Is Roche Stock Undervalued At $33?

After a 14% fall this year, Roche stock (OTCMKTS: RHHBY) looks like it can see higher levels. Looking at a slightly longer term, RHHBY stock is down 18% from levels seen in late 2019. This can be attributed to the company’s P/E ratio, which fell 22% to 12x trailing earnings from 16x in 2019, partially offset by a 5% growth in adjusted earnings per share to $2.67 in 2022 versus $2.54 in 2019. The earnings growth was driven by a 9% rise in revenues and its average shares (ADRs) falling 6% over this period.

RHHBY stock has faced a notable decline of 20% from levels of $45 in early January 2021 to around $35 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Notably, RHHBY stock has underperformed the broader market in each of the last three years. Returns for the stock were 18% in 2021, -24% in 2022, and -14% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that RHHBY underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector, including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could RHHBY face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, RHHBY appears to have ample room for growth, as discussed below.

Roche’s revenue grew 9% to $69.9 billion in 2022, compared to $64.4 billion in 2019, partly driven by higher demand for COVID-19 testing. The diagnostics business saw its sales surge 42% between 2019 and 2022. Roche also sold Ronapreve – a COVID-19 treatment developed by Regeneron and distributed by Roche outside the U.S. The drug garnered $1.8 billion in annual sales in 2021 and 2022. However, with the pandemic now behind us, the demand for testing and COVID-19 drugs is on a decline. As such, the 2023 sales for Roche are expected to decline in low single-digits.

Beyond COVID-19 products, Roche has benefited from the continued uptick of its relatively new drugs, including Perjeta, Kadcyla, Alecensa, Tecentriq, Hemlibra, Vabysmo, and Ocrevus. These drugs are expected to be the key growth drivers for Roche as it battles with biosimilar competition for its previously top-selling drugs – Avastin, Herceptin, and Rituxan – which have seen their combined sales fall a significant 66% to $6.7 billion in 2022, compared to $19.8 billion in 2019.

Roche’s eye drug – Vabysmo – has been the star performer for the company with its $1.8 billion sales for the nine-month period ending September 2023, reflecting a gigantic 6x jump y-o-y. The drug was approved by the U.S. FDA in early 2022. Market share gains for Vabysmo are expected to continue in the near term, boding well for Roche.

Although the company saw a rise in revenues in recent years, its adjusted net income margin declined 260 bps to 24.7% in 2022 versus 27.3% in 2019 due to higher general and administrative costs. Looking at valuation, we find that RHHBY stock has more room for growth. We estimate Roche’s Valuation to be $42 per share, about 24% above the current market price. Roche stock has been weighed down in the recent past due to some pipeline failures, including the Alzheimer’s treatment – Gantenerumab. Roche has been looking at inorganic growth to bolster its pipeline. Earlier this year, it signed a $2.8 billion deal to partner with Alnylam for commercialization of Zilebesiran – an Investigational treatment of hypertension in patients with high cardiovascular risk. Last month, the company announced its plans to acquire Telavant for $7 billion to get the rights for Telavant’s investigational drug for inflammatory bowel disease. ^[1]

While there are near-term headwinds for Roche with falling COVID-19-related sales and its older drugs, the company will likely see a rebound in sales growth in 2024 with market share gains for its relatively new drugs. The new acquisitions will also aid the overall growth. On the oncology front, Roche awaits the outcome of trial data for a new treatment – Tiragolumab – which is part of an experimental class of drugs known as anti-TIGIT. If successful, this could provide a boost to Roche’s future sales growth. Overall, we think investors can use the current dip in Roche for strong gains in the long run.

[1] Month-to-date and year-to-date as of 11/28/2023
[2] Cumulative total returns since the end of 2016

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1. Roche agrees $7.1bn deal for Telavant to boost drug pipeline, Hannah Kuchler, Oct 23, 2023, Financial Times [↩]