By Charles Craig
Genentech Inc. pointed to increased research and development spending during 1996 as the reason for its 19 percent earnings drop despite a total revenue boost of 5.5 percent over 1995.
The South San Francisco company in 1996 reported net income of $118.3 million, or 96 cents per share, compared with $146.4 million, or $1.21 per share in 1995.
For the fourth quarter of 1996, earnings were down 71 percent, sliding to $7.4 million, or 6 cents per share, from $25.6 million, or 21 cents per share for the last three months of 1995.
Genentech's revenues for 1996 climbed toward the $1 billion mark, reaching $968.6 million compared with $917.8 million the previous year. In the fourth quarter, revenues were up 4 percent to $230.3 million from $221.9 million in 1995.
When ousted president and CEO Kirk Raab was replaced in July 1995 by Arthur Levinson, then vice president of research and development, Wall Street analysts predicted Genentech would focus more on its pipeline than sales and marketing.
The change in strategy, analysts observed, was designed to build value in the company so majority owner Roche Holding Ltd., of Basel, Switzerland, would exercise its option to buy out minority stockholders at a premium by 1999.
In 1996, research and development spending jumped 30 percent to $471.1 million from $363 million in 1995. In the fourth quarter research spending increased even more, by 35 percent, over the same period the year before, rising to $128.1 million from $95 million.
Genentech officials said pipeline spending in 1996 was 49 percent of total revenues compared with 40 percent the year before.
The most advanced new product in that pipeline is IDEC-C2B8, a monoclonal antibody for treatment of non-Hodgkin's B cell lymphoma developed in collaboration with IDEC Pharmaceuticals Inc., of San Diego.
The antibody successfully completed Phase III trials and the companies expect to file a new drug application in the first quarter of this year.
The monoclonal antibody binds to the CD20 antigen on B cell lymphomas and mature B cells and recruits the immune system to kill malignant cells. Although mature B cells also are destroyed, B cell precursor cells are not attacked, allowing the body to replenish its B cell supply.
Other drugs that completed Phase II trials and are moving to Phase III studies are nerve growth factor (NGF) for diabetic peripheral neuropathy and insulin-like growth factor-1 (IGF-1) for use as an adjunct to insulin treatments for Type I and Type II diabetes.
The 1996 clinical trial successes fueled Genentech's overall revenue increase for the year. The company received $107 million in contract revenues, most of it from Roche, compared with $31.2 million in 1995. Roche made payments of $82.9 million to Genentech for development of IDEC-C2B8, IGF-1, and NGF outside the U.S.
During 1996 Genentech officials also noted the company received FDA approval for broader labels on three marketed products. Activase, a blood clot buster approved for acute heart attacks, was cleared for treating acute ischemic stroke. Nutropin, a growth hormone deficiency treatment, was approved for short stature caused by Turner's syndrome. And use of Pulmozyme, an aerosol drug for cystic fibrosis, was expanded to patients in advanced stages of the disease.
In comparisons of its product sales from 1995 to 1996, Genentech officials noted a change in the company's relationship with Roche in late 1995. Instead of recording total product sales inside and outside the U.S., Genentech's 1996 balance sheet reflects royalties from Roche for Pulmozyme sales in Europe and for all products sold in Canada.
As a result, while Genentech's reported product sales for 1996 were $582.8 million compared with $635.3 million in 1995, royalty revenues in 1996 increased to $214.7 million from $190.8 million in 1995 and the company saved $11.6 million in marketing and sales expenses, which declined in 1996 to $240.1 million from $251.7 million in 1995.
Total product sales of Genentech's most popular drug, Activase, declined to $284.1 million in 1996 from $288.3 million in 1995. The company blamed the decrease on "some heart attack patients receiving mechanical reperfusion therapy rather than thrombolytic therapy and others receiving therapy through ongoing large scale clinical trials."
Total Sales of Genentech's two growth hormone products, Protropin and Nutropin, increased to $218.2 million in 1996 from $216.7 million in 1995.
However, Pulmozyme generated the biggest product revenue increase for the year. Sales in 1996 jumped 8.5 percent to $76 million from $70 million in 1995.
Genentech released its 1996 fiscal report Tuesday morning. Its stock (NYSE:GNE) ended the day at $54.125, up $0.375. It gained $0.25 on Wednesday to close at $54.375. *