Genentech Inc.'s look to long-term value resulted in an earnings drop of 42 percent for the second quarter compared to earnings from a year ago.
The South San Francisco company on Monday reported second- quarter earnings of $21.7 million, or 18 cents per share, compared to $37.2 million, or 31 cents per share, in the same period last year. Revenues increased 5 percent, to $243.8 million.
Genentech attributed the earnings decline mostly to an increase in the effective tax rate to 48 percent in the second quarter. The increase stemmed from the company's approach to research and development funding and manufacturing of certain products by international subsidiaries.
The plan is to make the effective tax rate 33 percent for the year, with an expected rate of about 40 percent between 1997 and 1999, and 30 to 35 percent in 2,000, a Genentech spokeswoman said. After that tax rates are expected to decline as developmental products are brought to market.
"This approach increases our effective tax rate in the next several years, but has the potential to lower our tax rate and thereby increase earnings in the long term," President and CEO Arthur Levinson said in a news release.
Much of what's going on now at Genentech is in preparation for 1999, when majority shareholder Roche Holding Ltd., of Basel, Switzerland, can purchase the rest of the company. Roche, which owns about 70 percent of Genentech, can buy all remaining shares at an escalating price that reaches $82 in 1999. If Roche doesn't exercise the buyout option, Genentech shareholders can sell to Roche at $60 per share.
Peter Drake, an analyst at Deerfield, Ill.-based Vector Securities International Inc., said Genentech's quarterly numbers are almost insignificant. "We look at it as an ROI [return on investment] story that you get a guaranteed price of $60 in 1999 and you may get $82," he said.
Genentech's stock (NYSE:GNE) lost 25 cents Monday to close at $51.88.
"The commercial side of the company was not as strong in the quarter as many had anticipated," Drake said. "There were weaker tPA [Activase] sales than we anticipated and weaker Pulmozyme sales. But again, that doesn't really matter."
Matthew Geller, an analyst with New York-based Oppenheimer & Co., agreed that Genentech is taking a long-term approach.
"We're really working on 1999," Geller said. "A lot of the decisions are based on the way to create the best kind of numbers and product portfolio and pipeline three years from now."
Late last year Genentech began receiving royalties rather than recording sales of the cystic fibrosis drug Pulmozyme in Europe and for Canadian sales of all products as Roche assumed responsibility for those sales. That led to decreased product sales with increased royalty revenues as well as reduced expenses for marketing, general and administrative functions.
Product sales in the second quarter were $148.3 million vs. $161.2 million in the second quarter of last year. But on a pro forma basis considering the Roche arrangement sales in last year's second quarter were $144.8 million.
On a pro forma basis Activase sales increased to $72.3 million from $70.5 million in the second quarter of 1995. The company's market share for Activase as a treatment for heart attacks increased to 80 percent from 70 percent since the April 1995 approval of an accelerated dosing regimen. In the second quarter Activase was cleared as a treatment for stroke if given within three hours.
Sales of Genentech's two growth hormone products, Protropin and Nutropin, decreased to $54.1 million compared to $55.9 million a year ago ($55.2 million pro forma). The company attributed the drop to pricing pressures from distribution channels.
Contract and other revenues increased to $27 million from $7.9 million last year, primarily due to Roche's $19.3 million payment for exercising its option to develop insulin-like growth factor for diabetes outside the U.S. Research and development expenses increased 29 percent to $112.6 million. n
-- Jim Shrine Staff Writer
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