Genentech Posts Solid Quarter

Genentech (DNA, $85.10, up $0.02) reported a solid quarter on Thursday as profits came in at $931 million, or $0.87 a share, up from $632 million, or $0.59, a year earlier. Revenue was up 25% to $3.7 billion from $3 billion. The nearly 50% rise in profits were due to the strength of the company’s blockbuster cancer drug Avastin, but Genentech disappointed Wall Street when they gave a weaker-than-expected outlook for 2009. Avastin brought in $730 million and could be used for treating brain cancer down the road.

Our main interest is what is happening between Roche and Genentech as far as a buyout offer. Genentech was mums on that subject as Wall Street continues to expect a new offer of at least $100/ share.

Roche recently commented that its bid for Genentech was on track, though no one really knows what the heck that means. Roche will come out with an offer but they will try to lowball. Genentech could start up to 15 clinical trials and apply for 10 FDA approvals this year and Roche badly wants in on that action. Additionally, Genentech could get up to 4 FDA approvals. Those will certainly be market moving events.

The February 95 calls (DWNBS, $0.70, unchanged) were entered at 85 cents and the March 95 calls (DWNCS, $1.25, down $0.05) were profiled at $1.50. Stops are set 50% those entry points but can be lifted. I’m willing to take the risk of keeping them open. The premiums were not that much to start with and I think a bid is coming sooner rather than later for the company.

Rick Rouse
Rick@OptionsMentoring.com

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