Robert Steyer

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Another Big Quarter for Genentech

Robert Steyer

Genentech's(DNA - Cramer's Take - Stockpickr) third-quarter earnings released late Wednesday comfortably beat Wall Street estimates on a 47% jump in revenue. The biotech giant also brought its full-year earnings guidance up to a level consistent with analyst forecasts.

Nevertheless, shares fell 23 cents, or 0.5%, to $50.02 in premarket trading Thursday.

For the three months ended Sept. 30, Genentech earned $259.6 million, or 24 cents a share, on revenue of $1.2 billion. These are non-GAAP figures, which exclude recurring charges related to the 1999 Roche redemption of Genentech stock, special litigation items and a 2003 change in accounting. Roche owns 58.3% of Genentech's stock.

The consensus view on Wall Street for Genentech's third quarter was a profit of $228.9 million, or 21 cents a share, on revenue of $1.2 billion for the third quarter, which ended Sept. 30, according to Thomson First Call.

The company earned $143.9 million, or 14 cents a share on a split-adjusted basis, on revenue of $817 million for the same period last year.

The South San Francisco, Calif.-based biotech giant also said it was raising its predictions for full-year earnings per share to a range of 80 cents to 83 cents, up from a previous range of 75 cents to 80 cents. Analysts had been expecting a full-year EPS of 81 cents, according to a survey by Thomson First Call.

Genentech's new EPS guidance implies lower sequential earnings for the fourth quarter. On its conference call, CFO Lou Lavigne said the company expects higher expenses in the fourth quarter, mainly related to prelaunch spending for the lung cancer drug Tarceva, as well as to ongoing research and development activities. While fourth-quarter EPS will be lower on a sequential basis, the company still expects significant top-line revenue growth, Lavigne said.

The financial report was issued after markets had closed.

The company's revenue for the three months ended Sept. 30 was aided by Avastin, the new drug for treating advanced colon cancer. Avastin produced $183 million in sales, an increase of $50 million over the second quarter and a figure higher than many analysts had predicted. The drug was approved by the Food and Drug Administration in late February.

Avastin's sales appeared to have been little affected by a company warning sent in mid-August that said Avastin was linked to "serious thromboembolic adverse events," such as stroke, heart attacks, heart-related chest pains and death caused by blood clots.

In tests involving patients with advanced colon cancer, this warning -- known in the drug business as a "Dear Doctor" letter -- said that the risk of a dangerous side effect was approximately twice as great for patients receiving Avastin.

On the conference call, COO Myrtle Potter said Avastin's market penetration in first-line colon cancer had doubled sequentially to 40% in the third quarter. Given the fact that there are only a finite number of new colon cancer patients to treat, Potter said the company sees Avastin possibly reaching peak market penetration faster than expected. In other words, the rate of Avastin's sales growth in colon cancer may soon start to slow. At the same time, Potter said the company still believes that the overall market opportunity for Avastin in colon cancer remains the same.

Noting the strong Avastin sales numbers from the past two quarters, some investors have begun to worry that Avastin may be peaking too soon. But on a positive note, Genentech is still developing Avastin as a treatment for a variety of other cancers, including lung, renal and pancreatic.

A recent report by the SG Cowen brokerage said that "although Avastin appears to be tracking ahead of expectations, we believe the potential for future sales revisions to spark upside in Genentech shares is modest." However, the firm, which doesn't provide stock ratings, added that it still believes that Avastin will continue to gain more market share in the colorectal cancer market "and could provide further upside" to Wall Street estimates.

Also on Wednesday, Genentech said its biggest drug, Rituxan, recorded sales of $437.7 million, an 18% increase over the same period last year. The drug, which treats patients with non-Hodgkins lymphoma, is marketed in the U.S. through a joint venture with Biogen Idec(BIIB - Cramer's Take - Stockpickr). Sales of the advanced breast cancer drug Herceptin rose to $126 million, a 17% increase over the same period last year.

Commenting on the subpoena received Monday from government prosecutors concerning Rituxan, CFO Lavigne said the company has not been informed about the origin of the investigation, but that it is cooperating and is committed to the ethical and legal promotion of its products. Company executives declined to take any questions about the matter.