Tuesday, Oct 14, 1997

Genentech Reports 1997 Third Quarter Results

Earnings and Progress of Product Development Are Consistent with Company's Long Range Plan for Near- and Long-Term Growth

South San Francisco, Calif. -- October 14, 1997 --

Genentech, Inc. (NYSE: GNE) announced today that earnings for the third quarter of 1997 were $32.1 million, or 25 cents per share, compared to $50.9 million, or 41 cents per share, in the third quarter of 1996. These earnings reflect a $6.1 million tax provision in the third quarter of 1997 compared to a net $1.8 million tax benefit in the same quarter in 1996. Revenues were $248.9 million, down from $251.7 million in the same quarter of 1996. This revenue decrease results primarily from anticipated fluctuations in contract revenues, partly offset by an increase in royalties. Product sales in the third quarter of 1997 were $142.3 million compared to $142.5 million in the third quarter of 1996.

During the quarter, Genentech announced to financial analysts that it has implemented a new Long Range Plan (LRP) directed toward driving the company's value in both the near and long term. Genentech's LRP sets quantitative goals to help the company achieve its objectives, aimed at giving it, as it moves into the 21st century, a strong bottom line, strong potential for future growth and a strong late-stage pipeline.

"Our financial results reflect anticipated fluctuations in contract revenue and are consistent with our ambitious plan for growth as we approach the next century," said Arthur D. Levinson, Ph.D., Genentech's president and chief executive officer. "As we continue to invest judiciously in our future, we are beginning to see positive results from our efforts - particularly in the significant progress made with our late-stage product development pipeline during the quarter. Our results also reflect steady product sales revenues in the face of increased competition."

Research and Development

R&D expenses in the third quarter of 1997 were $118.1 million compared to $114.8 million in the third quarter of 1996. For the third quarter of 1997, Genentech invested 47 percent of revenues into R&D. Genentech reached important milestones with two late-stage development projects during the quarter:

  • The Biological Response Modifiers Advisory Committee to the U.S. Food and Drug Administration unanimously recommended for marketing clearance Rituxan™ (Rituximab), also known as IDEC-C2B8, a monoclonal antibody, for the treatment of relapsed or refractory low grade or follicular non-Hodgkin's B-cell lymphoma.

  • Received positive preliminary results from a Phase II trial in which the efficacy of rhuMAb-E25, a recombinant humanized monoclonal antibody to IgE called E25, was tested in adults and adolescents with moderate to severe allergic asthma. Development partners Genentech, Novartis Pharma AG and Tanox Biosystems, Inc., have agreed that these results support the continued development of E25 for the treatment of allergic asthma and allergic rhinitis. Genentech, Novartis and Tanox plan to start Phase III trials of E25 for allergic asthma early in the first quarter of 1998.

In addition, as part of its continued efforts to focus on those projects with the highest chances for medical and financial success, Genentech decided to discontinue two development projects:

  • Discontinued the IGF-I drug development effort in Type I and Type II diabetes mellitus. The decision was based on the scope and extended time frame of the clinical program that would be required to address potential concerns about diabetic retinopathy when using IGF-I in Type I and Type II diabetes mellitus.

  • Returned to IDEC Pharmaceuticals Corporation Genentech's marketing rights for IDEC-Y2B8, a radioimmunotherapy under investigation for the treatment of relapsed or refractory non-Hodgkin's B-cell lymphoma. (IDEC and Genentech continue to prepare for launch of Rituxan subject to clearance by the FDA.)

Marketed Products

Sales of Activase® (Alteplase, recombinant) were $60.7 million compared to $65.4 million in the third quarter of 1996. These results stem from a new competitive thrombolytic agent and a decline in the overall size of the thrombolytic therapy market as some heart attack patients receive mechanical reperfusion rather than thrombolytic therapy. During the quarter, Activase's market share as a thrombolytic therapy for the treatment of acute myocardial infarction (heart attack) was approximately 76 percent compared to 79 percent in the second quarter of 1997. As part of Genentech's overall managed care strategy, during the quarter Genentech announced a new study with Kaiser Permanente aimed at assessing the impact of improved patient management on clinical outcomes for victims of stroke. Designed to monitor and improve the quality, as well as reduce the costs, of stroke care, the study will be implemented at four Kaiser Permanente facilities throughout Northern California.

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) were $57.0 million compared to $57.6 million in the third quarter of 1996. Genentech now has four competitors in the U.S. growth hormone market. Though some market share loss is expected, Genentech has a comprehensive plan to defend its market position.

Pulmozyme® (dornase alfa, recombinant) Inhalation Solution sales were $23.8 million compared to $18.0 million in the third quarter of 1996. This increase primarily reflects quarter-to-quarter fluctuations in ordering patterns by wholesalers.

Contract and Other Revenues

Contract and other revenues in the third quarter of 1997 were $29.4 million compared to $38.9 million in the third quarter of 1996. The decrease was due primarily to the absence in the current quarter of Roche opt-in revenue. This was partly offset by an increase in ongoing development cost reimbursements from Roche. Contract and other revenues in the third quarter of 1996 included $28.4 million from Roche, primarily for the exercise of its option to develop nerve growth factor.

Royalties

Royalties during the third quarter of 1997 were $59.6 million compared to $54.4 million in the third quarter of 1996. This increase results from higher sales by licensees.

Income Tax Provisions

Genentech's effective tax rate was 16 percent for the third quarter of 1997 resulting in a year-to-date effective tax rate of 24 percent for 1997. This rate is less than the 28 percent effective tax rate for the first six months of 1997 due to the extension of R&D tax credits for the current quarter. Genentech's income tax provision in the third quarter of 1997 was $6.1 million compared to a net $1.8 million tax benefit for the third quarter of 1996. In connection with an operating plan review in 1996, Genentech decided not to implement a previously announced approach for research and development funding and manufacturing by international subsidiaries of certain of its development products. As a result, Genentech's third quarter results for 1996 included a reduction in the tax provision of $11.6 million to adjust the year-to-date effective rate from 33 percent to 20 percent.

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, six of which Genentech markets directly 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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GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three Months
Ended September 30,

1997 1996
Revenues
   Product sales $ 142,306 $ 142,463
   Royalties   59,632 54,429
   Contract and other   29,385 38,859
   Interest   17,594 15,956
      Total revenues   248,917 251,707
       
Costs and expenses
   Cost of sales   26,565 24,836
   Research and development   118,146 114,772
   Marketing, general and administrative   65,450 61,864
   Interest   542 1,094
      Total costs and expenses   210,703 202,566
       
Income before taxes   38,214 49,141
Income tax provision   6,092 (1,801)
       
Net income $ 32,122 $ 50,942
       
Net income per share $ 0.25 $ 0.41
       
Weighted average number of shares used in
   computing per share amounts:
  126,776 123,589
 
Nine Months
Ended September 30,

1997 1996
Revenues
   Product sales $ 441,537 $ 443,105
   Royalties   180,323 160,546
   Contract and other   67,453 87,991
   Interest   50,382 46,711
      Total revenues   739,695 738,353
       
Costs and expenses
   Cost of sales   79,817 77,868
   Research and development   351,779 343,008
   Marketing, general and administrative   190,504 174,893
   Interest   2,446 3,986
      Total costs and expenses   624,546 599,755
       
Income before taxes   115,149 138,598
Income tax provision   27,634 27,720
       
Net income $ 87,515 $ 110,878
       
Net income per share $ 0.69 $ 0.90
       
Weighted average number of shares used in
   computing per share amounts:
  126,326 123,402
 
September 30,
1997 1996
Selected balance sheet data
   Cash and short-term investments $ 812,912 $ 665,577
   Accounts receivable   207,805   196,413
   Inventories   98,893   92,045
   Long-term marketable securities   444,839   510,582
   Property, plant and equipment, net   663,779   549,059
   Other long-term assets   182,815   111,245
   Total assets   2,451,023   2,170,985
   Total current liabilities   269,745   216,490
   Long-term debt   150,000   150,000
   Total liabilities   465,294   391,561
   Total stockholders' equity   1,985,729   1,779,424