What Is Roche Holding’s Fair Price Estimate Based On Expected 2019 Earnings?

Roche Holding’s (NASDAQ:RHHBY) stock price has gained 7% year-to-date, higher than a little over a 1% gain for the Dow Jones U.S. Healthcare Index. The company’s new drugs have done well in the recent quarters, and they have so far been able to offset the declines seen on the older drugs, where the company is facing headwinds from the loss of marketing exclusivity. The stock price seems to have some more room for growth, in our view. This note details Trefis’ forecasts for Roche Holding for 2019. You can view our interactive dashboard analysis on ~ What’s Driving Our $38 Price Estimate For Roche Holding? ~ for more details on the expected performance of the company. In addition, you can see more of our data for healthcare companies here.

What Are The Key Sources of Roche’s Revenue, And How Have They Trended In The Recent Years?

• Roche generates its revenues from sales of pharmaceutical drugs for various therapeutic areas, including Oncology, Immunology, Infectious Diseases, Ophthalmology, and Neuroscience & Others.
• Apart from drug sales, the company also generates its revenues from In-Vitro Diagnostics, which includes Centralized And Point of Care Solutions, Tissue Diagnostics, Molecular Diagnostics, and Diabetes Care.
• Total Revenues for Roche have largely trended higher over recent years. Revenues grew from $53.2 billion in 2016 to $60.7 billion in 2018, led by strong sales of its newly launched drugs.

How Does The Revenue Growth of Roche Compare To Its Peers?

• Roche’s revenues have grown at an average of 6.9% from $53.2 billion in 2016 to $60.7 billion in 2018. The growth for Roche has been higher than its peers.
• Johnson & Johnson’s revenue has grown at an average rate of 6.5% from $71.9 billion in 2016 to $81.6 billion in 2018.
• Pfizer’s sales have grown at an average of 0.8% from $52.3 billion in 2016 to $53.6 billion in 2018.
• Merck’s sales have grown at an average rate of 3.1% from $39.8 billion in 2016 to $42.2 billion in 2018.

How Much Can Roche’s Top Line Grow In 2019?

• Roche’s sales will likely grow 3% to $62.6 billion in 2019, with gains in both pharmaceuticals as well as the diagnostics businesses.
• Pharmaceuticals revenue growth in 2019 will be led by the company’s new drugs, which will more than offset the declines expected in Rituxan and Herceptin, due to loss of marketing exclusivity. These are important drugs for Roche, with combined sales of $12.4 billion in 2018, and the decline in sales for these two drugs alone could be close to $1.5 billion, in our view.
• New drugs, such as Ocrevus, Tecentriq, Alecensa, and Hemlibra are seeing strong growth in sales, and this trend will likely continue in the near term. The contribution of new drugs to the company’s top line was north of $3.3 billion in 2018, and this will likely be even higher in 2019. This also reflects how Roche has so far been able to successfully compensate for expected revenue loss in its older drugs with the launch of its newer drugs. The company has been spending high on R&D over the past years, and it has a promising pipeline, which could fuel medium to long term growth.
• In-Vitro Diagnostics could see mid-single-digit growth, partly led by immuno-diagnostics, which has seen strong growth in the recent past, and this trend could continue in the near term. Most of the segment revenues are generated from centralized and point of care solutions, which could see steady growth in 2019.

How Much Can Roche’s Earnings Grow Based On The Expected Revenue Trends Above?

• Roche’s full year 2019 earnings will likely be $2.39 per share, reflecting 4% growth over 2018.
• Earnings growth can largely be attributed to higher revenues.
• The company has guided for mid-single-digit top line growth, and earnings to grow in-line with the revenues for 2019.
• The company’s gross margins have more or less hovered around 80% over the past few years, and we expect it to be around the same mark in the coming years as well.

What’s Roche’s Fair Price Estimate Based On the Above?

• Our price estimate of $34 for Roche is based on a 16x price to earnings multiple, and earnings of $2.39 per share in 2019.
• The multiple for Roche is slightly below its peers, including Merck, and Johnson & Johnson, where we expect the earnings growth to be stronger than that of Roche.

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