All investors have stories to tell. From the home runs to the ho-hum, our experiences pile up to form the story of our investing history. Many of these events aren't going to be particularly memorable, but there are those unique cases that will be permanent standouts on our track records. For me, biotech bellwether Genentech
My history with Genentech will always be important to me, but not because it is a great company, which it is, or because I made a well-timed investment in it, which I didn't. It is significant as a personal life lesson because I didn't act when I should have. It is one of the world's premiere biotech companies and I had it on the hook -- but it was a big fish that I let get away.
Let's step back a few years. While I don't recall the exact dates, the time period was early 2003. Like many biotechs back then, Genentech's stock price was at the tail end of a multiyear swoon. Split-adjusted, the stock had fallen from near $60 down into the mid-teens. As one of the top drug companies in the world with a price in the teens, I was eyeing it, but not acting.
The source of my hesitation at that time was the drug Avastin, a monoclonal antibody drug designed to kill tumors by choking their blood supply. At the time, that was an interesting theoretical approach that remained unproven in patients. In September 2002, the drug failed in a phase 3 trial in patients with metastatic breast cancer. I saw that as a big blow for the company and for the drug's mechanism of targeting tumors.
Avastin was important as a source of future revenue growth, since the company's lead products, Rituxan and Herceptin, were maturing, and fresh products were needed in the portfolio. With Avastin's disappointing result in the breast cancer trial, I wrote it off for all the other cancer types for which it was being studied. I figured if the drug didn't work in one cancer it probably wouldn't work in others. As it turns out, that was a naive and incorrect assumption... but I didn't know it at the time. I was assuming the company would just have to go on without Avastin, and I waited to try and buy the company "as is" for just a few dollars cheaper.
So I waited and waited and that day never came. In May 2003, Genentech announced that Avastin markedly improved the survival rate of patients with colorectal cancer. Against the backdrop of a prior failure in breast cancer, this was a big splash that served as a heck of a spark for the stock. It has since taken a 300% run, and while I was waiting for the perfect price, I missed out on the fun of owning a premier drug company at a very good price.
Today seemed like a good time to take this trip down memory lane, because yesterday Genentech announced the results from another phase 3 clinical trial, which showed that Avastin is effective in the treatment of non-small cell lung cancer (NSCLC). Specifically, Avastin plus standard chemotherapy fared better than the current standard of care (paclitaxel plus carboplatin).
That is great news both for cancer patients and for Genentech's shareholders. It bodes very well for an already successful drug. To give you an idea of how big a drug Avastin is, it had sales of $554 million in 2004, despite not even being on the market for a full year. That is an incredibly fast sales ramp. In that short time, it leapfrogged one of Genentech's other highly successful cancer drugs, Herceptin, to become the second-best selling product at the company.
Avastin can do so well because it is targeting very large markets and it works. That's a potent combination for a drug company, and it's one of my favorite strategies for finding new Rule Breakers. On top of the colorectal cancer market, in which Avastin is already approved, the NSCLC market represents a significant opportunity. This is why yesterday's news popped Genentech's stock for a quick 25% gain. That's a huge move for a company of this size.
In light of what is sure to be an expansion of the drug's label to include FDA approval for use in the treatment of NSCLC, Avastin seems poised to become an incredibly successful product. Exactly how high it will go, I don't know. But I wouldn't be at all surprised if one day it passes Rituxan to become Genentech's top-selling drug. That implies sales will be in the ballpark of $2 billion annually. I don't see that as unreasonable, considering that there are hundreds of thousands of new cases of colorectal and NSCLC every year. This is a very large medical need, and if Avastin continues to be a component of the best treatment regimen, it will sell very well.
I have always liked Genentech and I applaud the company for its success. It has continually turned in exceptional growth through a combination of internally developed drugs and in-licensed products. I consider it to be the best biotech company in which I've never been a shareholder.
So this brings me full circle. I've missed out before, yet at the same time, despite the great news on Avastin, I can't see Genentech as a compelling value now. So I'm back to the waiting game to see if I can finally own shares of this company at a price I like. Maybe that will work this time, or maybe two years from now I'll be kicking myself a second time. Who knows? In either case, I will certainly enjoy following the company's progress.
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For related Foolishness on the biotech industry, see:
- After the Crash, Is Biogen IDEC a Buy?
- From Rags to Riches
- Is Big Pharma a Bargain?
- Searching for Cheap Biotechs
- Investing in a Cure