Monday, March 19, 2007

Calls of Note Part 7

- JP Morgan is raising 2007 and 2008 EPS estimates ahead of Genentech's (NYSE:DNA) investment community meeting on March 23. Given strong Avastin and Lucentis trends exiting 4Q06 as well as impressive operating leverage, they would not be surprised to see 2007 earnings guidance raised at the meeting. However, even if guidance is unchanged, Genentech's P/E is near a 4-yr low on the back of concerns from the AVAiL data, making the risk/reward in DNA shares very compelling.

DNA shares began to weaken after the AVAiL data on Feb 21, with further pressure on YTD performance from a weak biotech tape. Consensus ests for 2007 began the year at ~$2.55, and they are now 12.5% higher, yet DNA shares are flat YTD (BTK index: -5.1%). In firm's view, concerns over Avastin growth due to AVAiL results as well as Herceptin competitive fears from the coming 30001 study from GSK's Tykerb (1H07e) have contributed to DNA weakness. JPM would argue that these concerns are largely priced into DNA shares; indeed their growth ests for both Avastin and Herceptin in 2007 and 2008 are beatable (Avastin: 29.4% and 22.5%; Herceptin: 15.3% and 11.7%).

Firm is raising their 2007 and 2008 estimates to $2.91 and $3.47 respectively from $2.83 and $3.43 previously largely on higher Lucentis estimates. Reits Overweight.

Notablecalls: Expect to see some buy interest in DNA today.

No comments: