Genetech (DNA) blew past most people's expectations with its Q2 2007 report on July 11th. Pundits feared that a need to add a warning about possible allergic reactions to Xolair, combined with the results of a study saying that a lower dosage of Lucentis may be as effective as the recommended dose, would take the wind out of Genetech's sales. But Xolair sales grew from $111 million in Q1 to $120 million in Q2, and Lucentis sales were only off to $209 million from $211 million in Q1. Overall revenues were up 7% sequentially and an amazing 37% from Q2 2006.
There have also been questions about whether growth can continue without a stronger pipeline. Note that today Genentech's P/E ratio was 33 (per Nasdaq); while typically a company growing revenues at 37% per year would have a higher PE ratio, it still assumes growth will be strong over the next few years. Biotech pipelines are the stuff of long waits: from the beginning of a Phase III trial to first revenues (presuming the drug does not bomb out, which many do) can take years (3 is about the minimum). As to drugs entering Phase I trials, you are looking closer to a decade out.
Genentech, however, has some successful drugs that can generate more revenue through label expansion. Companies often seek very narrow indications for approval, especially of cancer drugs. You don't get approval for "breast cancer;" you get approved for some very narrow subtype of breast cancer, or lung or liver or whatever form of cancer. But once you have that, if it looks like your drug is more broadly applicable, you go back and do trials on closely related indications. In Genentech's case it is seeking label expansion for Herceptin, which is currently approved for "metastatic breast cancer in HER2 overexpressed tumors; as part of a treatment regimen containing doxorubicin, cyclophosphamide, and paclitaxel, for the adjuvant treatment of patients with HER2-positive, node-positive breast cancer." It has completed Phase III trials and has applied to the FDA for approval in "in adjuvant HER2-positive breast cancer," which means in a less specific regimen than the current label. In another Phase III study it was combined with Avastin; and other varieties of Herceptin Phase III studies have been initiated.
Genetech is awaiting FDA action on its submission for Rituxan for Rheumatoid Arthritis (RA) and is preparing a submission for Avastin for first-line metastatic renal cancer and first-line metastatic breast cancer (first line means used as a first therapy; second line means using after a different therapy has failed to halt the progress of the disease). Rituxan already had $582 million in sales in Q2 for the indications it is already approved for.
Such is the size of Genentech's pipeline that this article could become quite a hefty volume if I discussed each pipeline drug in even minimal detail. So instead I will point to a different category: drugs that are not yet generating money for Genentech. These drugs can be anywhere in the clinical trial timeline from Phase I to Phase III. Keep in mind that each phase can take years; ten years from the beginning of a Phase I trial to approval by the FDA is not unusual. Also the field narrows as you go through trial sets; as a general rule you might want four or five candidates entering Phase I to get a single approved, marketable drug.
At the top of the list, in Phase III, we have Ocrelizumab, an anti-CD20 humanized monoclonal antibody. What that means is they are hoping to cure diseases caused by the human immune system attacking the human body. Phase III trials in rheumatoid arthritis have started and Phase III trials in lupus nephritis, systemic lupus erythematosus and relapsing remitting multiple sclerosis (yep, that is what the President had in West Wing) are planned.
At the base of the pyramid we have a slew of Phase I candidates. There's a bunch more anti-CD20 drugs. There are drugs for solid tumors, myelomas and lymphomas, anti-IFN apha for lupus, a variety of cancer therapies with strange designations, PARP inhibitor for malignant melanoma, and a systemic Hedgehog antagonist (Hedgehog is ... well, another time).
The picture I am painting here looks like this to me: a varied and in-depth pipeline covering the spectrum from Phase I to Phase III. Lots of earning potential just from adding to the labels of current successes.
So I think the PE ratio of 30 is a bargain. Genentech management plans to continue to invest heavily in R&D. They are also not shy about buying a drug from another company when they think it has potential. They kept saying they are looking for drugs that will be first in class (the first approved for a disease) or best in class (better than anything already on the market).
I don't own Genentech, but covering the company makes me want to buy some stock. Before you make any decision I suggest, at minimum, you read my summary of the Q2 2007 analyst conference that took place July 11th.
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