Tuesday, January 23, 2007

DNA keeps rolling (4Q earnings)

DNA is no doubt an outstanding company with exceptional near and long term growth prospects, but is it a good investment?

DNA - or perhaps the Google of biotech - just reported another solid quarter and full year.

DNA's '06 accomplishments bear repeating: 8 FDA approvals in '06, a slew of in-license deals, and a 40% rise in revenues.

Just to dwell on Avastin for a moment, '06 revenue increased 54% to $1.75B, with fourth quarter growth of 36% (or 13% sequentially - a good year in one quarter!) Results like this make it hard to remember that the product is less than 2 years old, and approved in only 2 indications (MSCLC and Colon), though likely to show benefit in many other solid tumors. I haven't found any analysts willing to project >$3B in revenue for Avastin, but I'd take the "over" on that bet.

(btw: the market has ALWAYS been behind in Avastin appreciation. In less than 2 years, Avastin has already busted some analyst's peak projections.)

'07 and beyond look great too - company issued guidance puts EPS growth at 25-30%. (Versus fourth quarter's 75% EPS growth.) Using this as a marker for revenue growth suggests that DNA growth is declining basically only because of the law of large numbers, as the growth range puts new revenue for '07 roughly equivalent for '06 ($2.6B in '06, $2.3B-$2.8B) Yep, DNA is likely to deliver >$2B in fortress-like* revenue growth, without any substantial new product introductions (I think.)

(* fortress-like, as the majority of the revenue is derived from young biological products unlikely to face generic competition for a while, with a wide moat of clinical trials data keeping competing products at bay. DNA has more than 250 different clinical trials ongoing using existing products.)

Across all industries, it's been my experience that growth stories eventually play out one of two ways: shallow growth stories eventually peter out, after a period of management attempts to maintain growth momentum thru financial levers such as M & A (Invitrogen), fraud (Healthsouth and MCI come to mind), or, with skeptics mounting, a high quality team delivers as promised, and then some (see Google, Commerce Bank, or White Mountain Insurance.) DNA sure looks to me like a company that ultimately belongs in the latter category.

The only problem is valuation. DNA has a very GOOG-like TTM P/E of 51 and a forward P/E of 30, based on '07 consensus of $2.94. (This might not reflect earnings revisions issued in the last week).

By comparison, Merck - valued at roughly the same as DNA - has 2.3X as much revenue and P/Es of 19.5 and 17.5 (forward).

But with the monstrous growth provided by existing products, extensive upside from >250 clinical trials, and monstrous R & D expansion (which could be throttled back to make EPS numbers in the future, DNA is and will continue to be the GOOG of biotech, making it a great choice for the future.

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