Karen Andersen, CFA
Morningstar
312-384-4826
[email protected]
The long patent life of Roche's (RHHBY) portfolio puts it among the biotechs least exposed to generic competition. Patents don't begin to expire until 2013 — when Rituxan loses protection in Europe — and management is implementing strategies to counteract future competitive pressures that we think will enable the firm to achieve 9 percent five-year earnings growth.
Subcutaneous versions of Roche's blockbuster antibodies are in the works, which could reduce hospital costs and add to convenience. Novel drugs are in development that could improve on the efficacy of its current products or represent new, personalized treatments for cancer patients.
Roche also has a solid pipeline beyond oncology, including drugs to treat schizophrenia and hepatitis C. With the Genentech integration starting to yield synergies, we think Roche's drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages.
Overall, we continue to think Roche's aggressive cost cutting, strong pipeline, and emerging market potential will provide a buffer from pressure due to Avastin in breast cancer, reform costs, and in the long run, bio-similar competition. Roche is also planning to expand its dividend by another 10 percent for 2010, boosting the already strong 4.2 percent dividend yield to 4.6 percent and providing another compelling reason to invest in this undervalued biotech.
John Boris
Citigroup Global Markets
212-816-1635
[email protected]
Watson is a strong domestic generics company with high potential for international growth after the Arrow acquisition and with attractive specialty pharmaceuticals and distribution segments. With the acquisition of Eden Biodesign, Watson is also positioning itself to potentially build a position in biosimilars.
Currently, the majority of Watson's sales are exposed to the generic segment that could materially benefit from manufacturing issues from other generic suppliers. Watson has a higher-margin branded segment that entered a new product cycle through the launch of Gelnique and Rapaflo in 2Q09. In addition, its higher growth distribution segment is the fourth largest distributor in the U.S. market.
