WASHINGTON, March 26 (UPI) -- Genentech's shares slipped on the company's announcement that U.S. revenues for the first quarter would be flat and on new toxicity issues related to Avastin, but analysts were more concerned by the company's lack of a strong pipeline.
Credit Suisse analyst Michael Aberman said Genentech's management did not impress him with their pipeline news and thus he remained "neutral" on the stock.
"I'm not really making a call one way or the other," Aberman told United Press International. "I'm still waiting for something to emerge from their pipeline to say we need to own this stock. It didn't happen at this meeting."
Genentech, which made the announcements at its R&D day last week, saw its shares fall 4 percent Friday, but Aberman thought the sell-off was mostly due to investor overreaction. (The stock rebounded 0.62 percent on Monday.) The flat first quarter forecast doesn't worry him in the short-term, and the Avastin toxicity issue is unlikely to significantly impact sales of the drug, he said.
The Avastin toxicity -- a condition known as tracheal-esophageal fistula -- occurred in a trial involving patients with small cell lung cancer who were receiving chemotherapy and radiation. The trial, which was not being funded by Genentech, was halted after the toxicity issue came to light.
"It was a small trial and small cell lung cancer is not an important driver for Avastin growth," Aberman said.
Despite concerns about Genentech's pipeline, the company noted that it now aims to bring 30 new molecular entities into clinical development by 2010.
"Our efforts are focused on developing a strong pipeline with novel and important drugs that aim to be first-in-class or best-in-class," said Arthur Levinson, Genentech's chairman and CEO.
"In the past 15 months, we have nearly doubled the number of new molecular entities in our development pipeline and now have a total of 21," Levinson added.
Although Aberman likes Genentech's management and thinks they will eventually reward the long-term investor, he concedes the company is facing several challenges they will have to overcome going forward.
The challenges include competitive threats to several of its key products. GlaxoSmithKline's Tykerb poses a threat to Herceptin; several companies, including GlaxoSmithKline, Wyeth and Roche, are developing compounds that could compete with Rituxan, and Pfizer, Bayer, Sanofi and AstraZeneca are developing compounds that could steal share from Avastin.
R.W. Baird analyst Chris Raymond was not deterred by Genentech's announcement, noting that he was impressed with the company's pipeline.
"Despite these issues, we are impressed by the breadth of progress across the company and remain buyers," Raymond stated in a research report, reiterating his "outperform" rating of the stock.
At the same time, Raymond reduced his first quarter U.S. product revenue estimates across the board, particularly citing issues with Avastin and Herceptin.
Genentech said its Avastin patient assistance program -- which limits the overall expense of the drug to $55,000 per year for eligible patients -- is partially responsible for its anticipated flat first quarter revenues.
Herceptin sales may level off due to increased payer scrutiny to ensure all patients receiving the drug are indeed Her-2-positive.
"While we have little quantitative data as to the prevalence of Her-2-negative Herceptin treatment, we think payers may be increasingly requiring Her-2 status confirmation before treatment, which may precipitate a lull in revenue growth," Raymond stated.
On the positive side, he said he was impressed with the company's pipeline reload, increased manufacturing capacity and upcoming filings and release of trial data. This includes Genentech's announcement that it would move Omnitarg into phase 3 clinical trials for first-line breast cancer that may help it stave off the threat from Tykerb.
Friedman, Billings and Ramsey analyst Jim Reddoch found little to celebrate in the company's pipeline, but noted that upcoming adjuvant data for Avastin in breast and colon cancer settings could add $1 billion in U.S. sales.
Reddoch lowered his first quarter revenue growth from three percent to one percent and also reduced his first quarter forecasts for U.S. sales of Avastin and Herceptin by $12 million and $21 million, respectively.
Reddoch also lowered his first quarter earnings per share estimate to $0.67, below Wall Street's consensus of $0.68, which is expected to also drop.
