Making Sense Of Roche’s Recent Settlement With Mylan And Aphinity Trial
Roche‘s (NASDAQ:RHHBY) stock rallied by nearly 7% earlier this month when the company announced the results from its much awaited Aphinity trial, which tested the combination of Herceptin and Perjeta for ‘after surgery breast cancer’. [1] The results were positive and put the recent settlement with Mylan in perspective. The two companies recently settled a dispute which will allow Mylan to launch a biosimilar version of Roche’s blockbuster Herceptin. [2] However, the results from the Aphinity trial indicate that Roche has positioned itself fairly strongly to defend the franchise’s revenue by expanding further in combination therapy, and reducing direct competition with the upcoming biosimilar. However, it must be noted that the EMA has already given the green light to a biosimilar version of another one of Roche’s blockbuster drugs, Rituxan. We have incorporated the expected competition from these two, and other potential biosimilars, in our analysis for Roche. Overall, we believe that Roche will continue to grow its cancer franchise’s revenues, but it is critical to understand the value risk in a bear case scenario.
The Risk In A Bear Case Scenario
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 possible 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 down further. In fact, some competitors are offering discounts of as much as 70%. If the discounts eventually extend to as much as 50% and doctors switch their patients to biosimilars faster than expected, Roche’s sales could fall nearly $5 billion below our current forecast by 2023, which would imply a downside of about 10% to our price estimate for the company’s stock.
Why Roche May Feel That It Is Protected At The Moment
Avastin is expected to lose its EU patent in 2018 and U.S. patent in 2019. While Herceptin’s EU patent expired in 2014, its patent exclusivity ends in the U.S. in 2019. Similarly, Rituxan (MabThera) lost its EU patent in 2013 and will lose its U.S. patent in 2018. So far, sales of these drugs have been relatively well-protected due to a lack of biosimilars in the market, as well as Roche’s strategy of using combination therapies to maintain a pricing edge.
Several companies, including Pfizer’s Hospira, are already developing and testing biosimilar versions of blockbuster cancer biologics Avastin, Herceptin and Rituxan. While we expect these biosimilars to eat away at sales beyond 2019, the shift may be slower compared to that for small molecule drugs. Currently, the price discount for biosimilars in the U.S. is just 15%. However, we expect this to increase as competition in the biosimilar market increases. This is already happening in Europe.
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Notes:
- Roche trial finds new drug cocktail cuts breast cancer deaths, Reuters, Mar 2 2017 [↩]
- Mylan deal clears path for biosimilar copy of Roche’s Herceptin, Reuters, Mar 13 2017 [↩]