Biotech Values

[DewDiligence]

Forbes on Genentech’s high hurdles:

[High-flying Wall Street darlings have always been a risky approach to investing, and Genentech is the highest-flying biotech darling of them all. Apart from the difficulty exceeding lofty expectations, Genentech is eventually going to suffer some fallout when investors come to understand, explicitly or implicitly, the notion of “Poisson arrivals” (#msg-2486205). Genentech’s earnings release is after the market close today.]

http://tinyurl.com/2jyoh

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Can Genentech Keep Investors Happy?

Matthew Herper, 07.07.04, 6:00 AM ET

NEW YORK - Genentech is indisputably one of biotech's strongest names. Shares are up 40% over the last year, and they have tripled over the past two years. But when the company posts second-quarter earnings after market close today, investors will be myopically focused on one topic: the colon cancer drug Avastin.

Last May, Genentech (nyse: DNA)started a magnificent run when the company announced that Avastin--which aims to starve tumors of blood--extended the lives of colon cancer patients. Analyst expectations for the medicine, seen as a real breakthrough because it can extend patients' lives by several months, began to soar.

Avastin, approved in February, has now been on the market for five months. Genentech's second-quarter results will provide a reality check for Wall Street's expectations. Two weeks ago, analyst forecasts for the drug's sales in the quarter ranged from $45 million to $139 million. But some analysts believe that if sales don't hit in the neighborhood of $100 million, Genentech stock could take a drubbing.

To keep investors very happy--something it has been doing for some time--Genentech is going to have to jump a very high bar. That's not great news for the company. It has managed to post almost consistently good results for experimental medicines, with Avastin and Tarceva, a cancer pill developed with OSI Pharmaceuticals (nasdaq: OSIP), managing to steal the show at big cancer meetings both this year and last. Keeping up that kind of pace isn't easy--and it may be impossible. In the past month, Genentech shares have dropped a split-adjusted 9% to less than $55.

Geoffrey Porges, the biotech analyst at Bernstein, is among those who think investors will be disappointed if Avastin sales come in much below $100 million. Porges' own sales estimate is $91 million. For investors to be surprised in a good way, Porges thinks Genentech will have to manage a number above $120 million.

Porges' modest expectations for Avastin in today's report do not mean he thinks Avastin will be a small drug in the long run. By 2007, Porges sees Avastin sales and royalties (from Roche, which markets the drug outside the U.S.) edging up near $3 billion--above consensus estimates.

Even many analysts with relatively low expectations right now expect Avastin to eventually become a big seller. "I'm looking for $85 million," says Jason Kantor, a biotech analyst at W.R. Hambrecht, speaking about Avastin sales for the second quarter. "Everyone wants to see companies do better than expectations, but expectations are pretty high for Avastin." Kantor owns Genentech stock and has a "buy" rating on the company. In an April note on Genentech, Kantor forecast Avastin sales of $875 million in 2006.

Any disappointment by this bellwether biotech may also spell bad news for the sector. Genentech is kicking off the biotech earnings season, to be followed over the next several weeks by Amgen (nasdaq: AMGN), MedImmune (nadsaq: MEDI) and Biogen Idec (nasdaq: BIIB). Of these stocks, only Biogen Idec has been pleasing investors lately--the company's shares are rising as expectations build for Antegren, the multiple sclerosis drug it is developing with Elan (nyse: ELN). But across the board, biotechs are being hurt by the increasing spotlight on cost--an issue likely to be brought into sharper focus by the impending Medicare drug benefit and the coming election.
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