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Morningstar | Roche Shines at ASCO 2019; Shares Undervalued Despite Pipeline Progress

Following the annual meeting of the American Society of Clinical Oncology, we're maintaining our Roche fair value estimate of $42/CHF 343 per share, and shares traded at a more than 20% discount to our valuation at Monday's close. Data at the meeting supporting our bullish view on several of Roche's drugs, including Venclexta in CLL and Tecentriq in lung cancer patients with liver metastases, triple-negative breast cancer, and adjuvant indications. We think Roche is also well positioned to weather competition in immuno-oncology and HER2-positive breast cancer, with pipeline progress supporting our wide moat rating.

In blood cancer, we're encouraged by details surround the CLL14 study for Gazyva and Venclexta in first-line CLL, and our Venclexta sales assumptions are ahead of consensus. We think this newly approved indication will become a key option for patients, as it eliminates chemo but still limits duration of treatment; AbbVie and J&J's Imbruvica is another effective option, but long duration of therapy can lead to side effects and financial toxicity. We're watching for competition from Imbruvica-containing combination regimens, including Gazyva and Imbruvica (recently approved in 1L CLL), and Imbruvica and Venclexta (looks promising, but minimal data so far).

In immuno-oncology, we also think Roche's positioning is underappreciated, given Tecentriq's ability to combine with Roche's portfolio of therapies. We remain bullish on Tecentriq and Avastin's potential to treat lung cancer patients with liver metastases (a subgroup analysis from the Impower 150 study), as risk reductions look bigger than those seen in a similar subgroup analysis from Merck's Keynote-189 study, and Roche's study also includes Avastin in the control arm (which is known to perform well in patients with liver metastases).

We're also taking a deeper dive into the potential of immuno-oncology therapies in earlier-stage cancer (pre-metastatic), and Roche's trials in the adjuvant lung setting in particular look well positioned (early data in neo-adjuvant NSCLC was also presented at ASCO). We're encouraged by Tecentriq's strong overall survival data in PD-L1+ triple negative breast cancer presented at ASCO, and while Roche will likely see tough competition in this indication as well as small cell lung cancer, the firm has a first-mover advantage for now.

As discussed at Roche's analyst event, Roche's core HER2-positive breast cancer franchise does face competition from Astra and Daiichi's antibody drug conjugate, which could steal share from Roche's older ADC, Kadcyla. However, recent data for Kadcyla in the adjuvant setting, which showed a dramatic improvement in the percentage of patients who are recurrence-free at three years over Herceptin (88% versus 77%), will be a high bar for Astra, and Roche has its own novel programs (a bispecific and an antibody drug conjugate) in phase 1 testing for HER2-positive breast cancer.

Looking beyond ASCO, we think Roche's oncology program has significant potential in blood cancers. Roche's positioning in AML looks particularly strong, given the recent Venclexta approval and ongoing studies of idasanutlin in the relapsed setting (MIRROS data expected late this year). In NHL, we continue to expect approval of polatuzumab in August; phase 3 polatuzumab trials are continuing in the first-line DLBCL setting as well, in combination with Rituxan and chemo, which could help defend Roche's blood cancer franchise from Rituxan biosimilars. Roche should present details surrounding Venclexta's efficacy and safety in multiple myeloma at the European hematology association conference next week. It appears that patients with a particular genetic profile could see an even stronger efficacy benefit than the overall PFS benefit in the broader BELLINI study (22.4 months versus 11.5 months for patients on Velcade), which could counter the higher risk of death. Roche is also running the CANOVA study focused exclusively on patients with this biomarker. Roche did present early data from its bispecific CD20 antibodies at ASCO, but we think data remains very early and expect a more meaningful update later this year; the company continues to face competition from Regeneron's CD20 bispecific, REGN1979, which should have updated data at EHA and is advancing to pivotal trials this year.