This post first appeared on 8percentpa.substack.com
Healthcare has always been a strong return generating sector and has consistently beaten the broader stock market. According to data from the S&P 500 Health Care Index and the S&P 500 Index, the healthcare sector has outperformed from May 2001 to May 2021. with an annualized total return of 12.1%, which was higher than S&P 500's annualized total return of 7.4% during the twenty year period.
I have monitored Roche for a couple of years and admired its strong cashflow compounding and drug innovation prowess. In the last twelve months though, the share price underperformed on the back of the dismal outlook of European stocks and Roche’s lack of growth as it faced declining revenue from the fallout of COVID-19 related sales. As such, share price corrected from CHF400 to CHF240 today, a c40% drawdown. This presents an interesting opportunity to buy the stock today.
At USD320bn, Roche was the largest European pharmaceutical company by market cap when Visual Capitalist charted the above. Today, it is #2 behind Novo Nordisk (market cap >USD400bn) with its market cap USD220bn as of Oct 2023. That said, Roche is consistently ranked top 5 globally in the pharmaceutical space either by revenue or earnings. As per previous ideas, we shall discuss its investment thesis, moats, risks and valuation in detail today.
1. Investment Thesis
- Sales: 66.9bn EBITDA: 25.6bn
- Net income: 15.0bn
- FCF: 16.5bn
- Debt: 18.2bn,
- Mkt Cap 218.5bn
- ROE 47.3%, ROIC 24.4%
- FCF yield 6.2% (consistently at mid to high single digit)
- EV/EBITDA 8.9x (Dec 24)
- PER 11.7x (Dec 24), PBR 4.6x (current)
- Past margins: OPM 25-35%
Roche’s numbers could be the strongest we have seen so far in the past few ideas. This corroborates with what we discussed earlier: the healthcare sector has consistently outperformed the broader market and this is because it enjoys stronger margins and return profiles due to the nature of its business. With ROE and ROIC above 20%, but PER at just teens, it simply shouts cheap!
- Ventana Medical Systems for USD3.4bn in 2008, which further strengthened its diagostics business.
- Genentech for USD46.8bn in 2009, Roche’s largest acquisition ever. Genentech is considered to be the first biotech company.
- InterMune for USD8.3bn and Seragon Pharmaceutical for USD1.7bn in 2014, both biotech companies focusing on orphan diseases and cancer treatments respectively.
- Spark Therapeutics for USD4.8bn in 2019, a US based gene therapy company.
- Johnson & Johnson: R&D budget of approximately $12.2 billion (2019).
- Pfizer Inc.: R&D budget of approximately $8.1 billion (2020).
- Roche Holdings: R&D budget of approximately $11.4 billion (2020).
- Novartis International AG: R&D budget of approximately $10.5 billion (2020).
- Merck & Co., Inc.: R&D budget of approximately $11.3 billion (2020).
- Sanofi SA: R&D budget of approximately $7.9 billion (2020).
- AstraZeneca PLC: R&D budget of approximately $6.6 billion (2020).
- GlaxoSmithKline PLC: R&D budget of approximately $5.1 billion (2020).
- Eli Lilly and Company: R&D budget of approximately $6.0 billion (2020).
- Bristol-Myers Squibb: R&D budget of approximately $5.9 billion (2020).