When to Jump into Genentech?


By Amy Tsao If there's one biotech stock worth owning, it's Genentech (DNA), analysts are fond of saying. This bluest of biotech blue chips, 58% owned by Swiss giant Roche Holdings, tops the list for good reason. No one in the industry can match its sterling pipeline of products in development, respected management team, and ability to deliver earnings growth. But lately, a big gap has opened between the admiration investors have for the company and their willingness to buy the stock.

Before Genentech announced fourth-quarter earnings in January, it was trading at a 50% premium to other large biotechs. News that 2000 growth came in on the low side of analysts' expectations knocked the stock down some 14% over the following week, though it remained about 25% above its rivals. The shares now trade around $60, on the low end of their 52-week trading range of $42 to $122.

SEEKING AN ENTRY POINT. This may still be too a high a price to pay for the No. 2 biotech company (No. 1 is Amgen), most analysts say. So how should investors play the venerable Genentech? "This is a company that should be a core holding in any biotech portfolio," says Banc of America Securities analyst Eric Ende, who rates the stock a buy. "But you have to own it at the right price." He recommends buying aggressively if the stock dips below $50.

Genentech's annual analyst meeting, scheduled for Feb. 21 in New York City, should shed some light on possible investing opportunities. If its key products -- Rituxan, Herceptin, and Xolair -- keep charging ahead and some new winners emerge from among the 26 other drugs in its pipeline, analysts are pretty sanguine that Genentech could pull off its five-year growth plan, launched in 1999.

The company's antibody drugs for cancer -- Rituxan for non-Hodgkin's lymphoma and Herceptin for breast cancer -- have been its main money spinners. Herceptin, which is administered with the widely used cancer drug Taxol to treat metastatic breast cancer, is "on track" with the company's projections so far: Its sales in 2000 jumped 46% over 1999.

But Wall Street thinks otherwise. It has reined in expectations because Genentech's fourth-quarter results showed a drop in Herceptin sales, to $70 million from $73 million in the previous quarter. Analysts fret that the drug, launched with much fanfare in 1998, will continue to be a slow performer. Banc of America Securities' Ende lowered his Herceptin sales expectations to $321 million in 2001 and $399 million in 2002. "It's going to take a while before the right patients are found to take this drug," the analyst says.

KEY STUDIES. To expand the market, the company is testing Herceptin in newly diagnosed patients who have undergone surgery to remove their tumor. Four separate trials involving 10,000 women with early-stage breast cancer are under way, and investors should watch the emerging data closely. If Genentech can show that Herceptin is useful in more patients, helping them live longer, it would be a major coup. The studies will take several years to complete, but preliminary data will be announced over the course of 2001. Conclusive data on Herceptin will be available around the end of 2002, Ende estimates.

On the other hand, Genentech's star product, Rituxan has had better-than-expected performance, bringing in $138 million in worldwide sales in the fourth quarter of 2000, up from the third quarter's $117.9 million. However, this hot streak may not last much longer. Credit Suisse First Boston's Alex To expects that the approval of IDEC Pharmaceutical's (IDPH) Zevalin will hurt Rituxan. "Despite Genentech's attempt to position the drugs in slightly different market niches, we believe that Zevalin will take market share away from Rituxan when it comes to market in the second half of the year," To wrote recently.

Several analysts disagree with To's analysis and believe that the drug's sales outlook remains strong. Rob Toth, an analyst with Prudential Vector Securities, says Zevalin, because it's a mouse antibody, may have toxic side effects on humans and won't likely be used in patients with early-stage disease. "If you look at the data, Zevalin had an 80% response rate, and Rituxan had 40%, but Zevalin has higher side effects," says Toth. He expects that doctors will use Zevalin in cases where patients have failed to respond to Rituxan early on.

DELAYED DEBUT? Xolair, which treats asthma, is expected to be Genentech's next big hit. It's the first drug of its kind and will address a new market. The only hitch is that the company has recently submitted additional safety data to the Food & Drug Administration, which could push back the drug's anticipated approval date. A Genentech spokesperson says the company is still "on track for summer approval and launch. We have not received any feedback from the FDA to suggest there will be a delay."

Ende expects Xolair to add only about $15 million to Genentech's top line in 2001, but he believes that it could hit peak sales of $700 million to $800 million. However, investors might get nervous if its projected summer launch is pushed back. Should shares dip on news of a Xolair approval delay, it could be a good buying opportunity.

The bigger issue is whether Genentech can deliver on its ambitious long-term goals. In 1999, the company put in place a five-part, five-year set of goals: 25% revenue growth year-over-year, about a 25% increase in earnings per share, net earnings at some 25% of revenue, $500 million in revenue from partnerships, and five product approvals.

NOT A "DONE DEAL." It's a tall order for any company, but analysts think Genentech, which essentially founded the biotech industry, has a good shot at succeeding. If any outfit in the sector can do it, it's Genentech, figures Leslie Marino, biotech analyst at Dreyfus Corp. John Alsenas of ING Furman Selz Asset Management cautions: "They very well could do it. But people are acting as if that's a done deal."

Buying Genentech at its current price may not make sense, but keep an eye out for dips. The stock has upside potential if the company can achieve its goals in the next two years. It's a longer-term play, but smart investors won't ignore this blue-chip biotech. Tsao covers biotech and the markets for BusinessWeek Online in New York


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