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Avastin's Stumble, Genentech's Tumble

By Arlene Weintraub Enthusiasm over Genentech's (DNA) colon-cancer drug Avastin has been sky-high ever since the company announced in May 2003 that the drug extends patients' lives by five months -- an unheard of feat with this deadly form of cancer. Sales of the product in the most recent quarter -- its first full quarter on the market -- $133 million, putting it squarely on track to grow into the blockbuster drug Wall Street has been counting on it to become.

Small wonder, then, that investors got a little spooked on Friday the 13th of August. That's when the Food & Drug Administration released a "dear doctor" letter that it had sent to physicians the previous week. The letter warns that Avastin can increase the risk of blood clots, which can lead to heart attack or stroke.

STILL A MAJOR PLAYER. Genentech will update the label on the drug to reflect the risk, which is particularly high for patients over age 65 and for those who have a history of blood clots. "We're working with the FDA, and we have let physicians know what the risk factors are," says Colleen Sweeney, a company spokeswoman. Genentech's stock dipped 5.5%, to close at $44.50 on Friday's news.

Fact is, this information wasn't much of a surprise. Avastin works by cutting off the blood supply to tumors. To do that, the drug blocks a protein called vascular endothelial growth factor (VEGF), which promotes the growth of the blood vessels that feed tumors. Problem is, VEGF is also expressed in normal arteries, and medical experts have long believed that blocking the protein outright could interfere with normal vascular functioning. And in some patients, Avastin is known to cause high blood pressure -- which is, in and of itself, a leading cause of heart attack and stroke.

This newest warning is far from a death knell for Avastin as a blockbuster. With a severe lack of life-extending treatments on the market for colon cancer -- a disease that commonly turns deadly within two years of diagnosis -- Genentech is likely to remain a major player in this market for some time to come.

VULNERABLE TO SHOCKS. When patients lives are on the line, physicians are likely to accept the risk of side effects, even if they could be serious. Geoff C. Porges, an analyst for Sanford C. Bernstein, wrote in a report after the announcement: "We do not anticipate that this warning letter will materially discourage patients, or physicians, from using Avastin."

Furthermore, encouraging early trials of the drug's impact on other forms of cancer, such as lung and kidney cancer, could add significant upside revenue potential toward the end of this decade. Even after Genentech issued its warning, none of the 28 analysts that cover the outfit revised their expectations for Avastin, which many believe could eventually bring in annual sales of $1 billion to $2 billion.

So why did Genentech's stock take such a hit? The answer lies in its valuation. For more than a year now, Genentech's shares have traded way above its peers in the biotech industry. With all the excitement generated by Avastin, the company's share price more than tripled to $122 from spring 2003 until May 13, 2004, when Genentech split its stock two for one. Even after a summer correction and this latest news, the stock is trading at 40 times next year's expected earnings. That's twice the valuation of industry leader Amgen (AMGN).

While the long-term picture on Avastin remains bright, investors should remain wary of getting into Genentech's shares at its current price. "Momentum stocks are vulnerable to these sort of shocks," says Christopher Raymond, an analyst for Robert W. Baird & Co. "It shows that even the Avastin story is not without its risks." Nor is it without a propensity to take investors on a wild ride. Weintraub covers biotech for BusinessWeek in New York.

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