Roche: Not Concerned About Slight Sell-Off On Weight Loss Drug Safety Data

Investment Overview

I last covered the Swiss pharma giant Roche (OTCQX:RHHBY) in a note for Seeking Alpha in mid-May, giving the company’s stock a “Buy” recommendation. Shares have risen in value by ~22% since, trading at ~$40 at the time of writing, which translates to a market cap valuation of $254bn.

In that note I wrote:

Roche has been struggling for top and bottom line growth over the past several years, and this may have affected its share price and valuation, which had slipped by >25% on a three-year basis, and >20% on a one-year basis (I’m using ADR price in the table above – eight ADRs equal one underlying share).

If I share the same table I shared last time, we can see that Roche’s fortunes have been improving, however.

In this table, we can see 17 of the largest European and US pharmas compared using a number of familiar investment and scoring metrics. I have filtered by market cap valuation, and we can see Roche is the sixth largest global pharma today. In May, it was the seventh largest, with a market cap

At the top of the list is Lilly (LLY) and in second place is Novo Nordisk (NVO), and I made the point in my last note that both of these companies’ valuations are primarily related to their GLP-1 agonist drugs tirzepatide, marketed and sold as Mounjaro/Zepbound in the indications of Type Diabetes (“T1D”) and Obesity, and semaglutide, marketed and sold as Ozempic/Wegovy in the same two indications.

These drugs are known for their miraculous weight loss qualities and are expected to become two of the best-selling drugs in history, taking the lion’s share of an obesity market that’s expected to be worth in the region of $150bn – $200bn per annum by the end of the decade.

When I last covered Roche, I discussed the Swiss pharma’s efforts to develop and commercially launch its own GLP-1 agonist drug. This begun with its $2.7bn buyout of Carmot Therapeutics, which completed in January this year, giving Roche access to the following three drug candidates:

• CT-388, the lead asset, is a Phase-2 ready, dual GLP-1/GIP receptor agonist for the treatment of obesity in patients with and without type 2 diabetes. Injected subcutaneously once a week, it has potential as a standalone and combination therapy to improve weight loss and to be expanded to other indications.
• CT-996, a once-daily oral, small molecule GLP-1 receptor agonist currently in Phase-1 intended to treat obesity in patients with and without type 2 diabetes.
• CT-868, a Phase-2, once-daily subcutaneous injectable, dual GLP-1/GIP receptor agonist intended for the treatment of type 1 diabetes patients with overweight or obesity.

As we can see in the table above, the successful launch of tirzepatide/semaglutide has triggered monumental gains in Lilly/Novo’s share prices – which are up >275%, and >160% on a three-year basis. I summarized in a previous article the drug’s pivotal clinical trial results as follows:

One study of nearly 2,000 patients showed that Wegovy achieved 14.9% weight loss versus 2.4% in the placebo arm, while 84% of patients achieved at least 5% weight loss, versus 31% for placebo.

Zepbound’s ability to reduce weight was even greater than Wegovy’s, with studies showing patients using the higher dose of the drug – 15mg – lost ~21% of their body weight at 72 weeks.

I also discussed Roche’s first data readout for CT-388 – a clinically meaningful, mean placebo-adjusted weight loss of 18.8% after 24 weeks. At week 24, 100% of CT-388 treated participants achieved a weight loss of >5%, 85% achieved >10%, 70% achieved >15%, and 45% achieved >20%.

Ever since that data release, Roche’s stock price has been rising as excitement mounts that the pharma may have a candidate capable of securing approval and establishing a foothold in the GLP-1 agonist weight loss/diabetes markets.

In July, Roche shared data from an early study of CT-996, the oral GLP-1 agonist pill obtained from the Carmot buyout, showing patients lost 6.1% more weight after one month vs. placebo. Not only did Roche’s share price jump – from $33, to ~$39 in response to the data, Lilly and Novo’s stocks reportedly fell.

In short, Roche has begun to look like a genuine contender in the long-term battle for obesity/diabetes market share, opening up the tantalizing prospect of its stock delivering triple-figure gains across the next few years, as Lilly and Novo’s stock did.

This week, however, Roche encountered its first setback since the Carmot acquisition.

Glimpse of Roche’s Latest GLP-1 Safety Data Checks Recent Progress, Gives Wall Street Jitters

This week, Roche shared a poster at the European Association for the Study of Diabetes (EASD) annual meeting relating to the injectable CT-388, apparently showing that patients in a small study has displayed side effects such as nausea, vomiting, and diarrhoea.

Roche’s stock price took a nose-dive on the news, falling from ~$40.5 per share to ~$38.5 per share – a drop of ~5%, and ending a four-month long bull run triggered by the first data from CT-388 shared in May.

In the GLP-1 class, safety is of paramount importance, firstly because this is a new drug class and the effects of long-term usage are not known, and secondly because, with so many companies now developing GLP-1 agonist drugs, drugs that cannot match or improve on current standards of care are unlikely to be commercially competitive, and potentially, may never make it to market.

Pfizer, for example, has run into similar issues with its danuglipron oral weight loss candidate, which required twice daily dosing. In December, the company admitted that it would not be advancing the drug due to the high drop-out rate of patients in a mid-stage clinical study owing to unpalatable side effects, although it more recently said it will proceed with a once-daily version of the drug.

Bloomberg, which broke the Roche/CT-388 news this week, speculated that “the gastrointestinal profile of Roche’s CT-388 for obesity may have pressured the company’s shares,” and suggested that the “trial poster shows slightly high rates of diarrhoea, and severe-adverse events.”

With that said, reportedly, the trial did not have any treatment-related discontinuations, and Roche suggested that CT-388 was found to be “safe and tolerable,” so could the market be overreacting to this latest “update?”

Data Can Be Distorted In Fast Moving, Highly Competitive Market

I’d speculate the answer to the above question is affirmative – the market is desperate for any information it can get its hands on in order to try and back the company with the best next-generation GLP-1 candidate.

Here’s a list of some of the competing candidate and developers, beginning with the two incumbents.

Eli Lilly – Besides tirzpepatide, Lilly is developing Retatrutide, nicknamed “triple-G” as it targets three different hormones – GLP-1, GIP, and glucagon, and has achieved a weight loss of 24% at 48 weeks. Orforglipron – an oral candidate – has shown nearly 10% weight loss at 36 weeks, meaning, arguably, Lilly has the three most powerful members of the GLP-1 agonist class of drugs in its portfolio.

Novo Nordisk – Besides semaglutide, Novo is developing amycretin, which recently showed participants lost up to 13.1% of their weight after 12 weeks in a Phase 1 study. Amycretin is both a GLP-1 and amylin receptor agonist.

Amgen (AMGN) – Amgen’s MariTide inhibits the gastric inhibitory polypeptide receptor (GIPR) and activates the glucagon like peptide 1 (GLP-1) receptor. Management was bullish about upcoming Phase 2 study results on its Q2 earning call, although no updates have been forthcoming since.

Pfizer – Moving forward with once-daily danuglipron, studies to begin later this year.

AstraZeneca (AZN) – Has obtained licensing rights for Ecogene’s GLP-1 candidate ECC5004 – the company says “small molecule GLP-1RA, such as ECC5004, could potentially offer more dosing convenience and ease of use compared to existing GLP-1RA therapies.”

Boehringer Ingelheim/Zealand Therapeutics – Are developing survotutide, “an investigational long-acting, glucagon/GLP-1 receptor dual agonist at the Phase 2 clinical study stage.

Viking Therapeutics (VKTX) – Is developing VK2735, a novel dual agonist of the glucagon-like peptide 1, or GLP-1, and glucose-dependent insulinotropic polypeptide, or GIP, receptors. Phase 2 data showed up to 14.7 weight loss after 13 weeks of treatment.

Structure Therapeutics (GPCR) – “Oral small molecule product candidate” GSBR-1290 has shown 4.74% placebo adjusted weight after eight weeks in a small study, with strong safety.

Terns Pharmaceuticals (TERN) – Developing an oral, small-molecule glucagon-like peptide-1 receptor agonist, which achieved 5.5% weight change from baseline at highest dose, in a nine-patient subset.

Altimmune (ALT) – Phase 2 stage GLP-1/glucagon dual receptor agonist candidate pemvidutide – mean loss of ~15% body weight at 48 weeks in mid-stage study.

With hundreds of billions of dollars in waiting for the outstanding GLP-1 candidate, and triple-digit share price gains in wait, and hundreds of millions of dollars of wasted R&D budget for those candidates that fail, plus a painful downward share price correction, it’s no wonder the market keeps such a close watch on even the smallest scale data readouts.

While spotting potential early could lead to a good “buy” or “sell” call, equally, the market risks jumping the gun, and piling into – or out of – a company’s stock before its drug candidate has delivered a proper set of clinical study data.

As such, I don’t believe the market’s sell-off of Roche stock in response to its latest glimpse of CT-388 data is necessarily justified for several reasons.

Firstly, it was a small data set, secondly, there were apparently no study discontinuations (the side effects noted are common to Zepbound/Wegovy also), thirdly, an immature data set, and fourthly, the presence of two other candidates in Roche’s GLP-1 agonist pipeline.

Does that mean that Roche’s plans to enter the GLP-1 agonist remain on track and the bull run on its stock can continue? I would caution slightly against that view – the reality is that Lilly and Novo have been developing GLP-1 agonist drugs for decades and have >100 years experience treating diabetes, hence in my view, they remain untouchable at the top of the tree – for now, at least.

Concluding Thoughts – Well-Hedged Roche Remains A Contender To Back In GLP-1 Race As Underlying Business Is Strong

Let’s take a moment to consider Roche’s Q2 2024 financial results. The pharmaceuticals division earned CHF 22.6bn of revenues in Q2 – up 5% year-on-year, the diagnostics division CHF 7.2bn revenues – up 9% year-on-year – and 2024 guidance was raised, for mid-single digit sales growth, high single digit core EPS growth, and an increased dividend.

As we can see above, Roche has multi-billion revenue generating assets in multiple pharmaceutical fields, including oncology, eye disease, autoimmune, infectious diseases and hematology, and as we can see below, the long-term outlook for the company is positive based on the growing revenue impact of multiple recent drug launches, with many more to come.

This represents a wonderful hedge against potential setbacks in the GLP-1 field, which is not in place for contenders such as Viking, Structure, Altimmune (ALT), and Terns, whose share prices could fall >50% on a significant study setback.

Roche’s GLP-1 agonist pipeline can be described more as a “nice-to-have” than a “must-have” in terms of preserving the company valuation. In other words, the upside from a successful GLP-1 candidate is in play, but there’s little long-term downside if these candidates don’t succeed.

True, Roche stock was stagnant for years prior to the GLP-1 candidates and has gained as a result of their progress, but the company has multiple other ways of achieving top and bottom-line growth in play, and can succeed even if its GLP-1 candidates do not.

The even better news is that – in my view at least – there’s no need to panic in relation to this week’s safety news for CT-388. Remember, no GLP-1 candidate is free from gastrointestinal adverse events such as diarrhoea, and there were apparently no patient discontinuations, plus Roche has two other candidates, with CT-868 the next to read out data.

I bought Roche stock myself on the basis of my thesis that there’s plenty of potential upside and little potential downside with regard to the GLP-1 programs, with the company delivering outstanding performance within its core business.

I’m still looking forward to the next data sets, whether they come from CT-388, 996, or 868, and I’m trying not to read too much into glimpses of data from small patient pools when Roche itself is bound to let me know if there are major breakthroughs or setbacks in good time.

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