Roche Earnings: Headwinds From Currency Continuing but Fundamentals Remain Strong

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.