West Coast Editor

Like a broken record playing a song investors never tire of hearing, Genentech Inc. chalked up another satisfying quarter, with Avastin and Herceptin sales benefiting from a parade of positive news this spring.

The company's stock (NASDAQ:DNA) closed Tuesday at $85.89, up $2.39.

Second-quarter product sales totaled $1.3 billion, a 39 percent increase over product sales of $913.4 million in the second quarter of 2004, with operating revenues jumping to about $1.5 billion, 35 percent more than the same period last year, when the figure was about $1.1 billion.

Non-GAAP earnings per share increased 58 percent to 30 cents per share (beating the consensus of 26 cents) from 19 cents per share for the same period in 2004. GAAP EPS rose 69 percent to 27 cents per share from 16 cents per share last year.

That boils down to a non-GAAP net income increase of 63 percent to $328.6 million from $201.8 million in the second quarter of 2004 - and a GAAP net income increase of 73 percent to $296.2 million from $170.8 million in the previous year's period.

Not bad.

Among the particularly impressive results were sales of Avastin (bevacizumab), the colorectal cancer drug, which pulled in revenue of $246 million, trouncing estimates such as those by Chicago-based Robert W. Baird & Co., which forecast $230 million - up 21 percent after a "flattish" first quarter, wrote analyst Christopher Raymond in a research note.

Baird reiterated its "outperform" rating on the stock, upping the price target to $90 from $87. The analyst firm last month pointed to a physician survey that showed increasing use of Avastin in non-small-cell lung cancer, as well as tumors of the breast, kidney, ovary and prostate.

Various New York-based analysts weighed in with enthusiasm, too. Topping them all was analyst John Sonnier, of Prudential Financial, who stayed with his "overweight" rating and price target of $100.

"That seems to be the fashionable price target," Raymond told BioWorld Today. "A lot of folks are 100 bucks. I'm not ready to go there yet, but it's possible [for Genentech] to grow into that sort of market cap at these valuations."

More conservative was analyst Mark Schoenebaum, of Bear Stearns in New York, who maintained his "outperform" rating and $87 target price. Analysts at First Albany kept their "buy" rating and hiked the target price to $98 from $83. Piper Jaffray in Minneapolis stuck with its "outperform" and boosted the target price to $96 from $93.

More stock-boosting news lies ahead. Based on positive trial outcomes, South San Francisco-based Genentech plans three supplementary biologics license application filings for Avastin in indications other than colorectal cancer - and is aiming for no fewer than nine regulatory filings in the near term, the company said.

Among them will be a filing for Herceptin in the adjuvant setting, due in the first quarter of next year, and for Avastin in lung and breast cancers, expected afterward. A bid for approval of Avastin in second-line colorectal cancer is likely by the end of this year, along with a decision from the FDA on a supplemental biologics license application for Genentech's drug Tarceva (erlotinib) for NSCLC combined with Gemzar (gemcitabine) against pancreatic cancer, which the FDA accepted for filing earlier this month.

Those will be followed by enrollment in Phase III trials testing Avastin in first-line ovarian cancer and hormone-refractory prostate cancer.

Meanwhile, second-quarter revenue from the breast cancer drug Herceptin (trastuzumab) hit $152 million, beating Raymond's estimate by almost $20 million. Jennifer Chao, analyst for New York-based Deutsche Bank Securities, wrote in a research note that the Herceptin surge probably is due to positive adjuvant breast cancer data presented at the American Society of Clinical Oncology meeting recently, along with increased penetration into the first-line metastatic breast cancer setting.

Chao's theory about Avastin, which has gained about 64 percent penetration into first-line metastatic colorectal cancer and about 35 percent into relapsed disease in the second quarter, is that the drug was helped by positive Phase III news disclosed in late November.

"Importantly, we believe Avastin is poised to gain significant off-label sales in lung and breast cancer settings," Chao wrote. Already, about 10 percent of the drug's use is off label in renal-cell carcinoma and NSCLC, by the company's count.

Raymond is skeptical - and believes the news for Genentech may be even better than that. In June, a physician survey by his firm showed 43 percent of doctors were using Avastin off label, mainly in lung and kidney cancers, with breast cancer close behind.

"If I were Genentech, I would not want to call attention to off-label use," he said. "You don't want to wave a flag and attract the ire of payers."

Allowing that he has seen no major publicized rejections of coverage, Raymond called the off-label situation "not a huge risk" for owners of Genentech stock.

"But if you use Avastin as indicated in the data that have been presented, in a course of colorectal therapy for example, that's about a $44,000 proposition," he said. "Lung cancer is closer to $57,000, and in breast cancer $98,000. These are widely disparate pricing points."

Rituxan (rituximab), for non-Hodgkin's lymphoma, reaped $450 million in revenue in the second quarter, staying within range of the $446 million consensus. Compensating for that outcome was what Raymond called a "surprising ramp-up" for Tarceva, which gained sales of $70.2 million, beating his estimate of $51.6 million.

Xolair (omalizumab) for allergic asthma sold $80.4 million, up 23 percent over the previous quarter, beating Chao's $75 million estimate. About 85 percent of patients get reimbursement for the product, she noted.

Sales of Raptiva (efalizumab) for psoriasis also came in higher than expected, at $21.3 million, thanks partly to a 5 percent price increase in late April.

"I think most investors have accepted that [Raptiva] is not a major player," Raymond said, but demand for Genentech's other drugs is high and growing - which leads to consideration of what some have called the "high-class problem" that the company might face next.

"The question is, can they make enough of this stuff? A high-class problem, but not so high class if you're considering buying the stock," he said. "You have to put an awful lot of faith in them to manage their existing manufacturing capability and get more. It's certainly doable, but not a slam dunk."

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