Avastin Paves Way for Upward Revisions on Genentech

Genentech ( DNA) announced impressive second-quarter sales for its Avastin colon cancer drug after the close Wednesday, handily beating lofty investor expectations and giving analysts good reason to boost sales forecasts.

Avastin sales in the quarter totaled $133 million, well above the sell side's consensus forecast of $85 million and topping even Wall Street's $100 million "whisper" estimate.

On its conference call Wednesday night, Genentech executives said there was no significant increase in inventory stocking during the quarter, which puts Avastin on a $500 million-plus sales run rate for the year. On average, sell-side analysts are currently forecasting about $400 million in Avastin sales this year, so don't be surprised if some analysts raise their numbers.

Avastin's first full quarter of sales was the big investor focus of Genentech's second-quarter earnings report, and the positive result was reflected in the stock's 2.4% rise to $55.18 in after-hours trading. The stock closed down 1.4% to $53.90 in Wednesday's regular trading session.

But Genentech is more than just Avastin, and the rest of the company's earnings report was solid, but not necessarily a home run. Pro forma earnings per share rose 19% vs. a year ago to 19 cents, in line with the consensus estimates, according to Thomson First Call.

Given the big upside surprise in Avastin sales, Genentech's bottom-line result seemed a bit of a disappointment. But the company did take two one-time charges totaling almost $59 million in the quarter, which one fund manager estimated at about 3 cents per share. Put that back in and Genentech could have earned 22 cents per share in the quarter.

Genentech also raised earnings guidance for 2004 to the range of 75 cents to 80 cents per share, but Wall Street was already forecasting 79 cents per share. If anything, Genentech's new guidance suggests the company intends to spend some of the Avastin upside this year on new product launches and more research and development, instead of allowing the sales to flow to the bottom line.

Right now, the Street has Genentech growing earnings by 31% this year. The midpoint of Genentech's new guidance pegs earnings growth at about 29%. Normally, you'd think analysts might take down their earnings estimates for the year; but Genentech is not normal, not with a top-line rocket like Avastin, plus the approval of the lung cancer drug Tarceva on the horizon. My sense is that analysts aren't going to quibble over a few pennies on the bottom line. Besides, Genentech still has plenty of time to raise 2004 earnings guidance again.

Of course, Genentech is not a cheap stock. At its current price, the company trades at 68 times 2004 earnings and 52 times expected 2005 results. At these valuations, upside surprises and a stellar earnings report are an absolute necessity.

It remains to be seen whether these second-quarter results -- and the strong Avastin sales figure -- boost Genentech's stock to another level. Despite a recent sell-off that began after the conclusion of the closely watched American Society of Clinical Oncology meeting in early June, Genentech shares are still up 17% this year, outpacing the broader biotech sector. The stock has zoomed more than 220% since the beginning of 2003, thanks, again, to Avastin.

By comparison, Amgen ( AMGN) -- the world's largest biotech firm by market cap -- is down 13% this year and up just 9.5% since the beginning of 2003.

Biotech investors crave growth and with Genentech they get it in spades. Not so at Amgen right now. Genentech grew earnings last year by 30% and will likely equal or exceed that this year and next. By comparison, Amgen's expected earnings growth looks downright miserly at 26% and 18% in 2004 and 2005, respectively.

On a relative valuation basis, Amgen is a lot cheaper than Genentech. But then again, biotech investors don't seem to care much about paying a high prices for strong growth.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to adam.feuerstein@thestreet.com.

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