Biotech-Stock Mailbag: Genentech

(Editor's note: Come see Adam Feuerstein at the Money Show in San Francisco. Adam will be speaking to attendees on Friday, Aug. 8, at 2:15 p.m. ("Biotech Investing for Individuals: How to Turn Geeky Science Into Fat Profits"); on a lunch panel on Saturday, Aug. 9, at 12:35 p.m. ("Tech and Biotech: Picks and Pans for 2008 and Beyond"); and on Sunday, Aug. 10, at 8 a.m. ("Biotech Investing for Individuals: How to Turn Geeky Science Into Fat Profits").

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Let's open this week's Biotech Mailbag with something a bit different -- a Big Pharma question.

Franco asks, "Do you see Pfizer (PFE Quote) potentially obtaining a biotech company to increase its sales?"

Speculating about Pfizer's M&A strategy is a favorite biotech parlor game. Unfortunately, my crystal ball is no more prescient than anyone else's.

As it stands, European and Japanese drugmakers -- Roche, Takeda, GlaxoSmthKline (GSK Quote) -- are taking advantage of the weak dollar to shop more aggressively for biotech than their U.S. counterparts.

Pfizer was reportedly interested in buying Biogen Idec (BIIB Quote) but not at the price demanded by activist shareholder Carl Icahn. The company's pipeline is actually fairly deep, but the problem is that Pfizer is so big that one or two new drugs don't make much of a dent in the looming revenue cliff caused by generic-drug competition.

I've long joked with friends that if Pfizer wants to really shake things up, it would just buy the entire Nasdaq Biotech Index. Does Pfizer buy Amgen (AMGN Quote)? Gilead Sciences (GILD Quote)? Does it take a run at Biogen again? I'm just guessing.

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Next up, an email from Tega on this week's blockbuster news from Roche and Genentech (DNA Quote):

"I am writing with regards to your column titled Roche Bid Could Alter Pharma's DNA. My question is how did Lehman Brothers come up with the Roche/Genentech EPS/NPV valuation that they also used Celgene (CELG Quote) as a comparator? Can you explain the process on coming up with such valuation or how I can make such valuations?"

There's a lot of educated guesswork when trying to determine a fair value for a company like Genentech. In a note to clients this week, Lehman analyst Jim Birchenough predicted that Roche would ultimately agree to a $105-a-share "compromise" offer for Genentech.

Birchenough got there using several points of reference. A 30x 2009 EPS multiple, comparable to Celgene, supports a $120-per-share purchase price. A 35%-60% 30-day premium, comparable to other acquisitions, would support a $104-$123/share offer price. Birchenough also pegs the net present value of Genentech's commercial and pipeline products at $70 -- a 50% premium that yields a $105/share purchase price.