- Oncology Drugs constitute 37% of the Trefis price estimate for Roche Holdings's stock.
- Other Therapeutic Drugs constitute 27% of the Trefis price estimate for Roche Holdings's stock.
- In Vitro Diagnostics constitute 16% of the Trefis price estimate for Roche Holdings's stock.
WHAT HAS CHANGED?
- Impact of Coronavirus Crisis On Roche's ADR
- Roche's ADR lost more than 12% – dropping from $41 at the beginning of 2020 to below $36 in late March 2020 – then spiked 30% to around $47 now (through June 9, 2021). That means RHHBY ADR is well above its pre-pandemic levels.
Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March 2020 helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound, which will bode well for Roche. In addition, the company's Covid-19 tests, as well as strong growth in sales of new drugs, has boded well for its business.
Roche’s two devices ~ cobas 6800 and cobas 8800 received FDA approval on March 13, 2020 for testing the coronavirus. These devices have a very limited installed base of around 1000 devices globally, with a capacity of over 5,500 tests per device in a 24 hour window. The company is also supplying 14 million tests per month.
- Loss of Patent Exclusivity
- Over the last few years, some of Roche's key drugs, including Rituxan, Avastin, and Herceptin, have lost their patent protection. These are blockbuster drugs with sales of around $6 billion each in 2018. But given the loss of market exclusivity, the combined sales declined from $19.4 billion in 2018 to $12.7 billion in 2020. This trend will likely continue in the near term. Also, some of the other pharmaceutical companies have already developed biosimilars to these three drugs, and they have already hit the market in 2020, likely resulting in lower sales for Roche going forward.
- New Drugs So Far Offsetting The Decline In The Sales of Older Drugs
- As stated above, Roche is facing biosimilar competition for some of its blockbuster drugs. However, the company's new drugs have managed to offset the decline in older drugs.
- Ocrevus Driving The Growth
- Ocrevus is used for the treatment of relapsing and primary progressive forms of multiple sclerosis. The drug has been on a strong run in the recent past, and the revenues have grown by 2.8x to around $2.40 billion in 2018, a further 56% y-o-y to over $3.7 billion in 2019, and a 23% jump to $4.6 billion in 2020. Ocrevus will likely be a key player in the multiple sclerosis segment, and could garner as much as $6 billion in peak sales, in our view.
- Late Stage Pipeline
- 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 Kadcyla and Tecentriq in oncology. In addition, the company has a strong hold in the neuroscience area. We estimate the combined potential peak sales of phase 3 drugs to be over $20 billion. After a strong run up in the past few years, Roche's fast growing pharma business could face risk of a slow down. Therefore, the company is banking on these phase 3 pipeline drugs to drive growth going forward.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
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. Needless to say, a big chunk of Roche's revenues 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 2026, 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 75% of our price estimate for Roche. However, there were cases even in the recent past where the phase 3 trials does not meet their endpoint. 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 Kadcyla and Tecentriq in oncology. In addition, the company has a strong hold in neuroscience area. We estimate the combined potential peak sales of phase 3 drugs to be about $20 billion. However, 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 over 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: Centralized And Point of Care Solutions, 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.
SOURCES OF VALUE
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 38% of the company's value according to our estimates, followed by other drugs at 25%.
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.
WHO in Q1 2020 declared Covid-19 a pandemic, and most of the countries went on lockdowns to contain the spread of the virus. This resulted in deferment of elective surgeries, especially in Q2 2020, and fewer hospital visits, impacting the overall demand for pharmaceuticals. That said, some of the healthcare companies that were involved in vaccine, treatment, or diagnostics for Covid-19 saw strong stock price gains. Roche's diagnostics business saw strong growth, due to its Covid-19 tests. As such, a 3% drop in pharmaceuticals sales was largely offset by an 11% gain in the diagnostics business in 2020.
Now that several countries have undertaken large-scale vaccination program for Covid-19, with over 40% of the U.S. population being fully vaccinated by the end of May 2021, the economy is expected to see a quicker rebound, boding well for Roche's businesses.
Strong demand for Ocrevus
Ocrevus is used for the treatment of relapsing and primary progressive forms of multiple sclerosis. The drug has been on a strong run in the recent past, and the revenues have grown over 5x to $4.6 billion in 2020. Ocrevus will likely be a key player in the multiple sclerosis segment, and could garner as much as $5 billion in peak sales, in our view.
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.