Wong’s BioTech Stock Report - Bumps In the Road:  Genentech
April 7th 2003.  Genentech (NYSE:  DNA) reported an increase in its first-quarter earnings to $0.29 a share from $0.18 a share in the year-ago period. The company's operating revenue advanced 32% to $749.7 million. Excluding an acquisition-related write-down, Genentech earned $0.35 a share, compared with $0.22 a share a year earlier. Wall Street’s average consensus earning was $0.28 a share with a range from $0.25 to $0.30 a share. With the Iraqi War, hopefully entering its final stages, Wall Street is now focused on corporate earnings and the economy. Thus, Genentech’s earnings came under scrutiny as the company used aggressive accounting practices to meet its numbers, rather than product revenue growth such as Herceptin and Rituxan. On the other hand, Genentech will likely have little difficulty in achieving its 5-by-5 goal of 20% average annual earnings growth in 1998-05.  In the near term, positive drivers for the company include a potential mid-May Food and Drug Administration (FDA) advisory committee meeting and June PDUFA date for Xolair, Genentech/Novartis/Tanox’s allergic asthma drug, and an expected FDA approval of Genentech and XOMA’s psoriasis drug, Raptiva in the second half of 2003. Also expected in mid-2003 are results from the Avastin Phase III colorectal trial and Tarceva Phase III front-line non-small lung cancer trial. With four major drugs approaching approval, 2003 promises to be an exciting year for Genentech. Of these four drugs, we expect Xolair and Tarceva to be the most competitive in their respective markets. Avastin data have been mixed, and Raptiva will face tough competition. Other promising drugs in the Genentech pipeline include Rituxan for rheumatoid arthritis as well as rhuFab V2, an anti-VEGF monoclonal antibody fragment in Phase II trials for the treatment of age-related macular degeneration. Of the drugs in late-stage Phase III clinical trials Avastin is the most risky for Genentech. First, Genentech owns all of the rights to the drug, so the company will enjoy all profits from the sales if Avastin makes it to market. The downside is that if Avastin fails to be approved, Genentech will incur all the expenses related to the drugs development, which is not an insignificant sum. Thus, Genentech’s reliance on Avastin to drive future growth makes its shares very sensitive to the release of Phase III data in colorectal cancer. The large Avastin Phase III regulatory trial is designed to evaluate the drug’s safety and effectiveness in patients with metastatic colorectal cancer. The primary endpoints of the clinical trials are response, time to progression, and overall survival of patients. A total of 900 patients are enrolled in the trial and patients in the randomized, controlled trial were assigned to one of 3 groups (chemotherapy alone or chemotherapy with Avastin): 1) 5-fluorouracil (5-FU), leucovorin, and CPT-11 alone, or 2) 5-FU, leucovorin, CPT-11, and Avastin, or 3) 5-FU, leucovorin, and Avastin. Despite positive Phase II trials of Avastin in breast, colorectal and non-small cell lung cancer the Phase III trial of Avastin in metastatic breast cancer was a failure. The failure brought further scrutiny to Avastin and Wall Street will continue to have concern about the ultimate effectiveness of the drug. Having said that, the most promising opportunities for Avastin are not in breast cancer, but rather in the treatment of colorectum and kidney cancer.
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