2023-10-20 09:38:08 ET
Summary
- Solid balance sheet, higher DPS expected, and firepower. Roche is a company to have.
- COVID-19 has positively impacted the company, and now Wall Street is discounting lower sales estimates. However, Roche is growing nicely.
- Despite a challenging environment, Roche confirmed its 2023 outlook and so did our valuation.
We decided to move Roche to a ' strong buy ' recommendation here at the Lab ([[RHHBF]], [[RHHBY]], [[RHHVF]]). Pfizer was not the only large pharmaceutical company positively affected by the pandemic outbreaks. In fact, Roche was also impacted and is now being discounted due to lower revenue from COVID-19 products and CHF strength compared to the other currencies. Despite that, Roche confirmed the 2023 guidance. Aside from the company's outlook, today, the company released a solid Q3, and we believe this current minus 4.5% at the stock price level is unjustified.
Our rating upgrade is not performed following an uplift revision from our internal numbers but for a mismatch between the company's solid results vs. a consensus downgrade. Our internal team has already investigated the two adverse downside risks: 1) the COVID-19 lower top-line sales and 2) Roche's Key failure in the pipeline combined with sales erosion from biosimilar competition. Despite a challenging momentum, Roche is progressing with sales, and there are ' Positive Readouts From Pipeline ' to price in.
Why is Roche a Strong Buy?
There are a few charts that support our long-term investment thesis.
- Starting with top-line sales, the Swiss pharmaceutical group closed the January-September 2023 period with a turnover down 6% to CHF 44 billion. COVID-19 and decremental FX are responsible for a drop of CHF 4.5 billion. Excluding the exchange rate effect, the Group sales increased by 1%. Excluding the COVID-19 beneficial effect (and looking at the orange line in Fig 1), Roche is growing at a double-digit rate in the Pharma division and a 7.5% rate in the Diagnostic segment. This is remarkable. Looking at the details in Fig 2, we see how Roche played a pivotal role in fighting the pandemic outbreaks and how the total COVID-19 sales reached CHF 18 billion since 2020. Instead of looking at an aggregate picture, Wall Street analysts should price Roche based on a quarterly organic sales evolution and not on positive/negative one-off events;
- As already reported, Roche confirmed its full-year guidance. In 2023, however, it expects a decline in group sales of the order of 1-5%. However, if we look at Fig 3 (HY outlook) and Fig 4 (Q3 new outlook), the company lowered its impact from COVID-19 sales from CHF 5 billion to CHF 4.5 billion and AHR from minus CHF 1.6 billion to CHF 1.1 billion. This is very supportive and confirms our thesis called ' New Drugs advancements to lower sales erosion ';
- Our recent publication emphasized how Roche's young portfolio was very well-performing. In Q1, we reported how Vabysmo drug development was a supportive catalyst for the company. According to our previous estimates, Vabysmo sales reached a plus 600% and will likely reach $4 billion in sales in 2024. In our 2023 numbers, we implied a revenue generation above $2.5 billion, and with the current trajectory, we believe it is achievable. Before moving on with Evrysdi development, we should recall that the company's top 5 growth drivers (Vabysmo, Ocrevus, Hemlibra, Polivy, and Evrysdi) generated a turnover of CHF 11.2 billion , with a CHF 3.3 billion higher sales vs 2022 9M results. Our previous estimates anticipated that ' Roche's newer products will deliver more than $10 billion in sales, and the old biologics portfolio is likely to be more resilient in sales than expected .' Therefore, we are well beyond our base case scenario;
- Evrysdi was approved for babies under two months old in the EU, and in Q3, the drug is now in the CHF 1 billion blockbuster. Again, looking back to our update, excluding the US, we forecast a CHF 2 billion peak sales potential, and we believe this scenario is now conservative (in the Q&A, the company also reported lower revenue from Evrysdi due to negative FX).
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Conclusion & Valuation
Looking at Roche's balance sheet, the company has M&A optionality with a CHF 25 billion firepower, and in our 2024 numbers, we arrive at a net debt/EBITDA of 1.5x. Having listened to the Q&A, Roche's CEO confirmed that the company " is open to acquiring both early-stage and late-stage drug development assets," adding that he is not in a rush and any deal must make sense financially and scientifically. Looking at the FCF development, our yearly debt arrives at CHF 9.35 billion, confirming a cash-positive position in 2025. At the last Pharma Day, the company provided positive feedback in September. Therefore, even if Roche performed better than expected, we decided to maintain our target price of CHF 330 per share unchanged . This is based on an EPS of CHF 22 supported by new portfolio sales and a 15x P/E (in line with comps). In our latest analysis, we already lowered Roche's earnings per share due to lower COVID sales and FX drag. Looking at the valuation, Roche's P/E is lower than 12x in 2024 versus competitors trading higher, such as AstraZeneca , Merck, and BMY.
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Be Patient, Roche Is A Clear Buy At This Price