Thursday, Jan 21, 1999

Genentech Reports 41 Percent Increase in Year-End Net Income

1998 Year-End Results Driven by New Product Sales of Rituxan and Herceptin

South San Francisco, Calif. -- January 21, 1999 --

Genentech, Inc. (NYSE: GNE) announced today that net income for 1998 increased 41 percent to $181.9 million, or $1.40 per share*, from $129.0 million in 1997, or $1.02 per share. Net income for the fourth quarter of 1998 decreased to $37.1 million, or 28 cents per share*, from $41.5 million, or 33 cents per share*, in the fourth quarter of 1997. The results of the fourth quarter of 1997 reflect substantial contract revenues from business transactions concluded with Sumitomo Pharmaceuticals Co., Ltd.; there were no commensurate business transactions concluded in the fourth quarter of 1998.

Total revenues for 1998 were $1,150.9 million as compared to $1,016.7 million in 1997. Product sales for 1998 increased 23 percent to $717.8 million from $584.9 million in 1997, driven by Herceptin® (Trastuzumab) anti-HER2 antibody and Rituxan® (Rituximab) sales. Overall company results for 1998 reflect increased product sales and a decrease in research and development expenses partially offset by increases in other costs and expenses primarily related to the sales of new products.

"We are very pleased with the strong results achieved by the company in 1998, which are in line with our corporate strategy for growth implemented in 1995," said Arthur D. Levinson, Ph.D., Genentech's president and chief executive officer. "In addition to the approval and successful launch of Herceptin and an impressive first full year of sales for Rituxan, we have made significant progress in moving projects through our development pipeline."

Herceptin received regulatory approval on September 25, 1998 from the U.S. Food and Drug Administration (FDA) 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 (human epidermal growth factor receptor2) protein. In addition, Pulmozyme® (dornase alfa, recombinant) Inhalation Solution received FDA approval for a change in labeling which includes the safety and alternative administration of Pulmozyme in cystic fibrosis patients under the age of five.

Genentech, with partner Alkermes, Inc., began preparing a New Drug Application for filing with the FDA seeking approval to market Nutropin Depot™ sustained-release growth hormone for the treatment of growth hormone deficiency in children. Genentech also completed enrollment in a U.S. Phase III trial of Neuleze™ nerve growth factor in patients with diabetic peripheral neuropathy and, with partner Boehringer Ingelheim International GmbH, a worldwide Phase III trial of TNK-tPA in patients with acute myocardial infarction. With partners Novartis AG and Tanox Biosystems, Inc., Genentech began Phase III trials with the anti-IgE antibody for the potential treatment of allergic asthma and allergic rhinitis. Genentech also initiated Phase II clinical trials with vascular endothelial growth factor (VEGF), an anti-VEGF antibody and an anti-CD18 antibody in 1998.

Product Sales

Genentech launched Herceptin on October 5, 1998, and recorded initial sales of $30.5 million for 1998. While Genentech is encouraged by these sales figures, not enough time has passed for these figures to be indicative of future sales, and the figures may reflect initial launch demand for the product.

Rituxan sales for 1998 were $162.6 million. In its first full year on the market, Rituxan was used to treat more than 16,000 patients worldwide and its first year of sales revenues exceeded that of any previously launched anti-cancer therapeutic. With partners IDEC Pharmaceuticals Corporation and Roche, Genentech continues to explore other uses of Rituxan as a single agent as well as in combination with other traditional therapies through clinical trials.

Activase® (Alteplase, recombinant) sales decreased to $213.0 million in 1998 from $260.7 million in 1997 due to increased sales of competitive thrombolytic agents and a decline in the overall size of the thrombolytic therapy market as some heart attack patients receive mechanical reperfusion rather than thrombolytic therapy. In addition, sales of Activase were impacted due to two large, recently completed, clinical studies where patients received clinical study drugs rather than commercial product.

Sales of growth hormone products decreased to $214.0 million in 1998 from $223.6 million in 1997 primarily due to increased competition.

Sales of Pulmozyme increased to $93.8 million in 1998 compared to $91.6 million in 1997.

Total Costs and Expenses

Costs and expenses increased in 1998 as compared to 1997. Research and development (R&D) expenses decreased in 1998 to $396.2 million compared to $470.9 million in 1997. R&D expenses as a percentage of revenues in 1998 were 34 percent, compared to approximately 46 percent in 1997.

"This decrease is consistent with our strategy to reduce R&D expenses as a percent of revenues as products move through the late stages of clinical development," said Levinson.

Cost of sales increased to $138.6 million in 1998 from $102.5 million in 1997 and marketing, general and administrative (MG&A) expenses increased to $358.9 million in 1998 compared to $269.9 million in 1997, both primarily driven by the increase in sales of Rituxan and the introduction of Herceptin. MG&A expenses also increased due to charges for the write-downs of certain biotechnology equity securities to current market value and increased sales and marketing expenses related to competitive conditions with other marketed products.

Income taxes increased to $70.7 million in 1998 from $40.8 million in 1997 corresponding to higher earnings and a slightly higher income tax rate.

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 biotechnology 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 Pacific Exchange under the symbol GNE.

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Genentech Business and Product Development Events in 1998

In 1998 Genentech made significant progress with the products in its pipeline, including several stemming from business collaborations. During the year Genentech:

  • Received approval from the FDA to market 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.

  • Received FDA approval for a label change for Pulmozyme to include the safety and alternative administration of Pulmozyme in cystic fibrosis patients under the age of five.

  • Genentech and IDEC's international partner, Roche, received approval to market MabThera (trademarked as Rituxan in the United States) from the EMEA (European Union equivalent of the FDA). MabThera was approved for treating non-Hodgkin's lymphoma (NHL) patients who have had two or more relapses or are resistant to chemotherapy.

  • Received FDA approval for the large-scale (12,000-liter) manufacture of Rituxan, enabling Genentech to supplement the Rituxan manufactured by partner IDEC.

  • Entered into an agreement with Roche providing Roche exclusive ex-U.S. marketing rights for Herceptin. As part of the agreement, Roche paid $40 million to Genentech.

  • Dedicated a new $250 million, 310,000-square-foot manufacturing facility, the world's largest biotech manufacturing facility for the large-scale production of multiple pharmaceutical proteins, in Vacaville, California.

  • With partner Alkermes, Inc., began preparing a New Drug Application for FDA filing seeking approval to market Nutropin Depot for the treatment of growth hormone deficiency in children.

  • Completed enrollment ahead of schedule in a U.S. Phase III trial of Neuleze in patients with diabetic peripheral neuropathy.

  • With partner Boehringer Ingelheim, completed enrollment in a worldwide Phase III trial of TNK-tPA in patients with acute myocardial infarction.

  • Based on positive results of Phase II trials in each indication, with partners Novartis and Tanox Biosystems, initiated Phase III trials of the anti-IgE antibody in allergic asthma and allergic rhinitis patients.

  • With partner IDEC, announced results of a Phase II pilot study combining Rituxan with standard chemotherapy in patients with previously untreated intermediate- or high-grade NHL.

  • The AIDS Clinical Trials Group (ACTG) completed a Phase II trial of Genentech's Neuleze for the potential treatment of HIV-associated neuropathy and presented positive preliminary results.

  • Began Phase II trials of:

    • VEGF for the potential treatment of coronary artery disease.
    • an anti-VEGF antibody in patients with advanced solid tumors
    • an anti-CD18 antibody for the potential treatment of acute myocardial infarction.

  • Through partner LeukoSite, Inc., began Phase Ib/IIa trials of LDP-02 in ulcerative colitis patients in Canada and Europe.

  • Agreed with DAKO A/S for DAKO to develop a laboratory diagnostic kit to screen breast cancer patients for overexpression of HER2 and potential eligibility for Herceptin treatment. DAKO received FDA approval on September 25, 1998 for its diagnostic kit, HercepTest™.

  • Licensed to Connectics Corporation the U.S. development and marketing rights to interferon gamma, including Actimmune® (interferon gamma-1b), for the management of chronic granulomatous disease and the potential treatment of various other diseases.

  • Agreed with Abgenix, Inc. that it will provide Genentech access to Abgenix's XenoMouse™ technology for generating fully human antibodies.

  • Agreed with Protein Design Labs, Inc. to cross-license rights to certain intellectual property in the field of monoclonal antibodies.

  • Made $2 million milestone payment to partner XOMA Ltd. for its successful completion of Phase II clinical trials of Genentech's anti-CD11a antibody (hu1124) for the potential treatment of psoriasis.

  • Discontinued development of Activase for treating acute ischemic stroke (AIS) in patients presenting later than three hours from symptom onset after two clinical trials showed no clinical benefit when treating in this time frame. Activase is approved for the treatment of AIS within three hours of symptom onset.

  • Completed Phase III studies with pimagedine. The drug did not demonstrate clinical benefit based on analysis of the primary end points. Genentech is in discussions with Alteon Inc. as to the future direction of the collaboration.

  • Discontinued relationship with CytoTherapeutics, Inc. for the development of encapsulated delivery of nervous system compounds.

# # #

GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


Three Months
Ended December 31,

1998 1997
Revenues
   Product sales $ 213,713 $ 143,352
   Royalties   46,983 60,789
   Contract and other   19,760 54,134
   Interest   23,844 18,778
      Total revenues   304,300 277,053
       
Costs and expenses
   Cost of sales   32,501 22,719
   Research and development   105,173 119,144
   Marketing, general and administrative   113,793 113,793
   Interest   1,250 1,250
      Total costs and expenses   252,717 222,407
       
Income before taxes   51,583 54,646
Income tax provision   14,443 13,117
       
Net income $ 37,140 $ 41,529
       
Earnings per share      
   Basic $ 0.29 $ 0.34
   Diluted $ 0.28 $ 0.33
       
Weighted average shares used to
   compute diluted earnings per share:
  130,958 127,230
 
Year
Ended December 31,

1998 1997
Revenues
   Product sales $ 717,795 $ 584,889
   Royalties   229,589 241,112
   Contract and other   114,795 121,587
   Interest   88,764 69,160
      Total revenues   1,150,943 1,016,748
       
Costs and expenses
   Cost of sales   138,623 102,536
   Research and development   396,186 470,923
   Marketing, general and administrative   358,931 269,852
   Interest   4,552 3,642
      Total costs and expenses   898,292 846,953
       
Income before taxes   252,651 169,795
Income tax provision   70,742 40,751
       
Net income $ 181,909 $ 129,044
       
Earnings per share      
   Basic $ 1.45 $ 1.05
   Diluted $ 1.40 $ 1.02
       
Weighted average shares used to
   compute diluted earnings per share:
  129,872 126,397
 
December 31,
1998 1997
Selected balance sheet data
   Cash and short-term investments $ 887,706 $ 833,322
   Accounts receivable   149,741   189,245
   Inventories   148,626   116,026
   Long-term marketable securities   716,888   453,189
   Property, plant and equipment, net   700,249   683,304
   Other long-term assets   196,307   177,201
   Total assets   2,855,402   2,507,612
   Total current liabilities   291,327   289,557
   Long-term debt   149,990   150,000
   Total liabilities   511,557   476,387
   Total stockholders' equity   2,343,845   2,031,225