Biotech firms struggle as they grow

Genentech warns of flat sales for first quarter; Amgen earnings could get squeezed by bad news.

By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Stalled sales, failed drug experiments and an SEC inquiry are among the problems nagging at Amgen and Genentech as the world's two biggest biotech companies get set to report first-quarter earnings.

Genentech (down $0.76 to $82.64, Charts), the No. 2 biotech measured by sales, is set to announce earnings on Wednesday. But the South San Francisco, Calif.-based company dampened investor enthusiasm on March 23, when it announced that first-quarter U.S. sales would be flat compared to the previous quarter.

Also that day, Genentech gave a disappointing earnings outlook and said it was pulling a lung cancer study for its colon and lung cancer drug Avastin, the company's second-best seller with $1.7 billion in 2006 sales. The stock sank 4 percent.

Christopher Raymond, analyst for investment research firm Robert W. Baird, said that breast cancer drug Herceptin, one of the company's top-selling products with $1.2 billion in 2006 sales, is partly responsible for the expected slowdown in the first quarter.

"We do think that there's one drug in particular that might have weakness: Herceptin," said Raymond. "A few payers seem to be scrutinizing claims for Herceptin asking physicians to provide proof that women that they're treating with Herceptin are HER2 positive."

Only patients who have the HER2 gene, or about one-fourth of all breast cancer patients, are eligible for treatment with Herceptin, according to Genentech.

Raymond said that requiring proof of the patient's genetic makeup "could slow down payments." Raymond said Herceptin sales could slip 4 percent in the first quarter, but he believes the "slowdown is temporary" and sales will pick up again as more claims are processed.

Meanwhile, Genentech's cancer drug Avastin will continue to drive sales, said Raymond, who wrote in a note last week that a "brisk uptake" in use of the drug as a breast and lung cancer treatment would drive Avastin sales up least 4 percent in the first quarter to more than $500 million.

When it warned last month, Genentech said earnings per share would rise at least 25 percent for all of 2007, which was below analysts' average forecasts for a jump of 47 percent.

Jason Kantor, analyst for RBC Capital Markets, said in a note last week that he believes that first-quarter earnings will be driven by strong profit margins, despite flat sales. The analyst projects 68 cents EPS for the first quarter, up from 61 cents in the fourth quarter 2006 and 46 cents in the first quarter of 2006.

Amgen (down $1.14 to $57.19, Charts), the world's biggest biotech measured by sales, is expected to announce first-quarter earnings on April 19, following a spate of bad news for the company. A consensus of analyst projections sees an 18 percent increase in first quarter EPS to $1.08, and an 11 percent jump in annual EPS to $4.32 in 2007.

On March 1, Amgen announced in its annual report that it received an "informal inquiry" from the Securities and Exchange Commission about the way it handled a study last year concerning its anemia drug Aranesp, its top-selling product with $4.1 billion in 2006 sales. Investors sent the stock down 3 percent on the news.

On March 23, Amgen said its FDA-approved colon cancer drug Vectibix failed a test to treat a wider population of patients with earlier stages of the disease, blowing its best chances of increasing sales and sending the stock down 5 percent. Meanwhile, ImClone's (down $0.59 to $42.35, Charts) stock shot up 18 percent when investors realized that ImClone's Erbitux won't face new competition from Vectibix.

Edward Nash, analyst for Stifel Nicolaus & Co., Monday cut Amgen's 12-month price target to $65 a share from $91, though he maintained his "buy" rating because he sees the company's bad news as an investment opportunity, albeit a risky one.

"Since January, Amgen has been bombarded with news of safety hazards, regulatory concerns, reimbursement problems, and aborted trials, dropping shares to a highly attractive price from a valuation standpoint," he wrote in a note to investors. But he urged caution since Amgen still faces risks "that will insure the price of shares will remain volatile through the rest of 2007."

In an interview with CNNMoney.com, Nash said that investing in Amgen is risky and volatile, "like surfing off the coast of Australia," so it's better for day-trading on headlines rather than as a long-term investment.

"I wouldn't hold the stock through the entire year," said Nash. "I would be buying and selling opportunistically."

Nash said Amgen could face competition from the Swiss drug giant Roche, which is trying to get its experimental anemia drug CERA approved by the FDA in coming months. Also, Amgen is expected to announce late-stage test results for its experimental osteoporosis drug denosumab in the second half of the year.

Amgen and Genentech also compete with conventional drugmakers, including Pfizer (up $0.16 to $26.00, Charts), Johnson & Johnson (up $0.08 to $61.63, Charts) and Abbott Laboratories (up $0.19 to $57.21, Charts).

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.