Monday, January 14, 2008

Genentech (DNA) Stalls, Points to Pipeline

Genentech (DNA) tried to put a positive face on its 4th quarter of 2007 today in its press release and analyst conference, mainly by pointing to full 2007 numbers. Most companies would envy those numbers, but for Genetech the point to slowing revenue and profit growth. Comparisons between Q4 2007 and Q2006 are positive but the growth is minimal. Worse still, net income (GAAP basis) has declined slightly for two quarters in a row now.

This, and the bad news on Zetia today, illustrate the downside to investing in biotechnology companies, even relatively big, successful ones like Genentech. Sales of most of Zenentech's drugs have stalled for one reason or another. Of Genentech's top selling drugs only Avastin showed strong growth from Q4 2006 to Q4 2007, at 23% growth. Two drugs, Lucentis and Nutropin, showed declines.

The big hope is that the FDA will approve Avastin for breast cancer in February, but management was careful to say that while approval is possible, further study may be requested as well.

For more detailed notes on today's conference, see my Genentech January 14, 2008 analyst conference summary. For past summaries and other useful links see my Genentech main page.

On the other hand, Genentech is spending an astonishing amount of money on R&D and still turning in profits. Management says it is looking at the long run. They have 20 molecules they are testing for various indications. Plus many of their currently approved drugs are being tested for expanded indications. The long run looks bright; the question is: how much do you want to pay now to participate in the long run?

What with the current liquidity squeeze I'd say now is a good time for a long term investor to buy Genentech stock. Priced at $70.64 per share at the end of today, it had a PE ratio of 24.7(per NASDAQ, which usually uses non-GAAP numbers). That is cheap for what is usually a growth stock.

The dilemma is, wait for the Avastin breast cancer decision, or plunge in? If the decision is a go, the stock will pop a bit. If they require more study, there will be some sinking.

And if the liquidity crisis worsens, like most stocks Genentech will probably go down. On the other hand (hey, I coulda been an economist), if the Fed cuts interest rates sufficiently later this month, the liquidity squeeze could evaporate and those of us with "actual cash money" (as Faulkner's characters used to say) could find ourselves chasing after stock prices rushing back to normal.

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