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Roche: Healthy Portfolio Holding

Ingrid Hendershot, President of Hendershot Investments, a money management firm, rates Roche Holding AG ADR (RHHBY) a Buy.

Roche is a global pioneer in pharmaceuticals and diagnostics, offers differentiated products in oncology, immunology, infectious diseases, ophthalmology and diseases of the central nervous system. Roche is also the world leader in in vitro diagnostics and tissue-based cancer diagnostics, and a frontrunner in diabetes management.

Market Leader

In 1896, when the industrial revolution was changing the face of Europe, 28-year-old Fritz Hoffmann-La Roche launched his company in Basel, Switzerland. Fritz was among the first to recognize that the industrial manufacture of medicines would advance the fight against disease. Known for producing vitamins, the company became the first to mass-produce synthetic vitamin C.

Since then, Roche Holding has grown into one of the world’s leading healthcare companies with products spanning the healthcare spectrum, from early detection and prevention of disease to diagnosis and treatment. Combining strengths and expertise of its two divisions, Pharmaceuticals and Diagnostics, Roche plays an increasingly important role in shaping the future of personalized healthcare to deliver clinically differentiated drugs. Much of Roche’s leadership in pharmaceuticals stems from its $47 billion Genentech acquisition in 2009.

Pharmaceutical division sales, which accounted for nearly 80% of total for three blockbuster drugs that represented more than 30% of 2019 sales. Strong global uptake of new medicines partly compensated for erosion in sales of drugs coming off patent protection. Indeed, medicines launched since 2012 increased 32% in 2020 and now sales. Roche’s pipeline is full with four new drugs authorized for use in 2020 and a record 19 new compounds either enrolled in registrational studies or awaiting regulatory approval.

Diagnostics division sales, which accounted for 20% of total 2020 sales, increased a healthy 14% in constant currency thanks to sales of COVID-related tests, which more than offset the COVID-related decline in routine testing across the portfolio.

Roche responded quickly and broadly to the pandemic. Within hours of receiving regulatory approval for its SARS-CoV-2 PCR test in March 2020, Roche sent test kits, which run on its high-volume fully automated diagnostic systems, to major hospitals and laboratories around the world. The launch of In February 2021, Roche received emergency use authorization for its Rapid Antigen Nasal home test that identifies highly infectious people in 15 minutes. Further, Roche’s drug to treat rheumatoid arthritis has been adopted by many countries to treat severely ill COVID-19 patients and, in August 2020, Roche announced a partnership with and distribute its investigational neutralizing antibody cocktail.

Profitable Growth

Roche generated healthy growth during the past five years with revenues compounding at a 7% annual rate as net income and EPS each grew at a solid 14% annual pace. Roche’s profitable operations consistently deliver double-digit net profit margins and returns on shareholder equity exceeding 30%.

For the first quarter, Roche reported a 3% increase in constant currency sales growth. Pharmaceutical sales declined 9% on continued headwinds from biosimilars and continuing pandemic impacts. Diagnostic sales jumped 55% on strong COVID testing momentum and healthy growth in routine business. For the full 2021 year, sales are expected to grow in the low- to mid-single digit range on a constant currency basis with core EPS targeted to grow in line with sales.

Healthy Balance Sheet

Roche maintains a healthy balance sheet with $13.9 billion in cash and investments and $12.5 billion in long-term debt as of 12/31/2020. Roche recently announced a 1% increase in the dividend, marking the 34th consecutive year of dividend growth. The current dividend yields an attractive 2.8%. Roche expects to distribute 47.5% of its earnings to shareholders during 2021.

Long-term investors seeking a profitable prescription should consider Roche Holding AG, a HI-quality market leader with profitable growth and a healthy balance sheet. Buy.

Editor’s Note: Ingrid Hendershot is President and CEO of Hendershot Investments, Inc. The money-management firm offers personalized investment advisory services to individuals, pension and profit sharing plans, trusts, estates, charitable organizations and corporations or other business entities. For more information on the services offered by Hendershot Investments visit www.hendershotinvestments.com.

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