By Mary Welch

As a result of a special $50 million charge for a legal settlement, Genentech Inc. reported a net income decline to $14.43 million (or $0.11 per share) for the first quarter of 1999, down from $41 million (or $0.32 per share) for the same quarter in 1998.

Had the special charge not been applied, the South San Francisco-based company would have reported a first-quarter net income of $58.8 million, a gain of 43 percent over the same period last year. Earnings would have been $0.44 per share, an increase of 38 percent.

Earlier this month, Genentech reported that it was negotiating with the U.S. attorney for the Northern District of California to settle an investigation into its promotion of human growth hormone during the late 1980s and early 1990s. As part of the possible settlement, Genentech agreed to pay a criminal fine and restitution in the amount of $50 million, thus resolving the charges that the company promoted its human growth hormone from 1985 to 1994 for uses that had not been approved by the FDA. Any agreement is subject to court approval.

¿We have reached a settlement in principle,¿ said Genentech spokeswoman Marie Kennedy. ¿We expect the situation to be resolved any hour now.¿

Jim Reddoch, research associate with Gerard Klauer Mattison & Co., in New York, was upbeat about the report. ¿Quarter after quarter, this company has exceeded expectations,¿ he said. ¿The consensus was that they [would] come in at about $0.34 [earnings per share], and they come in at $0.44 per share, excluding the special charge.¿

Competition Takes Toll On Activase

Sales of marketed products increased 42 percent to $234.1 million from $164.7 million, in the first quarter of 1998. Sales of Activase (alteplase, recombinant), a tissue plasminogen activator (t-PA), dropped to $52 million from $55.7 million in the first quarter of 1998, due primarily to the decline in the overall thrombolytic therapy market, which came as a result of the growing popularity of the mechanical reperfusion method. Activase also faced continued competition from rival thrombolytics.

Sales of Genentech¿s three growth hormone products ¿ Protropin (somatrem for injection), Nutropin (somatropin [rDNA origin] for injection), and Nutropin AQ (somatropin [rDNA origin]) ¿ increased to $56.2 million from $50 million in the first quarter of 1998.

Sales of Pulmozyme (dornase alfa) inhalation solution increased to $28.2 million, compared to $19.5 million in the year-ago period.

Two recently approved drugs, Herceptin (trastuzumab) and Rituxan (rituximab), helped drive the company¿s revenues to $322.3 million, up 22 percent from $264.7 million for the first quarter a year ago.

Herceptin, which posted first-quarter sales of $39.9 million, is used in the treatment of certain patients with metastatic breast cancer.

Rituxan is indicated for the treatment of patients with relapsed or refractory low-grade or follicular, CD20-positive, B-cell, non-Hodgkin¿s lymphoma. The drug generated first-quarter sales totaling $57.1 million, an increase from the $37.7 million reported first-quarter 1998 and up from $50.7 million for the fourth quarter of 1998.

Rituxan was discovered by Idec Pharmaceuticals Corp., of San Diego, and is being developed by Idec, Genentech, and F. Hoffmann-La Roche Ltd., of Basel, Switzerland.

¿These are two relatively new cancer drugs, and they¿ve already become a great source of revenue,¿ Reddoch said. ¿In the fourth quarter, they represented about 40 percent of all product revenue. This year, we expect it¿s about 46 percent. That¿s almost half of all the product sales. Genentech is seeking additional indications for both drugs. We expect Rituxan¿s sales will be $350 million in 2001; $320 million for Herceptin. Those drugs also are transforming the company to one that develops antibody-based products in addition to enzyme-based drugs.¿

On the down side, revenues were offset partly by a decrease in royalties, mostly related to the expiration last August of insulin royalties. Genentech licensed the product to Eli Lilly and Co., of Indianapolis, in 1982, when, Kennedy said, Genentech ¿was a small company and had to license out our work.¿ The company had cloned the gene for human insulin in 1978, she said.

Regardless of product sales and products in the pipeline, the biggest question in Genentech¿s future is whether Roche will exercise its option and buy the company for the set price of $82.50 per share by June 30.

¿What do people want?¿ Reddoch asked. ¿They want Roche not to exercise that option, and release Genentech, so its stock price can appreciate. There is some chance that Roche will exercise that option. That¿s the cloud over the company. [Roche is] being very tight-lipped, but the fact that Genentech¿s stock is above the option price indicates that people think Roche might not.¿

Genentech¿s stock (NYSE:GNE) closed Monday at $87.50, up $2.687.

FDA Filings Expected This Quarter, Next

If Roche does not exercise the option, Genentech¿s future is strong, Reddoch said. It¿s ¿expected to have two FDA filings in this quarter and next, Nutropin Depot and TNK-t-PA. Even when they have a failure like they had last week, the stock¿s still trading strong. That¿s how strong the pipeline is. Take one out and another fills the gap.¿

The Phase III failure came last week, in a pivotal trial testing recombinant human nerve growth factor for diabetic neuropathy, where it failed to show a statistically significant benefit for patients. The company is now deciding whether to continue the drug¿s development. (See BioWorld Today, April 12, 1999, p. 1.)

Genentech and partner Alkermes Inc., of Cambridge, Mass., intend to file a new drug application for Nutropin Depot sustained-release growth hormone for the treatment of growth hormone in children. Nutropin Depot is a formulation of Genentech¿s somatropin (recombinant human growth hormone or rhGH) based on Alkermes¿ ProLease injectable sustained-release drug delivery system.

In addition, Genentech will seek marketing approval in the U.S. for TNK-t-PA (tenecteplase), a thrombolytic therapy with improved product attributes for the treatment of heart attacks. The company¿s partner, Boehringer Ingelheim, of Ingelheim, Germany, will file in Europe.

Also in Phase III trials is an anti-CD11a (hu1124) monoclonal antibody product for psoriasis, which is in collaboration with Xoma Ltd., of Berkeley, Calif.