Genentech Got It Done

Genentech (DNA Quote) blows away consensus estimates, raises its guidance ... and its stock still sells off.

To understand just why that is, one must understand that, as our own Justin Ferayorni put it, the key to Genentech's stock is Avastin, Avastin and Avastin. Quite simply, the drug is vital to Genentech's existing and future revenue. After all, there are currently 130 clinical trials being conducted involving 25 tumor types, according to the company. But for investors to focus only on Avastin is misguided.

U.S. sales of the colorectal-cancer fighter were short of expectations -- $423 million vs. the $439 million estimate. However, sales of the anticancer drugs Rituxan and Herceptin both came in above the consensus predictions, at $526 million and $320 million, respectively, compared with expectations of $503 million and $309 million.

Seemingly lost in the examination of the earnings report was the fact that Genentech boosted its full-year guidance to what would be the equivalent of roughly $1.98 to $2.05 a share. The previous consensus on Wall Street was $1.96. That's a 55% to 60% increase in earnings over last year's $1.28 -- not bad for a nearly 30-year-old company with expected revenue of almost $9 billion.

How to Execute

Genentech raised its guidance because of strong sales and improving margins. The cost of sales dropped to 16% from 22% a year ago, and the company expects that figure to remain the same through the rest of the year. Marketing, general and administrative costs dipped to 20% of sales from 23% in the year-ago period, and management believes MG&A will come in between 20% and 21% for the remainder of 2006.

This tells me that, while revenue is growing, Genentech's management is still able to exercise some fiscal responsibility. As sales increased, MG&A actually rose 23%, but as a percentage of sales, it dropped.