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) - Get Report

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.

For the current fiscal year, the Thomson First Call consensus expects a profit of $1.18 billion, or $1.09 a share, on revenue of $6 billion.

Colon Cancer Competition

"The streak continues," says Howard Liang, of A.G. Edwards, in a recent report to clients about the Avastin advance and the Novartis-Schering retreat. "While it is still possible for PTK-787 to demonstrate a survival benefit ... we think the commercial availability of Avastin could make the task more difficult."

PTK-787 represented a major challenge, in part because it's a pill, while Avastin is administered intravenously. But Novartis and Schering said PTK-787 failed to meet one clinical goal of prolonging life without the cancer becoming worse. Another measurement of prolonging life achieved statistical significance, prompting them to continue testing the drug. They are pushing back by perhaps two years their filing of applications to European and U.S. regulators.

Considering that the earliest Schering and Novartis might seek regulatory approval for PTK-787 is 2007, the next two years "could be smooth sailing for Avastin commercially from a competitive standpoint," says Liang, who has a hold rating on the stock. He doesn't own shares; his firm has had a noninvestment banking relationship.

New Uses for Drugs

With its flank apparently protected against a colon cancer competitor, Genentech is looking to lung cancer as a way to significantly expand sales. "Avastin is running out of room

to grow in colon cancer," says M. Ian Somaiya, of Thomas Weisel Partners, in a March 29 research report. "The non-small cell lung cancer market could be double the size."

Somaiya, who has a peer perform rating on the stock, says lung cancer requires larger doses of Avastin and a longer treatment period than does colon cancer. He predicts Genentech will seek FDA approval of Avastin for lung cancer during the second quarter. His best-case scenario calls for the drug being approved by year-end. He doesn't own shares; his firm doesn't have an investment banking relationship.

Somaiya's optimism is based on

a National Cancer Institute study that shows patients taking Avastin plus two standard treatments for lung cancer had an improved overall survival rate -- or a reduced death rate -- compared with patients solely receiving chemotherapy.

The study says Avastin patients had a median survival rate of 12.5 months compared with 10.2 months for the chemotherapy-only patients. The difference is statistically significant. More details will be unveiled next month at a major cancer-research conference.

Analysts say they'll need more details on the tests involving Rituxan and rheumatoid arthritis before they're as gung-ho as they are about Avastin.

"Physicians are very excited about the prospects of Rituxan, but we believe there are just too many unanswered questions about Rituxan at this stage, which may take years to resolve," says Craig C. Parker, of Lehman Brothers, in an April 6 report to clients. He has an equal weight rating on Genentech. He doesn't own shares; his firm has had a noninvestment banking relationship with Genentech.

On April 6, Genentech and its Rituxan partner

Biogen Idec

(BIIB) - Get Report

said preliminary tests results showed patients taking Rituxan plus another drug, methotrexate, had statistically significant improvements vs. patients taking methotrexate plus a placebo after 24 weeks of treatment.

Improvement was based on measurements of reduced swelling and tenderness in joints, plus other indicators.

Mark E. Augustine, of Credit Suisse First Boston, speculates that Genentech and Biogen Idec might unveil more Rituxan data at a medical conference in Vienna in June. He predicts the companies by year-end will file applications to regulators in the U.S. and abroad for Rituxan as a rheumatoid arthritis treatment. He has an outperform rating on Genentech. He doesn't own shares; his firm has had an investment banking relationship with Genentech.

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Staff Reporter Althea Chang contributed to this story.