Genentech: Good Medicine

Biotech giant Genentech's growth story is impressive: Sales of its drugs soared 46% last year, to a whopping $5.5 billion. The company has a solid pipeline of new drugs, including a promising treatment for age-related macular degeneration. And it's testing additional uses for existing blockbusters, expanding their potential market. Analysts expect that the San Francisco-based firm's earnings will grow 30% annually over the next several years.

Genentech focuses on drugs that treat cancer and other serious illnesses, and it has been successful in getting some of its drugs approved for multiple uses. It now hopes that Avastin, which was originally approved in 2004 as a colorectal-cancer drug, will eventually be approved as a treatment for breast, lung and other types of cancer. And it is preparing to file an application with the Food and Drug Administration to expand the use of its breast cancer drug, Herceptin.

The company got two pieces of good news this week: The FDA said its lymphoma drug, Rituxan, could be used to treat certain cases of rheumatoid arthritis (Rituxan is Genentech's biggest seller). Regulators also granted priority review of its macular-degeneration drug, Lucentis, meaning the drug could win approval by the end of June.

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The positive news on Rituxan and Lucentis impressed Standard Poor's analyst Frank DiLorenzo. On Wednesday he raised his Genentech earnings estimates for 2006 and 2007 to $1.83 per share and $2.40 per share, respectively. The stock trades at 47 times the $1.82 per share that analysts, on average, expect the company to earn in 2006, according to Thomson First Call. DiLorenzo thinks the stock, which has soared more than 90% since last March, to $85, is still attractive given the company's earnings potential.

But John Sonnier, an analyst at William Blair Co., thinks the stock (symbol DNA) is too rich. Although he likes Genentech's potential and sees it as "the best growth story in the biotechnology industry," he recommends waiting for a dip in the price before buying. He currently prefers Amgen (AMGN), Genzyme (GENZ) and MedImmune (MEDI). They, too, have strong pipelines, says Sonnier, and their stocks are cheaper. He rates Genentech "market perform."

--Lisa Dixon