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    Quick Take
  • Roche’s revenues depend on its oncology division to a large extent.
  • The company leads the oncology segment and owns three of the top selling cancer drugs — Avastin, Rituxan and Herceptin.
  • Sales for all three drugs have been strong but patent expiry looms for Reituxan and Herceptin in Europe.
  • The company has some time before it hits the patent cliff and is focusing on its drug pipeline.
  • Recent successes in its oncology drug pipeline have boosted our outlook for the company.

Roche (OTCQX:RHHBY) is one of the world’s leading pharmaceutical companies and is particularly strong in the cancer drugs market. The company is scheduled to release its earning figures for the first quarter of 2013 this week on April 11th.

Over the past few months there has been some positive news from Roche’s oncology division regarding the approval of certain phase III cancer drugs. The news is important because any of these under-trial drugs could become the next blockbuster drug and reduce Roche’s dependence on Herceptin and Rituxan — two best-selling drugs for which patents are set to expire in the EU soon. The upcoming earnings release is crucial because it is expected to provide more details on these phase III drugs. The conference call is also likely to shed light on the company’s acquisition plans.

Roche’s stock has increased over 15% year-to-date and currently trades in line with our $58 price estimate.

Oncology Division: Strong Pipeline To Replace Existing Drugs

Roche owns three of the top selling oncology drugs in the world – Avastin (for types of colon and lung cancer), Herceptin (for types of breast and stomach cancer), and Rituxan (for types of blood cancer). Each of these drugs brought in revenues of over $5 billion for the company in 2012 and accounted for over 10% of Roche’s total 2012 revenues. The sales of these drugs increased by nearly 4%, 7% and 7%, respectively, in 2012 and contributed to Roche’s overall revenue growth.

Being the market leader in the cancer drug market, Roche stands to benefit significantly from growth in this segment. The market is likely to grow by 5–8% over the next several years and reach approximately $75-80 billion by 2015, according to IMS Health. [1] However, the patents for Rituxan and Herceptin are set to expire in Europe in late 2013 and mid 2014, respectively, and going forward we expect the sales of these drugs to moderate in this region as generics enter the market. (US$54 billion worth of biosimilar patents expiring before 2020, Gabi Online, September 30, 2011) These drugs generated around $3.6 billion in revenues in Western Europe in 2012. [2]

Nevertheless, there are reasons to remain optimistic about Roche’s total oncology sales, primarily because the patent expiry is limited geographically to Europe and the company has seen some recent successes in its oncology pipeline. Although the patents for Rituxan and Herceptin will expire in Europe, their sales outside Europe should remain unaffected at least until 2016, when the first patent for these drugs expires in the U.S. That gives Roche some time to develop new drugs to replace these best-sellers.

Meanwhile, the company has seen some major successes in its oncology pipeline over the last couple of months — including in-time approvals for two potential blockbuster oncology drugs, T-DM1 and Perjeta. [3] Perjeta is in phase III trials and has been shown to increase the survival rate in cases of breast cancer beyond the current standards of care. The drug is expected to be ready for launch by 2016 and should be in time to replace Herceptin.

We will be looking for more details on these developments from Roche’s management during the conference call. You can see Roche’s drug pipeline here.

Other Details To Look Out For

Recently, Roche was reported to be in the race for acquiring a diagnostics company called Life Technologies (Life Tech). The acquisition would give Roche an opportunity to boost its revenues from the pharma franchise as well as increase its market share in the diagnostics market, which could trigger an upside to our $58 price estimate. You can read more about Life Tech in one of our previous articles here. Although we do not expect the company’s management to elaborate on this development, we will be looking for any hints on the conference call.

We will update our $58 price estimate for Roche Holdings after the earnings release.

Notes:

  1. The Global Use of Medicines: Outlook Through 2015, IMS Health, May 2011
  2. Company Website, Roche
  3. Breast cancer drug ‘biggest boost since Herceptin’, The Telegraph, March 14, 2013

Disclosure: No positions

Source: Roche Earnings Preview: What We Are Watching