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Chandan Dubey
Chandan Dubey
Articles (150) 

Value Idea Update: Roche (RHHBY)

March 21, 2013 | About:

Roche (RHHBY) is one of my core holdings. These are the articles I have written on it before, and the corresponding share prices.

Roche Holding: A core long term holding = 150 Sfr

Roche is paying down its debt = 166 Sfr

Current price: 219 Sfr

Last time, we touched on the Illumina bid and the debt situation of Roche.

Roche’s acquisition of Genetech left the balance sheet quite weak with nearly $36 billion in debt (2010). The management was not comfortable with such a huge amount of leverage and promised to pay it down quickly. In the last year the company paid nearly 2.2 billion Sfr of debt, which now stands at Sfr 24.6 billion. Meanwhile, the equity has gone from 14.4 billion Sfr to 16.7 billion Sfr, a commensurate amount.

The company has hiked the dividend by 8%, which represents the 26th consecutive increase in dividends. The current payout ratio of 54% leaves a lot of room for additional growth in the coming years.

In the last year, Roche had two pharmaceutical successes and one diagnostic success with the FDA.

The FDA approved Erivedge, a first-in-class Hedgehog Pathway Inhibitor for adults with advanced cell carcinoma. The FDA also approved Perjeta for patients with HER2-positive metastatic breast cancer.

The FDA also cleared the AccuChek Combo System, the new interactive insulin pump system for people with diabetes.

One of the great things about Roche is its leadership position in in vitro diagnostic testing for early detection, evaluation and monitoring of disease. It is also one of the best in diabetes management. I have experience with the AccuChek system when my wife was pregnant and it was quite easy to use it.

The diagnostic sales were 10.3 billion Sfr which represents 22.6% of the total group sales.

I like the diagnostic division quite a bit. Diagnostic is going to play bigger and more important role in the future. I speak from personal experience. I was sick with flu like symptoms since the last two years. It came and went quite frequently. I ended up spending nearly 8000 Sfr on the treatment. Of course it was paid by the insurance but that is beside the point. Most of this expense was on diagnostics and detecting the disease. Which ended up being “allergy.”

Similarly, whenever I have been sick, I have noticed that even in case of a simple viral/bacterial infection — the expense on the diagnostic dwarfs the generic medicines I buy.

I am, of course, not talking about the egregious sums the cancer pharmaceuticals costs. Roche is privy to these and it is not clear how much of this is “moral.” Both sides have good arguments. Developing and then riding a molecule all the way to FDA approval takes a lot of money. A very few of the molecules make it. Most of them drop out and there is not much to show for the money invested in them. To fund these “lost causes” in the hope that one gets a “success” is going to increase the price of the successful drug. The larger the ratio of failed molecules, the higher the gross margin.

On the other hand, a full year dose of Herceptin costs $70,000!

Bottomline At 20x FCF, 16x P/E, 3.2% dividend yield and growth in single digits — you should wait for a better entry point.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

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