Analyst Conference Summary

conference date: July 14, 2008 @ 1:45 PM Pacific Time
for quarter ending: June 30, 2008 (2nd quarter 2008)

Forward-looking statements

Overview:

Basic data [GAAP] :

Revenues were $3.24 billion, up 6% sequentially from $3.06 billion, and up 8% from $3.00 billion year-earlier.

Net income was $782 million., down sequentially 1% from $790 million, but up 5% from $747 million year-earlier.

EPS (earnings per share) were $0.73, down 1% sequentially from $0.74, but up 4% from $0.70 year-earlier.

Guidance:

$3.40 to $3.50 non-GAAP EPS for full 2008.

Conference Highlights:

Competitive and reimbursement environments have become more difficult. Focus is currently on sales of Avastin for breast cancer, which was approved in Q1. Long term growth depends on obtaining approval for new indications for Avastin, Lucentis, and Rituxan.

Avastin could get near term label expansions in brain and kidney cancer. Longer term could see approvals for adjuvant colon cancer, 2nd line non-small cell lung cancer, ovarian cancer, and hormone-refractory prostate cancer. An SBLA submission for Rituxan for early Rheumatoid Arthritis (RA) is expected later this year. Phase III Lucentis retinal vein occlusion data is expected in 2009.

Compelling new molecular entities are in pipeline based on new mechanisms, platform technologies, and pathways for malignant cell division. Encouraged by results of Phase II Herceptin study in breast cancer. Looking forward to results in Beta Lung study of Tarceva plus Avastin. TDM1 program combines an antibody with a toxin targetted at cancer cells. Positive TDM1 results have caused us to add two additional Phase II trials for HER2 positive metastatic breast cancer.

Despite disappointment in results from Phase III Rituxan trials for SLE and primary progressive MS, we will continue our work in immunology.

MedImmune settlement will not cause us to update our royalty guidance.

Genentech continues to look at possible collaborations, mergers, and acquisitions, but recognizes that most acquisitions fail to create shareholder value.

$2.35 billion in U.S. sales, up 9% from year-earlier.

Non-GAAP: net income $871 million, EPS $0.82.

$629 million royalty revenue, with some benefit from low dollar. 2008 royalties to increase 20% to 30% over 2007.

$71 million contract revenues, down from $77 million year-earlier. Expect to remain flat in 2008 vs. 2007.

Operating costs including a $50 million manufacturing failure, one time.

R&D should ramp up in second half of year, should stay at about 20% of revenue. Royalty expenses were higher. MG&A expected at 16% for 2008.

Non-GAAP 42% operating margin, expect same for 2008.

$33 million one-time tax settlement with IRS.

$97 million employee stock-based compensation expense.

$500 million cash from operations. $200 million capital expenditures. $300 million free cash flow. $256 million share repurchases. Prepaid $500 million for shares expected to receive in Q3. Cash ended at $6.4 billion in unrestricted cash. $788 million restricted will become unrestricted in Q3 due to court ruling.

Cash strategy: will be in excess of optimal levels. So will repurchase more shares.

Product sales:

Avastin sales growth was largely from approval for use in metastatic breast cancer, where market penetration for 1st line HER2 negative cancer was about 35%. In eligible lung cancer patients penetration has reached about 65%. Colorectal cancer market penetration remained stable.

On May 22, 2008 had 2 label expansions for Herceptin, in HER2 positive adjuvant breast cancer.

Tarceva front line pancreatic cancer penetration has increased 40% from year-earlier. Tarceva data expected in 2nd half of 2008 for lung cancer.

Rituxan growth driven by new claim it slows joint damage in arthritis, so it should be used earlier as a therapy. Rituxan in PPMS study did not reach endpoints. Lupus and arthritis study results due in 2009.

In Q2 enrollment was completed in 9 studies and was initiated in 6 others. Two supplemental BLAs are expected to be submitted for Avastin in second half of 2008: for first line metastatic renal cell carcinoma and for accelerated approval in relapsed glioblastoma multiforme (GBM). In first half of 2009 will initiate Phase III study in newly diagnosed GBM. Adjuvant colon cancer data presented was encouraging, but final analysis will not be available until 2009. Continue to seek full FDA approval for Avastin in first-line metastatic breast cancer, which could be supported by RIBBON-1 study in 2nd half of 2008. Many more studies are underway. "We believe that Avastin data supports its use as the key biologic agent in front line colorectal cancer."

Our understanding of the HER-2 pathway continues to grow and we have seen additional evidence of the value of Herceptin for treating HER-2 positive breast cancer. Evaluating agents that help patients whose breast cancer progresses when on Herceptin.

Cost of sales $441 million. R&D expense $649 million. MG&A expense $559 million. Collaboration profit sharing $313 million. Recurring acquisition charges $43 million. Litigation $2 million. Total costs and expenses $2.007 billion, leaving operating income of $1.229 billion. Net other income $78 million. Income tax provision $525 million.

Q&A:

CNS reimbursement impact for Avastin? Generally is a positive announcement, but there is still some confusion about interpretation. PBM, renal cell, maybe ovarian reimbursement should start, but minimal impact on sales.

TDM1 Phase 3 trial? Up to now product has met or exceeded our expectations, but we have had a very limited number of patients. Question of how it will compare with Pertusimab. Enthusiastic based on data we have seen so far.

Copay issue challenges? Each drug has different challenges. Try to see all eligible patients get the drugs they need, but is a difficult situation.

NCCN recommendation against 2nd line Avastin in colorectal cancer if failed in 1st line? Doctors have room for interpretation. We have an indication in both 1st and 2nd line, we believe the impact will be limited.

Beta lung? Non-chemotherapy for 2nd line lung cancer would be attractive for patients. Olympta side effects are reasonable; we think it is an important drug, we are interesting in seeing how well it works with Avastin.

Tarceva beta trial, if its positive will Atlas trial be positive? I believe the data will be independent.

First line breast cancer, Avastin plus Zeloda? 20% of first line breast cancer market uses Zeloda. Still would like to know if Zeloda plus Avastin is beneficial in first line cancer. Will see the data by the end of this year.

Rituxan growth? Has grown in a step-like fashion over last 3 years. Seeing growth in maintenance therapy, which appears to work really well. We saw growth because of indication it helps prevent joint damage, and we are seeing growth in RA setting.

Cash position, possible dividend? $500 million cash only covers 3 months. Share repurchases do not create a lot of value for our shareholders. Would rather use money to make acquisitions when opportunities arise. Avastin adjuvant studies create near-term uncertainty, would like to see some certainty before considering a dividend.

Inventory issues? All in line with our targets and prior quarters.

Rituxan PML? The big picture is the death of one patient was clearly an outlier. She was not a typical rheumatoid arthritis patient. But do not want to underplay the event. We have good labeling regarding PML for Rituxan, and will continue to discuss with FDA.

Breast cancer launch? We are pleased so far, four months in. Study publication will help, but it is a fragmented market. Questions are about benefit in subpopulations and residual concerns about risk-benefit.

Adjuvant success needed to get to growth hurdle for 2010? In March we said we are positioned to exceed the 2010 goals.

Slideshow for this analyst conference

OpenIcon Analyst Conference Summaries Main Page
Genetech Investor Relations page

Search

More Analyst Conference Pages: