Ebb & Flow

Despite disappointing product sales, Genentech (NYSE:DNA) managed to beat the Street's 4Q EPS estimate by controlling costs and posting royalty revenues above expectations.

Product sales rose only 1% sequentially to $2.35 billion in 4Q07 from $2.32 billion in 3Q07. That represented a 5% increase over 4Q06 but still $100 million (4%) below the consensus estimate.

All three of Genentech's blockbuster products came in below the Street's revenue estimates: Avastin bevacizumab to treat colorectal cancer and non-small cell lung cancer (NSCLC), Rituxan rituximab for non-Hodgkin's lymphoma (NHL) and rheumatoid arthritis (RA), and Herceptin trastuzumab for breast cancer (see "Genentech by the Numbers").

Indeed, 4Q07 U.S. Avastin sales were $20 million below the consensus estimate, while Rituxan U.S. sales for the quarter were $8 million under.

EVP of Commercial Operations Ian Clark noted on the conference call that the use of high-dose Avastin in metastatic lung cancer seems to have "stabilized," while performance in first and second line use for colorectal cancer was "stable" relative to 4Q06.

Clark chalked up Rituxan's 10% gain in 2007 over 2006 to use in first line therapy in indolent NHL and increased adoption in front line chronic lymphocytic leukemia (CLL), an unapproved use.

What helped to save the bottom line was a 6% sequential increase in royalty revenue to $558 million, up 43% since 4Q06. That was $79 million more than the Street had anticipated. This was "substantially driven by higher royalties from Roche," EVP and CFO David Ebersman said. Roche (SWX:ROG) accounted for 64% of 4Q royalties, and 61% of 2007 royalties.

Ebersman also noted royalty growth due to sales of Lucentis ranibizumab for wet age-related macular degeneration (AMD) by Novartis

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