forbes.com
Street Fight: Genentech
Edited by Jody Yen, 03.19.01, 7:00 AM ET
NEW YORK - Despite trading near a 52-week low, shares of biotechnology firm Genentech still change hands at 64 times its 2001 earnings-per-share estimate. Is Genentech worth it?
This week's Street Fight gets contrasting opinions from two analysts: Mark E. Augustine and Rachel Leheny. A senior research analyst with U.S. Bancorp Piper Jaffray, Augustine graduated from Yale College and received his M.B.A. from Harvard University. Leheny, a senior vice president at Lehman Brothers, was a National Institutes of Health fellow and a lecturer in the chemistry department at the University of California, Berkeley. She holds a Ph.D. in chemistry from Columbia University and an A.B. in chemistry from Harvard.
Forbes.com: Mark Augustine, you're bearish on Genentech--what are your top two reasons for the "neutral" rating?
Mark E. Augustine: The two things we focus on for Genentech are product development and valuation. On the product side, there are three clear earnings drivers at Genentech, two of which are here today and the third in the not-too-distant future. The two here today are Herceptin, for breast cancer, and Rituxan, for lymphoma. Down the road is Xolair, which could be approved this year, for allergic asthma.
The two drugs on the market now account for more than 50% of current revenue and earnings estimates. And when you add in Xolair, these three drugs will account for the majority of revenue and earnings per share for several years.
We have identified concerns about both Herceptin and Xolair that weigh down on the stock and limit the near-term upside. Sales of Herceptin have reached a near-term plateau. We also feel there are some excesses of optimism on Wall Street about Xolair, which hasn't even been FDA-approved yet. There are a sufficient number of clinicians who are skeptical of using the drug, which limits its sales potential.
As for valuation, Genentech's long-term growth rate is 20% to 25%, and at today's price level, it is still trading at a pretty hefty premium to its growth rate.
Rachel Leheny, you rate the stock a "strong buy." Your response?
Rachel Leheny: Genentech has the broadest product portfolio of any other biotechnology company, and of those products Rituxan and Herceptin do have the bulk of growth in sales. Herceptin is in a holding pattern and will continue to be so for the next 12 to 18 months, until they get more data supporting broader use. The recent studies of Rituxan suggest broader usage, which will push sales from the current $600 million to the $1 billion range.
Genentech's biggest obstacle is its sub-optimal marketing strategy. Pulmozyme [for cystic fibrosis], TNKase [to treat heart attacks] and Nutropin Depot [for hormone growth deficiency in children] all have real room for sales growth in the double digits. They haven't reached their sales potential because marketing is not aggressive enough.
As far as its pipeline is concerned, Xolair has gotten a great deal of popular press, but there are others such as Tezosentan [to treat acute heart failure] and Anti-VEGF Antibody [to treat certain solid-tumor cancers]. These drugs are a lot more immediate than most people have recognized.
The stock definitely trades at a high premium, but we are comfortable paying for it. They have the best science and genomics research in the industry. It's expensive on a multiple basis, but you are paying a premium for a company that does the best work and will continue to grow for the next 15 years.
Mark Augustine gets the last word.
Augustine: Many agree that Genentech is the best-managed biotechnology company in the industry, but despite that the stock is down 53% year-to-date. The drop reflects problems with Rituxan, Herceptin and Xolair, and even with strong growth from other drugs, those three will still provide more than 50% of revenue and earnings over the next few years.
Several of Genentech's other drugs are in mature markets, or where market dynamics are changing. For example, TNKase will cannibalize an older product but won't grow much in the core cardiovascular market. We agree that there are many drugs in the pipeline, but Xolair is still the single blockbuster drug, and it has issues. If you have issues or concerns about any, or all, of the earnings drivers, then the stock should not be bought at such a high premium. |
