DNA 09-11-07.doc

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1 Δεκ 2012 (πριν από 5 χρόνια και 1 μήνα)

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1

Genentech


I.
Genentech

and its Market


Description
:



Genentech is a leading biotechnology company that
discovers, develops, manufactures, and commercializes
biotherapeutics for significant unmet medical needs.
Addition, Gene
n
tech receives royalties from c
ompanies
that sell and/or manufacture products based on
technology developed by Genentech or intellectual
property to which they have rights.



At the beginning of 2007, they had nine products in
phase III

testing

and five products preparing for phase III

te
sting
.


Market Position



Gene
n
tech has the largest market cap
italization

in the
biotechnology segment, and is competitively sized even
within the larger pharmaceutical
and biotechnology
industry
.



Genentech’s growth rate will slow compared to the
previous f
ive years, but it should be sufficient enough to
keep them performing highly within the industry.



II. The Competitive and Economic Environment


Competition



Three

Competitors:

o

Amgen Inc. (AMG)

o

Gilead (GILD)

o

Bris
t
ol
-
Myers Squibb (BMY)



Amgen and Gilead bot
h specialize in the biotechnology
segment of Pharmaceuticals and Biotechnology, and
have the second and third largest market capitalization
within the segment. Bristol
-
Myers Squibb operates in the
same segment with a comparable market capitalization
to tha
t of Gene
n
tech, and has strategic alliances with
some of its smaller competition.


Ticker
:

DNA

Sector
:

Healthcare

Industry
:

Pharmaceuticals and
Biotechnology
--

Biotechnology



Recomme
ndation:

Hold



Pricing

Closing Price

$
79.
15


52
-
wk

High

$
89.73


52
-
wk
Low

$
71.43




Market Data

Market Cap

$
83.28
B

Total
A
ssets

$
16.36
B

Trading
V
ol
.

3,
621
,
750


(3

mo
nth average
)



Valuation
*

EPS

$
2.44

P/E

32.41

PEG


.99



Profitability & Effe
ctiveness

ROA

15.98
%

ROE

24.09
%

Profit Margin

23.88
%


Oper
.

Margin

35
.
96
%

Gross Margin

86.7
0
%















Meagan Carrow

mlcgx6@missouri.edu


2



DNA

AMG

GILD

BMY

Industry












Market Cap

83.28B

55.32B

34.89B

54.87B

168.75M













Quarterly Revenue Growth

36.60%

3.40%

52.90%

1.20%

14.30%













Return on Assets

15.98%

10.33%

27.27%

5.74%



Return on Equity

24.09%

24.41%

-
31.74%

14.24%















Profit Margin

23.88%

27.35%

-
24.23%

9.00%



Operating Margin

35.96%

35.72%

53.98%

14.10%

-
217.70%

Gross Margin

86.70%

81.90%

83.88%

66.86%

97.8
1%

EPS

2.440

3.485

-
0.977

0.814

-
0.55

P/E

32.41

14.61


-


34.16

22.32

PEG

0.99

1.12

1.30%

1.44

1.37













Debt/Equity Ratio

0.5076

1.0000

0.9388

1.5251



Current Ratio

3.37

2.647

3.255

1.726



Book Value/Share

10.33

15.123

2.689

5.455















R&D/Revenues

20.30%

24.16%

12.64%

15.22%





Economic Factors



The Pharmaceutical and Biotechnology segment is largely unaffected by economic
conditions due to the demand for such products, at least by the end users, being relatively
inelastic.

o

The industry is more dependent on the health (declining) and age (increasing) of
the population.



The graph below shows
the 5
-
year returns for the both the S&P 500 and Genentech.
Genentech has far outperformed the S&P despite a drop
-
off since a
round January 2006.
The year
-
to
-
date has shown particularly poor returns for Genentech. This may have left
the company undervalued, a situation in which the price can be expected to increase.



3

5-Year Returns
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
300.00%
350.00%
400.00%
450.00%
500.00%
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
S&P
DNA






III. Valuation of Coach



In an attempt to fairly valuat
e the firm, two methods were utilized. The first was

Warren
Buffet’s Owner’s Earnings Model
, and the second was the Discounted Free Cash Flows Model.
Both used the assumption that Genentech’s WACC is 8.33%, the calculations for which can be
found in
the at
tached Exhibits document (Exhibit 3)
.


Warren Buffett’s Owner’s Earnings Discount Model
:



This Buffett Model was performed using net income, depreciation, and capital
expenditure figures from year ending 31
-
Dec
-
2006. The moderate assumptions are that the

first
stage growth rate is 15% and the second stage growth rate is 5%.

This is well below analysts’
expectations, but was used to account for overly optimistic growth predictions in the long
-
term.
The intrinsic value per share is given below.


Warren Buf
fett

Owners' Earnings Discount Model

assuming discount rate (k) of

8.33%



Owner Earnings in 2006:


Net Income


$ 2,113,000.00


4

Depreciation


$ 407,000.00

Amortization


$
-


Capital Expenditures


$
(1,214,000.00)

Owner Earnings


$ 1,306,000.00







2006

Prior Year Owner Earnings


$ 1,306,000.0

First Stage Growth Rate (add)

15.0%

Owner Earnings


$ 1,501,900.0

Discounted Value per annum

$1,501,900.0



Sum of pre
sent value of owner earnings

$19,939,729.4



Residual Value


Owner Earnings in year 10


$ 5,283,498.4

Second Stage Growth Rate (g) (add)

5.00%

Owner Earnings in year 11


$ 5,547,673.3

Capitalization rate (k
-
g)

3.33%

Value at end

of year 10


$ 166,423,841.48



Present Value of Residual

$74,746,244.05

Intrinsic Value of Company

$94,685,973.42



Shares outstanding assuming dilution

1,050,000

Intrinsic Value per share

$90.18


Because this model makes broad assumptions

that are difficult to accurately predict, a sensitivity
was performed on both the first and second stage growth rates to determine any fluctuations in
share value. The results are given below.










Conservative

Moderate

Optimistic

First Stage Growth

10.0%

15.0%

20.0%

2nd Stage Growth

5.00%

5.00%

5.00%

Value per Share

$60.31

$90.18

$133.63

















Conservative

Moderate

Optimistic

First Stage Growth

15.00%

15.00%

15.00%

2nd Stage Growth

4.00%

5.00%

6.00%

Value per Share

$73.23

$90.
18

$121.65


Though in the conservative cases the stock appears to be overvalued, in both the moderate and
optimistic cases, it is undervalued. This model seems to suggest that, overall, the stock is
undervalued.



5

Free Cash Flow Evaluation
:


The free ca
sh flow method was performed using multiple assumptions. The primary assumptions
are the growth rates for years 2007 to 2012 and the terminal growth rate into perpetuity. These
assumptions can be seen in the table below:


2007

2008

2009

2010

2011

2012

Term
inal

30%

20%

15%

10%

10%

5%

5%


A brief table of the final calculations can be found in the attached
Exhibits
document (Exhibit
4
),
which computes an estimated share price of $85. The varying growth rates and terminal rate
were again subjected to sensiti
vity testing, which

gave

the following results.


Varying Rates:

Conservative

Moderate

Optimistic

Subtract 2.5%

Same

Add 2.5%

$77

$85

$93

Terminal Rate:

Conservative

Moderate

Optimistic

3.00%

5.00%

7.00%

$56

$85

$199


Again, the conservative estimates

are showing an overvalued stock, but as long as expectations
for the company remain moderate to optimistic (the general sentiment in the market), the stock is
undervalued.

6

IV. Firm Financials


Financial Statement Analysis


Exhibit
s 1

&
2
: Income Statement

and Balance Sheet


Income Statement
:




Revenues have grown by

39.96
% in 2006
and 43.54% in 2005



Net income grew by 65.21% in 2006 and 62.97% in 2005



R&D expenditures were 20.3% of revenue in 2006

o

Investment into R&D is a necessity for companies in pharmace
uticals and biotech
in order for them to continue to have new and profitable products


Balance Sheet:




The current ratio is relatively high compared to competitors



The debt/equity ratio is substantially lower than that of their competitors



Return on Assets

and Return on Equity are impressive for the industry



All of these suggest the company is of lower risk than other competitors within the
industry


Debt/
Equity

50.76%

Current Ratio

3.
37



Investment in Research & Development


R&D/Revenue

20.3



Financia
l Condition


Ratio


Return on Equity

24.09

Return on Assets

15.98





7

Recommendation


While the recent drops in Genentech price may suggest it has been overvalued, a closer
analysis shows otherwise. The biotech industry has a lot of potential both in do
mestic and
foreign markets, and the technological advances within the industry will provide for a healthy
growth in the long run. Overall, this industry is still in its growth phase, and companies which
operate well will see huge profits.

Within the indust
ry, Genentech is clearly a leader and operates at competitive ratios. The
company has existed since the mid
-
1970s, and has more than established itself. Its financial
statements show a healthy company with a huge amount of growth in the last five years. It

continues investing into research and development, a key factor for companies to continue being
successful in the industry. It also has several compounds being tested for release within the next
few years.

That being said, it is also easy to say that Gen
entech is hugely undervalued. If the past
few years’ growth rates continue, the stock price could well be valued at those prices seen in the
optimistic ranges of the sensitivity reports. However, this is an already
-
large company,
and the
growth is not sust
ainable
. It is my belief that, as a company, Genentech is closer to maturity than
growth.
Thus, I believe the value found in the moderate range of the FCF valuation is very nearly
accurate, and that the stock price is currently undervalued, though not by m
ore than seven or
eight percent.




Genentech is a stable company that is currently undervalued and should be held
.