Tuesday, Jul 15, 1997

Genentech Reports 1997 Second Quarter Results

Earnings Increase 10 Percent on Slight Revenues Decrease

South San Francisco, Calif. -- July 15, 1997 --

Genentech, Inc. (NYSE: GNE) announced today that earnings for the second quarter of 1997 increased 10 percent to $23.8 million, or 19 cents per share, compared to $21.7 million, or 18 cents per share, in the second quarter of 1996. This earnings increase stems primarily from a decrease in Genentech's income tax provision compared to the second quarter of 1996. Revenues decreased slightly to $233.5 million, from $243.8 million in the same quarter of 1996. This decrease results primarily from expected fluctuations in contract and other revenues.

"Our results today importantly reflect our continued efforts at increasing efficiency," said Arthur D. Levinson, Ph.D., Genentech's president and chief executive officer, "as we pursue our long-term strategy and prepare for significant growth into the next century, and as the products in our pipeline progress through clinical trials. Toward our goals, we made significant operational progress in the second quarter. We continued to defend our current markets, and we made key progress with our pipeline projects."

In addition, in the second quarter of 1997, Genentech and Roche agreed to changes to their 1995 ex-U.S. license agreement. "These changes," said Levinson, "will more adequately reflect, for both companies, the practical realities, risks and benefits of working together toward the global development of important medicines."

In the second quarter of 1997, Genentech's income tax provision was $9.3 million (28 percent effective rate) compared to $20.0 million (48 percent effective rate) in the second quarter of 1996. This decrease reflects a tax rate of 28 percent in the second quarter of 1997. The second quarter 1996 tax provision included a "catch-up" for the year-to-date period to an overall 33 percent tax rate.

Marketed Products

Product sales in the second quarter of 1997 were $145.0 million compared to $148.3 million in the second quarter of 1996.

Sales of Activase® (Alteplase, recombinant) were $68.3 million compared to $72.3 million in the second quarter of 1996. During the quarter, Activase's market share as a thrombolytic therapy for the treatment of acute myocardial infarction (heart attack) declined to approximately 79 percent, compared to approximately 80 percent in the second quarter of 1996, and compared to approximately 85 percent in the first quarter of 1997. These results stem from the entry of 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. The results also reflect a gradual increase in sales of Activase for its acute ischemic stroke indication.

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 slightly to $55.6 million from $54.1 million in the second 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 $20.2 million compared to $20.8 million in the second quarter of 1996. During the quarter, Genentech began a Phase III clinical trial to determine whether early intervention with Pulmozyme can benefit young patients with preserved lung function by maintaining their lung function. Pulmozyme is currently cleared for marketing for the management of patients with moderate or advanced cystic fibrosis.

Contract and Other Revenues

Contract and other revenues in the second quarter of 1997 were $16.7 million compared to $27.0 million in the second quarter of 1996. The decrease from the same quarter in the prior year was due to the absence in the current quarter of Roche opt-in revenue, partly offset by an increase in Roche ongoing development cost reimbursements of approximately $7.0 million for insulin-like growth factor (IGF-I) for diabetes outside of the U.S., nerve growth factor (NGF) and rituximab (the C2B8 antibody). Contract and other revenues in the second quarter of 1996 included $19.3 million from Roche, primarily for the exercise of its option to develop IGF-I.

Research and Development

R&D expenses in the second quarter of 1997 were $110.9 million compared to $112.6 million in the second quarter of 1996. For the second quarter of 1997, Genentech invested 47 percent of revenues into R&D.

Besides beginning the Early Intervention Trial for Pulmozyme, Genentech achieved these product development milestones during the quarter:·

  • Launched new BioOncology initiative at the American Society of Clinical Oncology meeting in Denver. In addition to the marketed product Roferon®-A (Interferon alfa-2a, recombinant), which Genentech began promoting in the U.S. for its approved oncology indications following a January 1997 agreement with Roche, the initiative also includes the oncology products that Genentech has under clinical development. These include rituximab (the C2B8 antibody) under regulatory review for the treatment of relapsed or refractory low-grade or follicular B-cell non-Hodgkin's lymphoma and the anti-HER2 antibody, in Phase III clinical trials for the treatment of metastatic breast cancer.

  • Began treating patients with Genentech's NGF in a Phase III clinical trial in diabetic peripheral neuropathy.

  • Presented results of Phase II clinical trials of IGF-I for the treatment of Type I and Type II diabetes at the June 1997 meeting of the American Diabetes Association. Genentech is conducting Phase III clinical trials in Type I diabetes and planning for Phase III clinical trials in Type II diabetes based on these results.

  • With partner Boehringer Ingelheim International Gmbh, began planning a Phase III clinical trial for TNK t-PA (Genentech's second-generation t-PA) in the treatment of acute myocardial infarction, based on two Phase II clinical trials, the results of which will be presented in August at the European Society of Cardiology meeting in Stockholm.

  • Completedone and began a second of two planned Phase I safety trials of vascular endothelial growth factor (VEGF) in patients with coronary artery disease.

  • Began treating cancer patients in a Phase I safety trial of Genentech's anti-VEGF antibody.

Roche Ex-U.S. License Agreement Revisions

In the second quarter of 1997, Genentech and Roche agreed to changes to their 1995 ex-U.S. license agreement.

"These changes are designed to fine-tune our license agreement to the benefit of both our companies, based on two years of mutual experience in putting the agreement into practice," said Levinson. "The changes reflect the reality of our global collaborative development efforts, and are designed to prevent duplication of effort and expenses. In the spirit of the original agreement, the changes are also designed to more easily align the shared costs and rights with the risks undertaken by each company."

According to the 1995 agreement with Roche, Roche could choose to opt-in for ex-U.S. development of a Genentech product at the end of Phase II, or earlier if Genentech agreed. If Roche chose to opt-in for a product, it would reimburse Genentech for 50 percent of development costs to that date, share ongoing U.S. development costs 50/50, and pay 100 percent of ex-U.S. development costs.

Key changes to Genentech and Roche's 1995 ex-U.S. license agreement are summarized below:

  • For future products, Roche may choose to opt-in either when Genentech determines to move a product into development or at the end of Phase II (as in the 1995 agreement). U.S. and European development costs will be shared (discontinuing the distinction regarding location or purpose of studies).

    • If Roche exercises its option at the development determination point, U.S. and European development costs will be shared 50/50.

    • If Roche exercises its option at end of Phase II, Roche will reimburse Genentech for 50 percent of any development costs incurred, and subsequent U.S. and European development costs will be shared 75/25, Roche/Genentech.

  • For IGF-I in diabetes and for NGF, both of which Roche has already exercised its option to develop, prospective U.S. and European development costs will be shared 60/40, Roche/Genentech.

  • Roche will assume development of the oral IIb/IIIa antagonist globally on its own. Genentech will provide clinical and scientific input for the program and may subsequently opt-in and join development at any time up to the New Drug Application (NDA) filing for the first indication.
    • If Genentech chooses to opt-in, Genentech will reimburse Roche for 50 percent of the U.S. and European development costs incurred to that date. Roche and Genentech will co-promote the product in the U.S. with a 60/40, Genentech/Roche profit-sharing if the NDA filing for the first indication is for acute therapy or a 50/50 profit-sharing if the NDA filing for the first indication is for chronic therapy.

    • If Genentech does not opt-in, Genentech will receive a 6.0 percent royalty on worldwide sales of the oral IIb/IIIa antagonist from Roche.

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 June 30,

1997 1996
Revenues
   Product sales $ 145,018 $ 148,305
   Royalties   55,379 53,224
   Contract and other   16,659 27,032
   Interest   16,437 15,201
      Total revenues   233,493 243,762
       
Costs and expenses
   Cost of sales   25,567 27,153
   Research and development   110,890 112,603
   Marketing, general and administrative   63,073 60,987
   Interest   916 1,333
      Total costs and expenses   200,446 202,076
       
Income before taxes   33,047 41,686
Income tax provision   9,253 19,967
       
Net income $ 23,794 $ 21,719
       
Net income per share $ 0.19 $ 0.18
       
Weighted average number of shares used in
   computing per share amounts:
  126,539 123,257
 
Six Months
Ended June 30,

1997 1996
Revenues
   Product sales $ 299,231 $ 300,642
   Royalties   120,691 106,117
   Contract and other   38,068 49,132
   Interest   32,788 30,755
      Total revenues   490,778 486,646
       
Costs and expenses
   Cost of sales   53,252 53,032
   Research and development   233,633 228,236
   Marketing, general and administrative   125,054 113,029
   Interest   1,904 2,892
      Total costs and expenses   413,843 397,189
       
Income before taxes   76,935 89,457
Income tax provision   21,542 29,521
       
Net income $ 55,393 $ 59,936
       
Net income per share $ 0.44 $ 0.49
       
Weighted average number of shares used in
   computing per share amounts:
  126,101 123,309
 
June 30,
1997 1996
Selected balance sheet data
   Cash and short-term investments $ 684,303 $ 753,591
   Accounts receivable   209,622   189,829
   Inventories   99,667   85,447
   Long-term marketable securities   472,586   391,718
   Property, plant and equipment, net   633,942   534,484
   Other long-term assets   183,682   109,500
   Total assets   2,331,282   2,107,294
   Total current liabilities   248,952   221,697
   Long-term debt   150,000   150,000
   Total liabilities   424,472   397,043
   Total stockholders' equity   1,906,810   1,710,251