency can benefit from a weakening Swiss Franc against the U.S. dollar. Overall, 2015 is going to be an exciting year for Roche.
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
Oncology Stalwarts Will Continue To Support Overall Growth
Roche has one of the strongest and most profitable drug portfolios in the cancer therapeutics market. Three of its major drugs (Rituxan/MabThera, Avastin and Herceptin) are used for treating a variety of cancers including blood cancer, breast cancer and colorectal cancer. The combined sales from Oncology drugs accounted for around 62% of Roche’s total pharmaceutical revenues during 2013. The proportion remained more or less the same in the first nine months of 2014, evidence that their performance remains strong. Any decline in sales of off-patent, maturing products is being compensated by the growth in the current portfolio and new launches. Avastin continued its strength in 2014 and grew its sales by 6% in the first nine months of the year, driven by adoption in ovarian cancer treatment in Europe and growing use for treatment of colorectal cancer. While Herceptin grew by 7%, Rituxan/MabThera saw a modest increase of 3%. We expect these drugs to grow moderately in 2015.
Possibility Of Greater Focus On R&D And New Filings For Approvals
Roche is a research oriented pharmaceutical firm. In 2013, it slightly increased its R&D expenditure in absolute terms and the figure for 2014 may turn out to be somewhat same. However, the company may be prompted to pump up its R&D efforts in 2015 considering the growing competition in oncology. Roche has maintained its market leadership position in oncology (cancer therapeutics) for a long time but companies such as Merck, Bristol-Myers Squibb, Pfizer and AstraZeneca are showing keen interest in tapping this segment. As competition heats up, Roche’s sales may suffer which will prompt the company to develop something new and more effective as far as combating cancer is concerned. We believe that Roche is already putting in a great deal of effort in that area, and may step up these efforts this year.
Additionally, some of its drugs may get approval for additional and new indications in 2015. The company expects to file for approval of its current drug Kadcyla for additional indication of advanced HER2-positive gastric cancer, as well as the combination of Kadcyla and Perjeta for 1st line HER2-positive metastatic breast cancer. These two drugs are relatively new and have shown the highest growth in Roche’s portfolio in recent quarters. The company also expects to file for approval of its experimental drug ocrelizumab for a couple of indications in the neuroscience area.
In December 2014, Roche filed an application with the FDA to review its experimental drug Cobimetinib for the treatment of melanoma, in combination with already marketed drug Zelboraf. The therapy is meant to be used for patients who have a BRAF gene mutation which allows melanoma cells to grow. Melanoma is the deadliest form of skin cancer. Even though it accounts for less than 2% of all cancer cases in the U.S., it causes death in a majority cases. We may see the approval for this drug in 2015.
Europe Slowdown May Impact Pharma Spending In The Region, Thus Affecting Roche
After a brief period of recovery, the Euro Zone is again showing signs of faltering. Government debt as a percentage of GDP has increased in several countries including Greece, Portugal, Italy, Ireland and France. This figure has gone up for the United Kingdom as well. Additionally, fiscal pressure has increased sharply for Greece. Declining oil prices and the possibility of Greece exiting Euro have disturbed investor sentiment. The decline in European stocks is a manifestation of these events along with the fear of deflation. Overall, 2015 is not looking too good for the region and the possibility of certain austerity measures can weigh on the sales of pharmaceutical products.
A high percentage of healthcare spending in Europe is funded by the government. The faltering economy may pressure the public sector to take strict measures and cut financial corners. While healthcare spending is largely fixed, European governments may try to optimize the variable part of the expenditure which is largely related to drugs. This can take form of strict pricing policies and promotion of cheaper generic versions. Evidence suggests that while pharmaceutical spending growth has remained above GDP growth in the EU, this phenomenon changed during the financial crisis of 2009. [1] It won’t be surprising if it happens in 2015 also.
Also, governments use IRP tool (or international reference pricing) to benchmark prices across geographies. For instance, a Deloitte report suggests that a host of countries in Europe and other regions of the world reference their pharmaceutical pricing to Greece. If Greece exits Euro currency, its own currency is likely to depreciate which will make its Euro-denominated debt even more expensive, thus resulting in further austerity measures and economic slowdown. The pricing and sales of pharmaceuticals could be impacted too, and this effect can spread to other countries.
In 2013, approximately 25% of Roche’s revenues came from Europe. This figure has been stable for the last couple years and suggests that Europe remains a very important market for the company.
Currency Devaluation May Have Positive Impact
Approximately 42% of Roche’s sales came from the U.S. in 2013, as compared to 39% in 2012. In the first nine months of 2014, this figure stood at 42.7%. The overall growth in the U.S. region is also higher than that in Europe and Japan. In short, the significance of the U.S. market is growing for Roche which means that the currency risk exposure is also increasing.
In 2013, the Swiss Franc appreciated against the U.S. Dollar as well as Japanese Yen, which had a collective negative impact of 3% or 1.5 billion Swiss Francs. So what’s the risk against dollar alone? Considering the total revenue base and the fact that the U.S. accounts for 42% of the revenues, 1% appreciation against dollar will result in sales declining by roughly 200 million Swiss Francs. So how does the scenario look like for 2015?
Looking at the exchange rate chart, it appears that the Swiss Franc reached its high somewhere in March 2014 against the U.S. dollar, and has been weakening since then. Considering the situation in Europe and the trend in the last six months, there is a good chance that the U.S. Dollar will continue to appreciate against Swiss Franc, thus positively impacting Roche’s sales in local currency. The company is based in Switzerland.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research