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Stock Analyst Update

Genentech Still Strong

But the stock's high valuation remains a concern.


What Happened?
Genentech (DNA) announced another strong quarter of earnings and revenue growth Wednesday. Excluding charges related to Roche's (RHHBY) 1999 redemption of Genentech's stock, the company increased earnings 19% year over year to $0.31 per share. In general, product sales showed strong growth, although sales of Herceptin, Genentech's breast cancer treatment, failed to meet consensus estimates for the second quarter in a row. Sales of the non-Hodgkin's lymphoma treatment Rituxan, on the other hand, blew past estimates to $117.9 million for the quarter.

What It Means for Investors
The current quarter solidifies our opinion of Genentech: We believe the stock is an appealing--although expensive--long-term choice.

The Bay area biotech firm has a strong lineup of marketed products and a diverse pipeline of new therapies. The primary drawback is Genentech's valuation: The stock is currently trading at about 127 times forward Zacks earnings estimates, making it one of the most expensive of the big biotech firms. While we believe some premium is warranted, this high valuation leaves the stock open for considerable downside risk in the short term.

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