Not a Bad Quarter for Genentech

What do you call it when a biopharma giant musters double-digit percentage sales growth on two of its most successful drugs? I don't know, but it's hard to call such a quarter a bad one. Still, investors don't seem ecstatic about Genentech's (NYSE: DNA) first-quarter financial results from last week.

Overall, Genentech's revenue was up only 8% versus the first quarter last year. After a busy quarter of FDA activity over its lead drug, Avastin, and (at least) temporary approval to treat breast cancer patients with it, sales of Avastin climbed 13% in the first quarter. Rituxan sales also gained a healthy 13%, despite being on the market for more than 10 years.  

Avastin's and Rituxan's continued speedy growth contrasted with the decline that Genentech experienced with Lucentis and sales of its products to collaborators. Mostly as a result of these reduced collaborator sales, Genentech's product sales this quarter were up only 2% year over year, but its revenue picture was made brighter because of royalty revenue that Genentech receives on its partners' sales of its drugs outside the U.S.

Many of DNA's compounds are in a much earlier sales cycle in Europe and elsewhere after being approved later than they were in the U.S. Because of this, royalty revenue from marketing partners Roche and Novartis (NYSE: NVS) jumped 46% this quarter versus last year and accounted for 20% of Genentech's overall revenue (compared to 15% of revenue in the first quarter last year).

Genentech's non-GAAP net income was up 14% this quarter, to $0.84 per share. Genentech's bottom line didn't gain as much as a drugmaker with a premium-priced valuation would be expected to. But it's important to remember that Genentech hasn't had to cut into its research and development budget -- like other large-cap drugmakers such as Amgen (Nasdaq: AMGN) have done recently -- to maintain its earnings growth.

Genentech's shares are trading at 22 times the midpoint of its non-GAAP earnings guidance for 2008, which is $3.35 to $3.45 a share, but there will likely be a lot of volatility in Genentech's shares this year. With upcoming phase 3 study results for Avastin in breast cancer and the data Genentech and its competitors will present at the ASCO medical conference in late May, Genentech shareholders may still be in for a wild ride in 2008.