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Stock Analyst Update

Genentech Still Biotech's Golden Child

Strong pipeline should drive growth.

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What Happened
Genentech (DNA) reported earnings of $0.16 per share for its fourth quarter--excluding charges related to Roche's (RHHBY) 1999 redemption of Genentech's stock--in line with First Call consensus estimates. Sales of Rituxan, the company's therapy for non-Hodgkin's lymphoma, were a primary driver of growth.

What It Means for Investors
This quarter was yet another solid one for Genentech, and we continue to find the company one of the most appealing--but expensive--picks in the biotech category.

Genentech's diverse lineup of marketed products is impressive, most notably Rituxan. Sales of the drug increased an impressive 18% from the September period, although management acknowledged that a few percentage points of that growth may have come from wholesalers increasing their inventories. Nevertheless, Rituxan sales have trounced analyst estimates for several quarters and show no signs of slowing down. Moreover, Genentech has an extremely strong pipeline of new products, including the much anticipated allergy treatment Xolair, which is expected to launch in the second half of 2001.

However, the stock's high valuation does leave investors open to considerable price risk at a time when there are challenges ahead for Genentech. Management acknowledged on the conference call that it is supplying extra data on Xolair to the FDA, raising the possibility of a potential delay in the drug's approval. Also, Herceptin sales growth continues to be disappointing, and the therapy is beginning to look like it may have limited potential. Neither of these problems derail our overall positive opinion of the stock. But given the company's heady valuation, investors should be prepared for some volatility.

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