By Mary Welch

The good news was that Genentech Inc.'s first-quarter earnings rose 30 percent to $41 million, or $0.32 a share, over the first quarter of 1997 and that Rituxan, its non-Hodgkin's lymphoma drug, racked up sales of $37.7 million.

The bad news was that the South San Francisco-based company's other drugs experienced declines in sales.

First-quarter revenues increased 3 percent to $264.7 million from the $257.3 million for the same quarter of last year. First-quarter 1997 earnings were $31.6 million, or $0.25 per share.

"It's obvious that Rituxan sales are high — higher than we expected — and we had one of the highest estimates on the Street. Everyone is upping their estimations," said Meirav Chovav, an analyst with Salomon Smith Barney, of New York. "But the bottom line is that all their other products were down. Without Rituxan, they would have had a pretty bleak quarter."

Rituxan — cleared by the FDA for refractory or relapsed low-grade non-Hodgkin's lymphoma (NHL) — is the first monoclonal antibody approved for cancer. It is a chimeric monoclonal antibody aimed at the CD20 antigen found on mature B cells and most NHL tumors. Rituxan was introduced to the market in the fourth quarter of 1997 and saw sales of $5.5 million during that period.

Overall, sales of Genentech's products increased 7 percent to $164.7 million, from $154.2 million in the same period in 1997. However, if Rituxan's $37.7 million contribution is subtracted, Genentech's sales dropped to $127 million for the first quarter of 1998, a dip of 17.5 percent.

Activase, Growth Hormones, Pulmozyme Slip

Sales of Activase (tPA), a thrombolytic used to treat heart attacks, fell 26 percent to $55.7 million. Sales of the company's three growth hormone products — Protropin, Nutropin and Nutropin AQ (aqueous) — decreased nine percent to $50.9 million. Similarly, sales of Pulmozyme Inhalation Solution dropped 13 percent to $19.5 million. Pulmozyme is used to treat cystic fibrosis patients.

Genentech attributed drops in sales of Pulmozyme and the growth hormone products to fluctuations in distributor ordering patterns.

"The key is that all these products are keeping their market share," said Mark Simon, an analyst with BancAmerica Robertson Stephens & Co., in San Francisco. "They're holding their own."

Also helping the bottom line was Genentech's frugality on the expense side. Research and development (R&D) expenses, for instance, were cut 20 percent to $98.2 million, down from $122.7 million for the first quarter of 1997. About 37 percent of revenues were put into R&D compared with 48 percent for the same period a year ago.

"Expenses were way below what we expected," admitted Chovav. "The question is: 'Can they sustain it? How can they keep cutting R&D?'"

Genentech intends to cut R&D 10 percent by year's end, said Laura Leber, company spokeswoman. "We have so many products in Phase III. We hope to reduce R&D costs as a percent of revenues. As revenues increase, R&D will increase.

"Also having drugs in Phase III costs more because clinical trials are expensive. As they get approved, there will be more of a balance in our pipeline expenses," she said.

Simon took a positive look at Genentech's future, saying the Phase III reporting of results of Herceptin, an anti-HER2 receptor antibody, should be presented at a May medical conference. Herceptin is being fast tracked by the FDA as an effective anti-breast-cancer treatment.

The drug is a monoclonal antibody that is especially aggressive against a form of breast cancer that affects up to one-third of all victims. Preliminary data showed that the cancer's progress was slowed and tumor size reduced.

"The company is clearly excited about the data and bringing it to the market. One thing we can say, and that's shown by Rituxan, is that they know how to create and launch new markets. That's the power of their sales force, " Simon observed.

Genentech's stock (NYSE:GNE) closed Tuesday at $70.50, up $1.125. *