Thursday, July 21, 2005

Biotechnology's Killer Whale: Genentech

Let's play a game.

I'm going to name an industry and I want you tell me the first company that comes to mind.

Here we go.


What did you come up with?

Most likely, the first company you thought of was Genentech.

I am convinced that the next Boom -- or Revolution -- if you want to call it that, will be in biotechnology.

And Genentech is still the company to own.

Like the Energizer Bunny, it just keeps on going and going and going.

We're talking big money here, boys and girls.

Genentech now has an $89 billion market cap tracking at an annual revenue run rate near $6 billion and $1.2 billion in earnings.

Genentech is among the world's leading biotechnology companies focusing on innovative therapies for a variety of medical conditions, including cancer and cardiac arrest.

Founded in 1976 by Bob Swanson, a VC, and a biochemist named Dr. Herb Boyer, Genentech turns in exceptional growth.

Money and brains always make a good match, don't they?

Boyer and Swanson pioneered the scientific field of recombinant DNA technology, a technology that adds/replaces DN in an organism resulting in the recipient organism containing exogenous DNA.

Moreover, the biotech bellwether has perfected timing -- giving themselves enough room to both focus on R&D as well as release blockbuster drugs without compromising one for the other.

Genentech has arguably the sickest pipeline in the industry (no pun intended).

Take for example the drug Avastin, a monoclonal antibody drug designed to kill tumors by choking their blood supply.

Avastin is an important source of revenue growth for Genentech, as are Rituxan and Herceptin, maturing cash cows for the company's portfolio.

Avastin had sales of $554 million in 2004, despite not even being on the market for a full year.

Avastin performs so extraordinairily because it is targeting very large markets and, best of all, it works.

It seems like almost everyday Genentech is releasing positive clinical trial data to support the expanded use of its products.

When it comes to oncology, Genentech is the Shaquille O' Neal of the game, taking everyone else to school.

I'm especially excited about their new drug, Lucentis, which treats age-related macular degeneration, a horrid eye disease afflicting more and more people above the age of 65.

AMD is a huge market for Genentech, and word on the street is that the company's product outdoes its rival's treatments, like Eyetech's Visudyne.

Expectations are high that Lucentis will be successful.

So, is Genentech a buy at these levels?

The primary risk is that the sales growth, which the market assumes will occur, is slower than expected.

Slower-than-anticipated growth will cause the current P/E multiple to deflate; a decrease in Genentech's market valuation could possibly send investors to the cleaners.

We still like Genentech, nevertheless.

Whether the economy improves or weakens is irrelevant.

At the end of the day, people still need their drugs.

That's not to say that investing in biotechnology comes without its tremors and earthquakes.

The sort of earthquakes Martha Stewart tried to avoid by making an early exit out of Imclone when clinical trials for Erbitux went South.

On the other hand, Genentech has rewarded its shareholders several times over since its inception and, frankly, we don't think the party's over just yet.

Let's put it this way.

You can time the market or you can put your faith in a remarkably managed drug company with an industry-leading drug portfolio.

We'll let you decide.

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