Genentech's Still the Gold Standard in Biotech

Genentech(DNA Quote) is a good biotech company. Not mind-blowingly great -- just good, maybe even very good. But in a roiled market that's in desperate need of leaders, it's hard to bet against 'em.

I know -- this isn't a pound-the-table, get-the-bulls-running type of endorsement. But if you're looking for cheerleading, go someplace else. Criticizing Genentech isn't easy -- after all, this is the company that invented the biotech industry. Its campus in South San Francisco is sacred ground, a holy shrine to the cult of recombinant DNA.

But let's be honest, Genentech has taken its lumps in recent months at the Food and Drug Administration. The company's stock is not necessarily expensive, but it's not cheap, either. And management's stubbornness -- dare we say arrogance -- has put the company in danger of falling short of some rather lofty expectations.

So why do I like this company? Because Genentech hires people with big brains. These folks are smart. They're proven winners. They may stumble from time to time, but at the end of the day, Genentech develops more biotech drugs than anyone else. That's the kind of success you can take to the bank.

Rituxan and Herceptin form a very solid and growing foundation for Genentech's drug business. Rituxan will become a billion-dollar drug next year as doctors begin to use more of it -- and at earlier stages of treatment -- for patients suffering from non-Hodgkins lymphoma. Herceptin, used to treat breast cancer, puts up smaller revenue numbers, but is still in the early stages of its growth cycle.

Most biotech companies would sell their souls to have two successful products on the market -- Genentech has nine.

But if there's a weak link in the Genentech story, it's in the company's drug pipeline. Now don't get me wrong, Genentech's basket of experimental drugs is overflowing, offering many chances to score. But I fear that Genentech has gotten sloppy lately. It has gambled with the FDA and lost.

Case in point: the asthma drug Xolair, for which Genentech submitted a subpar approval application in June 2000. In July of this year, the FDA sent it back, asking for more information and possibly more tests, delaying the drug's approval for at least a year, if not more. Genentech hasn't said much about the FDA's concerns, but Xolair's long-term safety is reportedly the big hang-up.

What's most frustrating about this mess is that Genentech is actually conducting long-term safety studies of Xolair right now. The company could have been patient, waiting to include results from the completed tests in the approval application. But no, Genentech stormed ahead, betting its platinum imprimatur would somehow seduce cranky drug regulators. Foolish.

But again, I return to the fact that Genentech-ers might be stubborn, but they aren't stupid. They're gonna learn from their mistakes. I'll bet good money that long-term safety data will be included in the upcoming FDA approval application for the psoriasis drug Xanelim, even if it delays the application's submission by a few months. And Genentech, along with partner OSI Pharmaceuticals(OSIP Quote), is conducting a very thorough screening of Tarceva, a potential blockbuster cancer drug that will compete strongly against ImClone Systems (IMCL Quote) and its heralded drug, IMC-C225.

Genentech has promised to grow earnings by 25% into 2005. The Xolair delay puts a dent in that forecast, but stronger-than-expected Rituxan sales should help make up the difference. Genentech shares are trading at 45 times consensus 2002 earnings estimates of 90 cents per share. Some people consider that cheap; others will call it pricey. Given the premium Genentech deserves for its collective brainpower, I'll side with the former.

Bottom line: Biotech-land is full of Genentech wannabes, so why not own the real thing?