Assessing The Impact Of Roche’s Disappointing APHINITY Trial Results

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Roche‘s (NASDAQ:RHHBY) much-awaited APHINITY trial results did not impress the market, and the company’s stock took a beating this week. Roche was banking on the Herceptin + Perjeta combination to meaningfully outperform Herceptin in the treatment of breast cancer. However, trial results indicated an improvement of less than 1% after 3 years. The relatively small benefit is unlikely to justify a potential 100% increase in treatment cost. It is difficult to see how Roche will convince oncologists and payers to adopt the combo treatment, even if the FDA approves it in the U.S. This could effectively nullify the biggest weapon that Roche had to defend Herceptin against impending biosimilar competition. So how should investors quantify the risk? Below we present an interactive model using Trefis technology to help understand the risk to Roche’s stock from additional declines in Herceptin’s sales.

Our price estimate of $32 for Roche is about in line with the market. Our estimate is predicated on a relatively conservative forecast for Herceptin’s sales decline. We currently assume that Herceptin will lose, on average, $500 million in sales annually over the next 5 years. This incorporates the expectation that the company will be able to defend its turf to some extent through Herceptin + Perjeta combo therapy. However, considering the results presented at ASCO, the combo therapy’s monetization risk has increased substantially. Although Roche is confident that the data is good enough to warrant FDA approval, we remain cautious about its adoption among oncologists. There is a good chance that the combo therapy will be limited to high risk breast cancer patients, which will severely limit its target market size. If this results in an additional $500 million of annual sales loss above what we currently forecast, Roche’s oncology division could lose nearly $3 billion in annual sales by 2022-2023, implying a 5-10% downside to our current price estimate. You can modify the forecast above to see the impact of changes in oncology revenue on Roche’s valuation. It is interesting to note that the recent decline in Roche’s market price was of a similar magnitude.

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