Roche Earnings: Strong Portfolio and Pipeline, but We Slightly Reduce Tecentriq Forecast and Value

Roche’s ROG top line declined 2% at constant currencies in the first half of 2023 due to a CHF 2.7 billion headwind from the loss of COVID-19 diagnostics revenue, but pharma growth (8%) and diagnostics base business growth (6%) remained strong. As Roche’s biosimilar pressure on older oncology drugs fades (only a CHF 635 million headwind in the first half), we think the firm has a solid portfolio and pipeline to drive growth beyond 2023, forming the basis of its wide moat. We think shares look undervalued, as investors are myopically focused on upcoming data for the higher-risk oncology drug candidate tiragolumab. Key data from a trial testing immuno-oncology drug Tecentriq with tiragolumab in non-small cell lung cancer had been expected in the third quarter, but management now indicates that it will likely come around at the end of the year. We maintain our 20% probability of approval on tiragolumab, making our model relatively insensitive to potential failure of the program. Pipeline progress is countered in our valuation by our lower long-term expectations for Tecentriq, and we’ve lowered our fair value estimate to CHF 387/$56 from CHF 419/$57.

We’re encouraged by what we see as significant pipeline progress. We’ve updated our model for recent approvals of Duchenne muscular dystrophy gene therapy Elevidys and blood cancer drug Columvi, as well as the recent advancement of programs in chronic obstructive pulmonary disease and nephropathy into phase 3 trials. We’ve also added midstage hypertension drug zilebesiran to our model, and we think the licensing deal with Alnylam could bring Roche a blockbuster drug in cardiology, a field where Roche has virtually no presence. Roche has a history of launching market-leading drugs in new fields, most recently with some of the firm’s top-selling products like Ocrevus (multiple sclerosis), Evrysdi (spinal muscular atrophy), and Hemlibra (hemophilia A).