Sometimes it's good to just rally the troops a bit. While I didn't see anything especially new in Roche's (RHHBY.OB) Investor Day presentations, it was a good reminder as to the depth, breadth, and quality of this Big Pharma's drug and diagnostics pipeline. History says that several of these currently-promising programs will fall by the wayside, and Roche's shares are not quite slam-dunk cheap, but this remains a quality to name to hold in the healthcare space.
Easy As ADC?
It is clear from Roche's presentation that antibody drug conjugates are a major area of focus for the company. There are nine ADC programs underway at Roche, and drugs for breast cancer, hematological cancers, non-small cell lung cancer, and lymphomas could all be blockbusters in their own right, led by the very promising T-DM1 (which Roche is developing under an agreement with ImmunoGen (IMGN)). Better still, Roche is developing all of them with companion diagnostics (more on this later).
As a side note, investors interested in the ADC space but looking for more potential bang for the buck ought to consider Seattle Genetics (SGEN) and/or Celldex (CLDX) as well - success for Roche doesn't guarantee anything for them (nor does failure preclude anything), but it will likely generate more attention and interest in the approach.
Plenty More Where That Came From
Of course, Roche's pipeline isn't just about those antibody drug conjugates. Roche has 72 active development programs, with 19 of them in later stages. The company continues to put a great deal of emphasis on oncology (including its R3 kinase inhibitor program), but there's a meaningful non-oncology pipeline as well.
Antibody treatments for lupus and ulcerative colitis should have phase 2 data within the next year, and the company is also working on MS treatments. While Roche does not have much of a history in neuro/psych, the company's Glyt-1 inhibitor for schizophrenia could be a $1 billion-dollar drug, as well as two metaotropic glutamate receptor antagonists in development for MDD and Fragile X. Neither last nor least, Roche management continues to be bullish on the prospects for PCSK9 drug RG7652 in cholesterol.
There's also the company's Alzheimer's platform to consider. While Roche's gantenerumab looks passingly similar to the disappointing drugs we've seen from Johnson & Johnson (JNJ), Pfizer (PFE), and Lilly (LLY), Roche has chosen to focus on studies in earlier-stage patients - a strategy that may pay off given the apparent efficacy of Lilly's solanezumab in earlier-stage patients. Crenzumab is likewise undergoing an interesting study in high-risk patients, and Roche is also among those companies developing BACE inhibitors for Alzheimer's.
Going All In On Personalized Medicine
Roche management also gave investors a little more insight into its diagnostics and life sciences plans. Unfortunately, not a lot was said about the company's diabetes franchise - arguably an area that would benefit from some additional TLC. On the other hand, the company's commitment to personalized medicine and companion diagnostics should emerge as a significant driver.
Roche is looking to pair about 60% of its pipeline with companion diagnostics; not only is this a good way to "double dip" by collecting revenue from both diagnostics and pharmaceuticals, but targeted therapeutics have thus far assuaged some concerns about reimbursement. Better still, from the perspective of Roche at least, they have an internal drug-diagnostics capability that isn't matched by diagnostics rivals like Danaher (DHR), Johnson & Johnson, or Siemens (SI), and it's certainly worth asking whether a post-split Abbott Labs (ABT) will be able to as well.
As far as life sciences goes, it looks like Roche's strategy is still evolving. It's clear that biomarkers are going to be significant (given their role in companion diagnostics), but it doesn't sound as though the company is looking to go head-to-head with Illumina (ILMN) or Life Technologies (LIFE) with internally-developed sequencing technologies. I wouldn't rule out the possibility of M&A here, but it sounds like management is keenly focused on controlling R&D spending and probably not interested in speculative R&D projects (and catching up with Illumina with internal R&D would be pretty speculative at this point).
The Bottom Line
Analyst/investor days are supposed to sound bullish and exciting - hosting such an event just to tell investors that the cupboards are bare is contrary to the point. Accordingly, it's well worth remembering that while Roche has more than a dozen drugs in development with multi-billion dollar potential, some of these drugs are going to fail in trials and will never reach the market. That said, I'm glad to see that Roche hasn't followed other Big Pharmas down the path of drastic R&D spending cuts; R&D is ultimately the best source of economic profits for a drug company.
I'm happy to continue holding Roche shares (especially since the company refused to dramatically overpay for Illumina), but they're not the cheapest real estate on the block. Investors should spend some due diligence efforts on Pfizer and Sanofi (SNY) at today's prices, but those for looking for new ideas with a long-term focus can still find above-average potential in Roche shares.
Disclosure: I am long RHHBY.OB.