December 9, 2021

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SoftBank/Roche: Northstar reorients to embrace drug development

Pharmaceuticals sector updates

SoftBank’s asset management arm Northstar has a reputation for hedge fund-style risk taking, losing some $5.6bn on derivatives. The latest $5bn investment in pharma giant Roche by the “Nasdaq Whale” looks a lot more conventional at first glance.

However, the Swiss company and the Japanese tech investor both have a taste for big data and disruption. There will be a thesis behind this investment, and it may be less far-fetched than many embraced by SoftBank.

Despite its size, Roche is not a staid business. It is renowned for placing big bets of its own. Focusing on unmet needs — illnesses for which inadequate treatments exist — is risky because failure rates are high. But the rewards from developing even a single ultra-successful drug can be huge.

Roche has bet heavily on the potential of big data as it looks for new growth areas. It has invested in genomics, a technology that is enjoying a renaissance after falling flat in the 1990s and 2000s. That is helping it take an early lead in personalised medicine.

It also has a notable blockbuster in multiple sclerosis drug Ocrevus. Analysts estimate its net present value at more than $30bn. That helps explain why Roche’s return on research and development investments beats the sector average. It is more than a percentage point higher than its estimated 8 per cent cost of capital, according to Berenberg DrugBank.

A successful drug for Alzheimer’s could have the biggest pay-off of all. Until June, investors had little hope that Roche’s candidate gantenerumab might work. That changed with a surprise decision by US regulators in early June to approve Biogen’s aducanumab, which has a similar mechanism.

Since then enthusiastic investors piled into the stock, which is up by a tenth, outperforming the STOXX Europe Total Market Pharmaceuticals. The shares now trade on a price/earnings ratio of 18, slightly above the sector mean and its own long term average.

That share rally should fade. Positive trial results, due next year, are far from certain. There is a fierce debate over whether Biogen’s aducanumab actually works. Meanwhile revenues at Roche, which has had to reduce its reliance on its ageing cancer drugs, are likely to be flat next year.

Even so, Roche looks well-placed to capitalise on the convergence of medical knowledge, technology and data science. Its enthusiasm for data-driven drug discovery, likely shared by SoftBank, should feed a promising pipeline.

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