Morgan Stanley Upgrades Genentech

The shares should hold up well as investors look for stable growth.
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A 25% clubbing of



since early December makes the biotech company's shares a good bet in a potentially tough market, Morgan Stanley said in upgrading the shares to overweight from equal weight Friday.

Morgan, which has an investment-banking relationship with the company, raised its price target on Genentech's shares to $90 from $84, reflecting a discounted cash-flow analysis that pegs the 2011 to 2015 growth rate at 11%. "Given that cash flows are growing at 20% in 2009 and 2010, we view this assumption as reasonable," it said.

Genentech closed at $75.93 Thursday, down from its 52-week high of $100.20, which was touched on Dec. 6. The shares currently fetch 39.1 times the 2006 Thomson First Call earnings consensus of $1.94 a share; 29.8 times the 2007 consensus of $2.55 a share; and 24.1 times the 2008 consensus of $3.15 a share.

In its report, Morgan Stanley said Genentech should fare well as investor tastes change in coming months.

"The biotech tape has languished over the past few months (and we expect that it could continue its downward trend at least for the near term). We believe investors will increasingly look for stable growth in the face of peaking earnings growth, and Genentech fits that bill (perhaps the top consistent U.S. growth company from 2002-2008)," Morgan Stanley wrote.

Morgan Stanley said Genentech should be able to keep prices high for its cancer blockbuster Avastin over several years, helping it match or beat top-line estimates. In addition, the company stands to benefit from positive news flow on the drug as clinical data comes back from studies in ovarian, prostate, pancreatic and renal cancer.

The brokerage, which also argued that Wall Street is undervaluing Genentech's Lucentis franchise, did note some risks at Genentech, mostly having to do with its drug pipeline.

"Genentech remains extremely leveraged to its current portfolio of drugs for long-term growth," it wrote. "The company currently has no novel compounds in Phase III and the only drugs in Phase II are second-generation versions of currently marketed drugs. By 2010, we estimate that Genentech will have $15 B in revenue, and the company will need to diversify its long term growth drivers significantly between now and then. The law of large numbers also suggests that it will be increasingly difficult to generate anywhere near comparable growth rates going forward."