SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 1996.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File Number
1-9813
GENENTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2347624
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
460 Point San Bruno Boulevard, South San Francisco, California 94080
(Address of principal executive offices and zip code)
(415) 225-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.02 par value 76,621,009
Class Outstanding at September 30, 1996
Special Common Stock $.02 par value 44,548,651
Class Outstanding at September 30, 1996
GENENTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Condensed Consolidated Statements of Income -
for the three months and nine months ended
September 30, 1996 and 1995 3
Condensed Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1996 and 1995 4
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 5
Notes to Condensed Consolidated Financial Statements 6-10
Financial Review 11-18
Independent Accountants' Review Report 19
PART II. OTHER INFORMATION 20
SIGNATURES 21
Page 2
<TABLE>
PART I. FINANCIAL INFORMATION
<CAPTION>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
(unaudited)
Three Months Nine Months
Ended September 30 Ended September 30
--------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales (including amounts $ 142,463 $ 158,478 $ 443,105 $ 481,781
from related parties:
three months 1996-$1,659; 1995-$0;
nine months 1996-$11,151; 1995-$0)
Royalties (including amounts from 54,429 45,642 160,546 142,215
related parties: three months -
1996-$6,812; 1995-$3,246; nine
months - 1996-$19,325; 1995-$7,876)
Contract and other (including 38,859 4,494 87,991 28,577
amounts from related parties:
three months: 1996-$35,977;
1995-$2,331; nine months:
1996-$79,409; 1995-$11,902)
Interest 15,956 15,297 46,711 43,358
--------- --------- --------- ---------
Total revenues 251,707 223,911 738,353 695,931
Costs and expenses:
Cost of sales (including amounts 24,836 24,369 77,868 75,431
from related parties:
three months: 1996-$1,244; 1995-$0;
nine months: 1996-$9,085; 1995-$0)
Research and development 114,772 85,971 343,008 268,097
Marketing, general and administrative 61,864 55,249 174,893 187,386
Special charge (merger related) - 9,000 - 17,000
Interest 1,094 1,994 3,986 5,904
--------- --------- --------- ---------
Total costs and expenses 202,566 176,583 599,755 553,818
Income before taxes 49,141 47,328 138,598 142,113
Income tax provision (benefit) (1,801) 7,099 27,720 21,317
--------- --------- --------- ---------
Net income $ 50,942 $ 40,229 $ 110,878 $ 120,796
========= ========= ========= =========
Net income per share $ .41 $ .33 $ .90 $ 1.00
========= ========= ========= =========
Weighted average number of shares used
in computing per share amounts 123,589 121,334 123,402 120,909
========= ========= ========= =========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 3
<TABLE>
<CAPTION>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Nine Months
Ended September 30
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 110,878 $ 120,796
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 46,189 43,702
Deferred income taxes (13,278) -
Gain on sales of securities available-for-sale (472) (5,897)
Loss on sales of securities available-for-sale 263 -
Writedown of securities available-for-sale - 6,609
Gain on sale of a non-marketable equity security - (703)
Writedown of non-marketable equity securities - 469
Loss on fixed asset dispositions 601 32
Changes in assets and liabilities:
Receivables and other current assets (30,475) (47,047)
Inventories 1,603 10,500
Accounts payable, other current liabilities
and other long-term liabilities (10,291) 10,471
---------- ----------
Net cash provided by operating activities 105,018 138,932
Cash flows from investing activities:
Purchases of securities held-to-maturity (543,833) (481,551)
Proceeds from maturities of securities held-to-maturity 580,304 666,366
Purchases of securities available-for-sale (237,803) (243,729)
Proceeds from sales of securities available-for-sale 134,814 35,800
Purchases of non-marketable equity securities (7,523) -
Proceeds from sale of a non-marketable equity security - 703
Capital expenditures (86,574) (38,290)
Change in other assets 3,130 (32,594)
---------- ----------
Net cash used in investing activities (157,485) (93,295)
Cash flows from financing activities:
Stock issuances 61,821 45,607
Additions to long-term debt and
short-term borrowings - 27,224
Repayment of long-term debt, including
current portion (358) (646)
---------- ----------
Net cash provided by financing activities 61,463 72,185
---------- ----------
Net increase in cash and cash equivalents 8,996 117,822
Cash and cash equivalents at beginning of period 137,043 66,713
---------- ----------
Cash and cash equivalents at end of period $ 146,039 $ 184,535
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
(unaudited)
September 30, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 146,039 $ 137,043
Short-term investments 519,538 603,296
Accounts receivable, net (including amounts
from related parties: 1996-$54,309;
1995-$19,281) 196,413 172,160
Inventories 92,045 93,648
Prepaid expenses and other current assets 46,064 39,267
------------ ------------
Total current assets 1,000,099 1,045,414
Long-term marketable securities 510,582 356,475
Property, plant and equipment, less
accumulated depreciation
(1996-$308,391; 1995-$268,751) 549,059 503,654
Other assets 111,245 105,452
------------ ------------
Total assets $ 2,170,985 $ 2,010,995
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 30,215 $ 37,459
Other current liabilities (including
amounts due to related parties:
1996-$9,847; 1995-$8,745) 186,275 195,985
------------ ------------
Total current liabilities 216,490 233,444
Long-term debt 150,000 150,000
Other long-term liabilities 25,071 25,504
------------ ------------
Total liabilities 391,561 408,948
Stockholders' equity:
Preferred stock - -
Special common stock 891 853
Common stock 1,532 1,532
Other stockholders' equity 1,777,001 1,599,662
------------ ------------
Total stockholders' equity 1,779,424 1,602,047
------------ ------------
Total liabilities and stockholders' equity $ 2,170,985 $ 2,010,995
============ ============
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 5
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of Genentech, Inc. (the Company), the accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting only of adjustments of a normal recurring nature)
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September 30, 1996
and 1995 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996. The condensed consolidated balance
sheet as of December 31, 1995 has been derived from the audited financial
statements as of that date. For further information, refer to the
consolidated financial statements and notes thereto included in the
Company's Annual Report to Stockholders for the year ended December 31,
1995.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Note 2. New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires the Company to review for impairment long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain situations, an impairment loss would be
recognized. The Company adopted FAS 121 in the quarter ended March 31, 1996.
The adoption did not have a material impact on the financial position, results
of operations or cash flows of the Company.
In October 1995, the FASB issued FAS 123 "Accounting for Stock-Based
Compensation" which also is effective for the Company's 1996 fiscal year. FAS
123 allows companies which have stock-based compensation arrangements with
employees to adopt a new fair-value basis of accounting for stock options and
other equity instruments, or to continue to apply the existing accounting
rules under APB Opinion 25 "Accounting for Stock Issued to Employees" but with
additional financial statement disclosure. The Company will continue to
account for stock-based compensation arrangements under APB Opinion 25,
therefore the adoption of FAS 123 did not have a material impact on its
financial position, results of operations, or cash flows.
Note 3. Agreement with Roche Holdings, Inc.
On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc.
(Roche) was approved by Genentech's non-Roche stockholders to extend to June
30, 1999, Roche's option to cause Genentech to redeem the outstanding callable
Page 6
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
putable common stock (special common stock) of the Company at predetermined
prices. Should the call be exercised, Roche will concurrently purchase from
the Company a like number of common shares, for a price equal to Genentech's
cost to redeem the special common stock. The Agreement also granted the
additional right to shareholders to sell all, some or none of their shares to
the Company at $60.00 per share in the thirty business day period following
June 30, 1999, in the event that Roche has not exercised its redemption rights
(and Roche will concurrently provide the necessary redemption funds to the
Company by purchasing a like number of shares of common stock at $60.00 per
share). In conjunction with the Agreement, F. Hoffmann-La Roche Ltd (HLR) was
granted an option at terms discussed below for ten years for licenses to use
and sell certain of Genentech's products in non-U.S. markets. As a general
matter, such option for a Genentech product must be exercised at, or prior to
if Genentech mutually agrees, the conclusion of phase II clinical trials for
each product. In general, for each product for which HLR exercises its option
(option product), the Company and HLR will share equally all development
expenses, including preclinical, clinical, process development and related
expenses, incurred by the Company through that date and prospectively, with
respect to the development of the option product in the United States. HLR
will pay all non-U.S. development expenses. At the Company's election, and
with HLR's consent, HLR may reimburse Genentech for HLR's share of development
costs incurred prior to HLR's option exercise date, by payment of such costs
at the time of the option exercise, or by making payments prospectively until
HLR's share has been fully reimbursed to Genentech. In general, Genentech will
supply HLR's clinical requirements of option products at cost and its
commercial requirements at cost plus 20%. In general, HLR will pay a royalty
of 12.5% until an option product reaches $100 million in aggregate sales
outside of the United States, at which time the royalty rate increases to 15%.
In addition, HLR has exclusive rights to, and pays the Company 20% royalties
on, Canadian sales of the Company's existing approved products in Canada, and
European sales of Pulmozyme, registered trademark. Consequently, in the
fourth quarter of 1995, the Company transferred to HLR the rights to its
Canadian product sales, and its European sales of Pulmozyme, and commenced
recording royalty revenue from HLR on such sales.
Contract revenue in the quarter ended September 30, 1996, included $28.4
million primarily related to HLR's exercise of its option with respect to the
development of nerve growth factor (NGF) outside of the United States.
Contract revenue year to date 1996 also includes the following HLR option
exercises related to product development outside of the United States: $17.1
million in the first quarter for IDEC-C2B8 (a one time option fee of $13.1
million, and $4.0 million for reimbursement of development costs incurred by
Genentech during the first quarter but after the exercise date); and $19.3
million in the second quarter for insulin-like growth factor (IGF-1). All
other contract revenue from HLR in the three and nine month periods ended
September 30, 1996 totaled $7.6 million and $14.6 million, respectively.
Note 4. Legal Proceedings
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone products and Activase,
registered trademark; product liability cases involving Activase and
Protropin, registered trademark; and class action lawsuits regarding
Protropin. In addition, in 1995 the Company received and responded to grand
jury document subpoenas from the United States District Court for the Northern
District of California for documents relating to Genentech's clinical, sales,
and marketing activities associated with human growth hormone.
Page 7
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company, its directors, two former directors and Roche were defendants in
a number of suits filed in Delaware, which were consolidated in a single
action, by certain individual stockholders purporting to represent
stockholders as a class alleging, in general, breach of the defendants'
fiduciary duties to the Company in connection with the then proposed extension
of Roche's option to cause the Company to redeem the outstanding non-Roche
owned redeemable common stock and transactions related thereto. The Company,
Roche and the attorneys representing the plaintiff stockholders entered into a
memorandum of understanding settling all claims against the defendants in
these actions. In August 1996, a Delaware Chancery Court approved the
settlement, and the appeal period for the settlement expired in September
1996. In connection with the settlement, Roche agreed to increase the prices
at which it may cause Genentech to redeem the non-Roche owned special common
stock by $0.50 per share per quarter, to a final price of $82.50 in the
quarter ending June 30, 1999; Genentech paid the plaintiffs' attorneys' fees;
and in connection with the then proposed merger, Genentech absorbed the
termination costs of six Europe-based Genentech employees.
On June 28, 1995 and August 10, 1995, the U.S. District Court for the Southern
District of New York issued preliminary injunctions against Novo Nordisk A/S
and certain of its affiliates (Novo) and Biotechnology General Corporation and
its affiliate (BTG), respectively, which prohibited each of them, pending the
Court's final determination of the action, from importing, making, using and
selling their human growth hormone products in the United States. Each of Novo
and BTG appealed the Court's decision. On April 8, 1996, the U.S. Court of
Appeals for the Federal Circuit upheld the preliminary injunction against BTG.
On February 26, 1996, the same court overruled the preliminary injunction
against Novo. However, on June 27, 1996, a United States District Court judge
in New York granted the Company's request for a second preliminary injunction
against Novo, based on a recently issued U.S. patent that the Company did not
assert in the earlier proceeding. Future court decisions will determine
whether Novo's and BTG's human growth hormone products will be permanently
enjoined from the U.S. market.
On May 28, 1996, the Company filed a suit for patent infringement and
declaratory judgment of patent infringement in the Federal District Court for
the District of Massachusetts against Boehringer Mannheim GmbH (BM) and
Boehringer Mannheim Corporation, alleging that the manufacture, use and sale
of their thrombolytic agent, Reteplase, infringes five Genentech patents
relating to Activase and/or general biotechnology processes. On May 24, 1996,
Genentech and its licensee, Boehringer Ingelheim GmbH, filed suit in the
commercial court in Dusseldorf, Germany, against BM alleging that BM's
manufacture of Reteplase in Germany infringes one of Genentech's European
patents relating to Activase. A separate lawsuit brought by BM in Munich,
Germany, alleging that Reteplase does not infringe Genentech's patent, has
been consolidated by the German court with the lawsuit in Dusseldorf. A
hearing on those cases is scheduled to take place in Dusseldorf in March 1997.
In July 1996, the Company and Tanox Biosystems, Inc. (Tanox) announced the
settlement of pending lawsuits filed by each company against the other and
new joint development and cross license agreements relating to anti-IgE
monoclonal antibodies. The two companies and Ciba-Geigy Ltd., which is
jointly developing anti-IgE antibodies with Tanox, agreed in principle to
combine their existing anti-IgE antibody development projects into a
cooperative development effort, and, upon commercialization, to participate in
a joint U.S. marketing and U.S. and European profit sharing arrangement.
Page 8
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Based upon the nature of the claims made and the investigations completed to
date by the Company and its counsel, the Company believes the outcome of the
above actions will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company. However, were an
unfavorable ruling to occur in any quarterly period, there exists the
possibility of a material impact on the net income of that period.
Note 5. Inventories
Inventories at September 30, 1996 and December 31, 1995 are summarized below:
1996 1995
---------- ----------
(thousands)
Raw materials $ 18,261 $ 12,808
Work in process 62,746 67,239
Finished goods 11,038 13,601
---------- ----------
Total $ 92,045 $ 93,648
========== ==========
Note 6. Quasi-Reorganization
On February 18, 1988, the Company's Board of Directors approved the
elimination of the Company's accumulated deficit through an accounting
reorganization of its stockholders' equity accounts (a quasi-reorganization)
effective October 1, 1987, that did not involve any revaluation of assets or
liabilities. The Company eliminated the accumulated deficit of $329.5 million
by a transfer from additional paid-in capital in an amount equal to the
accumulated deficit.
The Company has been reporting in income the recognition of operating loss and
tax credit carryforward items arising prior to the quasi-reorganization due to
the Company's adoption of its quasi-reorganization in the context of the
accounting and quasi-reorganization literature existing at the date the quasi-
reorganization was effected. If the provisions of the subsequently issued
Staff Accounting Bulletin 86 (SAB 86) had been applied, net income for the
nine months ended September 30, 1995, would have been reduced by $11.8 million
or $.10 per share because SAB 86 would require that the tax benefits of prior
operating loss and tax credit carryforwards be reported as a direct addition
to additional paid-in capital rather than being recorded in the income
statement. The Securities and Exchange Commission staff has indicated that it
would not object to the Company's accounting for such tax benefit. As of June
30, 1995, the operating loss and tax credit carryforwards arising prior to the
quasi-reorganization had been fully utilized; thus there was no impact for the
three months ending September 30, 1995 or the three or nine month periods
ended September 30, 1996.
Page 9
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. Change in Effective Income Tax Rate
The Company's effective income tax rate for the three and nine month periods
ended September 30, 1996 was (4)% and 20%, respectively, compared to 15% in
the comparable periods of 1995. The third quarter of 1996 includes a
reduction in the tax provision of $11.6 million in order to adjust the year to
date rate from 33% to 20%, resulting in a net tax benefit of $1.8 million for
the quarter. Genentech is reviewing its operating plan for 1997 and beyond.
In connection with that review, the Company has decided not to implement, at
this time, the previously announced approach for research and development
funding and manufacturing by international subsidiaries of certain of its
development products, which are progressing in clinical trials. As a result
of the latest change, the Company's effective tax rate is expected to be 20%
for the fourth quarter and full year 1996, rather than 33% as previously
announced. The rate increase to 20% on a year to date basis in 1996 from 15%
in the prior year is due to the recognition of a greater amount of tax credit
carryforwards in 1995 than in 1996.
Page 10
GENENTECH, INC.
FINANCIAL REVIEW
AGREEMENT WITH ROCHE HOLDINGS, INC.
On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc.
(Roche) was approved by Genentech's non-Roche stockholders to extend to June
30, 1999, Roche's option to cause Genentech (the Company) to redeem the
outstanding callable putable common stock (special common stock) of the
Company at predetermined prices. Should the call be exercised, Roche will
concurrently purchase from the Company a like number of common shares, for a
price equal to Genentech's cost to redeem the special common stock. The
Agreement also granted the additional right to shareholders to sell all, some
or none of their shares to the Company at $60.00 per share in the thirty
business day period following June 30, 1999 in the event that Roche has not
exercised its redemption rights (and Roche will concurrently provide the
necessary redemption funds to the Company by purchasing a like number of
shares of common stock at $60.00 per share). In conjunction with the
Agreement, F. Hoffmann-La Roche Ltd (HLR) was granted an option at terms
discussed below for ten years for licenses to use and sell certain of
Genentech's products in non-U.S. markets. As a general matter, such option
for a Genentech product must be exercised at, or prior to if Genentech
mutually agrees, the conclusion of phase II clinical trials for each product.
In general, for each product for which HLR exercises its option (option
product), the Company and HLR will share equally all development expenses,
including preclinical, clinical, process development and related expenses,
incurred by the Company through that date and prospectively, with respect to
the development of the option product in the United States. HLR will pay all
non-U.S. development expenses. At the Company's election, and with HLR's
consent, HLR may reimburse Genentech for HLR's share of development costs
incurred prior to HLR's option exercise date, by payment of such costs at the
time of the option exercise, or by making payments prospectively until HLR's
share has been fully reimbursed to Genentech. In general, Genentech will
supply HLR's clinical requirements of option products at cost and its
commercial requirements at cost plus 20%. In general, HLR will pay a royalty
of 12.5% until an option product reaches $100 million in aggregate sales
outside of the United States, at which time the royalty rate increases to 15%.
In addition, HLR has exclusive rights to, and pays the Company 20% royalties
on, Canadian sales of the Company's existing approved products in Canada, and
European sales of Pulmozyme, registered trademark. Consequently, in the
fourth quarter of 1995, the Company transferred to HLR the rights to its
Canadian product sales, and its European sales of Pulmozyme, and commenced
recording royalty revenue from HLR on such sales.
Contract revenue in the quarter ended September 30, 1996, included $28.4
million primarily related to HLR's exercise of its option with respect to the
development of nerve growth factor (NGF) outside of the United States.
Contract revenue year to date 1996 also includes the following HLR option
exercises related to product development outside of the United States: $17.1
million in the first quarter for IDEC-C2B8 (a one time option fee of $13.1
million, and $4.0 million for reimbursement of development costs incurred by
Genentech during the first quarter but after the exercise date); and $19.3
million in the second quarter for insulin-like growth factor (IGF-1). All
other contract revenue from HLR in the three and nine month periods ended
September 30, 1996 totaled $7.6 million and $14.6 million, respectively.
Page 11
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
Quarter ended Nine months ended
September 30 September 30
---------------------- ------------------------
REVENUES 1996 1995 % Change 1996 1995 % Change
- ---------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $251.7 $223.9 12% $738.4 $695.9 6%
====== ====== ======== ====== ====== ========
PRODUCT SALES
- ----------------------
Activase $ 65.4 $ 73.2 (11)% $214.3 $225.5 (5)%
Protropin and Nutropin 57.6 54.2 6 167.6 164.5 2
Pulmozyme 18.0 30.1 (40) 57.7 88.9 (35)
Actimmune 1.5 1.0 50 3.5 2.9 21
------ ------ -------- ------ ------ --------
Total product sales $142.5 $158.5 (10)% $443.1 $481.8 (8)%
====== ====== ======== ====== ====== ========
</TABLE>
Overall product sales in the three and nine month periods ended September 30,
1996 decreased from the comparable periods in 1995, as reflected in the table
above, primarily due to the fact that product sales to customers in Europe and
Canada are now made by HLR instead of Genentech. In conjunction with the
Agreement with Roche, in the fourth quarter of 1995 Genentech stopped
recording customer sales of Pulmozyme in Europe and of each of its products in
Canada. The Company instead began to provide its products to HLR at cost plus
20% for HLR's sales to customers in these territories, and began to receive
royalties from HLR on such sales. In the third quarter of 1996, Genentech's
product sales to HLR for Canadian and European sales were $1.7 million; in the
comparable period of 1995 Genentech's sales to customers in these regions were
$17.3 million. On a pro forma basis, including sales to HLR in 1996 and
excluding Canadian and European customer sales in 1995, total product sales in
the third quarter of 1996 were $142.5 million, compared to $141.2 million in
1995. In the year to date period, on a pro forma basis, total product sales
were $443.1 million in 1996 and $434.3 million in 1995. Year to date sales to
HLR for Canadian and European sales in 1996 were $11.2 million; in 1995
Genentech's customer sales in these regions were $47.5 million. The new
arrangement with Roche also resulted in higher royalties in 1996 and had an
impact on cost of sales as a percent of sales; see comments below regarding
these items.
Net sales of Activase, registered trademark, (Alteplase, recombinant tissue
plasminogen activator), decreased in the third quarter of 1996 compared to the
third quarter of 1995 (see table above), due to lower U.S. sales attributable
to a drop in market size as discussed below, as well as the impact of not
having Canadian customer sales in 1996 (such third quarter sales were $3.5
million in 1995). On a pro forma basis as described above, 1996 third quarter
sales of Activase were $65.4 million, compared to $69.7 million in the third
quarter of 1995. On a year to date basis, Activase sales decreased due to the
loss of Canadian customer sales ($9.4 million on a year to date basis in
1995), as well as the sale in 1995 of $3.8 million of bulk product to Japanese
licensees. Activase sales on a pro forma basis for the year to date period
were $214.3 million in 1996 compared to $216.1 million in 1995. Although
Activase's market share remains at approximately 80%, the overall size of the
thrombolytic market during the third quarter of 1996 declined by approximately
6% from the third quarter of 1995 as a result of the increasing use of
mechanical reperfusion rather than thrombolytic therapy, as well as patients
Page 12
receiving therapy through ongoing clinical trials. In June 1996, the Company
received clearance from the U.S. Food and Drug Administration (FDA) to market
Activase for the treatment of acute ischemic stroke or brain attack. Activase
is the first therapy to be indicated for the management of stroke.
Net sales of the Company's two growth hormone products - Protropin, registered
trademark, (somatrem for injection) and Nutropin, registered trademark,
(somatropin [rDNA origin] for injection) - increased in the third quarter and
year to date periods of 1996 over the comparable periods in 1995 (see table
above), due to higher U.S. sales. On a pro forma basis, growth hormone sales
were $57.6 million in the third quarter of 1996 compared to $53.4 million in
1995, and on a year to date pro forma basis sales were $167.6 million in 1996
compared to $162.3 million in 1995. In June 1996, a preliminary injunction
was granted against Novo Nordisk and certain of its affiliates (Novo),
prohibiting the sale of Novo's human growth hormone in the United States until
a full trial on the matter is concluded. In April 1996, an appeals court
upheld the preliminary injunction against Biotechnology General and its
affiliate (BTG), another of the Company's possible competitors, similarly
prohibiting the sale of BTG's growth hormone product pending final
determination of the action.
Net sales of Pulmozyme decreased in the three and nine month periods ended
September 30, 1996 from the comparable periods in 1995, as reflected in the
table above, primarily in conjunction with the Agreement with Roche. 1995
Pulmozyme sales included $13.0 million of sales to European and Canadian
customers in the third quarter, and $35.9 year to date in 1995. In 1996,
sales in these territories are made by HLR. On a pro forma basis, Pulmozyme
sales were $18.0 million in the third quarter of 1996, compared to $17.1
million in the third quarter of 1995. Pro forma sales were $57.7 million year
to date in 1996, and $53.0 in 1995. In October 1996, the Pulmonary-Allergy
Drug Advisory Committee to the FDA recommended Pulmozyme for marketing
clearance for treatment of cystic fibrosis (CF) patients with advanced
disease. The Advisory Committee further recommended that Genentech continue
to study the long-term outcome of CF patients.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30 September 30
ROYALTIES, CONTRACT AND ---------------------- ------------------------
OTHER, AND INTEREST INCOME 1996 1995 % Change 1996 1995 % Change
- ----------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Royalties $54.4 $45.6 19% $160.5 $142.2 13%
Contract and other 38.9 4.5 764 88.0 28.6 208
Interest income 15.9 15.3 4 46.8 43.4 8
</TABLE>
Royalty income increased 19% in the quarter ended September 30, 1996, and 13%
in the year to date period, primarily due to new royalties from HLR in
conjunction with the Agreement. Under the new arrangement with Roche,
effective in the fourth quarter of 1995, Genentech receives royalties from HLR
on their sales of Genentech products in Europe and Canada. The first nine
months of 1995 did not include such royalties because at that time Genentech
recorded sales to customers in those territories. Royalties in 1996 also
included higher income from existing licensees due to increased licensee
sales.
Page 13
Contract and other income increased in the third quarter of 1996 over the
third quarter of 1995 primarily due to $28.4 million of contract revenue from
HLR primarily related to HLR's exercise of its option regarding NGF, as
previously discussed. For the year to date period, contract and other income
increased $59.4 million, and included the NGF revenue plus $17.1 million in
the first quarter of 1996 related to HLR's exercise of its option regarding
IDEC-C2B8, and $19.3 in the second quarter from HLR's IGF-1 option exercise.
All other contract revenue from HLR in the three and nine month periods ended
September 30, 1996 totaled $7.6 million and $14.6 million, respectively. The
increase attributable to contract revenue from HLR was partially offset by two
factors - the inclusion in other income in the first nine months of 1995 of
$6.4 million of gains on sales on biotechnology equity securities; and a
decrease in other contract revenue in 1996 resulting from normal variations in
the timing of contract benchmark achievements and payments.
Interest income increased in 1996 compared to 1995 due to a larger investment
portfolio. The total investment portfolio, consisting of cash and cash
equivalents, and short- and long-term marketable securities, increased to
$1,176.2 million as of September 30, 1996 from $1,080.2 million as of
September 30, 1995, and from $1,096.8 million as of December 31, 1995.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30 September 30
---------------------- ------------------------
COSTS AND EXPENSES 1996 1995 % Change 1996 1995 % Change
- ----------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales $ 24.8 $ 24.4 2% $ 77.9 $ 75.4 3%
Research and development 114.8 86.0 33 343.0 268.1 28
Marketing, general and
administrative 61.9 55.2 12 174.9 187.4 (7)
Special charge (merger related) - 9.0 (100) - 17.0 (100)
Interest expense 1.1 2.0 (45) 4.0 5.9 (32)
------ ------ -------- ------ ------ --------
Total costs and expenses $202.6 $176.6 15% $599.8 $553.8 8%
====== ====== ======== ====== ====== ========
</TABLE>
Cost of sales as a percent of product sales increased in the third quarter of
1996 over the third quarter of 1995 primarily due to the impact of lower
margin sales to HLR in 1996, in conjunction with the Agreement as discussed
above, and to a lesser extent due to increases in certain production costs.
Inventory reserve provisions were not a significant factor. For the year to
date period, the cost of sales percentage similarly increased primarily due to
the new lower margin sales to HLR in 1996, partially offset by lower inventory
reserves provided in 1996 ($0.6 million in 1996 versus $2.2 million in 1995).
The 1996 reserve of $0.6 million was provided in the first quarter for
expected obsolescence of certain Activase inventories in connection with the
discontinuance of the 20 milligram vial configuration of the product. The
main component of the 1995 provision was $1.7 million provided in the first
quarter of 1995 for expected product expiration of certain Activase
inventories.
R&D expenses increased 33% and 28% in the third quarter and year to date
periods of 1996, respectively, over the comparable periods in 1995 due to
increased expenditures for scale-up, material production and clinical trials
for products in late stage development, including IGF-1, currently in Phase
III trials for diabetes, and IDEC-C2B8, which recently completed Phase III
Page 14
clinical trials for treating non-Hodgkin's B-cell lymphoma, with results
expected by year end; costs to license technology from collaborative partners;
and expenses for the increased number of projects in early stage development,
including two projects which are currently being prepared to enter Phase I
clinical trials - vascular endothelial growth factor (VEGF) for coronary
ischemic disease, and an anti-VEGF antibody for cancer. R&D as a percent of
revenue was approximately 46% in both the quarter and year to date periods in
1996.
Marketing, general and administrative (MG&A) expenses increased in the quarter
ended September 30, 1996 versus the comparable period in 1995 primarily due to
higher general and administrative (G&A) costs attributable to the timing of
various corporate expenses, and higher royalty expense related to increased
royalty revenue from non-Roche licensees. The increase in G&A in the quarter
more than offset a decrease in marketing and sales expense resulting from the
closure of the Company's European and Canadian operations in conjunction with
the Agreement. On a year to date basis, MG&A expenses decreased in 1996
compared to 1995 primarily due to the foreign operations' closure.
Interest expense declined in 1996 compared to the prior year primarily because
1995 included interest on the Company's $25 million borrowing arrangement,
which commenced in February 1995 and was repaid in December 1995.
Quarter ended Nine months ended
September 30 September 30
--------------------- ------------------------
INCOME TAXES 1996 1995 1996 1995
- -------------------------- -------- -------- ---------- ----------
Income taxes $(1.8) $ 7.1 $ 27.7 $ 21.3
The Company's effective income tax rate for the three and nine month periods
ended September 30, 1996 was (4)% and 20%, respectively, compared to 15% in
the comparable periods of 1995. Genentech is reviewing its operating plan for
1997 and beyond. In connection with that review, the Company has decided not
to implement, at this time, the previously announced approach for research and
development funding and manufacturing by international subsidiaries of certain
of its development products, which are progressing in clinical trials. The
large number of products which remain in late stage clinical development at
this time will potentially require high levels of financial and human
resources, necessitating focusing on successful development of these projects
utilizing domestic, rather than international, manufacturing facilities and
resources. As a result of the latest change, the Company's tax rate is
expected to be 20% for the fourth quarter and for the full year 1996, rather
than 33% as previously announced. The third quarter results include a
reduction in the tax provision of $11.6 million in order to adjust the year to
date rate from 33% through the second quarter of 1996, to 20% in the third
quarter. This results in a net $1.8 million tax benefit for the quarter. The
rate increase to 20% in 1996 from 15% in 1995 is due to the recognition of a
greater amount of tax credit carryforwards in 1995 than in the 1996.
Quarter ended Nine months ended
September 30 September 30
---------------------- ------------------------
NET INCOME 1996 1995 % Change 1996 1995 % Change
- ------------------------- ------ ------ -------- ------ ------ --------
Net income $50.9 $40.2 27% $110.9 $120.8 (8)%
Earnings per share $ .41 $ .33 $ .90 $ 1.00
Page 15
Net income increased in the third quarter of 1996 over the third quarter of
1995 due to higher contract and royalty revenue and a net income tax benefit
for the quarter, partially offset by higher expenses, primarily R&D. On a
year to date basis, net income decreased in 1996 compared to 1995 due to
higher R&D and income tax expenses, partially offset by increased contract and
royalty revenue.
LIQUIDITY AND CAPITAL
RESOURCES September 30, 1996 December 31, 1995
- ----------------------------- -------------------- -------------------
Cash, cash equivalents, $ 1,176.2 $ 1,096.8
short-term investments
and long-term marketable
securities
Working capital 783.6 812.0
Cash generated from operations, maturities of investments and stock issuances
was used to make investments in marketable securities and capital additions.
Cash and cash equivalents at September 30, 1996 rose slightly compared to
December 31, 1995, and working capital decreased $28.4 million.
Capital expenditures totaled $86.6 million in the first nine months of 1996
compared to $38.3 million in the same period in 1995. The increase was
primarily due to improvements to existing manufacturing and administrative
facilities in 1996.
FORWARD-LOOKING STATEMENTS
The following statements are forward-looking and are based on the Company's
current expectations. The Company's actual results could differ materially
from these forward-looking statements.
Total Product Sales - The Company anticipates that a year over year decrease
in total reported quarterly product sales may continue throughout 1996.
Factors affecting the Company's total product sales include, but are not
limited to, the amount and timing of Genentech's sales to HLR, the amount of
sales to customers in the United States, increased competition in the growth
hormone and thrombolytic markets, and the timing and amount of bulk shipments
to licensees.
Activase Sales - The Company faces new competition in the thrombolytic market.
Genentech is aware that one company received FDA approval in October, 1996, to
market its product for the treatment of acute myocardial infarction (AMI) in
the United States. Genentech has brought suit against that company for patent
infringement. In addition, there is an increasing use of mechanical
reperfusion in the treatment of AMI patients in lieu of the use of
thrombolytic therapy. Depending on the extent and type of new competition,
the Company's total Activase sales could be materially affected. Other
factors affecting the Company's Activase sales include, but are not limited
to, the timing of FDA approval, if any, of additional competitive products,
pricing decisions made by the Company, the outcome of litigation against
Boehringer Mannheim GmbH and Boehringer Mannheim Corporation involving the
Company's patents for tissue plasminogen activator and processes related to
its production, the increasing use of other therapies such as mechanical
reperfusion techniques for the treatment of AMI, and the impact of the FDA's
recent clearance for the Company to market Activase for the treatment of acute
ischemic stroke.
Page 16
Growth Hormone Sales - The Company continues to face the possibility of new
competition in the growth hormone market. Three companies received FDA
approval in 1995, and a fourth company received FDA approval in October 1996,
to market their growth hormone products for treatment of growth hormone
inadequacy in children, although two of those companies have been
preliminarily enjoined from selling their products (see "Results of
Operations" for further information). Two of Genentech's competitors have
received approval to market their existing human growth hormone products for
additional indications. Genentech expects such competition to have an adverse
effect on its sales of Protropin and Nutropin which, depending on the extent
and type of the competition, could be material. Other factors affecting the
Company's growth hormone sales include, but are not limited to, the timing of
FDA approval, if any, of other new competitive products, the outcome of
litigation involving the Company's patents for human growth hormone and
related processes, decisions made by the Company about prices to be charged
for its growth hormone products, and the availability of third party
reimbursement for the cost of growth hormone therapy.
Pulmozyme sales - Factors that may influence the future sales of Pulmozyme
include physician perception of the number and kinds of patients who will
benefit from such therapy, the availability of third party reimbursement for
the costs of therapy, the timing of the development of alternative therapies
for the treatment and care of cystic fibrosis, whether and when additional
indications are approved for Pulmozyme, and the cost of Pulmozyme therapy.
Royalty and Contract Revenues - The Company's 1996 royalty and contract
revenues could continue to vary significantly from the prior year, both on a
quarterly and annual basis, and future royalties and contract revenues could
vary significantly from 1996 levels. Major factors affecting these items
include, but are not limited to, HLR's decisions to exercise or not to
exercise its option to develop and sell the Company's future products in non-
U.S. markets and the timing and amount of related development cost
reimbursement, if any; variations in HLR's sales of Genentech products; the
timing of non-U.S. approvals, if any, for products licensed to HLR; whether
and when contract benchmarks are achieved; the initiation of other new
contractual arrangements; and the conclusion of existing arrangements with
other companies and HLR.
R&D Expenses - The Company intends to continue its commitment to aggressive
investment in R&D. The Company has announced its intention for R&D spending to
remain at approximately half of total revenues for the short-term. Over the
long-term, however, R&D as a percent of revenues should decrease, although in
dollar terms R&D spending is expected to rise as revenues rise. Factors
affecting the Company's R&D expenses include, but are not limited to, the
outcome of clinical trials currently being conducted; the number of products
entering into development from late-stage research; future levels of the
Company's product sales (including the impact of competition), royalty
revenues and contract revenues; the possibility of competition with respect to
products or technologies under development; and decisions by HLR to exercise
or not to exercise its option to develop and sell potential products of the
Company in non-U.S. markets and the timing of such decisions.
Income Tax Provision - The Company expects that its effective tax rate will
increase from the current rate of 20% to approximately 35% in 1997, and
continue at or near 35% for the next several years dependent upon several
factors. These factors include, but are not limited to, changes in tax laws
and rates, future levels of R&D spending, the outcome of clinical trials of
certain development products, the Company's success in commercializing such
products, and potential competition regarding the products.
Page 17
Successful development of products - The Company intends to continue to
develop new products. Successful pharmaceutical product development is highly
uncertain and is dependent on numerous factors, many of which are beyond the
Company's control. Products that appear promising in the early phases of
development may fail to reach the market for numerous reasons. They may be
found to be ineffective or to have harmful side effects in preclinical or
clinical testing, may fail to receive necessary regulatory approvals, may turn
out to be uneconomical because of manufacturing costs or other factors, or may
be precluded from commercialization by the proprietary rights of others or by
competing products or technologies for the same indication. Success in
preclinical and early clinical trials does not ensure that large scale
clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations which may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical trials
and from submission of an application for marketing approval to a final
decision by a regulatory authority varies significantly and may be difficult
to predict.
Uncertainties surrounding proprietary rights - The patent positions of
pharmaceutical and biotechnology companies can be highly uncertain and involve
complex legal and factual questions. Accordingly, the breadth of claims
allowed in such company's patents cannot be predicted. Patent disputes are
frequent and can preclude commercialization of products. The Company, as in
the past, may be involved in future material patent litigation. Such
litigation is costly in its own right and could subject the Company to
significant liabilities to third parties and, if decided adversely, the
Company may need to obtain third party licenses or cease using the technology
or product in dispute. As discussed above, the presence of patents or other
proprietary rights belonging to other parties may lead to the termination of
research and development of a particular product.
Liquidity - The Company believes that its cash, cash equivalents, and short-
term and long-term investments, together with funds provided by operations and
leasing arrangements, will be sufficient to meet its foreseeable cash
requirements. Factors affecting the Company's cash position include, but are
not limited to, future levels of the Company's product sales, royalty and
contract revenues, and expenses.
Page 18
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of September 30, 1996, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1996 and 1995, and the condensed consolidated statements
of cash flows for the nine-month periods ended September 30, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Genentech, Inc. as of December
31, 1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated January 17, 1996, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1995, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
San Jose, California
October 9, 1996
Page 19
GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 9, 1996, Genentech and Tanox Biosystems, Inc. (Tanox) announced the
settlement of pending lawsuits filed by each company against the other and
new joint development and cross license agreements relating to anti-IgE
monoclonal antibodies. Tanox had filed a lawsuit against Genentech relating to
the development of anti-IgE, and Genentech had filed a patent infringement
suit against Tanox and Ciba-Geigy Ltd., which is jointly developing anti-IgE
antibodies with Tanox. The three companies agreed in principle to combine
their existing anti-IgE antibody development projects into a cooperative
development effort, and, upon commercialization, to participate in a joint
U.S. marketing and U.S. and European profit sharing arrangement.
On August 26, 1996, a Delaware Chancery Court approved the settlement of a
consolidated stockholder class action lawsuit filed following the announcement
of Genentech's new agreement with Roche Holdings, Inc. (Roche) in October
1995, and the appeal period expired 30 days later. In connection with the
settlement, Roche agreed to increase the prices at which it may cause
Genentech to redeem the non-Roche owned special common stock by $0.50 per
share per quarter, with a final redemption price of $82.50 in the quarter
ending June 30, 1999. Genentech paid the plaintiff's attorneys' fees and, in
connection with the then proposed merger, absorbed the termination costs of
six Europe-based Genentech employees.
See also Note 4 "Legal Proceedings" in Part I "Notes to Condensed Consolidated
Financial Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15.1 Letter re: Unaudited Interim Financial Information
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended September 30, 1996.
Page 20
GENENTECH, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1996 GENENTECH, INC.
/S/ARTHUR D. LEVINSON /S/LOUIS J. LAVIGNE, JR.
------------------------------------- ----------------------------
Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr.
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
/S/BRADFORD S. GOODWIN
----------------------------
Bradford S. Goodwin
Vice President and Controller
Page 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 146,039
<SECURITIES> 1,030,120
<RECEIVABLES> 196,413<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 92,045
<CURRENT-ASSETS> 1,000,099
<PP&E> 857,450
<DEPRECIATION> 308,391
<TOTAL-ASSETS> 2,170,985
<CURRENT-LIABILITIES> 216,490
<BONDS> 150,000
0
0
<COMMON> 2,423
<OTHER-SE> 1,777,001
<TOTAL-LIABILITY-AND-EQUITY> 2,170,985
<SALES> 443,105
<TOTAL-REVENUES> 738,353
<CGS> 77,868
<TOTAL-COSTS> 77,868
<OTHER-EXPENSES> 343,008
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 3,986
<INCOME-PRETAX> 138,598
<INCOME-TAX> 27,720
<INCOME-CONTINUING> 110,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,878
<EPS-PRIMARY> .90
<EPS-DILUTED> 0
<FN>
<F1>ACCOUNTS RECEIVABLE ARE PRESENTED NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS IN
THE CONDENSED CONSOLIDATED BALANCE SHEET. THE PROVISION FOR LOSSES ON DOUBTFUL
ACCOUNTS IS NOT REPORTED AS A SEPARATE LINE IN THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME OR STATEMENT OF CASH FLOWS.
</FN>
</TABLE>
Exhibit 15.1
November 14, 1996
The Board of Directors and Stockholders
Genentech, Inc.
We are aware of the incorporation by reference in the Registration
Statements pertaining to the 1991 Employee Stock Plan, the 1996 Stock
Option/Stock Incentive Plan, the 1994 Stock Option Plan, the 1990 Stock
Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan and the
1984 Non-Qualified Stock Option Plan, the shares issuable to certain
warrant holders, the shares issuable to certain convertible subordinated
debenture holders, the Genentech, Inc. Tax Reduction Investment Plan and in
the related prospectuses, as applicable, contained in such Registration
Statements of our report dated October 9, 1996 relating to the unaudited
condensed consolidated interim financial statements of Genentech, Inc.
which are included in its Form 10-Q for the quarter and nine months ended
September 30, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a
part of the registration statement prepared or certified by accountants
within the meaning of Section 7 or 11 of the Securities Act of 1933.
Very truly yours,
ERNST & YOUNG LLP
