Roche Earnings: Shares Remain Undervalued as Market Focuses on COVID-19 Headwind and TIGIT Risks

Roche’s strong underlying top-line growth in the third quarter was in line with our expectations, and we’re not making any changes to our CHF 387/$56 fair value estimates. While the firm has seen a 6% decline in revenue over the first nine months of the year, this translates to 1% growth on a constant currency basis and 9% growth after further excluding the headwind from the loss of COVID-19-related sales (particularly in the diagnostics arm). COVID-19 headwinds should persist through the first quarter of 2024, which we think is weighing on sentiment among short-term investors. We continue to see Roche holding a strong portfolio of products with patent protection through the rest of the decade, although we think the market is preoccupied with upcoming data for the firm’s TIGIT-targeting antibody tiragolumab in lung cancer (survival data now expected in the first quarter of 2024). We have modest expectations for tiragolumab, as we see Keytruda as a very high bar in this setting, although statistically significant data could imply potential in other indications also in testing. Roche’s pipeline has diversified from oncology into areas like neurology and cardiology, and we’re looking forward to upcoming data for the firm’s brain shuttle technology in Alzheimer’s later this month as well as data from the key phase 3 study for Duchenne muscular dystrophy gene therapy Elevidys later this year. We think established blockbusters like Hemlibra (hemophilia), Ocrevus (multiple sclerosis), and Evrysdi (spinal muscular atrophy) provide a strong foundation for the firm’s wide moat, which is further supported by the firm’s leading position in diagnostics.