Analyst Note
| Karen Andersen, CFA |We're maintaining our $60/CHF 420 fair value estimate for Roche following very mixed fourth-quarter results but strong prospects for growth beyond 2021. New branded drugs failed to fully counter the heavy CHF 5.7 billion headwind from biosimilar competition to the firm's legacy cancer drugs Avastin, Rituxan, and Herceptin (2% pharma decline), and it was only the tremendous and accelerating diagnostics growth (14% growth for the year and 28% in the fourth quarter) that allowed the firm to stay in positive growth territory. Roche saw top-line constant-currency growth of 1% for full-year 2020, with core EPS growth of 4%. Lower profit share to Biogen on Rituxan (due to biosimilar pressure) and manufacturing efficiencies boosted margins and allowed Roche to heavily invest in the pipeline, with R&D growing 8% to more than CHF 12 billion. For 2021, Roche expects new drugs to outweigh the CHF 4.6 billion expected additional worldwide biosimilar pressure, building in particularly strong expectations in the first half of the year for COVID-19 diagnostics as demand should remain high. We expect efficiency gains should continue to allow the firm to maintain or slightly improve margins, as in 2020, and diagnostics should continue to counter heavy biosimilar pressure that could begin to subside toward the end of 2021. Overall guidance for low- to mid-single digit top-line growth and similar core EPS growth (at constant currencies) mirrors 2020 guidance; management hopes sales growth will accelerate in 2021, but we assume relatively flat top-line growth in 2021, followed more solid mid-single-digit growth beyond. Beyond the biosimilar headwind, Roche maintains a solid portfolio of oncology, immunology, and hematology-focused therapies and a leading diagnostics business, supporting its wide moat.