Genentech Inc.'s look to long-term value resulted in an earnings dropof 42 percent for the second quarter compared to earnings from ayear ago.

The South San Francisco company on Monday reported second-quarter earnings of $21.7 million, or 18 cents per share, compared to$37.2 million, or 31 cents per share, in the same period last year.Revenues increased 5 percent, to $243.8 million.

Genentech attributed the earnings decline mostly to an increase in theeffective tax rate to 48 percent in the second quarter. The increasestemmed from the company's approach to research and developmentfunding and manufacturing of certain products by internationalsubsidiaries.

The plan is to make the effective tax rate 33 percent for the year, withan expected rate of about 40 percent between 1997 and 1999, and 30to 35 percent in 2,000, a Genentech spokeswoman said. After that taxrates are expected to decline as developmental products are broughtto market.

"This approach increases our effective tax rate in the next severalyears, but has the potential to lower our tax rate and thereby increaseearnings in the long term," President and CEO Arthur Levinson saidin a news release.

Much of what's going on now at Genentech is in preparation for1999, when majority shareholder Roche Holding Ltd., of Basel,Switzerland, can purchase the rest of the company. Roche, whichowns about 70 percent of Genentech, can buy all remaining shares atan escalating price that reaches $82 in 1999. If Roche doesn'texercise the buyout option, Genentech shareholders can sell to Rocheat $60 per share.

Peter Drake, an analyst at Deerfield, Ill.-based Vector SecuritiesInternational Inc., said Genentech's quarterly numbers are almostinsignificant. "We look at it as an ROI [return on investment] storythat you get a guaranteed price of $60 in 1999 and you may get $82,"he said.

Genentech's stock (NYSE:GNE) lost 25 cents Monday to close at$51.88.

"The commercial side of the company was not as strong in thequarter as many had anticipated," Drake said. "There were weakertPA [Activase] sales than we anticipated and weaker Pulmozymesales. But again, that doesn't really matter."

Matthew Geller, an analyst with New York-based Oppenheimer &Co., agreed that Genentech is taking a long-term approach.

"We're really working on 1999," Geller said. "A lot of the decisionsare based on the way to create the best kind of numbers and productportfolio and pipeline three years from now."

Late last year Genentech began receiving royalties rather thanrecording sales of the cystic fibrosis drug Pulmozyme in Europe andfor Canadian sales of all products as Roche assumed responsibilityfor those sales. That led to decreased product sales with increasedroyalty revenues as well as reduced expenses for marketing, generaland administrative functions.

Product sales in the second quarter were $148.3 million vs. $161.2million in the second quarter of last year. But on a pro forma basisconsidering the Roche arrangement sales in last year's second quarterwere $144.8 million.

On a pro forma basis Activase sales increased to $72.3 million from$70.5 million in the second quarter of 1995. The company's marketshare for Activase as a treatment for heart attacks increased to 80percent from 70 percent since the April 1995 approval of anaccelerated dosing regimen. In the second quarter Activase wascleared as a treatment for stroke if given within three hours.

Sales of Genentech's two growth hormone products, Protropin andNutropin, decreased to $54.1 million compared to $55.9 million ayear ago ($55.2 million pro forma). The company attributed the dropto pricing pressures from distribution channels.

Contract and other revenues increased to $27 million from $7.9million last year, primarily due to Roche's $19.3 million payment forexercising its option to develop insulin-like growth factor for diabetesoutside the U.S. Research and development expenses increased 29percent to $112.6 million. n

-- Jim Shrine

(c) 1997 American Health Consultants. All rights reserved.