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Biotech manufacturer

Genentech

(DNA)

is expected to deliver another strong quarterly earnings report as a growing list of indications supports increasing use of several of the company's key oncology franchises. The chart below shows that consensus is about 3 cents ahead of official company guidance for the quarter and the full year. The company is scheduled to report after the close on Tuesday, Jan. 10.

In the fourth quarter, Genentech will continue to enjoy easy year-over-year comparisons and outsized gains in its Avastin and Herceptin product lines. These products began to experience expanded off-label use in additional oncology indications during the second quarter of 2005. Management indicated that about 15% of Avastin sales were attributed to off-label lung cancer use last quarter. I'll be interested in gauging the progress of further off-label penetration or signs of leveling off this quarter.

The market is expecting at least $350 million in Avastin sales, compared to $325 million in the third quarter. Analysts are anticipating better sequential gains for Herceptin this quarter, with forecasts in a $240 million to $250 million range.

Last quarter, the company did warn that a certain amount of inventory accumulation had supported both Avastin and Herceptin sales, so I am expecting less upside in the fourth-quarter report.

Two of Genentech's other oncology products, Rituxan and Tarceva, appear likely to post stronger revenue contributions this quarter. These franchises have shown uneven results and modest growth in recent quarters.

Based on monthly prescription data and an October price increase, U.S. sales of Rituxan sales may breach the $500-million mark this quarter. Rituxan is expected to gain two new indications in first line non-Hodgkin's lymphoma and rheumatoid arthritis during the first quarter of 2006, and seems to have enjoyed increased off-label use and inventory building ahead of these approvals. Similarly, Tarceva's recent approval in a pancreatic cancer indication should revive quarterly sales trends, with over $80 million expected for this franchise.

Some other important issues expected to be discussed on the Genentech call will be the company's outlook for 2006 sales and earnings, as well as updates on the timing for potential new product filings.

Last quarter, management upgraded full-year earnings guidance to 50% year-over-year growth, from 35% previously. This corresponds to $1.24 to $1.25 a share and is 3 cents below current consensus estimates of $1.28. During 2005, Genentech experienced a year of exceptional or unsustainable growth, and is likely to temper expectations going forward.

Consensus currently estimates earnings of $1.81 a share for the full-year 2006. The company has recently reported progress on the filings of Lucentis and Avastin, but may give some clarity on the Herceptin filing timeline in adjuvant breast cancer, which is expected during the first quarter. The company has a relatively full slate of additional product filings and launches scheduled over the course of 2006.

In the third quarter, Genentech beat consensus earnings estimates by five cents a share to register 46% year-over-year growth. Total revenues also jumped 46% to $1.75 billion in the quarter. Results were driven by much stronger-than-expected sales gains in the Avastin and Herceptin franchises, which increased 78% and 70%, respectively. The performance of Rituxan was a bit weaker than expected, while Tarceva was in line with modest expectations.

The company continued to aggressively fund its industry leading R&D program with a 40% spending increase. SG&A spending also advanced at a hefty 32% pace, while the gross margin expanded 60 basis points to the 86.8% level. As mentioned, the company upgraded full-year earnings guidance on the strength of this report.

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Michael Latwis is Director of Health Care Content at TheStreet.com Professional Products. Michael has 10 years of investment experience, most recently with Barclays Wealth management division where he was Associate Director of Research. His responsibilities included portfolio management and research of global pharmaceutical stocks as a senior equity analyst. Michael covered companies in the pharmaceutical and specialty pharmaceutical sectors as well as biotech, medical technology, and healthcare services. He has also covered retail and media stocks and was previously associated with Lazard Freres and Fiduciary Trust. Michael has an MBA from Pace University. Send Michael Latwis

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