EUR 4635.28 For Business Accounts Only

The Future is Bound to APHINITY

We forecast zero margin expansion for Roche Pharma 2016-21 and as a result are 14% below consensus EPS in 2021. Consequently, the need for APHINITY to read out positively to drive the Roche share price through 2017 is absolutely key. We estimate that the risk is broadly symmetrical (+/-10%) and hence in the absence of significant underlying earnings momentum that could lead to material upgrades, we are reticent to recommend investors to buy Roche here. Our SFr.240 PT puts Roche on a sector multiple in 2017.

APHINITY is truly binary – We show that the outcome of the APHINITY study is truly binary and estimate +/-10% to 2021 EPS dependent on success or failure of the study. Moreover, we believe that the value transfer to Perjeta (in markets with pricing power) would be significant if APHINITY works to defend against the impact of Herceptin biosimilars. This value transfer would be limited if the study fails.

No Pharma Margin Expansion – If the underlying business provided sufficient long-term upside versus consensus, we could envisage a scenario whereby the binary risk of APHINITY could be considered asymmetrically skewed to the upside. However, we are 14% below consensus 2021 EPS because we forecast zero Pharma margin expansion 2016-21 as a result of price cuts on Herceptin & Rituxan in the face of biosimilars.

Biosimilar Best Case Assumed – Despite being so far below consensus, there could be further downside risk to earnings as our base case assumes a best case biosimilar impact, in our view. We assume just a 10% price cut in the first year post a biosimilar launch and 10% annual volume declines thereafter. However, we believe the declines could be materially worse even if interchangeability is not granted.

Ocrevus Long-term Upside – At a recent NSR Expert Roundtable meeting, our MS expert provided a bullish assessment of the potential for rapid uptake of Ocrevus not only in the RRMS & PPMS settings but also in the much larger SPMS setting. SPMS patients display symptoms very similar to those in PPMS. SPMS patients account for around 40% of all MS patients and could drive upside to current Ocrevus forecasts.

Valuation – Our SFr. 240 PT implies a 15.5x 2017 EPS multiple which is inline with the sector. We forecast 4% CAGR EPS growth 2016-21 which is lower than the sector but given Roche’s relatively defensive nature, peerleading R&D and strong balance sheet, we find it hard to justify a meaningful discount to the sector at present.

Note: This initiation is also included within the "EU Pharmaceuticals - Opportunities Abound" report.