DNA: "The Whole Package"

05/05/2006 12:00 am EST


Michael Shulman

Editor, Short-Side Trader

I've very quickly become a fan of Michael Shulman, editor of the ChangeWave Biotech Investor. Quite simply, this is an exceptional service for any investor interested in the biotechnology arena. Here, he discusses the latest addition to his buy list-Genentech.

"Genentech (DNA NYSE) I am adding Genentech to our Buy List. Man, have I been waiting a long time to do this! The stock is now $80, having traded down despite announcing very strong earnings along with some hidden or ignored facts that will drive the stock in the coming year. I could write a book about this company and still not tell all there is to tell. It is the best of the big biotechs.

"The cancer market is the fastest-growing component of the pharmaceutical market and is expected to grow 18% per annum during the next few years. Genentech is now seen as the growth leader in this market thanks to Avastin-the increasingly dominant anti-angiogenesis drug on the market. Genentech is pulling away in this market as Avastin is sponsoring more than 30 clinical trials to support label expansion in order to market Avastin for different forms of cancer as a 'first-line' treatment- rather than in conjunction with, and after, traditional chemotherapy.

"Herceptin was approved by the FDA in 1998 for breast cancer and is typically used in combination with traditional chemotherapy. It is most effective in women with a specific gene called the HER2-positive gene. Roughly 25% of breast cancer patients have this gene. In combination with chemotherapy, Herceptin reduces the chance of a recurrence of breast cancer in this specific population by 50%. Herceptin is easily the most successful of the new group of genetically targeted treatments on the marketplace, and last quarter's sales took Wall Street by surprise.

"In addition, Avastin is the first FDA-approved anti-angiogenesis drug designed to interfere with the blood supply to tumors, thereby inhibiting or eliminating tumor growth. Avastin was approved in February 2004 Tarceva, developed in conjunction with other OSI Pharmaceuticals is aimed at something called the human epidermal growth factor receptor pathway, which in turn is considered critical to the growth of cancer cells in patients suffering from lung or pancreatic cancer.

"The drug was approved in November 2004 for lung cancer and was approved last month for use against pancreatic cancer. And Rituxan is for patients with non-Hodgkin's lymphoma and for rheumatoid arthritis (RA) with trials under way to expand use to lupus, a cousin of RA. This drug was approved in November 1997 and more than 300,000 patients worldwide have been treated with Rituxan. Our ChangeWave surveys show this drug is going to be a big hit in the arthritis market.

"In the first quarter of 2006 revenues were up 36% to just a smidge under $2 billion and product sales were up 39% to $1.6 billion. Wall Street's reaction to DNA's earnings sums it up: The view is mixed, due to valuation concerns and a lack of understanding of the power that the company has with Avastin as a first-mover in the marketplace- and, this creates a wonderful opportunity for us. In my opinion, however, there is no company risk, whatsoever! The only risk in the stock is valuation.

"At these prices, DNA is selling for between 45 and 50 times earnings. And with 35% revenue growth and 50% profit growth, that is a very reasonable price given the demographics it is selling into and the large, untapped potential for all its cancer drugs. Buy it now and salt it away. This company is the whole package, the whole enchilada, the granddaddy and the big Kahuna of the biotech industry with a market cap of roughly $100 billion!  This is as close to a 'buy and hold' as I will ever recommend. This is the next great pharmaceutical company, and during the next three- to five-year period my target price is $300."

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