Roche: Looking Past COVID-19 Headwinds and TIGIT Uncertainty, Portfolio Appears Solid

We’re maintaining our CHF 419/$57 fair value estimates for Roche ROG following first-quarter sales results that were in line with our expectations, as growth benefited from strong sales of newer products like ophthalmology drug Vabysmo and rare disease drug Evrysdi as well as fading biosimilar headwinds, although foreign exchange and COVID-19 headwinds pushed reported sales to a 7% decline.

We now model a 3% sales decline for the full year, which we see as more bullish than management’s guidance for a low-single-digit sales decline at constant currencies, given the 4% currency headwind reported in the first quarter. We think shares trade at a more than 30% discount to their intrinsic value, with investors myopically focused on 2023 headwinds like declining COVID-19-related diagnostic sales and likely disappointing TIGIT data, rather than Roche’s increasingly diversified and growing biopharma portfolio as well as strong prospects for high-single-digit growth in diagnostics, following a rise in installed platforms during the pandemic. We think Roche’s leadership in both biopharma and diagnostics supports a wide moat.

Fundamental growth looked solid in the quarter, at 8% at constant currencies after removing the COVID-19 diagnostics headwind. Pharma’s 9% growth was boosted by Vabysmo’s strong ongoing launch in the quarter, which was in line with our estimates. We expect the drug to see peak sales north of CHF 5 billion, roughly equal to Regeneron’s potential peak sales for high-dose Eylea, launching later this year. Evrysdi’s traction across all age groups in spinal muscular atrophy looks solid as well, and the drug appears to be drawing new patients at the expense of Novartis’ gene therapy Zolgensma. We also think the growth profile for hemophilia drug Hemlibra and multiple sclerosis drug Ocrevus remains strong, despite emerging competition, particularly given their differentiated profiles and upcoming data for Ocrevus as a self-administered option and at higher doses.

Correction: An earlier version of this note said reported sales declined 3%.