Thursday, April 10, 2008

Psychology of the Genentech Inc. (DNA) Q1 2008 Call

Most notable recent analyst rating changes for Genentech (DNA):
February 25th, Rodman & Renshaw upgraded from mkt perform to out perform.
December 6th, three ratings changes:
Jeffries & Co. downgraded from buy to hold.
Leerink Swann downgraded from outperform to mkt perform.
Cowen & Co. upgraded from neutral to out perform. An interesting mix. Since there is a "tug of war" amongst Wall Street analysts and DNA, we will pay special attention to the exchanges of these four analysts and management during the Question and Answer session.

Last quick note, there are 32 firms currently rating/covering DNA: 11 have a Strong Buy, 10 Buy, and 11 say Hold. We hope you enjoy the DNA of this Call:

CC started at 4:47 PM ET with Kathy, VP of Investment Relations; joined by VP Ian Clark, Sue Hellman, President of Product Development, and David Eberman CFO.
Two minutes (2 m) Ian went over individual drug sales results, Avastin mentioned a lot.
4 m Avastin and lung cancer mentioned; AVAIL data later this year.
5 m Herceptin, patent use limited to late stage cancer
5 m 50 s: Tarceva
6 m Rituxan Q4 inventory affected sales
7 m Zolaire mentioned
8 m Lucentis sales down; main factors were unapproved uses of Avastin
Solid Q and look forward to growth ahead
9 m Dr. Sue Hellmann went over different ongoing studies
11-12 m notable FDA activities ahead. Avastin submission expected for further applications/uses in 2nd half of this year,
13 m Rituxan mentioned, encouraged by data, AAPR, Phase II for colorectal cancer will be enrolling patients soon; 2 more studies will be announced later in '08
13 m 50 s Asthma and Zolaire mentioned, October presentation this year in Europe
14 m Rituxan submission mentioned
15 m Q2 Lupus study trial will be announced. We thought Sue sounded somewhat doubtful the study will work; study results within 1-3 weeks, high clinical efficacy hurdle mentioned. we see no down side here, only upside surprises, that's our psychology of this call, remember, stocks discount public information, and DNA was very transparent with shareholders here.
16 m Lucentis study gone over, she sounded MUCH more confident in these results; she stressed words like "confident"; safety results encouraging, no signs of strokes.
17 m go-no-go decisions mentioned
18 m CHALLENGING FDA ENVIRONMENT MENTIONED, we will "follow the science and do what's right for patients”.
19 m AACR data that will be presented, ASCO will have MANY PRESENTATIONS, PH 3 Avastin data, safety results of Avastin, and many others. Here's a link for our readers; please scroll down to May 30th ASCO, Chicago:

20 m CFO David Ebersman read the financial results.
25 m free cash flow $800M
26 m shares purchased at around $72/share, pleased with Q1 results, and believe in solid growth in 2008. Many uncertainties remain and forecasting 2008 is difficult, non gaap eps 2008 between $3.35 and $3.45; Q2 could be an important Q for us, and will impact on how we see 2009 and 2010.

Question/Answer (Q/A)

28 m Chris Raymond from Robert Baird Q for Ian: walk through, describe marketing literature/material, talking points, tools sales reps have that there is a breast label for Avastin A: Good question, "one hand tied behind your back", we don't expect full marketing material until late May or early June, difficult period from a promotional point of view.
Follow up Q from Chris, so right now all it is the label basically A: Yep yep ...
29 m Joel from Lazard Q: slide 36 addressed, will we see phase II study at ASCO A: it will be limited to Phase I for ASCO
30 m Steve from Morgan Stanley Q for Ian: WHAT IS GOING ON WITH AVASTIN, we are now three straight quarters without any growth A: Two broad upside dynamics in growth, lung cancer gradual progression, not exponential take-off, some confusion in market place today, we're working our way through that, there will be growth but gradual, Avastin for breast cancer only 4-5 weeks in Q1, "remain optimistic" we are not in full promotional mode yet, as addressed with Chris from Robert Baird
32 m Kathy from Bank of America, Q on Rituxan use A: Difficult for us to track on quarterly basis, we break it out more on a yearly basis.
34 m Samuel Kim from BMO Capital Q was withdrawn
34 m Eric from Merril Lynch was fired up Q:" YOU GUYS SOUNDED A LITTLE HEDGY" on the Rituxan Lupus data A: laughter, I'm sorry I sounded hedgy, that wasn't my intention; we're excited, huge unmet need, but in the absence of randomized controlled data, it should be seen as speculative, Lupus, not our expectation to file after first data, unless REALLY DRAMATICALLY POSITIVE stressed, we felt Sue answered the question well, but we also feel the end point and FDA are problems; but the upside potential here is tremendous.
37 m Michael King from Rodman and Renshaw Q: would you publish studies before meeting, A: absolutely, they will be published and micro dissected both at medical meetings and in literature. Follow up Q: SLE prior to approval to Explorer and LUNAR trial A: no way of getting reimbursement
38 m analyst name unclear, Q from UBS: SLE and PPMS, can you quantify clinical benefit we should be looking for in these trials A: Sue gave a quick but thorough explanation
39 m Jason Cantor from RBC Capital Q: regarding two Rituxan studies, A: expect top line data without further discussion from any of these trials.
40 m Jason followed up and tried to pry information (San Antonio) A: yes and no, yes we will have data in San Antonio, and no we don't need to see full data to make the call
41 m Shiv Kapoor from Ferris, Baker Watts (FBW) Q: new molecules in Phase II studies, how do you make Phase III go-no-go decisions A: Sue answered thoroughly, in general terms...
42 m Megan Ho from Goldman Q: ASCO Rituxan (lung caner) small molecules A: laughter at 43 m, hesitation of who should answer the question (Ian was pointing at Sue), first line non-small cell lung cancer feel really good about the Avastin data (ASCO), looking forward to it, second and third line things look more crowded
45 m Ian: clearly market is getting more crowded, for our readers, "crowded" means "competition or saturation", not good.
45 m Mark from Bear Stearns (he under-scored still working at Bear) Q: about safety abstract updates Rituxan and Avastin A: Sue gave a long winded, thorough answer, she instructed him to "follow up with Kathy", Mark said thanks.
47 m Eric Schmidt from Cowan Q on AVAIL/Avastin/ASCO/Roche: A: we don't know the survival data, too late for ASCO, don't know survival for AVAIL, a Roche issue.
48 m Jeffrey from Sanford Bernstein Q on royalties: A: $35M exchange rate benefit, "unusual thing due to currency effect"... The worst question yet!!
50 m Bill from Leerink Swann Q: challenging regulatory environment (slide 37), how do we interpret your comments, do things have a rightward push A: Susan, I wouldn't interpret it that way, we're trying to be more pro-active, we've learned from set backs, also the new FDA amendment pact just piled more work, I can't predict everything, we've done a decent job.
53 m Jim of Lehman Q: FDA agreement on end point, Bilag scores, assessment of Lupus, how do you avoid having Bilag in the label, requirement for payers, seems cumbersome to clinicians, reimbursement front A: Sue said FDA and DNA have definitely agreed upon end point on Explorer, while Bilag is a complex scoring system, it is a clinical trial scoring system, Lupus (needs more aggressive therapy) more likely clinical parameters will be used than Bilag scores. Ian A: I agree... you're dealing with a disease where there is no indicated product at all, at the moment we don't see that being a likely hurdle.
55 m CC ended with Kathy's closing words

The CC definitely had emotionally charged moments, specifically at the 30th and 34th minute marks. Morgan Stanley and Merrill Lynch analysts sounded very frustrated. We thought the most forward-looking questions came from Bill of Leerink Swan and Jason Cantor of RBC Capital; the worst came from Jeffrey of Sanford Bernstein.

Genentech's management is effectively maneuvering in the red tape of the FDA, and some argue policing drugs is very necessary. The double stranded helix Watson and Crick discovered and won a Nobel Prize for has definitely been sewn. We feel Genentech is the most likely candidate to cultivate and harvest these 47 year old seeds. For investors seeking exposure to biotechnology, Genentech is the cream of the crop. We would wait for the Lupus studies to be announced within days and, since management sounded pessimistic on this front, buy shares on that potentially terrific pull back. Chicago's May 30th ASCO conference looks to be very positive for investors.
Please obey the 11 Commandments of Trading and remember that entering and exiting positions is all about The Psychology of the Call.

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