Genentech

(DNA)

will report second-quarter results on Wednesday (the biotech firm is expected to earn 22 cents per share) but the news that really matters will come later this quarter, when test results on its experimental cancer drug, Avastin, are made public.

This is a seminal event for Genentech. Investors have traditionally rewarded the South San Francisco, Calif.-based firm with a premium valuation because of its fat pipeline of experimental drugs, so Avastin gives Genentech the chance to step up and justify its reputation.

Genentech also needs Avastin to work in order to mollify fund managers who are growing increasingly anxious over the company's ability to achieve its long-term growth plans. Previously announced delays in the development of

Xolair for allergic asthma and

Xanelim for psoriasis have opened up some cracks in Genentech's forecast for 25% compound earnings growth through 2005.

Genentech closed Monday at $29.25, which puts it down 47% for the year.

The entire biotech sector is apt to feel the joy or pain from the Avastin data as well. After all, investors buy biotech stocks because they believe in the sector's ability to develop novel, breakthrough medicines. That's Avastin, in a nutshell, so positive news will go a long way to shore up investor confidence, already shaken this year by a series of drug setbacks. If the Avastin news disappoints, investors will bark and biotech stocks will suffer further. Here's a preview:

Avastin: The Background

Solid tumors need blood to live and grow, so they release growth factors that encourage the formation of new blood vessels from which they can feed, a process called angiogenesis. Medical researchers have long hypothesized that if a drug could be developed to block angiogenesis from occurring, tumors would be starved of blood and die, or at least stop growing.

Avastin is the most advanced attempt to create a so-called anti-angiogenesis drug. Specifically, it targets vascular endothelial growth factor, a protein first discovered by Genentech that seems to play a major role in jump-starting the formation of new blood vessels for cancerous tumors.

The Clinical Trial

Genentech is readying results from a phase III clinical trial testing Avastin in patients with advanced breast cancer. The company has enrolled 400 patients in the study, all of whom have metastatic breast cancer that has failed to respond to previous chemotherapy. Half of the patents are receiving a combination of Avastin and the existing breast cancer drug, Xeloda, while the remaining patients receive Xeloda alone.

Simply put, Genentech will measure how long it takes before tumors start to grow in both patient groups. If it takes 50% longer for tumors to start growing in the Avastin patients, the trial will be deemed a success.

Recent studies suggest that the median time to progression in breast cancer patients taking Xeloda alone is a little more than four months. If that's correct, then the hurdle for Avastin is approximately six months.

Predictions

The prevailing consensus of seasoned biotech fund managers contacted by

TheStreet.com

appears to be that Avastin will slow the growth of tumors, but not enough to show a statistically significant benefit for patients.

This negative view was summed up neatly last week by Deutsche Bank Securities analyst Dennis Harp, who downgraded Genentech to market perform from buy. After speaking to investigators in the Avastin breast cancer trial, Harp believes Genentech "faces a high hurdle in meeting the primary endpoint of a 50% improvement in time-to-disease progression." Harp's firm doesn't have a banking relationship with the company.

Not all analysts agree: Meirav Chovav, the newly minted biotech analyst at UBS Warburg, is "extremely bullish on Avastin," according to a recent research note. "We expect positive pivotal results for breast cancer in combination with Xeloda shortly."

The Next Steps

If Avastin clears the endpoint of the trial, Genentech could, conceivably, submit the data to the FDA for approval, which could get the drug on the market in 2003. This is the best-case scenario, but not guaranteed. Genentech might also wait for results from another phase III trial of Avastin in colon cancer patients -- due early next year -- before it sends the drug to the FDA.

Regardless of Avastin's exact regulatory timing, investors are likely to reward Genentech for proving that the drug works. The good news also would stand in stark contrast to the flood of bad news drowning the biotech sector these days.

If Avastin shows a positive trend, but nonetheless fails to meet the trial's endpoint, Genentech probably will have to conduct more studies, which could push the drug's timeline back into 2004, at least. The negative impact on Genentech's stock, if this happens, will depend on by how much Avastin misses the mark, as well as the amount of negative sentiment already priced into the company's shares.

These days, however, biotech investors seem to be in no mood for compassion when it comes to parceling out punishment for drug-development missteps.

Wild Cards

While safety issues are less of a concern with cancer drugs because of the deadly nature of the disease, Avastin has had problems with blood clots and bleeding in previous studies. That could be a concern again if the same thing pops up in the breast cancer study.

In 2000, Genentech ran into trouble when it tested Avastin in patients with nonsmall-cell lung cancer. Six patients in the study suffered from serious pulmonary bleeding, resulting in four deaths. It was later found that those patients had tumors located close to pulmonary arteries, and similar problems were not found in other Avastin studies.

At this year's annual meeting of the American Society of Clinical Oncology, Genentech presented data on long-term use of Avastin that showed problems with blood clots could be successfully managed by doctors during treatment.