Genentech (NYSE:DNA) had a remarkable run even by biotech standards this past year, tripling from its 52-week low of $33.80. That run computes to an added $35 billion in market capitalization, since we're dealing with the second-largest biotech company on the planet, after Amgen (NASDAQ:AMGN). Given the lack of little green men on Mars, Genentech might even be the second-largest biotech in the universe.

What's the source of all that excitement? Basically, it's been Avastin, Genentech's new cancer drug that works to starve tumors of the blood they need to grow. After a failed trial in breast cancer, the drug showed some promise in extending life by nearly five months for advanced colon cancer patients. Was that result really worth $35 billion in added market capitalization? Estimates of future Avastin sales range from $1.5 to $4 billion. That's sales, folks, not added earnings (operating margins for Genentech are just under 30%).

With the potential blockbuster status of new drugs like Avastin in mind, the company aims to increase earnings per share (EPS) by 20% every year from 2006 to 2010. Even if Genentech did that, increasing EPS by 2.5 times over that period, it would earn around $5 per share in 2010, assuming it earns about $2 per share next year. Therefore, Genentech is currently trading at 21 times 2010 earnings! That should give any investor pause, especially those of us who remember the tortured reasoning used to support valuations during the bubble years.

By way of comparison, Amgen trades at just 21 times next year's earnings, never mind 2010 earnings. The reason for this discrepancy stems from investors' perceptions of the companies' pipelines. Without a doubt, Genentech has the stronger pipeline, with potentially $4 billion in new revenues coming just in the next two years from drug candidates ready for approval or expanded indications of existing drugs.

The sources for Genentech's growth include expanding Avastin's indications to other cancers, using Rituxan in rheumatoid arthritis, and bringing new drugs like the cancer drug Tarceva and Lucentis for macular degeneration to market.

However, Tarceva has already had negative results in a phase 3 trial for non-small cell lung cancer. As with Avastin, which failed its trial in breast cancer, only to later succeed in colon cancer, I suspect Tarceva's utility will be restricted to specific cancers. Raptiva just failed in a phase 2 trial for psoriatic arthritis, leaving the door open for Amgen's Enbrel to dominate this market in psoriasis patients.

This record should trouble the investor who is expecting perfection by buying in at more than $100 a share. Even the best drug development gurus don't win all the time. Even the Yankees don't win all the time (please, let this be true).

In contrast, however, Amgen has been broadening its pipeline over the past few years and has several drug candidates pushing through the FDA approval process, including some in the later stages. One of these candidates includes ABX-EGF, an antibody against epidermal growth factor receptor, a target that several types of cancers depend on. It is being co-developed with Abgenix (NASDAQ:ABGX).

In phase 2 trials, Amgen is studying AMG 162, another antibody, in osteoporosis and metastatic bone disease. Finally, an exciting treatment for Parkinson's disease is undergoing phase 2 trials. As with Genentech's program, these new products are all being developed in conjunction with Amgen attempting to expand their current product lines to other diseases or applications.

The way I perceive it, an investor counting on perfection with Genentech, can earn 0% on his investment, and after five years finally own a piece of a reasonably valued company. Or, he could invest in Amgen, buying a stock at 21 times next year's earnings and bet that at least one or two of the new drugs in the pipeline will pan out.

Personally, I'd rather not bet on perfection. Finally, I also believe that the big biotech companies like Genentech and Amgen will approach big pharma valuations as they mature. Big pharma P/Es hover in the high teens and low twenties. Caveat investor.

Fool contributor David Nierengarten, Ph.D., works with a biotechnology venture capital fund. He is an active member of the TMF community as DavidMN, and enjoys the Biotechnology discussion board. He holds no positions in any of the companies listed.