Genentech's Lucky Day

It was an exciting morning in drug discovery today. Genentech (NYSE: DNA  ) and OSI Pharmaceuticals (Nasdaq: OSIP  ) both jumped in today's trading session after a drug the companies are co-developing showed promising results in clinical trials. Swiss pharmaceutical concern Roche is also involved in the development process.

What's all the fuss about? The experimental drug Tarceva, a treatment for small-cell lung cancer. Phase 3 trial results released today showed that the drug improved lung cancer sufferers' survival time in patients who used it after having failed with chemotherapy. That's heady stuff, and a rather major surprise, because a previous trial showed that Tarceva did not improve life expectancy when administered with chemotherapy.

One of the most interesting aspects of this medication is that it is the only one of several promising and similar new cancer drugs, such as AstraZeneca's (NYSE: AZN  ) Iressa, that has shown the potential to increase survival. These drugs work by inhibiting cell growth.

Also, chemotherapy is considered a cure that's almost as bad as the disease, so any treatments that are less caustic and increase survival time are a welcome addition to the battle against cancer.

If Genentech had been priced for perfection before, these results could signal more good times ahead. However, Tarceva has not yet been approved, and until approval is in the bag, it remains speculative. Further, even in the event of approval, the companies don't expect it to hit the market until 2005.

The potential, of course, is huge. According to the National Cancer Institute, 30% of cancer deaths are from lung cancer. The World Health Organization says there are 1.2 million cases annually, and this year, there will be 173,000 diagnoses of lung cancer in the U.S.

However, while pricey cancer drugs have been Genentech's bread and butter, the warning is well-taken that a portfolio of expensive treatments can pose a threat when you consider insurance companies' reimbursement policies, not to mention the fact that most patients can't afford high-priced treatments out of pocket.

In recent trading, Genentech's shares had gained 13%, while OSI Pharmaceuticals stock skyrocketed 130%. Although the news is good, the levels of enthusiasm here seem a bit irrational. The full study is expected in June at the American Society of Clinical Oncology's annual meeting, and again, the drug has yet to be approved. Investors jumping on the bandwagon here are taking a risk and may be setting themselves up for an expensive disappointment.

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Alyce Lomax does not own shares of any of the companies mentioned.


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