Should You Pick Roche Stock Around $40 After Positive Data For Its Obesity Drugs?

The stock price of Roche (OTCMKTS: RHHBY) is up 10% in a week, compared to around a 10% fall for its peer Eli Lilly stock (NYSE: LLY) over this period. The rise in Roche stock in recent days can primarily be attributed to the positive data for phase one clinical trial of its experimental obesity drug – CT-996. Patients who took the oral pill once a day lost 7.3% weight in a month, compared to 1.2% weight loss with patients who received a placebo. ^[1] However, looking at a slightly longer term, RHHBY stock has seen a decline of 10% from levels of around $45 in early January 2021 to around $40 now, vs. an increase of about 50% for the S&P 500 over this roughly three-year period.

Notably, RHHBY stock has underperformed the broader market in each of the last 3  years. Returns for the stock were 18% in 2021, -24% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — 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 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 elevated interest rates, could RHHBY face a similar situation as it did in the last three years and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we think Roche stock is fully valued. We estimate Roche’s Valuation to be $37 per share, slightly below its current market price of $39.

Roche’s revenue has declined 7.2% from $72.4 billion in 2021 to $67.2 billion in 2023. This can primarily be attributed to lower demand for its Covid-19 testing. Excluding the 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 41% to $5.4 billion in 2023, compared to $9.1 billion in 2021. The sales of these three drugs combined peaked at $21 billion in 2018.

On the pipeline front, Roche has seen multiple failures with its cancer and Alzheimer’s disease treatments. Earlier this month, Roche halted its cancer trial for its Tiragolumab plus Tecentriq and chemotherapy, which failed to meet the primary endpoints. ^[2] Back in late 2022, Roche’s Gantenerumab – an experimental treatment for Alzheimer’s also failed to slow the clinical decline in people with this disease. Although, on the diagnostics business side, Roche’s blood test to support an earlier diagnosis of Alzheimer’s was designated as a breakthrough device by the U.S. FDA earlier this year. With falling revenues and these failures, Roche stock has been continuously underperforming the broader markets since the last three years.

Roche acquired Carmot Therapeutics for $3.1 billion earlier this year, giving it access to Carmot’s experimental obesity treatments. Note that the obesity drugs market is expected to swell to over $100 billion in size by the end of this decade. Currently, Novo Nordisk and Eli Lilly are the key players in this market, but Roche’s entry could imply a meaningful share in its kitty, given that it has both options – an oral pill and an injectable. Eli Lilly’s Zepbound is an injectable, while Novo Nordisk’s Wegovy is a pill. Roche’s injectable – CT-388 – also showed positive results in early clinical trials in May this year.

Overall, we think that Roche is appropriately priced from a valuation perspective. However, any positive outcome from its ongoing clinical trials, especially with its obesity drugs, will likely result in higher levels for the stock. 

[1] Returns as of 7/18/2024
[2] Cumulative total returns since the end of 2016

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1. Roche’s Press Release, July 17, 2024 [↩]
2. Roche’s Press Release, July 4, 2024 [↩]