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Mark Yu
Mark Yu
Articles (397)  | Author's Website |

Roche Holdings Definitely Not a Lumbering Giant

Recent rumors prompt further review of the pharmaceutical company

July 11, 2016 | About:

"Rumor, noun.

"The Wall Street equivalent of a fact."

The Devil’s Financial Dictionary

Last week, Roche, correctly pronounced here, was rumored to have possibly approached BioMarin Pharmaceutical (NASDAQ:BMRN) for a takeover. Rather than focusing on BioMarin, a $14.85 billion pharma company target, this article will be mostly about Roche, the $220 billion potential acquirer.

Roche Holding (RHHBY) is the world’s largest and more than a century old biotech company. The company presents itself as a facilitator of breakthrough medicines involving different aspects of medicine. Roche is involved in different medicinal branches, namely oncology (cancer), infectious diseases (immunology), ophthalmology (eye) and neuroscience (nervous system).

According to its website, the founding families continue to hold the majority stake in the company.

The company focuses on two core businesses, which are fragrances and flavors and vitamins and fine chemicals. According to its website, as a research-driven company committed to innovation, Roche’s Pharmaceuticals and Diagnostics divisions supply products spanning the health care spectrum, from the early detection and prevention of disease to diagnosis and treatment.

Some key acquisitions that Roche made over the recent decades were its acquisition of worldwide marketing rights to the polymerase chain reaction (PCR) from Cetus Corporation (now a Novartis [NVS] subsidiary) in 1991 and acquisition of Genentech in 2009. The Genentech acquisition was worth $46.8 billion.

Drugs

In 2009, Roche’s three top-selling drugs were cancer drugs produced by Genentech, which were Avastin, Herceptin and Rituxan. Seven years later, Roche’s three top-selling drugs were still the same oncology drugs but with some added drug combinations. Stunningly, the trio of oncology drugs mentioned above still contributed more than half (50.5%) to its 2015 sales or 18.86 billion Swiss francs (CHF) in total.

Avastin remained solely as Avastin drug. Herceptin, on the other hand, now is combined with Perjeta and Tarceva, and is known as the HER2 franchise. Lastly, Rituxan is combined with MabThera. Further, Rituxan/MabThera also contributed a good amount in Roche’s immunology segment, too. If added to the total sales contribution, the trio now represented 54% or 20.27 billion CHF.

Avastin

This cancer drug contributed 18% of Roche’s last year sales. The company stated that the drug is used for advanced colorectal, breast, lung, kidney, cervical and ovarian cancers, and relapsed glioblastoma (a type of brain tumor). Avastin sales grew 9% in 2015 in constant exchange rate (CER). Avastin's patent expires in 2018.

Herceptin and HER2 franchise

The HER2 franchise represented 24.5% of Roche’s total sales. The HER2 franchise is indicated for breast cancer, and HER2-positive metastatic (advanced) gastric cancer (Herceptin only). Herceptin contributed 71% of the HER2 franchise. Herceptin sales grew 10% in 2015 in CER despite having its patent expire in Europe in 2014. Herceptin’s U.S. patent is set to expire in 2019.

Rituxan/MabThera

The combination represented 18.9% of total sales. The drug combination is used for non-Hodgkin lymphoma (NHL), chronic lymphocytic leukemia (CLL), follicular lymphoma (FL) and rheumatoid arthritis (RA) as well as certain types of ANCA-associated vasculitis. The drug combination grew its sales by 5% in 2015 in CER despite having its patent expire in Europe sometime in February 2013. It is expected to have its U.S. patent expire by September.

Sales numbers

In Roche’s recent first quarter update, the company reported an overall sales growth of 4% in CER. Roche did not mention anything about its profit nor earnings per share (EPS) but only mentioned this about its EPS: “Core earnings per share are targeted to grow ahead of sales at constant exchange rates.”

Cash, debt and book value

As of the latest data available in GuruFocus, Roche has total cash of $9.2 billion. The company also has $23.4 billion in debt and a book value of $21 billion.

Cash flow

Roche has a trailing 12-month (ttm) free cash flow of $11.5 billion. The company has not repurchased any of its shares for the past five years. With the free cash flow, the company has paid some $2 billion to reduce its outstanding debt and issued $7.46 billion in dividends.

Valuations

As of July 11, Roche ADR shares have a total market capitalization of $220.6 billion. This gives a price-to-earnings ratio of 24 times, price-to-book value ratio of 10.5 times and a price-to-sales ratio of four times. All of these valuations presented a noticeable premium compared to the Standard & Poor's 500’s.

Conclusion

Roche Holding appears to have navigated well the patent expiration challenges ever since it made its drugs. The company reported consistent growth despite a couple of Europe patents already took place in its top two drugs over the past five years. Roche also appears to be well maintained in terms of acquisition and expansion probably secondary to its majority stake owners. Whether it is to acquire BioMarin Pharmaceuticals remains a question.

Further, Roche Holding seems to have a juicy 3.15% dividend yield. Roche had successfully raised its dividends for the past 29 consecutive years. TTM, Roche had paid out 80.5% of its profits to its investors. In contrary, Roche’s debt levels together with premium traditional multiples may warrant further thoughts prior to any initiation in company’s shares.

Happy investing!

Disclosure: I do not have any Roche Holding shares in my portfolio, nor plans to initiate a long position this week.

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About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings per day. Dislikes goodwill and intangible assets.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

"To strive, to seek, to find, and not to yield." Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." Warren Buffett

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