Questor: it’s taking on Covid and fighting cancer, but Roche is far from overvalued. Buy

If Britain really is to test 10m people a day for coronavirus, as Boris Johnson wants as part of his “Moonshot” plan to restore some kind of normality, it will probably need the services of the company we feature this week.

Roche, the Swiss pharmaceuticals giant, has a large diagnostics business and is the biggest supplier of Covid-19 tests to the NHS.

Although its tests are not the rapid ones for at-home use that will be needed to deliver the huge daily numbers the Prime Minister has in mind, Roche’s more accurate laboratory-based variety will be essential for weeding out “false positives” among the quicker tests.

“In a pandemic you need quick, cheap-and-cheerful tests that you can make in bulk but are not completely reliable and then you recheck anyone who comes back positive with a top-quality test,” said Simon Edelsten, who holds Roche in his Mid Wynd investment trust. “Otherwise you risk having as many false positives as real ones.”

The value of the firm’s testing expertise goes far beyond coronavirus, however. As Mr Edelsten put it, “These days GPs are largely the people who tell you which tests you need to have done. This allows patients to be diagnosed far more accurately and then sent to see the appropriate specialist.”

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He said that as the population aged people were likely to need more testing for conditions of all kinds, not just those you catch from a virus. “Good-quality testing is a growing part of healthcare. It makes the system more efficient and therefore cheaper than it would be otherwise,” he said.

“Advances in testing are central to public health and pay for themselves.” He added that Roche was “well placed to benefit” from the growth in testing across the health service.

The other big part of the company is arguably even more valuable in the longer term. Roche has spent heavily on the research and development needed to turn the scientific breakthrough of the human genome project into medical breakthroughs – and its efforts are about to be rewarded.

“Immunotherapy” treatments for a wide variety of cancers are about to replace traditional chemotherapy, Mr Edelsten said, and Roche is a world leader in this area. Immunotherapy helps the body’s immune system to fight cancer, so it doesn’t harm the patient in the way that chemotherapy’s powerful agents tend to.

As a result, patients have fewer side effects, which the health service is saved the cost of treating. “Immunotherapy is more expensive as a cancer treatment, but in terms of whole-life care it is cheaper,” the fund manager said.

“We are at the beginning of a new wave of autoimmune drugs. This all came out of the mapping of human DNA 20 years ago and now the companies that have spent the research money are about to come up with the new treatments. They have the core science and it should yield results, although you can’t predict which particular treatments will succeed.

“However, growth among Roche’s new drugs will more than compensate for the traditional ones whose patents are about to expire.”

He said Roche, for all its involvement in fighting the pandemic, and its status as a “world-class, rock-solid blue-chip business”, was not expensively valued at about 16 times earnings and a 2.9pc dividend yield. He added that little sales growth was expected this year as Covid-19 prevented people from being treated for cancer, although 5pc sales growth and 5pc-10pc earnings growth should be possible thereafter.

He went on to say the risks to drugs firms from a Democrat win in the US presidential election were probably exaggerated. “American drugs buyers are fragmented and just not very good at getting the best deals. And both Barack Obama and Donald Trump have tried to cut drug prices, to little effect.

“If Roche is not expensively valued now, a few successes among its new drugs could make the shares start to look very undervalued indeed,” he said.

Questor says: buy

Ticker: SWX: ROG

Share price at close: Sfr307.05

Update: Merck

We tipped this American drugs maker last year after a conversation with Mr Edelsten. He said he still held it and, as with Roche, its cancer treatments had great promise.

Questor says: hold

Ticker: NYSE: MRK

Share price at close: $78.27

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.