Genentech Shines On

Over the past two and a half years, Genentech (NYSE:DNA) has been the large-cap biotech company to own, bar none. Its stock has shot up from the mid-teens in early 2003 to $85 today. As I wrote a few months ago, this is one ride that I've missed, much to my chagrin.

The drug giant has been a four-bagger because of outstanding progress made in its portfolio of oncology drugs, which consists of Avastin, Herceptin, Rituxan, and Tarceva. Yesterday, Genentech released second-quarter results and reported U.S. sales of $919 million for its cancer drugs, accounting for 76% of total U.S. product sales.

Although Rituxan, with nearly $500 million in quarterly sales, is still the king of the hill, I can't really single out any one of these products as leading the charge. Quite frankly, they are all doing very well in their respective markets. Every single cancer drug is growing at a robust double-digit clip, and I don't see them slowing down anytime soon.

I expect this torrid pace to continue because Genentech keeps releasing positive clinical trial data that supports the expanded use of its products in additional patient populations. Take Herceptin, for example. Herceptin was approved in 1998 for the treatment of metastatic breast cancer. As is often the case with mature products, sales growth began to slow. But new studies show that the drug is also useful for cutting down the recurrence of the disease, and sales have picked up again. Add in increased usage in combination with Taxotere for earlier-stage breast cancer, and Herceptin is again a growth drug.

That kind of success is not limited to Herceptin. The biggest label expansion will occur with Avastin, which will seemingly be used in just about every cancer type out there. Initially approved for use in metastatic colorectal cancer, Avastin has also been effective in non-small cell lung and breast cancer. Genentech is seeking FDA approval for the treatment of those diseases. Several other label expansion studies are underway, so it is easy to see why Avastin, which is already a billion-dollar drug, should become the best-selling oncology drug in the world.

All told, Genentech is planning on filing nine additional applications with the FDA in the near future. Many of these are label expansions to increase the usage of drugs that are already on the market (such as Avastin and Herceptin). But this also includes a new drug, Lucentis, which treats age-related macular degeneration. Genentech intends to file a Biologic License Application (BLA) for Lucentis in the first quarter of 2006. Although that's an increasingly crowded market, expectations are high that Lucentis will be successful.

So I was wrong
Last year, I wrote an article that said Genentech was priced for perfection. Even though I think my reasoning was sound, I was way off the mark. In the past 12 months, the company has actually been better than perfect. Sales have far outpaced what I thought were fairly generous growth projections. As a result, the stock has shot up 60% since my article said it was overvalued.

Genentech now has an $89 billion market cap, which makes it the world's largest biotech company, ahead of former leader Amgen (NASDAQ:AMGN). Now that Genentech tracks at an annual revenue run rate near $6 billion and $1.2 billion in earnings, I think we again have to revisit the question of whether or not the stock is a bit pricey. While earnings growth looks to be strong for the next few years, a lot of that growth is already anticipated and is clearly baked into the current market cap. The question is: Can Genentech keep turning in the kind of numbers that will increase shareholder value in the long run?

Maybe. Or maybe not. I've been so chronically wrong on this company that I wonder if any of the musings over future growth even matter. What we do know is that Genentech is a superbly managed drug company with an industry-leading drug portfolio. Instead of trying to pick the ideal spots to buy shares of a company like this, perhaps it's best to just dollar-cost average with regular investments over time and hold onto it for a few decades. Genentech has a long history as a high-quality drug company, so that's likely an approach that will beat the market without all the headache and heartache that comes from trying to land the perfect purchase.

Genentech was once a small-cap biotech, but with its success it has increased in value many times over for its shareholders. At Motley Fool Rule Breakers we've found several small biotechs that could do just as well in the long run. If you'd like to find out what companies we're bullish about, take a free 30-day trial.

Motley Fool Rule Breakers biotech analyst Charly Travers does not own shares of any company mentioned in this article. The Motley Fool has a disclosure policy.