Genentech on a Roll

When Genentech(DNA) approaches Wall Street on Monday with first-quarter results, analysts will be asking a familiar question: Is the stock running ahead of its revenue, profit and prospects?

It's a common theme among biotech companies when hope often exceeds reality. In Genentech's case, the gap between hope and reality appears to have narrowed, thanks to a spate of recent good news for the company and bad news for competitors.

One piece of good news was the March 14 release of preliminary late-stage test results that showed Genentech's colon cancer drug Avastin performed well in extending the life of patients with non-small cell lung cancer. That prompted three investment banking firms to upgrade their ratings and the stock jumped nearly 25%.

Another piece of good news was the April 6 release of preliminary data showing that a late-stage clinical test of Rituxan, for non-Hodgkins lymphoma, produced favorable results in patients with rheumatoid arthritis. While the announcement didn't change anyone's rating, the stock rose 2%.

The bad news for competitors arrived on March 21 when Switzerland's Novartis(NVS) and Germany's Schering AG(SHR) reported disappointing results from a late stage-clinical trial of their experimental colon cancer drug called PTK-787, also known as PTK/ZK. Two investment banking firms raised their ratings on Genentech that day. Its stock rose more than 10%.

All of this news won't affect first-quarter results; but analysts will be focusing more on the future as Genentech releases financial information Monday after markets close. Clearly, their sentiment has changed. Three months ago, there were 12 buy recommendations and 17 hold ratings; now there are 19 buy recommendations and 12 neutral ratings.

The consensus among analysts polled by Thomson First Call calls for a first-quarter profit of $266.4 million, or 25 cents, on revenue of $1.37 billion.

During the same quarter last year, the company earned $207.6 million, or 38 cents a share, on revenue of $975 million, excluding one-time items. On a GAAP basis, Genentech earned $176.6 million, or 33 cents a share.

Among Genentech's big three cancer drugs, an informal TSC poll of three Wall Street analysts puts first-quarter Rituxan sales around $460 million; Avastin sales around $220 million; and Herceptin sales at roughly $129 million.

"Although oncology physician practices will likely experience narrower profit margins on drugs purchased, given recent Medicare reimbursement changes, we do not expect a significant change in use of these products," says Elise Wang of Smith Barney.