What Avastin's New Approval Means for Genentech

In the warm afterglow of the approval of Avastin in breast cancer, here are my thoughts on Genentech(DNA) and the biotech sector, in general:

It feels good to be right. Here, too.

Genentech's stock is going higher. It should trade back into the $80s on this news as investors and analysts add $1 billion-plus in incremental Avastin sales back into their financial models.

Remember, most folks erased this revenue from their models back in December after the FDA's advisory committee voted 5-4 to recommend against Avastin approval in breast cancer.

After closing at $71.60 Friday, the stock leapt $5.80 to $77.40 in the after-hours trading session. At that price, Genentech is now up 15% for the year. It's nice to see the stock in the green once again after finishing each of the past two years with negative returns.

Annual revenue growth at Genentech slowed to 26% in 2007 from 40% in 2006. Before Friday's Avastin decision, the Street had Genentech revenue growth cooling off further to 10% this year and another 10% in 2009.

The Avastin breast cancer approval will certainly bump up those revenue growth numbers. It won't get back to those 40% salad days, but it will be enough to quiet the criticism that Genentech wasn't growing fast enough to justify a plump biotech multiple.

Genentech's earnings guidance for 2008 currently stands at $3.30 to 3.45 a share, with the Street consensus right in the middle at $3.38 a share. That equates to 15% earnings growth this year, down from 32% growth in 2007.

Again, expect Wall Street's earnings estimates in 2008 and beyond to go higher in the coming days.

Let's hope the Avastin approval buoys the biotech sector, which could use a healthy dose of good news right about now. While I wouldn't expect a huge sector rally, Friday's news does show that the FDA can be reasonable and not completely risk averse when it comes to drug approvals. If anything, investor sentiment when it comes to regulatory risk should brighten a bit.

Back to Genentech for a cautionary note. Technically, the FDA granted "accelerated approval" to Avastin in breast cancer. This means the agency wants to see additional clinical data to support the drug's clinical benefit in these patients before it will grant full approval for the new use.

Genentech will provide that supportive data in two ways. The first comes from data from the successful "AVADO" trial that has already been shared with the agency. A second study of Avastin in breast cancer, known as RIBBON-1, will be ready later this year.

Data from AVADO and RIBBON-1 have to be positive, of course. Whether the FDA wants to see additional clinical benefit in the form of progression-free survival or overall survival is not clear. My guess: A confirmed benefit in progression-free survival, with a trend toward longer overall survival, should be enough. That shouldn't be too hard for Genentech to produce.

There's more to come from Genentech. Next up will be results from a large study of Avastin as an adjuvant treatment for colon cancer. This study has super-blockbuster growth implications for Avastin and the company -- as in $2 billion to $3 billion in additional revenue in the United States alone. Results from this study could be ready in late 2008 or early 2009.

Genentech's other big growth opportunity to keep in mind is Rituxan, which has phase III studies in lupus and multiple sclerosis expected later this year. Rituxan sales has also slowed, but the lupus study, in particular, if successful, could provide a huge burst of new growth that isn't factored into many investor models these days.

I noticed that Dendreon(DNDN) was trading up by about 5% in Friday's after-hours session. It seems like some investors are betting that the FDA's decision to approve Avastin, despite a negative advisory panel vote, means that the agency will also reverse course and approve Dendreon's prostate cancer vaccine Provenge.

Not to end this column on a bum note, but that kind of thinking is really short-sighted. There really is no comparing the Avastin and Dendreon situations.

To reiterate what I've said countless times before, the FDA won't approve Provenge without new and convincing clinical data from the ongoing phase III clinical trial. Those results won't be ready until the second half of this year.

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