Roche steps up efficiency drive to take sting out of biosimilars

By John Miller and Ben Hirschler

LONDON/ZURICH (Reuters) - Roche, the world's biggest producer of cancer drugs, is stepping up cost cuts in an efficiency drive made unavoidable by competition from cut-price copies of three mega-brands from its famed U.S. Genentech biotech stable. Even though the Swiss company has some of the pharmaceutical industry's most admired research and development labs, it is now battling to increase medicine sales as its biotech portfolio ages and rivalry intensifies.

Chief Executive Severin Schwan told Reuters he was confident he could fill the sales gap but expects only "moderate growth" into 2019 - helped by newer drugs such as Ocrevus for multiple sclerosis (MS) - before a "re-acceleration" around 2021-22.

"If you have such a sharp portfolio shift as we have now, then of course you have to reallocate resources in a more dramatic way," Schwan said. "That's what we are doing."

The company will have to run fast to stand still. Roche estimates it could have a $10 billion sales gap to fill by 2022 from rival incursions into cancer treatment, territory the Swiss drugmaker has long dominated. Roche's three best-selling drugs - all for cancer - had combined sales of $21 billion last year, accounting for 40 percent of overall sales.

But the drugs - Rituxan, Herceptin and Avastin - now face a steep decline https://fingfx.thomsonreuters.com/gfx/editorcharts/ROCHE-CEO/0H0014BTS243/index.html due to cheap near-copies, known as biosimilars, made by rivals including Switzerland's Novartis and South Korea's Celltrion.

Adding to the pain, a key technology patent will expire next year, lopping another $600 million or so from cash flow.

In Europe, where biosimilars are already making deep inroads, Roche's cost-cutting is more advanced, with some commercial operations being trimmed back.

Now, the United States is on the block with Roche cutting 223 positions at Genentech's South San Francisco campus. The company is also streamlining global business units as part of a separate, wide-reaching move that could impact scores of jobs.

It is a prescription that investors are likely to appreciate. "There is room to improve efficiency in the business," said Berenberg analyst Alistair Campbell.

BOLT-ON ACQUISITIONS

Still, Roche intends to ring-fence research and development (R&D) and is sticking by a long-standing strategy of using only small to mid-sized bolt-on acquisitions to shore up its drugs pipeline, rather than buying in a big new medicine business.

To some extent that is pragmatic. "Typically, we cannot make the economics work," Schwan said.

The shifting sands mean Roche may look rather different when it finally emerges from the shadow of biosimilars, with non-cancer drugs playing an increasingly important role - a trend already being set by Ocrevus in MS and Hemlibra for haemophilia.

In particular, while other companies including Pfizer Inc have pulled back in neuroscience, Roche hopes to restock its medicine cabinet with drugs against autism, Alzheimer's and Huntington's disease.

These are high-risk, high-reward diseases but Roche believes its understanding of the latest science means it could become as well known for treatments of brain and nervous system disorders as for cancer.

"The jury is still out," Schwan said. "There is actually now a reasonable chance that we diversify into other areas in a meaningful way."

Meanwhile, its cancer R&D effort continues.

Schwan acknowledged Roche's Tecentriq immunotherapy had lost ground to Merck & Co's Keytruda in first-line lung cancer treatment but he still sees important new opportunities, notably in certain hard-to-treat forms of breast cancer.

Among Roche's biggest potentials is a bispecific antibody, a dual-action drug that brings tumour cells and immune cells closer together to fight blood cancers.

One patient who failed previous treatments, including CAR-T cell therapy in which the body's immune cells are reprogrammed, achieved full remission for a year after getting Roche's experimental bispecific therapy, it reported on Thursday.

"If you see such a response for very, very sick patients like that, that of course is extremely promising," Schwan said. "That is one of our molecules we put a lot of hope into."

($1 = 0.9660 Swiss francs)

(Editing by David Clarke)