Roche 's ( RHHBY ) results from trials of the Herceptin and Perjeta combination therapy for 'after surgery breast cancer' applications are eagerly awaited. Why? Simply because investors expect Roche to come up with novel combination therapies and make its portfolio resilient against inevitable biosimilar competition, which may start to affect Roche's sales in the next two to three years. Specialists have stated that the combination has to deliver a minimum of 2%-3% improverment over 'Herceptin + chemotherapy' combination. This begs the larger question - what risk do biosimilars pose to Roche? Nearly 75% of Roche's cancer drug sales and more than 50% of its pharmaceutical sales will be impacted to an extent as competition from biosimilars emerges. The drugs in question include Avastin, Herceptin and Rituxan (MabThera). To Roche's comfort, Herceptin and Mabthera, which together accounted for more than $14 billion in revenue in 2016, are still growing at low to mid single digit rates. Expansion in China, longer treatment duration, and continued uptake in vasculitis and rheumatoid arthritis are some of the factors driving this growth. Avastin's growth seems to have flattened out. We think that if the new drugs underperform and the competition from biosimilars turns out stronger than expected, there could be nearly 10% downside to Roche's price estimate. Our current price estimate of $31.86 for Roche is slightly above the market.
Roche's Key Drugs And Biosimilar Competition
Avastin is expected to lose its EU patent in 2018 and U.S. patent in 2019. While Herceptin's patent expired in EU 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, the sales of these drugs have been relatively well protected due to lack of biosimilars in the market, and Roche's strategy of using combination therapies to maintain 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 some sales beyond 2019, the shift will 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.
We already forecast the combined sales from Avastin, Herceptin and MabThera to decline from more than $21 billion in 2016 to merely $11.5 billion by 2023. However, we expect much of the gap to be filled by new line of drugs including Perjeta, Tecentriq, Gazyva and Venetoclax. If, however, the new drugs perform below our expectations and Roche's combination therapies fail to demonstrate improvement over traditional therapies, our overall forecast for Roche's oncology drug sales could turn out to be optimistic. If Roche's oncology drug sales remain more or less flat in the long run because of stronger than expected biosimilar competition and newer drugs face increasing challenges from branded and well-funded competitors, there could be nearly 10% downside to our price estimate for Roche.
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