Biosimilar Competition and Pipeline Potential Continue To Be Key Triggers For Roche’s Stock

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Roche

Our price estimate for Roche Holdings (NASDAQ:RHHBY) stands at $36.60, implying a premium of more than 10% to the market. We believe that this premium is justified considering Roche’s dominance in cancer therapeutics (oncology) and its innovative pipeline. Additionally, the recent decline in the stock can be primarily attributed to global market turmoil resulting from concerns in Asia, especially China. So while we believe that the market may not be reflecting Roche’s fundamental value, there are some factors that can trigger the stock movement either way. We have talked about these factors before and we would like to update our readers that on fundamental level. Note, however, that not a lot has changed for Roche. We continue to believe that the advent of biosimilars and potential success of Roche’s current pipeline remain as key catalysts.

See our complete analysis for Roche

Severe Price Competition From Biosimilars (10% Downside)

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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. The biosimilar versions of J&J’s Remicade were granted approval in Europe in early 2015 following which, Novartis’ Zarxio (a biosimilar) received the U.S. FDA approval.

More than 60% of Roche’s sales can be attributed to biologics which may be a cause of concern if the competition from biosimilars intensifies going forward. Our current assumption is that biosimilars will be priced roughly 30-40% below the regular prices for patented biologics. In addition, we believe that to some extent, Roche will be able to defend its primary franchises by expanding in adjuvant therapies.

However, as the process for biosimilar approval is refined further and more companies get into this business, competition could push the prices further down. There have been reports on discounts extending to as much as 70%. This happened in Norway but could also extend to other markets. There are more than 10 biosimilars under development to compete with Abbvie’s Humira, which loses its patent exclusivity in the U.S. in 2016. [1] If the discounts extend to as much as 60%-70% across most markets, Roche can potentially lose $5 billion in annual sales by 2021, implying a downside of about 10%.

Phase 3 Pipeline Success (10% Upside)

Roche’s pipeline is encouraging and the company continues to invest in the immuno-oncolgy, which is where the growth is likely to come from. 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 $5-6 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 $11-12 billion, resulting in a 10% upside.

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