Lower-than-expected sales from its flagship cancer drug, Avastin, eclipsed solid fourth-quarter and full-year earnings for Genentech Inc., and caused the company's shares to fall nearly 5 percent in early trading Wednesday.

The South San Francisco-based company reported non-GAAP net income of $363.3 million for the fourth quarter, a 61 percent increase over the last three months of 2004, and earnings per share met analysts' estimates of 34 cents. GAAP net income came in at $339.2 million, or 31 cents per share, for the three-month period ending Dec. 31.

Product revenue for the quarter came in at $1.9 billion, a 44 percent increase over the fourth quarter of 2004, and above consensus estimates of $1.85 billion.

"Overall, it was a very good quarter," said analyst Eric Schmidt, of New York-based SG Cowen & Co., adding that the company "easily bested expectations for aggregate product sales and revenues."

For the year, Genentech met estimates of $1.28 per share, a 54 percent increase over 83 cents per share in 2004. Non-GAAP net income totaled $1.4 billion in 2005, an increase of 55 percent over the $894 million reported the year before. GAAP net income for 2005 was $1.3 billion vs. $785 million in 2004.

But it was Avastin sales that had Wall Street worried. Sales of the anti-VEGF colorectal cancer drug totaled $359.1 million for the quarter, which marked an 89 percent increase over fourth-quarter 2004 sales of $190.5 million and a 10 percent increase over third-quarter 2005 sales of $325.5 million, but still fell short of analyst expectations.

Genentech's stock (NYSE:DNA) closed at $89.22 Wednesday, down $4.12.

"This is what we feared would happen," said Christopher Raymond, of Robert Baird & Co. in Chicago, which downgraded the company in November from "outperform" to "neutral," after conducting a physician survey and saw that, in colorectal cancer, the drug "appeared to hit a wall in terms of growth expectation.

"We thought [Avastin] would put up decent numbers, but not enough to hit consensus," Raymond told BioWorld Today.

Following the release of Genentech's earnings, New York firms First Albany and Merrill Lynch & Co. both downgraded the company's stock from "buy" to "neutral," and Rodman & Renshaw, also of New York, dropped the stock down to "market perform" from its previous "market outperform" rating.

For the full year, Avastin sales added up to $1.1 billion, compared to $544.6 million in 2004.

However, the full potential of Avastin (bevacizumab) still has yet to be seen. Genentech has submitted a supplemental biologics license application (BLA) to expand Avastin's label as a second-line treatment for metastatic colorectal cancer, and the company expects to file two additional sBLAs next quarter for approval of Avastin in first-line non-squamous non-small-cell lung cancer (NSCLC) and first-line metastatic breast cancer. (See BioWorld Today, Dec. 20, 2005.)

"I think the verdict's still out on whether Avastin's going to be a $4 billion drug or an $8 billion drug in the long term, and expectations are really all over the map," said Schmidt, whose estimates lean toward the conservative end, projecting Avastin sales of $4.7 billion by 2010.

"Trying to gauge overall product performance on a quarterly sales basis at this stage is probably a little premature," he added. "Data are continuing to roll out, and that's what made Genentech a very successful stock in 2005."

In the last year, the company's shares have gained more than 60 percent, due in part to explosive earnings in the first three quarters, as well as positive data from late stage trials.

And Genentech's future?

"Avastin, Avastin and more Avastin," Schmidt said. "Over the last several years, the company has had success on many fronts, but for all practical purposes, this story right now is all about how big Avastin will be."

Total U.S. product sales for the quarter were $1.5 billion, a 47 percent increase from $1.1 billion for the last three months of 2004. For 2005, Genentech reported product sales of $5.2 billion, compared to $3.6 billion the year before.

Rituxan (rituximab) sales led the way with $484.4 million for the three-month period ending Dec. 31, a 13 percent increase over the $429.2 million from same period last year. Full-year sales rose 16 percent to $1.8 billion, compared to 2004 sales of $1.6 billion. An anti-CD20 antibody, Rituxan is partnered with Basel, Switzerland-based F. Hoffmann-La Roche Ltd. and Cambridge, Mass.-based Biogen Idec, and approved for non-Hodgkin's lymphoma (NHL), though the companies have filed an sBLA to win FDA approval for the drug in front-line intermediate grade or aggressive front-line NHL. Another sBLA was submitted for use in rheumatoid arthritis patients who respond inadequately to anti-TNF therapy.

FDA action is expected on both of those filings next month.

Genentech's breast cancer drug, Herceptin (trastuzumab) posted fourth-quarter sales of $250.1 million, up 98 percent from fourth-quarter 2004 sales of $126 million. Total sales for 2005 were $747.2 million, up 56 percent from $479 million in 2004.

Sales of Tarceva (erlotinib) for the quarter were $83.9 million, and for the full year totaled $274.9 million. That drug gained approval in November 2004 to treat patients with locally advanced or metastatic NSCLC who have failed at least one prior chemotherapy. In November 2005, Genentech and partner, Melville, N.Y.-based OSI Pharmaceuticals Inc., won approval for Tarceva in a second indication: advanced pancreatic cancer in treatment-na ve patients in combination with gemcitabine. (See BioWorld Today, Nov. 4, 2005.)

Immunology products Xolair (omalizumab) and Raptiva (efalizumab) had fourth-quarter sales of $93.3 million (compared to $60.3 million) and $20.4 million (compared to $16.4 million), respectively. For the year, Xolair sales grew 71 percent to $320.6 million, and Raptiva sales increased by 51 percent to $79.2 million.

"We know that our 2005 performance increases the bar for us for 2006," Genentech chairman and CEO Arthur Levinson said during the company's conference call. "We're committed to doing the right things for the business to produce short-term growth while not jeopardizing our potential for long-term growth."

In the company's guidance for 2006, it expects EPS growth of between 35 percent and 45 percent over 2005.