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Stock Analyst Update

Genentech Tops Analyst Estimates

Cancer drugs help drive growth, but stock is still expensive.

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In the wake of its first-quarter earnings announcement, Genentech's (DNA) outlook appears strong. Unfortunately, its stock price isn't exactly a bargain.

The Bay Area biotechnology firm reported first-quarter earnings Wednesday that, excluding charges, blew past consensus estimates. The company announced pro forma earnings of 29 cents a share, 3 cents higher than consensus estimates and 27% higher than earnings from the year-ago period.

The primary driver of the company's growth were sales of two cancer drugs: Herceptin, for breast cancer, and Rituxan, for non-Hodgkins' lymphoma. Herceptin sales were up 72% from a year ago, while sales of Rituxan were up 49%. Because both Herceptin and Rituxan attack cancer cells differently than currently available chemotherapeutic agents and radiation therapies, they have achieved impressive market penetration over the past year.

But more importantly, Genentech has a range of products in late-stage clinical trials or awaiting approval from the Food and Drug Administration. The firm expects the FDA to rule later this year on TNKase, a clot-busting drug similar to its current product Activase. And after releasing impressive Phase III clinical-trial data last month on its allergy and asthma drug Anti-IgE, Genentech is expected to file an application with the FDA later this year.

Of course, Genentech isn't cheap. As of yesterday's close, the firm's shares were trading at about 120 times its 2000 estimated earnings. And the stock is subject to vicious declines when biotech stocks are crushed by the market. Only yesterday, the stock fell nearly 13% amidst a broad biotech sell-off.

Thus, relative to other biotech firms, Genentech's near-term prospects look very solid. But anyone who invests in the firm should be prepared for considerable volatility.

Emily Hall does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.