Event - Roche announces timely efficiency drive as Avastin decision looms

Update: On September 17, the FDA extended its decision on Avastin in breast cancer until December 17, 2010

It feels a bit like bowing to the inevitable, Roche announcing a productivity drive two weeks before the FDA pronounces on the fate of Avastin in metastatic breast cancer. Few anticipate the regulator will back further use of the drug in this setting; Roche included, it could be inferred today.

Financial analysts have already taken red pens to Avastin sales forecasts; consensus for 2014 dropped by 10% to $7.71bn in the last month alone, data from EvaluatePharmareveals. As such, in these quarters the impact of the FDA’s pronouncement, assuming it does withdraw approval, will mostly be symbolic. However, the loss of future sales is going to be real, as is the erosion of almost a quarter of the company’s market value so far this year. The restructuring announcement suggests Roche is under pressure to demonstrate that it has the situation under control.

Company Roche
Market Cap $107.91bn
Product Avastin
Product NPV $31.36bn
Total sales 2016 $8.15bn
Breast cancer sales 2016 $1.81bn
% of total sales in 2016 20%
Event FDA labelling decision
Date By 17 September 2010

Comprehensive withdrawal

The pretty comprehensive withdrawal of support for Avastin by the Oncologic Drug Advisory Committee in July leaves little room for the FDA to justify leaving the antibody on the market for breast cancer (Roche facing withdrawal of support for Avastin in breast cancer, July 21, 2010). The recommendation was based on weak overall progression free survival, marked toxicity such as increased blood pressure and lack of evidence of any survival benefit; hardly hallmarks of a successful cancer therapy. The FDA is due to announce its final decision by September 17.

Prior to the adcom, annual breast cancer sales were seen doubling to $2bn by 2016 to account for a quarter of the drug’s sales that year. Since then, some analysts have erased all US breast cancer sales from their models, and capped growth in Europe. Many have also reined expectations in ovarian cancer, in which Roche is due to file for approval later this year.

Even for a pharma giant like Roche, a dent of this size in its biggest franchise will hurt, and analysts had not only lowered sales forecasts but trimmed earnings estimates as well.

This is very bad news for financial investors, particularly after the share price decline this year. No doubt pressure from shareholders was mounting in the boardroom, and there is nothing the stock market likes more than a “restructuring” announcement, preferably accompanied by swingeing job cuts. Although today’s announcement contains little detail, only promises for later in the year, it did provide some appeasement to those with their eyes on the bottom line; Roche shares climbed almost 2% today to Sfr142.2.

A number of observers have been anticipating such a move from Roche in the light of recent setbacks and to keep up with peers, many of whom have embarked on serious rationalisations in the last year. Some believe the company has the capacity to strip $2bn from operating costs over the next couple of years, driving profit growth.

Finger pointing

As reason for the focus on costs Roche points the finger at mounting pressures on healthcare costs, particularly in the US and Europe. Positioning yourself in the most expensive, and arguably profitable, areas of medicine – oncology – and then complaining about price pressures is perhaps a little churlish. But this is a real issue and Roche’s point later in the statement, that budgets are increasingly going to be directed towards treatments with high medical value, rings true.

An example might be provided shortly when insurers, as expected, swiftly withdraw reimbursement for Avastin should the FDA pull its support in breast cancer.

However the company also points to recent late-stage pipeline setbacks, and here the company has been suffering, with taspoglutide (ADA - Roche's diabetes dreams fade as taspo data deteriorates, June 29, 2010) and T-DM1 (Roche and ImmunoGen sent reeling by FDA roadblock, August 27, 2010) . In fact, a whole swathe of costs could be eliminated if the company decides to cut its losses on the fated diabetes project, a decision not beyond the realm of possibility.

Shaking ground

At the same time Roche did not miss the opportunity to boast, highlighting an absence of patent worries compared to its peers and a strong pipeline, despite the setbacks.

But as the company has seen, pipelines can quickly deteriorate. And as a recent analysis by EP Vantage revealed, of all the big pharma groups Roche is hugely reliant on a couple of big drugs: Avastin, Herceptin and Rituxan (Which big pharma remains hostage to blockbuster fortune?, July 22, 2010).

This is fine when things are going swimmingly, but there is huge potential for investors to get very nervous if the ground starts shaking.

The Avastin breast cancer failure shook confidence. Rumbling biosimilar concerns are already being heard. Roche needs to deliver more than a holding statement to drive a real recovery in confidence.

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