Is Roche A Buy At $45?

Roche’s (OTCMKTS:RHHBY) ADR grew over 10% from $40 levels in the beginning of this year to $45 levels as of April 22, compared to a 13% decline for the broader S&P 500. While Roche’s ADR has outperformed the broader markets, we believe there is still 10% upside potential from the current levels. Why is that? Roche’s ADR has been on a strong run, with a 59% jump since the start of 2018, a little over two years ago, as compared to 22% growth for S&P 500. Our dashboard, ‘What Factors Drove 59% Change In Roche’s ADR Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

The stock price gain over the past two years can primarily be attributed to strong revenue and earnings growth for the company. Roche’s revenues were up 22% from $54.9 billion in 2017 to $64.4 billion in 2019. This combined with a 360 bps jump in adjusted net income margin from 23.7% in 2017 to 27.3% in 2019, helped earnings per share grow 35%. We explain the drivers for Roche’s expenses and net income margin in ‘Roche Expenses‘ interactive dashboard analysis.

A marginal growth in Roche’s P/E multiple aided the company’s stock price growth. Roche’s P/E multiple grew from 15x at the end of 2017 to 16x by the end of 2019. Moreover, Roche’s P/E is up to about 17.5x now, given the company’s strong Q1 results and its diagnostics segment growth in the current coronavirus crisis. This reflects an 18% increase in P/E multiple since December 2017. We believe there is a potential upside for Roche’s multiple when compared to levels seen over recent periods – P/E of 16x at the end of 2019, and 17x currently.

The reason for Roche’s stock’s outperformance over the recent years can be attributed to the success of its relatively new drugs, such as Tecentriq, Kadcyla, and Perjeta, among others. Some of Roche’s blockbuster drugs, including Rituxan, Herceptin, and Avastin have lost their patents in the U.S. and they are now exposed to biosimilar competition, thereby resulting in sales decline. However, the company’s newer drugs have thus far been able to more than offset the decline seen from the old drugs.

Looking over the recent past, Roche’s Q1 results were great in the current environment. On a constant currency, it reported 7% growth in the Pharmaceuticals segment, and a 5% growth in the Diagnostics segment. While Pharmaceuticals sales were largely driven by higher contribution from the company’s new drugs, Diagnostics segment sales were driven by strong uptick in molecular testing, as  emergency and COVID-19 testing increased. The company also guided for low-mid single-digit revenue and earnings growth for the full year. We currently forecast 3.3% growth in the company’s top line for 2020. Our analysis on ‘Roche’s Revenues‘, provides more details on the company’s business model, segments, historical revenues, and our forecasts.

How Is Coronavirus Impacting Roche’s Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact Roche’s revenues, as it faces supply chain disruptions, and potential impact on direct sales, due to postponement of minor health related issues and surgeries. Roche’s Diagnostics business growth in Q1 was led by molecular testing, but its other diagnostics sub-divisions, Diabetes Care and Centralized And Point of Care Solutions, saw low single-digit decline, a trend which could continue in the near term.

Between January 31st and April 22nd, Roche’s stock has gained 15% (vs. about a 13% decline in the S&P 500). A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Notably, Roche’s two devices ~ cobas 6800 and cobas 8800 received FDA approval on March 13 for testing the novel coronavirus. These devices have a very limited installed base of around 800 devices globally, with a capacity of 5,568 tests per device in a 24 hour window. The company is also aiming to supply 400,000 test kits per week. The company’s molecular testing business, in particular, aided the stock price growth over the recent past. From a longer term point of view, new drugs remain the key growth driver for Roche. Going by historical trends, and potential of Roche’s new drugs, we believe that the company’s stock could potentially offer upside returns. In fact, based on our ‘Roche Valuation‘ dashboard, the upside for Roche’s ADR could be over 10% from the current levels. Even during the 2007-08 crisis period, Roche outperformed the broader markets, something we explain in our 2007-08-2020 crisis comparison dashboard for Roche.

In addition, our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams