Genentech Matches Estimates, but Growth Rates May Be a Question

Updated from 4:47 p.m. EST

Genentech

(DNA)

kicked off biotech earnings season Tuesday by reporting higher first-quarter profits, matching Wall Street estimates.

But on its subsequent conference call, analysts were looking forward and seemed concerned with two issues: The strength of the company's drug development pipeline and the apparent slowing rate of growth in its top-selling cancer drug, Rituxan.

The South San Francisco-based biotech firm said pro forma net income rose 30% to $118.6 million, or 22 cents per share, compared with the year-ago quarter. Actual net income, excluding charges relating to a 1999 stock redemption, rose 256% to $95.3 million.

First-quarter revenue rose 14% year over year to $613.4 million, driven largely by sales of Rituxan, used to treat non-Hodgkins lymphoma. Rituxan sales totaled $247.5 million in the first quarter, up 44% from the year-ago quarter. But first-quarter Rituxan sales came in at the low end of Wall Street forecasts -- even though the company hiked the drug's price by almost 5% on March 1.

Now, most biotech companies would kill for 44% year-over-year growth in their lead product, but Rituxan's sales have been growing at an 87% clip, on average, for the last four quarters.

On the conference call, Genentech COO Myrtle Potter reasoned that investors should not expect Rituxan to sustain the stratospheric growth of 2001. But the drug is far from mature, she added, because Genentech continues to see doctors using it in more aggressive treatments of non-Hodgkins lymphoma, as well as in off-label uses for other blood cancers like chronic lymphocytic leukemia.

First-quarter Rituxan sales were "in line with our expectations and remain on track to meet our 2002 sales goals," she said.

Sales of Herceptin, the company's breast cancer drug, totaled $86.8 million in the first quarter, a 7% gain compared with last year. Again, Herceptin's sales came in at the low end of analyst estimates.

While Genentech turned in another solid quarter that matched bottom line estimates, investors are feeling uneasy because delays hitting drugs in its pipeline are raising questions about whether the company can still meet its goal of an average 25% earnings growth per year through 2005.

Last Friday , Genentech disclosed the second major delay in its experimental psoriasis drug, Xanelim. Like Genentech's other delayed product, the asthma drug Xolair, Xanelim won't be ready for Food and Drug Administration review until the end of the year, at the earliest. At one time Xolair was expected to hit the market in late 2001; Xanelim at the end of 2002.

Genentech's shares have fallen 16% in the past three trading sessions, closing Tuesday at $41.05, on the Xanelim setback. That's almost 30% off its 52-week high of $58.95, reached in December 2001.

Genentech's latest Xanelim troubles stems from the fact that the latest version of the drug made by Genentech is dissimilar from an earlier version made by its partner,

Xoma

(XOMA) - Get Report

. That's an FDA no-no. Analysts on the call were seeking assurances that Genentech could, indeed, file the Xanelim approval application by the end of year, and do so with enough data from patients taking the Genentech-manufactured drug. Without offering a complete guarantee, Genentech executives expressed confidence that they'd be able to satisfy any FDA concerns.

And what about that goal of achieving 25% earnings growth through 2005? Yes, Xanelim is delayed, said CFO Louis Lavigne, but these sorts of snags are built into the company's financial projections. Lavigne said Genentech remains confident that it can meet Wall Street earnings expectations of 91 cents per share this year.

That translates into 19% annual earnings growth, below the company's stated, long-term goal. But no worries, says Lavigne, because the company has averaged 30% earnings growth in the first three years of the plan, and it still has two years to go.