Luisa Hector PhD, CFA
Roche reported solid 1H12 figures with a sales beat and EPS in-line plus a reiteration of FY12 guidance. Key drugs and emerging markets all showed strong growth in 2Q12, and pharmaceuticals saw underlying sales growth of +6% (vs. +2% in 1Q12, +3% in 4Q11, 0% in 3Q11).
Roche benefits from a very limited patent-expiry burden in 2012-15E. Whilst some investors seem concerned about longer-term threats from bio-similars, Roche has multiple strategies in place to protect its core franchises. We believe that this defensive outlook should underpin Roche’s ability to return incremental cash to shareholders in the form of dividends (circa $31 billion of [free cash flow] remains unallocated from 2012-15E).
Karen Andersen, CFA
Roche’s top line grew 4% at constant currencies in the first half to reach Swiss franc 22.4 billion (US$ 22.9 billion), and the firm’s core EPS grew 8% to Swiss franc 6.94 (US$ 7.10), as costs of goods sold remained flat due to lower manufacturing costs and lower royalties owed for declining products like Tamiflu, CellCept and Boniva.
In the pharmaceutical division, sales grew 4%, thanks to strong growth in the U.S. (6%) and other international markets (8%), despite a 3% decline in European sales, where continued growth of key cancer blockbusters Herceptin and Rituxan was countered by generics pressure and a 2% impact of pricing pressure.
As the market leader in both biotech and diagnostics, Roche is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Key acquisitions, such as Ventana Medical and Genentech, complement this firm’s innovative offerings, and we’re confident in the sustainability of Roche’s competitive advantages.
Bottom line: Watson Pharmaceuticals remains our top pick. We continue to like WPI, because it has a superior growth profile among major generics companies, driven by a generics business with a favorable product mix characterized by several non-commodity products that bring better margins and durability than standard generics.
The pending Actavis acquisition is compelling strategically and financially, as it transforms WPI into a global generics leader with new strength in attractive markets, bolsters long-term growth and creates substantial value.
Concerta [competition] assumed in early 2013 has modest impact given margin step-up and likely quota constraint: We model a generic entrant (presumably Kudco) at the beginning of 2013. We assume that an entrant would face supply constraints due to limited quota availability, and consequently would take volume share slowly and thus have little incentive to price aggressively.
Following its acquisition of Actavis, Watson will become the world’s third-largest generic drug manufacturer. The deal brings numerous potential advantages to Watson’s operations, including a global footprint, enhanced economies of scale, access to attractive, fast-growing emerging markets, and additional manufacturing capabilities with injectable, transdermal, and liquid pharmaceuticals.
We think this acquisition strengthens Watson’s economic moat and follows a list of well-executed drug launches, including Concerta, Lipitor, and Lovenox, which have produced attractive returns on capital. While integration efforts, a higher debt load, European pricing pressure, and the patent cliff remain concerns, we think Watson has entrenched itself as a heavyweight in the generic-drug industry. Down the road, we expect management will focus on acquisitions to bolster vertical integration and the branded drug pipeline.
We continue to think Watson’s portfolio and pipeline of limited competition generic products offer greater future earnings clarity, and combined with the company’s branded segment, bio-similars agreement with Amgen, and soon-to-be acquired international operations from Actavis, Watson remains one of the best positioned generic drug manufacturers, in our view.
Cowen and Company
Inovio Pharmaceuticals focuses on the development of therapeutic and preventive vaccines for the treatment of cancers and infectious diseases that have a major medical need. The company has strong scientific expertise in the discovery and clinical development of vaccines by employing its proprietary SynCon plasmid technology for the composition of the vaccines and electroporation for the delivery. Inovio’s lead program, VGX-3100, is in Phase II clinical development for HPV infection.
Inovio’s business strategy is to partner the vaccine programs with strong companies that look to make Inovio’s vaccines a clinical priority and to create partnerships that maximize shareholder value. We believe that by focusing on therapeutic areas where there is a major need for new therapeutic and preventive vaccines, Inovio and its partners help to de-risk their interactions with the FDA.
Inovio’s proprietary plasmid technology and delivery method are differentiated. We believe Inovio’s plasmid technology, bundled with its electroporation technology, sets it apart from other DNA vaccine developers. This technology combines strong immunogenicity with a convenient and effective delivery method that is able to get Inovio’s vaccine into cells and provide novel therapeutic options across a diverse set of indications.