Subpoena May Spoil Genentech's Earnings Party

Updated from 6:58 a.m. EDT

The drugs Avastin and Tarceva might be the keys to Genentech's (DNA Quote) future, but company executives may have to dwell on the past a little bit more than they would like to Wednesday afternoon when they discuss third-quarter results with analysts and investors.

That's because Genentech disclosed late Monday that the U.S. attorney in eastern Pennsylvania had subpoenaed documents about Rituxan, its treatment for non-Hodgkin's lymphoma, which is sold in the U.S. through a joint venture between Genentech and Biogen Idec(BIIB Quote). Genentech said the "inquiry is both civil and criminal in nature," adding that the subpoena is related to the promotion of the drug. The company offered no other details.

After the markets closed and ahead of its earnings conference call Wednesday, the company said it earned 230.9 million, or 21 cents a share. That compares with earnings of $143.9 million, or 14 cents a share on a split-adjusted basis, for the same period last year. Non a non-GAAP basis, the company earned 24 cents a share.

The consensus view on Wall Street was net income of $228.9 million, or 21 cents a share, on sales of $1.2 billion for the three months ended Sept. 30, according to Thomson First Call.

For Genentech earnings, it's a tale of three money-spinners: past, present and future.

Rituxan, which is also being considered for other treatments, is currently Genentech's top drug. For the first six months of this year, the drug produced $825 million in sales, or 39% of corporate revenue. Rituxan, which reached the market in late 1997, recorded revenue of $1.49 billion last year.

Avastin, an advanced colon cancer drug, is viewed as the key sales and earnings propellant in the near term, while the experimental Tarceva, whose late-stage clinical tests have shown promising results in lung cancer and advanced pancreatic cancer, is looked upon as an integral part of Genentech's long-term financial vision.

Fast Start for Avastin

"Avastin is the most important driver of Genentech's future revenue growth, and should contribute more than 42% of total top-line growth and 50% of EPS growth through 2008," said Geoffrey C. Porges of Sanford C. Bernstein & Co., in a late September report to clients. He has a market perform rating on the stock. (He doesn't own shares; his firm doesn't have an investment banking relationship.)