Roche's Long-Term Position Solid Despite 2023 Coronavirus Headwinds, Near-Term Pipeline Uncertainty

While Roche posted flat sales in the second quarter, the firm had low-single-digit sales growth in both pharma and diagnostic divisions after excluding sales of COVID-19 antibody cocktail Ronapreve and COVID-19 diagnostics, which are facing tough comparisons as the virus evolves and testing ramps down. After making several offsetting adjustments to our model, we're maintaining our CHF 433/$55 fair value estimate, and we continue to see shares as undervalued. Roche continues to see a roughly CHF 2 billion hit to COVID-19-related drug and diagnostic sales and a CHF 2.5 billion hit to sales of cancer drugs Avastin, Rituxan, and Herceptin from biosimilars in 2022. We model a similarly steep decline in COVID-19-related product demand, but we assume a smaller CHF 2 billion biosimilar-related decline, based on easing rates of decline in recent quarters. We've also raised our probability of approval for CD20-targeting bispecific antibody mosunetuzumab following its approval as Lunsumio in Europe in June, and significantly raised our sales estimates for ophthalmology drug Vabysmo following signs of a strong launch and solid recent long-term data that we think solidify its advantage over Regeneron/Bayer's market leading drug Eylea. Countering these changes, we've also reduced our Tecentriq forecast to account for Japan pricing pressure and lowered our long-term diagnostics operating margin assumptions to fully account for the loss of COVID-19-related sales in the long run. Overall, we think the firm will see low-single-digit sales growth in 2022, at the high end of management's guidance. In our view, Roche's drug and diagnostic divisions continue to see synergies that create sustainable competitive advantages, supporting a wide moat.