Roche Defends $47 Value With Strong R&D Pipeline

by Trefis Team
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Roche Holdings
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Roche Holdings (PINK:RHHBY) is a Swiss healthcare company with a global presence. The firm operates in two main segments: pharmaceuticals and diagnostics. Last week, the company held its R&D and business briefings for investors, highlighting nearly 72 new molecular entities (NMEs) in its pipeline. Nearly 19 candidates, of which 12 are new drugs, are in Phase III clinical trials targeting a broad range of diseases. Roche expects to receive approvals for these drugs in the next year and a half. The company unveiled its R&D strategy going forward even as it vows to keep R&D spending stable. [1]

See Full Analysis for Roche Holdings Here

Oncology Still the Prime Target

Owing to its current top-selling cancer drugs, Roche has fared better than other pharma giants as most of its cancer drugs do not face near-term patents expiry. It has a formidable presence in the global oncology (cancer treatment) drug market with a range of successful products such as Avastin, Herceptin, Mabthera, Rituxan. The company continues to strengthen its oncology pipeline and will spend almost 50% its R&D budget on oncology drugs. Some of the investigational oncology drugs are:

• T-DM1- an “armed antibody” for HER2 positive breast cancer, which is likely to get the FDA approval soon following its encouraging results in clinical trials

• Onartuzumab – an antibody in Phase III for non-small cell lung cancer

• Obinutuzumab – an antibody in Phase III for chronic lymphocytic leukemia and non-Hodgkin’s lymphoma

We believe the company has a very strong oncology pipeline with most of the under-trial drugs capable of being commercially successful, if approved, which would help the company maintain its market leadership in the segment. We particularly are bullish on T-DM1’s prospects, which could turn into a blockbuster drug for Roche in time as its current blockbuster breast cancer drug Herceptin could see a decline in revenues, according to PHARE study. [2]

But, There is Much More Than Cancer

While the company recently received a setback for its promising under-trial cardiovascular drug Dalcetrapib as it failed to boost good HDL cholesterol significantly, we believe it still has some other promising drugs in its pipeline. Another cardiovascular drug, RG7652, is moving toward advanced trials after significantly reducing levels of bad LDL cholesterol. Further, the company’s pipeline for Alzihmer’s also looks promising.

In addition, Roche is adapting a strategy to combine pharmaceutical pipeline projects with the development of companion diagnostics in order to make treatments more effective. The strategy is based on developing differentiated drugs and diagnostics in areas of high unmet need. We believe this will provide significant growth opportunities, bringing an additional stream of revenue.

R&D Expenditure Too Much?

With patent cliff looming over big pharma, generic competition from emerging economies is a key threat for the entire industry. Nevertheless, companies like Roche are trying to fight back with renewed focus on R&D and innovative drug launches.

While most of its competitors are reducing expenditure on R&D, Roche will keep its R&D budget stable, if not decrease.  Many have questioned if the company may be overspending on drug development. But, we think one should not be too much concerned about spending on R&D unless there is a R&D productivity issue. We believe Roche has been very diligent in its R&D spending and all these late stage developments could trigger growth for the company. High R&D spending impacts short-term profit but lays foundation for long-term growth.

Our price estimate for Roche Holdings currently stands at $47, in-line with the current market price. The stock has risen nearly 20% since we launched the coverage of the company.

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Notes:
  1. Roche committed to innovation and growth, Roche Media Release, Sept 5 2012 []
  2. Roche eyes new drugs as Herceptin faces challenge, Fox News, Sept 5, 2012 []
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