Once again beating consensus estimates, Genentech Inc. reported a strong third quarter driven by better-than-expected sales of Avastin and Herceptin, two products that are increasingly being prescribed off-label.

The South San Francisco-based company - heralded by some Wall Street firms as the most successful biotech player to date - posted non-GAAP net income and earnings per share of $383.8 million and 35 cents (5 cents ahead of consensus), representing a 48 percent and 46 percent increase, respectively, over last year's third-quarter numbers of $259.6 million and 24 cents per share. GAAP net income increased by 56 percent from $230.9 million to $359.4 million, while GAAP EPS increased by 57 percent from 21 cents to 33 cents.

Analysts touted the results as "strong" and "excellent," but cautioned investors that much of Genentech's upside already is represented in the stock.

"With few apparent weaknesses, perhaps the only reason not to own Genentech stock is valuation," wrote analyst Eric Schmidt of New York-based SG Cowen & Co. in a research note. "Trading at a significant premium to any biopharmaceutical company (44 times 2006-estimated EPS), the shares have already priced in much of Genentech's recent success, in our view."

Genentech's shares (NYSE:DNA) rose $2.59 Tuesday to close at $84.59.

This year, the company has reported positive results from five Phase III trials, including data for expanding the Avastin label and to support a filing of Lucentis to treat wet age-related macular degeneration (AMD). The stock dropped only a few dollars when the company announced its decision last month to halt enrollment in a Phase II Avastin study due to a high rate of gastrointestinal perforations in ovarian cancer patients. (See BioWorld Today, Sept. 26, 2005.)

Genentech had $1.75 billion in operating revenues in the third quarter, a 46 percent increase over $1.2 billion in the third quarter of 2004. Total product sales were about $1.5 million, a 44 percent increase over $1 billion last year.

The company's blockbuster colorectal cancer drug, Avastin (bevacizumab), topped the list in terms of growth, increasing its U.S. sales 78 percent over last year from $183 million to $325.2 million. About half of the growth came from increased use in the metastatic colorectal cancer setting, while the rest came from the use of Avastin in unapproved indications.

"Metastatic non-small-cell lung cancer comprised the largest portion of these patients," said Ian Clark, Genentech's senior vice president of commercial operations.

Genentech expects to file supplemental biologics license applications in the first half of 2006 for Avastin in first-line non-squamous, non-small-cell lung cancer and in first-line metastatic breast cancer based on positive Phase III results reported earlier this year. And it plans to file an sBLA for Avastin in second-line colorectal cancer in the fourth quarter of this year. (See BioWorld Today, March 15, 2005, and April 18, 2005.)

Another sBLA - this time for Herceptin (trastuzumab) in adjuvant breast cancer - is expected in the first quarter of 2006. The company stopped a Phase III trial early due to positive results in the spring that showed a 52 percent reduction in the risk of disease recurrence when Herceptin was used with chemotherapy. (See BioWorld Today, April 27, 2005.)

That product also saw a 70 percent increase in U.S. sales during the third quarter, from $126.3 million last year to $215.1 million this year.

Analyst Christopher Raymond with Robert W. Baird & Co. in Chicago noted that Genentech has had an "unprecedented litany of positive clinical events this year" but the regulatory filings and approvals "still have yet to take place."

The off-label use of Avastin and Herceptin has "manifested itself so quickly this quarter," he added, "we do think much more commercial upside remains with appropriate product labeling and the resultant promotional efforts."

Genentech's U.S. sales for its other products, Rituxan (rituximab), Xolair (omalizumab) and Raptiva (efalizumab) were $456.2 million, $81.6 million, and $20.9 million, increases of 16 percent, 51 percent and 28 percent, respectively. Sales of Tarceva (erlotinib), which was launched last November for non-small-cell lung cancer, were $73.2 million, a 4 percent increase over the second quarter sales of $70.2 million.

The company expects to receive an FDA decision on the marketing of Tarceva plus gemcitabine for pancreatic cancer in early November. In September, an FDA committee recommended approval of the drug, which is partnered with Melville, N.Y.-based OSI Pharmaceuticals Inc. (See BioWorld Today, Sept. 14, 2005.)

Genentech also is working to expand the Rituxan label, with plans to file an sBLA in the first half of 2006 for the product's use in front-line indolent or maintenance therapy for non-Hodgkin's lymphoma, and the initiation of a Phase III study in lupus nephritis slated for the first quarter.

The company could introduce a new product next year as it plans to file the BLA for Lucentis to treat AMD in December, and to soon begin a Phase IIIb safety study in 5,000 patients. Analyst Jennifer Chao, of New York-based Deutsche Bank Securities Inc., expects Lucentis sales to be $150 million in 2007 and $310 million in 2008.

Although Genentech is aware that many physicians are prescribing Avastin off-label for AMD, the company remains focused on Lucentis.

"Lucentis is a smaller antibody fragment, which should enable it to reach more diseased choroidal vessels," said Susan Hellmann, president of product development.

Final U.S. sales in the third quarter came from the company's legacy products ($193.1 million), and its product sales to collaborators ($85.7 million). Expenses were lighter than expected: $230.1 million for cost of sales, $328.9 million for research and development and $349.3 million for marketing, general and administrative. Genentech had cash and investments of $4.1 billion as of Sept. 30.

On a final note, Genentech reported the impact of a dispute over its U.S. Cabilly patent, which covers key manufacturing processes of monoclonal antibodies for which the company receives royalties. Income dependent on that patent was about $20 million in the third quarter, or about a penny per share.

"This earnings-at-risk number [of $80 million annually] is significantly smaller than many had feared," which was about $200 million to $300 million, Raymond said, "and even if DNA should suffer a setback on this front, it would not have a very large impact on earnings."