These Two Oncology Drugs Are Key To Roche’s Future Growth

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Roche’s (NASDAQ:RHHBY) Oncology business accounts for over 50% of the company valuation, according to our estimates. The company’s blockbuster oncology drugs are Avastin, Herceptin and MabThera/Rituxan, as these three drugs alone accounted for roughly 40% of the company’s overall revenues in 2016. However, we don’t expect these drugs to see much growth in the coming years. The growth for these drugs has slowed of late, given competitive pressure. Further, they will all face biosimilar competition given that their U.S. patents are expiring in the next 1-2 years. For Roche, the most important oncology drugs to look forward to are Tecentriq and Perjeta. We expect that these two drugs will drive most of the company’s growth over the long run.

FDA Approvals

Tecentriq received its first FDA approval in 2016 for the most common type of bladder cancer, urothelial carcinoma. Urothelial carcinoma accounts for more than 90% of all cases of bladder cancer. Further, it was also approved for a specific type of metastatic lung cancer, and earlier in 2017, it received approval for initial treatment of advanced bladder cancer in certain cases. The drug could cost roughly $12,500 per month, which comparable to PD-1 inhibitors, such as Bristol-Myers Squibb’s Opdivo and Merck’s Keytruda. Tecentriq’s peak sales estimates range from around $3 billion to as high as $12 billion. We currently estimate its peak sales to be around $5 billion. It should be noted that Tecentriq currently is being tested in phase 3 trials for 18 indications. Based on the number of approvals it bags, the drug could see meaningful upside to our estimated peak sales.

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Perjeta is indicated for treating HER2+ breast cancer. We expect the drug to bring in excess of $4.5 billion in annual peak sales. This figure could increase meaningfully depending upon adjuvant approvals of Perjeta. The drug’s sales stood at $1.9 billion in 2016. Perjeta is also being tested for several additional indications and adjuvant therapies. It should be noted that Roche has a solid oncology portfolio, with around 8 drugs that are estimated to generate sales in excess of $1 billion in the coming years. Accordingly, Tecentriq and Perjeta even at their peak sales will account only for around 30% of the segment’s revenues. This is a positive in our view, as Roche’s performance is not tied to just a few drugs, unlike Bristol Myers Squibb, which largely relies on a handful of drugs for future growth (Also read – Why Opdivo Is The Most Important Driver For Bristol Myers Squibb’s Future Growth). Overall, we believe that Tecentriq and Perjeta will largely help offset the revenue losses arising from the decline of Avastin, Herceptin and Rituxan in the coming years.

The chart below shows the historical and estimated contribution of different drugs to Roche’s oncology portfolio.

Our price estimate of $33 for Roche implies roughly 10% premium to the market.

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