Genentech: Biotech Check

Biotech giant Genentech's latest earnings report signaled blue skies for the company, with the exception of one ominous storm cloud: Avastin. Despite posting a nearly 80% jump in profits during the second quarter, Genentech's stock has taken a 4% dive since its earnings release Tuesday. The drop stems from disappointing quarterly sales of colon-cancer drug Avastin, which missed analysts' expectations with revenues of $423 million versus Wall Street's $439 million estimate. (That ought to give us an idea of how short Wall Street's hair-trigger is.) Also not helping matters: Genentech announced a potential delay in regulatory approval of Avastin for use in treating breast cancer.

But Avastin's drag on the stock is offset by other growth drivers in the company's drug lineup, Piper Jaffray analyst Thomas Wei told clients on Wednesday. He thinks the Avastin dustup is a buying opportunity. Wei notes that several new noncancer drugs, such as Lucentis and Rituxan, offer growth potential. Wei says Genentech remains "one of" the best high-quality biotech stocks, rates it a "buy" and has a $117 one-year target price for the stock (symbol DNA). The shares traded at $81 Thursday.

Genentech's shares, which cracked $100 in December 2005, fell to $81 in early March and have since seesawed. For the second quarter ending June 30, the South San Francisco company reported earnings of 49 cents a share on sales of $2.2 billion, compared with 27 cents a share and $1.5 billion a year earlier. Based on strong sales of its stable of anticancer drugs, Genentech raised its 2006 forecast for earnings growth to a range of 55% to 60% from a previous estimate of 45% to 55%.

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Morgan Stanley analyst Steven Harr also maintained an "overweight" rating on Genentech and raised his target price to $92 from $90 on Wednesday. "The light quarter is likely to pause the stock's recent upward trend," he wrote in a note to clients. "However, we continue to have significant conviction in the stock."

Opinions on this volatile stock aren't unanimous. Ron Ellis of Prudential Equity group downgraded Genentech based on "reduced market opportunity" for Avastin, and dropped his price target to $84 from $94.

Like many biotechnology stocks, Genentech isn't cheap on a price-to-earnings basis. At $81, the stock trades at 40 times analysts' 2006 earnings estimate of $2.02 per share, and 31 times the 2007 estimate of $2.59, according to Thomson First Call.