Genentech rejects Roche Buyout, Shares keep climbing

The Pharmaceutical Industry is one that's complex and often difficult for Investors to understand. What with drugs, pipelines, trials, approvals, the FDA, and all the potential dangers, it is a business model built on spending massive amounts of money and taking even greater risks trying to develop medicine.

Drug development is one of the longest and most turbulent processes in capitalism and one doesn't have to look past a few pages in the paper, or a few web news articles these days, to see the problems and successes of drug makers first hand. The science behind medicine is fascinating but what makes this high stakes game of trial and error so lucrative is the fact that it is at its core, incredibly difficult.

So when the Amgen's (AMGN) or the Biogen's (BIIB) or the Genentech's (DNA) have something promising coming down the drug pipeline, doctors, patients and Investors take notice!

Genentech has one such success with Avastin, an FDA approved therapy that is designed to inhibit cancerous tumor growth by blocking the travel of nutrients through blood vessels to the tumor. Avastin is a big seller for Genentech and by accounts it will continue to be a blockbuster for the company. Sales of Avastin are already up to $1.3Billion in 2008, a sizable chunk of the $5.9Billion the company has done in total sales so far this year.

Roche Holdings (RHHBY) offer for Genentech of $89/share was eclipsed briskly in July by traders hoping Genentech would hold out for more. Shares were in the low 90s then and have continued climbing to stand at about $99/share today, the day Genentech officially rejected the buyout. Roche, based in Switzerland, already owns a majority stake in DNA (about 56%) but wants to own it outright, and for this it will have to put up plenty of cash.

The original offer of $43.7Billion for the remaining 44% of Genentech was sternly rejected as being too low, and Roche, it seems, would now have to pay north of triple digits per share to appease shareholders and management. At its current market cap, 44% of DNA works out to $45.7Billion.

To close the deal, I think Roche has to up their bid by as much as 10% from current levels, and that would give Genentech shareholders a lucrative reason to hold on to their shares. But this Investment, much like the Industry the companies find themselves in, is ever-changing and high-risk. For holders of DNA, the bottom's been set and rejected at $89/share, which should let you sleep a little easier, so continue to hold. Buyers beware as "buy high, sell higher" should work with this trade, but even so, the returns wont break open any portfolio.

Disclosure: Author holds no position in any of the mentioned companies

Rally Wednesday for the Markets, Genentech sell-off on Avastin news Sparks Opportunity

Markets were propped up today as economic data came in on the positive end of the spectrum. Employment numbers showed that 189,000 jobs were added, thus giving hope that consumer spending will be stronger than forecast this holiday season. All major US indices were up about 1.5%, with the Nasdaq leading the charge. The Dow gained almost 200 points to end the session close to the 13,500 mark.

Technology, Energy and the Financials were strong in this rally day. Positive sentiment on consumer spending clearly is associated with gadget buying for Christmas and that propped up stocks of Apple (AAPL), Dell (DELL), Seagate Tech (STX), Intel (INTC) and Google (GOOG).

Suffering a setback was bio-tech power Genentech (DNA) as the FDA rejected the use of its oncology drug Avastin. Shares of the company were halted with a loss of 9% already registered. The drug in question was to be used in combination to treat certain forms of breast cancer but the FDA panel voted against approval of the drug for this purpose. Avastin currently bring Genentech sales of approximately $600Million in the first 9 months of the year as it is also being used to treat forms of lung cancer. The approval of the drug for other types of cancer treatment is seen as a major positive for the bio-tech and as such this setback has caused this temporary dip.

Goldman Sachs came out in support of Genentech after the news, as the major Investment Bank said that even without Avastin's approval they saw Genentech being able to sustain 20% Earnings/share growth going forward, and they held out the possibility that given further trials and more data the FDA could still in fact approve the drug for further cancer treatments.

At this valuation I think the selling as a bit overdone and Genentech looks attractive in the mid 60s. While DNA is a bit on the expensive side compared to its peers like Amgen (AMGN) or Teva Pharma (TEVA) the best in breed deserve a slight premium. Avastin's use is continuing to grow in lung cancer use as results for the first 9 months of the year are up 37% year over year.

Investors should take note when the brightest companies are on sale and this is definitely a sale. Genentech is the drug maker on own at these discounted levels. I believe it could be back in the $70-75 range soon but I agree that even without Avastin's approval for Breast Cancer enough growth should be present to propel the stock to its $93/share analyst target within 12 months. A hefty 35% all in premium opportunity on the upside and if Genentech would fall to be valued with its peers at a 20 P/E the downside is $66/share based on estimated earnings of $3.30 next year.

The chance is here and now for this steal!

Disclosure: Author does not own DNA

Genentech (DNA) Earnings & Market Reaction

Genentech (DNA) announced earnings after the closing bell yesterday and it beat expectations ($0.78/share vs. consensus $0.72/share). The company also raised EPS guidance for the remainder of the year. [Earnings Release] *courtesy genengnews.com

How did the market respond? Currently shares of DNA are down $1.75 or almost 2.5%
My thoughts are that this selling is a blip and could prove a good entry point for longer term investment through the end of the calendar year. I look for DNA to come back this fall and move much higher by the end of the year.

Disclosure: Author long shares of DNA