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Morningstar | RHHBY Updated Forecasts and Estimates from 06 Aug 2018

Roche saw strong second-quarter performance, with top-line growth of 7% at constant currencies as a result of 15% U.S. pharmaceutical division growth (driven by new multiple sclerosis drug Ocrevus), despite an 8% decline in European pharma sales (driven by Rituxan biosimilars). This geographic split as well as a one-time divestment by Chugai and strong control of manufacturing costs translated into stronger operating margins for the first half of the year, with operating profits up 10% and 19% EPS growth at constant currencies (boosted by U.S. tax reform). Management's raised guidance (now mid-single-digit sales growth and midteens EPS growth) looks achievable despite increasing biosimilar competition to Herceptin in the second half of the year in Europe, and we don't expect any major changes to our $42/CHF 337 per share fair value estimate. With a strengthening pipeline in diverse areas, including virology (flu drug baloxavir marboxil), neurology (spinal muscular atrophy drug risdiplam), and ophthalmology (Lucentis port delivery and bispecific antibody VA2 in degenerative eye diseases), Roche appears to be on solid footing beyond its core indication of oncology, which is further cemented by diagnostics investments such as Foundation Medicine, and we're maintaining our wide moat rating for the firm.

Tecentriq's Impower 132 study, which has the most similarity in design to Keytruda's key first-line non-small-cell lung cancer trial Keynote-189, recently met its progression-free survival endpoint versus chemotherapy alone, with a trend toward an overall survival improvement at the interim analysis. While we're encouraged by this result, we're waiting for final overall survival data in 2019 to factor in additional market share for Tecentriq. As it stands, we're assuming Tecentriq competes strongly in lung cancer, but largely in the specific niches where it looks differentiated from competitors, including EGFR mutants and patients with liver metastases (data in combination with Avastin and chemotherapy looks strong, and competitors often exclude such patients) and in small-cell lung cancer (where it has leading data). If Tecentriq sees broader use in lung cancer beyond these niches, there would be upside to our estimates. In addition, the combination of Tecentriq, Avastin, and chemotherapy also looks strong in liver cancer based on phase 1b data, and could accelerate filling (phase 3 is also in progress versus Nexavar). Details surrounding recent positive trial readouts for Tecentriq are being presented at conferences in September and October. As we discussed in our recent report "Overall Immuno-Oncology Market Underappreciated, Supporting Undervalued Wide-Moat Firms Roche, Merck, and Bristol-Myers," we think Roche stands to gain 18% of a $33 billion immuno-oncology market by 2022.

As we highlighted in our recent note "Roche/AbbVie's Venclexta Expanding Indications, One of Many Positive Catalysts at Wide Moat Roche," there has been strong data flow for Roche in recent months and many near-term catalysts remain, including approvals (Hemlibra in broader hemophilia A market, new flu drug approval), data (Venclexta in first-line chronic lymphocytic leukemia), and filings (polatuzumab in diffuse large B-cell lymphoma later this year).