Genentech Analyst Thinks Big

Goldman believes the company's EPS growth can average 30% for the next few years.
Author:
Publish date:

Progress in the pipeline and continued cancer drug successes should keep

Genentech's

(DNA)

earnings growing dramatically for the next several years, according to one analyst after a visit with the biotech giant last week.

In its

second quarter, Genentech beat earnings and revenue estimates after finding increased acceptance of the colorectal cancer drug Avastin as an off-label treatment for several other cancer types. Those additional uses were spurred by positive trial results presented at the American Society of Clinical Oncology's annual meeting this year.

Thanks to the trial results and strong sales, Genentech's shares have risen 61% this year to currently trade around $89, and the company still has room to grow, according to Goldman Sachs biotech analyst May-Kin Ho.

Overall, Ho sees Genentech's EPS growth averaging 30% for the next few years, thanks to research and development investments and drug-pipeline progress. Ho is predicting full-year earnings of $1.15 a share, which is modest compared with the consensus estimate of $1.19 a share. Genentech, which has traditionally been conservative in its profit guidance, has forecast earnings of roughly $1.13 a share.

Following solid results in age-related

macular degeneration trials using the Genentech drug Lucentis, an Avastin pilot study suggested that a very low dose ocular injection of the company's cancer drug may also be effective in treating the disease by reining in blood vessel development.

If off-label Avastin use is prompted by these study results, there could be "cannibalization of Lucentis by Avastin," Ho wrote in a research note. She believes patients with inadequate financial means or insurance coverage will be treated with Avastin instead of Lucentis. But for patients with adequate coverage, Ho says Lucentis will be preferred if it gets Food and Drug Administration approval.

By the end of the year, Genentech's marketing partner

Biogen Idec

(BIIB) - Get Report

is expected to submit filings for Rituxan in refractory rheumatoid arthritis. Filings are also planned for Avastin in refractory colon, lung and breast cancers and for Lucentis in AMD.

Additionally, the FDA should make a decision on whether to clear Tarceva for use in pancreatic cancer. An interim analysis of a phase III trial of Avastin in kidney cancer is also expected in the second half.

Ho says in 2006, Genentech will probably seek approval to use Herceptin in post-surgery breast cancer. The analyst says the company will also present late-stage data of low-dose vs. high-dose Avastin as a first treatment for lung cancer.

According to Ho, risks to her performance expectations for Genentech include product failures, manufacturing constraints and cost containment. Ho rates the stock neutral, and Goldman Sachs has an investment banking relationship with Genentech.