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 June 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 June 30, 1996
Special Common Stock $.02 par value 44,048,647
Class Outstanding at June 30, 1996
GENENTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Condensed Consolidated Statements of Income -
for the three months and six months ended
June 30, 1996 and 1995 3
Condensed Consolidated Statements of Cash Flows -
for the six months ended June 30, 1996 and 1995 4
Condensed Consolidated Balance Sheets -
June 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 20-21
SIGNATURES 22
Page 2
<TABLE>
PART I. FINANCIAL INFORMATION
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales (including amounts
from related parties: three months -
1996-$5,537; 1995-$0; six months -
1996-$9,492; 1995-$0) $ 148,305 $ 161,236 $ 300,642 $ 323,303
Royalties (including amounts from
related parties: three months -
1996-$5,886; 1995-$2,234; six
months - 1996-$12,513; 1995-$4,631) 53,224 49,424 106,117 96,573
Contract and other (including
amounts from related parties:
three months - 1996-$24,675;
1995-$4,387; six months -
1996-$43,432; 1995-$9,571) 27,032 7,861 49,132 24,083
Interest 15,201 14,532 30,755 28,061
--------- --------- --------- ---------
Total revenues 243,762 233,053 486,646 472,020
Costs and expenses:
Cost of sales (including amounts
from related parties:
three months - 1996-$4,379; 1995-$0;
six months - 1996-$7,842; 1995-$0) 27,153 24,312 53,032 51,062
Research and development 112,603 87,167 228,236 182,126
Marketing, general and administrative 60,987 67,814 113,029 132,137
Special charge (merger related) - 8,000 - 8,000
Interest 1,333 2,039 2,892 3,910
--------- --------- --------- ---------
Total costs and expenses 202,076 189,332 397,189 377,235
Income before taxes 41,686 43,721 89,457 94,785
Income tax provision 19,967 6,558 29,521 14,218
--------- --------- --------- ---------
Net income $ 21,719 $ 37,163 $ 59,936 $ 80,567
========= ========= ========= =========
Net income per share $ .18 $ .31 $ .49 $ .67
========= ========= ========= =========
Weighted average number of shares used
in computing per share amounts 123,257 120,899 123,309 120,696
========= ========= ========= =========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 3
<TABLE>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<CAPTION>
Six Months
Ended June 30
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 59,936 $ 80,567
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 30,714 28,899
Deferred income taxes (7,305) -
Gain on sales of securities available-for-sale (90) (5,730)
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 529 32
Changes in assets and liabilities:
Receivables and other current assets (20,761) (69,980)
Inventories 8,201 10,312
Accounts payable, other current liabilities
and other long-term liabilities (6,708) 5,023
---------- ----------
Net cash provided by operating activities 64,516 55,498
Cash flows from investing activities:
Purchases of securities held-to-maturity (326,510) (286,197)
Proceeds from maturities of securities held-to-maturity 422,329 484,815
Purchases of securities available-for-sale (156,410) (225,942)
Proceeds from sales of securities available-for-sale 75,683 20,334
Purchases of non-marketable equity securities (7,523) -
Proceeds from sale of a non-marketable equity security - 703
Capital expenditures (58,184) (23,728)
Change in other assets 3,136 (25,694)
---------- ----------
Net cash used in investing activities (47,479) (55,709)
Cash flows from financing activities:
Stock issuances 43,682 26,644
Additions to long-term debt and
short-term borrowings - 26,109
Repayment of long-term debt, including
current portion (358) (425)
---------- ----------
Net cash provided by financing activities 43,324 52,328
---------- ----------
Net increase in cash and cash equivalents 60,361 52,117
Cash and cash equivalents at beginning of period 137,043 66,713
---------- ----------
Cash and cash equivalents at end of period $ 197,404 $ 118,830
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 4
<TABLE>
GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
(unaudited)
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 197,404 $ 137,043
Short-term investments 556,187 603,296
Accounts receivable, net (including amounts
from related parties: 1996-$49,633;
1995-$19,281) 189,829 172,160
Inventories 85,447 93,648
Prepaid expenses and other current assets 42,725 39,267
------------ ------------
Total current assets 1,071,592 1,045,414
Long-term marketable securities 391,718 356,475
Property, plant and equipment, less
accumulated depreciation
(1996-$294,936; 1995-$268,751) 534,484 503,654
Other assets 109,500 105,452
------------ ------------
Total assets $ 2,107,294 $ 2,010,995
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 31,474 $ 37,459
Other current liabilities (including
amounts due to related parties:
1996-$9,933; 1995-$8,475) 190,223 195,985
------------ ------------
Total current liabilities 221,697 233,444
Long-term debt 150,000 150,000
Other long-term liabilities 25,346 25,504
------------ ------------
Total liabilities 397,043 408,948
Stockholders' equity:
Preferred stock - -
Special common stock 881 853
Common stock 1,532 1,532
Other stockholders' equity 1,707,838 1,599,662
------------ ------------
Total stockholders' equity 1,710,251 1,602,047
------------ ------------
Total liabilities and stockholders' equity $ 2,107,294 $ 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 six-month periods ended June 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
putable common stock (special common stock) of the Company at predetermined
Page 6
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 June 30, 1996 included $19.3 million
primarily related to HLR's exercise of its option with respect to the
development of insulin-like growth factor (IGF-1) outside of the United States
for the treatment of diabetes. On a year to date basis, contract revenue also
included $17.1 million recorded in the first quarter of 1996 related to HLR's
exercise of its option regarding IDEC-C2B8, representing 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.
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; class action lawsuits regarding Protropin;
and employment related cases. In addition, the Company has 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 are defendants in a
number of suits filed in Delaware, which have been 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 have entered
into a memorandum of understanding settling all claims against the defendants
in these actions. In connection with the settlement, if approved by the
court, Roche would increase the prices at which it could 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, and
Genentech would pay the plaintiffs' attorneys up to $3.5 million in attorneys
fees, and in connection with the then proposed merger, Genentech would absorb
the termination costs of up to 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 had 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 products will be permanently enjoined from the U.S.
market.
On May 28, 1996, the Company filed a suit for patent infringement and
declaratory judgement of patent infringement in the Federal District Court for
the District of Massachusetts against Boehringer Mannheim GmbH 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.
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.
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.
Page 8
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Inventories
Inventories at June 30, 1996 and December 31, 1995 are summarized below:
1996 1995
---------- ----------
(thousands)
Raw materials $ 17,332 $ 12,808
Work in process 56,157 67,239
Finished goods 11,958 13,601
---------- ----------
Total $ 85,447 $ 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
quarter ended June 30, 1995, would have been reduced by $1.8 million or $.01
per share ($11.8 million or $.10 per share for the year to date period),
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 Securties
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 the quasi-reorganization had
been fully utilized; thus there was no impact for the three- or six-month
periods ended June 30, 1996.
Note 7. Change in Effective Income Tax Rate
The Company's effective income tax rate in the three-month and six-month
periods ended June 30, 1996 was 48% and 33%, respectively, compared to 15% in
the first half of 1995. The effective rate for the full year 1996 is expected
to be 33%. The second quarter effective rate was 48% as it included an
adjustment to bring the year to date rate to 33%. The rate increase was
primarily due to the implementation of a new approach for funding future R & D
costs of certain development products and related manufacture of these
products, by international subsidiaries of the Company, resulting in foreign
losses not currently providing a tax benefit. Also contributing to the 1996
rate increase was the recognition of a greater amount of tax credit
carryforwards in 1995 than in 1996. The higher tax rates resulted in net
income that was $13.7 million and $16.1 million lower in the second quarter
and first half of 1996, respectively, than it would have been if the prior
year rate had been used.
Page 9
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 8. Subsequent Event
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. A
definitive agreement is expected to be concluded within six months. In July,
1996, the Company made a payment to Tanox in connection with the agreements.
A portion of the payment was accrued by the Company in previous periods as
marketing, general and administrative expense related to expected settlement
costs of this litigation. The remaining portion of the payment will be
charged to research and development expense in the third quarter of 1996
related to the technology rights acquired under the new joint development and
cross license agreements.
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 June 30, 1996 included $19.3 million
primarily related to HLR's exercise of its option with respect to the
development of insulin-like growth factor (IGF-1) outside of the United States
for the treatment of diabetes. On a year to date basis, contract revenue also
included $17.1 million recorded in the first quarter of 1996 related to HLR's
exercise of its option regarding IDEC-C2B8, representing 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.
Page 11
<TABLE>
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
<CAPTION>
Quarter ended June 30 Six months ended June 30
---------------------- ------------------------
REVENUES 1996 1995 % Change 1996 1995 % Change
- ---------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $243.8 $233.0 5% $486.6 $472.0 3%
====== ====== ======== ====== ====== ========
PRODUCT SALES
- ----------------------
Activase $ 72.3 $ 74.1 (2)% $148.9 $152.3 (2)%
Protropin and Nutropin 54.1 55.9 (3) 110.1 110.3 0
Pulmozyme 20.8 30.3 (31) 39.7 58.8 (32)
Actimmune 1.1 .9 22 1.9 1.9 0
------ ------ -------- ------ ------ --------
Total product sales $148.3 $161.2 (8)% $300.6 $323.3 (7)%
====== ====== ======== ====== ====== ========
</TABLE>
Overall product sales in the three- and six-month periods ended June 30, 1996
decreased 8% and 7%, respectively, from the comparable periods in 1995
primarily due to the fact that sales of products to customers in Europe and
Canada are now made by Roche 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 second quarter of 1996, Genentech's
product sales to HLR for Canadian and European sales were $5.5 million; in the
comparable period of 1995 Genentech's sales to customers in these regions were
$16.4 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 second quarter of 1996 were $148.3 million, compared to $144.8 million in
1995. In the year to date period, on a pro forma basis, total product sales
were $300.6 million in 1996 and $293.1 million in 1995. Year to date sales to
HLR for Canadian and European sales in 1996 were $9.5 million; in 1995
Genentech's customer sales in these regions were $30.2 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)
recombinant tissue plasminogen activator, decreased 2% in the second quarter
of 1996 compared to the second quarter of 1995, as the impact of not having
Canadian customer sales in 1996 (such sales were $3.6 million in 1995) more
than offset an increase in U.S. sales due to higher market share, and the new
sales to Roche. On a pro forma basis as described above, 1996 second quarter
sales of Activase were $72.3 million, compared to $70.5 million in the second
quarter of 1995. On a year to date basis, Activase sales decreased 2% for the
same reasons, in addition to 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 $148.9 million in 1996 compared to $146.4 million in 1995.
Despite Activase's continued market share growth, the overall size of the
thrombolytic therapy market during the second quarter of 1996 declined by 5%
from the second quarter of 1995 as a result of the increasing use of alternate
therapies in the treatment of heart attack patients. 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.
Page 12
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) - decreased 3% in the second quarter
of 1996 over the comparable period in 1995, resulting from lower U.S. sales as
well as the transfer of Canadian sales of growth hormone to HLR in late 1995.
On a pro forma basis, growth hormone sales were $54.1 million in the second
quarter of 1996 compared to $55.2 million in 1995. On a year to date basis,
growth hormone sales were essentially flat. For the year to date period on a
pro forma basis, sales of growth hormone were $110.1 million in 1996 compared
to $108.9 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 31% in the quarter ended June 30, 1996
compared to the second quarter of 1995, primarily due to the Agreement with
Roche. 1995 Pulmozyme sales included $12.2 million of sales to European and
Canadian customers. In 1996, sales in these territories are made by HLR. On a
pro forma basis, Pulmozyme sales were $20.8 million in the second quarter of
1996, compared to $18.1 million in the second quarter of 1995. Pulmozyme
sales in the six months ended June 30, 1996 were down 32% from the prior year,
primarily due to the Agreement with Roche. On a pro forma basis, sales in the
first half of 1996 were $39.7 million versus $35.9 million in 1995.
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
ROYALTIES, CONTRACT AND ---------------------- ------------------------
OTHER, AND INTEREST INCOME 1996 1995 % Change 1996 1995 % Change
- ----------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Royalties $53.2 $49.4 8% $106.1 $96.6 10%
Contract and other 27.0 7.9 242 49.1 24.1 104
Interest income 15.3 14.5 6 30.8 28.1 10
</TABLE>
Royalty income increased 8% in the quarter ended June 30, 1996, and 10% 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 half 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.
Contract and other income increased in the second quarter of 1996 over the
second quarter of 1995 due to $19.3 million of contract revenue from HLR
primarily related to HLR's exercise of its option regarding IGF-1, as
discussed previously. For the year to date period, contract and other income
increased $25.0 million, due to the IGF-1 revenue plus $17.1 million in the
first quarter of 1996 related to Roche's exercise of its option regarding
IDEC-C2B8. This increase was partially offset by two factors - the inclusion
in other income in 1995 of $6.3 million of gains on sales on biotechnology
equity securities; and a decrease in other contract revenue in 1996 resulting
from normal quarterly variations in the timing of contract benchmark
achievements and payments.
Page 13
Interest income increased in 1996 compared to 1995 due to a larger investment
portfolio and a higher average portfolio yield. The total investment
portfolio, consisting of cash and cash equivalents, and short- and long-term
marketable securities, increased to $1,145.3 million as of June 30, 1996 from
$985.8 million as of June 30, 1995, and from $1,096.8 million as of December
31, 1995.
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
---------------------- ------------------------
COSTS AND EXPENSES 1996 1995 % Change 1996 1995 % Change
- ----------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales $ 27.2 $ 24.3 12% $ 53.0 $ 51.1 4%
Research and development 112.6 87.2 29 228.3 182.1 25
Marketing, general and
administrative 61.0 67.8 (10) 113.0 132.1 (14)
Special charge (merger related) - 8.0 (100) - 8.0 (100)
Interest expense 1.3 2.0 (35) 2.9 3.9 (26)
------ ------ -------- ------ ------ --------
Total costs and expenses $202.1 $189.3 7% $397.2 $377.2 5%
====== ====== ======== ====== ====== ========
</TABLE>
Cost of sales as a percent of product sales increased in the second quarter of
1996 over the second 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 also 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 29% and 25% in the second quarter and year to date
periods of 1996, respectively, over the comparable periods in 1995 due to
increased expenditures for scale-up, other process improvements and clinical
material production for products in Phase II and III clinical development; and
other expenses for products in late stage clinical trials including the
Company's cardiovascular products and IGF-1. There was also an increased
number of projects in early stage development in 1996. Partially offsetting
these increases were projects with decreased expenditures from the prior year,
including the Phase III trial for Pulmozyme for Chronic Obstructive Pulmonary
Disease (COPD), which was halted in the third quarter of 1995. R&D as a
percent of revenue was approximately 46% in the second quarter of 1996, and
47% on a year to date basis.
Marketing, general and administrative expenses decreased in the quarter ended
June 30, 1996 versus the comparable period in 1995 primarily due to the
closure of the Company's European and Canadian operations in conjunction with
the Agreement, partially offset by higher U.S. sales and marketing
expenses stemming from the timing of various promotional activities. Also
Page 14
contributing to the decrease was the $5.7 million writedown of an equity
investment in the second quarter of 1995. Marketing, general and
administrative expenses also decreased on a year to date basis, for the same
reasons as in the quarterly period.
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 June 30 Six months ended June 30
--------------------- ------------------------
INCOME TAXES 1996 1995 1996 1995
- -------------------------- -------- -------- ---------- ----------
Income taxes $ 20.0 $ 6.6 $ 29.5 $ 14.2
The Company's effective income tax rate rose to 33% for the six months ended
June 30, 1996, compared to 15% in the first half of 1995, primarily due to the
implementation of a new approach for funding future R & D costs of certain
development products and related manufacture of these products, by
international subsidiaries of the Company, resulting in foreign losses not
currently providing a tax benefit. The effective tax rate is expected to be
33% for the second half and full year of 1996. The effective rate in the
second quarter of 1996 was 48% as it included an adjustment to bring the year
to date rate to 33%. Also contributing to the 1996 rate increase was the
recognition of a greater amount of tax credit carryforwards in 1995 than in
1996.
Quarter ended June 30 Six months ended June 30
---------------------- ------------------------
NET INCOME 1996 1995 % Change 1996 1995 % Change
- ------------------------ ------ ------ -------- ------ ------ --------
Net income $21.7 $37.2 (42)% $59.9 $80.6 (26)%
Earnings per share $ .18 $ .31 $ .49 $ .67
Net income decreased in the second quarter and first half of 1996 compared to
1995 primarily due to the Company's higher effective income tax rate, and
secondarily due to increased R & D expenses which more than offset higher
revenues from contract payments and royalties.
LIQUIDITY AND CAPITAL
RESOURCES June 30, 1996 December 31, 1995
- ----------------------------- ---------------- -------------------
Cash, cash equivalents, $ 1,145.3 $ 1,096.8
short-term investments
and long-term marketable
securities
Working capital 849.9 812.0
Page 15
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 June 30, 1996 rose slightly compared to December
31, 1995, and working capital increased $37.9 million.
Capital expenditures totaled $58.2 million in the first six months of 1996
compared to $23.7 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 and the timing and amount of bulk
shipments to Japanese licensees.
Activase Sales - The Company faces the possibility of potential new
competition in the thrombolytic market. Genentech is aware that one company is
seeking FDA approval to market its product for the treatment of acute
myocardial infarction (AMI) in the United States, and recently an advisory
committee of the FDA recommended that the product be approved for such
treatment. Genentech has brought suit against that company for patent
infringement. 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 new competitive products, pricing decisions
made by the Company, the outcome of litigation involving the Company's patents
for Activase and related processes, the increasing use of other therapies such
as angioplasty for the treatment of AMI, and the impact of the FDA's recent
clearance to market Activase for the treatment of acute ischemic stroke.
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 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 page 13 "Results
of Operations" for further information). A fourth company received notice
from the FDA in April 1996 that such approval is imminent, and additionally is
seeking approval to sell its human growth hormone product to treat AIDS
wasting. Another of Genentech's competitors has received approval to market
its existing human growth hormone product for an additional indication.
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 new competitive products, the outcome of litigation involving the
Company's patents for 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.
Page 16
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, 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 as a result of its new
approach for funding and manufacturing certain development products (see page
15 "Income Taxes" for further information), and due to rate increases expected
following the recognition in 1996 of the balance of the Company's federal tax
credit carryforwards, Genentech's effective tax rate will continue to trend
upwards through 1999, and then decline as these development products are
brought to market. Factors affecting future effective tax rates include, but
are not limited to, future levels of R&D spending, the outcome of clinical
trials of certain development products, the Company's success in
commercializing such products, potential competition regarding the products,
and changes in tax laws and rates.
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
they 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
Page 17
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 revenues
and contract revenues.
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 June 30, 1996, and the related condensed consolidated
statements of income for the three-month and six-month periods ended June 30,
1996 and 1995, and the condensed consolidated statements of cash flows for the
six-month periods ended June 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
July 9, 1996
Page 19
GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 28, 1996, the Company filed a suit for patent infringement and
declaratory judgement of patent infringement in the Federal District Court for
the District of Massachusetts against Boehringer Mannheim GmbH and Boehringer
Mannheim Corporation, alleging that the manufacture, use and sale of their
thrombolytic agent, reteplase, infringes five Genentech patents relating to
Activase, registered trademark, and/or general biotechnology processes.
On June 27, 1996, the United States District Court for the Southern district
of New York granted the Company's request for a second preliminary injunction
against Novo Nordisk A/S and certain of its affiliates (Novo) to prohibit the
sale of Novo's human growth hormone product in the United States until a full
trial on the matter is concluded, based on a recently issued U.S. patent that
the Company did not assert in an earlier proceeding.
See also Note 4 "Legal Proceedings" in Part I "Notes to Condensed Consolidated
Financial Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on April 18, 1996, three
matters were voted upon. A description of each matter and tabulation of votes
follows:
1. Election of four Directors:
Nominee Votes
------------------- ----------------------------------
For Withheld
--------------- ---------------
J. Richard Munro 102,866,738 445,469
C. Thomas Smith, Jr. 102,867,699 444,508
Robert A. Swanson 102,882,373 429,834
David S. Tappan, Jr. 102,844,049 468,158
There were no abstentions or broker nonvotes.
2. Approval of the Company's 1996 Stock Option/Stock Incentive Plan:
Votes
-------------------------------------------------------------
For Against Abstain Nonvotes
-------------- ------------- ----------- --------------
89,024,393 7,292,966 218,406 6,776,442
Page 20
3. Ratification of Ernst & Young LLP as the Company's Independent
Accountants:
Votes
-------------------------------------------------------------
For Against Abstain Nonvotes
------------- ------------- ----------- --------------
103,177,219 48,290 86,698 0
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
June 30, 1996.
Page 21
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: August 14, 1996 GENENTECH, INC.
/S/ARTHUR D. LEVINSON /S/LOUIS J. LAVIGNE
------------------------------------- ----------------------------
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 22
<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 JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 118,830
<SECURITIES> 1,026,479
<RECEIVABLES> 189,829<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 85,447
<CURRENT-ASSETS> 1,071,592
<PP&E> 829,420
<DEPRECIATION> 294,936
<TOTAL-ASSETS> 2,107,294
<CURRENT-LIABILITIES> 221,697
<BONDS> 150,000
0
0
<COMMON> 2,413
<OTHER-SE> 1,707,838
<TOTAL-LIABILITY-AND-EQUITY> 2,107,294
<SALES> 300,642
<TOTAL-REVENUES> 486,646
<CGS> 53,032
<TOTAL-COSTS> 53,032
<OTHER-EXPENSES> 228,236
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 2,892
<INCOME-PRETAX> 89,457
<INCOME-TAX> 29,521
<INCOME-CONTINUING> 59,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,936
<EPS-PRIMARY> .49
<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 OF STATEMENT OF CASH FLOWS.
</FN>
</TABLE>
Exhibit 15.1
August 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 July 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 six months ended
June 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
