deserves a premium valuation and should trade higher because of its underappreciated intellectual property portfolio and dominant position in biotech, UBS argued in a research note Wednesday.
The brokerage upgraded the stock to buy from neutral and raised its price target to $67 from $54. The valuation reflects a 15% premium to its peers' price-to-earnings growth multiple of 1.1, or a price-to-earnings target multiple of 45 over expected 2006 earnings of $1.50. UBS has an investment banking relationship with Genentech.
"A little-known fact is that Genentech has and will continue to materially benefit from the large majority of biotechnology-derived therapeutic innovation due to its intellectual-property position," UBS wrote. UBS specifically cited a 1993 patent governing the creation and production of fusion proteins, an asset that probably must be licensed by any company trying to commercialize a monoclonal antibody in the U.S.
For example, UBS said, Genentech stands to receive 5% to 9% of the revenue generated by the U.S. sales of Tysabri, a
drug, and Erbitux, which is sold by
UBS put Genentech's potential royalty revenue at $622 million in 2004, $732 million in 2005 and $855 million in 2006, and said it could top $1 billion in 2008.
"In sum, intellectual property developed over the last 20 years has allowed Genentech to capture a piece of the economics of the large majority of therapeutic innovations in the biotech industry," UBS wrote. "We do not anticipate this situation changing as many of the most promising products currently in the industry's pipeline are fusion proteins or monoclonal antibodies."
"We believe that Genentech's profitability will improve over the next several years as research and development and SG&A expense growth moderates," UBS wrote. "This earnings leverage coupled with an aggressive share repurchase program should drive industry-leading earnings growth for years to come," the brokerage said.