Roche

Roche Holding AG, a global leader in pharmaceuticals and diagnostics based in Basel, Switzerland, has been a key player in the healthcare industry for decades. Founded in 1896, Roche has continuously evolved and had a significant impact on medical research and patient care worldwide. With a clear focus on innovation and sustainable development, the company has built an impressive pipeline of new medications and diagnostic solutions.

The Roche stock, listed on the Swiss Exchange (SIX Swiss Exchange) under the ticker symbol ROG, is considered one of the most stable and reliable investments in the healthcare sector. Thanks to a solid business strategy, continuous investments in research and development, and a robust market position, Roche has consistently delivered strong financial results. In this article, we take a detailed look at the development of Roche's stock, analyze the underlying fundamentals, and highlight the factors that make this stock an attractive investment.

Finance: Fundamentals and Financial Position

Roche recorded a revenue decline of 7.2% from USD 72.4 billion in 2021 to USD 67.2 billion in 2023. This decline is mainly due to reduced demand for Covid-19 tests. However, excluding Covid-19 products, Roche benefited from the continued demand for newer drugs such as Perjeta, Kadcyla, Alecensa, Tecentriq, Hemlibra, Vabysmo, and Ocrevus. These drugs are seen as important growth drivers for Roche, while the company faces competition from biosimilars for its formerly best-selling drugs – Avastin, Herceptin, and Rituxan. Sales of these three drugs declined significantly by 41% to USD 5.4 billion in 2023 compared to USD 9.1 billion in 2021. Combined sales of these drugs peaked in 2018 at USD 21 billion.

Roche's adjusted net profit margin decreased by 120 basis points to 24.7% during this period. Adjusted net earnings per share in 2023 were USD 2.58 compared to USD 2.72 in 2021. This reduction reflects the challenges Roche faces, particularly price and competitive pressure from biosimilars and declining demand for Covid-19 products.

Roche's total debt increased slightly from USD 34.3 billion in 2021 to USD 34.8 billion in 2023, while cash and cash equivalents decreased from USD 14.3 billion to USD 12.5 billion over the same period. The company's debt represents approximately 15% of equity, and cash equivalents make up about 12% of assets, indicating a solid financial position. This suggests that Roche, despite recent challenges, has a good financial foundation to finance future growth and manage potential market volatility.

In summary, despite a revenue decline due to falling demand for Covid-19 tests, Roche demonstrates a stable financial position, supported by strong sales of newer drugs. The reduction in net profit margin and slightly increased debt level pose challenges that could be mitigated by the introduction and growth of new drugs and a solid financial strategy. Roche's financial metrics indicate that the company is well-positioned to seize future growth opportunities and maintain its financial stability.

Recent Stock Increase:

Prospects for the New Obesity Drug In recent weeks, Roche Holding AG has seen a rise in its stock price by <10%. This upswing follows the release of positive clinical trial results for a promising new drug for treating obesity. Weight management is gaining increasing importance as health issues like diabetes rise globally. Companies like Novo Nordisk and Eli Lilly have already achieved significant success in this segment, indicating that the market holds great potential. For Roche, the new obesity drug could provide a much-needed boost as the company's revenue and profit growth are currently subdued. However, analysts are cautiously optimistic for 2024 and do not expect significant stock potential without further positive developments.

Competitors like Novo Nordisk and Eli Lilly currently dominate the weight management and diabetes market. Roche, on the other hand, has had minimal presence in the diabetes segment so far, which could be an advantage if the new drug is successful and the company can expand its market share. In 2023, Roche recorded a revenue decline of 7%, mainly due to the strong Swiss franc. For 2024, no significant acceleration in revenue growth is expected, underscoring the importance of the new drug for future revenues. The price-to-earnings ratio (P/E) currently indicates limited further stock potential. However, Roche offers an attractive dividend yield of 3.78%, which is above the industry average. While Roche has made promising progress with its new obesity drug, the financial outlook remains subdued. Investors should continue to monitor further developments regarding the drug and Roche's overall market performance to make informed investment decisions.

Recent TIGIT Study Failure:

Study Details and Results The SKYSCRAPER-06 study randomized patients with previously untreated, locally advanced unresectable, or metastatic non-squamous non-small cell lung cancer (NSCLC). Participants received either tiragolumab in combination with Roche's Tecentriq or Keytruda along with chemotherapy. The primary endpoint was progression-free survival (PFS). Roche reported a hazard ratio of 1.27 for PFS, indicating that Keytruda was superior in controlling disease progression. Additionally, overall survival (OS) data showed a hazard ratio of 1.33, suggesting that patients treated with Keytruda lived longer compared to tiragolumab. The failure in SKYSCRAPER-06 represents a setback for Roche's broader tiragolumab development program, which includes several NSCLC studies as well as studies in other forms of lung, esophageal, and liver cancer. Roche has reported the failure of a small cell lung cancer study and the PFS miss in SKYSCRAPER-01. An esophageal cancer study reached its primary endpoint, but the use of an outdated control therapy raised questions about clinical significance. If SKYSCRAPER-01 continues to trend similarly, Roche could achieve a Phase 3 OS victory in NSCLC in the future. Even if this happens, the company might face questions regarding the comparator therapy. SKYSCRAPER-01 compares the effect of adding tiragolumab or placebo to Tecentriq. Since tiragolumab failed against Keytruda in SKYSCRAPER-06, a win against Tecentriq in the other study could come with a caveat.

Pharmaceutical sector:

In the pharmaceutical sector, Roche recorded solid growth. The core business grew by 7%. Sales of key drugs such as Vabysmo for eye diseases, Phesgo for breast cancer, Ocrevus for multiple sclerosis, Polivy for blood cancer, and Hemlibra for hemophilia A were particularly strong. These drugs significantly contributed to a divisional revenue increase of 2% to CHF 10.921 billion. Despite the decline in the COVID-19 medicine Ronapreve, Roche was able to achieve an overall revenue increase of 2%. The diagnostics sector also showed solid growth, with the core business growing by 8%. The strong demand for immunodiagnostic products, clinical chemistry tests, and advanced staining solutions had a particularly positive impact. However, there was an overall decline in diagnostic revenue of 2% to CHF 3.478 billion, due to the decreasing demand for COVID-19 tests. This high baseline might level off in the coming months, and the market now seems to be gradually pricing in the declining COVID-related revenues.

For 2024, Roche expects a mid-single-digit increase in group sales at constant exchange rates. Core earnings per share are also expected to grow in line with sales. Despite positive developments in new drugs and diagnostic products, Roche remains challenged by factors such as the negative impact of biosimilars/generics and currency fluctuations. The first-quarter results show that Roche continues to have robust growth opportunities in its core business areas, particularly in the pharmaceuticals sector.

Diagnostics Business: Key Milestones in the First Quarter of 2024 A notable event in the first quarter was the granting of FDA Breakthrough Device Designation for Roche's Elecsys pTau217 test. This blood test is part of a collaboration between Roche and Eli Lilly and Company and aims to improve the diagnosis of Alzheimer's disease by identifying amyloid pathology. The importance of this test lies in its potential to help doctors diagnose the disease early and more accurately, which could be crucial for the effectiveness of future treatments. Together with the Lilly approval for their Alzheimer's drug, a broad market is emerging here. Another significant advancement was the FDA approval of the cobas Malaria test, the first molecular test for screening blood donors for malaria in the USA. This test is of great importance, as malaria is a serious and potentially deadly parasitic infection that can be transmitted not only by mosquitoes but also through blood transfusions.

Despite these milestones, Roche faces several challenges in the diagnostics business. Critics point out a lack of investment and a focus on short-term margins and cash flows. Nevertheless, Roche is performing well in areas such as molecular diagnostics and tissue diagnostics. The company plans to strengthen its market position further with new tests and technologies, such as liquid biopsies and continuous monitoring systems for diabetes. Vabysmo is threatened by patent expirations and new biosimilar candidates. Just this year, there were two biosimilar approvals, including Formycon FYB203 in June 2024. Additional data for DLBCL may still come in 2024. Additionally, sentiment-driven obesity data could give the stock a boost by the end of the year. However, Roche needs to reinvent itself to move away from its old products and has already taken a good direction with the Carmot acquisition. Without the obesity acquisition, Roche would be in a rather difficult position, as there are already strong established players. Overall, it feels like Roche is following a trend rather than setting one. In general, one is currently buying into a transformative phase, which is why I currently prefer other, more established portfolios and positions.