2023-09-20 12:30:54 ET
Summary
- Roche has optionality to grow its pipeline with selective M&A and new partnerships. The company also confirmed better pharmaceutical growth expectations.
- We evaluated the three biggest readouts, Elevidys, TIGIT, and Inavolisib, providing supportive news.
- From a premium valuation to a discount vs. its closest peers. We believe this is not justified. Our buy rating is confirmed.
Last week, Roche ( RHHBF , RHHBY , RHHVF ) hosted its Pharma Day in London and provided crucial highlights of the current asset portfolio and a deep overview to assess a potential pipeline revival after a stricter period in the last couple of quarters. Here at the Lab, we closely monitor Roche and its pipeline evolution, providing negative updates Another Key Fail , and a positive view of New Drugs advancements publications. Investors widely awaited this event, and the company communicated three key supportive facts:
- Better pharmaceutical growth expectations . As a reminder, Roche has two divisions: Pharma and Diagnostic, accounting for 72% and 28% of sales. In detail, the company expects Pharma sales to grow out to 2026, regardless of phase III success of 1) Elevidys, 2) TIGIT, 3) Giredestrant, 4) Inavolisib, and 5) Fenebrutinib. Given the biosimilars' ongoing competition, Roche highlighted its reassurance on the current portfolio growth contribution. Investors might likely focus attention post-2026. Here at the Lab, between 2022 and 2026, we forecast Pharma sales CAGR at 1.5% vs. the company's consensus of 3.5% (Fig 1). In addition, the company communicated that despite additional biosimilar competition, they still forecast sales growth post-2026. In our numbers, we already lowered Roche top-line sales due to Lucentis, Actemra (with LoE expected at the end of end-2024), and Xolair (LoE expected in 2025), as well as the erosion of Herceptin, Avastin, and Rituxan.
- While Roche's pipeline success could transform this outlook, the company has different options to drive commercial future success. How? There was a change in Roche's M&A strategy to target clinical-stage assets. The company acknowledges that it will continue to drive external innovation and internal pipeline growth. In Pharma Day, Roche focused on later-stage assets (Phase III), while before, they targeted earlier-stage deals. The company suggests a prudent approach in selecting investments with a good balance between financial and scientific risks. This might support Roche's pipeline value creation and contrast margin erosion from higher competitors.
- To support point 2), the other key topic was a focus on R&D productivity . Roche Phase III success moved below the industry average (58% vs. 76%). In addition, the company spent more money than its peers on new drugs. Roche confirmed its plan to improve R&D productivity with the system to standardize cost per drug, foster the decision-making process, and increase synergies between divisions. Roche also aims to lower the cost per new drug (Fig 2).
Source: Roche Pharma Day presentation - Fig 1
Fig 2
Here at the Lab, the commercial success of the new drugs is a critical supportive investment thesis in Roche 12/18 months. While near-term growth in the pharmaceutical division does seem underpinned, the three biggest readouts, Elevidys, Inavolisib, and TIGIT need to be carefully evaluated.
- Starting with Elevidys (SRP-9001), we will have data in Q3, and in our estimates, we expect CHF 2 billion peak sales potential, excluding the US. The company will start with ambulatory patients between four and seven years old with an estimated recurring revenue generation lower than CHF 0.5 billion. After the readout and beginning to treat the 4-7 and 8-18 year-old patient population, we estimate sales for CHF 2 billion (Fig 3).
- Inavolisib Phase III data in first-line Breast cancer readout is now expected in Q4 (from a previous estimate of 2024). This is supportive. The company believes that Inavolisib may provide a real treatment improvement vs. comps with a higher potency. Roche is estimating a potential sales peak of CHF 1 billion (Fig 4);
- TIGIT data are now expected in Q1 2024 from Q4 2024. TIGIT study and Tecentriq suggest a positive readout with statistically significant results. This comprehensive cancer development program could result in a new franchise with the potential of a multi-billion sales peak. Although the data collected "have not yet been fully finalized," Roche is optimistic. The analysis revealed an average survival of 22.9 months in patients who received the two drugs versus 16.7 months in patients treated with Tecentriq alone. In particular, the survival hazard ratio was 0.81, which means that patients treated with these drugs showed a 19% lower mortality rate than the parallel group not treated with these drugs. As a reminder, Tiragolumab is a new cancer immunotherapy designed to bind to the immunoinhibitory receptor TIGIT, considered a breakthrough therapy by health authorities. In addition, therapy effectiveness was questioned last year when study data showed that Tiragolumab did not slow the progression of the disease. This is not the case anymore (Fig 5).
Fig 3
Fig 4
Fig 5
Conclusion and Valuation
Having participated in the CMD presentation here at the Lab, we decided to maintain our target price estimate of CHF 330 per share . Last time, we lowered Roche's EPS due to FX drag and sales evolution. For this reason, we are maintaining a buy rating estimate. Roche's current valuation also supports this. The company's P/E is at 13x, while competitors such as Sanofi and AstraZeneca are trading at >15x. This valuation discrepancy represents a double-digit discount vs. Roche's closest peers. Today’s presentation provided a helpful review, and we came away with the impression that the company continues to run its R&D department in the top quartile. We also were reassured of some past issues (speed of development and trail drug design). Therefore, our overweight target is confirmed.
For further details see:
Roche: Positive Readouts From Pipeline