Biotech-Stock Mailbag: Genentech

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Let's open the Biotech Mailbag, starting with an email from Jerry B. on the takeout prospects for Genentech(DNA Quote) and ImClone Systems(IMCL Quote).

"It seems funny that the Street is valuing Genentech and ImClone's buyouts by the percentage increase from some recent stock price. Certainly, with the adjuvant, lung trials out there this doesn't seem like a logical starting point. What would Genentech's price be with a positive adjuvant trial or Imclone's with a positive overall survival result from in the BMS-99 or Crystal trials?"

What's more funny to me is that Roche made an insultingly low $89-a-share offer for Genentech, which represented a 9% premium to the stock's closing price of $82 right before the offer.

Investors, on the other hand, seems to be more in tune with Genentech's real value, which is why the stock has traded in the mid to upper $90s since Roche went public with its bid.

Fair value is still a matter of debate, but c'mon, any offer less than $100 a share isn't going to fly. How about $123 a share? That's a 50% premium to Genentech's stock price before the Roche bid. A 50% premium for a one-of-a-kind company like Genentech seems reasonable to me, and would more suitably bake in upside like the blockbuster potential for Avastin as an adjuvant colon cancer treatment.

Throw together Genentech's current business plus near-term label expansion opportunities plus mid- and early-stage pipeline and you get a fair value of $124 a share based on a discounted cash flow model, according to Sanford Bernstein biotech analyst Geoffrey Porges.