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Investment Overview for Roche Holdings (OTC:RHHBY)
Below are some key drivers of Roche's value that present opportunities for upside or downside to the current Trefis price estimate:
Biosimilar price competition intensifies
- Revenues from Oncology Drugs:
The competition from biosimilars is increasing. Novartis' Zarxio became the first biosimilar to be approved in the U.S. by the FDA. Needless to say, a big chunk of Roche's revenues (> 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. 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%. If the discounts eventually extend to as much as 60%-70%, Roche can potentially lose $5 billion in annual oncology sales by 2023, which would imply a downside of about 10%.
Phase 3 pipeline fails
- Oncology Drugs Revenues and Neuroscience,Metabolism and Other Drugs Revenues:
Our valuation of phase 3 drugs incorporates 50% probability of these drugs reaching commercial launch stage and therefore, our revenue forecast includes probability-adjusted revenue for these drugs. Neuroscience and oncology drugs together account for 70% of our price estimate for Roche. However, there have been concerns that the drug Gantenerumab, which helps to get rid of amyloid, could be responsible for plaguing the cognitive process of brain . Other trials by Eli Lilly and Johnson & Johnson which involved the same target protein have failed. Even a phase 3 trial for the drug was called off by Roche in 2014. If such issues plague Roche's phase 3 trials of oncology and neuroscience, and the drugs fail to gain FDA approval, it would imply 15% downside to our price estimate.
Phase 3 pipeline fires
- Oncology Drugs Revenues and Neuroscience, Metabolism and Other Drugs Revenues: Roche's pipeline is quite strong as it continues to invest in the growing area of immuno-oncology. 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. In addition, the company has a strong hold in neuroscience area. We estimate the combined potential peak sales of phase 3 drugs in oncology and neuroscience to be about $25 billion. Our valuation reflects probability adjusted revenues assuming 50% probability of phase 3 drugs reaching commercial launch stage. However, if all phase 3 oncology and neuroscience drugs are approved within next 3-4 years, it would imply 15% upside to our price estimate for Roche due to accounting of 100% of their sales. In other words, the uncertainty around approval of these drugs will be eliminated, implying lower risk and higher valuation.
Established in 1896 and headquartered in Basel, Roche is a healthcare company with a global presence. The firm operates in two main segments: Pharmaceuticals and Diagnostics. The pharmaceutical segment produces drugs in various therapeutic segments, primarily Oncology (cancer drugs), Autoimmune, Virology, Respiratory, Metabolism, Renal Anemia and Ophthalmology. Roche has the largest oncology drug market share in the world with a range of successful products such as Avastin, Herceptin and Mabthera/Rituxan.
The company also has a leading market position in in-vitro diagnostics. It reports its in vitro diagnostics segment into four categories: Professional Diagnostics, Tissue Diagnostics, Molecular diagnostics and Diabetes care. Some of its best selling products are CoaguChek, Accu-Chek, Immuno assays, blood glucose monitoring systems, advanced tissue staining and tests for HIV and Hepatitis B & C. Roche plans to acquire companies in genetic sequencing to strengthen its diagnostics division. Roche operates through its subsidiaries including Genentech and Ventana in the U.S. and Chugai Pharmaceuticals in Japan.
Roche manufactures some of the world's best-selling drugs, including Avastin, Herceptin and Mabthera/ Rituxan. Its oncology segment is the most formidable in the world with a host of pipeline drugs ready to make up for lost revenue after patent expiries. The oncology segment contributes around 55% of the company's value according to our estimates, followed by neuroscience and metabolism drugs at 20%.
Oncology to drive growth
Roche’s personalized healthcare and focus on cancer treatment has made it a leader in the oncology segment. It has a dedicated R&D and a range of pipeline drugs in addition to its highly successful products already available in the market. Most of its pipeline drugs could potentially be very commercially successful and would help the company maintain its market leadership position.
Strong pipeline potential for neuroscience
Although neuroscience and metabolism segment is currently small, it boasts of potentially the strongest phase 3 pipeline among Roche's therapeutic areas. This can be attributed to drugs being tested for Alzheimer's which is currently a relatively underserved market. These drugs have peak sales potential of nearly $19 billion.
Rapidly growing emerging markets
Per capita income levels in many emerging markets are rising rapidly, which provides an immense opportunity for growth in these markets. Also, new studies and increased access to information have led to rising health consciousness in these markets. However, many of these markets have less effective patent laws which can ultimately limit Roche's growth potential there.
Growing threat of generic products and biosimilars
The fast growing pharma market in emerging economies or referred to as the 'Pharmerging' economies have the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate profits in the long run. Roche's drugs could face potential threat from biosimilars in future, which are generic versions of biologics.
Historically, biologics remained well protected due to lack of appropriate approval guidelines. Biosimilars are comparable to generics in the sense that they are approved substitutes for specific bio-engineered therapies, or biologics. However, while generics are exact chemical copies of the small molecule therapies they replace, biosimilars include only the therapeutically active portion of large molecules biologics. Biosimilars are large molecule therapies that are generated through biological processes in so-called bioreactors containing specialized ecosystems. As such, they are harder to manufacture and require a greater deal of technical expertise. However, recent industry developments suggest that more biosimilars are likely to be approved going forward.
Global healthcare reforms
Governments around the world have been undertaking significant healthcare reform programs. Some of these programs could effectively cap drug pricing with rebates and other mechanisms.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
See more on: DCF Methodology
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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