Roche Holdings (
) has had an impressive ride in the last couple of months as its
stock price has soared close to 40% since we initiated coverage on
the drug maker. Continued growth across business segments and some
positive developments regarding its pipeline are largely drove this
huge appreciation. In its Q4 earnings, the drug maker reported a 4%
increase (at constant exchange rate or CER) in total revenues in
Swiss franc, bucking the trend of declining revenues shown by other
big pharma companies (Read
Roche Holdings's Oncology, Virology Drugs Drive Growth
). In the wake of earnings and recent developments, we have
our price estimate for Roche Holdings to $46 from
, which is about 5% ahead of current market price.
Below we discuss the changes made and the outlook in detail.
Check out our complete analysis of Roche
Strong Pipeline Supports Upside
Roche has invested heavily in its R&D program and owns one
of the strongest pipeline among pharmaceutical companies (Read
Roche Defends $47 Value With Strong R&D Pipeline). Most of its
promising pipeline drugs are in the Oncology division where the
drug maker has a formidable presence. While Roche has already
launched one of the potential blockbuster, Perjeta, in several
markets, it has also filed approval applications for T-DM1.
Both of these drugs target mainly HER2-positive breast cancer.
With the strong efficacy exhibited in clinical trials, we believe
the probability of T-DM1 getting FDA approval has increased
significantly. The FDA has already granted its application a
priority review, which means the drug could be approved by
mid-2013. Accordingly, we have incorporated expected revenues from
the drug. We expect the drug to garner more than $1 billion in peak
sales for its currently targeted indication.
A few days back, another blockbuster potential drug Obinutuzumab
(GA101) showed impressive efficacy in improving
progression-free survival in chronic lymphocytic leukemia (a type
of blood and bone cancer) patients. In the first stage of a phase
III study called CLL11, the drug in combination with chemotherapy
significantly reduced the risk of disease worsening or death
compared to chemotherapy alone in previously untreated patients.
Further, an additional study suggested that the experimental drug
could show superior efficacy compared with Roche's own
MabThera/Rituxan as a first line treatment for the condition. While
the drug still has a long way to go for the approval (expected
approval in 2014), we think it has a fair chance of succeeding now,
and thus we have incorporated expected sales of the drug in our
We have also increased our sales expectations from its several
established drugs. Mabthera/Rituxan is seeing a continued uptake in
demand, especially from emerging markets. Herceptin sales have been
helped by Roche's strategy to combine drugs with companion
diagnostics. The drug maker's other largest selling cancer drug,
Avastin, is seeing astounding growth in Western Europe market for
ovarian and lung cancer condition. According to management, Avastin
gained significant market share for ovarian cancer in the region
and this trend is expected to continue.
We have, however, lowered our sales expectations from Hepatitis
C vaccine Pegasys. While the drug exhibited double-digit growth in
the last couple of quarters due to its use in triple-combination
therapy, patients are going off the therapy, and this should result
in declining sales going forward. In addition to Pegasys, we have
also lowered our sales expectations from Bonviva and Neorecormon as
they continue to lose revenues at an accelerating rate amid generic
In the Diagnostic division, we have lowered Roche's expected
market share largely due to weakness in its diabetes franchise.
Adding to the pain, Roche has been facing pricing pressure in
While we expect gross margins (for both pharma and diagnostics)
to decline going forward due to a change in product mix and pricing
pressure, the decline may not be as steep as we had earlier
anticipated and so we have slightly revised our gross margin
expectation. Further, we have reduced our forecast for R&D
expenditures and selling, informational & administrative
(SI&A) expenses due to Roche's aggressive efforts to cut costs
to drive operating profit. All of these factors have led to an
increase in our price estimate.
However, there are other factors that could have an impact on
our price estimate. The company's experimental cardiovascular
drug, RG7652, is moving toward advanced trials after
significantly reducing levels of bad LDL cholesterol. Roche's
pipeline for Alzihmers also looks promising. And any success here
will lead to upside in our price estimate.
Submit a Post at Trefis Powered by Data and Interactive
Drives a Stock at Trefis