Company Reports

We don’t expect to make any changes to our CHF 379/$55 fair value estimate for Roche following the company's first-quarter results. Roche’s pharmaceutical and diagnostics divisions each grew at a 2% rate at constant currency, with 7% underlying constant-currency growth after removing the headwind from reduced covid-related antibody and diagnostic sales. Management maintained its guidance for mid-single-digit constant-currency sales growth and core earnings per share growth for the full year. We expect covid and foreign-exchange headwinds to subside for the remainder of the year, allowing Roche’s underlying growth to become more apparent to investors. While this is not a year for significant new launches, we expect significant pipeline data amid a pipeline reshuffling that prioritizes higher-impact programs in immunology (Roivant’s TL1A) and obesity (Carmot’s CT-388). Beyond 2024, we think Roche is capable of mid- or even high-single-digit annual growth (and core operating margins remaining in the mid-30s), with higher growth possible if these in-licensed programs—or in-house programs like Alzheimer’s drug candidate trontinemab or oncology drug candidate tiragolumab—reach the market. We think Roche’s pharmaceutical innovation and diagnostics dominance support a wide moat.

We’ve lowered our Roche fair value estimate to CHF 379/$55 from CHF 414/$59 after incorporating the firm’s 2023 financial results and 2024 outlook into our valuation model. Wide-moat Roche is facing relentless pressure due to the strength of the Swiss franc against other major currencies, so although the firm produced 1% constant-currency sales growth in 2023 despite pressure from COVID diagnostic and treatment declines (and above the low-single-digit decline guidance), this resulted in a 7% sales decline as reported. Similarly, the firm’s 6% core EPS growth rate (boosted by a one-time tax settlement) reversed to a 9% decline, as reported. However, we continue to see Roche shares as undervalued. Fundamentally, Roche’s base business (excluding COVID and foreign exchange headwinds) grew 8% on the top line in 2023, a combination of 9% pharmaceuticals and 7% diagnostics growth. Management expects COVID headwinds and erosion from generics and biosimilars to amount to CHF 2.7 billion in top-line pressure in 2024, down from the CHF 6.4 billion faced in 2023. Overall, we think the firm is in a good position to achieve its goal of mid-single-digit sales and core EPS growth in 2024, even after factoring in higher interest expenses tied to new debt.

We think Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic expertise.

Roche has announced that it will acquire private biotech Carmot Therapeutics for $2.7 billion upfront and an additional $400 million if certain milestones are reached in the firm’s obesity pipeline. Carmot has three clinical-stage obesity programs for patients with and without type 1 or type 2 diabetes, including GLP-1/GIP weekly injectable CT-388 (ready to begin phase 2) and daily oral GLP-1 CT-996 (phase 1). We’re slightly raising our Roche fair value estimate to CHF 414/$59 from CHF 387/$56, as we’re including peak sales above the value of the transaction. Further data updates could lead us to increase our market share assumptions and give wide-moat Roche a chance to become a significant player in this rapidly growing market.

We think Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic expertise.

Roche is paying $7.1 billion to acquire U.S. and Japan rights to inflammatory bowel disease drug RVT-3101 from Roivant in a deal that has been rumored for months, and we’re not making any changes to our fair value estimate. The value of the drug candidate has skyrocketed in recent months with positive midstage data, as Pfizer sold U.S. and Japan rights to Roivant in November 2022 in exchange for a 25% stake in the RVT-3101-focused subsidiary, which was valued at $88 million at the time. While Roche does not have an existing IBD business, this will be a nice boost to the firm’s immunology arm, which is under pressure from recent generics of pulmonary fibrosis drug Esbriet and upcoming potential biosimilar launches for arthritis drug Actemra (later this year) and asthma and hives drug Xolair (in 2025). We think RVT-3101 has demonstrated excellent data so far and has potential for a strong position ($3 billion in 2032 sales) in a nearly $20 billion IBD market, further supporting Roche’s wide moat.

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.

We think Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic expertise.

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.

We're maintaining our CHF 419/$57 fair value estimates for Roche following first-quarter sales results 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 think Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic expertise.

After updating our model for Roche’s full-year 2022 financial performance, foreign exchange rates, and our new assumptions for the firm’s portfolio and pipeline, we’re slightly adjusting our fair value estimates to CHF 419/$57 (from CHF 428/$57). Roche continues to trade at a steep 35% discount to our fair value estimates, and we think the market underappreciates Roche’s long-term growth potential, putting too much emphasis on the upcoming COVID-19-related sales losses in 2023 as well as recent pipeline failures. Roche saw 2% constant currency growth (1% as reported) in 2022, as newer drug launches and underlying demand for the firm’s diagnostics countered pressure from biosimilar versions of older oncology drugs (CHF 1.9 billion headwind) as well as lower COVID-19-related revenue in both divisions (amounting to a roughly CHF 1 billion headwind). Incorporating an expected CHF 5 billion decline in COVID-19-related sales and CHF 1.6 billion decline from oncology biosimilars in 2023, management expects a low-single-digit decline in sales and core earnings per share in 2023 at constant currencies. Our updated forecast for 2023 is slightly more bearish, assuming a 3% top-line decline and 4.7% decline in core EPS for the year. That said, we think fundamental growth for the firm’s underlying business looks strong, with multiple trial readouts and launches that will continue to support Roche’s wide moat.

We think Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic expertise.

Roche’s Alzheimer’s disease drug candidate gantenerumab has failed to slow cognitive decline in two large phase 3 studies, and while we expect to see more details at a presentation on Nov. 30, we’ve removed the drug from our valuation model. We’ve slightly adjusted our fair value estimates for Roche shares to CHF 428/$57 from CHF 433/$55, which also incorporates recent foreign exchange volatility, and we think Roche shares remain significantly undervalued. Despite gantenerumab’s failure, we remain bullish on Roche’s established portfolio and strong pipeline in oncology, as well as continued solid growth prospects for other key drugs in immunology and hematology, supporting its wide economic moat.

We think Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic arm.

We’re maintaining our CHF 433/$55 fair value estimate for Roche following third-quarter results that were in line with our expectations. COVID-19-related sales in the pharma division (Actemra and Ronapreve) and COVID-19 diagnostics all saw significant declines in the quarter, driving Roche’s constancy currency top-line decline of 6%. However, excluding COVID-19 products, third-quarter growth was in positive territory (2% pharma, 7% diagnostics), which we think demonstrates the strength of the firm’s underlying portfolio and wide moat, despite continuing pressure from biosimilar versions of several drugs. Following Regeneron’s positive data for high-dose Eylea, we remain bullish on the launch of Roche’s new ophthalmology drug Vabysmo as well as new blood cancer launches (Polivy and CD20 bispecifics Lunsumio and glofitamab) that should begin to drive sales in 2023. After some minor adjustments to our model, we still see roughly 2% top-line growth and 3% bottom-line growth for the full year, consistent with management’s confirmed outlook for stable to low-single-digit top-line growth and low- to mid-single-digit core EPS growth.

After taking a closer look at what we consider the three key elements of the Inflation Reduction Act that will affect the biopharma industry over the next decade, we're reducing our fair value estimates for 17 of the biggest biopharma names in Morningstar's coverage by an average of 2%. We think the step-down in U.S. branded drug sales from capping Medicare price increases to inflation (fully rolled out in 2023), redesigning Medicare Part D (beginning in 2025), and Medicare negotiation (beginning in 2026 for small molecules) will result in a 3% reduction in total sales for these firms by 2031, with firm-level reductions depending on the firm's reliance on the U.S. market, proportion of the portfolio targeting seniors, history of price increases, and relative size of its small molecule and biologics portfolios (as biologics are immune from Medicare negotiation for 13 years instead of nine). Our estimates factor in some ability for the industry to either benefit from certain changes (like potential increased prescription fill rates in Part D with lower out-of-pocket costs) or compensate for headwinds (like responding to inflation caps on price increases with higher launch prices). Overall, we think the effect of the Inflation Reduction Act is manageable for the industry, and we see the competitive advantages and economic moats of these firms remaining intact.

We think Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche's diagnostic arm.

The likelihood of drug-pricing policy changes in the United States changed dramatically over the course of July, and we are now assessing the impact of the various measures included in the Inflation Reduction Act of 2022 in our Big Biopharma valuation models. Assuming the bill is eligible to pass via reconciliation (the Senate parliamentarian is reviewing the bill), we think Democrats will be able to pass the Senate bill, paving the way for it to be signed into law. Overall, we don’t expect major changes to our fair value estimates or moat ratings, as the changes net out to a moderate negative that we believe is manageable, likely through a combination of cost-cutting, agreements with generic firms for limited authorized generic launches (to avoid the list for negotiated drugs), and higher launch prices (to counter pressure on price increases and earlier declines due to negotiation).

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.