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RHHBY AT A GLANCE

 

 

 

 

 

 

Roche Pharmaceuticals (OTC: RHHBY), a Basil, Switzerland-based healthcare company, is one of the largest pharmaceutical companies in the world by revenue. Total revenues for FY2008 were 45.6 billion CHF, driven mainly from sales of the biologic therapies, Rituxan/MabThera (13.0%), Avastin (11.4%), and Herceptin (11.2%) ^[1] Rituxan, which is used to treat arthritis and cancer, retains patent exclusivity through 2015, while Avastin and Herceptin, both cancer therapies, retain patent exclusivity through 2019.^{[2] [3]} This gives Roche one of the youngest and most profitable product portfolios in the pharmaceutical industry. The company expects to earn $4.03 from new products launched within the last five years for every dollar earned from those with expiring patents. This, compared to an industry average of only 77 cents.^[4] Roche also manufactures Tamiflu, one of the only available treatments for aggressive influenza. Tamiflu, which is purchased by national governments each year in anticipation of influenza outbreaks, constituted 1.3% of Roche's revenue in 2008. Tamiflu sales are significantly enhanced by influenza outbreaks, such as the H1N1 flu in the 2009/2010 season. Roche stands to gain from renewed demand for Tamiflu.

In March, 2009, the company completed a $46.8 billion buyout of the remainder of outstanding shares of US biotech company Genentech (of which it already owned a majority stake). ^[5] The company also holds a majority stake in Chugai Pharmaceuticals (4519-TO) of Japan.

Revenue

Roche FY2008 Revenue by Region^[6]

Roche FY2008 Revenue by Category^[7]

In the first half of 2009, Roche revenues rose 9% to 24 billion CHF compared to first half 2008 revenues of 22 billion CHF. Revenue growth was partially attributable to a substantial pop in sales of Tamiflu. Revenues for the drug reached 1 billion CHF on private and government stockpiling in the wake of the Influenza outbreak in the first half of 2009, and the company anticipates the number doubling by year's end. Net income in first half of 2009 was down 29% to 4.05 billion CHF from 5.73 billion CHF the year before, largely due to special charges related to Roche's buyout of Genentech. Excluding these special charges, net income rose 11%. ^[8]

In Q3 of 2009 (ending 9-30-09), Roche reported sales of 12.4 billion CHF, a 10% rise over the previous year's Q3 sales, beating analyst expectations of 12.2 billion CHF.^[9] Pharma sales grew 12% from the previous quarter, driven by Tamiflu sales as well as strong sales from Roche's oncology medications. The diagnostics division grew 8%, driven by strong sales across the entire division. Roche also announced that the Genentech integration was proceeding on schedule and would be complete by the end of 2010, with a new executive committee being formed in January 2010. Roche raised its full year expectations and stated that it expects double digit growth for both 2009 and 2010.^[10]

Corporate Overview

Pharmaceutical

In 2008, group sales (which include sales figures for Genentech and Chugai) decreased by 2% to 36 billion CHF. In local currencies, revenues rose 6% (or 10% excluding a predictable 68% drop insales of flu medicine Tamiflu after government stockpiling in 2007). Operating profit fell 1% to 12.9 billion CHF.^[11]

Major Products

Roche had six drugs at blockbuster status (over $1 billion in sales) in 2008. They include:^[12]

• MabThera/Rituxin: cancer/RA drug with 5.9 billion CHF in revenue

MabThera, also known as Rituxin, is a drug with indications both for cancer and for rheumatoid arthritis (RA). Within the cancer field, it is currently used as a treatment for non-Hodgkins lymphoma, but it is undergoing testing for many other applications. Sales of the drug increased 16% in 2008.

• Avastin: cancer drug with 5.2 billion CHF in revenue

Avastin sales grew 37% in 2008, primarily off of new applications. In February of 2008, the FDA approved the drug for treatment of breast cancer. Sales in Europe also grew due to usage of Avastin for colorectal cancer and lung cancer, as well as breast cancer. Avastin was also approved for use with kidney cancer by the FDA in August, 2009. Revenues for the drug are consequently expected to increase by 300-500M CHF. ^[13]

• Herceptin: cancer drug with 5.1 billion CHF in revenue

Herceptin is already a dominant treatment for adjuvant (early stage) breast cancer. Roche estimates its market share in Europe's five largest markets at approximately 75%, and penetration into the US market is already high.

• CellCept: anti-inflammatory/autoimmune drug with 2.1 billion CHF in revenue

CellCept is an immunosuppressant used mainly for transplant patients. Its sales grew 13%, as it is a significantly less toxic alternative to its competitors.

• NeoRecormon/Epogin: anemia/cancer drug with 1.7 billion CHF in revenue

NeoRecormon, also known as Epogin, is an anemia drug whose sales fell 13% in 2008. Causes include pricing pressure from branded competitors, as well as increased sales of biosimilar generics.

• Pegasys: antiviral drug with 1.6 billion CHF in revenue

Pegasys is a major antiviral drug used mainly in the treatment of hepatitis C. Sales grew 6% in 2008, mainly in Japan and in emerging markets. The drug already has a 70% market share in the US.

Recent Approvals

• In January 2010, the FDA approved Roche's antibody drug, Actemra, to treat rheumatoid arthritis. The drug, which was originally developed by Roche subsidiary, Genentech, is already approved in Europe and Asia and is expected to reach blockbuster status.^[14] Actemra is a first-in-class drug that directly inhibits the interleukin-6 receptor, which is known to be involved in the symptoms of arthritis. The drug will be administered intravenously every 4 weeks to patients.^[15]

Diagnostics

Roche is a provider of diagnostics products (products for testing and treating medical conditions) in addition to its pharmaceutical products. 2008 Sales increased to 3% to 9.66 billion CHF (a 10% growth in local currencies). This largely came off sales increases of 9% in the Professional Diagnostics division (46% of group revenue), weighed against a sales decrease of 1% in the Diabetes Care division (31% of group revenue). Operating profit fell 28% to 1.19 billion CHF (a 22% drop in local currencies). The company cited decreased out-licensing income as an explanation for the drop.^[16]

Trends and Forces

Pipeline Risks

Developing a new drug is a time-consuming and costly endeavor. Hundreds of thousands of candidate compounds must be screened to identify a handful of potential drugs, and even fewer of these candidate drugs are found to be effective at treating a disease. The drug must then pass strict safety standards in several series of clinical trials. The entire process of developing a new drug and bringing it to the market takes up to 10 to 15 years and on average costs $800 million.^[17]

Roche spent 8.85 billion CHF on research in 2008.^[18] Most of the company's product pipeline focuses on continuing the development of already certified successful drugs like Avastin. It has many clinical trials combining the drug with other compounds or using the drug for different cancer treatment applications. Success with these trials would extend the scope and duration of the drug's patent, bringing in billions more in revenue.^[19]

Generic drugs: Not a large threat

For a detailed discussion of brand name vs generic medication, see also Brand name vs Generic medications.

Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years, during which a pharmaceutical company has an exclusive right to manufacture a particular drug. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper to produce (due to the substantially lower research and development costs) than brand medication, and the lower cost is often a strong incentive for consumers to choose generics over branded drugs. In addition, the presence of a generic alternative may force a decrease in the brand name medication's price, through increased competition. Roche's business model is highly dependent on patent protection and the enforcement of intellectual property rights, and weak patent protection decreases the profitability of drugs. Major pharmaceutical companies are constantly threatened by the entrance of generics.

Roche, however, has one of the youngest pipelines in the industry. Its biggest drugs - MabThera/Rituxan, Avastin, and Herceptin - accounted for 35.6% of 2008 total revenue and have patent protection through 2015, 2019, and 2019, respectively. The only major drug for which the company is losing revenue due to pricing pressure (both from branded competition and generics) is the anemia drug NeoRecormon/Epogin, whose sales fell 13% in 2008 in a market whose overall sales fell 10%.^[20]

Flu Pandemics/Epidemics

There is always a threat of a regional or even global outbreak of a major influenza virus. For example, the Spanish influenza pandemic of 1918 infected 500 million people and killed 10% of victims ^[21]. More recently, the Avian flu of the early 2000s killed at least 200 people around the world, particularly in Southeast Asia. ^[22]. The Swine flu scare of April 2009 similarly has threatened countries all over the world, and the possibility that it could turn into a major flu pandemic is a serious concern. Public health officials all over the world have stocked up on vaccines and treatments in the event of such an outbreak. Roche's influenza treatment and vaccine, Tamiflu, is the most powerful and successful treatment for particularly infectious flu strains as of 2009. Fear over the Avian flu outbreak in the early 2000s Increased demand for Tamiflu and boosted Roche's earnings for several years. A sustained period of calm can result in decreased demand for Tamiflu and hurt Roche's bottom line, but renewed fear of outbreak (such as the Swine flu scare) can be a significant boon to earnings. The first half of 2009, for example, saw Tamiflu sales triple to 1 billion CHF. ^[23]

In September 2009, Roche announced that the H1N1 virus is fully sensitive to Tamiflu.^[24] Roche expects full-year sales of Tamiflu of about 2.7 billion CHF, with a further contribution of 400-700 million CHF the following year due to the H1N1 virus. Q3 sales of 1 billion CHF in 2009 were 10 times the previous year, indicating that the revenue boost is pandemic-related.^[25]

Competition

Competitors to Roche's major drugs include:

• MabThera/Rituxan -- MabThera competes with Bexxar by GlaxoSmithKline. The two drugs do not align perfectly, however, as Bexxar tends to be a treatment that follows initial use of MabThera. ^[26]

• Avastin -- Avastin competes in a number of different indications (including colorectal and kidney cancer) with with Erbitux by ImClone/Bristol-Myers Squibb, Nexavar by Bayer/Onyx, Sutent by Pfizer, Gleevec by Novartis, and Vectibix by Amgen. The drugs all work differently, targeting and killing cancer through different mechanisms. ^{[27] [28]}

• Herceptin -- Herceptin competes head-to-head with Tykerb by GlaxoSmithKline over breast cancer patients. GlaxoSmithKline is funding a trial comparing the drugs that is expected to be completed in 2011.^[29]

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[30]

References

1. ↑ Roche 2008 Financial Report
2. ↑ [www.yale.edu/ybps/pharmaceuticalcasecompetition2007/PharmaCase2007.pdf]
3. ↑ [mba.tuck.dartmouth.edu/cib/PDFs/Butz.pdf]
4. ↑ Tough Projections for Big Pharmas: Drug Revenues Don't Look Promising.
5. ↑ Trading Markets. "Roche Acquires Genentech." 30 March 2009
6. ↑ Roche 2008 Annual Report
7. ↑ Roche 2008 Annual Report
8. ↑ Roche 2009 Half Year Results
9. ↑ Flu drug Tamiflu boosts Roche sales in Q3
10. ↑ Roche reports further accelerated sales growth in third quarter
11. ↑ Roche 2008 Financial Report, Pharmaceutical Section
12. ↑ Roche 2008 Financial Report
13. ↑ Reuters. "Roche's Avastin gets U.S. nod for kidney cancer." 3 Aug 2009
14. ↑ U.S. approves Roche's Actemra arthritis drug
15. ↑ Actemra (tocilizumab) - What You Should Know
16. ↑ Roche 2008 Financial Report
17. ↑ "2007 Pharmaceutical Industry Profile.
18. ↑ Roche 2008 Annual Report
19. ↑ Roche 2008 Annual Report
20. ↑ Roche 2008 Financial Report
21. ↑ Wikipedia Entry on Spanish Flu
22. ↑ Wikipedia Entry on Avian Flu
23. ↑ Roche 2009 Half Year Results
24. ↑ Roche:Pandemic H1N1 Virus Fully Sensitive To Tamiflu
25. ↑ Glaxo takes biggest slice of swine flu market
26. ↑ [1]
27. ↑ WebMD Guide to Colorectal Cancer Treatment
28. ↑ San Francisco Chronicle. "Study: Avastin expands reach." 3 June 2007.
29. ↑ Herceptin vs. Tykerb Drug Trial
30. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction