Roche Holding’s Ocrevus Will Likely Continue To Drive Earnings Growth In The Near Term

by Trefis Team
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Roche Holding (NASDAQ:RHHBY) recently posted its Q3 results, which were more or less in line with estimates. The company’s overall revenues grew 7%, led by a continued ramp up in Ocrevus, and Perjeta sales. However, Rituxan sales continued to see pressure in Europe, and the global sales were down in the  high single digits. Looking forward, Ocrevus should lead the growth in the near term, along with other new drugs including Tecentriq, Alecensa, and Gazyva. These drugs will help offset the decline in sales expected from Rituxan, Herceptin, and Avastin in the near term, given these drugs are nearing the loss of patent exclusivity. We have created an interactive dashboard ~ What Is The Outlook For Roche Holding After An In Line Q3 ~ on the company’s expected performance for the full year 2018. You can adjust the revenue and margin drivers to see the impact on our earnings and price estimate for Roche.

Neuroscience To See Strong Revenue Growth Led By Ocrevus

We forecast Roche’s Pharmaceuticals revenue to grow in mid-single digits in 2018. Neuroscience, Metabolism & Other Drugs will likely lead this growth, given the trends visible for Ocrevus. The drug is used for the treatment of relapsing and primary progressive forms of multiple sclerosis. Ocrevus has been on a strong run in the recent past, and the revenues have grown by 2.4x to over $1.65 billion for the nine month period ending September 2018. The patient pool for Ocrevus now stands at 70,000, with a market share of 12% in the U.S.  Ocrevus will likely be a key player in the multiple sclerosis segment, and could garner as much as $5 billion in peak sales. Looking at the gross margins, they have remained stable at around 80% over the past few years, and we don’t expect any significant change in the near term.

Expect Low Single Digit Growth In Oncology Drugs Sales While Diagnostics Could See Mid-Single Digit Growth

We forecast a low single digit growth for the company’s oncology drug sales in the near term. While the company is currently facing generic competition for Rituxan in Europe, and it will likely see more generic competition for its other blockbuster drugs, Avastin and Herceptin in the coming quarters, as the drugs near their patent expiry, the new drugs, such as Tecentriq, Kadcyla, Gazayva, and Alecensa, should help offset these declines. Note that these new drugs, along with Perjeta, will generate sales of over $5 billion in 2018, according to our estimates. In the long run, Roche’s oncology drugs sales will benefit from its strong phase 3 pipeline, which includes several new compounds, including Idasanutlin, Ipatasertib, and Taselisib, which combined have a potential to generate over $7 billion in peak sales, in our view.

The company is also seeing robust growth in its In-Vitro Diagnostics business, which grew 6% in Q3. Tissue diagnostics in particular saw high single digit growth, while molecular diagnostics, and centralized and point of care solutions grew in mid-single digits. Asia Pacific as a region saw a double digit growth, and we continue to believe that the segment growth will largely be dependent on the emerging markets, which are seeing an increase in healthcare spends. However, we don’t expect any significant revenue jump in this business for Roche, as there is stiff competition from the likes of Johnson & Johnson, and other players.

Our $35 price estimate for Roche is based on $2.15 expected EPS in 2018 and a price to earnings multiple of a little over 16x. Our revenue forecast of $58 billion represents year-on-year growth of around 6%. Of the total expected revenues in 2018, we estimate $45.4 billion in the Pharmaceuticals segment, and In-Vitro Diagnostics making up for the rest.

 

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