Is It Time to Buy Genentech Yet?

Yesterday, top biopharma and industry bellwether Genentech (NYSE: DNA  ) announced strong second-quarter financial results, but few investors were cheering.

Sales were up 25%, net income grew 41%, and Genentech raised its guidance for full year non-GAAP earnings per share to be in the range of $2.85 to $2.95. Operating margins improved to a healthy 37%, even with a greater-than-50% rise in R&D costs. So why have shares of Genentech fallen today?

As the conference call showed, most analyst fears are about the future of Genentech's top compounds and whether it can keep up the heady sales growth with these drugs. Many of these fears may be unfounded, though. Besides Herceptin, which is facing potent competition from GlaxoSmithKline's (NYSE: GSK  ) Tykerb, as the lack of sales growth with the drug this quarter proves, the rest of Genentech's top compounds like Avastin and Rituxan are experiencing strong double-digit year-over-year sales growth and don't have any imminent competitive threats on the horizon.

Many investors have perennially branded shares of Genentech with the overvalued tag. As the drugmaker's share price has fallen over the past year but earnings and sales have continued growing at above 20% rates, the drugmaker's valuation has finally declined to a point where shares now appear undervalued.

I'll revisit this article a year from now to see if Genentech is still trading in the $74 a share range and to see what went right or wrong in the ensuing time. As it is, trading at 28 times the second quarter's GAAP annualized earnings per share yet growing earnings at a much higher rate and securing its future with heavy R&D investment, now may be the last time investors get to see Genentech's shares so cheaply.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. GlaxoSmithKline is an Income Investor recommendation.


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