Genentech Slides as Drug Setbacks Trim Optimism

What other surprises are in store for Genentech (DNA Quote) investors?

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Genentech's Numbers Meet Expectations

That's the big question facing investors in the big biotech company after shares dropped as much as 12% Friday, hitting $52.94. The stock's decline came in reaction to disclosures that the South San Francisco, Calif., company would have to do more tests on Xolair, a potential major asthma and hay fever drug in late-stage development. And sales of breast cancer drug Herceptin disappointed some analysts, who say the drug's growth may be flattening.

The disclosures came after Genentech, considered a powerhouse in drug development, released fourth-quarter numbers late Thursday that were in line with Wall Street estimates, driven by strong sales of another cancer drug called Rituxan, which is co-marketed by Idec Pharmaceuticals (IDPH Quote).

The Herceptin and Xolair disclosures sent analysts scurrying to cut forecasts for Genentech, with Credit Suisse First Boston cutting its rating on the stock to buy from strong buy. That's because there are also threats on the horizon to Rituxan in the form of Zevalin, a similar Idec drug for non-Hodgkins lymphoma that the Food and Drug Administration may approve by midyear.

Changing the Mix

"Genentech has previously been a company with near-perfect fundamentals that included a strong pipeline with a mix of high-growth products," said CSFB analyst Alex To in a morning note. "However, looking into 2001, the catalysts will be more mixed." The analyst cut his price target for Genentech sharply, to $80 from $125.

Besides Rituxan, Herceptin was considered a major earnings driver for Genentech, which is majority held by Switzerland's Roche. But sales of the drug fell short of analysts' forecasts for the third straight quarter, rising 26% to $68 million, below the $75 million that some analysts forecasted. That generally means that doctors may not be having as good results as expected with the drug, which was approved in 1998.

For biotech bulls accustomed to drug setbacks, the news isn't of major concern. Few drugs in development take a flawless path to market. But Genentech, being in the business longer than almost any other biotech, is sometimes held up to a higher standard, as reflected in its market capitalization of $28 billion.

Talk Talk

And some investors wondered if the company may be losing its magic touch and whether there could be other surprises in store. One fund manager said there is talk in the scientific community that Genentech's clinical tests for Herceptin in other cancers, like that of the lung, aren't promising. The company is expected to release Herceptin data this quarter.

Still, while the setbacks, including that of Xolair, hurt the short-term value of the stock, analysts weren't calling for investors to sell. Genentech has a dozen or so other drugs at various stages of development, and chances are always that some will achieve blockbuster status. And the company has plenty of cash, along with experience stretching to the inception of the biotech business decades ago.

"With a strong cash position of $2.5 billion as of Dec. 31, 2000, and a robust product pipeline, we believe the company offers the breadth and stability of a pharmaceutical company with the growth potential of a biotechnology company," says analyst Joel Sendek of Lazard Freres, which rates the stock outperform and doesn't advise the company. "We believe DNA deserves to trade at a premium to its comparable group."