US Edition
When a fund manager has made a tenfold return from a company in less than a decade, their verdict on the next investment opportunity from the same industry is worthy of attention.
Shares in Eli Lilly, the drug maker, have returned a staggering 987pc for Peter Rutter’s Royal London Global Equity Select fund since he first bought them in 2015.
The top-performing fund manager is now drawn to a share previously tipped here – and for the same reasons that first attracted him to the US drugs giant.
Rutter says the Swiss pharmaceutical group Roche offers a combination of sensible management and cheap valuation similar to that offered by Eli Lilly eight years ago.
He is not alone in rating Roche’s investment credentials. The company is heavily backed by the top-performing 3pc of equity fund managers tracked by the financial publisher Citywire, of whom Rutter is one.
Fourteen of these investors hold the shares, resulting in a top AAA rating from Citywire Elite Companies, which rates stocks on the basis of their backing by the best-performing fund managers.
“When we bought Eli Lilly it was just a sensibly run pharmaceutical company in the way Roche is today,” says Rutter, whose fund has returned 73pc over the past three years, more than double the market’s return over the same period.
“Our assessment of Roche’s wealth creation potential is that it’s reasonable rather than excellent, but the valuation is exceptionally attractive.”
Roche’s shares are valued at 10-year lows on several measures, including a forecast price-to-earnings ratio of 12.8. That will come as no surprise to readers who followed this column’s advice to buy the shares in 2020: in sterling terms they have delivered a flat return since.
Low valuations are usually explained by negative news and Roche is no exception. Among the difficulties the company faces is an expected loss of 5bn Swiss francs (£4.5bn) of revenue as demand dries up for its at-home Covid tests.
Worries about US regulation of drug prices have also weighed on the shares and Roche faces competition from “copycat” versions of some big-selling drugs that are no longer protected by patents. Revenues from these drugs are expected to be SFr7.7bn lower in 2026 compared with last year.
Nevertheless, brokers forecast that, after a dip this year, sales and profits will be setting new highs again by 2025. A big reason for this confidence comes from Roche’s increased spending on research and development, which has risen by 66pc over the past decade.
Increased investment in R&D has helped Roche bring 20 new drug discoveries to market since 2015. Brokers are forecasting that they will contribute an extra SFr13.7bn of sales by 2026, which will more than offset expected losses to copycat drugs.
A further SFr2.4bn of new revenue is pencilled in for drugs currently in the late stages of development.
These investments have diversified Roche’s drug portfolio, which improves sales reliability. In 2012 more than half the group’s sales were accounted for by three cancer drugs but by 2022 these treatments accounted for just 14pc.
Another 30pc came from other cancer drugs, with the rest spread across neuroscience, immunology and haemophilia treatments, as well as other medicines and diagnostic equipment.
Roche’s increased R&D spending has also helped to create the second biggest drug development pipeline in the industry, based on the number of trials.
It has said 18 of its late-stage drugs, if approved, could generate peak sales of more than SFr1bn each, of which eight have the potential for more than SFr2bn in revenues.
To aid the payback on its spending, Roche is keeping at the cutting edge of artificial intelligence and the development of models that emulate the human body. Management has also said a tighter focus on risk in the earlier stages of drug development will boost a subpar success rate at the later stages.
Net debt of 0.8 times “Ebitda” (earnings before interest, tax, depreciation and amortisation) and strong cash generation also put the company in a good position to make acquisitions to feed its international distribution operation.
Following a $20.7bn purchase of around a third of its own voting shares from rival Novartis in late 2021, it is also better positioned to make strategic decisions. A share structure that consists of voting and non-voting shares still gives major sway to the Roche family.
For a company as cheaply valued and as sensibly run as Roche, a mega-drug such as Eli Lilly’s diabetes and weight-loss treatment Mounjaro is not needed to drive strong returns. At the current price it should be enough for the company just to keep doing what it’s doing.
Questor says: buy
Ticker: SWX:ROG
Share price at close: SFr255.05
Algy Hall is investment editor of Citywire Elite Companies
Read the latest Questor column on telegraph.co.uk every Monday, Tuesday, Wednesday, Thursday and Friday from 6am
Read Questor’s rules of investment before you follow our tips