By Debbie Strickland

With the release of its 1997 earnings report, Genentech Inc. joined biotech's smallest club, cracking the $1 billion revenue mark for the first time, while boosting earnings 9 percent to $129 million.

Revenues from all sources climbed to $1.02 billion, a 5 percent gain over the $968.7 million total for 1996. Much of the increase came in the fourth quarter, which produced $277.1 million, a 20 percent jump over the $230.3 million posted in the fourth quarter of 1996.

Genentech's 1997 net income of $129 million, or $1.02 per share, was up from $118 million and 95 cents a share in 1996. The South San Francisco-based company's fourth-quarter earnings totaled $41.5 million, or $0.33 per share, up from $7.5 million and $0.06 per share in the comparable 1996 period.

The quarter's earnings were 50 percent higher than the expected $0.22 per share; for the year, earnings were 10 cents higher than the consensus forecast of $0.92.

"We're pretty pleased that we exceeded analysts' expectations," said Genentech spokeswoman Kathleen Rhinehart.

"Genentech is unique in that they have rising earnings and a deep pipeline," said analyst Mark Simon, managing director for BancAmerica Robertson Stephens & Co., in San Francisco. "For most of the profitable biotech companies with products on the market, there are clear questions regarding the viability of the follow-on pipeline. But there is no question with Genentech that the pipeline is robust."

The year's earnings, however, lagged behind the $146.4 million recorded in 1995—the year Genentech changed CEOs and began devoting more resources to research and development.

"What I like about them is they're taking a long-term view," said analyst Matt Geller, of Oppenheimer & Co., in New York. "Genentech is really planning for future growth and has spent some extra money on research and development."

The pipeline investment is paying off, according to both the analysts and the company, which in the earnings report highlighted four FDA approvals in 1997 and nine products currently in late-stage development.

Meanwhile, sales of the company's maturing blockbuster products—the thrombolytic agent Activase and a suite of human growth hormone products—have flattened. Overall, sales of marketed products were virtually unchanged at $584.9 million for the year, compared to $582.8 million in 1996.

Activase sales fell 8 percent to $260.7 million in 1997. Fourth-quarter 1997 market share slipped to 71 percent, down from 76 percent in the third quarter and 80 percent in the fourth quarter of 1996. Genentech cited the entry of a new competitor, Boehringer Mannheim GmbH's Retavase, along with increasing use of mechanical reperfusion instead of thrombolytic therapy.

Sales of Genentech's three growth hormone products inched up 2.6 percent to $223.6 million in 1997, despite heightened competition. The company recently won FDA approval of new indications for two of the products, Nutropin and Nutropin AQ.

The good news is that Activase and the hormone products are enjoying a longer period of high margins and sales than anyone expected, said Simon.

"Five years ago, there were assumptions that both products were going to see substantial sales declines, but sales have been very flat," he said. "That's ahead of expectations from a few years ago, especially since the growth hormone market now has multiple entrants."

The company's two other major revenue categories posted double-digit percentage gains: Royalties ticked up 11 percent to hit $241.1 million, and "contract and other" revenues rose 13.6 percent to $121.6 million.

On the expense side, research and development costs of $471 million for the year were unchanged versus 1996, but represented a smaller percentage of revenues—46 percent, down from 49 percent in 1996.

"They were able to maintain fairly rigid expense controls despite a very large pipeline of late-stage products," said Simon. "That's very hard to accomplish."

Marketing, general and administrative expenses rose 12 percent to $269.9 million, due to the creation of an oncology marketing initiative, stepped-up marketing for Activase and promotion of the newly approved growth hormone indications.

"They're doing a good job cutting back costs and they have the premier pipeline in biotech," said Geller, summarizing Genentech's 1997 performance.

"They executed on all cylinders and made some very tough decisions on IG-1 and TPO," noted Simon.

The company in September halted development of insulin-like growth factor 1 (IGF-1) for the treatment of Type I and Type II diabetes after determining the drug would require extensive clinical trials to be proven safe and effective. The drug was in Phase III clinical studies at the time.

As for TPO (recombinant thrombopoietin), Genentech earlier this month licensed worldwide rights to the product to Pharmacia & Upjohn, of London, for $35 million, with an additional final transfer payment and royalties due upon successful commercialization. TPO, a platelet generator, is undergoing Phase II clinical trials for the treatment of thrombocytopenia associated with cancer chemotherapy.

New Deals Generate Fourth-Quarter Gains

The fourth quarter's 20 percent revenue uptick in revenues came primarily from the "contract and other" category, which nearly tripled to $54.1 million, including a $12 million up-front payment from Pharmacia & Upjohn, for the TPO rights.

The company also received an undisclosed up-front payment in a deal with Sumitomo Pharmaceuticals Co. Ltd., of Osaka, Japan, yielding exclusive Japanese development and distribution rights for two human growth hormone formulations.

The company cited the increased revenues as the main factor in the quarter's $34 million earnings gain.

The upbeat earnings news kept Genentech's shares above the key $60 mark, with a $0.375 gain to $63.75 .

Basel, Switzerland-based Roche Holding Ltd. currently owns about two-thirds of the company's shares and has the right to buy the company at a steadily escalating price until June 1999. At that point, Genentech shareholders may "put" their shares to Roche for $60 per share.

"The company's goal is for Wall Street to be able to say the value of Genentech is significantly above $60 a share," said Simon. That's the corporate mission, and form our vantage point today, it looks like they're succeeding." *

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