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Factors Contributing to Roche’s Core Operating Margin

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Jul. 27 2016, Updated 9:04 a.m. ET

Roche’s operational efficiency

Roche’s (RHHBY) top line grew by 4%, whereas its operating margin grew by 5%. The operating profit as a percentage of sales stood at 39.4% in the first half of 2016.

Roche’s operating profit during the first half of 2016 was 9.9 billion Swiss francs. Pharmaceuticals recorded operating profit of ~9.0 billion Swiss francs while the diagnostics division earned ~1 billion Swiss francs.

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Operating profit for Roche’s two segments

The diagnostics division’s operating profit as a percentage of sales remained at 18.1% in 1H16. On a constant currency basis, the operating profit grew by 1%. New product launches and R&D (research and development) investments impacted the segment’s operating profit growth. RHHBY launched Cobas e801 and Ventana HE600 during the first six months of 2016. Similarly, it invested in molecular diagnostics solutions.

The pharmaceuticals division’s operating profit grew annually by 5% on a constant currency basis and stood at 46.2% of sales. Perhaps the strong uptake of Perjeta and Kadcyla along with newly launched oncology drugs Cotellic and Alecensa helped the company expand its margins. 

Roche plans to invest substantially in cancer immunotherapies. This will enable it to stay ahead of the competition in immuno-oncology. The market is dominated by Bristol-Myers Squibb (BMY), Novartis (NVS), and Pfizer (PFE).

Investing in a biotechnology or pharmaceutical company is highly risky. To get exposure to Roche and at the same time control excessive company-specific risks, you can invest in ETFs such as the Vanguard Total World Stock ETF (VT). Roche accounts for 0.48% of VT’s total holdings.

Continue to the next part to see what analysts recommend for Roche.

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