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August 25, 2014 at 08:00 PM
Karen Andersen, CFA
Morningstar
312-696-6000
[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
617-946-3923
[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.
