If

Genentech

(DNA)

is such a great biotech company, why is the stock spinning its wheels?

It's a good question, and one that will be on the minds of analysts and institutional investors as they gather on March 23 for Genentech's investor day in New York. The company's top management will offer a business outlook and give details of its drug research pipeline, including the first peek at new drugs being developed at the company's South San Francisco laboratories.

It remains to be seen whether Genentech's talk will get its stock moving again. Shares have been fairly range-bound for the past year, trading between the high $70s and mid-$80s for most of the past 12 months.

Genentech seemed poised to break out after reporting strong year-end results in early January, but the surge didn't hold. The stock closed Wednesday at $80.92, down 9% from its recent $89 high.

Right now, it seems as if little things are pecking away at Genentech. None by themselves is serious, but as a whole, they're enough to keep investors on edge:

  • On Tuesday, GlaxoSmithkline (GSK) - Get Report received approval to market Tykerb, a new breast cancer drug that might give Genentech's Herceptin some competition.
  • Last month, a lung cancer study showed that a lower dose of Genentech's Avastin worked just as well as a higher dose, raising worries that Avastin sales in lung cancer might be negatively affected.
  • The company's stellar launch of Lucentis (an Avastin offshoot) as a treatment for age-related blindness has the drug looking like a billion-dollar blockbuster in its first full year on the market. But that revenue might be cut if eye doctors swap out Lucentis for a lower (and far less expensive) dose of Avastin.

If those developments aren't enough, Genentech also must keep an eye on Washington, where the Democratic-controlled Congress is raising a ruckus about soaring drug prices and is seeking to push through legislation to pave the way for the approval and launch of so-called biogeneric drugs.

Even with a down market overall, Genentech isn't cheap. At Wednesday's close, the stock still trades at a forward P/E of 23, on the basis of projected 2008 earnings. That's a premium to the rest of the big-cap biotech group.

But that doesn't mean a premium valuation isn't deserved. Genentech's 2006 earnings rose 67% year over year to $2.23 a share, fueled by a 40% jump in revenue to $9.3 billion. The company's top three products -- Avastin, Rituxan and Herceptin -- dominate the cancer drug market. In 2006, U.S. sales for each rose 54%, 13% and 65%, respectively.

Genentech has forecast 2007 earnings growth of 25% to 30%. Analysts polled by Thomson Financial expect the company to earn $2.87 a share this year, a 30% increase over 2006.

Avastin is a full drug pipeline tied up in a single product, and U.S. sales should easily top $2 billion this year. It's currently approved to treat colon and non-small-cell lung cancer but is also used extensively off-label in a variety of other cancer types.

Genentech is preparing to seek FDA approval for Avastin use in metastatic breast and metastatic kidney cancer. In all, there are 130 Avastin clinical trials under way in 25 different tumor types, according to the company. Included in this list are five Genentech-sponsored studies looking at the combination of Avastin with either Tarceva or Herceptin.

The use of the company's Rituxan cancer drug has been plateauing for some time, because it exceeds 80% in market share, primarily in non-Hodgkin's lymphoma and chronic lymphocytic leukemia. But the drug's future growth is likely to come as a treatment for autoimmune diseases.

Last September, Genentech received FDA approval for Rituxan as a treatment for advanced rheumatoid arthritis. Additional clinical trials are under way exploring Rituxan's use in lupus and multiple sclerosis.

Genentech is also moving ahead aggressively with the development of a second-generation version of Rituxan that might be safer and more easily tolerated by patients.

Phase III trials of this drug, known as ocrelizumab, are being prepared for lupus and rheumatoid arthritis, with a 2009 projected approval and launch date.

Expect Genentech to discuss its future plans next week for Avastin, Rituxan and ocrelizumab. But the company also should peel back the curtain on some other drugs in its pipeline.

These include ALTU 238, a long-acting human growth hormone getting ready for phase II and phase III studies via a partnership with

Altus Pharmaceuticals

(ALTU)

.

Here's a chart of other Genentech pipeline drugs, including a few without names which might be unveiled next week.

Adam Feuerstein writes regularly for RealMoney.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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