Genentech (NYSE:DNA) zoomed up more than 15% on April 15 -- from $57.80 to $69.35 -- on the news that its cancer drug Avastin, already approved by the Food and Drug Administration for treating metastatic (spreading) colorectal cancer, was found to extend the lives of patients suffering from metastatic breast cancer. According to Genentech's annual report, Avastin is "a humanized antibody that binds to and inhibits vascular endothelial growth factor (VEGF)."


In layman's terms, Avastin is a protein (antibody) that gets injected into the bloodstream. It is engineered to locate, bind to, and interact with tumors to block their malignant cells from secreting VEGF, a substance that stimulates the body to produce blood vessels. If the tumor is able to persuade the body to produce blood vessels, it connects to those vessels and gets nourishment from the constant blood supply. Prohibiting the growth of vessels isolates the tumors and renders them unable to grow or spread. The drug is used in conjunction with conventional chemotherapy.

Avastin is also in phase 3 (final pre-release) trials to determine its effectiveness against renal cell (kidney) carcinoma, advanced non-small-cell lung cancer, and pancreatic cancer, and it is being prepared for a phase 3 trial to determine its effectiveness against ovarian cancer. These projects are being developed with Swiss pharmaceutical giant Roche (OTC BB: RHHBY), which owns the marketing rights to Avastin outside the United States.

After its February 2004 launch, Avastin accounted for almost $555 million, or 15%, of Genentech's sales in 2004, and it is already the company's second-most revenue-producing drug -- all of this when it was first approved only to treat one type of cancer.

The other good news for Avastin in the United States is that Medicare currently covers it. But health care is a highly politicized business, and Genentech recognizes that further Medicare legislation could hurt Avastin's prospects. Why? Medicare covers individuals 65 and over, and cancer disproportionately affects this group -- 75% of cancer incidences were discovered in people 65 and older between 1998 and 2002. The Medicare Prescription Drug Improvement and Modernization Act of 2003 has already reduced the reimbursement rate of many drugs, and that means physicians are less willing to prescribe expensive drugs, such as Avastin, to their patients.

Some competition to Avastin's market share also looms. Novartis' (NYSE:NVS) PTK-787, which treats colorectal cancer, is in phase 3 trials, with the results expected this year. Meanwhile, Bristol-Myers Squibb (NYSE:BMY) and ImClone Systems (NASDAQ:IMCL) have a cancer drug called Erbitux that had $261 million in sales in 2004. (Martha Stewart and Sam Waksal are very familiar with it, being the lucky recipients of prison sentences for their related dealings.)

These are all factors that Genentech should be wary of, but as Avastin expands its use, it has the potential to boost Genentech even further, provided that said parties -- doctors, patients, and regulatory sources -- continue to prove amenable to Avastin's charms.

Last year, Rule Breakers team member Charly Travers called Avastin Genentech's Next Billion-Dollar Drug . He may have been right.

Tim Hanson thinks Genentech has a cool ticker. He has scientific interest in the companies mentioned in this article, but no financial interest.