Genentech ( DNA) blows away consensus estimates, raises its guidance ... and its stock still sells off.To understand just why that is, one must understand that, as our own Justin Ferayorni put it, the key to Genentech's stock is Avastin, Avastin and Avastin. Quite simply, the drug is vital to Genentech's existing and future revenue. After all, there are currently 130 clinical trials being conducted involving 25 tumor types, according to the company. But for investors to focus only on Avastin is misguided. U.S. sales of the colorectal-cancer fighter were short of expectations -- $423 million vs. the $439 million estimate. However, sales of the anticancer drugs Rituxan and Herceptin both came in above the consensus predictions, at $526 million and $320 million, respectively, compared with expectations of $503 million and $309 million. Seemingly lost in the examination of the earnings report was the fact that Genentech boosted its full-year guidance to what would be the equivalent of roughly $1.98 to $2.05 a share. The previous consensus on Wall Street was $1.96. That's a 55% to 60% increase in earnings over last year's $1.28 -- not bad for a nearly 30-year-old company with expected revenue of almost $9 billion.
All of these positives to the income statement start at the top line with what was strong revenue, even with the soft Avastin sales. Another way the company showed me it's able to execute was the shipment of $10 million worth of Lucentis on the day it was approved. On June 30, the Food and Drug Administration gave the green light to Genentech's treatment for wet age-related macular degeneration. Though it's not unheard of for a company to start shipping a product on the same day it is approved, it's not exactly the norm. I certainly wouldn't have taken points away if Genentech took a little while to start moving the product out the door, but color me impressed on the execution. I was fascinated that on the conference call only one question was asked of Chief Financial Officer David Ebersman. He even thanked the analyst for asking it because he "didn't want to go two calls in a row without a single question." No doubt that pipelines and trials are the lifeblood of biotech companies, but an impressive financial performance like Genentech's shouldn't be ignored.
Along with the November appointment for Avastin, Genentech will go before the FDA on Aug. 17 with data on Herceptin for breast cancer (it's already approved for a specific type of breast cancer) and Oct. 11 with Avastin plus platinum chemotherapy for the treatment of nonsmall-cell lung cancer. Genentech will also soon start a couple of Phase III trials for rheumatoid arthritis and neuromyelitis optica, an inflammatory disease that strikes the optic nerve and spinal cord. Shares of Genentech, at more than 40 times 2006 estimated earnings, aren't cheap. However, on a forward price-earnings-to-growth basis, the stock is trading at roughly one times growth. Nevertheless, anyone with a long-term time horizon may want to wait for the speculators and weak hands to sell and let the shares come in a bit. At that point, investors will have the opportunity to pick up a leading biotech name that has proven it can perform.