Genentech: the future

Although, Genentech and Genzyme are projecting very similar growth rates, Genentech is presently much more richly valued despite being so much larger (size leading to worries of economies of scale). Genentech has a trailing price/earnings ratio of 30.75 and a trailing price/sales ratio of 7.25. Genzyme has a trailing p/e of 43.24 and p/s of 5.3. Although, Genzyme has a much higher p/e ratio, it is not due its inability to generate revenue. Over the past year Genzyme has been an active purchaser of small biotechs and had to spend extra money in SG&A to integrate the companies. Without a potential major contributor to the top line, I don’t see how Genentech can be valued more highly than Genzyme. The pressure to continually produce new therapies is huge for Genentech because it has to grow 11 billion by 20%, which amounts to 2.2 billion in order to maintain this type of valuation. In contrast, Genzyme only needs to add $600 million in revenues. It is assumed that the bulk of Genentech’s growth will come from more applications for its existing drugs Avastin, and Rituxin.

Avastin did receive accelerated approval for treatment for breast cancer. Accelerated approval is used to allow drugs for life-threatening diseases to enter the market as long as there is initially positive data. The FDA did that after an FDA advisory committee voted 5-4 to not approve it. The close vote by the FDA advisory committee hints at Avastin not being as effective as people may think. If the studies currently being conducted with Avastin fail, Avastin will have advanced approval revoked and be pulled out of the breast cancer market.

Let’s assume that Avastin actually does get approval to stay on the market. How much money can we expect it to bring in? Again, the fact that an FDA advisory panel had trouble deciding whether or not to recommend approval makes me concerned about the drug’s efficacy. And anytime you introduce a new competitor to a market, it better have a significant “competitive edge” to steal market share. This is competitive edge is questionable. Although I do believe that it will “take a piece of the pie”. The pie needs to be large enough to support $2.2 billion more revenue in the next year.

Another thing to note that I’m not sure many people are aware of is that Avastin is already prescribed “off-label” for breast cancer treatment to 9,500 patients. Prescribing a drug off label is a completely legal practice when physicians use their judgment to prescribe a drug for treatment not described on the label (aka not approved by the FDA). This means that of the $2.5 billion or so of revenue that Avastin brought in in 2007, an estimated $900 million (9,500 patients * a reported cost of $92,400/year - http://blog.wired.com/wiredscience/2008/02/fda-approves-ca.html - http://www.msnbc.msn.com/id/23298776/ ) may have been due to off-label use. I say may because of the 9500 patients receiving the drug off-label, it is uncertain as to when they began treatment. Nonetheless, this is a significant number. The main increase in revenue due to advanced approval will come from patients who wanted the treatment but were not able to afford it before. Those who can currently afford it, are already able to attain it. Insurance companies will not cover off-label treatments. Thus even with sustained approval for metastatic breast cancer, the growth potential in that market is limited.