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2021-12-24 11:22:03

Roche shareholders agree to buy back their own shares from Novartis

In early November, Novartis announced its agreement to sell 53.3 million shares of Roche to its current shareholders for $ 20.7 billion. At the end of November, Roche shareholders voted to acquire this stake from Novartis. The cancellation of the repurchased shares will take place in January-February 2022. We are currently seeing several positives for Roche in this deal. First, it is beneficial for Roche as the company will pay the market price for these assets, which is permitted by Swiss law. Secondly, the pharmaceutical sector is trading at lower multiples, so Roche has chosen the right moment to close the deal. Third, Roche’s profits should accelerate in the coming years, as economic activity around the world recovers after the pandemic. Fourth, Roche gets more strategic freedom. The company will have to raise borrowed funds to finance the deal. However, taking into account the annual operating cash flow of 15 billion Swiss francs, Roche will be able to fully repay the debt financing within 1-2 years. Thus, the increase in the debt burden will be insignificant and will be temporary in nature.





The buyout news forced us to rethink our financial model. Our previous earnings per share estimates of CHF 20.50 in 2021 and CHF 21.55 in 2022 remain unchanged. The estimate of the fair value of the shares also remained unchanged. Thanks to the share buybacks, EPS forecasts were raised by CHF 0.2-0.8 during 2023-2025 to CHF 28.8 in 2025. Our new 2027 EPS estimate is CHF 35.75 and assumes 10% EPS CAGR over 2021-2027. By comparison, our previous forecast was for 8% growth over 2020-2025. Promising new drugs, including Ocrevus, Hemlibra and Evrysdi, provide an opportunity for the company’s profit growth despite pressure from bionic analogs. In 2021-2022, final clinical trials for the company’s key drugs will pass and we expect new drugs to enter the market. We like Roche’s business and see the stocks are undervalued, which together enhances the company’s investment appeal.

Roche Holding AG is a Swiss pharmaceuticals and diagnostics holding company belonging to the Roche Group that operates through subsidiaries and associated companies around the world. The company has two divisions: Pharmaceuticals and Diagnostics. Diagnostics includes five business areas: Core Labs, Point of Care, Diabetes Care, Molecular Diagnostics and Pathology Lab.

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