Thursday, Oct 7, 1999

Roche To Publicly Sell 20 Million Genentech Shares, Genentech Board Approves 2-For-1 Stock Split

Genentech announces third quarter earnings increased, exclusive of redemption related charges

South San Francisco, Calif. -- October 7, 1999 --

Genentech, Inc. (NYSE: DNA) today announced that Roche Holdings, Inc. intends to sell in an underwritten public offering 20 million shares of Genentech common stock as soon as practicable. These shares represent 15.6 percent of the outstanding common stock of Genentech. Roche will also grant the underwriters an option to purchase an additional two million shares to cover over-allotments. As a result of this offering, Roche's economic and voting ownership of Genentech will be reduced to approximately 65 percent.

Proceeds from the proposed offering will be for the sole benefit of Roche. Genentech will not receive any proceeds from this transaction. Concurrently with this common stock offering, Roche also intends to issue U.S. dollar denominated bonds exchangeable with Roche for up to approximately 5.5 million shares of Genentech common stock owned by Roche. These offerings are dependent upon favorable market conditions.

"We are very pleased with these transactions, which will increase the shares of our common stock in the market," said Arthur D. Levinson, Ph.D., Genentech's chairman and chief executive officer. "These transactions will broaden our shareholder base and increase the liquidity of our shares. We believe this is further recognition of the success of our stand alone operations and the value of our partnership with Roche."

"We have decided to sell part of our stake in Genentech in order to provide more liquidity in Genentech shares as requested by the market," said Franz B. Humer, Ph.D., Roche's chief executive officer. "This transaction will also further strengthen our financial position. At the same time, Genentech and Roche will continue to benefit from our excellent strategic relationship."

Genentech Stock Splits 2-for-1

Genentech also announced that its board of directors approved a 2-for-1 split of its common stock to be effective in the form of a stock dividend. The record and distribution dates for the stock split have not yet been determined, but will occur after the completion of the common stock offering by Roche. The stock split has not been reflected in the accompanying financial information. As of September 30, Genentech had 128.3 million shares outstanding.

Third Quarter Earnings Up 6 Percent, Exclusive of Redemption Related Charges

In addition, Genentech today reported its third quarter results. Exclusive of redemption related charges, earnings increased six percent compared to the third quarter of 1998. Revenue grew 10 percent, driven primarily by product sales. This increase in revenues was achieved even though the company experienced a significant decrease in contract and other revenues and royalties. The redemption charges are due to Roche's exercise of its option requiring Genentech to redeem Genentech's special common stock on June 30, 1999 and related accounting treatment . As a result of such charges, the company recorded a net loss for the third quarter of 1999.

For the three months ended September 30, 1999:

  • Exclusive of special and recurring redemption related charges, net income for the third quarter of 1999 would have been $66.9 million, or 51 cents per share2, an increase in earnings per share of 4 percent over the third quarter of 1998. Year-to-date earnings per share in 1999, excluding the legal settlement and redemption special charges and the recurring charges related to the redemption, would have been $1.50 per share, a 34 percent increase as compared to the same period in 1998.

  • Due primarily to charges related to the redemption, the company recorded a third quarter 1999 net loss of $62.8 million, or a net loss of 49 cents per share, as compared to net income of $63.4 million, or 49 cents per share, in the third quarter of 1998.

  • Revenues in the third quarter of 1999 increased 10 percent to $345.3 million from $313.9 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. This revenue increase was recorded even though the company experienced a significant decrease in contract and other revenues and royalties as compared to the same period last year. Contract and other revenues in the third quarter of 1998 included a $40 million payment from Roche related to an agreement providing Roche exclusive marketing rights outside the United States for Herceptin.

  • As a result of the June 30, 1999 redemption of Genentech's special common stock and related accounting treatment, the company began recording recurring charges related to the redemption in the third quarter. These recurring charges are primarily comprised of the amortization of intangibles and goodwill and were $98.9 million in the quarter. The company also recorded a special charge related to the redemption of $57.8 million, which is primarily a non-cash charge associated with the remeasurement, for accounting purposes, of certain stock options.

Product Sales

Sales of marketed products increased 64 percent in the third quarter of 1999 to $267.0 million from $163.1 million in the third quarter of 1998.

Sales of Herceptin in the third quarter of 1999 were $47.9 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.

Sales of Rituxan in the third quarter of 1999 increased 84 percent to $72.4 million from $39.4 million in the third 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), in the third quarter of 1999 increased to $59.2 million from $45.1 million in the third quarter of 1998. The increase in Activase sales is primarily the result of a competitive product not being available in the marketplace. This increase is offset in part by a decline in the overall size of the acute myocardial infarction 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], increased to $60.1 million from $52.9 million in the third quarter of 1998. This increase primarily reflects fluctuations in distributor ordering patterns.

Sales of Pulmozyme® (dornase alfa) Inhalation Solution increased to $27.0 million in the third quarter of 1999 compared to $24.7 million in the third 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.

Total Costs and Expenses

Costs and expenses increased during the third quarter of 1999 as compared to the third quarter of 1998 due primarily to the redemption related charges described above. Primarily as a result of the increase in product sales, cost of sales increased to $92.8 million in the third quarter of 1999 from $35.3 million in the third quarter of 1998.

Marketing, general and administrative expenses increased to $113.6 million in the third quarter of 1999 from $89.6 million in the third quarter of 1998. This increase was driven primarily by the growth of Rituxan and the resultant profit sharing expense as well as the introduction of Herceptin.

The income tax benefit of $40.9 million in the third quarter of 1999 reflects the tax benefit of a portion of the redemption related charges. Research and development (R&D) expenses decreased to $84.6 million in the third quarter of 1999 from $99.9 million in the third quarter of 1998. For the third quarter of 1999, Genentech invested approximately 25 percent of revenues into R&D, compared to 32 percent in the third quarter of 1998. This decrease is currently running ahead of the goal of Genentech's Long-Range Plan to decrease R&D spending as revenues increase, and is expected to vary over the next several periods as products progress through late-stage clinical trials. R&D and Business Events

In addition to the events mentioned above, the following events occurred during the third quarter:

  • Announced the appointment of Arthur D. Levinson, Ph.D. to chairman of the board of directors as well as the re-election to the board of Herbert W. Boyer, Ph.D. and the appointment of two additional new board members, Charles A. Saunders, M.D. and Sir Mark Richmond, Ph.D. In addition, the company announced that William D. Young resigned his position as chief operating officer, and Susan D. Hellmann, M.D., M.P.H. has been named executive vice president overseeing Genentech's Development and Product Operations organizations.

  • Announced the public offering in July 1999 of 22 million shares of Genentech common stock by Roche. On June 14, 1999, Roche exercised its option to cause Genentech to redeem as of June 30, 1999 all of its outstanding special common stock not owned by Roche. The Genentech common stock is traded on the New York Stock Exchange under the symbol, DNA.

  • Accepted for review by the United States Food and Drug Administration (FDA) following a July 30, 1999 submission, a Biologics License Application for Tenecteplase (TNK-tPA) to be used in treating heart attack patients. Boehringer Ingelheim filed with the European Regulatory Authority for approval of Tenecteplase for the same indication on August 31, 1999. Boehringer Ingelheim is co-sponsor of the ASSENT 2 study, and Genentech's international marketing partner for Alteplase and developmental collaborator for Tenecteplase.

  • Received FDA priority review for Nutropin Depot™, a long-acting formulation of Genentech's recombinant human growth hormone (rhGH) using Alkermes' ProLease® injectable sustained-release drug delivery system. Priority review provides for a six-month review instead of the standard 12-month FDA review process. Genentech and Alkermes are now in the process of accelerating approval activities, including manufacturing, which previously were based on the 12-month timeline.

  • Roche Holding AG reported that Xubix™, an oral platelet IIb/IIIa antagonist aimed at reducing the risk of repeat heart attacks, showed no benefit over aspirin in a Phase III trial. Xubix was discovered in a joint discovery program between Genentech and Roche. Through a 1997 agreement, Roche assumed development of Xubix in Phase III clinical trials and Genentech retained opt-in rights to the product.

  • With XOMA Ltd., Genentech announced positive results from a Phase II clinical study of the anti-CD11a antibody product in moderate to severe psoriasis patients.

  • Decided to move two new products from research into development:

    • With Immunex Corporation, began planning Phase I clinical trials for TRAIL /Apo2L in cancer. In preclinical research, TRAIL /Apo2L has been shown to cause a wide variety of tumor cells to undergo apoptosis (programmed cell death) while sparing normal cells.

    • With XOMA, expanded the anti-CD11a antibody product development program to include organ transplant rejection and are in the process of planning for Phase I clinical trials.

    Genentech intends to file a registration statement shortly with the Securities and Exchange Commission relating to the proposed sale of Genentech shares by Roche. The common stock offering will be made only by means of a prospectus. This press release shall not constitute an offer to sell or the solicitation of an offer to buy common stock.

    Roche will not register the exchangeable bonds under the Securities Act of 1933 or under any state securities laws. Therefore, these securities may not be offered or sold within the United States or to, or for the account of any United States person unless the offer or sale would qualify for a registration exemption from the Securities Act of 1933 and state security laws. Accordingly, Roche is only offering the exchangeable bonds (1) to qualified institutional buyers as defined in and in reliance upon Rule 144A under the Securities Act of 1933, and (2) outside the United States in compliance with Regulation S of the Securities Act of 1933.

    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. Genentech markets seven products directly in the United States. The company has headquarters in South San Francisco, California and is traded on the New York Stock Exchange under the symbol DNA.

    1The accounting treatment under U.S. Generally Accepted Accounting Principles (GAAP) required 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 on June 30, 1999. Roche's cost of acquiring Genentech was "pushed down" to Genentech and reflected on Genentech's financial statements beginning June 30, 1999. On a year-to-date basis, 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 related to the redemption primarily includes the cash-out of certain stock options and a non-cash charge related to the continuance of certain stock options recorded in second quarter of 1999 and includes a non-cash charge associated with the remeasurement, for accounting purposes, of certain options recorded in the third quarter of 1999. In the third quarter of 1999, the company began recording recurring charges related to the redemption which primarily include the amortization of intangibles and goodwill.

    2All 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 September 30,

    1999 1998

    Actual Pro Forma(2) Actual
    Revenues
       Product sales $ 266,968 $ 266,968 $ 163,100
       Royalties   46,128   46,128 60,725
       Contract and other   7,503   7,503 66,113
       Interest   24,729   24,729 23,992
          Total revenues   345,328   345,328 313,930
               
    Costs and expenses
       Cost of sales   92,750   45,936 35,351
       Research and development   84,629   84,629 99,862
       Marketing, general and administrative   113,613   113,613 89,544
       Special charge related to redemption   57,800   - -
       Recurring charges related to redemption   98,986   - -
       Interest   1,326   1,326 1,148
          Total costs and expenses   449,104   245,504 225,905
               
    Income (loss) before taxes   (103,776)   99,824 88,025
    Income tax (benefit) provision   (40,931)   32,942 24,647
               
    Net income (loss) $ (62,845) $ 66,882 $ 63,378
               
    Earnings (loss) per share:          
       Basic $ (0.49) $ 0.52 $ 0.50
       Diluted $ (0.49) $ 0.51 $ 0.49
               
    Weighted average shares used to
       compute earnings (loss) per share:
             
       Basic   127,854   127,854 126,080
       Diluted   127,854   131,082 129,948
     
    Nine Months
    Ended September 30,

    1999 1998

    Actual Pro Forma(2) Actual
    Revenues
       Product sales $ 770,392 $ 770,392 $ 504,082
       Royalties   138,732   138,732 182,606
       Contract and other   84,684   64,347 95,034
       Interest   69,114   69,114 64,920
          Total revenues   1,062,922   1,042,585 846,642
               
    Costs and Expenses
       Cost of sales   191,154   144,340 106,122
       Research and development   269,580   269,580 291,013
       Marketing, general and administrative   328,186   328,186 245,137
       Special charge:          
          Legal settlement   50,000   - -
          Related to redemption   1,205,104   - -
       Recurring charges related to redemption   98,986   - -
       Interest   4,045   4,045 3,302
          Total costs and expenses   2,147,055   746,151 645,574
               
    Income (loss) before taxes   (1,084,133)   296,434 201,068
    Income tax (benefit) provision   (112,511)   97,823 56,299
               
    Net income (loss) $ (971,622) $ 198,611 $ 144,769
               
    Earnings (loss) per share:          
       Basic $ (7.59) $ 1.55 $ 1.15
       Diluted $ (7.59) $ 1.50 $ 1.12
               
    Weighted average shares used to
       compute earnings (loss) per share:
             
       Basic   128,013   128,013 125,480
       Diluted   128,013   132,338 129,510
     
    September 30,
    1999 1998
    Selected balance sheet data
       Cash and short-term investments $ 745,064 $ 987,785
       Accounts receivable   185,220   135,127
       Inventories   284,972   123,886
       Long-term marketable securities   918,569   566,052
       Property, plant and equipment, net   721,990   692,876
       Goodwill   1,667,382   -
       Other intangible assets   1,506,478   60,843
       Other long-term assets   125,978   126,548
       Total assets   6,169,395   2,748,252
       Total current liabilities   332,326   317,170
       Long-term debt   149,708   150,000
       Total liabilities   942,293   500,171
       Total stockholders' equity   5,227,102   2,248,081

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

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