It's always good to be the top company in a growing industry. With sales of biopharmaceutical drugs well over $50 billion and growing at a double-digit clip according to IMS Health, drug developer Genentech (NYSE:DNA) has put itself in a great position as the undisputed leader in the biopharmaceutical industry after surpassing Amgen (NASDAQ:AMGN) as the largest biotechnology firm last year.
Earlier this week, Genentech released its fourth-quarter and full-year 2006 results. With revenue up 40% to $9.3 billion in 2006, it's easy to see why the biotech sector is booming. Revenue increased similarly for the quarter, up 43% year over year. It's also nice to see a drug company allowing scale to take over, and in 2006, expenses accounted for only two-thirds of operating revenue rather than the 71% they did in 2005. This allowed earnings to jump much higher than revenues grew -- to 67%, or $1.97 per share, for the year and for operating margins to hit 34%.
Year-over-year growth is starting to moderate for Genentech's four maturing oncology drugs Avastin, Herceptin, Tarceva, and Rituxan, although growth remains solidly in the double digits for all four products. Several of these drugs like Herceptin and Avastin do have catalysts, though, in the form of possible FDA approval for earlier-stage disease or new indications that could swing sales growth higher in the future. Genentech's newly launched Lucentis, on the other hand, is gaining market share like mad, with sales up to $217 million and growing 42% versus the last quarter.
Genentech does have some competitive risks around the corner, like the possible approval of GlaxoSmithKline's (NYSE:GSK) Tykerb, which will compete with Herceptin as a treatment for breast cancer, and ImClone's (NASDAQ:IMCL) Erbitux, but overall, there's nothing in the near term that could derail it from achieving its goal of 25% compounded annual earnings growth.
Despite the strong earnings growth, Genentech is not resting on its laurels, either. It made an acquisition last quarter when it bought Tanox (NASDAQ:TNOX), its partner for the asthma treatment, Xolair. Genentech also signed another drug development deal just this week.
While Genentech appears to be operating on all cylinders operationally, shares look more than a bit expensive, trading at 44 times last year's earnings and over 100 times its $900 million in free cash flow. This is too rich a valuation for my blood, but investors should follow Genentech closely, as the company's a bellwether for the rest of the biopharmaceutical sector.
GlaxoSmithKline is an Income Investor recommendation.
Fool contributor Brian Lawler does not own shares of any company mentioned in this article.
