Will Earnings Pull Biotech Out of the Summer Doldrums?

Updated from 9:09 AM.

Investors are hoping that strong second-quarter performances will lift the biotech sector out of its current malaise.

The American Stock Exchange Biotech Index outperformed the broader Nasdaq Composite with a 30% gain in the second quarter, but June was a cruel month. The index hit its year-to-date high on June 5, but has since drifted more than 16% lower. A slew of bad news from U.S. drug regulators only added to the gloom.

Amgen(AMGN Quote), Praecis(PRCS Quote) and Novartis(NVS Quote) all had drugs rejected by the Food and Drug Administration, while Eli Lilly(LLY Quote) was sent back to the waiting room with its highly anticipated sepsis drug.

But positive second-quarter earnings should help clear the air and get biotech stocks moving again. Biotechs, like their larger pharmaceutical brethren, are relatively immune to a slowing economy. Early indications point to strong drug sales during the quarter, which should help biotechs meet or exceed earnings expectations.

Genentech(DNA Quote) kicks off the biotech earnings season Wednesday, with the Street looking for earnings of 19 cents per share. A key measure to watch is sales of Rituxan. The cancer drug has become a big hit with doctors, driving up sales during the quarter. Most analysts have ratcheted up quarterly revenue estimates for the drug to well north of $200 million. If Genentech beats earnings estimates, it will be because of boffo Rituxan sales.

The company's other big revenue driver, the breast cancer drug Herceptin, looks a bit shakier. Sales of the drug looked to be in line with, or just a bit lower than expectations, which range from $75 million to as much as $83 million. There is a chance that Herceptin sales surprise to the upside, however, because positive follow-up research on the drug was published in April and May.

Analysts are busy taking down estimates for upcoming years after news Tuesday that the FDA was rejecting approval this year of the company's highly anticipated asthma drug Xolair. Company executives had acknowledged that the current dyspeptic mood at the FDA could mean an approval delay until early next year. Now it looks as if it might be even further out. An advisory committee of the FDA will also meet Aug. 9 to discuss Tracleer, Genentech's experimental drug to fight pulmonary hypertension.

Shares in Genentech rose 9% during the second quarter.

Genentech Banking on cancer drug Rituxan

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Idec Pharmaceuticals (IDPH Quote) shares Rituxan revenue with Genentech, so the San Diego biopharmaceutical firm is another strong candidate to beat second-quarter expectations of 15 cents per share, up nicely from a 9-cent per share profit in the year-ago quarter.

Idec is a one-drug story for now, but that hasn't stopped investors from going gaga for its shares, which jumped 69% during the second quarter. The company does have a second cancer-fighting drug, Zevalin, in front of FDA regulators. The drug's approval has been delayed because regulators asked for additional information. Expect an update on Zevalin's progress from company executives during its analyst conference call.

Idec Pharmaceuticals Soared 69% in second quarter

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Analysts won't be too surprised if Genzyme General (GENZ Quote) also reports earnings above expectations of 28 cents per share, mainly because the company has a knack for beating estimates. It trounced first-quarter expectations by 3 cents per share on strong sales of its two big drugs, Renagel and Cerezyme. That performance helped Genzyme's shares post 30% gains during the second quarter.

Analysts are looking for $143 million in Cerezxyme sales and $32 million in Renagel sales during the second quarter. More importantly, company executives could boost revenue and earnings guidance for the remainder of the year. Currently, Genzyme is expected to earn $1.18 per share in 2001.

Genzyme is also waiting for the FDA and European regulators to rule on Fabrazyme, a new drug to treat Fabry's disease.

Genzyme General Defies expectations with two solid performers

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Chiron(CHIR Quote) is one of the few profitable biotech firms that will report lower second-quarter earnings this year. The company is expected to post a profit of 19 cents per share in the second quarter, down from 30 cents per share during the second quarter last year.

Year-over year comparisons are not exactly fair because Chiron sold about $100 million of its meningitis-C vaccine to the U.K. during the first half of last year, skewing the company's results. While overall revenues will be lower, the deficit should be narrowed by strong sales of Tobi, the company's cystic fibrosis drug, which performed well in the first quarter. Overall, analysts are looking for revenue to come in around $170 million.

The big issue with Chiron is its weak pipeline of new products and drugs, which is putting a drag on future earnings growth. The company is still waiting for FDA approval for a new, super-sensitive test to screen for HIV and hepatitis in donated blood. The company is also developing an experimental drug to fight sepsis, but testing won't be completed until next year.

Chiron needs to acquire or license new products. The company recently raised $400 million in a convertible debt offering, pushing its cash levels to more than $1.2 billion. How it plans to use that money will certainly be a topic of conversation during the company's analyst conference call.

Chiron Has some question marks but has a strong cystic fibrosis drug

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The problem with Amgen is not its drug pipeline (among the strongest in the sector), but whether it can actually get its drugs onto pharmacy shelves. Last month, the FDA shot down Plenaxis, the company's experimental prostate cancer drug, and Aranesp, its highly anticipated, second-generation anemia drug, is now officially delayed in the U.S. The FDA also is reviewing two other Amgen drugs.

Analysts are looking for Amgen to earn 28 cents per share in the second quarter. Sales of Epogen are expected to reach between $520 million and $550 million, while Neupogen will generate revenue of around $325 million, according to analyst estimates.

Amgen was expecting Aranesp to get an FDA green light during the first half of the year. With those hopes dashed, there is a chance that company executives might reduce revenue and earnings estimates for the rest of the year, especially if the company believes Aranesp approval may not come until much later in the year. At this point, Amgen is expected to earn $1.17 per share in 2001.

Amgen Approval delay on anemia drug could hurt bottom line