Tuesday, July 15, 2008

Genentech Pipeline and Analyst Conference Summary

I listened the the Genentech (symbol: DNA) Q2 2008 analyst conference yesterday in order to write my summary of the event. In fact I listened to most of it twice. I don't own Genentech stock. I currently own ANSV, DNDN, BIIB, GILD, and CELG among the biotechnology companies. I prefer simpler stories, in particular where one or two relatively new drugs are apt to make a company's fortune. But after listening to the presentation and looking at the slideshow, I am thinking about putting the July cash designated to be converted into undervalued stocks into DNA. Short term I don't expect much from it, but in the coming decade I suspect we are all going to wish we had a position in Genentech.

Why? Because of the enourmous breadth of Genentech's pipeline. Just mentioning all of the trials taking place right now requires a document pages long. There are trials to extend the labels of blockbuster drugs like Avastin. There are trials for hitting cancers earlier or later than is currently recommended, and for hitting different varieties. There are trials of a variety of new drugs for cancer and other indications. There are whole new bits of science that are in preclinical trials (they are not yet being tested on human beings).

Of course, even a successful company like Genentech will have failures. The failure rate for drug candidates is very high, though by the time a drug makes it to Phase III its chances are getting reasonable enough for investors to bet on. Genentech announced both failures and successes already this year. When you try so many drugs for so many different diseases, that is what you will get.

Remarkably, Genentech is solidly profitable despite the heavy investment in drug development. GAAP earnings were $0.73 per share in the quarter just reported. At this moment it is up, trading for $79 per share. That gives it a current (not trailing) PE of 27, which sounds high in this current market where growing companies sometimes have current PEs in the 10 to 15 range. But compared to the past, this is not a high PE for DNA. Just the growth trend lines in its current drug line up could justify today's price.

Look at the summary of trials and pipeline developments on pages 13 through 41 of the slideshow. There are risks, certainly, but on the whole I believe some remarkable profits are going to be generated in this next decade from the winners in the pipeline.

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