Genentech Will Recover from FDA's Rejection of Avastin

Markets were propped up today as economic data came in on the positive end of the spectrum. Employment numbers showed that 189,000 jobs were added, thus giving hope that consumer spending will be stronger than forecast this holiday season. All major US indices were up about 1.5%, with the Nasdaq leading the charge. The Dow gained almost 200 points to end the session close to the 13,500 mark.

Technology, Energy and the Financials were strong in this rally day. Positive sentiment on consumer spending is associated clearly with gadget buying for Christmas, and that propped up stocks of Apple (APPL), Dell (DELL), Seagate Tech (STX)
Intel (INTC) and Google (GOOG).

Suffering a setback was bio-tech power Genentech (DNA) as the FDA rejected the use of its oncology drug Avastin. Shares of the company were halted with a loss of 9% already registered. The drug in question was to be used in combination to treat certain forms of breast cancer, but the FDA panel voted against approval of the drug for this purpose. Avastin  will bring Genentech sales of approximately $600Million in the first 9 months of the year as it is also being used to treat forms of lung cancer. The approval of the drug for other types of cancer treatment is seen as a major positive for the bio-tech and as such this setback has caused this temporary dip.

Goldman Sachs came out in support of Genentech after the news, as the major Investment Bank said that even without Avastin's approval they saw Genentech being able to sustain 20% Earnings/share growth going forward, and they held out the possibility that given further trails and more data, the FDA could still in fact approve the drug for further cancer treatments.

At this valuation, I think the selling as a bit overdone and Genentech looks attractive in the mid 60s. While DNA is a bit on the expensive side compared to its peers like Amgen (AMGN) or TevaPharma (TEVA), the best-of-breed deserves a slight premium. Avastin's use for lung cancer is continuing to grow as results for the first 9 months of the year are up 37% year over year.

Investors should take note when the brightest companies are on sale and this is definitely a sale. Genentech is the drug maker to own at these discounted levels. I believe it could be back in the $70-75 range soon but I agree that even without Avastin's approval for breast cancer, enough growth should be present to propel the stock to its $93/share analyst target within 12 months. A hefty 35% all in premium opportunity on the upside and if Genentech would fall to be valued with its peers at a 20 P/E the downside is $66/share based on estimated earnings of $3.30 next year.

The chance is here and now for this steal!

Disclosure: Author does not own DNA

Comments

[borisb]

yes. but what about a catalyst. if everyone was expecting Avastin to easily ramp to $5 Billion this is a rude awakening.

[parker]

I agree with your analysis -- nice write-up

Parker

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