Logo on building exterior at the Silicon Valley headquarters of pharmaceutical company Roche, Santa … [+]
Roche’s ADR outperformed the broader markets as well as some of its peers, thus far in 2020. While Roche’s ADR grew 10% since the beginning of the year, the S&P 500 declined 13%. Looking at other pharmaceutical giants, J&J gained 1%, Merck is down 15%, Pfizer is down 5%, and Novartis is down 10%. Why is that? The healthcare sector, in general, has remained resilient, thus far, during the crisis. For Roche, it is seeing stronger than expected growth from its new drugs. There were concerns on Roche’s oncology portfolio, after the patent expiry of 3 massive drugs, Rituxan, Avastin, and Herceptin, which together garnered sales of roughly $20 billion last year.
But Roche has been spending, over the last few years, a significant amount of money on R&D to strengthen its pipeline. In fact, Roche’s R&D expenses of $13 billion is highest for any pharma company, and it appears to be paying off well. Roche secured regulatory approvals for several drugs in the recent past. These relatively new drugs have been doing well for Roche. In Q1, the company reported 7% revenue growth in a tough environment, primarily led by its new drugs. To put things in perspective, Roche lost close to $900 million in sales from the three blockbuster drugs above, but the incremental revenues from the relatively new drugs were over $2.3 billion. This trend will likely continue, and we believe that the market is still not fully pricing in the potential of Roche. We estimate Roche’s valuation to be $52 per share – roughly 15% ahead of the current market price. Our price estimate takes into account the latest earnings as well as the company’s guidance. Our valuation is based on 4 factors, Roche’s Total Revenue, its Net Income Margin, No. of Shares, and P/E Multiple. We briefly discuss these factors below.
- Roche’s Revenues have seen an increase of 17.3% from around $54.9 billion in 2017 to $64.4 billion in 2019, and we expect it to increase to $65.8 billion in 2020, led by the contribution of new drugs, as detailed in our Roche’s Revenues dashboard.
- Roche’s Adjusted Net Income has increased from around $13.0 billion in 2017 to $17.6 billion in 2019 and we expect it to increase to $18.0 billion in 2020. This change is likely to be led by higher revenues and stable margins. A separate interactive dashboard analysis on Roche’s Margins highlights the company’s various expenses components in detail.
- Roche’s Adjusted EPS has increased from $1.89 in 2017 to $2.55 in 2019 and we expect it to increase to $2.60 in 2020. The change in EPS can be attributed to an increase in adjusted net income and a stable share count.
- Our Price Estimate of $52 For Roche’s Stock is based on our Detailed Valuation Model, and implies a 19.8x P/E Multiple on expected 2020 Adjusted EPS of $2.60. While this figure is higher than the historical P/E multiple, we believe Roche’s multiple will expand based on the increased contribution of sales from its new drugs.
Do you know what drove 60% growth for Roche’s ADR since early 2018?
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