Monday, Jul 12, 1999

Genentech Reports 1999 Second Quarter Results

South San Francisco, Calif. -- July 12, 1999 --

Genentech, Inc. today reported the highest quarterly earnings and product sales in its history for the second quarter of 1999, exclusive of redemption related charges. The charges are due to the redemption of Genentech's Special Common Stock and related accounting treatment1 resulting from Roche's exercise of its option. As a result, the company recorded a net loss for the second quarter of 1999.

For the three months ended June 30, 1999:

  • Exclusive of redemption related charges, net income for the second quarter of 1999 would have been $73.2 million, or 55 cents per share*, an increase in earnings per share of 77 percent over the second quarter of 1998. Year-to-date earnings per share in 1999, excluding the redemption related charges in the second quarter and the legal settlement charge of $50 million in the first quarter of 1999, would have been 99 cents per share, a 57 percent increase as compared to the same period in 1998.

  • Due to the redemption of Genentech's Special Common Stock and related accounting treatment, the company recorded a second quarter net loss of $923.2 million, or a net loss per share of $7.19, as compared to net income of $40.4 million, or 31 cents per share, in the second quarter of 1998.

  • Revenues increased 47 percent to $395.2 million from $268.0 million in the same quarter of 1998. This revenue growth was driven primarily by sales of Herceptin® (Trastuzumab) antibody, indicated for the treatment of certain patients with metastatic breast cancer, and Rituxan® (Rituximab) antibody, indicated for the treatment of certain patients with non-Hodgkin's lymphoma. Contract revenues increased due to the recognition of $20.3 million corresponding to an adjustment to unrealized gains on marketable securities due to the accounting treatment described in footnote 1. Contract revenues also include an initial license fee and retroactive royalties from a licensing agreement with Immunex Corporation for ENBREL® and a milestone payment from Schwarz Pharma AG related to a U.S. Food and Drug Administration (FDA) filing for Nutropin Depot™ sustained-release growth hormone. The revenue increases were offset partially by a decrease in royalties, primarily related to the expiration of royalties from Eli Lilly in August 1998.

  • As a result of the redemption of Genentech's Special Common Stock and related accounting treatment as described in footnote 1, the company recorded in the second quarter of 1999, a special charge of $1,147.3 million, that includes $752.5 million as a non-cash charge for in-process research and development, $284.5 million primarily for the cash-out of Special Common Stock options, and $102.3 million as a non-cash charge for the remeasurement of the value of continuing employee stock options.

"The second quarter of 1999 has been an historic and exciting period for Genentech," said Arthur D. Levinson, Ph.D., Genentech's president and chief executive officer. "Roche's decision to sell Genentech shares after exercising its option will enable us to conduct Genentech's business and operations as we have in the past, allowing us to continue our efforts to bring important new products to patients."

Product Sales

Sales of marketed products increased 53 percent in the second quarter of 1999 to $269.4 million from $176.3 million in the second quarter of 1998.

Sales of Herceptin in the second quarter of 1999 were $46.2 million. Genentech first recorded sales for Herceptin of $30.5 million in the fourth quarter of 1998. An increase of physician acceptance of Herceptin has contributed to a positive sales trend and successful penetration into the breast cancer market.

During the quarter, Genentech announced the long term, follow-up results from a Phase III trial that showed that metastatic breast cancer patients who have tumors that overexpress the HER2 (human epidermal growth factor receptor2) protein, when treated with Herceptin plus chemotherapy, had a longer overall survival as compared to chemotherapy alone.

Sales of Rituxan in the second quarter of 1999 increased 114 percent to $74.4 million from $34.8 million in the second quarter of 1998. This sales increase is due primarily to increased market penetration for the treatment of non-Hodgkin's lymphoma.

Sales of Activase® (Alteplase, recombinant), a tissue plasminogen activator (t-PA), during the second quarter of 1999 increased to $58.1 million from $54.1 million in the second quarter of 1998. This increase in Activase sales is due largely to usage in peripheral indications previously served by another company's thrombolytic currently in short supply in the marketplace. This increase is offset in part by a decline in the overall size of the thrombolytic therapy market due to mechanical reperfusion and continued competition.

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], decreased to $59.3 million from $62.3 million in the second quarter of 1998. This decrease primarily reflects fluctuations in distributor ordering patterns.

Sales of Pulmozyme® (dornase alfa) Inhalation Solution increased to $30.6 million in the second quarter of 1999 compared to $24.1 million in the second quarter of 1998. This increase is due primarily to increased market penetration in the early and mild patient populations for the treatment of cystic fibrosis, partially offset by a decrease in sales to Roche.

Total Costs and Expenses

Costs and expenses increased during the second quarter of 1999 as compared to the second quarter of 1998 due primarily to redemption related charges described above. Primarily as a result of the increase in product sales, cost of sales increased to $52.7 million in the second quarter of 1999 from $37.2 million in the second quarter of 1998.

Marketing, general and administrative (MG&A) expenses increased to $117.4 million in the second quarter of 1999 from $80.6 million in the second quarter of 1998. This increase was driven primarily by the growth of Rituxan and the resultant profit sharing expense and the introduction of Herceptin, as well as the write-down of certain biotechnology investments.

Income taxes reflect a benefit of $94.5 million in the second quarter of 1999 primarily due to the income tax benefit of redemption related charges. This was partially offset by the effect of an increase in the income tax rate on year-to-date earnings.

Research and development (R&D) expenses of $94.2 million in the second quarter of 1999 were comparable to $92.9 million in the second quarter of 1998. For the quarter, Genentech invested approximately 24 percent of revenues into R&D, compared to 35 percent in the second quarter of 1998. This is consistent 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.

Including the events mentioned above, Genentech recently announced the following:

  • With Alkermes, Inc., submitted a new drug application for Nutropin Depot — the first long-acting form of recombinant growth hormone — with the FDA after announcing positive results of a Phase III multi-center clinical trial.

  • With Novartis Pharma AG, announced that results from a Phase III clinical trial showed that treatment with anti-IgE decreased the severity of nasal and ocular allergy symptoms and reduced the use of rescue allergy medication, such as antihistamines, by more than 50 percent.

  • Initiated Phase II clinical trials of Herceptin in other solid-tumor indications and began preparing for Phase III clinical trials in adjuvant therapy for breast cancer.

  • Agreed with Aradigm Corporation to jointly develop an advanced pulmonary delivery system for Genentech's Pulmozyme Inhalation Solution.

  • Agreed with Immunex Corporation to jointly develop and commercialize TRAIL/Apo2L (also known as TNF-related apoptosis-inducing ligand) that appears in animal models to suppress tumor growth and cause remission of tumors by a direct and specific mechanism known as apoptosis, or programmed cell death.

  • Signed a license agreement with Immunex that grants rights under Genentech's immunoadhesin patent portfolio to Immunex for its product ENBREL. In exchange for a worldwide, co-exclusive license covering p75TNFR:Fc fusion proteins such as ENBREL, Immunex paid Genentech an initial license fee. Genentech will also receive royalties on sales of ENBREL from the date of product launch and continuing for the life of the Genentech patents.

The public offering will be made only by means of a prospectus. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This announcement does not constitute an offer to sell or the solicitation of an offer to buy. There shall not be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

Genentech, Inc. is a leading biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. Twelve of the approved products of biotechnology stem from Genentech science, seven of which Genentech markets directly in the United States. The company has headquarters in South San Francisco, California.

1. The accounting treatment under U.S. Generally Accepted Accounting Principles (GAAP) requires Genentech to establish a new accounting basis for the company's assets and liabilities based on the cost of Roche's 1990 through 1997 purchases of Genentech shares and the redemption of Genentech's Special Common Stock. Roche's cost of acquiring Genentech is "pushed down" to Genentech and reflected on Genentech's financial statements beginning June 30, 1999. The effect of the push-down accounting on Genentech's statement of operations is primarily a non-cash adjustment to earnings. In addition to the push-down impact, the special charge includes the cash-out of certain options and a non-cash charge related to the continuance of certain options.

* All earnings per share amounts in the text of this news release represent diluted earnings per share.

GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

 

Three Months
Ended June 30,

 
 

1999

 

1998

 

Actual

 

Pro Forma (2)

 

Actual

Revenues:

               

Product sales

$

269,355

 

$

269,355

 

$

176,263

Royalties

 

45,986

   

45,986

   

57,388

Contract and other

 

57,915

   

37,578

   

14,056

Interest

 

21,986

   

21,986

   

20,305

Total revenues

 

395,242

   

374,905

   

268,012

Costs and expenses:

               

Cost of sales
 

52,681

   

52,681

   

37,150

Research and development
 

94,211

   

94,212

   

92,949

Marketing, general and administrative
 

117,372

   

117,371

   

80,643

Special charge, related to redemption
 

1,147,304

   

-

   

-

Interest
 

1,356

   

1,356

   

1,195

Total costs and expenses
 

1,412,924

   

265,620

   

211,937

Income (loss) before taxes

 

(1,017,682)

   

109,285

   

56,075

Income tax (benefit) provision

 

(94,490)

   

36,064

   

15,701

Net income (loss)

$

(923,192)

 

$

73,221

 

$

40,374

Earnings (loss) per share

               

Basic

$

(7.19)

 

$

0.57

 

$

0.32

Diluted

$

(7.19)

 

$

0.55

 

$

0.31

Weighted average shares used to compute earnings (loss) per share:

               
                 

Basic
 

128,480

   

128,480

   

125,601

Diluted
 

128,480

   

133,411

   

129,775




(2) Pro Forma amounts exclude redemption related charges and related tax effects.

 

 

 

GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

   

Six Months
Ended June 30,

   

1999

 

1998

   

Actual

 

Pro Forma (3)

 

Actual

Revenues:

                 

Product sales

 

$

503,424

 

$

503,424

 

$

340,982

Royalties

   

92,604

   

92,604

   

121,881

Contract and other

   

77,181

   

56,844

   

28,921

Interest

   

44,385

   

44,385

   

40,928

Total revenues

   

717,594

   

697,257

   

532,712

Costs and expenses:

                 

Cost of sales

   

98,404

   

98,404

   

70,771

Research and development

   

184,951

   

184,952

   

191,151

Marketing, general and administrative

   

214,573

   

214,572

   

155,593

Legal settlement

   

50,000

   

-

   

-

Special charge, related to redemption

   

1,147,304

   

-

   

-

Interest

   

2,719

   

2,719

   

2,154

Total costs and expenses

   

1,697,951

   

500,647

   

419,669

Income (loss) before taxes

   

(980,357)

   

196,610

   

113,043

Income tax (benefit) provision

   

(71,580)

   

64,881

   

31,652

Net income (loss)

 

$

(908,777)

 

$

131,729

 

$

81,391

Earnings (loss) per share

                 

Basic
 

$

(7.09)

 

$

1.03

 

$

0.65

Diluted
 

$

(7.09)

 

$

0.99

 

$

0.63

Weighted average shares used to compute earnings (loss) per share:                  

Basic
   

128,092

   

128,092

   

125,179

Diluted
   

128,092

   

132,967

   

129,291

     
     
   

June 30,

   

1999

 

1998

Selected balance sheet data:

           

Cash and short-term investments

 

$

912,978

 

$

921,313

Accounts receivable

   

191,743

   

180,086

Inventories

   

324,473

   

116,840

Long-term marketable securities

   

808,024

   

466,963

Property, plant and equipment, net

   

718,743

   

693,375

Goodwill

   

1,706,042

   

-

Other intangible assets

   

1,563,601

   

65,033

Other long-term assets

   

130,660

   

109,207

Total assets

   

6,369,379

   

2,606,695

Total current liabilities

   

619,235

   

267,241

Long-term debt

   

149,989

   

150,000

Total liabilities

   

1,240,528

   

447,676

Total stockholders' equity

   

5,128,851

   

2,159,019




(3) Pro Forma amounts exclude redemption related charges and legal settlement, and related tax effects.

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