Swiss pharmaceutical company Roche (RHHBY -0.60%) has underperformed the stock market over the past five years as it has grappled with the loss of patent exclusivity on three top-selling drugs. The company hopes to reverse the trend with a bunch of new product launches and a more diversified portfolio. Last week's earnings release shows some positive signs for the company going forward.

Shrinking sales from previous blockbusters

Five years ago, Roche had a monopoly on three major monoclonal antibody treatments for different types of cancer -- Avastin, Herceptin, and Rituxan. In 2017, these three medicines combined to generate almost half of Roche's total revenue.

Since then, all three have seen sales slide as patent protection expired and biosimilars entered the market. In the first half of 2022, sales for the three drugs declined by 16% to 29%, and management forecasts that these drugs will bring in $2.6 billion less this year compared to last year.

The silver lining is that even though these sales will continue to erode, the drugs now make up only a relatively small portion of the company's portfolio, so these declines will have less impact on Roche's bottom line. In the first half of the year, these three drugs added only 14% to total sales. 

Strong underlying business

Fortunately, a slew of new medicines have picked up the slack. Eight new entities have been approved in the past two years. In the area of breast cancer, picking up for Herceptin are Perjeta, Phesgo, and Kadcyla -- all of which showed strong performance. For blood cancer treatment, Polivy and Gazyva look to replace Rituxan. 

Roche has also built a name for itself in bivalent monoclonal antibodies, which improves treatment by blocking two separate pathways (rather than a single one) that contribute to a disease. Hemlibra is now well-established for hemophilia, and the regulatory approvals this year of Lunsumio for lymphoma and Vabysmo for eye disease add to the company's franchise. 

Vabysmo is expected to pose fierce competition to Regeneron's reigning best-seller Eylea. Both drugs treat two eye diseases: age-related macular degeneration and diabetic macular edema, which are leading causes of vision loss. But Vabysmo caused fewer side effects in the clinical studies and also extended the length of time between treatments, from monthly eye injections needed to up to four months between injections. 

On top of that, Roche offers a world-class diagnostics segment. The division offers COVID-related diagnostics and has already developed tests for monkeypox, among other technologies.

Overall, Roche's strong underlying pharmaceutical business grew by 3% over the first half of 2022 despite pressure from biosimilars. The diagnostics division grew 11%, aided by strong first-quarter sales of COVID tests, giving a respectable growth of 5% for the company as a whole.

Higher margins going forward

Earlier in the year, Roche settled its ongoing patent infringement lawsuit against Chugai Pharmaceuticals' Ultomiris for a single lump-sum payment of $775 million. The one-time payment boosted Roche's operating income and earnings per share (EPS) for the first half of 2022.

Still, about two-thirds of the core EPS growth came from improved core operating margins and the effect of fewer outstanding shares due to repurchases. While management anticipates that margins for the diagnostic division will decline as COVID-related sales subside, the gains on the pharmaceutical side appear more robust and should continue to drive growth going forward. 

Roche has now put much of the pain caused by patent losses behind it and looks set for modest but steady growth in the future. Analysts expect the company to expand earnings per share by about 6% annually over the next five years.Meanwhile, Roche's forward price-to-earnings ratio of 19 looks reasonable compared to many of its major pharmaceutical peers.

Roche could be a solid long-term pick, offering a stable business that pays a 2.9% dividend and diversified across both the pharmaceutical and diagnostics spaces.