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FDA Surprise Might Spark Genentech

The stock is offering a nice risk/reward entry point.

Take note of this important date for

Genentech

(DNA)

: Feb 23. That's when the Food and Drug Administration is expected to issue its approval decision on Avastin as a treatment for metastatic breast cancer.

The odds -- and investor sentiment -- are running against approval, especially since an advisory panel voted 5-4 to recommend

against approval back in December.

Because of that negative vote, it's widely assumed that the FDA will want more clinical data before approving Avastin for breast cancer.

Avastin is already a blockbuster for Genentech, but the company needs to expand the drug's label to other big cancer indications to fuel earnings growth. Breast cancer fits that bill quite nicely, with the potential to generate another $1 billion in sales.

That said, Genentech shares at Tuesday's closing price of $70.78 are already pricing in bad news, so a "surprise" approval of Avastin by the FDA would light a fire under the stock, especially since most, if not all, analysts have removed Avastin breast cancer sales from their near-term models.

Call me a sunny-side optimist, but I think there's a decent chance that the FDA does grant full approval to Avastin on Feb. 23. Even if the agency goes the other way, there will be new Avastin-breast cancer clinical data coming in the middle of the year.

These data should be positive and sufficient for Genentech to re-file Avastin with the FDA and get the drug approved in late 2008 or early 2009.

As an investment, Genentech has disappointed investors with negative returns for two straight years, but I think that losing streak ends in 2008.

Here's an interesting wrinkle to this story: One of the experts on the FDA advisory panel that reviewed Avastin in December -- and who voted against approval -- has now switched sides, recommending to the FDA the drug be approved.

Swiss drug maker

Roche

TheStreet Recommends

, which sells Avastin in Europe, disclosed this vote change on its year-end conference call last week without providing any details. I did some digging and pretty much confirmed it.

There is no formal mechanism for an advisory panel member to change votes, so I don't want to over-interpret or lead anyone to believe that this will definitely sway the FDA to approve Avastin.

However, it's interesting to note that the 5-4 advisory panel vote against approval would be a 5-4 vote for approval if this panel member's reversal were allowed. And let's not forget that a majority of the practicing oncologists on the advisory panel voted for Avastin's approval.

This could be nothing, but then again, it may be the small thing we look back on as how the FDA approved Avastin on Feb. 23. It might be like the David Tyree football-on-the-helmet reception that really won the Giants the Super Bowl.

I'm hopeful that Avastin does win approval on Feb. 23 but like I said, the game is far from over if that doesn't happen.

Roche is currently conducting a phase III clinical trial of Avastin in first-line metastatic breast cancer patients that mirrors in most ways the Avastin trial that's now under FDA review.

If this Roche study (known as AVADO) is positive and shows a similar progression-free survival benefit for Avastin patients, Genentech should have an easy time satisfying whatever concerns the FDA might have to secure the drug's approval.

Look for a data readout on the AVADO trial in the first half of this year.

If still more clinical data on Avastin in breast cancer is required, there is the so-called RIBBON-1 study also underway, with results expected in the second half of this year.

For Avastin in breast cancer, approval is not in doubt, the only question is when. December's negative advisory panel vote was muddled and wrong, hopefully the FDA sees through that and approves the drug on Feb. 23.

If not, the disappointment is already priced in, so the risk to owning the stock is minimized. With more phase III clinical data coming later this year on the company's Rituxan drug in lupus and multiple sclerosis, and possibly Avastin in adjuvant colon cancer, it's shaping up to be a big year for successful clinical trials at Genentech.

For these reasons, I expect the stock to be one of the better big-cap biotech performers in 2008.

Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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