High Hopes Hit Genentech

The shares drop as Wall Street worries about Avastin.
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Updated from 9:09 a.m. EST

When you're a superstar, good isn't good enough.

Genentech's

(DNA)

shares fell Wednesday after the company reported fourth-quarter earnings that merely matched estimates and said sales of a key cancer drug weren't as strong as some people hoped.

Merrill Lynch cut the shares to neutral from buy, citing the shortfall in sales of Avastin, the cancer drug. First Albany also cut the stock to neutral. In morning trading, shares of Genentech were down $4.76, or 5.1%, to $88.58.

Genentech's shares surged 70% last year. They closed Tuesday at 52 times the Thomson First Call 2006 earnings estimate of $1.81 a share, and 37.6 times the 2007 estimate of $2.48 a share. As such, a lot of optimism was built into the price.

For the quarter ended Dec. 31, Genentech earned $339.2 million, or 31 cents a share. Excluding certain charges, the company earned 34 cents, matching the average forecast of analysts surveyed by Thomson First Call. Genentech earned $206.6 million, or 19 cents a share, a year ago.

Operating revenue totaled $1.89 billion in the latest quarter, a 44% increase from last year. Product sales rose 48% to $1.58 billion.

By any empiric measure, Genentech saw stellar sales of the colorectal cancer drug Avastin, as doctors increasingly prescribed it in cases beyond the indication for which it was approved by the Food and Drug Administration. Avastin brought in $359.1 million in U.S. sales during the fourth quarter, up from $190.5 million in the prior year. Avastin sales for the full year were $1.13 billion, more than double the prior year, after being boosted by positive clinical trial data

presented in May.

Analysts were hoping for more, however. A consensus estimate gathered by

Briefing.com

suggests Wall Street was hoping for Avastin sales of roughly $370 million in the fourth quarter.

Data from a late-phase trial showed that Avastin could extend the lives of patients with a certain type of nonsmall-cell lung cancer, resulting in increased demand for the drug and driving Genentech to practically max out its production. The company is now operating at about 100% of its manufacturing capacity and is boosting its output at some plants.

Fourth-quarter U.S. sales of the breast cancer drug Herceptin jumped 98% to $250.1 million, slightly better than expected. Genentech reported a 70% increase in Herceptin sales in the

third quarter.

Last year, Avastin came closer to topping Rituxan as Genentech's top-selling drug. Sales of Rituxan, a non-Hodgkin's lymphoma treatment, were $484.4 million in the fourth quarter, an increase of 13% that matched estimates. Some analysts expect to see Avastin supplant the older drug in the top spot as early as next year.

"Looking back over 2005, Genentech had a year of unprecedented success in clinical trial results and FDA filings for potential therapeutics to treat cancer, blindness and rheumatoid arthritis," said Arthur Levinson, Genentech's chairman and chief executive, in a prepared statement.

With Genentech's exceptional growth in 2005, however, come questions about whether the company can continue at that level

going forward.

Still, Genentech said it expects 35% to 45% growth in earnings before items for 2006. On that basis, the company earned $1.28 a share last year, and the forecast implies earnings of $1.73 to $1.86 a share. Wall Street is looking for a profit of $1.81 a share this year.