Also alludes to good news regarding Omnitarg for ovarian cancer (a pan-her family targeted drug) to be announced at ASCO in June:
Genentech Is a Hard Act to Follow
After Strong 2006, Biotech Firm Races Against Its Own Track Record
By MARILYN CHASE
January 10, 2007; Page A12
It doesn't get any better than 2006 for Genentech Inc. And that may be the problem.
The biotech behemoth is expected to announce today that earnings grew as much as 70% for the year. The impressive result was driven largely by the successful debut of Genentech's new eye drug, Lucentis, cAlso fueling the year's performance was solid, if less explosive, growth of its core cancer drugs, Avastin, Rituxan and Herceptin.
Genentech's challenge: What to do for an encore?
"No company grows at 70% into infinity," warns Cowen & Co. analyst Eric Schmidt. He currently forecasts 2007 growth of 32%. That's still well above average for an industry where good growth typically means 15% to 20%. But it shows how Genentech, the second-largest biotech company by sales, after Amgen Inc., is starting to face some of the same challenges to growth now confounding its even bigger and more mature pharmaceutical competitors.
"Look out three to five years," Mr. Schmidt says. "Genentech, like every biotech and pharma company before it, is going to face the problem of needing to grow off a larger sales base. There's no risk that earnings will decline anytime soon. But we'll probably see Genentech as a midteens growth company in a few years."
Along with the growing pains of a maturing company, analysts point to a pipeline depleted by flurry of swift product launches, and a recent regulatory setback, as putting potential brakes on growth.
Filling the pipeline after a blockbuster year is "a good challenge to have," said Genentech Chief Executive Officer Arthur Levinson at the J.P. Morgan Healthcare Conference in San Francisco late Monday. He cited 17 brand-new molecules in Genentech's early-stage program and more than 30 later-stage products -- many of these new uses for existing drugs -- as fuel for growth. Genentech has vowed to put 20 new molecules into its pipeline by 2010, an ambitious goal.
In its three decades of existence, the company, based in South San Francisco, grew from a boutique biotech trying to prove it could spin gold out of the straw of gene splicing. After first coaxing living cells to churn out human insulin and human growth hormone, it came up with the clot buster Activase for heart attacks. Now, it has evolved into a cancer-drug company ranking at the top in U.S. oncology-product sales.
Cowen's Mr. Schmidt projects that Genentech's 2006 revenue will total $9.13 billion, with $7.53 billion of that coming from product sales, and the rest coming from royalties, contract income and other operations. He estimates earnings will total $2.36 billion, or $2.19 a share, over 70%. While Genentech has forecast 2006 earnings growth in the range of 65% to 70%, Dr. Levinson declined to comment on specific estimates.
As for refilling its pipeline, Genentech recently announced encouraging results for its experimental ovarian-cancer drug Omnitarg, and promised to unveil detailed data at a big cancer meeting in June. But Omnitarg is still in the middle stages of human testing, far from final proof and the market. Another new drug known as APO2L/TRAIL, which delivers a suicide order to cancer cells, is still in even earlier safety tests.
Right now, the company's pipeline appears "somewhat depleted" of novel candidates nearing late-stage development, Mr. Schmidt says.
"We're scrambling, hiring new people into R&D as fast as we can," Dr. Levinson told a packed crowd of investors on Monday. "We're consumed" with hiring the best researchers to stoke the pipeline, he added. "The money is there; we're working on the people ... scrambling to make sure people are as pleased with our growth 10 years from now as this year."
Susan Desmond-Hellman, Genentech's president of product development, said in an interview that although product launches were run out faster than anticipated, "I feel as good about the Genentech R&D as ever." But as with any discovery company, she cautioned, "not all new molecules will work."
For now, analysts say, a lot of the company's pipeline action comes from clinical trials testing new uses for its existing drugs -- Avastin, Rituxan, Herceptin and Lucentis -- to extend their already-successful franchises.
"Avastin is a pipeline in itself," says Geoffrey Meacham, an analyst at J.P. Morgan Chase & Co. in New York. "Simply leveraging the Avastin assets will continue to drive growth for Genentech." He sees label extensions for the drug as the company's near-term "value story."
However, there could be "a drag on earnings for 2007" as a result of a recent Food and Drug Administration decision to delay Genentech's application to market Avastin for breast cancer, says Gene Mack, a biotech analyst with HSBC Securities (USA) Inc. In September, the FDA asked Genentech for more-rigorous analysis of its breast-cancer data, deferring approval.
"The hangover, the deceleration of earnings growth in 2007, has been compounded," Mr. Mack says. "A very important expansion of Avastin's label that we were expecting at the end of 2006 ... isn't coming until the end of 2007."
Meanwhile, a cash-rich Genentech is also adding product opportunities by forging partnerships. Just before the new year, Genentech signed a $40 million investment in Exelixis, a smaller biotech company developing experimental molecules that have the potential to lead to cancer drugs.
Avastin is the "marquee franchise going forward," with a breast-cancer approval foreseen in late 2007 or early 2008, Mr. Schmidt predicts.
Even sanguine forecasts envision Lucentis will eventually plateau, though Genentech is testing new uses for the drug in diabetic eye disease. Now used to prevent blindness and restore vision to people suffering age-related macular degeneration, or AMD, a problem affecting the sight of one million U.S. patients, the drug costs $2,000 per injection. Mr. Schmidt, the analyst, sees Lucentis posting $900 million in its first full-year sales in 2007.
Lucentis's spectacular debut is clouded by off-label use of Genentech's older drug, Avastin, made with a larger version of the same antibody, at a fraction of the price. Amid popular demand by ophthalmologists and patients, and support from the American Academy of Ophthalmology, the National Eye Institute, a unit of the National Institutes of Health, is sponsoring a head-to-head clinical trial pitting Lucentis against its cheaper predecessor.
"Off-label use of Avastin may remain a factor in this market" for some time, Dr. Levinson acknowledged Monday at the J.P. Morgan meeting.
Dr. Desmond-Hellman said in an interview last month that Genentech declined to sponsor the trial but didn't oppose the NIH-sponsored study or physicians' off-label use. But she cautions that when given as a cancer treatment -- in far higher doses -- Avastin carries a "black-box warning" signaling potential cardiovascular risks. Lucentis is a smaller-molecule version tailored for use in the eye, and carries less risk of such side effects, she said.
Dr. Desmond-Hellman called reports on the success of using Avastin off-label "impressive" but "anecdotal." And she added, "If my Mom had AMD, I'd want her to get a drug that is [proven] safe and effective."
The NIH's two-year, multicenter trial -- set to start in April -- should settle the question. But for now, it adds to analysts' uncertainty over the future of Lucentis as a blockbuster.
"Call me concerned," says HSBC's Mr. Mack, adding that Avastin needs only to show equal safety and efficacy to trump Lucentis. "I believe that in this trial, Avastin doesn't have to be superior to Lucentis," he says. "It is 1/100th the cost."
Write to Marilyn Chase at
marilyn.chase@wsj.com
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