Genentech Inc. pointed to a $20 million boost in research anddevelopment spending as the primary reason for a 12 percentearnings decline for the first quarter of 1996 compared with last year.

In addition total revenues for the quarter from product sales, royaltiesand contracts were flat, increasing 2 percent to $242.9 million from$239 million in the first quarter of 1995.

The South San Francisco company said Tuesday first- quarter 1996earnings decreased to $38.2 million, or 31 cents per share, from$43.4 million, or 36 cents per share, last year.

In late 1995 Genentech began receiving royalties on Canadian salesof its products and on European sales of Pulmozyme from RocheHoldings Ltd., of Basel, Switzerland. Previously Genentech's totalrevenues had included the sales.

The change in relationship with Roche, Genentech's majoritystockholder, decreased sales figures, but boosted royalties.

Contract revenues also jumped based on Roche's contribution of$17.1 million to co-develop a monoclonal antibody for non-Hodgkin's B cell lymphoma outside the U.S. Genentech isdeveloping the antibody in the U.S., where it is in Phase III trials, incollaboration with IDEC Pharmaceuticals Corp., of San Diego.

For the first quarter of 1996, Genentech's research and developmentexpenses increased to $115.6 million, or 48 percent of total revenues,compared with $94.9 million during the same period a year ago.

The company said the added expenditures included costs associatedwith ongoing Phase III trials of a monoclonal antibody against theHER2 oncoprotein for treatment of breast cancer and clinical studiesto broaden the FDA label for the approved clot-buster, Activase(tPA). The company has filed a product license application for use ofthe heart attack drug in ischemic stroke.

Activase is Genentech's biggest selling product and dominates thethrombolytic market in the U.S. First-quarter sales increased to $76.6million from $75.9 million in the same period in 1995.

U.S. revenues of Genentech's two growth hormone products,Protropin and Nutropin, jumped to $56 million for the first threemonths of 1996 compared with $53.7 million a year ago. The twodrugs account for a majority of growth hormone sales in the U.S. andit has protected its market share through aggressive patent litigationagainst competitors.

Genentech's third largest selling product is Pulmozyme for treatmentof cystic fibrosis. Sales of the drug increased in the U.S. to $18.9million during the first quarter of this year from $17.8 million in1995.

Peter Drake, analyst for Vector Securities International Inc., ofDeerfield, Ill., said Genentech's quarterly earnings were in line withhis expectations.

He noted the increase in spending for research and development is areflection of the change in leadership at the company. In July 1995Arthur Levinson, a former vice president of research anddevelopment, replaced ousted president and CEO Kirk Raab.

Placing more attention on the product pipeline, Drake said, "makeslong-term sense for getting Roche to buy out the company at apremium in 1999."

Under a May 1995 agreement, Roche, which owns about 70 percentof Genentech, can purchase all remaining shares at a price thatescalates periodically to a maximum of $82 per share in 1999. If theSwiss drug maker does not exercise the buyout option, shareholderscan sell to Roche for $60 per share.

Genentech's stock (NYSE:GNE) closed Tuesday at $52.12, down 62cents.

Drake said 1996 is a transition year for Genentech during which it isexpanding research and development "to create longer-term value inthe form of more products on the market in 1997 and 1998."

The company, he added, is back to where it was in 1990 when it firstentered its relationship with Roche. Genentech, Drake observed, isfocused on growing its pipeline, not growing earnings. n

-- Charles Craig

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