Biotech Values

[DewDiligence]

DNA Reports 3Q08 Results

[Avastin has finally solidified first place in DNA’s drug portfolio ($704M, +18% YoY, +8% QoQ) surpassing Rituxan ($655M, +15% YoY, +1% QoQ). Herceptin ($368M, +15% YoY, +9% QoQ) and Lucentis ($225M, +14% YoY, +4% QoQ) remained in third and fourth place, respectively. (All of these sales are in the US, so there were no effects from currency swings.) Non-GAAP EPS was 0.81, +11% YoY, -1% QoQ. Employee-retention programs in the wake of Roche’s hostile buyout offer (#msg-31431459) cost DNA 0.03 of EPS in 3Q08 and will cost another 0.05 in 4Q08. Please see actual PR for full financial tables.]

http://biz.yahoo.com/bw/081014/20081014006622.html

›Tuesday October 14, 4:02 pm ET

- Operating Revenue Increases 17 Percent to $3.4 Billion, Including U.S. Avastin Sales of $704 Million -

SOUTH SAN FRANCISCO, Calif.--(BUSINESS WIRE)--Genentech, Inc. (NYSE: DNA ) today announced financial results for the third quarter of 2008. Key results for the third quarter of 2008 include:

* U.S. product sales of $2,452 million, a 14 percent increase from U.S. product sales of $2,155 million in the third quarter of 2007.
* Non-GAAP operating revenue of $3,408 million1, a 17 percent increase from operating revenue of $2,905 million in the third quarter of 2007; GAAP operating revenue of $3,412 million, a 17 percent increase from operating revenue of $2,908 million in the third quarter of 2007.
* Non-GAAP net income of $863 million, an 11 percent increase from $778 million in the third quarter of 20071; GAAP net income of $731 million, a 7 percent increase from $685 million in the third quarter of 2007.
* Non-GAAP earnings per share of $0.81, an 11 percent increase from $0.73 in the third quarter of 20071; GAAP earnings per share of $0.68, a 6 percent increase from $0.64 in the third quarter of 2007.

Non-GAAP and GAAP net income and earnings per share in the third quarter of 2008 were affected by a number of items, including the following:

* Expense of $44 million, or $0.03 per share, related to the employee retention programs announced on August 13 in response to the Roche proposal to acquire the outstanding shares of Genentech stock2;
* Expense of $105 million, or $0.06 per share, related to a collaboration agreement with GlycArt and Roche announced on October 2; and,
* Expense of $67 million, or $0.04 per share, in “other expense, net” related to the impairment of certain assets in the company’s investment portfolio.

Reconciliations between non-GAAP and GAAP earnings per share for the third quarters of 2008 and 2007 are provided in the following table:

Non-GAAP Diluted EPS1 Employee Stock-Based Compensation Expense

Net Charges related to Redemption, Tanox Acquisition and Special Items+
In-Process Research and Development Expense related to Tanox Acquisition Non-Cash Gain on Tanox Acquisition Reported GAAP Diluted EPS1
Q3 2008 $0.81 ($0.07) ($0.06) -- -- $0.68
Q3 2007 $0.73 ($0.06) ($0.03) ($0.07) $0.07 $0.64

+ In the third quarter of 2008, Genentech accrued additional costs of $0.02 per share related to the City of Hope contract dispute based on the status of negotiations between the parties on amounts owed for periods subsequent to the original Court judgment rendered in 2002.

The company is currently forecasting full-year 2008 non-GAAP earnings to be in the range of $3.40 to $3.45 per share, narrowed from $3.40 to $3.50 per share1, due primarily to the cost of the employee retention programs, which is estimated to be $0.08 per share in 2008.2

Product Sales and Royalty Revenue

Information on product sales for the three months ended September 30, 2008 and 2007, are provided in the following table (dollars in millions):

Three Months

Ended September 30,

2008 2007 % Change
Avastin®i $704 $597 18%
Rituxan® 655 572 15
Herceptin®ii 368 320 15
Lucentis® 225 198 14
Xolair® 136 121 12
Tarceva® 110 101 9
Nutropin® Products 95 93 2
Thrombolytics 66 67 (1)
Pulmozyme® 65 57 14

Raptiva®
28 29 (3)

Total U.S. product sales
$2,452 $2,155 14

Net product sales to collaborators 182 166 10

Total product sales
$2,634 $2,321 13


i Third quarter 2008 Avastin U.S. product sales results include a net deferral of approximately $1 million in conjunction with the company’s Avastin Patient Assistance Program. Third quarter 2007 Avastin U.S. product sales results included a net recognition of approximately $5 million in previously deferred revenue.

ii Herceptin sales in the third quarter of 2008 benefitted from an increase in channel inventory levels of approximately $12 million.

Non-GAAP royalty revenue for the third quarter of 2008 was $683 million, a 31 percent increase over the third quarter of 2007.1 GAAP royalty revenue of $687 million in the third quarter of 2008 increased 31 percent over the third quarter of 2007. The increase was largely due to growth in royalties from ex-U.S. sales by Genentech's licensees.

Total Costs and Expenses

Information on costs and expenses including cost of sales (COS), research and development (R&D) and marketing, general and administrative (MG&A) expenses for the three months ended September 30, 2008 and 2007, are provided in the following tables (dollars in millions)3:

Three Months

Ended September 30,

2008 2007 % Change
non-GAAP3
COS $389 $390 --%
R&D 738 578 28
MG&A 546 497 10
GAAP
COS 409 406 1%
R&D 777 615 26
MG&A 611 541 13
Three Months

Ended September 30,
2008 2007
non-GAAP3
COS as a % of product sales 15% 17%
R&D as a % of operating revenue 22% 20%
MG&A as a % of operating revenue 16% 17%
GAAP
COS as a % of product sales 16% 17%
R&D as a % of operating revenue 23% 21%
MG&A as a % of operating revenue 18% 19%

Key Cost and Expense Items

The following key items impacting both non-GAAP and GAAP net income and earnings per share are included in total costs and expenses as well as other non-operating expense:

* R&D expense includes approximately $105 million, or $0.06 per share, in association with a collaboration agreement with GlycArt, a company wholly-owned by Roche, and Roche to jointly develop and commercialize GlycArt’s GA101 molecule. GA101, a humanized monoclonal antibody, is currently in Phase I/II clinical trials for CD20-positive B-cell malignancies.
* R&D and MG&A expenses for the third quarter of 2008 each include costs of $22 million, for a total of $44 million, or $0.03 per share, related to the company’s broad-based retention programs implemented in lieu of the 2008 stock option grant program.2

* Other expense, net included the impact of an impairment charge of $67 million, or $0.04 per share, related to certain assets in the company’s investment portfolio. As of September 30, 2008, the company has approximately $8.6 billion in cash and investments.

Clinical Development

Genentech announced that it submitted a supplemental Biologics License Application (sBLA) to the U.S. Food and Drug Administration (FDA) for Avastin® (bevacizumab) in combination with interferon alfa-2a therapy for patients with first-line metastatic renal cell carcinoma. The study is based on the global Phase III study AVOREN. The company also submitted an sBLA for the use of Rituxan® (Rituximab) in rheumatoid arthritis patients who have had an inadequate response to prior treatment with a disease modifying anti-rheumatic drug (DMARD).

Genentech announced it made a Phase III “go” decision to study Trastuzumab-DM1 (T-DM1) as a potential second-line treatment for HER2-positive metastatic breast cancer. In the third quarter of 2008, the company initiated enrollment in two Phase II studies of T-DM1 as potential first-line and third-line treatments for patients with HER2-positive metastatic breast cancer.

On October 2, 2008, Genentech announced it issued a Dear Healthcare Provider letter to inform potential prescribers of a case of progressive multifocal leukoencephalopathy (PML) in a 70-year old patient who had received Raptiva® (efalizumab) for more than four years for treatment of chronic plaque psoriasis. The patient has subsequently died. The company continues to work with the FDA to evaluate the risks and benefits of Raptiva and determine next steps.

Other Company Activities

Genentech announced that Science magazine ranked the company as “top employer in the biopharmaceutical industry” in its annual 2008 survey. This is the seventh year Genentech has appeared on the list and the sixth number one ranking for the company.

Webcast

Members of Genentech's management team will be participating in a conference call to discuss the company’s financial and other business results on Tuesday, October 14, 2008, at 1:45 p.m. Pacific Time (PT). Live audio of the conference call will be broadcast simultaneously over the Internet and may be accessed on Genentech's web site at http://www.gene.com. The webcast and any corresponding materials will be archived and available for replay until 5:00 p.m. PT on November 4, 2008.

A telephonic replay of the webcast will be available beginning at 4:45 p.m. PT on October 14, 2008 through 4:45 p.m. PT on October 21, 2008. Access numbers for this replay are: 1-800-642-1687 (U.S./Canada) and 1-706-645-9291 (international); conference ID number is 60099652.‹


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