EUR 850.00 For Business Accounts Only

Morningstar | Roche's Tecentriq and Hemlibra Label Expansions Benefit First Quarter; Maintaining FVE

We may revisit our near-term estimates following Roche's strong top-line results in the first quarter, but we do not anticipate a material change to our CHF 333/$42 fair value estimate for wide-moat Roche. We continue to believe that the market underappreciates the firm's pipeline and new marketed drugs, and we think the firm's wide moat protects cash flows despite strong headwinds from biosimilar versions of Herceptin, Rituxan, and Avastin (which together represented 36% of 2018 sales). Roche still expects to close the acquisition of gene therapy player Spark Therapeutics by the end of the second quarter, and we continue to view the $4.3 billion price tag as a fair deal and a smart way of adding to Roche's hemophilia portfolio (beyond Hemlibra) and bringing exposure to gene therapy in many other therapeutic areas including ophthalmonology, neurology, and other rare genetic diseases.

Hemlibra sales are beginning to ramp more significantly, with CHF 219 million in sales in the first quarter, and we expect more acceleration as the non-inhibitor launch begins in Europe this year. We expect annual Hemlibra sales to grow to nearly $5 billion by the end of our 10-year forecast, given its strong efficacy, solid safety profile, and very convenient administration (as little as one monthly subcutaneous injection) relative to current intravenous options. Tecentriq's label has been expanding rapidly, with the December 2018 first-line lung cancer approval in the U.S. followed by similar approval in Europe as well as FDA approval in other first-line indications without approved checkpoint inhibitor competition--small cell lung cancer and PD-L1 positive triple-negative breast cancer--all in the first quarter. We also await key phase 3 data for Tecentriq combination regimens in liver cancer and melanoma later this year.

We're still comfortable with our estimates for 2019 erosion of U.S. sales of Herceptin (11%), Rituxan (20%), and Avastin (7%) this year, as biosimilar competition begins to weigh on price, although Roche now has subcutaneous version of both Herceptin and Rituxan approved in the U.S. that could give them an edge in price negotiations. On a global basis, we expect these three drugs will see combined sales decline by more than CHF 2 billion in 2019 and again in 2020, before declines begin to decelerate in 2021. The best biosimilar launch example we have in the U.S. is Johnson & Johnson's Remicade; Pfizer and Merck biosimilars have been on the market for more than two years, but Johnson & Johnson still had 92% volume share as of the first quarter of 2019, as the firm has used bundled contracts and price concessions to maintain share (U.S. sales of Remicade fell 19% in 2018 largely due to price concessions).