Genentech still expensive

Genentech (DNA) has not been kind to its shareholders recently with its share price declining
steadily over the last couple of years. Now that the excitement of its new blockbuster cancer
drug Avastin has worn off investors are looking down the pipeline and seeing little to get
excited about.

The directors are aware of this and have announced that they are aiming to introduce 30 new
molecules to the pipeline in the five year period ending 2010. In 2007 they introduced 8 new
molecules. This sounds impressive until you find out that they also removed five molecules from
the pipeline last year. The directors do not state if the 30 figure is net or gross!

In general these new molecules do not have names yet and little is known about them. Until some exciting phase II or III results start coming in investors will mostly ignore them.

Another worry for DNA is its new AMD drug Lucentis whose sales actually declined in Q4 year on year. This is because Lucentis is very expensive and doctors are prescribing Avastin as it is much cheaper and seems to be equally effective.

So where is the growth going to come from in 2008? From increased sales and new indications of its existing drugs only. In reality Avastin will be the growth driver, making DNA a bit of a one drug wonder at the moment. Most of the other drugs are growing at single figure rates.

DNA is on a 2008 PE of 20. This is a much cheaper multiple compared to one year ago but still not cheap enough considering that earnings growth in 2008 will probably be considerably less than 20%. And if any new medical or competitive threats arise for Avastin all hell could break loose with the share price.

DNA might be worth another look in 6 months. But for now it seems that the multiple compression is not over.