Monday, October 12, 2020

An International Equity holding: Roche Holding Ltd ADR (RHHBY, $42.68): “Roche: Time to Hit the Road?” by: Vince Park, AIM Student at Marquette University

Roche Holding Ltd ADR (RHHBY, $42.68): “Roche: Time to Hit the Road?”

By: Vince Park, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• Roche Holdings Ltd ADR (NYSE: RHHBY) is the world’s largest biotechnology company and a healthcare giant in pharmaceuticals and diagnostics, with a market capitalization of $296 billion. The company was founded in 1896 and is headquartered in Basel, Switzerland. 

• Despite the massive disruptions in healthcare and pharmaceuticals due to the Covid-19 pandemic, Roche has been able to ride out the storm.

• Roche Diagnostics’ Covid-19 PCR test was among the first to receive FDA emergency use authorization and has been critical to testing and tracing efforts both in the U.S. and globally. 

• Despite strong testing and Diagnostics performance, the firm’s other businesses were significantly disrupted by the pandemic, namely a delay in patient treatments, but has since made a recovery as communities are better able to conduct business safely. Revenue grew 4% from Q1 to Q2 2020, driven largely by diagnostics. 

• Roche has hit its price target of $42.71 for a return of around 10%, but further upside and value is not likely to be realized in the short to medium term.

Key points: Roche’s giant scale and robust product portfolio has been successful so far in the thesis driving the AIM International Fund’s investment in the company. However, despite Roche’s impressive scale and diversified businesses, the firm certainly faces headwinds both from the pandemic and other risk factors. Revenues have been compressed on a year-over-year basis and operating margins have decreased slightly compared to last year.

Peak disruption to Roche’s business occurred in Q1 of 2020 as the most stringent lockdowns were enforced globally in the effort to “flatten the curve.” In this period, revenues took a significant hit as drug treatments, visits to the doctor, and diagnostics were delayed. Moreover, Roche has reported “some” delays in early clinical trial starts.

Since then, while the firm’s pharmaceuticals business has been slow to recover, declines in diagnostics have been offset by strong demand for Covid-19 tests. Overall, quarterly revenues grew 4% in Q2 2020 and on a YoY basis, revenues are down 4% for H1 2020. Roche is not currently developing a vaccine for Covid-19.

In addition to negative impacts from the pandemic, Roche’s pharmaceutical portfolio is highly vulnerable to biosimilar competition. However, for H1 2020 so far, revenue erosion from biosimilar competition have been largely offset by new product launches. Overall, revenues for the segment are down and the company has not provided guidance on whether biosimilar competition will outpace new product launches. 

Looking forward, the outlook is slightly more grim, but growth opportunities remain. Roche currently derives nearly half of its revenue from the U.S. Either outcome in the U.S. presidential election is likely to have negative short- and medium-term impacts: a Trump victory will lead to significant disruptions in healthcare with a likely repeal of the Affordable Care Act while a Biden administration would pursue a corporate tax hike (contingent upon Democratic victories in the U.S. Senate). Roche’s pipeline of pharmaceutical candidates is also quite strong and should be able to serve as catalysts for growth in the medium and long term, assuming the FDA has the bandwidth to oversee clinical trials at that point.

What has the stock done lately?

Roche’s 1-month performance is -2.51% and its quarterly performance is -2.13%, an underperformance of the S&P 500. Since the AIM International Equity Fund purchased shares at $38.78 in March 2020, the stock has hit its price target and returned about 10%. (The stock jumped about 9% between the time it was pitched and the bought.)

Past Year Performance: In the year-to-date, Roche has also underperformed the S&P 500 in terms of return: 6.91% versus 7.38%, respectively. Looking back one year, however, the stock has returned 19.52% versus the S&P 500’s 18.59% and versus iShares U.S. Pharmaceuticals ETF (IHE)’s return of 18.53%.

1-Year Stock Chart vs. S&P 500

Source: FactSet

My Takeaway

Top-line compression is likely to continue throughout the rest of 2020 for Roche. Considering the significant disruptions caused by Covid-19 and the firm’s concerning exposure to biosimilar erosion, Roche certainly faces a challenging environment. The bull case for the firm rests with continued growth in diagnostics driven by Covid-19 testing and the firm’s product pipeline, but this value is not likely to be unlocked in the short term. However, the firm does pay a strong dividend and therefore the recommendation for the stock is Hold. 

1 Month Stock Chart from FactSet here

Source: FactSet