Roche Earnings: Strong Portfolio and Pipeline, But We Slightly Reduce Tecentriq Forecast and Value

Roche’s top line declined 2% at constant currencies in the first half of 2023 due to a CHF 2.7 billion headwind from the loss of COVID-19 diagnostics revenue, but pharma growth (8%) and diagnostics base business growth (6%) remained strong. As Roche's biosimilar pressure on older oncology drugs fades (only a CHF 635 million headwind in the first half), we think the firm has a solid portfolio and pipeline to drive growth beyond 2023, forming the basis of its wide moat. We think shares look undervalued, as investors are myopically focused on upcoming data for the higher-risk oncology drug candidate tiragolumab. Key data from a trial testing immuno-oncology drug Tecentriq with tiragolumab in non-small cell lung cancer had been expected in the third quarter, but management now indicates that it will likely come around at the end of the year. We maintain our 20% probability of approval on tiragolumab, making our model relatively insensitive to potential failure of the program. Pipeline progress is countered in our valuation by our lower long-term expectations for Tecentriq, and we’ve lowered our fair value estimate to CHF 387/$56 from CHF 419/$57.