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Kathee Littrell - Senior Director, Investor Relations

Arthur D. Levinson Ph.D. - Chairman of the Board, Chief Executive Officer

Ian T. Clark - Executive Vice President, Commercial Operations

Susan D. Desmond-Hellmann - President, Product Development

David A. Ebersman - Chief Financial Officer, Executive Vice President


Geoff Meacham - J.P. Morgan

Mark Schoenebaum - Bear Stearns

Joel Sendek - Lazard Capital Markets

Katherine Kim - Banc of America Securities

Michael Aberman - Credit Suisse

Jim Birchenough - Lehman Brothers

Jason Zhang - BMO Capital Markets

Mike King ­- Rodman & Renshaw

Ian Somaiya - Thomas Weisel Partners

Steven Harr - Morgan Stanley

Eric Schmidt - Cowen & Company

May-Kin Ho - Goldman Sachs

Geoffrey Porges - Bernstein

Genentech, Inc. (DNA) Q4 2007 Earnings Call January 14, 2008 5:15 PM ET


Welcome, ladies and gentlemen. My name is Gerald and I will be your conference operator. At this time, I would like to welcome everyone to the Genentech Q4 and year-end earnings conference call. (Operator Instructions) It is my pleasure to introduce Ms. Kathee Littrell, Senior Director of Investor Relations.

Kathee Littrell

Thank you, Gerald. Good afternoon, everyone and thank you for joining our Q4 year-end ‘07 earnings call. We have posted an earnings call slide set on our website at This call is being electronically recorded and is copyrighted by Genentech. No reproductions, retransmissions, or copies of this conference call can be made without the written permission of Genentech.

We’ll be making forward-looking statements and actual results may vary materially from the statements made. Please see the risk factors section of our Form 10-Q for the period ending September 30, 2007 that’s on file with the SEC for a discussion of the risk factors that could cause material variations from the forward-looking statements made during this conference call.

We’ll be discussing financial information today that includes non-GAAP financial measures. Please refer to our website -- again, under the investor tab, please click financials for the most directly comparable GAAP financial measures and that has a reconciliation to the non-GAAP financial measures discussed today.

I am joined by Art Levinson, Chairman and Chief Executive Officer today; Ian Clark, Executive Vice President of Commercial Operations; Sue Hellmann, President of Product Development; and David Ebersman, our Executive Vice President and Chief Financial Officer. Now I’ll turn the call over to Art.

Arthur D. Levinson Ph.D.

Thank you, Kathee and good afternoon, everyone. 2007 was another year of significant growth for Genentech. For 2007, non-GAAP total operating revenues were $11.7 billion, increasing 26% from 2006 and our non-GAAP earnings per share were $2.94, up 32% from 2006. We also made some significant progress building our early stage pipeline and positioned the company for future success.

In the short term, Genentech's continued growth will be driven by our ability to increase sales of our marketed products while adding new indications for our existing products, Avastin and Rituxan. Potential near-term growth opportunities for Avastin include metastatic breast cancer, renal cell carcinoma, Glioblastoma Multiforme, and adjuvant colon cancer. And we are evaluating Rituxan in earlier RA disease as well as in multiple immunological disorders, including Lupus and multiple sclerosis.

For the long-term, continued growth will depend upon our ability to bring new molecules to the market that make a meaningful difference for patients and provide significant commercial opportunities. As a company building our pipeline and advancing potentially important NMEs into late stage development is our number one focus and priority. In 2007, we announced our goal to add a total of 30 molecules into development during the five-year period from the beginning of 2006 to the end of 2010 and we feel good about the progress we’ve made during the last two years.

In 2007, we added eight NMEs to the development pipeline, so two years into the five year period we have added 15 molecules into development. We now have 20 new molecules in the development pipeline, most targeting novel mechanisms based on promising biology and five of these new molecules started Phase II clinical trials during 2007.

We are also pleased with our robust late stage research program, which we expect will provide most of the additional molecules to enable us to meet our 2010 NME goal.

We continue to be excited about our exploration of new scientific pathways and approaches to treating unmet medical needs and I will now highlight just one of the many new molecules that we are studying.

We and our collaborator Curis have a small molecule hedgehog antagonist that we are evaluating in the Phase I study of solid tumors that are refractory to standard therapy. We have seen regression of established metastatic basal cell tumors in Phase I trials and have observed a long half life and excellent exposure of the compound, and we have also observed significant blockade of expression of Gli1, a marker of hedgehog activity in humans. We are preparing to begin Phase II trials in 2008.

This pathway may offer the potential for important new therapies as we seek to prevent tumor progression in cancers that are hedgehog dependent. Similar to hedgehog, we are also encouraged by early clinical data with our proapopotic agents and with our antibody drug conjugates.

In 2007, we had our share of business challenges. Data from the AVAiL study evaluating high and low dose of Avastin led to a decline in the use of high-dose Avastin in non-small cell lung cancer. Additionally, we were disappointed in the outcome of the December ODAC meeting assessing Avastin as a potential therapy for patients with metastatic breast cancer. We continue to believe that Avastin is an important new therapy option for these patients and we will work with the FDA closely to try to address their questions and concerns.

Another important challenge for us in 2007 was in the AMD marketplace. As you know, we launched Lucentis in this market in mid 2006. We designed Lucentis in the mid-1990s with a specific scientific objective of making the best possible molecule for the AMD setting where we believe that the following factors -- small size to enable optimal diffusion, extremely tight VEGF finding, short systemic half life, and the absence of an FC region to attract the immune system -- might all be important to maximize safety and efficacy in AMD and we are extremely proud of the benefits Lucentis demonstrated in multiple large Phase III trials.

As you know, since launch Lucentis’ primary competition has come from off label use of intra-vitriol Avastin. In October 2007 we announced our decision to discontinue actively supplying Avastin to compounding pharmacies. It is important to understand that this decision was not motivated by an expectation that we would eliminate or reduce Avastin use or that we would increase Lucentis profits, but rather we acted based on our belief that Genentech continuing to play an active role enabling distribution to compounding pharmacies would represent a business risk.

We continue to believe that Lucentis, which has been designed, formally studied, and approved for treatment of wet AMD is the appropriate treatment for these patients. However, we respect that physicians have a right to make whatever prescribing choice they believe is best for their patients.

Over the past few months, before our supply of Avastin to compounding pharmacies ended on January 1st, we worked with the medical organizations, AAO and ASRS, and determined that physicians can purchase Avastin from authorized distributors and ship to the destination of the physician’s choice, including to compounding pharmacies.

Using this approach, we expect Avastin to continue to be available, albeit in a manner in which Genentech is no longer directly supplying it. This issue has been a difficult and complex one with multiple stakeholders and we believe that we have found a path that balances everyone’s interest and protects as best we can our relationships with this important physician group.

In the meantime, we remain committed to ensure that patients have access to our therapies and we are proud of the programs we have in place to ensure eligible patients can receive Lucentis regardless of their ability to pay.

Looking now to 2008, it should be a busy year for us in terms of news flow. We expect an FDA decision on Avastin in metastatic breast cancer, typical clinical data for Rituxan on Lupus and MS, progress in our early stage pipeline, and other news in areas such as the City of Hope appeal and the Cabilly proceedings.

We also have the potential to see data from the Avastin adjuvant colon trial if one of the 2008 interim looks crosses a pre-specified statistical boundary, although of course we are not predicting that this will happen in the coming year.

We look forward to these pieces of new information and will continue to manage through them with the intent of creating value for our shareholders over the long run. We remain confident in our approach to running the business and will continue to focus on excellent science, planning, and investing for the long term, disciplined execution against our aggressive goals, and a passionate commitment to patients and our employees.

As a scientist, I continue to be enthusiastic about the tremendous advances occurring in understanding the biological basis of many debilitating diseases and we believe these advances play to Genentech's greatest strengths as we try to translate the biology into new drugs.

We continue to embrace and nurture our unique culture, which we believe offers us a competitive advantage in recruiting and retaining highly talented people and stimulating innovation and efficiency, and we will continue to make decisions that take into consideration the complexity and risk in drug development and commercialization.

We believe that if we continue to invest wisely and appropriately in R&D, we expect to be able to develop first and/or best-in-class molecules for significant unmet medical needs and to deliver long-term growth for shareholders.

Now, let me turn the call over to Ian Clark.

Ian T. Clark

Thank you, Art and good afternoon, everybody. The increasing diversification across our strong portfolio of oncology, immunology and tissue growth and repair products contributed to the continued growth and we are pleased with our U.S. product sales of $2.2 billion in the quarter, up 7% from quarter four 2006 and up to $8.54 billion for the full year 2007. That was up 19% compared to 2006.

Moving to the products and starting with oncology and first of all Avastin; Avastin U.S. sales were $603 million in quarter four of last year and $2.3 billion in the full year 2007, an increase of 32% over the full year 2006. Year-over-year growth resulted from increased sales in metastatic non-small cell lung cancer and metastatic breast cancer, an unapproved use of Avastin in the U.S.

Net sales also benefited from $5 million we recognized this quarter from the Avastin patient assistance program. As previously noted, since fewer-than-anticipated patients enrolled in the program, we got to release some of the [inaudible] for that revenue, increasing reported Avastin sales in the quarter.

In the first-line metastatic lung cancer setting, tracking data indicates that overall penetration is at approximately 35% and among the approximately 50% to 60% of patients in this setting who are eligible for Avastin therapy, we estimate that the drug penetration is therefore approximately 60%.

We continue to closely monitor dosings indication. Q4 estimates of the percentage of patients receiving the higher 15 mg per kg Q3 weekly dose of Avastin is at approximately 60% to 65%, which is in line with our estimate from Q3.

While use of the high dose in this indication appears to have stabilized for now, physician adoption of the low dose will likely be influenced by the results from two clinical studies expected during the first half of the year, the AVADO study testing low dose in breast cancer and the follow-up survival data from the AVAiL study testing low dose in lung cancer.

With respect to colon cancer, performance in the first and second line settings in Q4 was stable relative to the same quarter in 2006. As discussed in prior calls, we’ve seen increased competition in second line colon cancer which negatively impacted Avastin usage in the first half of 2007. So we are pleased to report in spite of this competition, Avastin use in this setting is rebounding to the levels seen in Q4 2006.

Our policies do not allow us to promote Avastin in breast cancer; however, our market research tracks Avastin use in metastatic breast cancer patients who have not previously received chemotherapy and among those patients, adoption in Q4 was at approximately 25%. The majority of this use is at the 10 mg per kg Q2 weekly dose that was studied in the E2100 study.

Avastin use in this setting has been supported by favorable reimbursement, which is partly due to a compendia listing. If Avastin does not receive regulatory approval, compendia listing may be at risk and that could negatively impact reimbursement for some patients. We anticipate increased use of Avastin breast cancer, of course, if we do receive the FDA approval.

Moving on to Herceptin, U.S. sales of Herceptin were $327 million in Q407 and $1.29 billion for the full year 2007, a 4% increase over the full year 2006. Our market research indicates that the overall penetration in HER2-positive adjuvant breast cancer remains stable in the mid 70s in Q407 relative to the prior quarter of that year.

Despite new competition, Herceptin’s penetration in the first line metastatic setting also remains stable at approximately 70%. Currently, the pattern of use appears to be limited primarily to later lines of metastatic disease.

Next is Tarceva; U.S. net sales of Tarceva are $112 million in Q4 and $417 million in 2007, a 4% increase compared to 2006. Our tracking data suggests that penetration and duration in both second line lung cancer and front line pancreatic cancer remains stable in Q4. Tarceva product returns, which negatively impact reported sales in both Q2 and Q3, did not have an impact on sales in Q4.

Now on to Rituxan, total U.S. sales reached $596 million in the quarter and $2.29 billion in 2007, a 10% increase over 2006. In hematology, sales growth resulted from an increased use of Rituxan following first line therapy in indolent NHL and from increased adoption in front line CLL, an unapproved use. Rituxan’s overall adoption in other areas of NHL and CLL remain steady.

Moving on to our immunology and continuing with Rituxan, this time for RA; 2007 sales of Rituxan in immunology estimates to have been between $240 million and $260 million in the full year. This represents an 80% to 90% growth over 2006.

Growth during the year was driven primarily by increased patient share in the anti-T and FIR segment, and increasing the total number of prescribers, now estimated to be 80% of target hematologists, and a [inaudible] treatment in [inaudible] averaging between six and seven months.

2008 will be a really exciting year for us in this area. We are expecting new data from many of our key clinical trials for Rituxan in also immune disease, including PBMS, Lupus, and more data in the RA setting.

On the Xolair, U.S. sales of Xolair were $120 million in the quarter and $472 million in the year, an 11% increase over full year 2006.

And completing immunology, U.S. sales for Aptiva were $28 million in the quarter, $107 million for the year, a 19% increase over 2006.

Finally, our tissue growth and repair products, and beginning with Lucentis; at $197 million, Q407 sales were down 9% over the same quarter for 2006. For the full year, sales were $815 million. New patient share is relatively stable at approximately 15% and in November, CMS released a new permanent J code for Lucentis and we anticipate that some physician reimbursement concerns will be addressed when this code comes into effect this month.

Finally, on to our other tissue and repair products, U.S. sales of Nutropin were $371 million for the year, a 2% decrease over the full year 2006, due to increased managed care contracts and heightened competitive activity. For our lytics products, U.S. sales were $268 million in the year, a 10% increase over full year 2006, and finally for Pulmozyme, U.S. sales were $223 million this year, a 12% increase over the full year 2006.

In summary, despite facing come challenges during the year, growth was robust at over 19% and we are pleased with the increasing diversification of our portfolio and excited about the growth prospects ahead.

Now I’ll turn the call over to Sue.

Susan D. Desmond-Hellmann

Thanks, Ian. I’ll start by providing my perspective on the Avastin sBLA filing for metastatic breast cancer. As Art mentioned, we were disappointed in the spit vote from ODAC in December. We continue to believe strongly that the E2100 data set should support the approval of Avastin and that the combination of Avastin and Paclitaxel has demonstrated a meaningful net clinical benefit by increasing timed progression by five-and-a-half months, as assessed by an independent review facility with an acceptable safety profile.

However, as you saw at ODAC, the FDA has concerns about the quality and integrity of the E2100 data despite the independent radiology review. We continue to have a dialog with the FDA regarding their concerns in advance of the action date of February 23rd.

The potential outcomes of the Avastin metastatic breast cancer sBLA filing include an approval on the action date likely with specific post-approval commitments, or a non-approval complete response which sends us back to the drawing board in terms of trying to get Avastin approved for metastatic breast cancer.

Any number of outcomes in between is also possible where we do not receive approval on the action date but emerge with an agreed upon path forward for what additional information we would need to produce for FDA in order to obtain a future approval.

In these scenarios, potential delays before we obtain approval could be short or quite long, depending on the additional information required by the FDA, which might include further analysis from E2100, or data from additional Avastin trials such as AVADO, from which data is expected in the first half of this year. Data is also expected from RIBBON 1, although that data will not be available until the second half of 2008.

As of now, we cannot predict the final outcome of the FDA deliberations but we will continue to work towards the most rapid possible approval of Avastin for progressed cancer.

Moving on now to some other Avastin trials, enrolment in two Phase III HER2-negative adjuvant breast cancer studies, E5103 and Roche’s BEATRICE, has begun. Both of these studies will investigate the equivalent of five milligrams per week dose of Avastin for 12 months, with disease-free survival as the primary endpoint.

The results of the Phase II Avastin study in relapsed Glioblastoma Multiforme demonstrated positive results in that 36% of patients treated with Avastin alone and 51% of patients treated with Avastin in combination with Irinotecan lived without cancer progression for six months.

These are exciting results when compared to historical data in this setting, in which only an estimated 15% of patients with relapsed GBM live without their cancer advancing within six months. We have a meeting scheduled with the FDA to discuss the feasibility of submitting Phase II data and are planning a Phase III study in first line GBM.

During the second half of this year, we anticipate results from our first Phase III study investigating the combination of targeted therapies, the BETA lung study in second line non-small cell lung cancer. This study includes two arms only -- one with Tarceva as mono-therapy and a second including Tarceva plus Avastin.

In December, we informed investigators in our Sutent plus Avastin SABRE clinical trial program of toxicity concerns noted in a Sutent plus Avastin metastatic renal cell cancer investigator sponsored trial. In this study, two of 12 patients receiving the higher dose of Sutent or 50 milligrams in combination with Avastin experienced reversible microangiopathic hemolytic anemia. The event was not observed in patients receiving Avastin with lower doses of Sutent.

One additional case of this anemia has been observed in the SABRE R study and Genentech has made the precautionary decision to close the study and remove patients from treatment. The SABRE B and SABRE L studies in breast and lung cancer are continuing to enroll patients and careful safety monitoring is ongoing.

Microangiopathic hemolytic anemia has not been observed in an NCI study using this combination in multiple tumor types. We will continue to work with our collaborator and the FDA to evaluate the safety and tolerability of this combination and plan next steps.

Now turning to our immunology program, starting with Rituxan. In quarter four 2007, we received positive results from the Phase III SUNRISE study investigating controlled retreatment of patients who are inadequate responders to TNF therapies. In this study, patients with active disease 24 to 40 weeks following an initial course of Rituxan were randomized to receive either a second course of Rituxan or placebo.

The primary endpoint was achieved with significantly more patients achieving an APR 20 score after 48 weeks with Rituxan treatment followed by Rituxan retreatment, as compared to Rituxan treatment followed by placebo. A preliminary review of the safety data has revealed no new safety signals.

We are in the process of obtaining and evaluating all of the safety and efficacy data and look forward to presenting the data at an upcoming meeting.

In Q1 this year, we anticipate results from the Phase III SERENE study investigating the safety and efficacy of Rituxan in the earlier disease setting, the Methotrexate inadequately responding RA patients.

We completed enrolment in the IMAGE study in Q4. The primary endpoint is inhibition of structural damage measured by x-ray at 52 weeks in early RA patients. Results from these studies are of particular interest to us because of the theoretical potentials of impacting the course of disease by initiating B cell mediated therapy in early RA patients. There is also a scientific interest in the question of whether selective B cell depletion can help to reset the immune system.

In the first half of 2008, we anticipate results from EXPLORER, the Phase III Rituxan and FLE study. The British Isles Lupus Assessment Group scale, or BILAG, will be used to assess FLE disease activity in this study. We chose this scale because it has been shown to be comprehensive, reliable, sensitive to change, and effective in capturing the waxing and waning nature of Lupus. Whether patients in this study have achieved and maintained a major or partial clinical response will be assessed at 52 weeks.

Later this month, we will also complete enrolment in the Rituxan Lupus Nephritis study called LUNAR. The primary endpoint for LUNAR is renal response at 52 weeks and we expect results in early 2009.

In the first half of 2008, we also will have results from OLYMPUS, the Rituxan in primary progress MS study. The primary endpoint for this study is time to disease progression as measured by the expanded disability status scale at 96 weeks.

Let me turn now to early development. We’ve made good progress in moving eight new molecules into early clinical development in 2007. We also removed five new molecules, including the topical VEGF molecule, telbermin, for which we made a no-go decision following negative Phase II data in diabetic foot ulcers. At this time, we do not plan to move forward with this molecule in this indication.

Additionally, Genentech and Innotech have terminated our agreement for the discovery, development, and manufacture and commercialization of the PARP inhibitor to the potential treatment of cancer.

While of course we would prefer all of our early programs to be successful, if they are going to fail we want them to do so early in development whenever possible and before the investment has grown large. We work hard to design early trials to provide us with clear answers and our programs are held up to a high standard for continued development.

Now I’ll review the planned Phase III milestones and data in the first half of 2008. We expect first patient in in Phase III studies for: second generation anti-CD20 for Lupus Nephritis; Herceptin plus Pertuzamab for HER2-positive metastatic breast cancer study; Avastin CALGB hormone study for first line metastatic breast cancer; Herceptin plus Avastin combination study, ECOG 1105, in first line metastatic breast cancer; Herceptin plus Avastin BETH combination study for adjuvant HER2-positive breast cancer; Avastin SWOG 502 study for gastrointestinal stromal tumors; Avastin SWOG 518 study for high risk carcinoids.

We also expect to complete enrolment in LUNAR, the Lupus Nephritis Rituxan study this month; SATURN, the Tarceva first line metastatic non-small cell lung cancer maintenance study; and ATLAS, the Avastin and chemotherapy plus/minus Tarceva in second line non-small cell lung cancer study.

And we expect data results in Phase III Rituxan, in methotrexate IR rheumatoid arthritis, the SERENE study; the PPMS study with Rituxan called OLYMPUS; the Rituxan SLE study, EXPLORER; Roche’s Avastin Phase III AVADO study in metastatic breast cancer; Novartis’ Phase III Xolair pediatric asthma study; Roche’s Phase II chemotherapy plus/minus Pertuzamab in platinum sensitive ovarian cancer; the Phase I data from the hedgehog antagonist study in solid tumors; and the SAILOR data to be presented at Angiogenesis in February of 2008.

Now I will turn the call over to David.

David A. Ebersman

Thank you, Sue and good afternoon, everyone. Let me start with a legal update; the California Supreme Court is now scheduled to hear our appeal in the City of Hope matter on February 5th and we expect a ruling within 90 days of that hearing date. The compensatory and punitive damages originally awarded to City of Hope in 2002 as well as the accumulated interest are fully accrued on our balance sheet as a short-term liability of $776 million.

Turning then to the financials, as Kathee mentioned earlier, unless otherwise noted the financial figures in my comments are non-GAAP numbers which exclude the effects of recurring charges related to the 1999 Roche redemption, litigation related and similar special items, employee stock compensation expense, and accounting for our acquisition of Tanox.

I will start then with the revenue components of the income statement. Sales to collaborators were $150 million this quarter and $903 million for 2007, representing a 21% decrease from Q406 and a 92% increase for the year.

For 2008, we are currently planning that sales to collaborators will increase by approximately 15%, but please remember that these sales vary from quarter to quarter based on the production and order plan and other contractual requirements.

Further, please keep in mind that the favorable Herceptin pricing terms from Roche will conclude at the end of 2008, which will lead to a significant reduction in sales to collaborators in subsequent years.

Royalty revenues were $554 million in Q4 and $1.98 billion for 2007, increases of 42% and 46% over Q4 and full year 2006, substantially driven by higher royalties from Roche, which represented 64% of Q4 and 61% of full year 2007 royalties.

We also benefited from Novartis’ sales of Lucentis in 2007 and from growth in Cabilly related royalties, which totaled $256 million in 2007 and made a net contribution of $0.08 to EPS.

For 2008, we are planning for royalties to grow by approximately 10% to 15% over 2007. Our royalty forecast for 2008 relies primarily on collaborators and analyst sales forecasts and assumes no material change in the intellectual property situation for our patents, including Cabilly.

Contract revenues were $63 million this quarter and $297 million for the full year 2007. In 2008, we are planning for contract revenues to increase by approximately 10%. However, contract revenue is difficult to forecast because it can vary based on many factors, including opt-in and milestone payments received and the mix of spending by us and our collaborators.

Turning now to the expense line items, cost of sales was 14% of product sales this quarter, a decrease from 15% in Q4 2006 primarily due to lower production costs and a favorable product mix.

For 2008, we expect cost of sales to be approximately 16% of sales, consistent with 2007. As always, cost of sales may be higher than we expect if we have unplanned manufacturing or inventory issues.

R&D expenses were $579 million this quarter and $2.3 billion for the year 2007. R&D was 20% of revenues this quarter and for the full year 2007.

For 2008, we are planning for R&D expense to remain at approximately 20% of revenues as we continue to invest in our late stage pipeline and add new molecules and indications to the early pipeline.

MG&A expenses were $650 million this quarter and $2.1 billion for 2007. Q4 2007 MG&A expenses as a percentage of revenues was 22%, an increase from 20% in Q4 2006 due to increased headcount related expenses, timing of marketing programs, and increased charitable contributions, primarily funding for co-pay assistance programs.

Full year MG&A expenses as a percentage of revenue was 18% in 2007, a decrease from 20% for the full year 2006 and in 2008, we expect MG&A as a percent of revenues to be approximately 16% as we continue to manage our infrastructure costs.

Collaborator profit sharing expenses were $275 million for the fourth quarter and $1.1 billion for 2007, driven by sales of Rituxan, Tarceva, and Xolair. Our pretax operating margin as a percentage of total revenues was 38% this quarter, same as in Q4 of last year, and for the full year 2007, operating margin was fractionally less than 41%, an increase from 39% in 2006. In 2008, we expect our operating margin to improve slightly over 2007 to the 41% to 42% range.

Other income net was $18 million this quarter and $197 million for 2007. The decrease in other income from $59 million in the fourth quarter of 2006 was due to write-offs of $46 million this past quarter related to a fixed income investment and certain biotech equity investments.

In 2008, we are planning for other income to increase approximately 25% compared to 2007. Of course, actual results for other income will depend on interest rates and potentially on changes in our biotech stock portfolio.

On taxes, our non-GAAP tax rate was 36% this quarter and 37% for the year, representing decreases from 40% in Q406 and 38% in 2006 full year.

For 2008, we expect our non-GAAP tax rate to be 36% to 37%, barring any changes in tax regulations or any material adverse results from tax examinations.

Non-GAAP net income this quarter was $737 million, or $0.69 per share, a 12% increase in net income and a 13% increase in EPS over Q4 last year and for 2007, non-GAAP net income was $3.1 billion, or $2.94 per share, a 31% increase in net income and a 32% increase in EPS over 2006.

Now turning to some cash metrics, cash from operations in 2007 was $3.5 billion. Cash used for capital expenditures was $1 billion, so our free cash flow for 2007 was approximately $2.5 billion. In 2008, we expect capital expenditures to be flat at approximately $1 billion.

In 2007, we spent about $1 billion for gross share repurchases, offset by cash in-flows to the company from stock option exercises of about $452 million and the tax benefits related to those option exercises of about $177 million, for a net impact on our cash position of negative $415 million from share repurchases.

Our unrestricted cash and investments portfolio totaled approximately $6.1 billion at December 31, 2007, compared to $4.4 billion as of December 31, 2006.

Overall, we are pleased with our 2007 results. This year’s performance marks our tenth consecutive year of double-digit growth for both revenue and non-GAAP EPS.

Looking forward to 2008, this is a difficult year for us to provide you with earnings expectations because there is some significant near-term business uncertainties; in particular, the FDA review of Avastin for breast cancer, which has an action date in six weeks.

What we can say is that internally, we are currently planning for a range of $3.30 to $3.45 for 2008 non-GAAP earnings per share. We will likely need a timely approval of Avastin in metastatic breast cancer to get to the high end of this EPS range and of course, certain combinations of events in the business could cause us to trend to an earnings forecast outside of this range, so we’ll update you on subsequent quarterly earnings calls as new information comes in.

Even more important, please also note that while we believe in setting short-term financial goals as a means of promoting focus and discipline in the business, we are always prepared to adjust our plan if we find valuable opportunities to increase spend in 2008 in a manner that we believe will create long-term value for our shareholders.

We look forward to assessing these kinds of trade-offs and we remain optimistic that the investments we are making will enable us to continue to grow the business over the long-term in a manner that helps patients, creates value for shareholders, and makes Genentech an exciting place to work.

2008 promises to be a busy year for us in terms of news flow and we are looking forward to what might be in store.

Now I will turn the call back over to Kathee.

Kathee Littrell

Thank you, David. Operator, we are going to start the question-and-answer session. However, I would like to ask that as per our usual, that we limit it to one question per person so we can take as many questions as possible. Operator.

Question-and-Answer Session


(Operator Instructions) And your first question comes from Geoff Meacham of J.P. Morgan.

Geoff Meacham - J.P. Morgan

Just a question for David on guidance; I just wonder if you can tell us, to the extent that you can, what’s implied in terms of growth of Avastin in breast this year of any line? And then obviously if you have anything in the model or in your forecast for an up-tick in adjuvant colon.

David A. Ebersman

Well, as you can imagine for these kinds of binary events, you sort of have to plan it both ways and take a look at what the outcome of the numbers looks like, particularly for the Avastin breast where we know we will get some answer in a few weeks time.

So the range we have provided attempts to really accommodate the range of outcomes that we see as likely for the Avastin breast filing, so as I said, I think if we get the approval in a timely fashion, it opens up the upper end of the range I provided and if we don’t, I think we’ll have a hard time being in the upper end of that range. The range we provided does accommodate the possibility that we won’t get an approval for Avastin in breast cancer this year.

In terms of the adjuvant, we really haven’t factored that in so obviously we’re hopeful that that trial comes in positive and comes in as soon as possible, but as you can imagine, it’s much easier to run the business with an upside surprise than a downside surprise, so we’ve chosen not to bake that into our financial planning.


Your next question comes from Mark Schoenebaum of Bear Stearns.

Mark Schoenebaum - Bear Stearns

I have a question please for Ian and perhaps for Sue, and that is can Avastin without an approval in breast cancer, can it grow in 2008? And can you help convince us of the case for growth without an approval? Because if you take out the deferred revenue this quarter, it looks like end user demand is roughly flat quarter over quarter. So I’m just trying to get a picture internally, you guys, is there an opportunity for Avastin growth, double-digit growth in 2008 without a breast cancer approval?

Ian T. Clark

Let me take it first, and by the way on the deferred revenue, just bear in mind that we also added the 5 in quarter three, so you kind of -- if you want to do that, you need to take it out of both quarters.

Mark Schoenebaum - Bear Stearns

Okay. That’s fair.

Ian T. Clark

I’d think about it this way when you think about the revenue -- I find it interesting; in quarter three, we had a good increase in revenue and yet I couldn’t report an increase in penetration in lung cancer and you guys asked me a lot of questions about it. This time around, I’ve got almost the reverse; I’ve got a good increase in lung cancer penetration but not quite so much increase in revenue. And if you had to ask me which I’d take, it’s always the underlying demand increase is the thing I really want to see.

Penetration in lung cancer is good but still only 60% of eligible, so to my mind there’s growth left there. As you say, breast cancer is unknown. It was good to see that the colorectal cancer sales were solid and at the same level as the prior year, because if they weren’t that could kind of weaken the growth.

And then we do have the possibility of growth that might occur as a consequence of any renal cell or Glioblastoma indication as well. So I think there is definitely room for growth; clearly not as much room as we might get should we get the approval for breast cancer. Sue.

Susan D. Desmond-Hellmann

I would just echo what Ian said about Glioblastoma, which we think is really important new data that was just presented near the end of last year and we continue to believe in Avastin for renal cell.

Going back to metastatic breast cancer, I talked about the range of possibilities in terms of how the FDA thinks about E2100 and the approvability. I would just say two other points in terms of Avastin for metastatic breast cancer; first of all, we continue to believe in Avastin for metastatic breast cancer based on the really strong, literally unprecedented increase in PFS that we saw in E2100 but it isn’t just Genentech.

As you heard me articulate, the field believes that Avastin is adding value for breast cancer or the oncology thought leaders wouldn’t put Avastin in the adjuvant setting for breast cancer, and I just think that’s a really important aspect of thinking about Avastin.

The belief based on this data that we have so far is one, Avastin added substantial value in progression free survival. While not a pre-specified endpoint, we also statistically significantly increased survival at the six month and 12-month periods of time in the trial and while we did increase toxicity, much of the increase in grade three to five toxicity was asymptomatic hypertension that was treatable with medication.

I do think the AVADO study, which will be available in the first half of this year regardless of FDA action, will have an impact on the belief that the field has about the use of Avastin in the first line metastatic breast cancer setting. So I think answering your question as it relates specifically to breast cancer will now rely in part on not only the February 23rd action date but the AVADO data.


Your next question comes from Joel Sendek of Lazard.

Joel Sendek - Lazard Capital Markets

I had a question on Rituxan and Lupus. In particular, with the EXPLORER study, is this enough if the data is good for you to file for approval or will you want to wait for the LUNAR study? Can you just talk a little bit about that? Thanks.

Susan D. Desmond-Hellmann

I would have to say that this is one of those where it will very much depend on the data. As you know, systemic Lupus is a very large unmet medical need but I expect that both the thought leaders, as well as Genentech and our collaborators and FDA will look at both the magnitude of the difference in EXPLORER in SLE but also the safety. So I think for us to depend on that study will absolutely depend on the benefit risk and there could be a spectrum of outcomes, one where there’s benefit but more risk and we would probably need the second trials, and another where there’s extreme benefit and the risk benefit looks good, at which point we would definitely go into FDA with a single study.

It will depend on how big the difference is and the net clinical benefit.


Your next question comes from Katherine Kim of Banc of America Securities.

Katherine Kim - Banc of America Securities

My question is do you have any assumptions for impact on Avastin due to competition in frontline lung cancer, such as Herbitux or Nexavar? And then the second question I have is, is there any precedent for drugs that have had compendia listing removed prior to approval? Thank you.

Ian T. Clark

In terms of when we look at our sales forecast, we look at all possible competition and we build them into the models that we have around our sales. That said, and Sue may want to add to this, it’s interesting that that study still yet hasn’t been reported in terms of the results. I think what we hear from our customers is that if there is going to be use, it might well be predominantly in patients who are currently not on Avastin and therefore, should there be an impact, then maybe it won’t be too significant. Do you want to add to that, Sue? And then I’ll come back to your reimbursement question.

Susan D. Desmond-Hellmann

I think it is extremely difficult to comment on the non-small cell lung cancer study with Herbitux in the absence of data. The report suggests that it’s statistically significant but I think we have to wait for ASCO and I’ll look for safety and efficacy in that trial to benchmark it.

Thought leaders are concerned that they haven’t seen the data and are talking about the question of whether or not it could help patients who aren’t eligible for Avastin, but it’s too soon to comment. We need to see the data.

Ian T. Clark

So let me come back to the reimbursement and precedent -- it’s a complex situation. We’ve looked back at situations in the past wherein maybe people have had a compendia listing and have been removed. In the instances we can find, at least recently, it’s usually as a consequence of a subsequent piece of data, which was negative. And I can give you a couple of examples -- there was a change to the reimbursement of VSAs and we ourselves, when we got our not positive Avastin pancreatic data had a compendia which was taken away.

That’s clearly not our situation. That said, if the FDA doesn’t approve the drug, you could interpret that as a negative view of the quality of the data. But then again, you could go on and say we’ve got a reasonable chance of two other sets of data in the same setting and if those studies are positive, which we hope they would be, you are not seeing negative data. You are seeing more positive data.

If it could possibly get more complicated, it does because we are in the midst of a shift of U.S. PDI being the principal source of information for compendia listing, which has gone away as of the end of last year. It’s being replaced by Drug Points, which it’s not so clear it’s going to have the same authority. And then you have the AHFS list and the NCCN guidelines.

And for what it’s worth, all of those at the moment currently do list Avastin for breast cancer. So I think the bottom line is there is some risk here but I think what precedent we could find would suggest that the risk should not be too high.


Your next question comes from Michael Aberman of Credit Suisse.

Michael Aberman - Credit Suisse

Talking about -- going back to breast cancer again and the AVADO trial, my recollection -- and correct me if I’m wrong -- but AVADO does not have an independent review, and if the FDA’s concern is about data quality, do you think an additional progression free survival endpoint without independent review would be sufficient? Or do you think RIBBON might be a more important data point, if I have that correct?

And also, can you comment commercially what the impact might be in AVADO if you see similar outcomes from the high and low dose, both in the breast cancer setting where you see already the majority of the patients in the U.S. are on the higher dose, as well as whether there’d be spillover into lung cancer and how that plays into your forecasts?

Susan D. Desmond-Hellmann

The Roche trial, AVADO, is a placebo control trial. It is a company sponsored placebo control trial, so many of the concerns that were expressed at the advisory committee in terms of corporate sponsorship and monitoring, et cetera, that the criticisms of the Quattro Group trial will not be potential criticisms of AVADO. AVADO does not have an independent review or an IRF as the regulatory requirements in Europe are different than in the U.S. And you are right that RIBBON 1 does have an independent review.

I’ll give you my personal point of view, and as I mentioned, we are still discussing all of these details with the FDA, but I think a second progression free survival Phase III in light of the strong and retrospectively IRF reviews, E2100 data, I think that would be compelling and I certainly think again in the field with a 5.5 median, a positive one year survival in E2100, and you add on AVADO on top of that, I think that’s very compelling data that would suggest Avastin is safe and effective on top of the E2100 that’s already very strong. But I can’t read the tea leaves. The data is going to speak for itself.

Ian, did you want to comment on the dose?

Ian T. Clark

Yes, so if AVADO was to have a similar sort of result to AVAiL in terms of as a consequence of that, people thinking maybe they could adopt the lower dose, where would we go -- well, a couple of things.

It’s sort of interesting, as I just said in my prepared remarks, with lung cancer we’ve seen a drop but not a lot of a drop. We’ve seen it stabilize and one could speculate you might see the same sort of thing with breast cancer. That said, if you compare the two studies, the lung cancer study was with a chemo backbone typically not used in the U.S., whereas in the breast cancer study, it is with chemo that U.S. oncologists do use, so there might be a willingness to interpret more completely as a consequence of that.

Plus the fact you’ll have two studies rather than one study, which possibly support the lower dose, so I think it would be a reasonable conclusion that if AVADO looks like AVAiL, you will see a greater adoption of the lower dose in the breast cancer setting than we’ve seen so far.

Michael Aberman - Credit Suisse

Shouldn’t you consider changing your adjuvant trials if that’s the case to lower the risk of toxicity, if efficacy appears to be better with a low -- or equivalent with a low dose?

Susan D. Desmond-Hellmann

The adjuvant therapy trials were, as was the case with the Phase III, completely data driven and so the data in the adjuvant therapy trials followed our Phase II and Phase III trials in the U.S., and when we did get AVAiL, specifically in the lung cancer setting, we went back to the thought leaders who continued to feel that in non-small cell lung cancer, we should use the higher dose based on all the data that had been seen with Taxol-Carbo in the U.S.

So we have looped back with investigators on the lung cancer. It’s hard to speculate about breast cancer before we see the AVADO data.


Your next question comes from Jim Birchenough of Lehman.

Jim Birchenough - Lehman Brothers

A question for Sue on Rituxan; Sue, just wondering if you could comment on whether there’s any studies to evaluate a Rituxan half dose? In particular in SUNRISE, just wondering if there’s a half-gram dose that’s being evaluated and if so, what the implications would be commercially if a lower dose was proven to be as effective as the higher dose.

Susan D. Desmond-Hellmann

In the Rituxan trials and specifically in SUNRISE, we’re using 1,000 milligrams of Rituxan day one and day 15. It’s important to note with Rituxan, we do have some constraints in how low we can go. That’s one of the reasons for our enthusiasm about a humanized antibody as compared to the chimera, so we’ve been cautious about lowering the doses of Rituxan, concerned that in the absence of full B cell depletion we could run into [HAKA] issues. So specifically in SUNRISE, it’s a 1,000 milligram dose.

Jim Birchenough - Lehman Brothers

Are there any other studies looking at a lower dose?

Susan D. Desmond-Hellmann

There is. The SERENE trial does have a 500 milligram dose, so in SERENE in the methotrexate inadequate responder patient population, we will have one study that does look at the lower dose.

Jim Birchenough - Lehman Brothers

And just to follow that through, if it turns out as we’ve seen with Avastin, that you’ve got a comparable effect in a lower dose, how do you think about that commercially in terms of maybe lower toxicity concern, broader use but lower reimbursement?

Ian T. Clark

I think that inevitably, if it turns out the lower dose is as good and you get a wider adoption, there would be some impact on the sales. I think where the dynamic is somewhat different from Avastin is that you do go from a potential annual cost here which is not dissimilar to competitors to a cost that might be considerably less than the competitors. And you rightly point out there might be a benefit from the side effects, so I’m not suggesting they entirely balance but there might be some upside to a lower dose as well as some downside.

Kathee Littrell

Operator, would you remind everyone, one question per person, please?


(Operator Instructions) Your next question comes from Jason Zhang of BMO Capital Markets.

Jason Zhang - BMO Capital Markets

My question is for Sue; you mentioned that AVAiL trial survival data would be available sometime this year. Have you considered the risk of that trial not showing a statistical difference of survival, given that the progression free survival we have seen last year was much shorter than your trial with Carbo-Taxol backbone in the U.S.?

Susan D. Desmond-Hellmann

Well, let me start by saying that the AVAiL study was -- the primary endpoint in the AVAiL study was progression free survival. It was not a trial that was designed to look at a survival question. So I would start there.

It is hard to predict what the outcome of AVAiL will be on survival. We know from our colleagues at Roche that they expect to update survival in the first half of this year but yes, you’re right that the magnitude of the difference in the primary endpoint was less than what we had seen in the U.S. and we talked a lot and I would say speculated about why that may have been the case.

I do think, just to re-emphasize a point that Ian made, it is very hard to compare AVAiL to 4599. 4599 was a well-powered, primary endpoint survival Taxol-Carbo study. AVAiL is a Gem-Cis study with a somewhat different study conduct that was carried out in Europe. In fact, we were concerned that the duration of chemo plus Avastin could have been short in the AVAiL study and because of that, the investigators in AVADO were encouraged to continue with concurrent chemotherapy and Avastin as per protocol, with a Taxotere background in chemotherapy.

So while it’s pure speculation why the differences may have been there, I would agree with you that the magnitude of the difference was not as impressive in the U.S. trial that was the basis for our approval.


Your next question comes from Mike King ­of Rodman & Renshaw.

Mike King ­- Rodman & Renshaw

I was wondering, can you comment about when the last interim look was taken on NSAVP, Sue?

Susan D. Desmond-Hellmann

It was in quarter four of 2007 and we expect interims in quarter two and quarter four this year. It’s every six months as per the protocol.

Mike King ­- Rodman & Renshaw

Okay, but you won’t say what month?

Susan D. Desmond-Hellmann


Mike King ­- Rodman & Renshaw

Okay. Thank you.


Your next question comes from Ian Somaiya of Thomas Weisel Partners.

Ian Somaiya - Thomas Weisel Partners

Thanks. Just a quick question on Rituxan and MS; can you just review for us the statistical powering of the OLYMPUS study and what type of treatment benefit you need to see in that trial for that trial to be successful?

Susan D. Desmond-Hellmann

Why don’t we take another question and I will look up the statistical power for you while we are taking the other question, okay?


Your next question comes from Steve Harr of Morgan Stanley.

Steven Harr - Morgan Stanley

This is a question probably for David and Ian. I’m just trying to understand what the potential impact is of Avastin in breast cancer if or when it’s approved, and that would be -- the specific question is whether -- actually, what is your median duration of therapy right now? And with approval as patients go and this patient cap, what kind of an early hit do you expect to see and how much penetration growth do you need to even see flat revenue, let alone an accelerated revenue in that indication?

Ian T. Clark

Let me try and be clear on what you are saying -- in terms of -- we have an existing set of revenue based on adoption without the label and absent of a major challenge of compendia, I’d expect us to retain the majority of that revenue and to Sue’s point, should we -- even if we fail in terms of the label, at least in the short-term we might get some sort of benefit of a positive AVADO and/or RIBBON.

So in terms of -- I don’t see any likelihood it’s going to go down much.

Steven Harr - Morgan Stanley

I’m thinking more with approval as you move into patient cap.

Ian T. Clark

I wouldn’t comment on duration at the moment because it’s early days. What I would say is that I mentioned in my prepared remarks that the penetration is only about 25%. We think the eligible population is maybe as high as 90%, so there’s a huge amount of upside attached to that.

And obviously we’re only going to hit the cap if we get patients on the higher dose for a substantial period of time, in which case I think we’d be in positive territory regardless. David, do you want to add?

David A. Ebersman

I just want to make sure people understand the dynamics of Steve’s question, which is a good one. The patient assistance program, which provides a cap of the Avastin price at $55,000 over a 12-month period for eligible patients only applies to approved indications, so the logic behind the question is that a disease where the high dose is used for long durations in an unapproved fashion, you actually -- the cap doesn’t come into play and it would upon its approval. So that is a dynamic that would play out in the marketplace.

As Ian said, in the long run we obviously view it as a net significant positive to have the label and be able to promote. There would likely be some ups and downs in the short-term.

The only reason I’m not that concerned about the impact is that our experience with the program to date is that enrolment is slow.

Susan D. Desmond-Hellmann

Before we take the next question, let me come back to the question about the primary progressive MS. So as is typical, we don’t share the power of our trial but it is a trial that is a Phase II/III, planned for 435 subjects. And as I mentioned in my prepared remarks, the primary outcome measure is time to confirmed disease progression and we use the expanded disability status scale. So if the primary endpoint is a times progression endpoint based on the patient’s baseline expanded disability status scale, and I can assure you that the trial is well powered, the key risk to the trial isn’t the powering -- it’s that no therapy has shown benefit in primary progressive MS and so that is a risk factor that we pointed out in the past. But it is a well-powered, 435 patient trial.


And your next question comes from Eric Schmidt of Cowen & Company.

Eric Schmidt - Cowen & Company

A question for David on the royalty line; I noted that the guidance for ’08 has decreased from your previous guidance of 20% to 25% year-over-year growth. Were there any changes to the analyst expectations that you used to guide that line? Or what was the reason for the change?

David A. Ebersman

A couple of things, and the comparison that Eric is making is to the guidance we gave in March of this year when we had the analyst meeting and we projected forward to 2008. The first is that subsequent to that March meeting, we did a deal which involved us licensing in some assets and in exchange essentially forgiving a royalty obligation over the next couple of years which, from an accounting standpoint, we then booked in the middle of the year as a large acceleration of royalty revenue. So that bumped up the 2007 number by taking royalties that we had been expecting out of 2008 and 2009, so it hurts you on the comparison on both sides. It increases 2007 without an offset in 2008.

And no, not so much on the analyst expectations. Another thing that is part of that trend is that the Lucentis sales that we had been forecasting before outside the United States ramped up more quickly in 2007 in Europe, as we saw in the U.S. as well but we didn’t know what to predict outside the U.S. So again, just sort of an acceleration of where we expected to get to more in 2007 than 2008.

Nothing else really materially impacts the change coming down.

Eric Schmidt - Cowen & Company

You also gave 2009 guidance at the time back in March. Could that have changed too?

David A. Ebersman

We’ll update that in March of this year when we come to New York, and I won’t do it now because I don’t know the answer.


Your next question comes from May-Kin Ho of Goldman Sachs.

May-Kin Ho - Goldman Sachs

This is a question for Ian; looking at the usage of Rituxan in rheumatoid arthritis, and thinking about how many patients actually refractory, is it lower than you expected? And if so, why do you think that is? And if the data were positive in early RA, how do you think that might change it?

Ian T. Clark

We’re very pleased with the progression of Rituxan, the TNFIR population so far. It’s pretty much meeting our expectations and our market share is still relatively low in that patient population, so I think there’s a lot of room for growth.

Clearly like any disease area, if we can get data in an earlier and larger disease population, then we would expect an acceleration of sales in that place, so so far, so good and if the data is good, a greater chance of growth in the RA setting.

Kathee Littrell

Operator, this will be our last question.


Your final question comes from Geoffrey Porges of Bernstein.

Geoffrey Porges - Bernstein

This is for Sue, related to clinical trials, particularly for metastatic breast cancer, you’ve got AVADO and RIBBON coming in and potentially others there as well. Could you give us a sense if the FDA stuck to their guns and said we need to see at least no negative effects on overall survival, and ideally an improvement in overall survival as well as an improvement in progression free survival, when would those two trials or any other trials show an improvement in overall survival, or at least no negative effect on overall survival for Avastin in metastatic breast cancer? Thanks.

Susan D. Desmond-Hellmann

Let me say two things; first of all, just to recall the non-voting discussion at the advisory committee, my takeaway from that discussion was that the advisory committee input to FDA was that progression free survival should be an approvable endpoint in first line metastatic breast cancer. And so that is my takeaway and was my takeaway from the advisory committee.

Neither the AVADO nor the RIBBON 1 trial are powered as survival trials, so I think that that’s an important thing to note about both of those trials. They are both company sponsored, well conducted, rigorous trials with all the monitoring that one would expect on both safety and efficacy but they are not powered for overall survival.

But there would be a read on the trend in survival at the same time that PFS is reported, so I would expect a preliminary assessment of survival, again under-powered and early, but one could rule out a negative impact on survival in the first half of the year for AVADO and at the end of the year for RIBBON 1, but with all the caveats that go along with that, under-powered and it would be very early to look at survival. But if one hypothesized that there’s a negative impact, one could see a negative impact early.

So I would say that those trials will be unblinded in the first half and second half, as I said earlier.

Kathee Littrell

Thank you all very much for your questions today and Sue Morris and I will be back at our offices to take calls.


Ladies and gentlemen, this does conclude today’s teleconference. You may now all disconnect.

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