Genentech's Bullish Forecasts Are Not in Line with Wall Street

With just ten days to go until expiry of Roche’s (RHHBY.PK) $86.50 per share offer for the remaining 44% of Genentech (DNA) it does not already own, Genentech’s senior management yesterday presented in great detail, with sales and earnings projection as far as 2024, its side of the “what is Genentech worth” story, all intended to persuade minority shareholders, and ultimately Roche, that the current offer significantly undervalues the biotech giant.

The focus of the presentation was on Genentech’s financial model published in November, which claimed the company to be worth $112 per share, a model which was significantly upgraded since a report submitted to Roche last June, before Roche’s initial $89 per share offer in July. With Genentech and Roche proposing such wildly different forecasts and valuations for Genentech, EP Vantage has compared current analyst consensus from EvaluatePharma with both versions and finds the view of Wall Street to be much more in line with Roche’s outlook (see table below).

Siding with Roche

The table below compares the forecasts provided by Genentech, Roche and EvaluatePharma over a range of financial items, including sales, earnings and free cash flow.

Whilst forecasts for 2009 and 2010 are largely comparable between all three outlooks, significant differences of opinion start to emerge in 2011, particularly with regard to Genentech’s sales and earnings model.

By 2014, Genentech’s total sales prediction of $20.8bn is 11% higher than consensus at $18.5bn, whilst earnings per share for the same year of $8.90 is almost 30% higher than consensus at $6.38. Conversely, Roche’s estimates for sales of $18.7bn and EPS of $6.91 are much closer to consensus.

Key differences of opinion also exist over R&D expenses, tax rate, the rate of share buy-backs, capital expenditure and free cash flow, with Genentech unsurprisingly much more bullish than Roche and also current consensus.

Worlds apart

Genentech also made some pretty ambitious product development claims that 15 new molecular entities could reach the market between 2010 and 2015, and that 24 line-extension uses of currently marketed products can be approved between 2009 and 2011, suggesting the company may have been wearing wrap-around rose-tinted spectacles when compiling these bullish forecasts and product development outlook.

With the war of words between Genentech and Roche steadily increasing in intensity and neither party expected to compromise any time soon, it’s becoming clear that the relationship may need to be saved by a slightly sweetened offer by Roche, possibly in the mid-$90 per share range.

The expiry of the current offer on March 12 will provide some insight into whether Roche will need to go this extra mile to complete the acquisition.

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Comments

[Roscat:]

No one should underestimate the power and value of the biotechs in this day and age. If I were Roche, I would try to wrestle the price a bit but, eventually pay to get Genentech at any cost.

Mar 05 11:20 AM

[Genentech s...:]

Genentech made a very persuasive case that it has a very valuable pipeline that will drive its growth in revenues and income No biotech company can compare to what Genentech is capable of doing. Note the devastating slide in Genentech's presentation to investors that shiows that the bulk of Roche's pipeline is Genentech products.

Mar 05 11:53 AM