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Ebb & Flow

Genentech shares hit their lowest level since early 2005 last week, shedding $7.76 (10%) to reach $68.49 and lopping off more than $8 billion of the company's market cap to $72 billion. The dive came after FDA's Oncologic Drugs Advisory Committee voted that Avastin bevacizumab plus paclitaxel did not demonstrate a favorable risk-benefit ratio as first-line treatment of metastatic breast cancer.

In a 5-4 vote, panel members expressed concerns about the conduct of the trial DNA submitted to support efficacy, and about toxicity associated with the anti-VEGF antibody (see "Cover Story").

Evan McCulloch of Franklin Templeton argued the market now has fully priced its expectation that there will be no approval for metastatic breast cancer.

He thinks there's a slim chance FDA will approve Avastin in this indication, going against the historical precedent to follow panel votes, "because of the narrow vote and how the doctors on the panel weighed in." Still, McCulloch suggested it's safest to assume FDA won't approve the indication.

Buysiders and analysts spent the end of the week adjusting Avastin breast cancer sales in their models. "This shaved 4-5% off its long-term growth rate," said McCulloch.

"It is relatively meaningful in people's models," noted Max Jacobs of Ridgemark Capital. "Avastin has gone from being a decent growth story to being kind of slow growth." With year end tax loss selling, he suggested DNA may not yet have hit bottom and could trade down into the low $60s.

Sellside analysts Adam Walsh of Jeffries and William Tanner at Leerink both slashed their target prices and downgraded on the news to "hold" and "market perform," respectively. They also substantially lowered FY08 sales and EPS estimates.

But Cowen's Eric Schmidt took the contrarian view. He upgraded DNA to "outperform," arguing the price decline was too severe and approval in first-line disease still could be forthcoming.

Schmidt's also eagerly awaiting the data from a Phase III trial of Avastin as an adjuvant to treat colorectal cancer. But even without success on this front he feels DNA is attractively valued (see "Analyst Picks & Changes," A18).

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