Tuesday, Apr 16, 1996

Genentech Reports 1996 First Quarter Results

Though revenues increased, earnings decreased as Genentech invested aggressively in future potential products

South San Francisco, Calif. -- April 16, 1996 --

Genentech, Inc. (NYSE: GNE) announced today that earnings for the first quarter of 1996 declined 12 percent to $38.2 million, or 31 cents per share, from $43.4 million, or 36 cents per share, in the first quarter of 1995. Reported revenues increased 2 percent to $242.9 million from $239.0 million in the same quarter of 1995. This revenue change reflects increases in contract revenues and royalties offset by reductions in sales, due primarily to Roche Holdings Inc.'s assumption of Canadian sales of Genentech products and European sales of Pulmozyme® (dornase alfa) Inhalation Solution in the fourth quarter of 1995.

"Our results for the first quarter of 1996 show growth in U.S. sales of our two leading product lines, Activase and growth hormone, and a growth in royalty and contract revenues stemming from our revised relationship with our majority stockholder, Roche," said Genentech President and Chief Executive Officer Dr. Arthur D. Levinson. "Also during the quarter we launched a new growth hormone product; filed for regulatory approval to market a new indication for Activase; began clinical trials for a new indication for DNase, the active ingredient in Pulmozyme; and entered one new business development agreement and expanded another."

Increased Royalties and Decreased MG&A Expenses as Roche Assumes ex-U.S. Sales

In November 1995, Genentech began receiving royalties rather than recording sales on all European sales of Pulmozyme as Roche assumed responsibility for those sales per Genentech's new 1995 arrangement with Roche. In December 1995, Roche similarly assumed responsibility for Canadian sales of all Genentech products. These changes have led to a reduction in reported product sales compared to the first quarter of 1995, but also to increased royalty revenues and decreased marketing, general and administrative expenses. On a pro forma basis that considers the new arrangement with Roche, product sales increased 3 percent to $152.3 million from $148.3 million. Reported total product sales were $152.3 million in the first quarter of 1996 compared to $162.1 million in the first quarter of 1995. Royalties in the first quarter of 1996 increased to $52.9 million from $47.1 million in the first quarter of 1995. MG&A expenses in the first quarter of 1996 decreased to $52.0 million from $64.3 million in the first quarter of 1995.

Marketed Products

On a pro forma basis, sales of Activase® (Alteplase, recombinant), a tissue-plasminogen activator (t-PA), increased to $76.6 million in the first quarter of 1996 from $75.9 million in the first quarter of 1995, with a $3.8 million bulk shipment of t-PA to licensees in Japan included in the first quarter of 1995. This increase follows Food and Drug Administration clearance in April 1995 for Genentech to promote an accelerated infusion of Activase and its mortality benefits, after which Genentech's U.S. thrombolytic market share jumped from approximately 70 to 75 percent. Reported total sales of Activase during the first quarter of 1996 decreased to $76.6 million from $78.2 million in the first quarter of 1995.

On a pro forma basis, sales of Pulmozyme increased 6 percent to $18.9 million in the first quarter of 1996 from $17.8 million in the first quarter of 1995, with the increase driven primarily by sales of Pulmozyme to Roche for ex-U.S. sales. Principally due to Roche's assumption of ex-U.S. sales, reported total sales of Pulmozyme decreased to $18.9 million from $28.5 million in the first quarter of 1995. Sixty percent of U.S. cystic fibrosis patients over age five currently receive Pulmozyme.

On a pro forma basis, sales of Genentech's two growth hormone products Protropin® (somatrem for injection) and Nutropin® [somatropin (rDNA origin) for injection] increased 4 percent to $56.0 million in the first quarter of 1996 from $53.7 million in the first quarter of 1995. Reported total growth hormone sales increased to $56.0 million from $54.4 million in the first quarter of 1995. This increase occurred even with the assumption of responsibility for Canadian sales of growth hormone by Roche and with the introduction in late 1995 of a competitive growth hormone product. These results support our comprehensive plan to defend our leadership position in this market. During the quarter, Genentech launched the first liquid version of growth hormone, Nutropin AQ [somatropin (rDNA origin) injection] and an injection device, GenJect, representing two potentially important competitive advantages.

Genentech continues to defend its patent position against potential new growth hormone competition. In June and August of 1995, respectively, a district court in New York granted preliminary injunctions preventing Bio-Technology General and its affiliates (BTG) and Novo Nordisk A/S and its affiliates (Novo) from marketing their human growth hormone products in the United States. Subsequent to those decisions, both companies appealed the decisions against them to the Federal Court of Appeals for the Federal Circuit. In February, 1996, that appeals court overruled the preliminary injunction against Novo, but in April 1996 it upheld the preliminary injunction against BTG prohibiting sales of its growth hormone product. Genentech has since sought a rehearing on the overturn of Novo's preliminary injunction, and it has sought a second preliminary injunction against Novo on another patent not previously considered. Neither product is currently on the market, though a third product from Pharmacia & Upjohn Inc. has been on the market since December, 1995.

Contract Revenues

Contract and other revenues in the first quarter of 1996 increased to $22.1 million from $16.2 million in the first quarter of 1995. This increase resulted primarily from $17.1 million from Roche for its exercise of its option (per Genentech's 1995 arrangement with Roche) to codevelop the IDEC-C2B8 monoclonal antibody for non-Hodgkin's B-cell lymphoma outside of the United States. This is made up of a one-time option fee, including pre-opt-in development costs and Asian rights of $13.1 million, with the balance related to development activity since Roche chose to opt in. On a quarter-to-quarter basis, this amount from Roche was partially offset by a $4.0 million gain in the first quarter of 1995 on sales of biotechnology securities and normal quarter-to-quarter variation in contract revenues. Genentech is codeveloping the IDEC-C2B8 antibody, currently in Phase III clinical trials, for the same indication in the United States with IDEC Pharmaceuticals Corporation.

Research and Development Expenses and Progress

Research and development expenses in the first quarter of 1996 were $115.6 million compared to $94.9 million in the first quarter of 1995. This increase was related to production of product and other expenses for clinical trials for Genentech's HER2 monoclonal antibody (in pivotal Phase III trials for the treatment of breast cancer) and for Genentech's various cardiovascular products under development, including trials related to Activase for the treatment of ischemic stroke (currently awaiting regulatory approval) and Genentech's second-generation t-PA, TNK (currently in Phase II clinical trials). The increase also stems from an up-front $5 million payment to Washington University to license worldwide rights to human neurturin, a homologue of glial cell-derived neurotrophic factor (GDNF) in preclinical research that might be useful for the treatment of neurodegenerative disorders. For the quarter, Genentech invested 48 percent of revenues into R&D.

"For the short term we plan to continue to invest close to half of our revenues back into R&D so we can realize the full potential of our strong product pipeline," said Dr. Levinson. "Over time, though we will continue to increase R&D investment in dollar terms as our revenues increase, we expect a decrease in this spending as a percentage of revenues as we bring more revenues to the bottom line. We anticipate spending about 25 to 30 percent of our revenues on R&D by the turn of the century."

Genentech's aggressive investment in R&D was coupled with significant progress in product development during the quarter. Besides launching Nutropin AQ, Genentech:

  • Submitted a product license application for Activase in acute ischemic stroke, or brain attack, within three hours of system onset.

  • Began clinical trials of DNase, the active ingredient in Pulmozyme, for the treatment of lupus nephritis, kidney damage resulting from an inflammatory connective tissue disease.

  • Identified for development vascular endothelial growth factor (VEGF) for the treatment of ischemia; began preparing to file an investigational new drug application by year end.

Also, during the quarter, Roche indicated that it will not exercise its option (per Genentech's 1995 arrangement with Roche) to develop and commercialize outside of the United States Genentech's anti-HER2 antibody for the treatment of breast cancer. Genentech is actively seeking another partner for ex-U.S. development of this product.

Business Development

During the quarter, besides entering into a business development agreement with Washington University as described above, Genentech:

  • Expanded its collaborative agreement with IDEC to include the clinical development and commercialization of its IDEC-Y2B8 antibody, currently in Phase I clinical trials, as a potential complementary treatment for non-Hodgkin's B-cell lymphoma.

  • Invested in Genenvax, Inc., which was created to continue the development and commercialization of gp120, Genentech's potential vaccine for the prevention of HIV-1 infection, and agreed to provide Genenvax with exclusive rights to gp120.

Genentech, Inc. is a leading biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. Ten of the currently marketed biotechnology products stem from Genentech science, five of which Genentech markets directly in the United States. Genentech is headquartered in South San Francisco, California, and is traded on the New York and Pacific Stock Exchanges under the symbol GNE.Genentech's world wide web address is http://www.gene.com.

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(in thousands, except per share amounts)

Three Months
Ended March 31,

1996 1995
   Product sales $ 152,337 $ 162,067
   Royalties   52,893 47,149
   Contract and other   22,100 16,222
   Interest   15,554 13,529
      Total revenues   242,884 238,967
Costs and expenses
   Cost of sales   25,879 26,750
   Research and development   115,633 94,959
   Marketing, general and administrative   52,042 64,323
   Interest   1,559 1,871
      Total costs and expenses   195,113 187,093
Income before taxes   47,771 51,064
Income tax provision   9,554 7,660
Net income $ 38,217 $ 43,404
Net income per share $ 0.31 $ 0.36
Weighted average number of shares used in
   computing per share amounts:
  123,360 120,493
March 31,
1996 1995
Selected balance sheet data
   Cash and short-term investments $ 761,149 $ 722,374
   Accounts receivable   174,865   166,143
   Inventories   88,853   94,300
   Long-term marketable securities   386,664   212,975
   Property, plant and equipment, net   514,461   482,117
   Other long-term assets   100,146   88,551
   Total assets   2,065,668   1,806,846
   Total current liabilities   224,377   205,802
   Long-term debt   150,000   175,140
   Total liabilities   400,356   404,600
   Total stockholders' equity   1,665,312   1,402,246