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Robust Results

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Karen Andersen, CFA
[email protected]

We think Roche Holding’s (RHHBY) drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss health-care giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor.

In Roche’s pharmaceutical division, blockbuster cancer biologics acquired with Genentech—including Avastin, Rituxan and Herceptin—continue to grow quickly as they gain market share in approved indications and garner widened approval in new indications and emerging markets. The acquisition also facilitates information sharing between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic arm. For example, BRAF-inhibitor Zelboraf, approved for melanoma in 2011, is among the first drugs tested in biomarker-selected patients from the start. We expect such synergies to increase as Roche’s pipeline advances.

Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters mature. Three-fourths of Roche’s top pharmaceutical sales are from biologics, which provides a buffer against traditional generic competition.

Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott and Johnson & Johnson. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.

Roche’s wide moat arises from its status as the leader in oncology therapeutics (30% market share) as well as in vitro diagnostics (20% share), and the firm has a promising strategy of combining its expertise in both areas to generate a growing personalized medicine pipeline, making use of companion diagnostics.

Steve Scala, R.Ph., CFA
Cowen and Company
[email protected]

Roche offers at least average, but highly visible, EPS growth potential through 2020, supported by a handful of still robust franchises, including Avastin, Rituxan and Herceptin. While these products are unlikely to deliver upside to expectations, we believe they are equally unlikely to disappoint.

The pipeline has a few high-potential products, and recent approvals have had strong launches. Biogenerics are a manageable risk, given Roche’s efforts to advance the standard of care. A powerful Diagnostics Division is well positioned for the emergence of personalized medicine. Despite these strengths, Roche’s P/E multiple is just above the group average.

EPS are expected to grow 2% to 7.30 Swiss francs in 2014, on a 1% decline in revenues. Growth accelerates to mid-single digits for 2015-2019. Core EPS are pegged at 10.00 Swiss francs in 2020, implying 2014–20 compound EPS growth of 5%, which is about in line with the group average. However, we believe there is greater than average possibility of upside to these forecasts.

Kadcyla and Perjeta [to treat breast cancer] have enjoyed good rollouts and fortify the human epidermal growth factor receptor-2 (HER-2) franchise. Gazyva [GA-101] similarly could advance the standard of care in chronic lymphocytic leukemia/non-Hodgkin’s lymphoma (CLL/NHL), and protect the Rituxan franchise.

Lampalizumab looks like a breakthrough in dry age-related macular degeneration (AMD), and etrolizumab holds promise in both Crohn’s diseas and ulcerative colitis.

Edward Nash
Cowen and Company
[email protected]

Inovio Pharmaceuticals (INO) has reported promising preclinical data demonstrating protection against the Chikungunya virus in animal models.

There is no cure for CHIKV, and therefore a safe and effective vaccine against CHIKV represents an unmet need. INO’s team engineered a specific monocolonal antibody (mAb) against CHIKV with neutralizing ability and delivered the plasmid directly into the animal.

This resulted in animal serum having the ability to neutralize the virus within hours of injection and lasting several weeks.

This method of generating immunity is distinct from traditional antigen mediated immunity and can potentially have broad applications for any number of diseases for which a long-lasting protective mAb would confer long-term therapeutic effects.

Brian Klein, M.D.
Stifel Nicolaus
[email protected]

This morning [July 23, 2014], Inovio reported VGX-3100 vaccination successfully led to statistically significant cervical intraepithelial neoplasia 2/3 histological regression, along with robust, human papillomavirus -specific T-cell responses, and virologic clearance of HPV. We view these results as highly encouraging, and with these positive data in hand we anticipate the company will be able to successfully partner the VGX-3100/3112 franchise.

In addition, we believe these results help validate the company’s vaccine technology platform by correlating T-cell activation to clinical improvement, which adds additional value to Inovio.

We believe VGX-3100 for this indication (CIN2/3) alone could represent up to a billion-dollar commercial opportunity worldwide, given the high global prevalence of HPV infections, and the company’s HPV-targeting franchise 3100/3112 could address additional billion-dollar HPV-induced cancer indications, including frank cervical cancer, head and neck cancer, and ano-genital cancer.

We anticipate additional data will be presented/published in the near term and believe partnering discussions will accelerate.


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