Roche: New FV of CHF188 leaves little upside to the stock

Fair Value CHF188 vs. CHF186 (+2%)       BUY

News published on October Wednesday 17, 2012
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  • We had left our estimates unchanged for a while as we were expecting a full note to review all aspects of the investment case in a row. However the Q3 results presented yesterday make us change our plans and do some interim adjustments as it is worth underlying some trends.
  • We would rank changes to our numbers in three categories: currencies, pharma and diagnostics. First of all currencies had a higher than expected impact on Q3 (11pp positive influence on sales vs. 9% in the consensus) and currencies will now turn positive as well for Core EPS over the full year. Forex is the most relevant change made to our final numbers for 2012 but also for 2013.
  • Referring now to the underlying business, there are clearly two opposite trends: on one hand pharmaceuticals is doing fairly well with still very solid trends for Herceptin and Rituxan whereas Avastin is reviving now that breast is no longer weighing negatively. Although Lucentis and Pegasys will progressively decline, Perjeta and T-DM1 are expected to offset the impact. However the net final growth rate should not exceed 4-5% for the coming quarters. On the opposite side, it is now becoming clearer that Roche is facing problems in its Diagnostics business for the first time for a long time. Yes there are structural issues in the market itself which is struggling with price pressures and reimbursement but Roche is likely to lose market share in a few segments such as Diabetes Care and new products are behind expectations. We have cut our estimates for the division and also adjust profitability downwards.
  • In the end our FV is adjusted upwards by CHF2 but mainly on currencies. We will revisit the case shortly. Our guess is that there is growth ahead with antibody drug conjugates and CNS in particular but this will deliver in the second part of the decade. By the time it becomes more visible, we think Roche should rest in the range CHF180-190.

Eric Le Berrigaud,

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