2023-08-01 12:57:01 ET
Summary
- Roche reports Q2 financial results in line with expectations and confirms 2023 guidance.
- Diagnostic turnover declines due to lower COVID-19 sales. Excluding that, Pharma and Diagnostics grew by 7% and 8% in Q2, showing a solid recovery.
- Guidance confirmed with FX drug. Therefore, we are slightly reducing our target price, maintaining a buy.
Last week, Roche reported its Q2 financial results ( RHHBF , RHHBY , RHHVF ). Since our latest publication, called " Q1 Results Support Our Long-Term Thesis ," we have been broadly flat with Roche stock price development. Here at the Lab, we were not very optimistic about the Swiss pharmaceutical giant in 2022, and we investigated two adverse downside risks 1) COVID-19 lower sales to provide support to the Diagnostic division sales development, and 2) Roche pipeline evolution with Another Key Fail versus New Drugs advancements to lower sales erosion.
Despite downside risks and anticipating a declining momentum in turnover , we were optimistic about the company's medium time horizon. After analyzing the Q2 release, we reaffirmed our buy rating target. This is supported by Roche's 2023 guidance confirmation and positive dividend forecast outlook. Here at the Lab, we are implying a 2024 DPS increase of 3% to CHF 10 per share (from CHF 9.7).
Mare Past Analysis Roche 2023 guidance
Source: Roche Q2 results presentation .
Q2 results
Roche delivered H1 top-line sales of CHF 29.78 billion and EBIT of CHF 10.91 billion. This was in line with Wall Street consensus expectations and our internal estimates. We are also positively surprised by diagnostic turnover evolution, which recorded a 3% lower sales. Given COVID-19 normalization, we believe this decline aligns with tolerance. In addition, after the pandemic outbreaks, we believe there is a positive trend in Diagnostic investments. Improving laboratory efficiencies and reducing testing times improved outcomes in saving lives and optimizing costs.
Roche clear leader in Diagnostic
Source: Roche Diagnostics Investor Day 2021 .
Excluding COVID-19 sales, the pharma division grew by 7% in Q2 and the Diagnostics segment by 8%. This is a very healthy recovery compared to the Q1 release. These data are at a constant currency exchange.
Roche Pharma and Diagnostic sales evolution
On the upside, Roche's newer products continue to deliver. Evrysdi and Hemlibra were below expectations by 9% and 3%, respectively, but Vabysmo (as already happened in Q1) was ahead estimated by 9%. Vabysmo is in line to achieve 2023 sales of >$2.5 billion. Related to the old biologics portfolio, the company delivered a better performance than expected. Aggregate sales reached CHF 1 billion, with Rituxan, Avastin, and Herceptin 4% above Wall Street. All in all, this was a positive performance.
Roche new products vs old products
Upside on Roche
Last time, we anticipated M&A optionality with a CHF 25 billion potential firepower on the 2024 estimate with a net debt/EBITDA of 1.5x. Today, looking at the cash flow development, we arrive at a year-end debt of CHF 9.35 billion (with a debt projection of 3.5 billion in debt for 2024 and cash positive position in 2025). This is supported by the latest company's partnership with Alnylami n to co-develop RNAi therapeutic. There are also no major R&D updates.
In our numbers, we still believe 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.
Roche erosion comp vs Wall Street estimates
Source: Mare Past Analysis
On the upside, we also recall that Roche owns a majority stake in Chugai. In detail, it has a 59.89% equity investment worth approximately $25 billion (representing more than 10% of Roche's market cap).
Conclusion and Valuation
The company's core EPS reached CHF 10.10 and declined in line with sales. Excluding the COVID-19 lower turnover, Roche forecasts solid sales growth in both divisions. Indeed, the company confirmed its guidance on a low single-digit decline for group sales and core EPS. Therefore, the expected currency development drag is now worse than anticipated in our numbers. We previously forecasted -4% and -5% in negative FX development in 2023 and 2024 and are now at an EPS drag to -7% and -9%, respectively. This will likely drag the consensus price target down by a few percent. For this reason, we maintain a buy rating target but slightly reduce our price from CHF 340 to CHF 330. We still value Roche with a 16x P/E ratio on a twelve-month horizon target. This represents a 7% discount vs. peers and a cheap EV/net present value valuation on drug earnings estimates. As emphasized in the Q1 update, H2 2023 will be a decisive momentum for the Roche pipeline . We are unsurprised to see Roche's next catalyst with a Pharma Day scheduled for mid-September.
For further details see:
Roche: FX Drug But Positive Outlook