The Key Contributor Of Roche’s Value Is Not In Danger Yet
Our price estimate for Roche Holdings (NASDAQ:RHHBY) stands at $36.71, implying a premium of more than 10% to the market. About 70% of this value comes from its oncology and auto-immune drugs, and it’s not hard to see why. Roche is a dominant force globally in cancer therapeutics (oncology) with three of its cancer drugs earning more than $6 billion annually. Its oncology and auto-immune drug sales have grown reasonably over the last few years, especially considering how the broader pharmaceutical industry has performed. In addition to this, the percentage contribution of these segments to Roche’s total revenues has also increased. In 2014, oncology drugs accounted for roughly 48.5% of the company’s sales, totaling more than $26.6 billion. Roche has done well to take market lead in a growing therapeutic area. It needs to build upon this success as other firms are getting increasingly interested in cancer therapeutics, and there is also a potential threat from biosimilars which are generic versions of biologics.
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Segment Revenues in $ Million (Source: SEC Filings)
Percentage Revenue Contribution (Source: SEC Filings)
HER2 franchise has been the backbone of Roche’s growth. The term stands for Human Epidermal Growth Factor Receptor 2 and is related to certain aggressive types of breast cancers. The launch of HER2 products such as Perjeta and Kadcyla has aided the company’s growth in recent quarters. Roche’s HER2 franchise saw a strong global growth of more than 20% in 2014, with Perjeta’s sales ramping up by 189%. The drug was the biggest contributor to Roche’s incremental pharmaceutical revenues in 2014. Herceptin also continued 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 docetaxel. We believe oncology drugs will continue to account for more than half of Roche’s value going forward, especially considering recent financial results. We also believe that Roche has a strong drug pipeline to make up for revenue losses due to patent expiries in future.
However, emerging competitive risks must be considered. Bristol-Myers Squibb and Merck have made significant strides in immuno-oncology segment in recent quarters by gaining approval for Keytruda and Opdivo. [1] [2] These drugs essentially work by blocking the ability of the melanoma cells to hide themselves from the body’s immune system. While they don’t directly compete with Roche’s products because of their different disease focus, they could well in the future. A significant chunk of R&D dollars is being pumped to bolster immuno-oncology pipeline.
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- FDA approves Keytruda for advanced melanoma, www.fda.gov [↩]
- FDA approves Opdivo for advanced melanoma, www.fda.gov [↩]