Genentech's Wealth Transfer Program

Biotech giant Genentech (NYSE: DNA  ) released third-quarter earnings earlier this week, and the results on the product front are fantastic. In particular, Avastin is doing quite well, with $183 million in sales in only its second full quarter on the market. That is an extremely fast sales ramp. With increased penetration in colorectal cancer and label expansions on the horizon, Avastin could challenge Rituxan as the company's top product.

Now, as good as the sales and profit growth look in the press release, a few important numbers are going to be revealed in the upcoming 10-Q filing. Don't make the mistake of overlooking these when the 10-Q comes out, because your perception of the value of the company could change considerably.

According to the 10-Q filed at the end of the second quarter, expensing stock options would have shaved 27% off of EPS through the first half of the year. If options were expensed, as proposed by FASB, first-half EPS would have been $0.24 instead of $0.33. GAAP EPS for the third quarter was $0.21, and it will be interesting to see how much that is hit by including stock option expenses.

With such an impact on EPS from expensing stock options, it is no wonder that Genentech was part of a group, along with Cisco (Nasdaq: CSCO  ) and Qualcomm (Nasdaq: QCOM  ) , lobbying for a new way to price employee stock options. For more on that story, see "Exhausting Every Option," by Fool extraordinaire Bill Mann.

On a related note is Genentech's share buyback program. From the recent 10-Q, the company says, "Genentech intends to use the repurchased stock to offset dilution caused by the issuance of shares in connection with Genentech's employee stock option plans." In other words, it's the second half of the company's wealth transfer plan.

The most recent figures from the second-quarter 10-Q show that through the first half of the year, Genentech bought back 9.9 million shares at an average price of $57.87 for a grand total of $575 million. Hey, add another zero and then we're talking real money. Is this really the best use of half a billion dollars? At the stock's current price, I very much doubt it.

I am not against share buybacks or granting stock options to employees. But the cost of issuing options should be laid out inside the earnings press release and not tucked away when no one is paying attention. Stock buybacks can also be great for shareholders, but it is only a good use of funds when prices are attractive, not just at any time.

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For additional articles on the biotech industry, see:

Fool contributor Charly Travers does not own shares of any company mentioned in this article.

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