Here Are The Prime Catalysts For Roche’s Stock

+35.04%
Upside
31.31
Market
42.28
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RHHBY: Roche logo
RHHBY
Roche

Our price estimate for Roche Holdings (NASDAQ:RHHBY) stands at $38.26, implying a premium of less than 10% to the market. Roche is a dominant force globally in cancer therapeutics (oncology) with three of its cancer drugs earning more than $6 billion annually. It has a strong competitive position in the broader pharmaceutical industry given its strong focus on growing market of cancer therapeutics. Despite this, the stock hasn’t moved much over the last year. This suggests that the potential growth opportunities are being balanced by potential risks. This appears to be true as we believe that there are two plausible scenarios (upside as well as downside) that can cause significant movement in Roche’s stock price as they become more likely and are priced in by the market. Let’s take a quick look at them.

See our complete analysis for Roche

Biosimilar Price Competition Intensifies (-10%)

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The threat of biosimilars has emerged, and this time it is more real than ever considering the recent approvals. The biosimilar version of J&J’s Remicade has been approved in Europe and, in early March, Novartis’ Zarxio became the first biosimilar to be approved in the U.S. by the FDA. Biosimilars are comparable to generics in that they are approved substitutes for specific bio-engineered therapies, or biologics. However, unlike generics, which are exact chemical copies of the small molecule therapies they replace, biosimilars only include the therapeutically active portion of the very large molecules they are intended to replace. Because they are generated through biological processes in so-called bioreactors containing specialized ecosystems, they are harder to manufacture and require a greater range of  technical expertise as compared to generics of small molecule drugs.

Needless to say, a big chunk of Roche’s revenues (more than 60%) comes from biologics. This puts the company in a vulnerable position should the competition from biosimilars intensify in the next few years. Currently, our forecast assumes that biosimilars will be priced roughly 30% below the regular prices for patented biologics, and that Roche will be able to defend its primary franchises to some extent (Rituxan and Herceptin) by targeting adjuvant therapies. Using combination adjuvant therapies, Roche could potentially transfer pricing power to newer drugs and stay competitive against biosimilars as far as Rituxan and Herceptin are concerned.

But it is plausible that we are underestimating the future impact from biosimilars and overplaying Roche’s competitive position, which is very strong right now. The evolving competition may bring the prices further down. In fact, some competitors are offering discounts of as much as 70%. Also, there are around 11 biosimilars under development to compete with Abbvie’s Humira, which loses its patent exclusivity in the U.S. in 2016. [1] Needless to say, if a few of these come to the market in the next couple of years, competition can drive down biosimilar prices more than we expect. If the discounts extend to as much as 60%-70%, Roche can potentially lose $5 billion in annual sales by 2021, which would imply a downside of about 10%.

Phase 3 Pipeline Fires (+10%)

Roche has a strong $120 billion oncology business (our valuation estimate) primarily built around biologic cancer drugs such as Rituxan/MabThera and Herceptin. However, its pipeline is quite strong and  the company continues to invest in the growing area of immuno-oncolgy. Looking at the programs under phase 3 trials, we find that the company is giving a strong push to Perjeta, Kadcyla and Avastin for early, second line and adjuvant therapies in breast cancer, ovarian cancer and lung cancer. We currently expect the drugs in the pipeline to drive incremental annual revenues of $6 billion in the next few years, but our estimate may turn out to be conservative. If a few of the current phase 3 trials are successful and Roche expands much in adjuvant therapies, revenue from the pipeline drugs can easily cross $12 billion, resulting in a 10% upside to our price estimate.

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Notes:
  1. Big Pharma’s Unfamiliar Biosimilar Threat, The Wall Street Journal, Mar 22 2015 []