Roche Earnings Preview: Oncology Drugs In Focus
Roche Holding AG (PINK:RHHBY) is scheduled to report its earnings for Q3 on October 17. For the first six months of this year, its overall sales were 23.3 billion Swiss Francs, an increase of 5% year-on-year (y-o-y). This came on a strong performance in its pharmaceutical division (+6%) that is mostly dominated by cancer drugs and accounts for over 85% of the company’s value, according to our estimates.
We expect Roche to continue reporting revenue growth as its top selling drugs – Herceptin, Avastin and MabThera/Rituxan — continue to lead in their respective segments. Together, these drugs accounted for nearly 40% of the company’s revenue in the first six months of 2013, and have been growing at healthy rates in recent quarters. Sales for Herceptin, Avastin and MabThera/Rituxan increased y-o-y by 5%, 12% and 3% respectively in the first half of the year. It will also be interesting to see how some of Roche’s newer drugs are behaving because they will be the key to its revenue growth after the patents of its top-selling drugs start expiring.
Our price estimate for Roche’s stock is around $57, almost 15% below the current market price.
See our full analysis for Roche Holding AG
Oncology Division: Top Drugs Are Likely To Continue Leading The Market For Some Time
According to IMS Health, the oncology (cancer) market is likely to grow by 5%-8% annually and reach $75-80 billion by 2015. [1] As the market leader in this segment, Roche is well-positioned to benefit from this growth. The company owns three of the top-selling oncology drugs in the world – Avastin (for types of colon and lung cancer), Herceptin (for types of breast and stomach cancer), and Rituxan (for types of blood cancer). In 2012, each of these drugs brought in revenues of over $5 billion, which is more than 10% of Roche’s total revenue.
As mentioned earlier, these drugs have been showing healthy sales growth, and we believe that the trend will continue at least until the end of 2013. After that, Rituxan will lose patent protection in Europe and its sales could come under pressure if it faces competition from generic manufacturers. The same could happen with Herceptin in the second half of 2014 because its European patent will also expire in mid-2014. [2]
However, we believe that this should not be a cause for alarm among investors because no generics for these drugs have yet been approved in Europe. Since the approval process is difficult and time-consuming, one can assume that Rituxan and Herceptin will continue to lead in their respective segments in Europe for some time even after their patents expire.
Even if generic competition were to emerge immediately after the expiry of these patents, our analysis suggests that less than 10% of Roche’s total revenues will be at risk. The monopoly of these drugs will still continue in the U.S., their largest market, because the U.S. patents for Rituxan and Herceptin are valid until 2016 and 2019, respectively. [2] You can read more about this analysis here.
Meanwhile New Drugs Are Showing Promise
Meanwhile, Roche has been busy developing new drugs and has reported initial success in some of its initiatives. Two of its cancer drugs – namely Alectinib and GA-101 (obinutuzumab) – were granted the status of “breakthrough” drugs by the FDA in the recent past. Another investigational drug, MPDL3280A, recently showed high efficacy in lung cancer patients with a history of smoking. [3] [4] Among the new drugs that have already been launched in some markets, Kadcya and Perjeta have shown impressive initial uptake.
It will be interesting to hear from the company’s management about any new developments in its new drug pipeline. You can read about some of Roche’s promising new drugs in our previous article: All Eyes On Roche’s Oncology Pipeline At European Cancer Congress
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Notes:- The Global Use of Medicines: Outlook Through 2015, IMS Health, May 2011 [↩]
- US$54 billion worth of biosimilar patents expiring before 2020, GABI, September 30, 2011 [↩] [↩]
- Roche Pulls Ahead in Immunotherapy Race, DailyFinance, October 1, 2013 [↩]
- New Roche drug a lung cancer ‘game changer’, CHealth, September 29, 2013 [↩]