Better-than-expected Rituxan sales helped Genentech Inc. meet The Street's consensus estimate, but even with the most robust product portfolio in the business, Genentech will need more of the same to meet growth estimates for 2003.

News of the solid quarter, released after market's close Wednesday, coupled with management's financial guidance calling for at least 20 percent earnings-per-share growth in 2003 and 2004, gave Genentech's stock (NYSE:DNA) some bounce, as shares rose $4 Thursday, or 11.4 percent, to close at $39.21. The increased revenue bodes well for the South San Francisco-based company but the question for investors is how much longer Rituxan will be asked to carry the revenue load.

First, though, the fourth-quarter numbers. Genentech reported pro forma earnings per share of 24 cents on net income of $124.2 million. Its revenue for the quarter increased 33 percent to $756 million. As of Dec. 31, it had cash, cash equivalents and short-term investments of more than $1 billion.

For the year, Genentech posted earnings per share of 92 cents - year-over-year growth of 22 percent. Marketed product sales in 2002 rose 24 percent to about $2.2 billion, with oncology sales accounting for 72 percent. The leader in Genentech's oncology portfolio is Rituxan - it generated nearly $1.2 billion in sales in 2002, up from $818.7 million in 2001 - and that's where analysts and investors look first. As Winton Gibbons, principal and group head of health care at Blair, William & Co. LLC put it, "Right now, [Genentech] is still a Rituxan story."

Rituxan Remains Main Driver

"What's great is that their revenue line was up 33 percent over last year," Gibbons told BioWorld Today. "The reason [Genentech] didn't beat estimates was a marketing build-out for Xolair and Raptiva, and its tax rate was higher than expected."

Blair, William, which does not have a corporate financial relationship with Genentech, rates the company "market perform," although Gibbons said, "We tell anyone, The first stock you should own is Genentech.'"

It all starts with Rituxan, Gibbons said. Rituxan (rituximab), a monoclonal antibody, was approved in 1997 for the treatment of patients with relapsed or refractory, low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma. The product is co-promoted in the U.S. by IDEC Pharmaceuticals Corp., of San Diego. A supplemental new drug application has stretched its uses further, and there is reason to believe sales will continue to increase, Gibbons said.

"It looks like when you are given treatment with Rituxan, you should have it about twice as long as the label says," he said, adding that there are arguments for benefits in re-treatment as well. "And it looks like maintenance therapy will work, meaning even if you are in remission and don't get the cancer, it looks like it's good to keep you on the maintenance therapy, although there isn't a label for that yet.

"Also, it looks like there is a certain amount of off-label use that is hard to quantify."

Therefore, although there is concern among Genentech followers that Rituxan's strong penetration into the NHL and chronic lymphocytic leukemia markets could impede further growth, Gibbons feels there is room for Rituxan to expand. Throw in the fact that Genentech is developing Rituxan for rheumatoid arthritis, and its potential increases that much more.

"With the longer treatment, both when you have the disease and potential maintenance treatment, plus re-treatment - I believe that is what is driving current Rituxan growth and should continue to drive it through 2004," he said. "When you get into 2004, the whole complexion starts to change."

Pipeline Expected To Keep Drugs Coming

What helps set Genentech apart is the drug machine behind Rituxan. As SG Cowen Securities Corp. analysts Eric Schmidt and Phil Nadeau wrote in a research note, "Genentech has one of the industry's best pipelines, with 20 products in development, including two in registration."

In December, Genentech submitted the final pieces of its biologics license application for the asthma product Xolair. The submission seeks approval for moderate to severe allergic asthma patients aged 12 to 75 years, and Genentech expects an FDA response in the middle of the year. The drug is partnered with Novartis Pharma AG, of Basel, Switzerland, and Tanox Inc., of Houston. (See BioWorld Today, Dec. 20, 2002.)

About a week later, the company said it submitted its BLA for Raptiva, a psoriasis product. The drug is partnered with XOMA Ltd., of Berkeley, Calif., and the companies expect FDA action in the fourth quarter, following a standard 10-month review.

Genentech also has two products in late-stage development with results expected in mid-2003. Tarceva, partnered with OSI Pharmaceuticals Inc., of Melville, N.Y., is in a Phase III non-small-cell lung cancer trial. Genentech's Avastin is in a Phase III colorectal cancer trial, although the product did not meet its primary endpoint in a Phase III refractory metastatic breast cancer trial. (See BioWorld Today, Sept. 11, 2002.)

"By 2004, Rituxan should get some visibility on RA and a couple of new drugs should be on the market," Gibbons said. "What I'm saying is, by 2004, the growth story of Genentech will be more drugs out of its pipeline. Our expectation is that all the heavy lifting won't have to be done by Rituxan. Not to say it can't do the heavy lifting, but it won't be required to."

The possible pitfall for investors, Gibbons said, is the willingness of management to adhere to its 20 percent EPS estimate.

"For me the big question is, If there is a revenue issue on Rituxan, will management address that with the expense line?'" he said. " Are you willing to cut your expenses to make sure we still get our 20 percent?' A good management team delivers no matter what happens. And I have confidence that they will."

Genentech is Genentech - biotechnology's oldest company and a giant in the industry. It's a mainstay in any biotechnology portfolio, Gibbons said.

"We really love Genentech because they have 10 or so drugs across four indications," Gibbons said. "It's a diversified large biotech company."