Rayno Biopharmaceuticals: New Buy Idea - Roche Plc.

Roche/Genentech Has a Strong Pipeline in Diagnostics and Therapeutics to Drive Moderate Growth in 2016

New Stock Pick: Roche Holding (RHHBY) $30.36

Over the past 3 months we recommended several new buys for the Rayno Biopharma Portfolio emphasizing moderate growth, relative safety and dividend plays. Three large cap biopharma stocks were previous picks: Abbvie (ABBV), Bristol-Myers Squibb (BMY) and Gilead Sciences (GILD). Today we add another large cap Swiss pharma Roche Holdings a leading drug and biotech Company with a dominating high growth position in diagnostics with revenues accounting for about 22% of total. Roche revenue growth should be up for 2017 at ~6% compared to previous years. Total revenues for 2015 were $50.35B with a Net Income of $9.04B. Cash flow from operating activities was $15.236B.

The investment thesis for Roche is as follows:

Synergy from a strong position in both diagnostics and biopharmaceuticals. Historical CAGR growth of 15% from immunodiagnostics and total global diagnostic revenues of about $10.9B growing at 6%.

Broad diagnostics products portfolio and pipeline: strong platforms with Cobas and Ventana; positioned in oncology, infectious diseases, CVD, diabetes care and virology. Innovator in companion diagnostics.

Forward PE of 15.2 lower than some peers. Current PE is 23, an attractive valuation given growth prospects.

Dividend of 3.4% converted from Swiss francs (CHF 8.1/sh.) CHF currently 0.951/dollar.

Roche seeks partners with both diagnostics and emerging biopharma companies to boost R&D.

diagnostics products in immunology and immunology with 8 NMEs (new molecular entities) with a high success rate from R&D.

Two potential blockbuster products which would boost sales in 2017: Atezolizumab for lung and bladder cancer; and Ocrelizumab for a more serious form of Multiple Sclerosis expected to launch in 2016.

Large cap biopharmaceutical stocks have been laggards over the past six months due to political concerns about pricing and earnings growth. Roche stock has been a laggard over the past 12 months down 14.7% so look for support above the $30 level.