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Analyst urges Roche back to acquisition trail

by Jonathan Marino  |  Published September 27, 2012 at 4:01 PM
roche227x128.jpgRoche Holding AG grabbed several headlines earlier this year when it launched -- and ultimately withdrew -- a $6.3 billion bid for Illumina Inc., but one prominent analyst has identified two potential targets that the pharma giant should now consider.

In a research note Wednesday, Sept. 26, Jefferies & Co. analyst Jeffrey Holford identified both AbbVie -- the pharmaceutical business Abbott Laboratories will spin out Jan. 1, 2013 -- and Bristol-Myers Squibb Co. as two prime strategic assets for Roche to acquire.

Holford's financial models point to an earnings slowdown between 2014 and 2016 for Roche, largely because he views the company's prescription drug business as an underperformer.

While Roche boasts the most significant oncology presence in the world, Holford believes the Swiss company is relying on it too heavily despite increasing competition. Roche has attempted to build out franchises in the autoimmune, cardiometabolic and central nervous system, or CNS, areas, but the Jefferies analyst is skeptical of the results.

"The autoimmune franchise lacks the scale required to address the over-reliance on oncology and the ability of the R&D efforts in cardiometabolic and CNS to deliver are highly questionable given the poor success rate to date and high-risk nature of ongoing projects," he wrote.

Holford expects a "growth gap" for Roche beginning in 2014 from a slowdown for key franchises such as cancer drugs Rituxan ($6.01 billion in 2011 sales) and Avastin ($5.29 billion in 2011) and declines for other big producers, such as age-related macular degeneration treatment Lucentis, hepatitis C interferon Pegasys, cancer drugs Xeloda and Herceptin, and anemia treatment NeoRecormon.

For Roche to achieve growth as it waits for catalysts in its product pipeline to achieve success -- most notably a group of antibody drug conjugates, or ADCs, headlined by breast cancer drug TDM-1 -- it must either lean on a hefty share repurchase program or go the acquisition route, Holford wrote.

He favors M&A -- and specifically an opportunity to build a third pillar alongside its diagnostics and oncology units -- because it would diversify Roche's business and add a revenue stream that would bring long-term value to the company.

"We believe that Roche management should more seriously consider M&A to fold in already established R&D competencies from other companies and products to build out additional legs to the business outside of oncology and diagnostics," he wrote.

Holford outlined two potential transactions. The first would be a buyout of AbbVie, an acquisition he projects as a $69 per share, $105 billion acquisition (based on a 25% premium to Jefferies' $55 per share, $84 billion valuation of the entity when it is spun out of Abbott).

AbbVie has a dominant position in inflammatory diseases, largely due to cash cow Humira ($7.9 billion in 2011 sales), as well as a history in cardiometabolic diseases, which could give Roche a chance to build its presence in each area. Roche could also help AbbVie advance its development-stage hepatitis C compounds, Holford wrote.

Roche has a significant presence in the hepatitis C market, while AbbVie is seen as one of the potential market leaders in the coming wave of all-oral regimens for the deadly virus.

A second option would be a buyout of Bristol-Myers, which Holford models as a $41 per share, $66 billion buyout. That attaches a 25% premium to the drugmaker's roughly $33 per share, $52 billion enterprise value. Holford believes Bristol's "proven R&D capability" and established presence in cardiometabolic disease would help Roche gain traction in that segment, while significant overlap in areas such as oncology, CNS disorders and anti-infectives create a strong strategic fit for the two.

Not all analysts agree, however. For example, Morningstar Inc. analyst Karen Anderson said in an interview that Roche has, indeed, gotten its debt levels down to the point that it can theoretically make a large acquisition. But Roche's sharp focus of having branded drugs work in tandem with companion diagnostics to foster more personalized medicines for patients makes it harder for the company to digest a significant buyout.

Anderson thinks it would make more sense for Roche to continue to forge partnerships with other companies for early-stage drugs, giving it individual new targets that it could then create a companion diagnostic for.

"I have trouble with the idea of them really looking to acquire a Bristol," she said. "It would be really difficult to integrate into that strategy."

Like Holford, Anderson does see a slowdown for Roche coming, but believes that Roche would be more likely to consider a large acquisition down the road, when the company "gets a clearer picture of what the next drugs emerging through their pipeline are."

Roche, in a presentation to investors in London just three weeks ago, noted that it expects readouts from 19 late-stage trials over the next 18 months. Roche specifically said that nine of those compounds are ADCs, a rapidly evolving class of drugs that work by binding an anti-cancer toxin to an antibody and specifically targeting tumor cells. The resulting compound travels through the bloodstream without activating the toxin until it reaches the tumor.

In addition, Roche hopes to advance drugs in higher-risk areas such as schizophrenia and Alzheimer's disease. TDM-1, meanwhile, sailed through Phase 3 trials in August and is projected by many analysts to eventually reach the sales heights of Herceptin ($5.4 billion in 2011).

"They have their hands in a lot of therapeutic areas that could be very big," Anderson said. "At this point, it's unclear which ones will succeed. That's another reason an acquisition would be difficult."

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Tags: Abbott Laboratories | AbbVie | Avastin | Bristol-Myers Squibb Co. | Herceptin | Humira | Illumina Inc. | Jefferies & Co. | Jeffrey Holford | Karen Anderson | Lucentis | Morningstar Inc. | NeoRecormon | Pegasys | Rituxan | Roche Holding AG | Xeloda

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Jonathan Marino

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