Roche was founded in 1896 in Basel, Switzerland and has grown from a small drug laboratory to a healthcare company active in more than 130 countries. Roche is involved in discovery, development and manufacturing of pharmaceuticals and diagnostic symptoms, and is a producer of vitamins and carotenoids.
The company's Pharmaceutical division engages in the research and development, manufacture and distribution of pharmaceuticals for the treatment of infectious diseases, cardiovascular diseases, inflammatory and autoimmune diseases, bronchopulmonary diseases, metabolic disorders, and in the fields of virology, oncology, hematology, dermatology, and neurology. The Diagnostics division engages in developing and marketing tools for research in genomics and proteomics, test methods for viruses such as HIV and HCV, integrated laboratory workstations, and devices for patients' own use. Its products are delivered through its affiliates all over the world.
Roche Vitamins and Fine Chemicals division is a bulk supplier of vitamins and carotenoids to the feed, food, pharmaceutical, and cosmetic industries. Its products include medicinal feed additives, amino acids, polyunsaturated fatty acids, feed enzymes, sunscreens, and emulsifiers. Let us look at the brief history of Roche since its foundation.
1896: F. Hoffmann-La Roche & Co. is founded in Basel, Switzerland.
1919: The company goes public.
1960: The company introduces Librium, a benzodiazepine tranquilizer that relieves tension without causing apathy.
1963: The company introduces Valium and it exceeds Librium in popularity.
1986: The company releases Roferon-A, a treatment for rare forms of cancer.
1990: The company restructures into divisions; Roche purchases a majority shareholding in California's leading biotech company, Genentech, Inc.
1994: The company acquires Syntex Corporation, which becomes Roche Bioscience, a major R&D development site.
1998: Franz Humer becomes chief executive officer.
1999: Roche inaugurates a new R&D facility in Basel.
2000: Roche spins off its Fragrances and Flavors division as a new company, called Givaudan.
2001: Roche acquires Amira Medical, a corporation active in diabetes monitoring, disposes Laboratory Corporation of America Holdings, acquires majority interest in Chugai Pharmaceutical Co., Ltd., Tokyo, Japan, and Amira Medical Inc., Scotts Valley, California
2002 Disposal of Vitamins and Fine Chemicals
2003 Acquires Disetronic AG, Burgdorf, Switzerland (injection pumps)
2004 Disposal of Roche Consumer Health(over-the-counter drugs)
2005 Acquires GlycArt Biotechnology AG, Schlieren, Switzerland
2007 Acquires BioVeris Inc., Gaithersburg, Maryland, USA (immunochemistry), NimbleGen Inc., Madison, USA (DNA microarrays), 454 Life Sciences Inc., Branford, USA (DNA sequencing), and Therapeutic Human Polyclonals Inc., USA (therapeutic antibodies)
2008 Acquires Ventana Medical Systems Inc., Tucson, USA (diagnostics, histopathology), Mirus Bio Corporation, Madison, USA (gene therapy), and Arius Research Inc., Toronto,
Canada (antibody therapy)
2009 Acquired Genetechin which it held a majority sketch since 1990.
- Pharmaceuticals: Roche has brought many highly effective drugs onto the market and is a world leader in innovative cancer drugs. Other areas include viral infections, metabolic, central nervous system disorders and inflammatory diseases.
- Diagnostics: As the world leader in in-vitro diagnostics, we supply a wide range of rapid, reliable instruments and tests for disease screening and diagnosis in laboratories, at the point of care, and for patient self-management.
- Product for researchers: Roche Applied Science supplies a broad array of instruments and highly specific reagents and test kits for use in the diverse research market.
- The portfolio is especially strong in genomics and proteomics.
Roche has one of the youngest pipelines in the industry. I give here the following from the annual report of Roche.
Let us look at the history of sales of Roche.
If we concentrate on the last 10 years the sales growth is not extremely impressive. Furthermore, due to strong appreciation of CHF in the last year, the sales growth has been negative. Let us look at the data
Even with the negative sales growth the EPS growth is positive.
The growth of sales in the last 10 years has not been too stellar. In 2001, Roche had 29b of sales and in 2010 the number stood at 49b. This is an average growth rate of 5%.
Sales risk I: few drugs contributing the most of the sales. This is not the case with Roche. Here are some of the drugs with > 1bn of sales. As you see, the portfolio is quite diverse.
[/b]Sales risk II: Geographical risk. An adverse competition in one of the countries can effect the sales too much ? This is again not the case with Roche. Roche has a very diverse and global operation.
The Company has a share capital of CHF 160,000,000, divided into 160,000,000 fully paid bearer shares with a nominal value of 1 Swiss franc each. There are no limitations on the transfer of these shares and no shares with maximum voting rights.
In addition, 702,562,700 non-voting equity securities have been issued in bearer form. They are not part of the share capital and confer no voting rights. However, each non-voting equity security does confer the same rights as any one of the shares numbered 1–160,000,000 to participate in the available earnings and in any remaining proceeds from liquidation following repayment of the share and the participation certifi- cate (PC) capital.
All shares in the Company are bearer shares, and for this reason the Company does not keep a register of shareholders. The following figures are based on information from shareholders, the shareholder validation check at the Annual General Meeting and on other information available to the Company.
- 80,020,000 (previous year 80,020,000) shares: Shareholders’ group with pooled voting rights, comprising Ms Vera Michalski-Hoffmann, Ms Maja Hoffmann, Mr André Hoffmann, Dr Andreas Oeri, Ms Sabine Duschmalé-Oeri, Ms Catherine Oeri, Ms Maja Oeri, Mr Jörg Duschmalé and Mr Lukas Duschmalé. a)
- 53,332,863 (previous year 53,332,863) shares (participation below 33 1/3%): Novartis International Ltd, Basel including Affiliates thereof.
- Board of directors and executive committee hold (586+148)k non-voting shares together.
The company has 27b of debt. A year back it had 36b, which was mainly a result of the Genetech acquisition. The Group continued to pay down the debt issued in the first half of 2009 to finance the Genentech transaction, with a further 3.1 billion Swiss francs of bonds and notes repaid in the first half of 2011. It is nice to see that management is on the job and is aggressively reducing debt. The current ratio stands at 1.61 and the quick ratio at 1.11 in the most recent quarter. The company has 10b in cash on its balance sheet. With 11b in FCF, I am not too worried at the moment.
Looking at the last 10 year of data, Roche seems to be very stable in maintaining its margins. I see no reason to worry here.
|Free Cash Flow/Sales %||10.11||-3.89||15.99||15.96||18.74||15.56||16.97||18.87||27.16||23.74||26.68|
|Free Cash Flow/Net Income||0.80||0.29||1.63||0.75||0.99||0.86||0.84||1.01||1.78||1.35||1.47|
Return on Invested Capital
Growth (5y average)
In the last year the FCF of Roche was 11.6b (see table). Let us assume now growth rate, then in five years with a discount of 8% Roche will generate
in cash. With different discount rates the results are listed in the table below.
What should we use as the current value of Roche ? The current book value of 11 seems too small to me, especially for a pharma company with 50b in sales, the current valuation of 11b (there are< 1b shares outstanding) according to the book value is definitely too ridiculous to base our calculations on. So, if we do not go with the book value, what should we base our calculations on ? For a pharma company of this magnitude, I will say that a Price/Sales ratio of 2 is pretty conservative, which translates to 100b or chf100/share. Adding the calculations above we see that the company is easily worth 150chf/share with 0% growth in FCF if at manages to have the same FCF for only 5 years and earns nothing after that.
Now let us answer a few questions and see if Roche survives the checklist I have for a long term value holding.
Does the company have a moat ? Will it be around here for another 100 years ?
The company was started in 1896. It has seen countless recessions, two world wars and many CEOs. To survive such a long time is a feat in itself. The company has a strong portfolio with many drugs/molecules in different stages of trials. It also is comforting to know that the founding family owns around 50% of the voting rights and Novartis owns another 33%. Novartis has previously made an attempt at acquiring Roche and was foiled by the family pool.
Who is the CEO ?
The CEO of Roche (Dr Severin Schwan), it is nice to see, started his career as trainee in corporate finance for Roche in 1993. He has risen from there to his current position of CEO in 1998. He took over the position of the company when Roche was facing setbacks and the shares have gone from chf241 in 2007 to now chf142. I do not have necessary background to judge him at the moment.
Will the company grow ?
This is a tough one to answer. The recent rise in swiss franc has made the growth negative. In local currencies the growth is around 7%. The company raised dividends by 10% last year and expects to do the same this year. But if you look at the valuation, even if there is no growth, the company looks cheap. With such a huge portfolio of drugs (376 in phase I and II and 39 in Phase 3 or filing), I am certain the company will perform well.
Are there significant risks associated with the company ?
Bankruptcy - no. Credit risk - with 1.11 quick ratio, 11b in fcf and 10b in cash, I don’t think this risk exists at the moment. The company has done phenomenally well in maintaining its cap-ex around 4b. Major drugs and patent cliff - no. Roche has a few major drugs, Avastin (6.4b sales), Rituxan (6.3b sales), Herceptin (5.4b sales), Pegasys (1.6b sales) and Lucentis and Traxeda (1.4b sales). Roche, however, has one of the youngest pipelines in the industry. Its biggest drugs - MabThera/Rituxan, Avastin, and Herceptin - accounted for large portion of annual revenues and have patent protection through 2015, 2019, and 2019, respectively. The only major drug for which the company is losing revenue due to pricing pressure (both from branded competition and generics) is the anemia drug NeoRecormon/Epogin.
When would I consider buying more ?
I already own around 5k chf of Roche at an average price of 135chf. I would consider buying more if the share price drops below chf130.