Roche’s wars on cancer
Value, like beauty, is the eye of the beholder, in both the aesthetic and Benjamin Graham sense. However, emotions also have a place in the quest for investment excellence, almost a Proustian sense of search for the valuation metrics of a lost time (temps perdu, to Charles Swann!). Genentech ( DNA), one of the most profitable ideas in my life was taken over by Switzerland’s Roche Holdings. Roche, in my opinion, is the world’s classiest Big Pharma/ oncology franchise, with the lowest patent risk expiry, highest proprietary R&D excellence, a fabulous drug pipelines and the most visible, recurrent 14 to 15 per cent EPS growth potential in the sector. While I can easily envisage Roche shares to falling to the New Year levels near 230-240 Swiss francs, I believe that this is the world’s most-attractive oncology (may God bless the biotech scientists who founded Genentech, for they have saved the lives of hundreds of millions of human beings, including in generations yet unborn!) business on earth. The Swiss ego will not allow it but this company should be renamed Genentech.
Blood cancer pipeline drugs have now been designated as “breakthrough therapy” by the FDA. This is a milestone in the war on cancer since it creates a new global market for several pipeline drugs for chronic lymphocytic leukemia, non-Hodgkin’s lymphoma and multiple myeloma. This is the ultimate raison d’etre to own Roche (and Gilead) since Gazyva will replace the blockbuster but mature Rituxan as the gold standard for blood cancer treatment. This is the reason Amgen paid $10 billion to acquire a multiple melanoma drug called Kyprolis, owned by Onyx. I know an investor who once told me about the science behind Kyprolis who made ten times his money in Onyx shares when it was taken over by Amgen last summer. Knowledge is power on Wall Street and not just for algo traders!
Roche is not cheap at 16.4 times current earnings and 10 times enterprise to book value. However, I would be extremely perturbed if the world’s finest oncology business was available for sale at a dirt cheap valuation. Roche is a cash machine, with its 6.5 per cent free cash flow yield and a 3.5 per cent dividend that has the potential to rise to five per cent in two years even if the buy price is the current 250 Swiss francs. The absurdly overvalued Swiss franc and the controversy over the Tamiflu stockpiles after the global H1N1 pandemic could pressure Roche shares in the short term. Fine. However, Tamiflu is stockpiled by 100 governments worldwide and is on the WHO’s “essential medicine list”. The British and US governments have invested billions of dollars in Tamiflu/antiviral reserves. Why? The Spanish flu pandemic once killed 50 million people worldwide. It was the Black Death of our times because, tragically, then was no Tamiflu to save the doomed in 1919.
Another potential revenue bonanza for Roche is in orphan diseases and rumours about takeover bids from Basle are rife among the cognoscenti, though I believe Roche will probably broaden its pipeline in autoimmune diseases, inflammation and neurosciences. This could mean a potential five bagger target in small cap biotechs on Wall Street. There is no doubt in my mind that Genentech saved Roche from being the victim of a takeover bid from Novartis. Roche is now a biotech predator, not target, as Bloomberg’s story on Alexion proved. Tissue diagnostic and the multiple cancer drugs are the twin global growth engines for Roche. Rituxan is still a growth drug in the Far East, as is Avastin (ovarian cancer) and Pegasys (hepatitis-C vaccine). The black swan in Roche’s pipeline is its Alzheimer product, the ultimate killer app in neurology biotech. My ideal buy/sell zones for Roche are 240350 Swiss francs. Bonne chance!