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Morningstar | Maintaining Our Roche FVE Following Spark Deal; Fair Price to Expand Hemophilia Portfolio

Roche will acquire gene therapy firm Spark Therapeutics for $4.3 billion in a deal that not only adds to Roche's hemophilia portfolio but also gives access to gene therapy technology for use in other therapeutic areas, including ophthalmology, neurology, and other rare genetic diseases. Roche's tender offer of $114.50 in cash per share represents a 122% premium to Spark's closing price as of Feb. 22, and the deal is expected to close in the second quarter. Overall, we think Roche is paying a fair price for Spark, and we're not making any changes to our $42/CHF 333 fair value estimates for Roche. Spark's gene therapy platform adds further support to Roche's wide moat and ability to continue innovating and launching new medicines.

Spark's Luxturna is on the market in the U.S. for a rare genetic eye disease and generated $27 million in revenue in 2018 (partnered with Novartis outside the U.S.). However, we think valuation is driven by Spark's progress in hemophilia, which includes SPK-9001 (phase 3 for hemophilia B, Roche will receive double-digit royalties from Spark's partner Pfizer), SPK-8011 (hemophilia A, entering phase 3 this year), and SPK-8016 (hemophilia A inhibitors, early development). This fits well with Roche's bispecific antibody therapy Hemlibra, which was recently launched for hemophilia A patients, with and without inhibitors. 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.

We think gene therapy will be a strong competitor to Hemlibra in the long run, particularly as we gain more information on duration of benefit and as pricing (which will likely be a multiple of the annual cost of Hemlibra) gets ironed out. A one-time, effective treatment should eventually win out, and early data from Spark's SPK-8011 is promising; Spark has increased doses to an effective level and is working to prevent declines in efficacy that were seen in two patients last year by using prophylactic steroids in a phase 1/phase 2 expansion study. Spark and Roche are also beginning a phase 3 study this year, which likely puts them a year and a half behind BioMarin's val-rox, which entered phase 3 in December 2017 and could be filed using an accelerated filing by the end of 2019. Several other firms, including Pfizer (Sangamo), Bayer (Ultragenyx) and Takeda are also in early-stage development with hemophilia A gene therapies.

Spark also gives Roche a strong gene therapy platform across many other therapeutic areas. Beyond hemophilia, Spark also has SPK-7001 for choroideremia (rare genetic eye condition) in early development and SPK-3006 (Pompe disease) and SPK-1001 (CLN2 disease) poised to enter clinical development this year. We expect Roche is also encouraged by preclinical data for SPK-miHTT in Huntington's disease, given Roche's phase 3 Huntington's program RG-6042 with partner Ionis.