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By Karen Andersen, CFA | 07-24-2017 06:00 AM

Attractive Valuation Makes Roche a Standout

We think the wide-moat firm can counter biosimilar competition and maintain its strong position.

Karin Anderson: Among wide-moat drug stocks, Roche stands out for its attractive valuation. Roche's business is split between a cancer-focused, branded-drug segment and a diagnostics arm. As a global leader in both areas, the firm has historically warranted a premium valuation, but the market has become concerned about generic biologic, or biosimilar, threats to blood cancer drug Rituxan and breast cancer drug Herceptin. Branded competition from big pharma firms like Bristol and Merck has also left investors worried that Roche can't maintain its strong position. But we think the market underestimates Roche's ability to counter biosimilar competition with its own novel drug pipeline. Roche recently traded at more than a 20% discount to our fair value estimate.

A foundation to Roche's new cancer drug portfolio is Tecentriq, and we're bullish on data coming later this year for the drug in lung cancer. We think Roche has a continuing strong position in blood cancer, as Gazyva and Venclexta have significant potential in combination in leukemia and lymphoma. Outside of cancer, new MS drug Ocrevus could be a $5 billion drug, and we're also bullish on hemophilia and eye disease drugs that could launch over the next couple of years. 

In the long run, we also think Roche's diagnostics arm gives it the best shot at bringing more complex drug regimens and diagnostics to the market to improve efficacy and safety in oncology and beyond.

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