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It hasn't been the best of years for Genentech. Pipeline problems were already hurting its stock price when, on Sept. 9, the biotech giant announced that Avastin, its much-hyped cancer drug, hadn't produced the desired results in tests on breast-cancer patients. "Avastin was the one that really missed the mark," says Cory Kasimov, analyst at Ryan Beck & Co. Shares have fallen 43%, to around $31, year-to-date.
Despite the big drop in price, Genentech (DNA
) is trading at a relatively rich price-earnings ratio of 29.5 times projected 2003 earnings of $1.07 per share -- the highest p-e multiple of any major biotech outfit now turning a profit.
The stock is hanging tough largely because of Genentech's golden reputation and solid growth attributable to strong-selling cancer drugs such as Rituxan and Herceptin. But Wall Street is now asking for proof that the company can deliver the 25% average annual earnings it has led investors to expect through 2005. "We're hitting a critical stage," says Kris Jenner, health-care analyst at T. Rowe Price. "There's plenty of reason to be optimistic, but the investment community is looking for positive news from [Genentech's product] pipeline."
RITUXAN'S RICHES. That means many investors will likely hold off on buying Genentech shares until some of the lingering uncertainty lifts later this year. During the fourth quarter, Genentech intends to file delayed applications on two new drugs with the Food & Drug Administration, and it will unveil new clinical data on Rituxan. The attitude of investors in Genentech for the long haul is summed up by Kinetics Medical Fund (MEDRX
) portfolio manager Paul Abel: "Our horizon is a decade. We still think that, over the decade, Genentech will be rewarded."
Rituxan, Genentech's blockbuster cancer drug, could carry the company for some time. Analysts project that its sales could hit $1 billion in 2002, an increase of about 20% vs. last year. Over the longer term, sales may reach $2 billion or more. That's because Rituxan revenues will get a boost if new uses for it are approved. For instance, at an October meeting of the American College of Rheumatology, researchers will present data detailing Rituxan's use as a treatment for rheumatoid arthritis. At another upcoming conference, Genentech will address the drug as a maintenance therapy for non-Hodgkins lymphoma.
Rituxan sales alone won't be enough to meet Genentech's ambitious growth targets. According to First Call, analysts expect earnings per share to jump 21% this year, to 92 cents, or about $182 million, on sales that are projected to increase by 24%, to $2.1 billion. With the prospects for Avastin diminished, Genentech's growth will likely drop to "the high teens instead of 22% to 25%, between 2003 and 2007," Jenner estimates.
SHRINKING EXPECTATIONS? Genentech's main problem is that each of the four late-stage drugs in its pipeline has hit hard times in recent months. The FDA wants more safety data on asthma drug Xolair, and Genentech plans to refile its application by yearend. It will also resubmit its FDA application for the psoriasis treatment Raptiva in the fourth quarter, following the recent completion of tests intended to demonstrate a consistent manufacturing process.
However, doubts were cast on its Tarceva cancer drug when clinical trials of Iressa, a similar medication developed by rival Astra-Zeneca, failed to improve the survival rate for lung-cancer patients.
Then there's the Avastin stumble. That drug had been widely seen as having the greatest profit potential of any in Genentech's pipeline, not least because it's the only one of the four big products that Genentech wholly owns. Tarceva revenues will be split with OSI Pharmaceutical (OSIP
), Raptiva is 25% owned by Xoma (XOMA
), and Xolair is split among several companies.
"VERY CRITICAL PIECE." Avastin's failure to match expectations as a breast-cancer therapy also raises significant doubts about its potential against other cancers. Preliminary results of a study of Avastin as a treatment for colorectal cancer are expected some time in 2003. Says Jenner: "That's a very critical piece of information that will have substantial impact on how well Genentech stock does over the next couple of years."
Genentech downplays the difficulties. "Avastin is a broad-based program. Breast cancer was the first set of data out of the chute, but it is a broad program, and we're testing in other tumor types," says spokeswoman Sabrina Johnson. She adds that it's too early to say if Avastin will have any impact on the five-year growth plan that Genentech unveiled in 1999.
As long as Avastin's potential remains under a cloud, so too will Genentech's future in the eyes of investors. It's still the biotech outfit with the most exciting prospects. But the big question remains: Can the pipeline can deliver gold?
Tsao covers financial markets for BusinessWeek Online in New York Edited by Thane Peterson
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Copyright 2002, Bloomberg L.P.
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