Genentech's Strong Quarter Blemished by Approval Worries

Updated from 5 PM

Genentech(DNA Quote - Cramer on DNA - Stock Picks) executives were eager to bask in the glow of a strong first quarter. Instead, analysts grilled them over possible delays in the approval of a new and highly anticipated asthma drug, Xolair.

In short, Wall Street is waiting for Xolair. And waiting. And waiting. Will Xolair gain approval later this year, as hoped by Genentech and investors? Or will the back-and-forth with the U.S. Food and Drug Administration drag on until early next year?

Thursday night, Genentech executives didn't have much of an answer, which could force analysts to retreat to their chalkboards and rethink the company's growth targets.

By some estimates, Xolair could add as much as $50 million to Genentech's top line in 2001 and $300 million in 2002. Peak sales of the drug could reach $1 billion annually.

"We continue to plan for approval [of Xolair] for the latter part of this year," said Susan Bentley, Genentech's director of investor relations. "But we do recognize that approval may not occur until early 2002."

Genentech had previously disclosed that an FDA regulatory panel canceled an April meeting at which the drug was to be discussed. These panels are a precursor to final approval, but a makeup meeting has not yet been scheduled. Thursday night, Bentley said FDA regulators have asked Genentech for more Xolair data from already-completed trials, which just added to the uncertainty over when the drug will reach the market.

"Overall, I was hoping for more clarification on the timing of the Xolair approval, but otherwise, it was a great quarter for the company," says Cory Kasimov, analyst with Gruntal & Co., who gives Genentech his firm's strongest buy rating. Gruntal doesn't do banking for Genentech.

And by all other measures, Genentech did pull off a strong quarter, led by better-than-expected sales of its cancer drugs.

The South San Francisco, Calif.-biotech giant posted net income of $91.2 million, or 17 cents per share, minus special charges, an increase of 21 percent over the year-ago quarter and matching Wall Street estimates as polled by Thomson Financial/First Call.

Revenue for the quarter increased 37 percent to $540.1 million from the same quarter in 2000.

Genentech's big guns are its two cancer-fighting drugs, Rituxan and Herceptin, and both sold more than expected in the first quarter.

First quarter sales of Rituxan, used to treat non-Hodgkins lymphoma, increased 102 percent to $172.1 million, compared with a year ago.

Herceptin, a breast cancer drug, posted first-quarter revenue of $81.4 million, an 18 percent rise over one year ago.

Overall, Genentech's drug sales rose 38 percent in the first quarter to $391.9 million, compared with a year ago.

Sales of Rituxan were particularly strong because of studies that have shown the drug's effectiveness in patients that have more aggressive forms of non-Hodgkins lymphoma. While Genentech doesn't yet have FDA approval to market the drugs in this way, doctors are increasingly using the drugs anyway for these "off-label" uses.

"Rituxan sales blew away my estimates because the off-label penetration has been faster than anyone envisioned," says Kasimov.

Genentech is currently seeking FDA approval to expand the use of Rituxan, which would increase the drug's adoption, the company said today.

Also on Friday's conference call, Genentech executives reiterated the company's previous earnings guidance, which calls for the company to post 25% average annual earnings per share growth. Consensus estimates call for the company to earn 74 cents per share in 2001 and 97 cents per share in 2002, according to Thomson Financial/First Call.

And some of that growth may come from new acquisitions. The company has more than $2 billion in cash, and is looking to use it now that valuations for biotech companies have dropped sharply since last year.

"There are a lot of opportunities that are more attractive today than they would have been at higher valuations," says Lou Lavigne Jr., Genentech's CFO. "We're going to look at acquisitions as well as in-licensing deals."

Ahead of the earnings announcement, Genentech shares rose 40 cents, or 0.9%, to $45.65 in Thursday trading. Shares then jumped to $49.84 per share in after-hours Instinet trading.

The uncertainty over when Xolair will be approved was the only major blemish on what was a strong showing by one of the biotech industy's marquee names. Investors, it seems, were brushing those concerns aside Thursday night and focusing instead on the strong sales growth of the company's cancer drugs.