Solid Performance Supports Sales Growth for Roche

We're maintaining our $59 fair value estimate for Roche RHHBY following strong second-quarter results, with top-line growth of 14%. The strong performance was partly due to pandemic headwinds in the second quarter of 2020 creating weaker comparisons and partly due to strong sales growth for Roche's diagnostics and innovative drugs. Core operating profit was up 4% in constant currency in the first half versus sales growth of 8%, due to a higher contribution from the lower-margin diagnostics arm as well as increased investment in pharma R&D. Roche continues to re-route its investment from sales and marketing and into R&D, with 19% growth in R&D expenses in the first half of 2021 for the pharma division, which we think bodes well for Roche's long-term competitive advantages. Roche confirmed its guidance for the full year of low- to mid-single-digit constant currency top-line growth and core earnings per share growth in line with sales growth. We think Roche's combination of branded drugs and diagnostics continues to support a wide moat.

There are several upcoming pipeline updates that could have a significant impact on our fair value estimate. First, Roche expects data in the third quarter for hematology drug Polivy in first-line DLBCL, which we think could allow total Polivy sales north of $2 billion (we model total sales of $1.7 billion by 2030). In 2022, we expect phase 3 data for Alzheimer's drug gantenerumab, which could allow Roche to compete with a cleaner data set than Biogen as well as more convenient subcutaneous dosing. We include a 20% probability of $3 billion in gantenerumab sales by 2030. Roche's SERD (breast cancer) and TIGIT (oncology) will also have pivotal data in 2022 and have potential for blockbuster sales. We expect Roche's newer approved therapies and solid pipeline will drive growth despite continued biosimilar pressure as well as potential new biosimilar launches for opthalmology drug Lucentis (2021) and immunology drug Actemra (2022).

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