Genentech Inc. reported an 11 percent increase inearnings for the second quarter of 1995, compared withthe same period a year ago, despite flat sales of its leadingdrugs for heart attacks and growth hormone deficiencies.

The South San Francisco-based company, which lastweek ousted president and CEO Kirk Raab after 10 yearsat the helm, credited the earnings rise to twodevelopments: a 62 percent leap in sales of its cysticfibrosis treatment, Pulmozyme, and an increase in royaltyrevenue from settlement in January of its patent battleover recombinant growth hormone with Eli Lilly and Co.,of Indianapolis.

Genentech's net income for the quarter, ending June 30,was $37.2 million, or 31 cents per share, compared with$33.4 million, or 28 cents per share, in the second quarterof 1994. For the first six months of this year, earningswere up 11.5 percent to $80.6 million, or 67 cents pershare, from $72.2 million, or 61 cents per share, last year.Net income for the first quarter of 1995 was $43.7million, or 36 cents per share.

Included in the current income statement was a charge of$8 million, or 5 cents per share, for expenses associatedwith the May 1 agreement to extend for four years the buyout option of Switzerland-based Roche Holdings Ltd.,which already owns nearly 70 percent of Genentech.

Total revenues for the quarter were $233 million, up 20percent from the $194.9 million for the same period ayear ago.

Sales of Pulmozyme reached $30.3 million, comparedwith $18.7 million in the second quarter of 1994. Despitethe huge increase, the company suffered a setback inlong-term growth potential for the drug when it wasforced last week to discontinue Phase III trials for chronicobstructive pulmonary disease, which represents a muchlarger market than cystic fibrosis.

Although Pulmozyme sales soared, revenues forGenentech's leading products were flat.

Sales of Activase (t-PA) increased less than $1 million to$74.1 million from $73.5 million in the second quarter ayear ago. The expensive clot-busting drug for heart attackvictims accounts for 75 percent of the thrombolyticmarket.

In addition, the company reported a decrease in sales ofits two growth hormone products, Protropin andNutropin. Combined revenues from the drugs were $55.9million in the second quarter, down $3.6 million fromsales of $59.5 million a year ago.

Most of Genentech's increased royalty revenue wasderived from settlement of its eight-year patent fight withLilly, which agreed to pay $145 million mostly inquarterly payments of $7.5 million over four years.

Among its increased expenses, the company reported a 19percent rise in research and development funding to $87.2million for the second quarter from $73 million for thesame three months a year ago.

Genentech said the $8 million special charge associatedwith extending Roche's buy out option from June 30,1995, to June 30, 1999, included settlement ofshareholder lawsuits related to the transaction.

The lawsuits also precipitated Raab's ouster after it wasreveled he sought, but did not receive, a $2 millionpersonal loan guarantee from Roche during the mergeroption negotiations, creating the possibility of a conflictof interest.

Genentech said it will take additional charges nextquarter on the Roche buy out proposal and Raab'sseverance pay. Raab is slated to receive a one-timepayment of $1.2 million plus 34 percent of that amount,or $408,000, each year for the next 15 years. In additionhe will receive full health care benefits.

Barbara Hoffman, independent analyst with Hoffman &Co. in Denver, described Raab's compensation as "a veryrich severance deal."

Said Hoffman, "It appears the total costs associated withseverance of the former CEO are likely to approach the$8 million charge taken this quarter [for the Rochenegotiations]."

Arthur Levinson, former senior vice president ofGenentech's research and development program,succeeded Raab. In addressing Wall Street analystsTuesday on the company's earnings, Levinson deniedrecent speculation that his background as a scientistsignaled a shift in focus for Genentech from sales andmarketing to product development for Roche. Levinsonsaid Genentech intends to continue operating as a fullyintegrated drug company.

Genentech's stock (NYSE:GNE) closed Tuesday at$47.50, down 12 cents. n

-- Charles Craig

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