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Will Roche's (RHHBY) Acquisition Spree Revive the Top Line?

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Swiss pharma-giant Roche Holdings (RHHBY - Free Report) has been quite active on the acquisition front, of late. Roche, being a leading health care company, focuses on developing and commercializing innovative diagnostic and therapeutic products and services, which help in early detection and prevention of diseases as well as their treatment and monitoring.

2018 is expected to see a surge in M&A, primarily due to lower U.S. tax rates. Small tuck in acquisitions of companies with innovative technologies and promising early and mid-stage pipeline candidates, enable these large pharma giants to foray into attractive markets without having to spend on R&D from the scratch. On the other hand, the larger ones are mostly to complement or strengthen their core areas of strength.  

A Look at Roche’s Recent Acquisitions

During the first quarter of 2018, Roche acquired Flatiron Health and Ignyta, Inc. While Flatiron Health will help accelerate development and delivery of breakthrough medicines for oncology patients, Ignyta’s lead molecule, entrectinib, targets tumors with one of two genetically defined gene rearrangements: ROS1 fusions in NSCLC and NTRK fusions across a broad range of solid tumors. The candidate is currently being evaluated in an ongoing phase II trial, which, if successful, will support NDA submission.  The deal will further strengthen the company's strong pipeline.

Roche recently announced that it will acquire the shares of Foundation Medicine, Inc. which are not already owned by it.  Both the companies will leverage expertise in genomics and molecular information to increase the development of personalised medicines and care for cancer patients. Roche intends to use the latter’s high-quality comprehensive genomic profiling (CGP) testing and innovative data services to realise its own vision of personalised healthcare.

Potential Buy-outs In the Offering

Meanwhile, shares of another biopharma company, Tesaro, Inc. (TSRO - Free Report) , have surged on rumors of a potential bid by Roche. Tesaro focuses on transformative therapies for the treatment of cancer, an area where Roche is a market leader with a wide portfolio of drugs. Tesaro’s PARP inhibitor, Zejula, was approved by the FDA in March 2017 for the maintenance treatment of women with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer, who are in a complete or partial response to platinum-based chemotherapy.  The European Commission also approved the drug in November 2017.

Earlier this month, Roche entered into a collaboration agreement with Tesaro to evaluate the combination of its immunotherapy drug, Tecentriq, with MEK inhibitor, Cotellic, and Tesaro’s PARP inhibitor, Zejula, in patients with platinum-sensitive ovarian cancer.

Both the companies are planning to tap the potential synergy between MEK and PARP inhibitors and working together to evaluate the combination of Zejula and Tecentriq also in patients with metastatic bladder cancer as a part of MORPHEUS, Roche's novel cancer immunotherapy development platform.

Hence, a potential buy-out might be in the offing.

But Why Is Roche On an Acquisition Spree?

Roche, like many other companies, is facing decline in sales of blockbuster drugs due to loss of patent exclusivity. Stiff competition from biosimilars looms large for some of Roche’s key drugs, such as Avastin, Rituxan and Herceptin, in the long term.   Entry of biosimilars of these key drugs will adversely impact sales in 2018. Moreover, Roche is facing competition from the likes of Keytruda and Opdivo in the immuno-oncology space. Avastin is also facing competition from immunotherapies.

Sales of Pegasys (approved for hepatitis B and C) continue to decline, due to competition from a new generation of hepatitis C treatments. Xeloda, Valcyte and Lucentis are also facing competitive pressure. Tamiflu lost exclusivity as well.

Roche’s stock has lost 10.3% in the last six months compared with industry’s decline of 2.7%.

Hence, the company is on the lookout of deals and acquisitions to bolster its portfolio/pipeline, but Roche is not the only one to do so.

French company Sanofi (SNY - Free Report) recently acquired Ablynx, which focuses on the development of nanobodies (proprietary therapeutic proteins, based on single-domain antibody fragments). The company had earlier acquired Bioverativ Inc., which focuses on therapies for the hemophilia and other rare blood disorders.

We expect a lot of activity on the M&A front during the rest of this year as well, from not only Roche but other big pharma/biotech companies too.

Zacks Rank

Roche currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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