$94.97
0.00 (0%)
Genentech, Inc. (DNA.DL)
CAPS Rating:
The Company is a biotechnology company that discovers, develops, manufactures, and commercializes biotherapeutics for unmet medical needs.
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Timing probably isn't the best, but this is a long-term play - if I had more time I'd probably watch for a nice dip to buy on, but in the long haul Genentech is probably as safe a biotech company as you'll find as well as the best big cap bet to appreciate over the next half decade or so. As a former bench jockey I have to admit to having a fawning deference for this company, they're legendary amongst My People, pretty much the biology geek version of what Google is to computer geeks. Their business model is extremely different from that of big pharma in that management lets their science lead the business, while most big drug companies' management run business with an iron fist.Not much analysis here, except to point out that:*In 2007 total revenue was $11.7B. Analysts project that in 2010 Genentech will have 3 of the top 4 oncology drugs by revenue (Avastin, Rituxan, and Herceptin), with those 3 drugs alone generating $17.1B. If they hit that number they'll be growing sales at a CAGR of ~13.5%, something almost no other major drug companies can expect over the same time frame.*While I wouldn't say anyone has a really robust pipeline right now, Genentech has done a good job at developing new compounds, and inlicensing a nice mix of drugs that look intriguing and/or complement/enhance their current drugs nicely (the deals they cut with IMGN and SGEN for ADC technology that could enhance their monoclonal antibodies could pay off huge).*They're still expanding indications for their drugs with new approvals. Avastin's recent approval for breast cancer will give a nice boost, and there are still more cancers out there for their antibodies - the trick will be whittling down which ones the antibodies work for and will provide the biggest payoff. They're also testing their drugs against competitors, such as their recent release of data showing that Herceptin enhances GSK's Tykerb.Big pharma has had an awful decade, largely due to being slow to recognize that the blockbuster model will not work going forward. Most of the large pharmaceutical companies are considerably cheaper than they were 10 years ago. Genentech, on the other hand, is up over 700% over the same time frame. While there's an argument to be made that they too use the blockbuster model (few drugs, huge sales/drug), if you look closely their development style is much more deliberate than the frantic style of big pharma, and the input from the scientists has paid off handsomely, as Genentech's productivity smokes big pharma any way you care to measure it. DNA is currently carrying a somewhat higher PE ratio than most of big pharma (26.02 vs. an average of ~14.71), but I think the premium is warranted.
Great options opportunity for someone willing to risk a bet on a binary event (gulp) to pick up some leverage.The skinny:Roche put in a bid for Genentech this past summer for $89/share. Genentech laughed at it. Time passed, we were told there was still wrangling going on behind closed doors, then Roche goes hostile (insane) with a bid for $86.50, and also that Genentech was seeking $112. Genentech has data coming out in April about their megadrug, Avastin, which could expand its label significantly, i.e. make a ton more money, and push their stock way up. A survey of DNA shareholders indicates that 92% are not willing to tender their shares at $86.50 before finding out how the Avastin data looks. The $86.50 offer expires on March 12th, and Roche really, really wants this deal done before the Avastin data comes out or they risk having to pay a lot more. So it seems likely that Roche was stalling with the $86.50, and will probably put in another bid somewhere between there and $112 pretty soon.DNA is at 83 now. Some options prices:Mar 85 $2.20Mar 90 $0.80June 85 $6.47June 90 $3.80I see 2 main strategies:1) assume Roche's last bid was a setup to try to get Genentech to lower expectations and maybe rattle them a bit and that they'll come back with a new bid before the current bid expires. If that happens I'd say the 90 calls will probably blow up, possibly the hell up.2) assume Roche will take their ball and go home. Hard to say how Genentech's stock would react, but the ace in the hole is the Avastin data coming out in April. I'd bet that it'll be positive, but with the market being the way it is it's hard to say if anyone, including DNA, could be expected to go up.If you've got some extra cash sitting around that you genuinely, honestly, no BS-ly would be psychologically and financially ok if you lost all of it you could find worse risk-reward profiles.
Roche's new bid, still aiming for a tender from shareholders, came in at $93 today. DNA closed at $90.86. Current option prices:Mar 85 $6.30Mar 90 $2.20June 85 $8.50June 90 $4.70They also extended the deadline a week to 3-20-09. The old $86.50 received tenders for a comically small 500,000 shares. I still think they're too low - they have to convince Genentech shareholders that it's in their best interest to merge into Roche, and I just don't see this doing it. The bid is sort of surprising, I'd think Roche would've done quite a bit of market research to get a good ballpark figure of what is realistically going to get things done, but this feels more like they're just systematically raising and hoping to keep negotiations going. Genentech is frankly a far better company than Roche is now, and will perform very well if they don't cut this deal. On the other hand, there's a very good chance that all the hostility from the hostile bid is likely to rip the guts out of Genentech if the deal goes through, with their senior scientists taking jobs at just about any company they want. Once Roche went hostile it became very obvious that this is about filling their pipeline with Genentech's current and future drugs, which are currently the best in the world, and not about absorbing their culture, skills, or know-how to make a better drug discovery machine. Avastin data and currency swings are both applying time pressure to Roche, while Genentech has absolutely no rush to get anything done.
Deal set at $95. Sad to see, but maybe breaking up the talent at Genentech and sprinkling it throughout the industry will be good for us. Here's how the options have settled after the deal:Mar 85 $9.00Mar 90 $4.10June 85 $9.70June 90 $4.90Even better, liquidity was insanely high and contracts were relatively easy to come by. It's a shame these things happen so rarely, I'd be retiring a lot sooner if they did.