What’s Happening With Roche’s Stock?

[Updated 12/15/2020] Roche Update

Roche (OTCMKTS: RHHBY) today announced the launch of the cobas® PIK3CA Mutation Test for patients with advanced or metastatic breast cancer. The company in its press release stated that out of 2 million women that are diagnosed with breast cancer each year, an estimated 0.5 million could develop a PIK3CA mutation, which can now be detected via Roche’s test. This will aid the company’s Diagnostics business, which has seen 2% growth in the first three quarters of 2020, as Covid-19 testing offset the decline from lower volume for other tests amid the pandemic.

While Roche’s stock has seen 21% growth since its March lows, it still appears reasonably valued, trading at just about 16x projected 2020 earnings. This compares with an 18.6x figure for Johnson & Johnson, and 21.6x figure for Eli Lilly & Company. We continue to believe that Roche’s relatively new drugs will more than offset the decline from biosimilar competition for its blockbuster drugs, translating into steady sales growth over the coming years.

(Updated 12/04/2020) Buy Or Sell Roche Stock 

Roche’s ADR (OTCMKTS: RHHBY) is up just 2% since the start of the year and it has gained around 20% from its March lows. Despite the recent run, Roche could offer an upside in the near term, as the company’s revenues and earnings are expected to see steady gains going forward. While the company’s sales were up just 1% in the first nine months of 2020, it can largely be attributed to the impact of Covid-19, which has reduced doctors’ visits and delayed patients from seeking care. Though Covid-19 also helped the company’s Diagnostics business sales, given that Roche’s Covid-19 tests are approved by the U.S. FDA. The development of a vaccine could end the pandemic and help to revive demand for its pharmaceutical products. Roche’s Covid-19 tests will also bolster the overall sales growth, along with the expansion of its relatively new drugs, such as Tecentriq and Ocrevus, in the near term, leading to stock price growth.

RHHBY ADR has rallied from $35 to $42 off the recent bottom compared to the S&P which moved 64% over the same time period. This underperformance can be attributed to higher than estimated impact of biosimilars on Roche’s top line. Looking at a wider time horizon, RHHBY ADR is up 33% from levels seen in early 2018, more than two years ago. While Roche stock has fully recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic, and despite the 20% rise since the March 23 lows, we feel that the company’s stock still has potential as it will benefit from the expansion of its relatively new drugs, while the decline in sales of older drugs, primarily Herceptin, Avastin, and Rituxan, due to biosimilars hitting the market, is already expected. We believe that the growth in sales of new drugs will more than offset the decline from the older drugs sales, implying a steady top line growth over the coming years. Our dashboard ‘Buy Or Sell Roche Stock provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last two years or so is justified by the roughly 17% growth seen in Roche’s revenues from $54.9 billion in 2017 to $64.4 billion in 2019. The company also managed to expand its Net Margins from 23.7% to 27.3% over the same period, on an adjusted basis. Revenue growth clubbed with margin expansion has meant that Roche’s EPS grew 35% from $1.89 in 2017 to $2.55 in 2019.

Finally, Roche’s P/E ratio contracted slightly from 17x in 2017 to 16x in 2019. While the company’s P/E is still at around 16x trailing earnings, it could see further expansion given the market share gains for some of its drugs, including Tecentriq, Hemlibra, and Ocrevus among others, driving the earnings growth in 2021 and beyond.

How Is Coronavirus Impacting Roche Stock?

The global spread of Coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower sales growth for pharmaceutical companies, such as Roche. However, Roche stands to benefit from the Covid-19 tests. Its two devices ~ cobas 6800 and cobas 8800 received FDA approval as early as March for testing the novel coronavirus. While Roche’s SARS-CoV-2 rapid antibody and rapid antigen tests are already in the market, the company is currently developing SARS-CoV-2 rapid antigen (saliva) and SARS-CoV-2 & Influenza A/B rapid antigen tests. Now the company’s diagnostics business has seen higher demand of late due to Covid-19 testing, which more than offset the decline in other tests. For the nine month period ending September 2020, Diagnostics revenue were up 9%, while pharmaceuticals sales were down 1%. While the Covid-19 tests will surely aid the sales growth in the near term, the company’s new drugs will likely drive the sales growth in the medium to long run. Look at our analysis, What’s The Buzz About Roche’s New Drugs for more details. With economies now opening up, Roche can see expansion of sales for these drugs.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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