Tuesday, Oct 14, 2008

Genentech Announces Third Quarter 2008 Results

Operating Revenue Increases 17 Percent to $3.4 Billion, Including U.S. Avastin Sales of $704 Million

South San Francisco, Calif. -- October 14, 2008 --

Genentech, Inc. (NYSE: DNA) today announced financial results for the third quarter of 2008. Key results for the third quarter of 2008 include:
  • U.S. product sales of $2,452 million, a 14 percent increase from U.S. product sales of $2,155 million in the third quarter of 2007.
  • Non-GAAP operating revenue of $3,408 million1, a 17 percent increase from operating revenue of $2,905 million in the third quarter of 2007; GAAP operating revenue of $3,412 million, a 17 percent increase from operating revenue of $2,908 million in the third quarter of 2007.
  • Non-GAAP net income of $863 million, an 11 percent increase from $778 million in the third quarter of 20071; GAAP net income of $731 million, a 7 percent increase from $685 million in the third quarter of 2007.
  • Non-GAAP earnings per share of $0.81, an 11 percent increase from $0.73 in the third quarter of 20071; GAAP earnings per share of $0.68, a 6 percent increase from $0.64 in the third quarter of 2007.
Non-GAAP and GAAP net income and earnings per share in the third quarter of 2008 were affected by a number of items, including the following:
  • Expense of $44 million, or $0.03 per share, related to the employee retention programs announced on August 13 in response to the Roche proposal to acquire the outstanding shares of Genentech stock2;
  • Expense of $105 million, or $0.06 per share, related to a collaboration agreement with GlycArt and Roche announced on October 2; and,
  • Expense of $67 million, or $0.04 per share, in "other expense, net" related to the impairment of certain assets in the company's investment portfolio.

Reconciliations between non-GAAP and GAAP earnings per share for the third quarters of 2008 and 2007 are provided in the following table:

  Non-GAAP Diluted EPS1 Employee Stock-Based Compensation Expense Net Charges related to Redemption, Tanox Acquisition and Special Items+ In-Process Research and Development Expense related to Tanox Acquisition Non-Cash Gain on Tanox Acquisition Reported GAAP Diluted EPS1
Q3 2008 $0.81 ($0.07) ($0.06) -- -- $0.68
Q3 2007 $0.73 ($0.06) ($0.03) ($0.07) $0.07 $0.64

+ In the third quarter of 2008, Genentech accrued additional costs of $0.02 per share related to the City of Hope contract dispute based on the status of negotiations between the parties on amounts owed for periods subsequent to the original Court judgment rendered in 2002.

The company is currently forecasting full-year 2008 non-GAAP earnings to be in the range of $3.40 to $3.45 per share, narrowed from $3.40 to $3.50 per share1, due primarily to the cost of the employee retention programs, which is estimated to be $0.08 per share in 2008.2

Product Sales and Royalty Revenue
Information on product sales for the three months ended September 30, 2008 and 2007, are provided in the following table (dollars in millions):

  Three Months
Ended September 30,
 
  2008 2007 % Change
Avastin®i$704$59718%
Rituxan®65557215
Herceptin®ii36832015
Lucentis®22519814
Xolair®13612112
Tarceva®1101019
Nutropin® Products95932
Thrombolytics6667(1)
Pulmozyme®655714
Raptiva ®2829(3)
Total U.S. product sales$2,452$2,15514
 
Net product sales to collaborators18216610
Total product sales$2,634$2,32113

i Third quarter 2008 Avastin U.S. product sales results include a net deferral of approximately $1 million in conjunction with the company's Avastin Patient Assistance Program. Third quarter 2007 Avastin U.S. product sales results included a net recognition of approximately $5 million in previously deferred revenue.
ii Herceptin sales in the third quarter of 2008 benefitted from an increase in channel inventory levels of approximately $12 million.

Non-GAAP royalty revenue for the third quarter of 2008 was $683 million, a 31 percent increase over the third quarter of 2007.1 GAAP royalty revenue of $687 million in the third quarter of 2008 increased 31 percent over the third quarter of 2007. The increase was largely due to growth in royalties from ex-U.S. sales by Genentech's licensees.

Total Costs and Expenses
Information on costs and expenses including cost of sales (COS), research and development (R&D) and marketing, general and administrative (MG&A) expenses for the three months ended September 30, 2008 and 2007, are provided in the following tables (dollars in millions)3:

  Three Months
Ended September 30,
 
  2008 2007 % Change
non-GAAP3
COS$389$390--%
R&D73857828
MG&A54649710
GAAP
COS4094061%
R&D77761526
MG&A61154113

  Three Months
Ended September 30,
  2008 2007
non-GAAP3
COS as a % of product sales15%17%
R&D as a % of operating revenue22%20%
MG&A as a % of operating revenue16%17%
GAAP
COS as a % of product sales16%17%
R&D as a % of operating revenue23%21%
MG&A as a % of operating revenue18%19%


Key Cost and Expense Items
The following key items impacting both non-GAAP and GAAP net income and earnings per share are included in total costs and expenses as well as other non-operating expense:
  • R&D expense includes approximately $105 million, or $0.06 per share, in association with a collaboration agreement with GlycArt, a company wholly-owned by Roche, and Roche to jointly develop and commercialize GlycArt's GA101 molecule. GA101, a humanized monoclonal antibody, is currently in Phase I/II clinical trials for CD20-positive B-cell malignancies.
  • R&D and MG&A expenses for the third quarter of 2008 each include costs of $22 million, for a total of $44 million, or $0.03 per share, related to the company's broad-based retention programs implemented in lieu of the 2008 stock option grant program.2
  • Other expense, net included the impact of an impairment charge of $67 million, or $0.04 per share, related to certain assets in the company's investment portfolio. As of September 30, 2008, the company has approximately $8.6 billion in cash and investments.

Clinical Development
Genentech announced that it submitted a supplemental Biologics License Application (sBLA) to the U.S. Food and Drug Administration (FDA) for Avastin® (bevacizumab) in combination with interferon alfa-2a therapy for patients with first-line metastatic renal cell carcinoma. The study is based on the global Phase III study AVOREN. The company also submitted an sBLA for the use of Rituxan® (Rituximab) in rheumatoid arthritis patients who have had an inadequate response to prior treatment with a disease modifying anti-rheumatic drug (DMARD).

Genentech announced it made a Phase III "go" decision to study Trastuzumab-DM1 (T-DM1) as a potential second-line treatment for HER2-positive metastatic breast cancer. In the third quarter of 2008, the company initiated enrollment in two Phase II studies of T-DM1 as potential first-line and third-line treatments for patients with HER2-positive metastatic breast cancer.

On October 2, 2008, Genentech announced it issued a Dear Healthcare Provider letter to inform potential prescribers of a case of progressive multifocal leukoencephalopathy (PML) in a 70-year old patient who had received Raptiva® (efalizumab) for more than four years for treatment of chronic plaque psoriasis. The patient has subsequently died. The company continues to work with the FDA to evaluate the risks and benefits of Raptiva and determine next steps.

Other Company Activities
Genentech announced that Science magazine ranked the company as "top employer in the biopharmaceutical industry" in its annual 2008 survey. This is the seventh year Genentech has appeared on the list and the sixth number one ranking for the company.

Webcast
Members of Genentech's management team will be participating in a conference call to discuss the company's financial and other business results on Tuesday, October 14, 2008, at 1:45 p.m. Pacific Time (PT). Live audio of the conference call will be broadcast simultaneously over the Internet and may be accessed on Genentech's web site at http://www.gene.com. The webcast and any corresponding materials will be archived and available for replay until 5:00 p.m. PT on November 4, 2008.

A telephonic replay of the webcast will be available beginning at 4:45 p.m. PT on October 14, 2008 through 4:45 p.m. PT on October 21, 2008. Access numbers for this replay are: 1-800-642-1687 (U.S./Canada) and 1-706-645-9291 (international); conference ID number is 60099652.

About Genentech
Founded more than 30 years ago, Genentech is a leading biotechnology company that discovers, develops, manufactures and commercializes medicines to treat patients with significant unmet medical needs. The company has headquarters in South San Francisco, California and is listed on the New York Stock Exchange under the symbol DNA. For additional information about the company, please visit http://www.gene.com.

About Genentech's Commitment to Patient Access
Genentech is committed to patients having access to our therapies. Through its Genentech Access Solutions program, the company provides patients and healthcare providers with coverage and reimbursement support, patient assistance and informational resources. Patient assistance support is for those eligible patients in the United States who do not have insurance coverage or who cannot afford their out-of-pocket co-pay costs. Since 1985, when its first product was approved, Genentech has donated approximately $1 billion in free medicine to uninsured patients through the Genentech® Access to Care Foundation (GATCF) and other product donation programs. Since 2005, Genentech has also donated more than $140 million to various independent, non-profit organizations that provide financial assistance to eligible patients who cannot access needed medical treatment due to co-pay costs.

For information on Genentech's latest business and product development events please refer to http://www.gene.com/gene/news/press-releases/index.jsp.

This press release contains forward-looking statements regarding expected growth in non-GAAP earnings per share for 2008, the impact of the retention program and certain costs associated with the City of Hope litigation. Such statements are predictions and involve risks and uncertainties such that actual results may differ materially. Such risks and uncertainties include, but are not limited to, the need for additional data, data analysis or clinical studies; the results of clinical trials; Biologics License Application preparation and decision making; U.S. Food and Drug Administration (FDA) actions or delays; failure to obtain or maintain FDA approval; difficulty in obtaining materials from suppliers; unexpected safety, efficacy or manufacturing issues for Genentech or its contract/collaborator manufacturers; product withdrawals; competition; efficacy data concerning any Genentech products which shows or is perceived to show similar or improved treatment benefit at a lower dose or shorter duration of therapy; pricing decisions by Genentech or its competitors; Genentech's ability to protect its proprietary rights; the outcome of, and expenses associated with, litigation or legal settlements; cost of sales, other expenses and indebtedness; variations in collaborator sales and expenses; fluctuations in contract revenue and royalties; actions by Roche that are adverse to the interests of Genentech; the outcome of, or developments concerning, Roche's proposal to acquire Genentech's outstanding shares; decreases in third party reimbursement rates; and changes in accounting or tax laws or the application or interpretation of such laws. Please also refer to the risk factors identified in Genentech's periodic reports filed with the Securities and Exchange Commission. Genentech disclaims, and does not undertake, any obligation to update or revise forward-looking statements in this press release.

1 Genentech's non-GAAP royalty revenue and operating revenue for the third quarters of 2008 and 2007 exclude recognition of deferred royalty revenue associated with the acquisition of Tanox, Inc. of $4 million and $3 million, respectively. In the third quarter of 2008, GAAP royalty revenue and GAAP operating revenue were $687 million and $3,412 million, respectively. Genentech's non-GAAP net income and non-GAAP earnings per share exclude the after-tax impact of certain items associated with the acquisition of Tanox, Inc. (including recurring recognition of deferred royalty revenue, recurring amortization of intangible assets, in-process research and development expenses [Q3 2007 only], a gain pursuant to Emerging Issues Task Force issue no. 04-1 [Q3 2007 only], and purchase accounting adjustments [Q3 2008 only]); recurring charges related to the 1999 redemption of Genentech's stock by Roche Holdings, Inc.; litigation-related and similar special items; employee stock-based compensation expense; and certain expenses identified in item (ii) of endnote 2 below related to the 2008 proposal from Roche. The differences in non-GAAP and GAAP amounts are reconciled in the accompanying tables and on http://www.gene.com.

2 GAAP net income for the third quarter of 2008 includes $53 million, or $0.03 per share, in costs associated with the Roche proposal to aquire the outstanding shares of Genentech stock (the Proposal). Proposal costs are considered in Genentech's non-GAAP and GAAP operating results as follows: (i) Costs incurred by the company in connection with the Proposal, including implementation of a retention bonus plan, and legal and other fees, including those associated with the defense of the company in shareholder lawsuits filed in connection with the Proposal, are included in both non-GAAP and GAAP operating results; during the third quarter of 2008, approximately $44 million, or $0.03 per share, in expenses were charged to operations in connection with the company's broad-based retention program. The expenses associated with the retention program are being recognized on a pro rata basis for the period from August 13, 2008, to June 30, 2009, and are allocated to all functional areas of the company. Retention program costs associated with the manufacturing organization in the third quarter of 2008 will be recognized in the company's results when inventory produced in the third quarter of 2008 is sold. Legal and other fees incurred by the company in connection with the Proposal in the third quarter of 2008 were approximately $3 million. (ii) Costs incurred by the company on behalf of the Special Committee in connection with its review of the Proposal, as well as legal costs incurred in defense of the Special Committee and/or its individual members in shareholder lawsuits filed in connection with the Proposal, are excluded from non-GAAP operating results; during the third quarter of 2008, charges associated with supporting the Special Committee in connection with the Proposal and charged only to GAAP results were approximately $6 million. No retention program costs or legal and other fees in connection with the Proposal were recorded in the third quarter of 2007. The differences in non-GAAP and GAAP amounts are reconciled in the accompanying tables and on http://www.gene.com.

3 Genentech's third quarter 2008 non-GAAP reported COS, R&D and MG&A expenses exclude the effects of employee stock-based compensation expense of $20 million, $39 million, and $44 million, respectively. Third quarter 2007 non-GAAP reported COS, R&D and MG&A expenses exclude the effects of employee stock-based compensation expense of $16 million, $37 million, and $44 million, respectively. The differences in non-GAAP and GAAP amounts are reconciled in the accompanying tables and on http://www.gene.com.

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