By Debbie Strickland

Genentech Inc. reported lower revenues but higher earnings for the second quarter of 1997. At 19 cents per share, however, the company's net income did not hit Wall Street's per-share projection of about a quarter.

"Toward our goals, we made significant operational progress in the second quarter," emphasized Arthur Levinson, president and CEO. "We continued to defend our current markets and we made key progress with our pipeline projects."

Thanks to a lighter income tax burden, earnings climbed to $23.8 million, a 10 percent gain over the comparable period in 1996.

The gain largely results from a more than 50 percent reduction in income taxes, which amounted to $9.3 million, down from $20 million. Genentech's pre-tax income of $33 million was down 19.5 percent from the $41 million reported in the second quarter of 1996.

For the year to date, earnings sagged to $55.4 million, down from $59.9 million in the first half of 1996.

Second-quarter revenues declined 4.2 percent to $233.5 million. Genentech, of South San Francisco, attributed the decline to "expected fluctuations in contract and other revenues." For the first two quarters combined, revenues totaled $490.8 million, a slight gain over the 1996 first-half tally of $486.6 million.

Product sales slipped 2.2 percent to $145 million during the second quarter, with sales of the company's lead product, Activase, falling 5.5 percent to $68.3 million. After peaking in the first quarter with a market share of 85 percent, the thrombolytic therapy's share of the heart-attack market fell to 79 percent.

Genentech cited "the entry of a new competitive thrombolytic agent" into the market -- Retavase, produced by Boehringer Mannheim GmbH, of Mannheim, Germany. Moreover, the company said, the size of the thrombolytic market is declining due to the increasing popularity of mechanical reperfusion as an alternative. The company noted that Activase sales are up for the treatment of acute ischemic strokes.

Sales of the company's other core drugs were fairly flat. The three growth hormone products rose to $55.6 million from $54.1 million in 1996's second quarter. Pulmozyme Inhalation Solution sales were $20.2 million, down from $20.8 million. The company has initiated a Phase III Pulmozyme trial in early stage cystic fibrosis patients, which could boost the market for the product, currently approved for moderate or advanced cystic fibrosis.

Analyst Matt Geller, of Oppenheimer & Co., in New York, is looking beyond the current numbers to a slew of products under development: the anti-HER2 antibody, in Phase III trials for the treatment of metastatic breast cancer; NGF, in a Phase III study for diabetic peripheral neuropathy; IGF-I, which has reached the Phase III level for Type I and Type II diabetes; TNK tPA, a second-generation tissue plasminogen activator whose Phase II trial results will be presented in August; VEGF (vascular endothelial growth factor) for coronary artery disease; and an anti-VEGF antibody for cancer, now in Phase I.

"The real key is not a few cents here or there," Geller said. "The key is whether they get these potentially large products approved or not."

Genentech's research and development expenses totaled $110.9 million, or 47 percent of revenues, in the second quarter, down from $112.6 million during the same period in 1996.

"What are the new products and how are they doing in the clinic -- that's what's going to determine the success or failure of Genentech, and whether or not it remains independent after June of 1999," he said, referring to the company's 1995 agreement with Basel, Switzerland-based Roche Holdings Ltd., which currently owns about two-thirds of the company's shares.

Under the agreement, Roche may buy the company at a steadily escalating price until June 1999. At that point, if Roche hasn't yet taken over the firm, Genentech shareholders may "put" their shares to Roche for $60 per share.

"With essentially no downside, Genentech probably represents the safest investment in biotechnology," Geller wrote in a report following the earnings announcement.

The company's shares (NYSE:GNE) closed Tuesday at $57.875, down $0.438.

Genentech ended the quarter with cash and short-term investments of $684 million, and total stockholders' equity of $1.9 billion.

In its earnings report, the company also announced revisions to its development and licensing agreement with Roche, which has options to acquire non-U.S. rights to Genentech products.

When signed in 1995, the agreement called for Roche, upon deciding to "opt in" on a product's development, to reimburse Genentech for 50 percent of development costs to date and pay 100 percent of development costs outside the U.S.

The revised agreement calls for the companies to share on a 50-50 basis U.S. and European development costs -- but only if Roche exercises its option "at the development determination point."

If Roche waits until Phase II trials are complete, the big pharma company will reimburse Genentech for half of development costs incurred, and the two companies will share subsequent U.S. and European development costs, with Roche funding 75 percent and Genentech paying 25 percent.

The agreement amends the percentages on several advanced-stage products as well.

"The changes . . . are designed to prevent duplication of effort and expenses . . . and to more easily align the shared costs and rights with the risks undertaken by each company," said Levinson. *