Morningstar | Chugai's Internal Innovation and Partnership With Roche Support a Stable Narrow Moat
Japanese drug firm Chugai has established competitive advantages due to its alliance with majority shareholder Roche as well as its internal research and development engine. While current top products could see new branded and biosimilar threats over the next several years, we are bullish on the combined Roche/Chugai pipeline, particularly in immuno-oncology and hemophilia.Chugai was founded 90 years ago and developed into one of Japan's leading biotechs in the 1990s, launching Epogin (1990) and Neutrogin (1991). In 2002, Chugai merged with Roche’s small-molecule-focused Japan affiliate, Nippon Roche, and Roche became the parent company. Roche increased its stake in Chugai from 50.1% to 59.9% in 2008 and has been relatively steady since (59.9% at the end of 2017).Chugai has launched several products from Roche in the Japanese market, helping the firm achieve leading share in Japan for therapeutic antibodies and oncology drugs. Products include cancer antibodies Avastin, Rituxan, Herceptin, Perjeta, and Kadcyla and cancer small molecules Tarceva, Xeloda, and Zelboraf. While Rituxan and Herceptin began to see biosimilar competition in Japan in 2018, we think Roche's late-stage pipeline is strong, particularly in oncology. For example, Gazyva could help replace lost Rituxan sales, as it proved superior in leukemia and one of the largest lymphoma indications (follicular lymphoma), and PD-L1 antibody Tecentriq is now approved in Japan in second-line lung cancer.Both Roche and Chugai are benefiting from Chugai's strong internal pipeline. Roche launched Chugai's immunology antibody Actemra outside Japan beginning in 2009, and global sales are roughly $2 billion annually. Roche is also launching Chugai's lung cancer drug Alecensa outside Japan for patients with a rare form of the disease; superior data against Pfizer's Xalkori in 2017 boosts potential, and we see this as a $1.5 billion product at peak. Hemlibra is launching in 2018 for hemophilia A patients with inhibitors and in 2019 for the broader noninhibitor population, and we now have peak sales north of $3 billion globally.Chugai Pharmaceutical is a pharmaceutical company. Along with its subsidiaries, Co. is engaged in the research and development of new prescription medicines and the subsequent manufacturing, marketing and distribution activities. Co. sells its pharmaceutical products to the nationwide appointed stores in Japan, as well as in overseas, such as Germany, the U.K., France, Taiwan, China, South Korea and the U.S. Co., through its subsidiaries, is also involved in the management of research facilities, and the research on drug discovery, as well as the provision of literature research services for pharmaceutical information, and pharmaceutical academic information.
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