Genentech's Pricey DNA

Biotech giant Genentech (NYSE: DNA) is on a roll, at least overall. Fourth-quarter sales rocketed up 47%, and net income soared 63% -- but earnings per share missed analyst estimates by one solitary cent. Wall Street rewarded the performance by sending the stock down 5%.

Weighing on the shares also may have been 2005 earnings guidance. The company noted that non-GAAP earnings per share (EPS) growth had averaged 29% from 1999 through 2004. It said that it expects EPS growth of "greater than 25 percent" this year. That has an anticlimactic ring, but don't be fooled. That's still strong growth, especially for a not-so-small company with $4.6 billion in annual revenues -- and the company didn't rule out greater-than-average growth either.

Genentech and biotech powerhouse Amgen (Nasdaq: AMGN) are biotech rarities -- large, cash-rich companies with great products and great prospects. In Genentech's case, that includes 30 projects in development and multiple phase 3 trials.

Success adds up to Genentech trading at 63 times trailing earnings. That's rich. Use earnings of $1.41 a share, the mean analyst estimate for 2006, and the company's valuation still works out to a rich 37 times forward earnings. Better, but not exactly cheap.

If that makes you want to look elsewhere, perhaps within less sophisticated waters, I'd suggest skipping Merck (NYSE: MRK) for its withdrawn Vioxx pain drug and taking a look at Pfizer's (NYSE: PFE) Celebrex. Here is an FDA-approved pain drug that, after years on the market, has had safety issues raised (and only at very high dosages). Pfizer's stock has fallen 26% over the last 52 weeks and trades at 12 times the 2005 estimated earnings level. This is a company that had $12 billion in free cash flow over the last year, and it pays a dividend!

So far, Genentech's on-market problems have led only to labeling changes -- such as that with cancer drug Avastin last week. But, at 63 times earnings, there are no angels available that can stop the company for falling, and falling mightily, if really bad news should rear its ugly head.

There is no doubt that Genentech's long-term success has been nothing short of fantastic. But the stock trades at fairly lofty levels in an industry bedeviled with problems driving multiples down to average and below-market levels. Cautious investors would be wise to consider other alternatives.

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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.