Genentech Inc. released its third-quarter earnings and, although it hit consensus estimates, saw a 23 percent increase in product sales and a 15 percent increases in pro forma earnings per share over 2001's third quarter, some industry observers question the pace of its future growth.

Genentech, of South San Francisco, boasted $551.8 million in total product sales, up 23 percent from $448.7 million in the third quarter of 2001. Of that figure, its cancer product, Rituxan, generated the most, bringing in $293.9 million, a 38 percent increase. The company posted a net income of $89.3 million, or 17 cents per share. Pro forma results showed a net income of $120.2 million, or 23 cents per share for the quarter, hitting the consensus Street estimate.

Genentech's stock (NYSE:DNA) fell 92 cents Thursday to close at $30.96, on a day when the Nasdaq biotechnology index rose 4 percent.

But with products, not to mention revenues, that leave the vast majority of biotechnology companies wistfully salivating, Genentech doubters aren't questioning if the company will grow as much as they are questioning how much the company will grow and when.

"Genentech is clearly one of the leading biotechnology companies," said Jason Kantor, analyst with WR Hambrecht and Co. in San Francisco. "It has more biotechnology products than any other company and it has one of the largest oncology franchises - it's definitely a bellwether for biotech." But Kantor rates the stock as "hold" and said his long-term outlook is cautious.

Of an opposing cautious view is SG Cowen Securities Corp.'s Eric Schmidt, who said in a research note: "Over the long haul, we continue to believe that Genentech has one of the industry's best pipelines (20 projects in development) and that the company will likely have little difficulty in achieving its 5-by-5 goal of 25 percent average annual EPS growth in 1998-2005. Investors with a longer-term view should still find shares of this high-quality company attractive, in our opinion."

Yet Schmidt and SG Cowen downgraded Genentech to "market perform" following its earnings release, citing a lack of "any significant catalysts until mid-2003," a void that the firm believes will stifle Genentech's stock in the near term. SG Cowen estimated Genentech would post earnings per share of 24 cents for the third quarter.

Also, while Rituxan has been a commanding financial driver for Genentech, its ability to continue to do so is somewhat doubted by Schmidt, mainly due to perceived marketplace saturation.

He said product growth "has decelerated over the past year and is likely to continue to do so over the next 12 to 18 months. Past sales growth has been driven almost exclusively by a single product, Rituxan, and while the long-term outlook for Rituxan is still positive based on new indications [near-term growth] is likely to continue to decelerate as Rituxan becomes a victim of its own success."

Other analysts and industry observers, while not doubting Genentech's science or its ability to translate science into drugs, felt the coming months would deaden positive movement in Genentech's stock until its biotechnology Tommy gun fired off four or five drivers - in the form of product launches or indication expansions - in the second half of 2003 and into 2004.

But that's not to discount the positive sales the company saw in the third quarter.

"They were in line with our expectations and the First Call consensus, as well," Kantor told BioWorld Today. "In terms of how they got there, earnings quality was high, sales were higher than our estimates. We were encouraged by sequential growth in all the products we were looking at.

"Looked like a good quarter to me," he added.

And it was. The 38 percent increase in Rituxan sales was due mainly to increased sales for the treatment of non-Hodgkin's lymphoma. And, as Genentech's executive vice president, commercial operations, and chief operating officer, Myrtle Potter, said in the company's conference call, in the third quarter Rituxan "became the No. 1 branded antitumor product in the United States."

Herceptin, Genentech's humanized antibody approved for the treatment of HER2-positive metastatic breast cancer, brought the company $96.7 million, up 15 percent. Its growth hormone products increased in sales 14 percent to $77.4 million. Genentech's three cardiovascular products - Activase, TNKase and Cathflo Activase - however, decreased slightly in sales, down 6 percent to $45.6 million. Pulmozyme Inhalation Solution recorded $38.2 million in sales in the third quarter, an increase of 16 percent.

Genentech's total revenues were about $675.2 million. The company ended the quarter with about $1.1 billion in cash and short-term investments.

Will Strong Product Sales Be Enough?

Looking ahead, the company is expected to file biologics license applications in the fourth quarter for both Raptiva, for psoriasis, and Xolair, for allergic asthma. Although "those are expected events," Kantor told BioWorld Today, "both of them will be viewed positively when they occur." The anticipated filings add to Kantor's positive near-term outlook for Genentech.

However, in September Genentech said Avastin (bevacizumab), an antibody directed at vascular endothelial growth factor, missed its primary efficacy endpoint of progression-free survival in relapsed metastatic breast cancer. Two Phase III trials of Avastin in colorectal cancer have completed enrollment and results are expected in mid-2003. Tarceva, an anticancer endothelial growth factor inhibitor partnered with OSI Pharmaceuticals Inc., of Melville, N.Y., is in four Phase III trials, but that class of drugs still is experimental, even though London-based AstraZeneca plc's cancer product, Iressa, recently passed muster with an FDA panel in one cancer indication. Those two Genentech products, Kantor said, are high risk. (See BioWorld Today, Sept. 11, 2002, and Aug. 21, 2002.)

IDEC Pharmaceuticals Corp., of San Diego, which discovered Rituxan and is partnered with Genentech on the product, said its preliminary net income estimate for the quarter is 22 cents per share on a diluted basis, driven in large part by Rituxan sales. Zevalin, its radioimmunotherapy indicated for the treatment of relapsed or refractory low-grade follicular, or transformed B-cell non-Hodgkin's lymphoma, including patients with Rituxan-refractory follicular NHL, brought in $5 million and was cleared by the Centers for Medicare and Medicaid Services for previously assigned C-codes and billing rates, effective Oct. 1. The centers said that for the remainder of 2002, it would reimburse hospitals at the 2002 standard rate of 78 percent of published average wholesale price for the Zevalin therapeutic regimen. IDEC's stock (NASDAQ:IDPH) rose $2.18 Thursday to close at $38.60.

As Goes Genentech, So Goes Biotech

Although Kantor finds it hard to get on board for Genentech's goal of 25 percent EPS growth through 2005 - his firm is projecting a 14 percent growth in 2003 - he said the company still is a good barometer for biotechnology.

"They'll have to blow away sales projections or lower sales costs in some way" to reach the growth expectation, he said, but overall, Genentech - and in some ways, the industry itself - is sturdy.

"Genentech posted strong sales for all of its products, every single one of them, which underlines and strengthens our confidence that fundamentals for biotech remain strong," he said. "It shows sales of these products are not linked to economic conditions and the fundamental drivers behind drug sales [are there]. It's difficult to make direct comparisons, but it does bode well for all major biotech companies."

Or companies with products, anyway.