Avastin Paves Way for Upward Revisions on Genentech

Right now, the Street has Genentech growing earnings by 31% this year. The midpoint of Genentech's new guidance pegs earnings growth at about 29%. Normally, you'd think analysts might take down their earnings estimates for the year; but Genentech is not normal, not with a top-line rocket like Avastin, plus the approval of the lung cancer drug Tarceva on the horizon. My sense is that analysts aren't going to quibble over a few pennies on the bottom line. Besides, Genentech still has plenty of time to raise 2004 earnings guidance again.

Of course, Genentech is not a cheap stock. At its current price, the company trades at 68 times 2004 earnings and 52 times expected 2005 results. At these valuations, upside surprises and a stellar earnings report are an absolute necessity.

It remains to be seen whether these second-quarter results -- and the strong Avastin sales figure -- boost Genentech's stock to another level. Despite a recent sell-off that began after the conclusion of the closely watched American Society of Clinical Oncology meeting in early June, Genentech shares are still up 17% this year, outpacing the broader biotech sector. The stock has zoomed more than 220% since the beginning of 2003, thanks, again, to Avastin.

By comparison, Amgen(AMGN Quote) -- the world's largest biotech firm by market cap -- is down 13% this year and up just 9.5% since the beginning of 2003.

Biotech investors crave growth and with Genentech they get it in spades. Not so at Amgen right now. Genentech grew earnings last year by 30% and will likely equal or exceed that this year and next. By comparison, Amgen's expected earnings growth looks downright miserly at 26% and 18% in 2004 and 2005, respectively.

On a relative valuation basis, Amgen is a lot cheaper than Genentech. But then again, biotech investors don't seem to care much about paying a high prices for strong growth.