Genentech Contraction

It is nice to be right for a change!

Back in April I recommended waiting for multiple contraction before buying into Genentech (DNA.) Well the contraction happened with DNA dropping from the low 80s to $75 with no specific bad news to explain the fall.

DNA certainly looks attractive at these levels. A 2008 PE of 22 is not bad for a company which grew EPS at 61% in the last quarter. Of course the real benchmark is sustainable revenue growth and this is where DNA starts to fall short. US product revenue growth in the last quarter was 30% but take out the new revenue from Lucentis and this falls to 16%. So assuming that once the launch for Lucentis is anniversaried it keeps growing, US revenue growth could be down to 20%.

Of course with MG&A expenses growing slower than revenue and an ongoing share buy back program, EPS growth should be higher than revenue growth. So assuming EPS growth of 25% DNA looks fairly valued.

However if DNA can expand the labels for existing drugs or launch a new one its valuation starts to look like a bargain. Although there are no new blockbuster drugs on the immediate horizon, both Avastin and Herceptin could receive new indications in the next year. There are over 10 Phase III trials of Avastin ongoing at present so DNA certainly has confidence that its use can be expanded.


In summary DNA looks worth accumulating at these levels. There may still be more multiple contraction in the short term but it is hard to see it falling much below $70.

Do yourself a favour - pick up some DNA for the long term.