After a 21% fall year-to-date, Roche stock (OTCMKTS: RHHBY) looks undervalued. It has declined from $52 in early January to around $40 now. The YTD 21% fall for Roche is worse than the -17% returns for the broader S&P500 index and -3% returns for the S&P500 Health Care index. Looking at the longer term, Roche stock is up 27% from levels seen in late 2018, compared to around 65% returns for the S&P500 index.
This 27% rise for Roche stock since late 2018 was driven by: 1. the company’s EPS, which rose 18% to $2.72 in 2021, compared to $2.31 in 2018, and 2. an 8% rise in the company’s P/E ratio to 15x trailing adjusted earnings now, vs. 14x in 2018. The earnings growth can be attributed to higher revenues, partly offset by net margin contraction, as discussed below.
Roche’s revenue grew 12.4% to $72.4 billion in 2021, compared to $64.4 billion in 2019, partly driven by higher demand for Covid-19 testing since the pandemic’s beginning. The diagnostics business saw its sales surge 49% between 2019 and 2021. Roche also sells Ronapreve – a treatment for Covid-19, developed by Regeneron and distributed by Roche outside the U.S. The Covid-19-related products accounted for $7 billion of the $72 billion sales for Roche in 2021. However, now that the worst of the pandemic is behind us, the contribution from Covid-19 products is expected to fall in the near term.
Roche has benefited from the continued uptick of its relatively new drugs, including Perjeta, Kadcyla, Alecensa, Tecentriq, Actemra, Hemlibra, and Ocrevus. These drugs combined garnered $24.4 billion in sales in 2021, reflecting a 21% y-o-y growth. These drugs are expected to be the key growth drivers for Roche as it battles with biosimilar competition for its top-selling drugs – Avastin, Herceptin, and Rituxan – which have seen their combined sales fall a significant 54% to $9.1 billion in 2021, compared to $19.8 billion in 2019.
Looking at the company’s performance so far this year, its top line grew 2% on a constant exchange rate basis, with the diagnostics business seeing a 4% rise and pharmaceuticals flat y-o-y. A decline in Covid-19 product sales and forex and biosimilar headwinds will likely weigh on Roche’s sales growth in the near term. Roche’s Alzheimer’s treatment – Gantenerumab – failed to slow the disease in a late-stage clinical trial, and the company is cutting down its clinical trials for the drug. 
Most of these factors appear to have already been priced in by investors, given the decline in RHHBY stock. We estimate Roche’s valuation to be $50 per share, reflecting nearly a 25% upside from its current market price of $40, implying that investors are likely to be better off buying RHHBY stock in the recent dip for solid gains in the long term. At its current levels, RHHBY stock is trading at 15x the forward adjusted earnings estimate of $2.66, compared to the last three-year average of over 17x, making the stock attractive from a valuation point of view.
While RHHBY stock looks undervalued, it is helpful to see other valuable comparisons for companies across industries at Peer Comparisons. Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for IDEXX Laboratories vs. Entegris.
|S&P 500 Return||-3%||-17%||76%|
|Trefis Multi-Strategy Portfolio||-4%||-21%||214%|
 Month-to-date and year-to-date as of 12/7/2022
 Cumulative total returns since the end of 2016
- Roche shutters most trials of Alzheimer’s drug after failed trials, Julie Steenhuysen, Reuters, Dec 1, 2022 [↩]