Centocor Finding Wall Street Reluctant to Stomach Latest Setback

The Pennsylvania biotech's bowel drug isn't meeting sales targets. Once again, it's wait till next year.
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It appears

Centocor

(CNTO)

will likely miss analysts' earnings estimates for its second quarter. And the year ain't looking too good either, say two investors and two analysts.

The main problem is that

Remicade

, its drug for the bowel disease called Crohn's, isn't selling well enough. Two other Centocor products, heart drugs

ReoPro

and

Retavase

, are doing fine, so don't worry about them. While the range condoned by Centocor for Remicade sales this year is between $120 million and $160 million, Wall Street is starting to think the Malvern, Pa., firm's drug will barely hit the bottom of the range and may only get to around $110 million.

Street Smart?
Centocor vs. the Nasdaq 100

Source: BigCharts

According to the

First Call

consensus, Centocor is supposed to earn 13 cents a share in the second quarter and 69 cents a share for the year. Centocor's only guidance, which came back in October (might as well have been delivered in ancient Greek for all its current relevance), was that the company would earn 75 cents to 85 cents a share this year.

Jason Rubin, a spokesman for Centocor, declined to comment. He finds himself in the awkward position of having to point out both the current First Call consensus for the year along with the incongruent October guidance when people ask about expectations. The company will report earnings this month and has scheduled a conference call for July 21.

"I think the consensus will keep coming down to the 11-cents-to-12-cents range" for the second quarter, says Jon Alsenas, an analyst for

ING Baring Furman Selz

. But Alsenas says that if things go well -- for instance, if Remicade wins expanded approval for rheumatoid arthritis treatment early enough -- the company could still make 75 cents a share this year. Alsenas rates the stock a buy, and his firm hasn't done any underwriting for Centocor.

Bulls say this news is in the stock, but that's what they always say. Sure, it sort of got "in the stock" briefly, when longtime bearish

Bear Stearns

analyst David Molowa cut his earnings estimates June 25. (Molowa is neutral on the stock; Bear Stearns hasn't participated in recent underwriting for Centocor.) Molowa said then the company was planning to increase its expectations for research-and-development spending and lower expectations for Remicade sales.

Centocor shares had closed at 46 7/8 the day before Molowa's note, and traded down a bit right after. But the news being out among the elite institutions and being in the stock are two different things. After all, the shares have since crept forward, closing Friday at 49 3/4, up 15/16.

Now, Centocor shares are trading at about 72 times 1999 earnings estimates. So does that mean if the bad news weren't in the stock, it would have

eBay's

(EBAY) - Get Report

and

priceline's

(PCLN)

multiples combined, or something like that?

The problem is that Remicade is a powerful drug and doctors continue to use it sparingly. It's approved only for a subset of Crohn's disease patients, but bulls hope that it will be approved later this year for rheumatoid arthritis patients and compete with

Immunex's

(IMNX)

Enbrel

.

Unfortunately for Centocor, Enbrel is safe, highly effective and will have been long established in the market by the time Remicade comes along. Further, it's no guarantee that Remicade, which has had numerous safety concerns, will ever win approval for rheumatoid arthritis. Alsenas at ING Baring expects Remicade to win an expanded approval for the disease by early in the fourth quarter. The earlier the better for Centocor, of course, especially when it comes to making the numbers.

But there is a larger issue. Centocor keeps screwing up its communications with the Street. As talk of missing the quarter flourished, "I called Centocor and told them, 'When am I going to hear from you that the numbers are too low'" and that the Street has to raise estimates, says an exasperated hedge fund manager who's a longtime holder. "The direction is always the same way" with earnings.

Says Alsenas, "There's a sense too often that Centocor is next year's story."

Add to this the collapse of recent merger talks. What appeared to be exploratory talks with

Johnson & Johnson

(JNJ) - Get Report

have been put on hold, Alsenas says. He believes the company isn't on the block. Centocor declines to comment on the issue. Without that takeover hope, the bulls need Centocor to perform. So far, the company's not exactly in line for an Oscar.