Genentech Posts Sharp Drop in 2002 Net Income

Despite continued strong sales of its cancer drugs in the fourth quarter, Genentech Inc. on Wednesday reported a sharp drop in net income for 2002 because of its $500-million loss last June in a contract dispute with City of Hope National Medical Center.

Genentech, the world’s No. 2 biotechnology company, said its net income for the year fell 58% to $63.8 million, or 12 cents a share, compared with $150.2 million, or 28 cents, in 2001.

Excluding the Los Angeles County jury verdict against it and other special charges, Genentech would have reported 2002 earnings of $483.6 million, or 92 cents a share, up from $404.5 million, or 76 cents, in 2001.

Genentech is appealing the verdict, which awarded $300 million in unpaid drug royalties and an additional $200 million in penalties to City of Hope, a cancer center in Duarte whose collaboration with Genentech in the late 1970s led to the discovery of recombinant insulin and growth hormone, the first biotechnology drugs.

Genentech’s total revenue in 2002 rose 23% to $2.7 billion from $2.2 billion in 2001, driven by the success of Rituxan, a treatment for non-Hodgkin’s lymphoma, and the breast cancer drug Herceptin. Rituxan, which Genentech markets with San Diego-based Idec Pharmaceuticals Corp., become the top-selling cancer drug overall in 2002, with sales of $1.16 billion.

For the fourth quarter, Genentech’s revenue rose 30% to $778.3 million from $600.2 million a year earlier, exceeding Wall Street’s estimate of $678.2 million.

Quarterly net income was $92.8 million, or 18 cents a share, compared with $42.1 million, or 8 cents, a year earlier. The results included special charges of $13.4 million, in part related to the City of Hope case.

Genentech, based in South San Francisco, announced its results after the stock market closed. The company’s shares closed Wednesday down $1.21 at $35.21 on the New York Stock Exchange but rose to $37 in after-hours trading.

The company attributed the strong sales performance in part to a restructuring of its oncology business that created a separate sales force for each cancer medication.

Also contributing to Genentech’s strong results for the year was a 19% gain in growth hormone drug sales, to $297.2 million from $250.2 million in 2001. The product comes off patent this year and one rival has signaled its intention to market a generic version, but Myrtle Potter, Genentech’s chief operating officer, said the company expected sales to continue to grow.

Genentech said it expected the Food and Drug Administration to approve Xolair, its drug for allergic asthma, by midyear and its psoriasis drug Raptiva near the end of the year. But the company offered no guidance on how these new medications might fare in the marketplace.

Raptiva, which Genentech will co-develop with Xoma Corp., is likely to have competition from drugs used to treat inflammatory diseases. Biogen Inc. has a rival drug awaiting FDA approval ahead of Raptiva, and Genentech faces off-label use of Amgen Inc.’s drug Enbrel and Johnson & Johnson’s Remicade.

Analysts believe that Raptiva has stronger sales prospects than Xolair, which is aimed at patients older than 12 with moderate to severe asthma. Eric Schmidt, an analyst with S.G. Cowen, said Xolair could cost $5,000 to $10,000 annually and that physicians have given it mixed reviews based on clinical trial data.

Louis Lavigne, Genentech’s chief financial officer, said in a conference call with analysts that the company’s pro-forma earnings in 2003 should grow by 20%, higher than the Wall Street consensus of 16%. He did not offer sales projections but said the company anticipated an increase in royalty revenue and a slightly lower tax rate.