What To Expect From Roche’s Q3’16 Earnings?

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Roche Holdings (NYSE:RHHBY) is set to report its Q3 earnings for fiscal 2016 on October 20th. The company generated CHF 25 billion in revenue in first half of this fiscal year. It had generated CHF 35.5 billion in the 9-month period for fiscal 2015. On year-over-year basis we expect the company to report revenue growth in mid-single digit range on back of continued strong performance of Oncology products. We expect EPS growth to be above sales growth on account of lower marketing and interest expense for 9 month period of this fiscal year as compared to same period last year.

Our price estimate of $38 for Roche is 28% above the current market price

Older Drugs And Recent Launches Will Support Growth

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Roche generates over 77% of its revenue from pharmaceutical products and rest from diagnostics. It is the market leader in Oncology, due to its acquisition of Genentech some years ago. The company launched Tecentriq in May this year. We expect the drug to have incremental effect revenue in Q3 of this fiscal. Our estimate is that the drug will generate about $3.5 billion in revenue by 2020. Avastin is the company’s strongest pharma product and adds close to $7 billion in annual revenue. Recently, the company got approval for the combination therapy of Avastin and Traceva for the treatment of recurrent NSCLC in Europe. This will also help arrest the slide that Tarceva is facing because of increased competition. We expect the company to report strong growth from emerging markets for the last 9-month period over the same period in 2015 fiscal. A significant percentage of this growth is attributable to China and Latin America.

Diagnostic Segment To Perform On Expected Lines

Immuno-diagnostics contributes about 58% to the diagnostic segment revenue. We expect the company to report growth in immuno-diagnostics business. In the diabetes segment the company has been facing challenges due to pricing pressure in U.S. because of Medicare disbursement issues. We expect the company to report negative growth for diabetes business.

Expect EPS Growth Above Sales Growth

In its Q2 fiscal 2016 presentation, management indicated that EPS growth would be above sales growth for full year. We believe that this is attainable. The positive impact of PSI (past service income) of about CHF 426 million has already been accounted for in the first half earnings. It will also reflect on the 9-month period for fiscal 2016 on year-over-year basis as compared to fiscal 2015. The company reported increase in marketing & distribution for the H1 of this fiscal on year-over-year basis on account of recent new launches. As compared to Q2 we expect this expense as percentage of sales to have come down in Q3 of this fiscal year. The company has been reducing debt which has helped decrease its effective interest cost. This will also add positively to EPS. Overall, we expect the company to report EPS growth at faster rate than sales for 9-month period of fiscal 2016.

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