Genentech: An expensive darling
Analysts are bullish on the company's prospects, but the value is already baked in.
By Aaron Smith, staff writer

NEW YORK ( - Genentech is still the darling of the biotech industry. The problem is everyone knows it.

Genentech handily outperformed Big Pharma last year. Biotechs in the S&P 500 gained 18.2 percent in 2005, compared to a decline of 5.9 percent for the pharmaceutical industry.

Analysts are bullish on the company's fourth-quarter earnings, to be announced Tuesday, with consensus projecting revenue growth of 41 percent to $1.85 billion and earnings growth projected at 60 percent to 34 cents a share, according to Thomson Financial.

"As far as the fourth quarter goes, I think it will be a great finale to an awesome year," said Eric Schmidt, analyst for SG Cowen. "Herceptin sales are ramping up very quickly over the last few months and I think that's where you'll see most of the upside in the fourth quarter."

Genentech (up $0.08 to $92.74, Research), based in South San Francisco, totaled $3.9 billion in sales during the first nine months of 2005 and is the second-largest biotech in the industry, behind Amgen (down $0.43 to $78.55, Research). Genentech's three top products are: Herceptin, a breast cancer treatment for patients with a specific gene; Avastin, a treatment for colorectal cancer; and Rituxan, a treatment for non-Hodgkin's lymphoma.

During the first three quarters last year, Herceptin sales totaled $476 million, Avastin totaled $772 million and Rituxan totaled $1.35 billion.

But the stock price for the second-biggest biotech soared about 70 percent in 2005, with a PE ratio of about 80. So analysts are still asking the same question they've been asking throughout 2005: Is Genentech too expensive? Many think so, saying the run-up in the stock's price has already covered all the good news.

"[Genentech's] clearly one of the most premium value stocks," Schmidt said. "There's no question that this company is blessed with a lot of good products. But I think valuation is the biggest issue."

Shiv Kapoor, analyst for Montgomery & Co., thinks highly of Genentech and its "robust pipeline." Genentech is trying to get Avastin approved for the additional treatment of breast and lung cancer, which could boost the drug's annual sales to $7 billion within three or four years, making it "the biggest biotech drug ever," Kapoor said.

"Once they get approval for these lung and breast cancer indications, Avastin will go up big time," Kapoor said. "There is very little doubt they will get these approvals. It's just a matter of time. They're going to be cancer king, primarily because of Avastin."

Nonetheless, Kapoor has a "hold" rating for Genentech and a "buy" for its competitor Amgen, the world's biggest biotech. Kapoor said he considers Amgen, which was trading at $78 a share with a PE of about 26, a better buy than Genentech, which was trading at $92 Monday morning with the previously mentioned PE of 80. The biotech sector carries a PE of about 30.

Kapoor said the projected upside for Avastin in the early part of 2006 has already been "baked in" to Genentech's stock price.

But Avastin isn't the whole story. Last week, Genentech applied to the Food and Drug Administration for a review of Lucentis, a treatment for wet, age-related macular degeneration, the leading cause of vision loss in people over 60, according to the National Institutes of Health. The drug would compete with Visudyne from Novartis (down $1.31 to $53.16, Research) and Macugen from Pfizer (down $0.26 to $24.59, Research).

Lucentis is projected to take market share away from Macugen when it enters the market in the last quarter of 2006 or the first quarter of 2007, said Rahul Jasuja, analyst for MDB Capital Group.

Jasuja said Lucentis could reach $1 billion in peak annual sales within three years of its market entry because it serves "an unmet need for an evolving, expanding population."

The market for macular degeneration treatment is fueled by aging baby boomers. Jasuja said the market size for these treatments totals about $1 billion, but he expects it to double in the next few years.

Genentech spokeswoman Dawn Kalmar said that if the FDA grants Lucentis priority review status, which it often does for cancer-related and potentially life-saving drugs, then a regulatory decision could come as early as June 2006.


To read more about Genentech's anti-cancer drugs, click hereTop of page

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