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12:00 AM
Oct 16, 2006
 |  BioCentury  |  Finance

Ebb & Flow

Like many top tier biotechs, Genentech (DNA) does not provide any product-specific sales guidance, leaving Street forecasters to take their best guess at upcoming sales and earnings. While DNA may or may not care whether its analysts are on target, the stock can get a haircut when the numbers come in below the consensus.

Indeed, DNA lost almost $600 million of market cap last week despite reporting what seemed to be a double dose of good news. The company received FDA approval for an sBLA for Avastin to treat non-small cell lung cancer (NSCLC), while DNA's third quarter EPS figures eclipsed the consensus. But many of DNA's analysts decided the third quarter was lousy, mostly because sales of many of the company's drugs fell short of expectations (see "Analyst Picks," A15).

Overall, DNA posted revenues of $2.38 billion, above the Street's $2.31 billion estimate. But the upside was almost exclusively from Lucentis, which was launched on June 30 to treat age-related macular degeneration. Lucentis posted third quarter sales of $153 million, crushing the consensus of $32 million.

For the second quarter in a row, Avastin came in below consensus. The anti-VEGF antibody, originally approved for colorectal cancer, had third quarter sales of $435 million, $22 million shy of the Street number. Second quarter Avastin sales of $423 million were $16 million below consensus.

Herceptin, an anti-HER2 antibody for breast cancer, and Rituxan, an anti-CD20 antibody that is approved for non-Hodgkin's lymphoma (NHL) and rheumatoid arthritis (RA), also disappointed analysts. Herceptin sales were $302 million, $35 million shy of the consensus, while Rituxan's $509 million number was $34 million below the Street's mark.

In addition to the lack of topline guidance, Cowen analyst Eric Schmidt told Ebb & Flow that third party prescription data for hospital-based products, like DNA's cancer drugs, are less reliable than for drugs that doctors prescribe from their offices.

"IMS data tends to have more errors for hospital-based products," he said. "So for companies like Amgen, Genzyme and Genentech, the numbers are all a bit more volatile around the quarters than for Gilead and its HIV drugs, where you have good scrip data every week."

Baird analyst Christopher Raymond added that off-label use and the difficulty in predicting reimbursement make Avastin particularly tricky to model. "We have detailed tumor-specific and patient-specific models," he noted. "We also do a boatload of physician surveys and try to fill in the penetration numbers with our survey work."

At the end of the day, said Schmidt, "I think Genentech is fed up with the focus on quarterly earnings by the Street and some investors. Management is vocal about looking out five years. You certainly don't like stock price volatility, but I expect most of their investor base looks past it."

Early fund, early deals

Domain Associates appears to be making a good living by picking good exit vehicles, most typically from later-stage and commercial stories. For example, the firm has seen infectious disease company Peninsula Pharmaceuticals get acquired by Johnson & Johnson (JNJ) in 2005 for $245 million in cash. VCs put $80.6 million into Peninsula. Meanwhile, cancer company Novacea(NOVC) went public in May after raising $108.2 milllion in venture money and is now valued at $162 million.

Last week, however, Domain invested in two early stage biotechs - CoDa and Achaogen. Both investments were from Domain's Domain VII, a $700 million fund that closed in August.

Investing in preclinical companies is easier early on in the life of a fund, because the companies have a chance to mature and add value before the fund has to show a return, Domain Partner Bob More told Ebb & Flow. The firm plans to invest Domain VII over the next three to four years, and the fund will have a life of at least 10 years.

Achaogen raised $26.5 million in a series B round with Domain; 5AM Ventures; Arch Venture Partners; Venrock; and Versant. The company hopes to identify a lead antibacterial candidate for preclinical development next year. Domain was the only investor in CoDa's $10 million series A financing. The company's Nexagon...

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