When is a 61% increase in earnings per share and a 36% year-over-year growth in revenues not something to be extremely pleased about? The answer is when the company is Genentech (NYSE:DNA) and shares are richly trading at roughly 10 times expected sales for 2006 and 43 times earnings per share for the year.

With this sort of valuation, shares of Genentech aren't exactly cheap. Then again, with such a proven history of successful drug launches, a solid management team, and the company growing earnings at a rapid clip (see below), investors should be expected to have to pay up for such a quality biotech stock.


Q-O-Q Growth

Y-O-Y Growth

Q3 06




Q2 06




Q1 06




Q4 05




Q3 05




The big news of the quarter was the rapid uptake of age-related macular degeneration (AMD) drug Lucentis. In just four months on the market, the drug has already pulled in $153 million in sales and accounted for nearly 8% of Genentech's total product sales. Genentech reported that 80% of Lucentis sales were for patients already under treatment for AMD, and with sales of competing drugs from QLT (NASDAQ:QLTI) and OSI Pharmaceuticals (NASDAQ:OSIP) declining, Lucentis appears to be growing sales primarily by taking market share away from these rivals.

Somewhat tempering the rapid uptake of Lucentis is the reduction in sales growth of cancer drug Avastin. Avastin pulled in $435 million in sales for the quarter, representing an increase of 34% over third-quarter 2005. This has been by far the slowest quarter of year-over-year growth for the drug, and much of the reduced growth is probably related to the approval of Lucentis and the subsequent reduction in off-label usage of Avastin to treat AMD.

Thus far it has been a mixed year for Avastin, but today we should find out if the drug gains approval to treat non-small cell lung cancer. Treating this additional indication may reignite Avastin sales once again.

This most recent quarter's operating results, while not totally unexpected, are at least another quill in the hat of continued excellence from Genentech's management. Genentech will have to make $0.54 per share in the fourth quarter in order to reach the low end of its stated goal of 65%-70% GAAP EPS growth for 2006. With the growth of Lucentis sales and another possible approval for Avastin, I wouldn't be surprised to see Genentech race past this EPS goal. So from this analyst's opinion, everything is going just fine at Genentech.

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QLT is a former Hidden Gems selection.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy .