Roche’s ADR (OTCMKTS: RHHBY) looks attractive at current levels of $41, as it is up only 17% from the levels it was at on March 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This marks a significant underperformance compared to the S&P which has moved 73% since its March 2020 lows, with the resumption of economic activities as lockdowns are gradually lifted and vaccination programs have been initiated in multiple countries. This underperformance can partly be attributed to a larger than expected decline in sales of the company’s three blockbuster drugs - Avastin, Rituxan, and Herceptin - due to increased biosimilar competition. Roche’s ADR is also up 32% from levels of around $31 seen toward the end of 2018.
Some of the 32% rise of the last 2 years or so is justified, given the company’s robust fundamentals. Roche’s total revenue grew 6% to $64.3 billion in 2020, as compared to $60.7 billion in 2018. Also, the company saw an expansion of 120 bps for its net margins from 26.2% in 2018 to 27.4% in 2020, resulting in a 11% growth in net income from $15.9 billion in 2018 to $17.6 billion in 2020, on an adjusted basis. The company’s total ADRs saw a modest growth of 0.6% over the same period, and on a per share basis, adjusted earnings grew 10% to $2.55 in 2020, as compared to $2.31 in 2018. Given the robust performance over the recent years, Roche’s P/E multiple also expanded, and it will likely see a further rise from the current levels. Our dashboard, ‘What Factors Drove 32% Change In Roche Stock between 2018 and now?‘, has the underlying numbers.
Roche’s P/E multiple expanded from 13x in 2018 to 17x in 2020 based on trailing adjusted EPS. While the company’s P/E is at 16x now, it can see an expansion in the near term, led by steady earnings growth. We discuss more in the section below.
So what’s the likely trigger and timing for upside?
Though Roche managed to garner revenue of $64 billion in 2020, in line with the sales seen in 2019, the pharmaceuticals business actually saw a decline of 3%, which was largely offset by a 12% growth in the company’s diagnostics business, led by Covid-19 tests. Roche’s pharmaceuticals business was primarily impacted by a large 30% drop in combined sales of Avastin, Herceptin, and Rituxan, as biosimilars from other companies gained market share. Now, the decline in sales was expected given the patent expirations over the recent years, and the focus has been on the company’s relatively newer drugs to drive sales growth. However, the expansion of newer drugs was impacted during the pandemic.
Looking forward, Roche will likely see an increase in sales of its relatively new drugs with an increase in new patient starts, as the Covid-19 crisis winds down. That said, any further recovery in the economy and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Looking at valuation, at the current price of $41, Roche is trading at 15x its estimated adjusted EPS of around $2.65 in 2021, compared to levels of over 17x seen as recently as late 2020, implying there is more room for growth for Roche’s ADR. Also, with the steady earnings growth going forward, led by improved margins and market share gains for new drugs, the P/E multiple will likely expand further. As such, we believe Roche is a good buying opportunity at the current levels of $41.
While RHHBY stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for UnitedHealth vs Ingevity.
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March 11, 2021 at 06:30PM
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Here’s Why Roche Looks Undervalued At $41 - Forbes
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