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Tickers in this Article: DNA
Genentech (NYSE:DNA) managed to beat consensus estimates for its recent quarter by a slim margin. The company's quarter was driven by the drug Avastin, which is used in the treatment for colon, breast and lung cancer.

Sales of Avastin climbed 37% to $597 million. However, sales for its other drugs languished, with all of its other drugs failing to live up to Wall Street expectations. If Genentech can't find another drug to compliment Avastin's success, the company could be in for rough times ahead.

Quarterly Breakdown
Genentech is the world's second largest biotechnology company as measured by sales and the largest as measured by market capitalization. The company discovers, develops, manufactures and markets leading-edge biotherapeutic solutions and also commercializes its products by licensing them to other companies. The Swiss drug manufacturer Roche Holding AG owns a majority stake in the company

Analysts polled by Thompson Financial were looking for Genentech's third quarter to come in at 72 cents per share, but in fact it reported 73 cents per share. Genentech recorded a net profit of $685 million (64 cents per share) compared to a profit of $568 million (53 cents per share) a year earlier. Revenue for the quarter expanded to $2.91 billion for a solid 22% increase from $2.38 billion in the year prior.

The Stable Is Empty
The expansion in sales was driven by Genentech's Avastin. This was the good news, the bad news is sales of the firm's other cancer drug Herceptin rose only 6% to $320 million while analysts were anticipating more along the lines of $339 million. Genentech's drug Rituxan, which is used in therapies for rheumatoid arthritis and non-Hodgkin lymphoma, brought in $572 million for a 12% increase.

The firm's macular-degeneration drug Lucentis contributed $198 million for a 29% improvement, although, the street was expecting sales in the $210 million range. Overall, Avastin was the only drug that exceeded Wall Street's expectations. (For more insight into earnings estimates, read Great Expectations: Forecasting Sales Growth.)

The Evil Eye
This brings us to another problem. As mentioned above, Lucentis is used to treat macular degeneration, the leading cause of blindness in elderly patients. It is apparently very effective, but it requires five to seven doses per year at a cost of $1,950 per dose according to company officials. Genentech's star performer Avastin is also apparently effective for treating macular degeneration (although FDA has not approved its use for this treatment), and it is cheaper than Lucentis. Some physicians are using Avastin in very small doses, off-label, at a fraction of the cost of Lucentis.

Genentech is moving to curtail sales of Avastin to independent compounding pharmacies that are able to divide the drug into portions for those elderly patients. In my opinion, this policy is the type of negative publicity a corporation doesn't need and is a great example of the cliché "penny-wise but pound-foolish". (To learn more about the controversial move, read Marilyn Haddrill's article "Lucentis Vs. Avastin: A Macular Degeneration Treatment Controversy" and "Avastin May No Longer Be Available For Treating Macular Degeneration".)

Should You Bank on DNA's Estimates?

Genentech is sticking with its full-year estimates of earnings per share to grow 28% to 32%, while Wall Street analysts are looking for growth more in the 32% range. The market is clearly expecting more from Genentech, but unless the company can achieve success with more segments of its product mix than just one drug, I have to think that banking on it meeting its unchanged estimates is a risky proposition.

To learn more about pharmaceutical valuations, see Measuring The Medicine Makers.

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