Conference Call, 02/02/97: Genentech, Inc. Q4 '96

FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Genentech, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNE)") else Response.Write("(NYSE: GNE)") end if %>
460 Point San Bruno Boulevard
South San Francisco, CA 94080-4990
(415) 225-1000
http://www.gene.com

UNION CITY, CA. (February 2, 1997)/FOOLWIRE/ --- Genentech released results for the fourth quarter and fiscal year 1996 on January 21st. Genentech's results continued in much the same pattern of the previous quarters of 1996. Earnings for 1996 declined to $118.3 million or $0.96 per share from $146.4 million or $1.21 per share in 1995. Earnings for the fourth quarter were $7.4 million or $0.06 per share compared to $25.6 million or $0.21 per share in Q4 1995. Revenues for 1996 increased 6% to $968.6 million from $917.8 million in 1995. Revenues for the fourth quarter of 1996 increased 4% to $230.3 million from $221.9 million in the fourth quarter of 1995. Their earnings per share for the year at $0.96 were consistent with their comments of the last few months indicating that they expected earnings for the year 1996 to be less than $1.00 per share due to their major investment in R&D.

NO ROCHE OPT-IN. The major change from the three earlier quarters in 1996 was the fact that, as forecast, there was no opt-in by Roche for a development project in the fourth quarter of 1996. While this was as they expected, the variability of the opt-in timings, products involved, does cause fluctuations in their quarter-to-quarter and year-to-year comparisons and they expect this will continue to be the case in 1997.

R&D EXPENSES. In the cost and expense area, the increase in R&D expenses compared to the third quarter 1996 was the major driver of their overall total expenses. Development expenses in the fourth quarter of 1996 increased due to the increased expenses associated with products in later stages of clinical trials, particularly Activase for stroke in the 3-5 hour time period, TNK, and C2B8. For the fourth quarter, over 56% of revenues went to R&D and for the year 49%. For the next several years, they expect that 1996 will be the high-water mark on R&D as a percent of revenues.

COST OF SALES. Cost of sales was 18% of sales in 1996, which is at the top end of the 17-18% range they have mentioned earlier, compared with 15% in 1995. While the change is primarily related to mix on customer sales and inventory reserves, the big driver is the impact of sales to Roche which are at lower margins as most of the benefit runs through the royalty line on those sales rather than the sales line.

SG&A EXPENSES. Marketing, general and administrative expenses increased versus the third quarter due to the timing of sales and marketing expenses. For the year, marketing, general, and administrative expenses were down some $10 million compared to 1995 primarily as a result of the transfer of sales and marketing for Europe and Canada to Roche, which was offset partially by increased expenses in the US.

TAXES. Their overall tax rate for 1996 was 20% which compares to 15% in 1995, resulting at the bottom line with $0.06 per share for the fourth quarter of 1996 and $0.96 per share for the 1996 fiscal year.

ACTIVASE. Activase achieved sales in 1996 of $284.1 million compared to $288.3 million on a pro forma basis in 1995. Sales in 1996 reflect their very strong market share of 80% in the thrombolytic marketplace that has declined in 1996 by 6.5% over the previous year due to the use of mechanical reperfusion rather than thrombolytic therapy for some heart attack patients. They expect ischemic stroke indications to provide a major growth opportunity for Activase in the future. At this time, medical centers and physicians are becoming acquainted with the therapy, reviewing and adopting protocols. At the same time, national organizations such as the American Heart Association, the American Neurological Association, and the National Institute of Neurological Disorders and Stroke have established stroke treatment guidelines and are working to put in place effective strategies to ensure that eligible ischemic stroke patients are viewed as medical emergencies and treated rapidly with Activase to enhance their chance of recovery with no or minimal disability. In addition, education of healthcare professionals and patients can really make a difference. In February, Genentech will be working with the AMA to introduce their product to general practitioners and train them. In March they will be working with the AAN on continuing efforts to educate the public.

GROWTH HORMONE. Protropin and Nutropin sales increased in 1996 from $216.7 million in 1995 to $218.2 million in 1996 on a pro forma basis. They continue to maintain their market leadership with at least two-thirds market share, even with increased competition during the year. Biotechnology General's growth hormone product was kept off the market due to a preliminary injunction. However, in December the preliminary injunction against Novo Nordisk was stayed, allowing its growth hormone product to enter the market. Genentech expects to proceed to full trial on this matter. Genentech takes their patent position and their market leadership very seriously. They feel they are well positioned to maintain both in this marketplace. In 1996, two new competitive advantages and a new indication for Genentech's growth hormone were achieved. The first liquid version of growth hormone, Nutropin AQ, and an injection device, GenJet, were launched. In December, Genentech received clearance from the FDA to market Nutropin for the treatment of growth failure associated with Turner syndrome, a chromosomal disorder in girls affecting approximately 1 in 2500 live female births.

PULMOZYME. On a pro forma basis in 1996, Pulmozyme sales increased to $76 million from $70 million in 1995 driven primarily from sales of Pulmozyme to Roche for ex-US sales. Enabled expansion for Pulmozyme was approved in December for treatment of cystic fibrosis (CF) patients for advanced disease.

ACTIMMUNE. Due to the rarity of chronic granulomatous disease, the approved indication for Actimmune sales, the sales of this product remained modest -- about $4.5 million in 1996 compared to $3.6 million in 1995.

ROFERON-A AND ONCOLOGY PRODUCT DEVELOPMENT. They recently announced that they would be promoting Roche's Roferon-A in the US for the approved cancer indications including hairy-cell leukemia, AIDS-related Kaposi's sarcoma, and pH-positive chronic myelogenous leukemia. This agreement supports their efforts to build a strong oncology franchise. By marketing Roferon-A, Genentech will have the opportunity to establish a presence in the oncology market which will open the door as they move their cancer products from development to approval. In addition, as they prepare for the launch of C2B8 later in 1997, they will be able to pre-market this product -- a major advantage that Roferon-A activity will be giving them early this year.

SUMMARY AND OUTLOOK -- R&D INVESTMENT. Maximizing sales of their marketed products in addition to developing new indications for these products is one cornerstone of Genentech's four-point corporate strategy. They have been successful in 1996 with this strategy and will continue in 1997 to compete as the market leader for all their products and seek additional indications. In 1996 they were successful in their aggressive pursuit of product development. These successes required an investment of almost 50% of revenues into R&D and they anticipate R&D expenses to continue at or near this level for the short term, but working down to the 25-35% of revenue range by the year 2000, as revenues increase. Their corporate strategy reflects the components necessary to accelerate and expand product development by developing new indications for existing products, clinical development of new products, and to accelerate the development of high-potential late-stage research products.

1996 R&D/PRODUCT HIGHLIGHTS. To recap some of the highlights of 1996, they had three new indications for their marketed products as discussed with the sales figures -- acute ischemic stroke for Activase, Turner syndrome for Nutropin, and advanced disease in CF patients for Pulmozyme. The Phase III trials for the IDEC-C2B8 antibody for non-Hodgkins lymphoma were completed successfully and they completed their Phase III trial for Activase in acute ischemic stroke 0-3 hours after symptom onset. They completed Phase II trials for three products -- IGF-1 for Type 2 diabetes, NGF for diabetic peripheral neuropathy, and oral 2D3A for coronary artery disease. Two new products were moved into clinical testing during 1996 -- NICD11A and anti-CD18 -- and they filed an IND on VEGF (vascular endothelial growth factor) for the treatment of coronary ischemia. They are in the fortunate position of having 15 products in various clinical phases, demonstrating both the necessity and the outcome of their R&D investment. Obviously not all of their products are going to make it through the development process. Actually in 1996 they were fortunate in that only one product didn't achieve a successful result.

STRATEGIC ALLIANCES/ACQUISITIONS. They put a great deal of effort into their business development work in 1996. This has resulted in their ability to continue to build relationships with a wide variety of companies. They have more than $1 billion in cash. They can fund alliances and make acquisitions that make strategic sense and that are in line with their therapeutic areas. Their goal has been and will continue to be to increase the pace of such alliances. Recent progress on this goal include collaboration with Baxter for joint development of cellular therapy for hemophilia. They expanded on their agreement for development of a sustained-release growth hormone product. They announced new agreements to develop treatments for Parkinson's, ALS, and Huntington's disease using several of Genentech's growth factors in cytotherapeutic encapsulated cell technology delivered directly into the central nervous system. Other alliances have complemented the strength in their internal research efforts and a sample of this is their new relationship with Genetics Institute.

REVIEW OF 1996 BENCHMARKS. At the beginning of last year they discussed the benchmarks Genentech had established to measure progress of their four-point strategy. They indicated that earnings would remain modest in 1996 as they balanced growth in earnings with building the future growth of the company into the 21st century. The benchmarks, just to recap, for 1996 were: Phase III results of TPA and stroke, PLA filings for TPA and stroke, approval of liquid Nutropin growth hormone, Roche election of products, announcement of new strategic alliances, Phase II results of IGF-1 in Type 2 diabetes, Phase III results of Actimmune in kidney cancer, Phase II results of NGF for peripheral neuropathy, and the Phase III results of anti-CD20 for non-Hodgkin's B-cell lymphoma. They were successful in achieving those 1996 benchmarks other than the disappointing news with the Phase III results of Actimmune in renal cancer. In addition, they were fortunate to exceed the benchmarks with the approvals of TPA for acute ischemic stroke and Nutropin for Turner syndrome.

HIGHLIGHTS OF 1997 BENCHMARKS. As they begin 1997, they are again establishing measurable criteria to evaluate their strategic progress. The following is an idea of some of the benchmarks they will be using in 1997 to measure this progress: the announcement of new strategic alliances and acquisitions, Roche election of products, the launch of Roferon-A during the first half of 1997, FDA approval to market the C2B8 antibody for non-Hodgkin's lymphoma by year end, Phase II results of anti-IGE for allergic asthma by mid-year, Phase II results of TNK (the second-generation TPA molecule) for myocardial infarction by mid-year, complete Phase II pediatric growth hormone deficiency trial by Fall 1997, complete the enrollment in Phase III IGF-1 trial for Type 1 diabetes by year end. There are additional benchmarks as well, but these are some of the highlights.

OUTLOOK ON FINANCIALS. Genentech is targeting 1996 as the low-water mark on earnings per share. Genentech's overall objective for 1997 is to begin the process of increasing earnings, however modestly, over $1.00 per share with expected sales increases and growth in R&D expenses slowing to a minimal single-digit percentage increase compared to 1996, despite the planned increase in Genentech's tax rate from 20% in 1996 to 35% in 1997.

PRODUCT LINE/INDUSTRY EXPECTATIONS FOR 1997. Genentech cautioned that some of these comments are directional only at this point. Product sales are dependent on the overall competitive situation and the results of litigation. They expect an increase in Activase sales with the stroke indication. However, depending on the litigation, the positive growth from stroke could be offset by market share declines in AMI (acute myocardial infarction -- heart attack). They also expect increases in Pulmozyme, particularly in ex-US shipments. Growth hormone sales are expected to decline. In the final quarter of 1997 they are optimistically expecting approval and beginning sales of the C2B8 monoclonal antibody. While they will be marketing Roferon-A in the oncology area and sharing in the expenses and earnings, the nature of this arrangement results in their not recording Roferon sales per se. The net effect of this is expected to be rather minimal in 1997.

FINANCIAL EXPECTATIONS FOR 1997. They expect royalties to be similar to the 1996 levels. They expect contract revenues to continue to be a major variable with new arrangements, existing contract revenues, and Roche opt-ins causing year-to-year and quarter-to-quarter fluctuations. Currently the only expected Roche opt-in in 1997 is TPL. All of the other opt-ins for the current pipeline in terms of Phase II products have all occurred in 1996. Interest income is expected to be similar to 1996. Cost of sales in 1997 is again expected to be in the 17-18% of sales range. R&D should only increase over 1996 in the low-single-digit percentages. For marketing, general, and administrative expenses, while the marketing and sales component is expected to increase, decreases in general and administrative expenses coupled with other items is expected to resolve in the net of these items declining somewhat from 1996. Their tax rate for 1997 is expected to be 35%, significantly higher than the 20% in 1996 as they have been indicating for some time. The increase in the tax rate results from their utilization of tax credits and carryforwards in 1996.

SUMMARY. While there are many variables and risks associated with these expectations for 1997 and they expect quite a bit of quarterly variability, they feel it is important to note that they are managing the business for increasing revenues, tightly managing their expenses, and beginning to increase earnings as their R&D investment begins to bear fruit.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.