Contributing Writer

Genentech Inc. outstripped analyst expectations for the fourth quarter, capping off a banner year in which the South San Francisco-based company increased earnings by an impressive - if not exactly sustainable - 74 percent compared to 2005.

For the quarter ending Dec. 31, Genentech posted operating revenue of $2.7 billion, beating analyst estimates of $2.6 billion and representing a 43 percent increase over the fourth quarter of 2005. Non-GAAP net income of $659 million and earnings of 61 cents per share also exceeded analyst expectations of 56 cents per share. GAAP net income of $594 million and earnings of 55 cents per share increased 77 percent over GAAP earnings of 31 cents per share in the same period last year.

For the full year, operating revenue of $9.3 billion exceeded analyst expectations of $9.1 billion and increased 40 percent over 2005. Non-GAAP net income was $2.4 billion, with GAAP net income at $2.1 billion. Non-GAAP earnings increased 74 percent to $2.23 per share, above estimates of $2.17 per share, while GAAP earnings came in at $1.97 per share, up 67 percent.

Eric Schmidt, analyst with New York-based Cowen and Co., called the 2006 growth "tremendous," but cautioned that such growth will be harder to come by in 2007. Indeed, Genentech set expectations at 25-30 percent non-GAAP earnings growth for this year. Schmidt estimates an average annual growth rate of 18 percent over the next five years due to a leveling off of product sales as markets mature.

In 2006, Genentech's U.S. product sales brought in $7.2 billion, with fourth quarter sales topping the $2 billion mark for the first time. Over the year, the top revenue generators were the oncology trinity of Rituxan (rituximab) at $2.1 billion, Avastin (bevacizumab) at $1.7 billion and Herceptin (trastuzumab) at $1.2 billion. Although Rituxan and Herceptin had suffered flagging sales in the third quarter, they recovered in the fourth quarter. Ian Clark, executive vice president of commercial operations, said on a conference call that effects of the new distribution model, which had affected how sales of those products were recorded, have "normalized." (See BioWorld Today, Oct. 12, 2006.)

Another big contributor to the bottom line was the wet age-related macular degeneration drug Lucentis (ranibizumab), which pulled in $380 million in a little more than six months on the market. Still, Schmidt expects Lucentis sales to reach "equilibrium" in 2007 as patients transition to less frequent dosing. Other barriers to growth include off-label use of less-expensive Avastin, a stable pool of eligible patients, and the fact that many patients already have switched to Lucentis from competing therapies.

Including Lucentis, Genentech received eight FDA approvals of new products or new indications in 2006. Chairman and CEO Art Levinson said on the conference call that the company's short-term growth "will be driven by the ability to execute on recent approvals."

While most anticipated 2007 milestones are thus clinical rather than regulatory, Genentech expects to re-submit its application for the approval of Avastin in breast cancer around the middle of the year, which could result in an end-of-year approval. Schmidt also is looking forward to the presentation of full data from the Phase II trial of Rituxan in multiple sclerosis, top-line data from which were announced in August 2006.

In the longer term, Genentech's growth will depend on new molecules. "Building the pipeline is our No. 1 focus and priority," he said. Some of that pipeline is likely to come from external sources, as evidenced by the eight new collaborations signed in 2006 - including Genentech's first acquisition. Already in 2007, the company has entered cancer deals with Amphora Discovery Corp., Seattle Genetics Inc. and Exelixis Inc.

Yet according to Levinson, "the internal pipeline will primarily drive growth," and Genentech anticipates a significant R&D investment in 2007. He added that the investment estimates are limited not by money, but by the "availability of really good people."

On the conference call, Goldman Sachs & Co. analyst May-Kin Ho questioned whether those people might be found toiling on indications beyond the company's existing franchises. She pointed to neurology as an area of unmet medical need in which "the science is coming together" - the two key factors Levinson had outlined as prerequisites for a new indication. Levinson confirmed that those points were not lost on the company, adding that two of Genentech's senior research leaders are neurobiologists.

Susan Desmond-Hellmann, president of product development, called out a December 2006 collaboration with AC Immune Ltd. for anti-beta-amyloid antibodies that may be applicable in treating Alzheimer's disease. "You will see more deals in 2007 outside of oncology and immunology," she said. (See BioWorld Today, December 8, 2006.)

Genentech's stock (NYSE:DNA) rose $3.66 to close at $87.40 on Thursday following Wednesday's aftermarket earnings announcement. The company's stock price throughout 2006, however, declined from $92.75 to $81.13.

"It has to do with investor expectations," Schmidt said of that discrepancy. "People expected growth at a torrid pace in 2006. To get the stock moving in the right direction again, investors would need to see data from a new, unforeseen opportunity."