One of the newer bits of conventional wisdom in
biotech regarding Idec Pharmaceuticals is that its new cancer drug, Zevalin, is
more important to the company's bottom line than its
other cancer drug, Rituxan. The reason: Idec keeps
100% of the profits from Zevalin, but must share the
Rituxan bounty with Genentech.
Well, look what happened Wednesday. Idec reported
disappointing fourth-quarter Zevalin sales, while
Genentech and Idec co-reported stronger-than-expected
Rituxan sales. But somehow, Idec beat Wall Street's
fourth-quarter earnings per share estimate by a whopping 4 cents per share.
It seems as if Rituxan, and not Zevalin, is the
key to Idec's profit. Let me explain why, and also
make the case for buying Idec, not Genentech, in order
to best capture Rituxan growth:
Under its partnership with Genentech, Idec has two
different revenue streams for Rituxan. First, it gets
a split of U.S. Rituxan sales. Second, it earns a
royalty on end-user sales of the drug in Europe, where
it's marketed by Swiss drugmaker
Roche. Every bit of
the ex-U.S. royalties flow directly to Idec's bottom
line. By comparison, Idec has to field a sales force
to sell Zevalin.
Lazard biotech analyst Joel Sendek has been
telling his clients for the past year that most
investors are paying too much attention to Zevalin,
and undercutting the significance of the Rituxan
revenue stream -- especially those lucrative ex-U.S.
royalties -- on Idec's future growth.
By Sendek's reckoning, every $10 million in
incremental sales of U.S. Rituxan sales translates
into 1.2 cents per share on Idec's bottom line. But
take a look at this: Every $10 million in incremental
ex-U.S. Rituxan sales pads Idec's profits by 3.5 cents
per share. That's just a whisper more than the EPS
impact of Zevalin sales. (Understand that Idec and
Genentech do not disclose the exact details of their
Rituxan partnership.)
This analysis becomes even more important when you
realize that Rituxan's ex-U.S. sales growth is
tremendous -- on the order of 122% in 2002, by
Sendek's estimate. (The final number won't come in
until Roche reports fourth-quarter results next
month.) Wednesday, Genentech and Idec reported 39%
growth for U.S. Rituxan sales in 2002.
Adam Feuerstein
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