Genentech flying high - Trailblazing company's rich drug pipeline continues to flow

Article Published: Sunday, August 01, 2004

An aerial view of the Vacaville Genentech facility. The plant plans a major expansion that will make it the largest biotechnology facility in the world. (Brad Zweerink/The Reporter)

Genentech flying high
Trailblazing company's rich drug pipeline continues to flow

By Tim Simmers
San Mateo County Times
When Jane Lee visited her doctor six years ago for a routine checkup, the former model was stunned to find out she had a small lump in her left breast.

The news took her breath away, and she saw her life flash before her. The doctor didn't give her much hope.
But Lee, 68, started taking a then-new breast cancer drug called Herceptin, developed by biotechnology pioneer Genentech. It saved her life, and she's seen five grandchildren born since the terrifying diagnosis.

"I've been given a wonderful six years because of that drug," said Lee, a Piedmont resident whose cancer went into remission since taking Herceptin. "I've been blessed."

South San Francisco-based Genentech hit a home run with Herceptin, which it now produces at its Vacaville facility. But that's only one of many drugs in the pipeline. The trailblazing company has a strong oncology franchise. Cancer drugs such as Herceptin and the non-Hodgkin's lymphoma treatment Rituxan are breakthrough medicines that have propelled sales and saved patients' lives in recent years.

Founded 28 years ago, Genentech has 12 products on the market, unparalleled among firms in the industry. Its rich pipeline of new and future treatments is flowing, and its stock has tripled since the beginning of last year. The company's product sales hit $2.6 billion last year, with profits of $600 million.

This year, the biotech giant has continued its hot streak, scoring with the approval of its colon-cancer drug Avastin, which works by cutting off the cancer tumor's blood supply. Avastin sales helped push the company over a financial milestone for the second quarter, when it topped $1 billion in quarterly sales for the first time ever.

"The whole driver for Genentech is targeting unmet medical needs," said Thomas Thomas, the company treasurer. "We're trying to continually generate innovative products for patients who have no medicines. It's important for us to maintain their lives with a higher quality."

That's what happened for Grace Vanhoose, a 56-year-old Seattle secretary diagnosed with colon cancer a few years ago. She was lucky to qualify for a clinical trial of Avastin before it was approved in the United States, partly because she was in danger of dying.

"Avastin was the miracle I needed, and it saved my life," said Vanhoose, who has seen two of her children married during her recovery and is waiting for her fourth grandchild to be born soon.
"I met some scientists at Genentech, and I'm in awe of their work, and how much they care," said Vanhoose, her voice cracked as she remembered other cancer patients she knew who didn't get Avastin and died.

The drug treatments are expensive. Avastin costs $4,400 a month for patients, who get two infusions a month. Herceptin costs $21,400 for a 30-week course of treatment, which includes one infusion a week.

Genentech's work on treating sick and dying patients started 28 years ago, when Bay Area scientist Herbert W. Boyer and venture capitalist Robert Swanson were drinking beer in an Irish bar in San Francisco. They raised some venture capital investment and decided to start the world's first biotechnology company in 1976, with a vision to revolutionize medicine.

They didn't know they were giving birth to an industry legend, but they planted the seed for the entire biotechnology industry, which now produces medicines for cancer, AIDS, diabetes and other life-threatening diseases.

Last year, Avastin showed prolonged survival in colon-cancer patients when combined with traditional chemotherapy, and the news stunned investors.

"Wall Street was blindsided," said Adam Walsh, analyst with Jefferies & Co. "That's because some analysts had written off Avastin after an earlier clinical disappointment."

The company's stock shot up from $30 a share in June 2003 on the Avastin news, and rose quickly to $80 per share. It even topped $120 per share when Avastin was approved in February. It has since split and come back to earth some, and is now at about $52 per share.

The industry is notoriously volatile, with stocks going up and down like a yo-yo because it takes about five years and a hundred million dollars to develop a drug and get it on the market. And it could easily fail after all that time and money. But Genentech keeps delivering. And many other biotechnology firms ride its coattails as the company's stock rises. It had a big run into June, climbing to a peak of $68.25 per share, but has slipped over concerns that competitors could grab some of Avastin's market as well as a setback on another cancer drug.

But such ups and downs are part of the business, analysts say.
"It's remarkable," said Walsh. "They've done a great job of feeding drugs into the pipeline."

Management is smart enough to cut the cord on some products that don't appear to be potentially successful, and invest in the good ones, Walsh said.

In 1997, Genentech Chief Executive Art Levinson, a scientist who worked his way up through the research department, established what he called the five-by-five plan. It set the bar high for the company, with goals like getting five new drugs in late-stage trials by 2005, boosting annual revenue and profits by 25 percent each year, and generating $500 million in alliances and collaborations with other companies.

The approval in June 2003 of Xolair, an asthma drug that helps people get off steroids, was part of the fruits of that plan. So was the November approval of Raptiva, for psoriasis, and the February approval of Avastin, a drug analysts project will sell more than $2 billion a year. A fourth drug, Tarceva, for pancreatic cancer, is expected to be approved next year.

Genentech isn't the biggest company in the industry, but it's No. 2. Rival Amgen of Thousand Oaks, which generates 2.5 times the revenue of Genentech, is on top.

But Genentech is an innovator. Its leadership has helped spawn many new local biotechnology firms from Genentech alumni, helping fuel the Bay Area's long run as the nation's biotechnology hub.

Genentech's birth helped foster some 60 public companies in the Bay Area, and 85,000 jobs.

And it's not only the company's drug pipeline that's growing. So is its Peninsula workforce and its local and outlying campuses.
Genentech added 1,402 new jobs last year, and 683 in 2002. This year it expects to add 1,600 new jobs.

The biotechnology powerhouse is expanding its South San Francisco campus along the Bay, where it employs 4,780 people. In April, it opened a five-story, 125,000-square-foot administrative building and is building another administrative building to match.

It broke ground last spring on three new buildings at its existing manufacturing site in Vacaville. Even Gov. Arnold Schwarzenegger came with a shovel, showing support for California business expansion. By the time the three new buildings are completed around 2009, the Vacaville plant will be the world's largest biotechnology manufacturing facility.

Herceptin, Rituxan, which generated $1.5 billion in sales last year, and Xolair are currently made at the Vacaville plant.
Many of the company's key cancer drugs, including Herceptin, Rituxan and Avastin, also are made at the South San Francisco plant.

Genentech drug sales have been strong. Sometimes the company is helped with overseas sales by its majority Swiss owner Roche Holding, or other firms it has marketing partnerships with.
The company is expected to generate sales of $3.5 billion this year and $4.6 billion in 2005, according to Jason Kantor, analyst with WR Hambrecht & Co. in San Francisco.

"This is a company that's growing fast because it sells lots of drugs," Kantor said. "They have innovative, new drugs based on good science that target unmet medical needs."

Key to Genentech's success is high spending on research and development, Kantor noted. The company will pour more than a quarter of its annual revenue into R&D this year. That's up nearly $140 million from last year to $860 million.

Success isn't easy, though.

"The bigger you get, the more pressure there is to sell more drugs," said Kantor.
One strategy that helps is Genentech's focus on finding "targeted therapies."
Six years ago, it launched Herceptin. The breast-cancer drug that is prescribed to only one-fifth of breast-cancer patients. It's for patients whose tumors have a certain genetic mutation. The drug sold $425 million last year and is expected to climb over $450 million this year. That's not a $1 billion blockbuster, but it's the type of solid business that drives the company, said Genentech's Thomas.

"Some patients won't make blockbuster sales," Thomas said. "But we know specific numbers of patients will take our drugs, and it's a great way to target disease types."

Look at Genentech under a microscope, and you might see the smarter, leaner drug company of the future, Kantor said. The company recorded a 29 percent boost in profits in the second quarter, led by its new cancer fighter Avastin.

No doubt, terrific sales and market-leading medicines keep Genentech humming, but there's always plenty of uncertainty in the drug business. Drug development is extremely risky and expensive.

Keeping the new products coming is never easy and there are usually setbacks, as happened with Avastin. But Genentech manages the ups and downs as well as anybody, analysts say.
It has many young patents and former scientist Levinson leading the firm. He keeps the company on the track of developing and marketing drugs. Levinson's latest plan is called Horizon 2010. The theme is that Genentech aims to become the leading oncology company in the United States by then, and the strategy includes bringing five new cancer products on the market by 2010 and achieving earnings per share growth of 20 percent per year.
"We're setting our sites high," Thomas said.

There will always competitors on the rise, peaks and valleys, and lots of unknowns. Some drugs won't sell as well as expected. And Wall Street is fickle.

One stumble and the stock could be pushed down. But Genentech has reached legendary status, and appears to be on a roll.
Whatever happens, there are patients out there who are cheering the company on. Being able to watch eight grandchildren grow up before your eyes after being given six months to live has made breast-cancer survivor Jane Lee a believer - one who is very thankful her life was extended so she could be with her family.

"Every time I drive by that company down by Grand Avenue, I give the thumbs up sign," she said.