Roche Sees Small Molecule Opportunity Differently Now

+29.53%
Upside
32.64
Market
42.28
Trefis
RHHBY: Roche logo
RHHBY
Roche

Roche Holdings (NASDAQ:RHHBY) recently announced its plan to restructure its small molecule drugs manufacturing network, but the incremental restructuring cost (cash component) will have only a minimal negative impact of <1% on its annual EPS (earnings per share) in the coming years. [1] So from financial point of view, the immediate effect on profits and valuation is going to be negligible. However, the move makes sense considering the changing dynamics of the pharmaceutical industry. We have crossed the era of highly profitable small molecule drugs and the big players are increasingly investing in large molecule biologics where there is greater scope for innovation. The success of recently launched biologic drugs such as Sovaldi, Opdivo and Harvoni, corroborates our view. In 2014, seven of the top eight drugs (by sales) were biologics.

See our complete analysis for Roche

This Is Why Roche Sees Small Molecule Opportunity Differently Now

Relevant Articles
  1. Is Roche Stock Undervalued At $33?
  2. What’s Driving Roche Stock?
  3. Company Of The Day: Roche Holdings
  4. What’s Happening With Roche (RHHBY) Stock?
  5. What’s Next For Roche Stock?
  6. Should You Buy, Sell, Or Hold Roche Stock At $42?

Roche wants to restructure its manufacturing network to focus on specific small molecule therapies using new age manufacturing technologies which produce drugs in smaller quantities. This means that the firm will have to shut down or divest some existing manufacturing facilities. The total estimated cash cost could be nearly $600 million (assuming 1 CHF = 1 USD), spread out between 2016 and 2021. [1] Besides exiting some existing facilities, Roche will invest in technological enhancement of its Kaiseraugst, Switzerland facility.

Looking at the R&D spending of the pharmaceutical industry as a whole in the last 5 years and assessing the success of small molecule drugs launched during that timeframe, there is no denying that the productivity has declined. The small molecule market, such as that of cardiovascular therapeutics, is flooded with generics. Roche and other pharma companies need to make a quantum leap in terms of drug efficacy and ease of administration, if they are to thrive in this market.

Biologic Focus Is Likely To Increase

Much of the future opportunity lies in biologics, which are relatively difficult to manufacture but have demonstrated high efficacy and specificity for hard-to-treat conditions such as cancer, Hepatitis C, etc. Roche’s HER2+ franchise, which belongs to this group of medicines, has done well in recent quarters. For the first nine months of 2015, revenues from Herceptin, Perjeta and Kadcyla increased by 19% year over year with a substantial portion of incremental revenues coming from the latter two therapies. [2] The year-to-date sales of Perjeta and Kadcyla have exceeded a total of CHF 1.6 billion, though Herceptin, Rituxan and Avastin continue to be the dominant drugs with combined sales of more than CHF 15 billion. [1] The HER2+ franchise will get further boost in revenues from the approval of a Perjeta combination therapy for breast cancer in Europe. Roche has filed the data for combination therapy of Avastin and Tarceva in the EU and expects to get approval in the first half of next year. The company’s drug pipeline is promising, and we expect greater focus in the coming years on immunotherapy and immuno-oncology applications. The data from clinical trials of medicines such as atezolizumab, which is intended to treat bladder and lung cancer, and ocrelizumab, which treats tackle multiple sclerosis, has been positive. Roche has stated that it may file for ocrelizumab approval in the U.S. and Europe in the first half of 2016.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

Notes:
  1. Roche to restructure its manufacturing network for small molecules, Roche Press Release, Nov 12 2015 [] [] []
  2. Roche’s Q3 2015 Earnings Press Release []