Source: Roche
The healthcare industry remains a global enterprise with world-class companies working towards new treatments. Let’s have a look at the prospects of Roche Holdings.
By Alexander J. Poulos
Overview
Roche Holdings (RHHBY) is far from a household name in the US, yet it remains one of the top pharmaceutical companies in Europe. When reviewing the prospects of Roche, we could not help but draw the comparison to the old Abbott Labs (ABT) before splitting off Abbvie (ABBV). The holding company houses a world-class diagnostics division with one of its main consumer products being the Accu-Chek Blood Glucose Test Strips. The diagnostic group can be viewed from the perspective of a slow and steady earnings producer with incremental innovation to spur sales along. The benefit of a stable group such as Diagnostics is the absence of the dreaded patent cliff that afflicts all research-based entities. The primary earnings driver for Roche remains the Pharmaceutical division which has recently brought forth some innovative molecules. The focus of the report will stay on the innovative pharmaceutical group to help gauge whether Roche is about to accelerate revenues.
Pharmaceutical Division
Source: Roche
The Pharmaceutical division remains a center of innovation for many decades. As is the case with its US-based brethren, patent exclusivity issues can alter revenue trajectories. Roche is perched at a critical inflection point where its top three selling products are nearing the end of its respective patent protection. We view Roche as highly exposed with stellar results needed from the next generation products to maintain revenue growth.
Roche has indicated the patent for top-selling product Rituxan, will lapse in the US in the middle of next year whereas the EU patent has expired. The European Commission which is the EU equivalent of the US FDA has granted Sandoz marketing approval for a biosimilar version of Rituxan. We feel the full effect of the patent loss will be felt in 2018, as Sandoz will need to some time to market its version of Rituxan. The loss of patent protection will be acutely felt, as we expect roughly half of Rituxan’s overall sales may be at risk to a biosimilar challenger by 2021.
Further complicating matters for Roche is the pending patent loss on Herceptin. Roche expects the patent on Herceptin to lapse in 2019 in the US whereas it has now expired in the EU. Roche has signed a deal with Mylan Labs (MYL) that would grant Mylan a license to bring forth its version of Herceptin while forgoing the ongoing legal expenses. We view the deal as a clever way to control the rate of decline in Herceptin while allowing ample time for Roche’s next generation treatment Perjeta to gain traction.
The recent ASCO data read for Perjeta has underwhelmed, raising doubts the ambitious revenue targets for Perjeta will be met over time. The following data point from Roche press release demonstrates incremental gains in efficacy– yet with health care cost containment high in the minds of payers, will the additional improvement warrant an increase in usage. It remains to be seen yet we are skeptical.
Based on data available at the time of the primary analysis, an estimate of iDFS at four years showed that 92.3% of people treated with the Perjeta-based regimen did not have their breast cancer return compared to 90.6% treated with Herceptin and chemotherapy, suggesting that further analyses with longer follow-up will be important to provide additional insights on these treatments.
Roche New Foray into Oncology
Roche has a long history of bringing forth innovative oncology treatments. Its latest crop of novel therapies offers some promise headlined with its PD-L1 compound Tecentriq. Roche is optimistic the sales growth from Tecentriq will help offset the bulk of the upcoming patent cliffs. The molecule has gotten off to a good start with FDA approval for first-line use in patients with advanced or metastatic bladder cancer. First line use is critical as most patients will only get one to two rounds of therapy– most do not ever progress to a product indicated for third-line use. Tecentriq is the first of the PD class to garner this designation as other members only have a second-line indication.
The FDA approved Tecentriq for this indication through the fast track approval process based on the results of the IMvigor 210 study. Expectations continue to ramp higher with the IMvigor 211 studies expected to validate the results from the previous trial. Tecentriq failed to post superior overall survival rates compared with chemotherapy in the phase 3 IMvigor 211 study, casting doubt on the future viability of the product. Parallels with Bristol Myers-Squibb’s (BMY) infamous Opdivo failure are bound to be drawn. We have a more sanguine view of the trial results–the drug discovery process is a never ending maze of spectacular flameouts with the occasional dash of brilliance thrown in. We feel Tecentriq will be a viable treatment option going forward yet until superior trial results are posted, we feel it will be relegated well behind Keytruda and Opdivo for now.
Ocrevus
Stepping outside of Roche’s expertise in Oncology, the company has brought forth a remarkable advance in the treatment of Multiple Sclerosis. The newest treatment is sold under the trade name Ocrevus. Ocrevus is the first approved product for the treatment of relapsed or primary progressive form of multiple sclerosis. We fully expect Ocrevus to meet its lofty growth expectations assuming there are no unexpected side effects that manifest themselves. There was a recent report of a patient developing progressive multifocal leukoencephalopathy (PML). The development of PML has hampered some of the growth in Tysabri, yet it still has morphed into a blockbuster for Biogen (BIIB).
Role of the Dividend
Source: Roche
One of the main appeals in our view of the established, slower-growing big pharma companies is the dividend. A generous dividend heightens the appeal of the equity, especially in today’s low-interest rate environment. In this regard, Roche sharply differs from its peers, including Abbvie/Abbot and Johnson and Johnson (JNJ), with an annual payout. We believe the annual dividend lowers the appeal of the equity for dividend growth investors. Roche’s dividend is subject to 35% Swiss withholding tax, which further reduces the overall dividend payment.
Concluding Thoughts
At this time, we are not compelled to add Roche to either of the newsletter portfolios.
We feel Roche is at a crucial juncture with reduced visibility as to the path of future revenue growth. We believe in light of the recent setbacks in Tecentriq and the more aggressive schedule of biosimilar entrance into Roche key products, revenues at best will stagnate over the next few years.
As for Roche’s ability to return cash to shareholders in the form of a dividend, we feel the company is top-notch and on par with other pharma heavyweights such as Johnson and Johnson. The annual dividend payment coupled with the Swiss withholding tax is a deal breaker for us at this time, however.
We continue to be enamored with Johnson and Johnson, as we feel the diversified revenue stream backed with a Fort Knoxesque balance sheet is a combination that is too hard to resist.