With CHF13bn ($14bn) annual sales, Roche is a dominant force in the global diagnostics market. Interestingly, in recent years, most diagnostics majors have witnessed material re-ratings – also a function of increased M&A euphoria. Now, in the backdrop of COVID-19, Roche has also emerged as a prominent player on the testing front. With big pharmas moving away from (low-growth) non-pharma offerings, is it time for Roche to consider unlocking value from Diagnostics?
Companies: Roche Holding
Pharmaceuticals and well-complemented by Diagnostics. Interestingly, although Roche’s management claims minimal COVID-related Q1 disruption, there were delayed appointments for some chronic diseases and a drug shortage. While it is difficult to believe that the performance in the coming quarters will continue unscathed, Roche – by virtue of its competitive offerings and balance sheet strength – should be able to sail through with minimal damage.
Roche ended 2019 on a subtle note, with erosion of key off-patent drugs capping gains from new high-potential drugs like Ocrevus, Hemlibra and Tecentriq. Nevertheless, full-year sales growth was 9% CER vs. early-2019 guidance of low-to-mid single-digit growth. While the group’s pipeline – especially in oncology, remains impressive, relatively muted 2020 guidance (vs. Novartis) is an indication of the biosimilar impact eventually gathering momentum.
Roche’s Q3 19 sales growth of 13% CER is the highest quarterly growth in the last eight years. In oncology, the newer drugs have clearly taken over the growth baton from the older ones, further supported by multiple sclerosis, haemophilia and immunology drugs. Despite the looming biosimilar risk, a third consecutive guidance upgrade this year is a reflection of the group’s sustained innovation and efficient lifecycle management.
The cancer burden is growing globally. Each year >18 million people are diagnosed, nearly 10 million die and the estimated economic cost exceeds $1 trillion. From early diagnosis to late-stage disease, cancer care often involves inappropriate or unnecessary interventions that drive costs but provide limited clinical benefit. Coupled with an increased understanding of cancer biology and rapid technological advances, this has been driving momentum for precision medicine, leading to patient and societal benefits. The use of biomarkers and sophisticated diagnostics is facilitating early intervention through robot-enabled minimally invasive surgery and locally delivered radiotherapy. Immuno-oncology has revolutionised cancer care, with the focus now on identifying combinations that further improve long-term outcomes. Liquid biopsies and companion diagnostics are increasingly being used to personalise therapy.
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Roche continued its strong momentum and upgraded 2019 guidance for the second time. While the Q2 sales growth of 9% at CER was largely driven by Pharmaceuticals (+11%), Diagnostics’ (+4%) reflected a recovery from the one-off setbacks of Q1. The new drugs continued to hold up well, more than compensating for the erosion of the legacy drugs. As the company moves deeper into the biosimilar battle, it is this balance, which would be critical.
Roche reports a strong start to the year and, consequently, upgrades the 2019 guidance. Q1 sales grew by 8% at CER with the growth coming predominantly from the pharma business (+10) as diagnostics (+1%) languished (an unpleasant surprise). The new drugs continued to strengthen, amid biosimilar competition for the legacy ones in Europe and ahead of the threat in the US. The outlook for both revenue and core earnings for the year has been raised.
Roche ended the year on a good note – 9% CER growth in Q4 sales, with a solid performance across the portfolio, particularly diagnostics. Despite a biosimilar impact of ~CHF1.3bn (predominantly in Europe), the full-year sales grew by 7%, thanks to the new drugs, particularly Ocrevus and Hemlibra. The outlook for 2019 came in soft, on account of the imminent threat from biosimilars for three of its best-selling drugs in the US.
Roche delivered another strong quarter – group sales up by 7% at CER – pharma up 7% and diagnostics up 6%. New launches have been able to offset the impact of biosimilar competition for the bestsellers in Europe. The US continued to be the main contributor, while Europe the worst. The outlook for 2018 was retained – sales and core EPS growth in mid single-digit. The coming quarters will see biosimilars making their way in the US, posing a massive risk.
Roche reports 7% growth in its top-line for both Q2 (to CHF14.5bn) and H1 18 (to CHF28.1bn). Both the pharma and diagnostics businesses grew at 7% during the quarter, both in CER as well as reported. The US and international markets have been in the driving seat while Europe was debilitated by the biosimilar impact. Reported-core EPS for H1 grew by 8% (+19% including the effect of the US tax reform). Guidance upgraded again.
Strong growth reported for the quarter – likely to be the best quarter for the year, considering the ongoing erosion for MabThera and the imminent risk for Herceptin from biosimilars. Ocrevus stood out while Tecentriq was not very impressive. Hemlibra is steady so far in the inhibitor space and has bagged BTD in the non-inhibitor space, but some early news is slightly worrying. Overall, good past but challenges ahead.
Roche reported decent Q4 results. As expected, biosimilars have started to hurt and the pain is only likely to get worse with more biosimilar candidates. However, the strength of the pipeline has helped to sustain the momentum, with new product launches more than making up for the decline in legacy products so far. Ocrevus was a standout and Hemlibra holds a lot of promise. We maintain our ‘Add’ rating and will make modest changes to our estimates.
Roche’s much-awaited treatment for haemophilia A, Hemlibra (emicizumab/ACE910), has been approved by the FDA for patients with Factor VIII inhibitors. Roche also announced the data for the non-inhibitor community, wherein Hemlibra successfully met both the primary as well as the secondary endpoint.
The second front to provide fillip to the share price was the positive top-line data from another eagerly-followed trial IMpower 150, evaluating checkpoint inhibitor Tecentriq’s combination with Avastin and chemotherapy as the first-line option for controlling disease worsening (also called progression free survival/PFS) in lung cancer patients. Roche announced that the trio demonstrated a ‘statistically significant and clinically meaningful’ results in the phase III study, which will form the basis for filing both in the US and Europe. Detailed results are likely to be made public in the annual congress of the European Society for Medical Oncology in Geneva in December 2017.
Roche reported decent results in the third quarter, but the details and management commentary has fanned the already nervous market sentiments. Sales grew by 6% during the quarter, with both pharma (thanks to the new products and a strong contribution from immunology) and diagnostics growing by 6%. All sales growth numbers at CER unless specified otherwise.
Europe deteriorating by 5% came as a surprise, although, at group level, this was compensated by 12% growth in the US, thanks to Ocrevus’s robust performance (sales of CHF308m). All the top three rankers were more underwhelming than what we had expected – Avastin down by 4% (flat in Q2), Herceptin flat (+4% in Q2) and Rituxan managing just 1% growth (+3% in Q2). Tarceva (-16%), Tamiflu (-61%) and Esbriet (+3%) added to the woes, but a bigger cause of concern was weak Tecentriq, which declined on a qoq basis (CHF118m vs CHF124m in Q2 17). The diagnostics business (CER growth numbers available only for 9M) was driven primarily by Asia Pacific (+15% CER for 9M), while pricing and reimbursement issues in the US diabetes care pulled down the growth in the geography to 1% for 9M (vs +4% in 9M 16). Business-wise, the highest contribution in growth came from centralised and point of care solutions (+7%; driven by Asia Pacific) and tissue diagnostics (+13%; driven North America and EMEA). The molecular diagnostics business (+3%) continued to see growth in the underlying molecular business (+4%) but a decline in the sequencing business.
The company reports only top-line numbers in Q3. 2017 guidance of mid single-digit growth in both sales and core EPS was maintained.
Roche’s Q2 sales growth of 6% at CER (+4% in Q1) was largely driven by pharma (+7% to CHF10.2bn), while the Diagnostics business was slower at 4% growth to CHF3.1bn (vs +6% in Q1, +5% in Q4 16, +8% in Q3 16 and +8% in Q2 16). H1 scored a CER 5% growth at the group level, implying 5% growth each in the Pharma and the Diagnostics businesses. NB all sales growth numbers are in CER, unless mentioned otherwise. Nearly half of the pharma’s H1 growth came from the strongly trending new products, Tecentriq, Ocrevus and Alecensa, while the mature ones such as Tarceva, Tamiflu, and Pegasys succumbed to increasing competition. Despite weaker growth, Diagnostics remained at the top of the IVD market, which grew by ~4% in H1 17, thanks to the robust immunodiagnostics business (+13%) within the centralised and point care solutions (+8%).
In terms of geographic performance, although the US (+10%; +6% in Q1) continued to be the biggest contributor to the pharma sales during the quarter, the International markets (8%), primarily China, stood out as Europe came in flat after 1% growth registered by both the geographies in Q1. While MabThera/Rituxan (+10%), Avastin (+15%) and Tamiflu (+222%) were the main drivers boosting the International markets, they were the spoilers in Europe (-3%, -7% and -96%, respectively). The diagnostics business, too, was driven by the international markets, such as Asia Pacific (+13%) and LatAm (+8%), as the developed markets of the US (+1%) and Europe (+3%; includes the Middle East and Africa) remained mediocre.
Adjusted operating income for H1 (according to our calculations) came in ahead of our expectations at CHF9.6bn (+17%). Higher investment in marketing of new products and the R&D of the pharma business were countered by lower R&D in diagnostics and better control on the general and administrative front. The company-reported core operating profit grew by 3% to CHF10.1bn, implying a margin decline of 91bp. Growth was pulled down by the partial impairment of the Esbriet-related intangibles acquired as part of the InterMune acquisition. The outlook for both revenue and core EPS was revised up from low-to-mid single-digit to mid single-digit.
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Novacyt (NCYT.L): Trading update | Avacta (AVCT.L): COVID-19 wastewater detection sensor collaboration with Integumen
Companies: Novacyt Avacta Group
EKF has delivered another positive trading update, with outperformance in H1 and further orders for the Primestore MTM sample collection device prompting further material upgrades to our FY20 estimates. Despite a lot of noise around potential Covid-19 diagnostics and therapeutics. EKF remains one of very few UK-listed companies actually generating material revenues. Given the nature of its offering, which is agnostic over which molecular test is used, we expect demand to continue at elevated levels for the duration of the pandemic and continue to see further upside potential to our already materially upgraded estimates. EKF remains one of our best Ideas for 2020.
Companies: EKF Diagnostics Holding
Full-year results to 31 March were in line with the trading update at the time of the recent fundraise (£10.5m net), with revenues, adjusted pre-tax loss from the continuing businesses and year-end net debt of £9.8m (+12%), £0.4m and £0.8m, respectively. The company is fully funded to exploit the emerging COVID-19 diagnostic testing opportunities. Despite the disruption to its Food intolerance business in Q1 FY 2021, we still expect strong growth and a profitable FY 2021, with multiple value inflections points (WHO prequalification for VISITECT CD4, UK-RTC lateral flow COVID-19 antibody test CE marking and Chinese approval for Food Detective self-test) and subsequent orders determining the actual outcome, with potential upside to forecasts. We leave our forecasts unchanged for the time being and our target price under review.
Companies: Omega Diagnostics Group
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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Futura Medical’s update on MED3000, its novel treatment for erectile dysfunction (ED), confirms progress is in line with our expectations. The regulatory filings with both the US FDA and European Notified Body are progressing well. Importantly, the FDA has indicated there is a pathway for MED3000 to be launched as an OTC product in the US. This will require an additional, albeit modest, supplementary clinical trial to demonstrate longer term efficacy. More details should be known by the time of H120 results, likely in early-September. Our DCF-based model, using conservative assumptions, values Futura Medical at £153.8m, equivalent to 60.9p a share.
Companies: Futura Medical
MaxCyte’s new clinical and commercial licence agreement with Apeiron Biologics allows the use of MaxCyte’s proprietary Flow Electroporation technology for manufacturing Apeiron’s gene-silencing siRNA therapy, APN401, for clinical studies. The deal is the latest in a series of clinical and commercia
MXCT made outstanding progress in H1 20 across the business and is set to report revenue growth of c 30% to $10.9mln ($8.4mln in H1 19). Trading reflected the solid progress made in MXCT’s cell therapy business, which is focused on driving adoption of its nonviral cell engineering technology Flow E
Diaceutics is expected to report 20% YoY revenue growth in H1E. This strong performance against a difficult global backdrop reinforces the recession proof growth qualities of the business model. With the launch of the DXRX platform this year, we expect further operational benefits to flow through the business.
Futura Medical (FUT.L): Regulatory update | EKF Diagnostics Holdings plc (EKF.L): Trading update
Companies: Futura Medical EKF Diagnostics Holding
Allergy Therapeutics released a further positive trading update to that of 24 June, citing full-year revenues of £78.2m (+7% CER), above-market earnings and year-end cash of £37.0m (c.£5.4m higher than forecast). With confirmation that June was also a ‘normal’ month, albeit in the seasonally weaker second half, this should provide greater comfort to investors as we enter FY 2021, still with some uncertainty over the potential for second waves to disrupt patient visits. We make only minor changes to forecasts to reflect actual revenues and year-end cash in FY 2020 as well as small changes to FY 2021, but this is the third positive trading update since the interims. We reiterate our target price of 40p, which excludes any value attributed to early pipeline products and US market entry.
Companies: Allergy Therapeutics
SDI announced that it expects to meet market expectations for FY 2020, which are for adjusted pre-tax profit of £4.2m. Despite taking decisive action to reduce costs following the lockdown on 23 March, and confirmation that it has traded profitably in March and April, the lack of long-term visibility prompts a withdrawal of FY 2021 guidance. That said, we believe the company to have sufficient liquidity to weather the COVID-19 crisis with end markets still viable, and the improved 2020 margins are positive.
Companies: Scientific Digital Imaging
Many of the world’s best and most important products (eg Space exploration, nuclear medicine/power & the internet) were originally invented by the military. It’s happened again – but this time to combat airborne pathogens like Ebola, SARS/MERS and all manner of other biological nasties doing the rounds. You see on 10th December 2018, Kromek was awarded a $2.0m contract by DARPA (research arm of US Dept. of Defense) to develop a vehicle-mounted bio-threat detector. The idea being that this should be able to rapidly identify (within 1 hour) any dangerous germ that might have been released into the environment, say by terrorist groups, organised criminals &/or rogue states.
Companies: Kromek Group
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
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Today Ergomed held its annual general meeting (AGM). As expected, no new financial details were provided, although the executive chairman released a statement with a general business update. Q120 trading was good with ‘solid overall growth in revenue’ and cash generation ‘remained strong’. In Q220, Ergomed continued to grow the order book across the business and maintained its ‘revenue growth trend’. Its staff successfully adapted to remote working conditions and no employees were made redundant or furloughed. The H120 trading update will be released in July 2020 as usual, but Ergomed stated within its AGM update (June 10) that it is confident the results will be ‘in line with current market expectations’.
Inspiration Healthcare has announced its intention to acquire SLE Limited (SLE), a leading neonatal ventilator designer and manufacturer for consideration of £18.0m. Inspiration Healthcare has conditionally raised £16.5m (gross, ahead of an open offer) via an oversubscribed equity placing to support the acquisition. We believe the acquisition represents a transformation deal, virtually doubling the size of the business and providing significant new revenue growth opportunities. We expect the acquisition, on a 12-month proforma basis to be accretive to adjusted earnings in the near-term and increasingly so in the medium-term. We reiterate our Buy recommendation.
Companies: Inspiration Healthcare Group