Wednesday, Oct 14, 1998

Genentech Reports Third Quarter Results

Genentech Reports Net Income Increase in the Third Quarter of 1998 Driven by Increases in Contract Revenues and Product Sales

Genentech Received Regulatory Approval for Herceptin, a New Medicine for Metastatic Breast Cancer

South San Francisco, Calif. -- October 14, 1998 --

Genentech, Inc. (NYSE:GNE) announced today that net income for the third quarter of 1998 increased over 97 percent to $63.4 million, or 49 cents per share*, compared to $32.1 million, or 25 cents per share, in the third quarter of 1997. This increase resulted primarily from an increase in revenues. Revenues increased 26 percent to $313.9 million from $248.9 million in the same quarter of 1997 due primarily to increases in contract and other revenues and product sales.

In September 1998, Genentech received regulatory approval from the U.S. Food and Drug Administration (FDA) for Herceptin® (Trastuzumab), a unique new approach for treating one type of metastatic breast cancer and the first monoclonal antibody approved for use in this disease. Herceptin is indicated both as first line therapy in combination with paclitaxel and as a single agent in second and third line therapy for patients with metastatic breast cancer who have tumors that overexpress the HER2 protein. Genentech began shipping Herceptin to the oncology medical community on October 5, 1998, just ten days after approval.

"The third quarter was highlighted by the expeditious approval of Herceptin, Genentech's second oncology product approval within the past year," said Arthur D. Levinson, Ph.D., Genentech's president and chief executive officer. "Our strong product pipeline and financial results this quarter are in line with our Long-Range Plan, and as revenues increase with the introduction of new products, we are indeed bringing a greater percentage of revenues to the bottom line."

Contract and Other Revenues

Contract and other revenues were $66.1 million in the third quarter of 1998 compared to $29.4 million in the third quarter of 1997. This increase resulted primarily from a $40 million payment from Roche in the third quarter of 1998 related to an agreement entered into during the quarter providing Roche exclusive ex-U.S. marketing rights for Herceptin, as well as from a settlement payment from Novo Nordisk A/S. The increase was partly offset by lower contract revenues from Roche related to other projects.

Marketed Products

Sales of marketed products in the third quarter of 1998 increased 15 percent to $163.1 million from $142.3 million in the third quarter of 1997. This increase resulted primarily from sales of Rituxan (Rituximab).

Sales of Rituxan in the third quarter of 1998 were $39.4 million. Rituxan, developed in partnership with IDEC Pharmaceuticals Corporation, is currently approved for marketing in the United States as a single-agent therapy for the treatment of relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma.

Genentech first recorded sales for Rituxan of $5.5 million in the fourth quarter of 1997 and recorded sales for this product of $37.7 million in the first quarter and $34.8 million in the second quarter of 1998. During the quarter, Genentech began shipping Rituxan to drug wholesalers rather than directly to customers. The sales increase over the previous quarter resulted primarily from initial stocking by wholesalers.

Sales of Activase® (Alteplase, recombinant) decreased 26 percent to $45.1 million from $60.7 million in the third quarter of 1997. This decline resulted primarily from a decrease in market share compared to the prior year's third quarter. The decline from the prior year's third quarter also resulted, to a lesser extent, from a decline in the thrombolytic market size due to mechanical reperfusion and from a temporary decrease in the available commercial market because of two large ongoing Phase III studies that involve thrombolytic therapy. Patients in these studies did not receive commercial product, as they may have if they were not participating in a study.

Sales of Genentech's three growth hormone products, Protropin® (somatrem for injection), Nutropin® (somatropin [rDNA origin] for injection) and Nutropin AQ® (somatropin [rDNA origin] injection) decreased 7 percent to $52.9 million compared to $57.0 million in the third quarter of 1997. This decrease resulted primarily from fluctuations in ordering patterns by distributors.

Pulmozyme® (dornase alfa) Inhalation Solution sales increased 4 percent to $24.7 million from $23.8 million in the third quarter of 1997. This increase in sales resulted from new Pulmozyme patients in all age groups, including very young patients following the FDA approval for a label change to Pulmozyme in February 1998. This label change allows Pulmozyme to be used to treat very young children with cystic fibrosis, ages three months to four years.

Expenses

Research and development (R&D) expenses in the third quarter of 1998 decreased 15 percent to $99.9 million from $118.1 million in the third quarter of 1997. This decrease is in line with the goal of Genentech's Long-Range Plan to decrease R&D spending as a percent of revenues as products progress through late-stage clinical trials and revenues increase.

Marketing, general and administrative (MG&A) expenses increased 37 percent in the third quarter of 1998 to $89.6 million from $65.5 million in the third quarter of 1997. The increased expenses were primarily in support of marketing and sales for Genentech's launch of Herceptin and continued to be driven by the introduction of Rituxan and the resultant profit sharing with IDEC as well as by competitive conditions with other marketed products. In addition, the third quarter reflected a charge for the write down of certain biotechnology equity securities to current market value. Cost of sales increased 33 percent to $35.3 million in the third quarter of 1998 from $26.6 million in the third quarter of 1997, resulting primarily from the mix of marketed products, including the introduction of Rituxan.

Additional R&D and Business Development Progress

  • The FDA in September approved Herceptin for use as first line therapy in combination with paclitaxel and as a single agent in second and third line therapy for patients with metastatic breast cancer who have tumors that overexpress the HER2 protein. This approval came only five months after regulatory submission to the FDA and 23 days after recommendation by the Oncologic Drugs Advisory Committee.

  • Genentech terminated the U.S. trial ATLANTIS (Alteplase ThromboLysis for Acute Noninterventional Therapy in Ischemic Stroke) based upon an interim analysis which revealed an extremely small statistical chance to demonstrate a net clinical benefit by fully enrolling and completing the trial. ATLANTIS studied Activase in acute ischemic stroke patients three to five hours from symptom onset.

  • Began administering the anti-CD18 antibody to patients in Phase II clinical trials for the potential treatment of acute myocardial infarction.

  • With partner LeukoSite, Inc., began a Phase Ib/IIa clinical trial of LDP-02 in ulcerative colitis in Europe.

  • Besides the new agreement with Roche for ex-U.S. marketing of Herceptin, Genentech entered into one other new strategic business agreement during the quarter:

  • Announced an agreement with Protein Design Labs, Inc. to cross-license rights to certain intellectual property in the field of monoclonal antibodies. Under the agreement, the companies will pay each other certain up-front fees and future royalties on sales for rights to license particular antibodies under specified patents and patent applications held by the other company.

Genentech, Inc. is a leading biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. Twelve of the currently marketed biotechnology products stem from Genentech science. Genentech markets seven products directly in the United States. The company has headquarters in South San Francisco, California and is traded on the New York Stock Exchange and the Pacific Exchange under the symbol GNE.

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GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)
(unaudited)

Three Months
Ended September 30,

1998 1997
Revenues
   Product sales $ 163,100 $ 142,306
   Royalties   60,725 59,632
   Contract and other   66,113 29,385
   Interest   23,992 17,594
      Total revenues   313,930 248,917
       
Costs and expenses
   Cost of sales   35,351 26,565
   Research and development   99,862 118,146
   Marketing, general and administrative   89,544 65,450
   Interest   1,148 542
      Total costs and expenses   225,905 210,703
       
Income before taxes   88,025 38,214
Income tax provision   24,647 6,092
       
Net income $ 63,378 $ 32,122
       
Earnings per share      
   Basic $ 0.50 $ 0.26
   Diluted $ 0.49 $ 0.25
       
Weighted average shares used to
   compute diluted earnings per share:
  129,948 126,677
 
Nine Months
Ended September 30,

1998 1997
Revenues
   Product sales $ 504,082 $ 441,537
   Royalties   182,606 180,323
   Contract and other   95,034 67,453
   Interest   64,920 50,382
      Total revenues   846,642 739,695
       
Costs and expenses
   Cost of sales   106,122 79,817
   Research and development   291,013 351,779
   Marketing, general and administrative   245,137 190,504
   Interest   3,302 2,446
      Total costs and expenses   645,574 624,546
       
Income before taxes   201,068 115,149
Income tax provision   56,299 27,634
       
Net income $ 144,769 $ 87,515
       
Earnings per share      
   Basic $ 1.15 $ 0.71
   Diluted $ 1.12 $ 0.69
       
Weighted average shares used to
   compute diluted earnings per share:
  129,510 126,120
 
September 30,
1998 1997
Selected balance sheet data
   Cash and short-term investments $ 987,785 $ 812,912
   Accounts receivable   135,127   207,805
   Inventories   123,886   98,893
   Long-term marketable securities   566,052   444,839
   Property, plant and equipment, net   692,876   663,779
   Other long-term assets   187,391   182,815
   Total assets   2,748,252   2,451,023
   Total current liabilities   317,170   269,745
   Long-term debt   150,000   150,000
   Total liabilities   500,171   465,294
   Total stockholders' equity   2,248,081   1,985,729