Staff Writer

Fueled by four new product launches over the last two years, Genentech Inc. recorded a healthy first quarter in terms of both dollars and data.

The South San Francisco-based company posted total sales of about $1.2 billion - a 55 percent increase over the $763.7 million recorded in the first quarter of 2004. Those figures, in combination with promising Avastin data in non-small-cell lung cancer (NSCLC), as well as four new clinical programs started during the quarter, kept Genentech on the investment community's radar.

"In our opinion, Genentech remains one of the most compelling new product stories in the biotechnology industry," said Michael King in a research note issued Monday by New York-based Banc of America Securities. "We continue to consider DNA a must own, core holding in any biotechnology portfolio due to its superior product lineup and pipeline and strong management team."

Over the last two years, Genentech has launched four new products: Xolair for allergic asthma, Raptiva for moderate to severe psoriasis, Avastin for metastatic colorectal cancer, and Tarceva for NSCLC.

For the first quarter, Genentech said non-GAAP earnings per share increased 53 percent over last year to 29 cents per share, above Wall Street's consensus estimate of 25 cents and King's estimate of 26 cents. The company's net income increased 50 percent to $311.6 million in the first quarter. GAAP EPS increased 69 percent to 27 cents per share and net income increased 61 percent to $284.2 million.

"We're off to a strong start in 2005," David Ebersman, the company's senior vice president and chief financial officer, said in a conference call Tuesday. "But I'd caution against using our Q1 results as an indication of the expected quarterly results for the remainder of 2005, due to the fact that we expect a significant ramp-up in expenses in the next couple of quarters."

Not only does the company plan on beefing up its research and development efforts preparing for long-term growth, but also it expects to increase marketing, general and administrative expenses as it prepares for potential launches of Rituxan in rheumatoid arthritis and Lucentis for age-related macular degeneration. Data from late-stage trials of those products are expected within a year.

During the first quarter, Genentech's product sales came from Avastin ($202.9 million), Tarceva ($47.6 million), Rituxan ($440.5 million), Herceptin ($129.6 million), Xolair ($65.3 million), Raptiva ($16.6 million) and the company's legacy products, including growth hormone and cardiovascular products and Pulmozyme ($184.5 million).

Avastin sales rose from $38.1 million in the first quarter last year, when the product was launched in March for colorectal cancer. Avastin achieved first-line and relapse-setting penetration in the first quarter of 61 percent and 47 percent, respectively.

Last month, Genentech released Phase III data of Avastin in non-small-cell lung cancer, showing a significant survival benefit and representing "a very exciting growth opportunity," said Ian Clark, Genentech's senior vice president and general manager of the BioOncology unit. "This was the first time that any treatment has improved upon the standard two-drug chemotherapy regimen in non-small-cell lung cancer."

The strong NSCLC data with Avastin had some analysts wondering how Tarceva might fit into the picture. Tarceva was approved in November for NSCLC. (See BioWorld Today, Nov. 22, 2004, and March 16, 2005.)

Tarceva's first-quarter sales "substantially outpaced" King's estimate of $31 million. The product captured 59 percent of total prescriptions in the epidermal growth factor receptor inhibitor market and 90 percent of new prescriptions. "We continue to believe that Tarceva will dominate this market," King's note said.

But now Genentech has survival data with Avastin in first-line NSCLC, in addition to its survival data with Tarceva in second- and third-line NSCLC.

"We don't fully yet know how either of these molecules will be used," said Susan Hellmann, Genentech's president of product development.

The company has some promising information suggesting that the combination of the two products might offer a benefit over chemotherapy. Genentech is studying the use of the products together.

"I think the randomized, controlled study will allow us to further assess whether it's possible to treat lung cancer patients without chemotherapy, something exciting for all of us," Hellmann said.

Looking ahead, the company plans to initiate an Avastin Phase III trial in prostate cancer this year. It would represent Avastin's sixth potential application in a solid tumor and one of four new projects brought to the company's pipeline in the first quarter. The other three projects include a Tarceva Phase III trial in adjuvant non-small-cell lung cancer, a Raptiva Phase II trial in adult atopic dermatitis, and an undisclosed new molecular entity in oncology.

Genentech began enrollment in the first quarter of a Phase II refractory ovarian cancer study of Avastin and the BR3-FC Phase I study for patients with rheumatoid arthritis. It also completed enrollment in the Lucentis Phase IIIb PIER trial and filed an investigational new drug application with the FDA to start a clinical trial of a drug candidate to topically treat basal-cell carcinoma. The candidate is an antagonist of the Hedgehog signaling pathway that was discovered by Cambridge, Mass.-based Curis Inc. Genentech and Curis established a second major collaboration earlier this month to discover and develop small-molecule modulators of an undisclosed pathway. (See BioWorld Today, April 5, 2005.)

Product sales to Genentech's collaborators reached $99 million in the first quarter, representing an 88 percent increase over last year's first quarter. Those sales were driven by Enbrel shipments for the U.S. market and shipments of Rituxan, Avastin, Herceptin, Pulmozyme and Raptiva for ex-U.S. markets.

Genentech also recorded research and development expenses of $243.2 million; product sales expenses of $251 million; and marketing, general and administrative expenses of $315.2 million in the quarter.

While those expenses likely will increase in the coming months, rising revenues should help alleviate the burden.

"The bottom line for 2005," Ebersman said, "is that we're currently expecting year-over-year non-GAAP EPS growth of greater than 30 percent."

Genentech's stock (NYSE:DNA) rose $1.12 on Tuesday, to close at $57.72.