Wall Street wary as Genentech's 4Q profit rises 6 percent

SAN FRANCISCO -- Wall Street may not get very excited -- or worried -- about Genentech Inc.'s prospects until it sees results from several clinical trials of its drugs.

The nation's largest biotechnology company, renowned for its phenomenal growth, saw its stock fall slightly in after-hours trading Monday after reporting that its fourth-quarter profits had only barely scraped past Wall Street's prediction of meager growth.

Analysts said four tests that could lead to expanded use of its two top-selling products will drive Genentech's stock prices in 2008.

The South San Francisco-based company posted a 6 percent rise in fourth-quarter net profit compared with the same period a year ago. Fourth-quarter sales of Genentech's top-selling product, the cancer drug Avastin, fell below Wall Street expectations by several million dollars.

Shares of Genentech fell 80 cents to $69.84 in after-hours trading after closing Monday at $70.64.

To get investors excited, at least one of four clinical trials expected to post results this year must show promise, said RBC Capital Markets equities analyst Jason Kantor.

"Right now what's going to get the stock moving in 2008 is not the earnings numbers," he said.

A year ago, Genentech posted a 75 percent surge in fourth-quarter profits, and investors have become accustomed to growth in the high double digits. As growth slowed in 2007, Genentech shares fell about 18 percent for the year.

The company earned $632 million, or 59 cents per share, during the three months ended Dec. 31, compared with profit of $594 million, or 55 cents per share, during the same period a year earlier. Revenue rose to $2.97 billion from $2.71 billion.

Excluding stock-option expenses and other one-time costs, the company said it earned 69 cents per share. Analysts polled by Thomson Financial expected earnings per share of 67 cents on total revenue of $2.97 billion.

"I don't think anyone would rightly expect us to sustain growing a business this size at those numbers," said Chief Financial Officer David A. Ebersman.

At the same time, Ebersman said, the 31 percent jump in the company's overall profits in 2007 offered proof that Genentech still had room to grow, even if more slowly. For the full year, Genentech's net profit was $2.77 billion, or $2.59 per share, versus $2.11 billion, or $1.97 per share, in 2006. Annual revenue was $11.72 billion, up 26 percent from $9.28 billion a year earlier.

Earnings jumped 65 percent from 2005 to 2006.

Sales of Rituxan, Genentech's second biggest source of revenue, brought in $596 million last quarter, up 6 percent from the same period a year ago.

Two trials being closely watched by analysts are testing the drug as a treatment for lupus and multiple sclerosis. Rituxan is already approved to treat rheumatoid arthritis and non-Hodgkin's lymphoma.

Genentech's breast cancer drug Herceptin brought in $327 million for the quarter, a 2 percent increase.

Avastin sales reached $603 million during the fourth quarter, falling short of Wall Street expectation of $616 million, and analysts have worried that the market for the drug is becoming saturated even as the company seeks approval for new uses. Its prospects grew cloudier last month when a Food and Drug Administration panel's decided not to recommend the drug for expanded use in breast-cancer patients.

A final FDA vote on whether to treat breast cancer patients with Avastin alongside chemotherapy is slated for February. The agency does not have to follow the advice of its panel, though it usually does.

"We continue to believe strongly that the testing of Avastin and metastatic breast cancer was a successful study," said Susan Desmond-Hellmann, Genentech's president of product development.

The two other clinical trials attracting investor attention involve using Avastin as a breast cancer treatment and as an a therapy to prevent the return of colorectal cancer. If either of the Rituxan or Avastin trials show positive results, analysts said, the company could again see major growth.

"To say that all four are going to flunk, that's going to be highly unlikely," said Ferris, Baker Watts, Inc., analyst Shiv S. Kapoor.

In 2008, the company said it expects profit, excluding charges, between $3.30 and $3.45 per share. Analysts expected earnings of $3.37 per share for the year.