>ROCHE (EUROPEAN STOCK)

■ Attractive valuation, EPS momentum and pipeline data
We maintain our Buy recommendation given the potential for positive earnings momentum and upcoming pipeline catalysts. We believe Roche’s valuation is undemanding given it offers one of the best growth rates in EU large cap pharma with an expected ’10-’13 EPS CAGR of 9%, yet trades on only a ’10E P/E of c12x. Our CHF190 PO is in-line with our DCF valuation and assumes shares trade on 13.8x.

■ Pipeline catalysts and further EPS momentum expected
Meaningful catalysts for Roche in our opinion include: 1) Further positive earnings momentum (from pharma margin/Tamiflu/ tax rate; 2) Phase III Avastin data in three new indications (metastatic prostate, ovarian and gastric cancer) expected could open up a combined market opportunity of CHF3-4bn; 3) The first Phase III data for once-weekly GLP-1 analogue taspoglutide in the treatment of diabetes is expected 2H09, with filing 2010; 4) Tamiflu guidance of CHF400m for 2010 could be raised given the ongoing swine flu pandemic.

■ Competitor newsflow also picking up
However, we highlight a pickup in competitor newsflow with: ) Erbitux pIII data from the COIN study in colon cancer (mCRC) in Sept 09; 2) First detailed Vectibix data in 1st line mCRC, also Sept 09, from the PRIME study; 3) Potential interim analysis for ASA404 (Novartis) from the ATTRACT Phase III study in 1st line NSCLC by end 09; 4) Potential further PIII data for Sutent (Pfizer) in 1st line mBC late 09, although initial data has been negative; 5) Phase III data for Nexavar (Bayer) in 1st line NSCLC from the NEXUS study in non-squamous patients 1H10; 6) Recentin (AZN) first Phase III data in 1st line mCRC 1H 2010, although there has previously been negative data in both lung cancer and 2nd line mCRC.

To see full report: ROCHE (MERRILL LYNCH)