Roche, Genentech And The Cancer Drug Billionaires

| About: Roche Holding (RHHBY)


Swiss giant Roche (OTCQX:RHHBY), the world's largest maker of cancer drugs, had a very good year in 2012 and it projects great things for 2013. In 2012 sales rose 7% to 45.5 billion Swiss francs (approximately $49.39 billion). Full-year net profit rose to 9.54 billion francs from 9.34 billion francs from a year earlier.

Sales in China, India and other emerging economies helped offset sales falling in Europe, where austerity measures have cut into profitability. In Western Europe, sales were down 4 percent.The company is also able to raise its dividend this year and expects further increase next year.

Price pressure in austerity-stricken Europe is expected to persist, while emerging markets should post a strong growth and sales in the U.S. are projected to remain stable. Roche's success contrasts its hometown rival Novartis (NYSE:NVS), which has reported flat performance and suffered a loss of patent protection for a key drug.

Roche's shares are available for US investors in ADR form (American Depositary Receipts) which are dollar-denominated securities readily available from local brokers-dealers. Currently, one ADR represents one quarter of one underlying non-voting share. ADRs are liquid. In 2011, the average daily trading volume in Roche's ADRs was 568,302 shares, and the depositary bank J.P. Morgan Chase can issue large number of additional shares, if needed.


In February the FDA approved breast-cancer drug Kadcyla, formerly called T-DM1 from Roche and its U.S. biotech partner ImmunoGen (NASDAQ:IMGN). European approval is expected later in 2013, the Japanese approval probably next year. Kadcyla is approved for patients with metastatic breast cancer who had been previously treated with Herceptin, the blockbuster also owned by Roche.

The drug uses newly developed antibody conjugate technology which links Herceptin's antibody with ImmunoGen chemotherapy agent DM1. Kadcyla helped people in the Emilia study live nearly six months longer than patients taking the Tykerb (from GlaxoSmithKline(NYSE:GSK)) and Xeloda (also from Roche) combo.

A whole new wave of antibody-drug conjugates was inspired by Kadcyla, using technology mainly from ImmunoGen or Seattle Genetics. Roche/Genentech now has 25 ADC-s (antibody-drug conjugates ) in their pipeline, including 9 in clinical trials.

Analysts project peak sales for Kadcyla ranging from $2 billion to $5 billion a year. The prospects much improve if Kadcyla wins approval for first-line treatment. Roche is conducting a clinical trial with that in mind with results due in the first quarter of 2014.


The monthly cost of Kadcyla in the United States will be $9,800. The estimated cost of a course of Kadcyla is approximately $94,000, based on people taking it for 9.6 months. As a comparison, the Tykerb and Xeloda combo cost approximately $10,460 per month and it proved to be inferior to Kadycla in the Emilia study.

The question is how much payers are willing to reimburse. Herceptin's $70,000-a-year price tag in the U.S. was already controversial, so what will they say about Kadycla's $94,000? Genentech pledges to provide the drug free to those who cannot pay.


The approval is also a great day for Immunogen, which provides the cancer killing compound in Kadcyla. The FDA approval triggers a $10.5 million payment from Genentech, and Immunogen will also receive royalties on sales.


The approval helps shoring up Roche's breast-cancer dominance.

The franchise suffered a setback in 2011, when the FDA revoked the breast-cancer indication of Avastin, but Herceptin retains a 90% market share in first-line treatment of cancers involving HER2 cell receptors, which make up 20 to 30% of all breast cancers. Herceptin is generally used in combination with chemotherapy agents such as Roche's own Xeloda, Bristol-Myers Squibb's (NYSE:BMY) Taxol and Celgene's (NASDAQ:CELG) Abraxane.

In advanced cancers, it faces competition from GlaxoSmithKline 's Tykerb, but in clinical trials Kadcyla came out ahead against a Tykerb-Xeloda combo treatment. Herceptin, however, is likely to face cheaper competition from biosimilars in a few years. According to Morningstar analyst Karen Andersen, Herceptin biosimilars could arrive as early as 2015 in Europe and 2019 in the U.S. By that time Kacyla may be able to take its place.


Roche's Board of Directors proposed a dividend increase of 8% for 2012 to 7.35 Swiss francs per share (approx. $7.87). This is subject to approval by the shareholders meeting on March 5, and it will be Roche's 26th consecutive annual dividend increase. Ex-dividend date is March 07, record date March 11, dividend payment date March 12.

Dividends are paid in U.S. dollars and the dividend tax re-claim process is taken care of by the depositary bank, typically reducing dividend tax to the U.S. level (0-15% depending on investor status). Roche's depositary bank is J.P. Morgan Chase, which has the duty to issue and cancel Roche's ADRs, distribute dollar-denominated dividends to holders and help reclaim Swiss withholding taxes on dividends.


Roche' articles of incorporation mandate that only bearer shares have voting rights. Roche's 702.6 million non-voting shares make up more than 80 percent of the company's equity.

Bearer shares do not contain the name of the shareholder and are not registered, with the possible exception of their serial numbers. Bearer shares thus have a very high level of anonymity Roche has 160 million bearer shares outstanding.

At least half of the shares are held by families, and another third is controlled by Basel-based competitor Novartis. A dozen billionaires, members of the Engelhorn family of Germany and Switzerland' Hoffmann-Oeri clan, have a combined fortune valued at more than $35 billion, according to the Bloomberg Billionaires Index.

8 of the 12 are great-grandchildren of Fritz Hoffmann-La Roche, who founded the company in 1896 with his cough syrup formula. They control at least 50% of the company's voting rights and 9.3% of its value. Bloomberg calls these shareholders the "hidden billionaires."

The hidden Hoffmann billionaires, Sabine Duschmale-Oeri, Andreas Oeri, Catherine Oeri, Beatrice Oeri, Andre Hoffmann, Vera Michalski-Hoffmann and Maja Hoffmann, have avoided being identified by holding their Roche stakes in a voting pool created in 1948 to maximize the family's control over the publicly traded company. Reportedly, they stay away from the day-to-day operations but maintain deep interest in the company.

As to the German owners: In 1998, Roche paid $10.2 billion to acquire Bermuda-based Corange Ltd., which controlled German diagnostics manufacturer Boehringer Mannheim GmbH and 84 percent of DePuy Inc., a Warsaw, Indiana-based orthopedics maker. The transaction made billionaires of four members of Germany' Engelhorn family.

In 2011, Maja Oeri's departure from the voting pool caused the family voting pool to lose its Roche voting majority, sparking speculation that Novartis could mount a takeover attempt. But Novartis views its holding in Roche as a strategic investment and nothing more for the moment.

Investor' summary

In the past ten years, Roche's shares are grew in a phenomenal 371 percent from $10.77 to over $56. Roche owns California-based Genentech and a stake in Japan's Chugai Pharmaceutical. Roche and Genentech have the best-selling cancer treatments in the world, with Rituxan, Avastin and Herceptin as leaders, now another potential winner Kadcyla added.

Herceptin, Rituxan, Avastin, Actemra (for rheumatoid arthritis ), Zelboraf (metastatic melanoma) and Pegasys (hepatitis B or C) together represent 60% of Roche' portfolio, and generated 2.4 billion Swiss francs in additional sales for the year. 2012 was a particularly good year for Roche's pipeline development, 11 out of 14 late-stage clinical trials delivered positive results. The company now has 9 compounds in Phase 3 and another 14 compounds in Phase 2, and overall it has over 70 new molecular entities in clinical development, clearly one of the strongest pipelines in the industry.

For 2013, analysts expect earnings per share to rise 23% and continue growing through 2017, according to a poll conducted by Thomson Reuters. Roche will continue paying down its debt from the $46.8 billion purchase of Genentech in 2009. The stock price ranged from $38.63 to 57.89 in the past 52 weeks.

This past year, faced with a continuing economic crisis, many companies saw their revenues shrink. Not Roche. Its sales grew and expected to go on growing. For investors wishing to diversify their portfolio with international companies, Roche is certainly a prime candidate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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