Biotech drug maker Genentech (NYSE:DNA) knocked the chromosomes off its Q2 earnings, announcing GAAP EPS of $0.25 vs. a loss last year.

Quarterly product, royalty, and contract revenues jumped 23% to just under $800 million. Highlights include more good news from breast cancer treatment Herceptin and non-Hodgkins lymphoma drug Rituxan, whose profits Genentech shares at an undisclosed rate with Idec Pharmaceuticals (NASDAQ:IDPH). Sales climbed 32% to $363 million and 15% to $109 million, respectively, against last year's Q2.

The company's stock doubled in the month following May 16's $37.90 close on news that its Avastin drug candidate for colon cancer increased patient survival times. Genentech expects FDA approval next spring, and if it gets the green light, Avastin will be the first-to-market drug that works by cutting off the blood supply to tumors. (To learn more about this method, read our interview with the head of the Angiogenesis Foundation and take a look at how the playing field looked then.) Because Avastin's mode of operation could theoretically apply to many solid tumor types and billions in revenues, investor expectations for Genentech exploded.

The company is the leading monoclonal antibody drug maker in the world today, which is sweet. Tufts Center for the Study of Drug Development research shows that biologic drugs such as monoclonal antibodies have a higher rate of achieving FDA approval than other drug types that enter human trials -- 20% vs. 10%. That alone means greater potential return on investment, but Genentech has been trouncing even that rate of late. Not only that -- if an approved monoclonal antibody drug does succeed (and not all do), it fears less generic competition because it's tougher and more expensive to make than a traditional small molecule drug.

Genentech's shares certainly reflect not only success, but great expectations. Today, they go for 84 times trailing-12-month free cash flow (we don't yet know the free cash flow numbers for Q2), pricier even than fellow biotech pioneer Amgen (NASDAQ:AMGN), and against no growth in free cash flow from 2001 to 2002.

But while I've been publicly very skeptical of the company's valuation for a while, it's clear that long-term shareholders don't care. They are most likely smiling -- and not selling.

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