It’s About “What Next” For Roche
Roche‘s (NASDAQ:RHHBY) Q4 2016 results were in-line with our expectations. For the full year 2016, the company reported 3% growth in the pharma business and 7% growth in the diagnostics business at constant exchange rates. We are comfortable with Roche’s position in diagnostics, in which it has shown more or less steady growth. It has focused on expanding in international markets including China, and has targeted high throughput laboratories with new products in its Cobas family. However, we expect the competition from biosimilars to impact Roche’s pharma business over the course of next three years. So there is pressure on Roche’s management to compensate for the expected sales decline of its current products, most important of which are Avastin, Herceptin and MabThera. Management made an effort to convince investors and analysts that its new products and those in the pipeline will be more than enough. We believe in Roche’s ability to deliver, considering its strong R&D track record. The fact that the company received five breakthrough therapy designations from the FDA in 2016, bringing the total count to 14, further reinforces our belief. One of the key events to watch out for next year is the result of APHINITY trial, which explores usefulness of Perjeta in an adjuvant setting.
Our price estimate of $38.50 for Roche is nearly 20% above the market. We are currently reviewing our price estimate in the light of recent earnings, and will have an update ready soon. Here are some of the key takeaways from Roche’s Q4 2016 earnings.
First. Its blockbuster Avastin, which accounted for nearly $7 billion in revenue in 2015, is barely managing to hold its ground. It saw just 1% growth in the first 9 months of 2016 and the figure fell to 0% for the full year, implying that the drug’s sales declined in the fourth quarter. While Avastin is growing in international markets, especially China which is expanding its drug coverage, the competition in lung cancer market is increasing in the U.S. Nearly 15% of Avastin’s sales can be attributed to its use in lung cancer. This trend is likely to intensify next year as Tecentriq’s sales start ramping up and cannibalize Avastin’s.
Second. To Roche’s comfort, Herceptin and Mabthera, which together accounted for nearly $14 billion in revenue in 2015, are still growing at low to mid single digit rates. Expansion in China, longer treatment duration, and continued uptake in vasculitis and rheumatoid arthritis are some of the factors driving this growth. Even 1% growth implies an incremental revenue of $140 million. This could help Roche mitigate the decline in its off-patent drugs.
Third. Tecentriq is off to a good start, according to Roche’s management. It has reached nearly 60% penetration in bladder cancer market in the U.S. and has become a standard in the second line therapy. [1] The drug was approved earlier in 2016 for bladder cancer, and was further approved for a specific type of metastatic lung cancer in the fourth quarter. Tecentriq is first-in-class PD-L1 inhibitor approved for bladder cancer, which can help Roche build lead in this area. Also, the approval in lung cancer puts it in direct competition with Merck’s Keytruda and Bristol-Myers Squibb’s Opdivo. Tecentriq is critical for Roche because we think it has potential to be as big as Avastin or Herceptin.
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Notes:
- Roche’s Q4 2016 Earnings Transcript [↩]