West Coast Editor

Analysts had set the expectations bar high, but Genentech Inc. vaulted over it - again - with a second-quarter earnings report showing product sales of $913.4 million, a 42 percent increase over the same period last year, powered largely by sales of the colorectal wonder-drug Avastin.

Trouncing consensus estimates of $85 million, Avastin (bevacizumab) pulled in $133 million in its first full quarter of sales.

Genentech's stock (NYSE:DNA) closed Thursday at $52, down $1.90.

William Tanner, analyst with Leerink Swann & Co. in New York, had published an estimate of $100 million for Avastin, which was expected to lead the pack for South San Francisco-based Genentech.

"We wanted to have a number that we thought was realistic but could be beaten," he said. Leerink Swann has been conducting physician surveys rather than relying on data from the research firm IMS Health, as many do. Three surveys have been done so far.

"Until you see a full quarter and can correlate it with the surveys, you don't really know" the level of accuracy, he said, conceding that many of those surveyed might fall into the "early adopter" category.

"But if you took [survey results] at face value, the number could be in the $150 million range" for anticipated Avastin sales, Tanner added. That number turned out to be the highest forecast he saw on Wall Street.

"Analysts tend to stake out the high ground because if they're right, they look smart," Tanner said, adding that some analysts told him Thursday "they were cool on the name because [Genentech] missed their Avastin number. You can have some absurd estimates but it doesn't say anything about the company; it was just a stupid number."

In any case, Genentech's actual results proved satisfying. Avastin, Tanner said, is "well on its way to being the best commercial launch ever in biotech."

The company's net income totaled $170.8 million, or 16 cents a share, compared with $132.3 million, or 13 cents a share, for the same quarter a year ago.

Analyst consensus, according to Thomson First Call, was for revenues of about $1.06 billion, with non-GAAP income expected of 19 cents per share, but Genentech did better. Revenues topped out at about $1.13 billion, compared with $799.7 million for the second quarter last year. It's the first time Genentech has broken the $1 billion barrier in quarterly revenues.

The consensus also had called for the company to post a non-GAAP income of 19 cents a share, which was right on the money - a 19 percent increase over the second quarter of 2003 (16 cents per share). GAAP earnings per share jumped by 23 percent to 16 cents per share.

Sales of Rituxan (rituximab) for non-Hodgkin's lymphoma rose 17 percent to $424.7 million, from $363.4 million in the second quarter of 2003, $390 million of that in the U.S. The breast-cancer drug Herceptin (trastuzumab) sold $117.7 million, up 8 percent over the period in 2003.

Also performing well were Xolair (omalizumab, for asthma), with sales of $43.7 million for the quarter, and Raptiva (efalizumab, for psoriasis) with $13.4 million.

Sales of growth hormones, cardiovascular products and inhaled Pulmozyme (recombinant dornase alfa) solution for cystic fibrosis collectively rose 5 percent to $180.9 million, up from $171.8 million in the second quarter of 2003.

The news might have been even better. Gententech in June discontinued Nutropin Depot (somatropin, partnered with Cambridge, Mass.-based Alkermes Inc.) for growth hormone deficiency in pediatric patients, saying the costs no longer justified it and taking a $37.4 million charge. Another one-time charge of $21.3 million was related to filling failures for other products that "they didn't really say much about," Tanner said.

"I think they're mindful of trying to not let the numbers get away from themselves, so they don't set expectations too high," he told BioWorld Today, pointing out that EPS would have been 22 cents instead of 19 cents, if those one-time charges had not taken their toll.

"They didn't really go into any detail" on that, either, he said. "They're trying to keep a lid on it, in a way. If they were to say the EPS was 22 cents in this quarter [excluding the charges], people would be saying, What are you going to do in the next quarter?'" and beyond.

Indeed, analyst David Webber with First Albany in New York was as pleased with Genentech's results as the rest of Wall Street, but said in a research note that the "chance for positive surprises" in the second half of 2004 is limited, after the likely approval of the cancer drug Tarceva (erlotinib), and lowered his rating to "buy" from "strong buy."

Meanwhile, Genentech raised earnings guidance for 2004, but only to between 75 cents and 80 cents per share. The Street consensus already was at the higher end of that range - a state of affairs that might cause some chagrin among investors, Tanner said.

"I don't think [Genentech] will get a lot of credit for letting it all flow to the bottom line," he said.

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