Genentech Regenerates Avastin


After a knee-jerk reaction to the downside after the closing bell yesterday to the surprising four-cent miss by Genentech, the shares are rallying big time in the early regular trading session.

The company raised its full-year earnings guidance range by a nickel although some analysts and investors were expecting that to happen.

Maybe investors are running for cover in DNAand other biopharma stocks, but what may also be moving the stock this morning is a lot of analyst commentary about the performance of DNA's all-important cancer drug Avastin. As Deutsche Bank's Mark Schoenebaum declares in the title of his research note to clients today, "It's Alive!" He's talking about the fact that Avastin sales grew sequentially (from one quarter to the next) for the first time since the third quarter of last year.

Uptake in the use of Avastin for breast cancer (the Food and Drug Administration approved it for that earlier this year) appears to be kicking in. DB makes a market in DNA and wants to do investment banking for the company.

And deals might be in the offing. On the conference call Genentech's Chief Financial Officer announced that the company is launching its first stock buyback program. David Ebersman said Genentech isn't putting a specific dollar cap or a timeline on it. For now, he said the board has approved half-a-billion dollars worth of stock repurchases over the next three months. During the question and answer period Morgan Stanley analyst Steven Harr likened the amount of money to "barely sticking your little pinky toe in the water."

But Ebersman said he wants to keep the company's cash pile at the ready in case opportunities for a partnership or acquisition present themselves. Harr also asked about the possibility of the company starting to pay a dividend. Ebersman called that "an important question for us", but said a dividend represents a long-term commitment and because he can't say for certain what the business is gonna look like in a couple of years he doesn't want to lock into that right now.

On the call, officials repeatedly mentioned the difficult challenges they're facing regarding insurance picking up the tab for their expensive drugs. The New York Times and The Wall Street Journal have both done front-page stories on the cost of Avastin. Some, including former Merck kahuna Roy Vagelos, have warned that the industry is risking bringing on government price controls. During the conference call, Genentech Chairman and CEO Art Levinson said he's keeping a close eye on the election, but added the company has a tradition of being able to work with people on both sides of the political aisle. "It's too soon to understand the impact that the 2008 elections will have on the industry," he said.

So, how/why did Genentech miss the earnings mark by four cents? The company says it was due, in part, to an "unplanned" approximately $50 million one-time charge for "failed lots" from a "start-up campaign" at a manufacturing plant. That's a euphemism for, "We made some drugs that we couldn't use and had to throw away." I asked the company which drug it was and where it was made, but a spokesperson emailed me to say, "We are not disclosing specifics regarding the product or the facility." Genentech says the problem won't affect supply. If you stripped out that and some other one-time charges, analysts say DNA would have had earnings per share of 90 cents. A four-cent beat instead of a four-cent miss.