Editor

Investors are likely to be all ears this week when Genentech Inc. hosts its annual meeting with stockholders. A recent earnings report and other news from the pioneering company - the industry's oldest, often cited by analysts as an example of what a biotechnology firm can be - seem certain to drum up even more interest than usual in the much-watched firm.

Questions surround Tarceva (erlotinib HCl), the Phase III drug in trials for lung and pancreatic cancers. A data safety and monitoring board, citing an undisclosed problem with one trial, said patients given Tarceva as front-line therapy should be taken off the drug after their disease progresses. Neither Genentech nor partner OSI Pharmaceuticals Inc. could offer more details.

Worries over Tarceva, the subject of a three-way deal that also involves F. Hoffmann-La Roche Ltd., may have been responsible for the lack of Wall Street rejoicing when Genentech disclosed its hardy earnings April 10. Genentech shares dipped $1.43 to close at $34.99, and OSI took a 9.5 percent slap, ending the day at $14.38, down $1.51.

Even IDEC Pharmaceuticals Inc., Genentech's partner for sales leader Rituxan (rituximab), was made to feel investor skepticism. IDEC closed with a loss of 6.92 percent, or $2.35, at $31.59.

The IDEC nip may have been due to suspicions that demand for Rituxan is slacking off, as indicated by slowing sales growth, although Rituxan and Genentech's other strong anticancer drug, Herceptin, sold at record levels in the latest report.

Along with news on Tarceva, analysts and investors will be sniffing for any hints on the colorectal cancer drug Avastin (bevacizumab), which is in Phase III trials with colorectal cancer with data expected in mid-2003. In late March, analyst Mark Augustine with Credit Suisse First Boston cast doubt on Avastin's prospects in a research report citing Avastin data so far available, review of literature and "conversations with key clinicians and researchers."

Among those who sought to rehabilitate Genentech's standing was Winton Gibbons, analyst with William Blair & Co., who owns no stock in the company but wasn't placing much stock, either, in some of the dark opinions afloat.

"The Genentech franchise is not a traditional biotech franchise," he said. "It's more like a middle-size pharmaceutical company."

With regard to Rituxan, "The company only needs to get 30 percent year-over-year [sales] growth, and the growth in Europe was 65 percent year over year in local currency" for the first quarter, Gibbons said.

Total Genentech sales reached $598.5 million, 26 percent more than the same quarter a year ago, with leader Rituxan (rituximab) hitting $341 million in sales, 38 percent more than 2002's first quarter.

The company said it bumped prices for Rituxan by 5.8 percent and Herceptin by 5.5 percent on March 7 of this year and allowed a four-week grace period for buyers, but inventory levels still finished the fourth quarter at the upper end of the typical range and finished the first quarter at the low end.

Some investors might have interpreted this as a sign of weakening demand, Gibbons acknowledged.

"But if you go back and look at just the U.S.-driven numbers, which is what a lot of people seem to be focused on, and go back to 2001, what happened [as compared to] 2002?" Gibbons said. "Did we see a similar phenomenon? Yes. You basically had essentially flat [sales]. It was up $1 million in the first quarter of 2002 vs. the fourth quarter of 2001."

Gibbons said some may be asking too much from Genentech because of its impressive historical performance, and therefore overlook what's cooking in the company. Not only is Tarceva's safety record generally satisfactory, which could speak well for its chance, but the company has Avastin and other products potentially on the market by the end of 2003: Raptiva (efalizumab) for psoriasis and Xolair (omalizumab) for asthma, both awaiting FDA approval.

"They've showed great financial management and got no credit for it," he said of the company, noting that Avastin, also being studied for renal cancer, shows more promise in that indication and seems to work better in early stage disease, where informed consent is often difficult to get. (See BioWorld Financial Watch, March 31, 2003.)

Avastin also has been hampered by negative news: a letter to doctors warning about bowel perforations in some Avastin trial patients. Gibbons characterized that as "old news."

In his research report, Gibbons said Genentech "remains on track to post year-over-year earnings growth near 20 percent through 2005 with continued strong contributions from its marketed products and additional revenue from new products beginning in 2004," and called first-quarter 2003 as "solid across the board."

With its robust pipeline, "It's clear that Genentech will likely be successful with one [drug candidate] if not more," he said. "The question, which gets very confused, is what does that mean for financial performance?"

Investors and some analysts become entangled in details that are meaningful and "may be scientifically interesting" but are not critical to Genentech's ongoing success, Gibbons said.

"What we have to ask ourselves is what we get when we look at all the revenue opportunities, and run a model, and look at the probabilities of approval and revenue uptake over a specific time frame" - something that has not been done often enough in an even-handed way with regard to Genentech, he told BioWorld Financial Watch.

"They're running a tight ship," Gibbons said. "They showed great financial management and got no credit for it. They have the capabilities to pull the levers to make it happen."