NEW YORK -- What if
develops the Avastin of Alzheimer's disease?
That would be pretty cool, no doubt. It also would propel the biotech giant into another dimension of growth and profitability.
To me, this was the most intriguing headline coming out of Genentech's investor meeting Friday. Building on the successful development of blockbuster cancer drugs like Avastin and Rituxan, CEO Art Levinson announced the company's intention to plant its drug research flag into two new therapeutic realms: neuroscience and infectious diseases.
Genentech is wasting no time, either. The company will seek permission from regulators this year to begin human testing of a drug for Alzheimer's that targets beta amyloid.
"There is a tremendous need in this area, so it is time for Genentech to get involved," said Richard Scheller, Genentech's executive vice president for research, adding that he is seeking a "household name," i.e. a neuroscience all-star, to lead the company's efforts in this area.
Given the company's stellar R&D track record, anyone care to bet against Genentech?
Now, I do realize that it's very early to be counting on Genentech's push into Alzheimer's or any other neurological or infectious disease. But there isn't a drug or biotech company in existence with a better R&D track record, so when Genentech says it intends to puts its collective brain power into a new disease area -- especially one as medically important and financially lucrative as Alzheimer's -- investors should be taking notice.
Cancer Sweet Spot
Cancer will remain Genentech's sweet spot for the near future, so naturally, the bulk of Friday's meeting was spent discussing Avastin and the rest of the cancer pipeline. Genentech said it will seek regulatory approval later this year for Avastin as a treatment for relapsed glioblastoma multiforme, a type of brain tumor. Further ahead, there are two ongoing, pivotal studies of Avastin as an adjuvant treatment for colon cancer.
On the commercial front, Genentech is launching Avastin in metastatic breast cancer. Remarking on the
, CEO Levinson bristled at suggestions that U.S. regulators lowered the regulatory bar to approve Avastin for the new use.
Genentech's commercial chief Ian Clark was a bit more cautious, however.
"I'm confident in the medium term, but don't expect Avastin in this setting to take off like it did in colorectal cancer," he said.
The issue, he explained, was that Avastin already has about 25% market share in breast cancer due to off-label use of the drug, so the formal, on-label launch won't be as explosive.
Investors have high expectations for Avastin in breast cancer, and rightly so, since the new approval could add about $1 billion to the drug's revenue. But Clark's cautious tone was likely partly responsible for Genentech decision not to bump up its 2008 earnings forecast.
Instead, the company raised the lower end of its previous guidance by five cents to a new range of $3.35 to $3.45 a share. The stock traded up into Friday's meeting in anticipation of more, which explains why the stock fell 3% to $78.83 Friday. (The
mess didn't help either.)
Genentech's cancer pipeline is deep. The company has one new drug -- pertuzumab -- in a phase III study for breast cancer. There are another six new drugs in phase II studies with data expected within the next 18 to 24 months, according to Sue Desmond-Hellman, the company's president of product development. Further back, another seven new drugs are in phase I studies.
Cancer drug partnerships with
also were highlighted Friday.
Money to Burn
Genentech has $6.1 billion in cash on hand. That's more moolah now than the company says it needs to run the business. Which begs the question: What does it do with all that money?
The more mundane choices are a big stock repurchase plan or a dividend, both of which are under review by the company's board, said CFO David Ebersman.
Will Genentech go out and make a big acquisition? Historically, that has not been the company's style, but Friday, CEO Levinson didn't rule out M&A activity in the future.
"If we have a serious downturn, there will be wonderful opportunities for a company with financial strength," he said. Levinson added that he and other officers at the company have been fielding a lot more phone calls from smallish biotech firms - some feeling particularly cash strapped these days -- that want to explore "strategic relationships" with Genentech.
Not that Levinson needs my advice, but if the company wants to get into infectious disease in a big way, why not merge with
? Now, that would be a mega-blockbuster deal! (And, it would combine the two best management teams in biotech.)
Here and There
Other thoughts and observations from the Genentech investor meeting:
The next big clinical event to watch out for are results from two Rituxan phase III studies, one in lupus and the other in primary progressive multiple sclerosis. Positive data from either of these studies, especially the lupus trial, could have a big impact on Genentech's stock price.
Spending on research and development at Genentech totaled 19.5% of non-GAAP operating income in 2007, a ratio the company hopes to maintain in the future. By comparison, spending on marketing and sales as a percentage of operating incomes was just under 11% last year. That ratio has fallen since 2004, and the company said it will continue to drop in the future.
For most, if not all of, Big Pharma, these ratios are reversed, with spending on marketing higher than R&D as a percentage of operating income, mainly because their labs haven't been successful at developing new blockbuster drugs. That forces the marketing departments of Big Pharma to work harder - and spend more -- to grow sales of older drugs.
Generic copies of biologic drugs are coming, but Genentech's patent estate is fairly secure. Key patents are Avastin don't expire until 2017; for Rituxan, it's 2014. (By the way, Amgen has 24% of its 2006 sales vulnerable to patent expiration through 2012; that's second only to Pfizer. )
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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