Tuesday, Jul 14, 1998

Genentech Reports 1998 2nd Quarter Results

Net Income Increased 70 Percent on 15 Percent Revenues Increase as Genentech Seeks Approval for Its Second Oncology Product

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

Genentech, Inc. (NYSE: GNE) announced today that net income for the second quarter of 1998 increased 70 percent to $40.4 million, or 31 cents per share* from $23.8 million, or 19 cents per share*, in the second quarter of 1997. This increase in net income stemmed primarily from an increase in revenues. Revenues increased 15 percent to $268.0 million, from $233.5 million in the same quarter of 1997. This increase resulted primarily from an increase in product sales driven by Rituxan™ (Rituximab) sales.

"Our financial results for the quarter are in line with the goals for initial earnings increases of our Long-Range Plan (LRP) for growth and show again that this plan is working," said Arthur D. Levinson, Ph.D., Genentech's president and chief executive officer. "Our progress with the products in our pipeline and with our business relationships also validate the soundness of our LRP. I'm particularly excited about the progress made with our leading pipeline project, Herceptin® (Trastuzumab). During the quarter we filed under Fast Track review for regulatory approval to market Herceptin for the treatment of women with metastatic breast cancer who overexpress the HER2 proto-oncogene. This filing was based on positive results that were announced in May based on comprehensive Phase III trials testing Herceptin alone or in combination with chemotherapy."

* All earnings per share amounts in the text of this press release represent diluted earnings per share as defined under Statement of Financial Accounting Standards No. 128, "Earnings per Share."

Marketed Products

Product sales in the second quarter of 1998 increased 22 percent to $176.3 million from $145.0 million in the second quarter of 1997.

Sales of Rituxan in the second quarter of 1998 were $34.8 million. Rituxan 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 of 1998. Genentech and its partner IDEC Pharmaceuticals Corporation expected this pattern of sales as initial pent up demand reflected in sales for the fourth quarter of 1997 and the first quarter of 1998 is being replaced in subsequent quarters by demand from increased use.

During the quarter, Genentech and IDEC's partner Roche received approval from the European Commission to market Rituximab under the tradename MabThera for marketing in the European Union. MabThera was approved for treating non-Hodgkin's lymphoma patients who have had two or more relapses or are resistant to chemotherapy. Roche holds marketing rights for MabThera outside of the United States and Japan. Genentech will receive royalties and a mark-up on product supplied to Roche.

Also during the quarter, Genentech and its partner IDEC announced encouraging results of a Phase II pilot study combining Rituxan (the U.S. tradename for Rituximab) with standard chemotherapy in patients with previously untreated intermediate- or high-grade non-Hodgkin's lymphoma. The full results of this small Phase II study were presented in May at the annual meeting of the American Society of Clinical Oncology (ASCO) in Los Angeles.

Sales of Activase® (Alteplase, recombinant), a tissue plasminogen activator (t-PA), declined 21 percent to $54.1 million from $68.3 million in the second quarter of 1997. This decline resulted primarily from a decrease in market share compared to the prior year's second quarter. The sales dollar decline from the prior year's second 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. While Activase market share and the thrombolytic market size declined from the second quarter of 1997, during 1998 they have both remained constant.

Effective June 1998, a large healthcare alliance enterprise, Premier, Inc. entered a sole-source corporate partnership agreement with Genentech. The agreement, which is part of Premier's commitment program, includes Activase. As part of the agreement, Premier will work closely with Genentech to enhance community awareness by implementing educational programs related to cardiac arrest and stroke.

Shortly following the close of the second quarter, Genentech partner Boehringer Ingelheim GmbH announced preliminary findings from the European Cooperative Acute Stroke Study II (ECASS II) in stroke patients presenting within 0 to 6 hours of symptom onset. While this study showed an unexpected low overall mortality compared to previous stroke clinical trials, it failed to show a statistically significant clinical benefit in stroke patients treated with Actilyse (the European tradename for Alteplase, recombinant) compared to placebo. Genentech's Activase (the U.S. tradename for Alteplase, recombinant) is approved for the treatment of acute ischemic stroke within 3 hours of symptom onset.

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) increased 12 percent to $62.3 million from $55.6 million in the second quarter of 1997. This increase resulted from fluctuations in ordering patterns by distributors and treatment of new adult patients with growth hormone deficiency following regulatory approval of Nutropin and Nutropin AQ for this indication in December 1997. Genentech's new agreement with Premier mentioned above also extends an existing contract between Premier and Genentech covering Genentech's three growth hormone products.

Pulmozyme® (dornase alfa, recombinant) Inhalation Solution sales increased 19 percent to $24.1 million from $20.2 million in the second quarter of 1997. This increase in sales resulted from fluctuations in wholesalers' purchase patterns and 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.

During the quarter, Genentech licensed U.S. marketing and development rights to interferon gamma, including Actimmune® (Interferon gamma-1b), to Connetics Corporation for the management of serious infections associated with chronic granulomatous disease (CGD) and the potential treatment of various other diseases. Following a transition period, Genentech will no longer sell Actimmune for CGD. Actimmune sales for the second quarter of 1998 were about $1.0 million.


R&D expenses in the second quarter of 1998 decreased 16 percent to $92.9 million compared to $110.9 million in the second quarter of 1997. For the second quarter of 1998, Genentech invested 35 percent of revenues into R&D, compared to 47 percent in the prior year's second quarter. 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 28 percent in the second quarter of 1998 to $80.6 million from $63.0 million in the second quarter of 1997, driven by the introduction of Rituxan and the resultant profit sharing with IDEC and by competitive conditions with other marketed products. Cost of sales increased 45 percent to $37.2 million in the second quarter of 1998 from $25.6 million in the second quarter of 1997, resulting primarily from the mix of marketed products, including the introduction of Rituxan.

R&D, Business Development and Intellectual Property Progress

As listed below, Genentech's strong investment in R&D was coupled with significant progress in product development during the quarter. Genentech also continued to invest in business development with two new business relationships entered into during the quarter, in addition to the Connetics agreement mentioned above. In addition, Genentech successfully resolved two legal cases related to the protection of its intellectual property:

  • Genentech completed submission of a Biologics License Application (BLA) to the U.S. Food and Drug Administration (FDA) seeking approval under Fast Track review to market Herceptin, Genentech's antibody to a growth factor receptor known as HER2, for the treatment of women with metastatic breast cancer who have tumors that overexpress HER2.

    • At the annual meeting of the American Society of Clinical Oncologists (ASCO) Genentech announced encouraging Phase III investigational clinical trial results for Herceptin for this indication.

    • Genentech partner DAKO A/S submitted a Pre-Market Approval application (PMA) to the FDA seeking approval to market a diagnostic kit to screen breast cancer patients for overexpression of HER2 to determine whether Herceptin treatment might be appropriate.

  • Entered into an agreement with Roche providing Roche exclusive marketing rights outside of the United States for Herceptin. The agreement provides Roche to pay a $40 million up-front fee (to be recorded in the third quarter of 1998) and cash milestones tied to product development activities, to share global development costs and to make royalty payments on product sales.

  • The AIDS Clinical Trials Group (ACTG), which is part of the Division of AIDS (DAIDS) within the National Institute of Allergy and Infectious Disease (NIAID), completed a Phase II trial of Genentech's recombinant human nerve growth factor (rhNGF) for the treatment of HIV-associated neuropathy. Positive preliminary results of that study were presented in June at the Neuroscience of HIV Infection meeting in Chicago.

  • Genentech began Phase II clinical trials of vascular endothelial growth factor (VEGF) for the treatment of coronary artery disease.

  • Genentech signed a research license and option agreement with Abgenix, Inc. that allows Genentech to use Abgenix' XenoMouse™ technology to generate fully human antibodies to specific targets.

  • Genentech settled litigation on Novo Nordisk A/S and Genentech patents relating to human growth hormone and insulin, ending more than four years of U.S. legal battles as well as potential disputes in jurisdictions around the world. Under the agreement, Novo Nordisk and Genentech will cross-license worldwide certain patents relating to human growth hormone. At the end of August 1998, Novo Nordisk will receive a worldwide license under Genentech patents relating to insulin and Genentech expects to receive certain future payments.

  • Genentech signed multi-party agreements with Schering-Plough Corporation, Biogen, Inc. and Roche settling a 1996 lawsuit that Biogen filed against Roche and Genentech related to a disputed alpha interferon invention. As a result of the settlement, the U.S. Patent Office is expected to issue a patent to Genentech/Roche for the disputed alpha interferon claim. Genentech expects to receive certain future payments.

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

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(in thousands, except per share amounts)

Three Months
Ended June 30,

1998 1997
   Product sales $ 176,263 $ 145,018
   Royalties   57,388 55,379
   Contract and other   14,056 16,659
   Interest   20,305 16,437
      Total revenues   268,012 233,493
Costs and expenses
   Cost of sales   37,150 25,567
   Research and development   92,949 110,890
   Marketing, general and administrative   80,643 63,073
   Interest   1,195 916
      Total costs and expenses   211,937 200,446
Income before taxes   56,075 33,047
Income tax provision   15,701 9,253
Net income $ 40,374 $ 23,794
Earnings per share:      
   Basic $ 0,32 $ 0.19
   Diluted $ 0.31 $ 0.19
Weighted average shares used to
   compute diluted earnings per share:
  129,775 126,425
Six Months
Ended June 30,

1998 1997
   Product sales $ 340,982 $ 299,231
   Royalties   121,881 120,691
   Contract and other   28,921 38,068
   Interest   40,928 32,788
      Total revenues   532,712 490,778
Costs and expenses
   Cost of sales   70,771 53,252
   Research and development   191,151 233,633
   Marketing, general and administrative   155,593 125,054
   Interest   2,154 1,904
      Total costs and expenses   419,669 413,843
Income before taxes   113,043 76,935
Income tax provision   31,652 21,542
Net income $ 81,391 $ 55,393
Earnings per share:      
   Basic $ 0.65 $ 0.45
   Diluted $ 0.63 $ 0.44
Weighted average shares used to
   compute diluted earnings per share:
  129,291 125,842
June 30,
1998 1997
Selected balance sheet data
   Cash and short-term investments $ 921,313 $ 684,303
   Accounts receivable   180,086   209,622
   Inventories   116,840   99,667
   Long-term marketable securities   466,963   472,586
   Property, plant and equipment, net   693,375   633,942
   Other long-term assets   174,240   183,682
   Total assets   2,606,695   2,331,282
   Total current liabilities   267,241   248,952
   Long-term debt   150,000   150,000
   Total liabilities   447,676   424,472
   Total stockholders' equity   2,159,019   1,906,810