From the September 2013 issue of Research Magazine • Subscribe!

Healthy Prospects

Strong sales and pipeline products bode well for the industry.

Karen Andersen, CFA
Morningstar
karen.andersen@morningstar.com
312-384-4826

We think Roche’s (RHHBY) drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages. With the U.S. launch of Perjeta in 2012 and the launch of Kadcyla in 2013, Roche is in a strong position to continue growing its breast-cancer franchise beyond Herceptin.

Now that pressure on Avastin breast-cancer sales has waned, Roche is beginning to see renewed growth, stemming from Rituxan and Herceptin (particularly in emerging markets) as well as strong momentum in newer products like Actemra. Biosimilar competitors to Rituxan have witnessed delays, and we think the firm’s strong portfolio and late-stage pipeline will enable five-year average earnings growth of 7%.

We expect pharmaceutical and diagnostic synergies to increase in the wake of the Genentech acquisition. While cancer remains Roche’s core strength, a late-stage pipeline including drug candidates in schizophrenia and cardiovascular disease could expand its reach beyond oncology.

Richard Vosser
J.P. Morgan
richard.vosser@jpmorgan.com
+44-20-7742-6652

Roche reported 2Q/1H 2013 results this morning [July 25] showing strong Core EPS results for 1H’13 driven predominantly by higher royalties in the Pharmaceuticals division. Guidance was not raised, because it’s open ended; but in our view, the combination of results and guidance should lead to consensus remaining unchanged for FY’13. With the pipeline moving in the right direction with a couple of Phase III progressions and good numbers, we expect the results to be supportive of the shares …

Roche reported strong results with core EPS of 7.58 Swiss francs (2.4% ahead of company consensus) on inline sales, with the majority of the beat coming from better profitability in both Pharma and Diagnostics. (One franc equals U.S. $1.08 as of July 29.) In Pharma, this was driven by higher royalty income, and in Diagnostics this was driven by the profits from better than expected sales falling to the bottom-line.

Roche 2013 guidance remains unchanged with sales growth in-line with 2012 (i.e. 4% in local currencies) and core EPS targeted to grow ahead sales and a further increase in the dividend.

Steve Scala, RPh, CFA
Cowen & Co.
steve.scala@cowen.com
617-946-3923

Roche H1:13 EPS of 7.58 Swiss francs (+10%) was 0.28 francs above our 7.30 francs estimate. Q2 Group revenues of 11,706 million francs (+3%) were 166 million francs above our estimate: Pharmaceutical sales of 8,992 million francs (+2%) and Diagnostic revenues of 2,714 million francs were 18 million francs below and 184 million francs above our forecasts, respectively. Net financial loss of 838 million francs was 157 million francs above our forecast. Tax rate of 23.1% was 60 basis points above our estimate (clipped 0.06 francs per share).

Avastin, Lucentis, CellCept, Tarceva, and three others together were 215 million francs above our estimates; Avastin alone beat by 71 million francs. 2013 guidance of sales increasing in-line with last year’s sales growth at a constant exchange rate (CER) and EPS targeted to grow ahead of sales was reiterated. Our 2013 revenue estimate of 46,464 million francs (+2%) and EPS estimate of 14.20 francs (+5%) remain intact.

Edward Nash

Cowen & Co.
edward.nash@cowen.com
646-562-1385

Inovio Pharmaceuticals is a biopharmaceutical company focused on the development of DNA vaccines for both oncology and infectious diseases. The company’s lead program is focused on targeting human papilloma virus (HPV), which is the cause of cervical cancer.

Approximately 2.8 million women worldwide have the HPV 16 and/or 18 strains, which account for 80% of HPV infections. The only currently approved vaccine for HPV in women is administered as a prophylaxis and is not used to treat the infection, dysplasia, or resulting cancers.

In addition to HPV infection, Inovio is developing vaccines for leukemia in collaboration with Merck and for infectious disease indications such as pandemic flu, specifically H5N1, universal flu and HIV as a therapeutic and as a prophylaxis in collaboration with academic centers and government agencies.

We believe Inovio will partner all of its vaccine programs given the sizable markets for which they are being developed. We assume a 2017 launch for VGX-3100 for the treatment of cervical cancer, with royalty revenue of $43.4 million on sales of $289.4 million.

Inovio reported positive preclinical results from the H7N9 vaccine program and also published results of Phase I PENNVAX-B HIV vaccine program. While these results are early stage, we believe the strong fundamental scientific underpinnings illustrate the true strength of the company’s platform technology.

The Chinese Center for Disease Control and Prevention reported more than 130 cases of H7N9 to date with a 30% death rate. The virus’ ability to bind both salient human and bird receptors, as well as infect the upper rather than lower respiratory tract, makes H7N9 highly transmissible. Furthermore, reported cases of resistance of H7N9 against antiviral drugs gives H7N9 pandemic potential. Inovio’s report of 100% protection against H7N9 in animal models after vaccination with Inovio’s DNA vaccine is very timely and promising.

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