<PAGE>
UNITED STATES
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, 1998.
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)
1 DNA Way, South San Francisco, California 94080
(Address of principal executive offices and zip code)
(650) 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.
Class Number of Shares Outstanding
- ----- ----------------------------
Common Stock $.02 par value 76,621,009
(Common Stock) Outstanding at June 30, 1998
Callable Putable Common Stock $.02 par value 49,223,128
(Special Common Stock) Outstanding at June 30, 1998
<PAGE>
GENENTECH, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Condensed Consolidated Statements of Income -
for the three months and six months ended
June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows -
for the six months ended June 30, 1998 and 1997 4
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Independent Accountants' Review Report 10
Financial Review 11-19
PART II. OTHER INFORMATION 20
SIGNATURES 22
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales (including amounts
from related parties: three months -
1998-$6,566; 1997-$4,504; six
months - 1998-$13,173; 1997-$8,998) $ 176,263 $ 145,018 $ 340,982 $ 299,231
Royalties (including amounts from
related parties: three months -
1998-$8,752; 1997-$6,225; six
months - 1998-$15,881; 1997-$13,023) 57,388 55,379 121,881 120,691
Contract and other (including
amounts from related parties:
three months - 1998-$7,850;
1997-$10,695; six months -
1998-$15,648; 1997-$26,401) 14,056 16,659 28,921 38,068
Interest 20,305 16,437 40,928 32,788
--------- --------- --------- ---------
Total revenues 268,012 233,493 532,712 490,778
Costs and expenses:
Cost of sales (including amounts
from related parties: three months -
1998-$5,747; 1997-$3,664; six
months - 1998-$11,772; 1997-$7,563) 37,150 25,567 70,771 53,252
Research and development (including
contract related: three months -
1998-$10,679; 1997-$10,695; six
months - 1998-$19,741; 1997-$26,401 92,949 110,890 191,151 233,633
Marketing, general and administrative 80,643 63,073 155,593 125,054
Interest 1,195 916 2,154 1,904
--------- --------- --------- ---------
Total costs and expenses 211,937 200,446 419,669 413,843
Income before taxes 56,075 33,047 113,043 76,935
Income tax provision 15,701 9,253 31,652 21,542
--------- --------- --------- ---------
Net income $ 40,374 $ 23,794 $ 81,391 $ 55,393
========= ========= ========= =========
Earnings per share
Basic $ 0.32 $ 0.19 $ 0.65 $ 0.45
========= ========= ========= =========
Diluted $ 0.31 $ 0.19 $ 0.63 $ 0.44
========= ========= ========= =========
Weighted average shares used to
compute diluted earnings per share 129,775 126,425 129,291 125,842
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 81,391 $ 55,393
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 37,246 33,568
Deferred income taxes (8,480) (4,445)
Gain on sales of securities available-for-sale (5,835) (5,836)
Loss on sales of securities available-for-sale 389 1,217
Write down of securities available-for-sale 7,193 -
Loss on fixed asset dispositions - 83
Changes in assets and liabilities:
Investments in trading securities (16,263) (101,631)
Receivables and other current assets 12,458 (17,618)
Inventories (814) (7,724)
Accounts payable, other current liabilities
and other long-term liabilities (7,281) 6,064
---------- ----------
Net cash provided by (used in) operating activities 100,004 (40,929)
Cash flows from investing activities:
Purchases of securities held-to-maturity (177,416) (213,523)
Proceeds from maturities of securities held-to-maturity 152,182 281,045
Purchases of securities available-for-sale (302,359) (204,141)
Proceeds from sales of securities available-for-sale 162,945 237,383
Purchases of non-marketable equity securities (5,425) -
Capital expenditures (43,331) (76,454)
Change in other assets (2,568) (34,334)
---------- ----------
Net cash used in investing activities (215,972) (10,024)
Cash flows from financing activities:
Stock issuances 61,451 51,420
---------- ----------
Net cash provided by financing activities 61,451 51,420
---------- ----------
Net (decrease) increase in cash and cash equivalents (54,517) 467
Cash and cash equivalents at beginning of period 244,469 207,264
---------- ----------
Cash and cash equivalents at end of period $ 189,952 $ 207,731
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 4
<PAGE>
GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 189,952 $ 244,469
Short-term investments 731,361 588,853
Accounts receivable, net (including amounts
from related party: 1998-$36,238;
1997-$44,386) 180,086 189,245
Inventories 116,840 116,026
Prepaid expenses and other current assets 53,878 55,325
------------ ------------
Total current assets 1,272,117 1,193,918
Long-term marketable securities 466,963 453,188
Property, plant and equipment, less accumulated
depreciation (1998-$409,351; 1997-$376,091) 693,375 683,304
Other assets 174,240 177,202
------------ ------------
Total assets $ 2,606,695 $ 2,507,612
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,859 $ 48,992
Income taxes payable 57,032 40,293
Accrued liabilities - related party 14,468 15,427
Other accrued liabilities 165,882 184,845
------------ ------------
Total current liabilities 267,241 289,557
Long-term debt 150,000 150,000
Other long-term liabilities 30,435 36,830
------------ ------------
Total liabilities 447,676 476,387
Commitments and contingencies
Stockholders' equity:
Preferred stock - -
Special Common Stock 985 952
Common Stock 1,532 1,532
Additional paid-in capital 1,525,186 1,463,768
Retained earnings 592,532 511,141
Net unrealized gain on securities
available-for-sale 38,784 53,832
------------ ------------
Total stockholders' equity 2,159,019 2,031,225
------------ ------------
Total liabilities and stockholders' equity $ 2,606,695 $ 2,507,612
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 5
<PAGE>
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- and six-month periods ended June 30, 1998 and 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. The condensed consolidated balance sheet as of
December 31, 1997 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, 1997.
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
The Company adopted Statement of Financial Accounting Standards (FAS) No.
128, "Earnings Per Share," for the year ended December 31, 1997. All
earnings per share (EPS) and share amounts for all periods presented have
been restated to comply with FAS 128. The following is a reconciliation of
the numerator and denominators of the basic and diluted EPS computations for
the three- and six-month periods ended June 30, 1998 and 1997 (in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income - numerator for
basic and diluted EPS: $ 40,374 $ 23,794 $ 81,391 $ 55,393
-------- -------- -------- --------
Denominator:
Denominator for basic EPS--
weighted-average shares 125,601 122,808 125,179 122,389
Effect of dilutive securities:
Stock options 4,174 3,617 4,112 3,453
-------- -------- -------- --------
Denominator for diluted EPS
--adjusted weighted-average
shares and assumed conversions 129,775 126,425 129,291 125,842
======== ======== ======== ========
</TABLE>
Page 6
<PAGE>
Options to purchase 1,580,150 shares of Special Common Stock between $68.19
per share and $68.38 per share were outstanding in the six-month period ended
June 30, 1998, and options to purchase 147,900 shares of Special Common Stock
at $58.38 per share and 182,105 shares of Special Common Stock between $57.38
per share and $58.38 per share were outstanding in the three- and six-month
periods ended June 30, 1997, respectively, but were not included in the
computations of diluted EPS because the options were anti-dilutive.
In the three- and six-month periods ended June 30, 1998 and 1997, the Company
had convertible subordinated debentures that were convertible to 1,013,514
shares of Special Common Stock, but were not included in the computations of
diluted EPS because they were anti-dilutive.
The Financial Accounting Standards Board (the FASB) issued FAS 130,
"Reporting Comprehensive Income," and FAS 131, "Disclosures about Segments of
an Enterprise and Related Information," in June 1997, which require
additional disclosures to be adopted by December 31, 1998. Under FAS 130,
the Company is required to display comprehensive income and its components as
part of the Company's full set of financial statements. Comprehensive income
is comprised of net income and other comprehensive income. The measurement
and presentation of net income will not change. Other comprehensive income
includes certain changes in equity of the Company that are excluded from net
income. Specifically, FAS 130 requires unrealized holding gains and losses
on the Company's available-for-sale securities, which are currently reported
separately in stockholders' equity, to be included in other comprehensive
income. For the three months ended June 30, 1998 and 1997, total
comprehensive income was $20.2 million and $20.0 million, respectively. For
the six months ended June 30, 1998 and 1997, total comprehensive income was
$66.3 million and $45.7 million, respectively.
FAS 131 requires that the Company report financial and descriptive
information about its reportable operating segments. The Company is
evaluating the impact on its disclosures.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities, " effective beginning in the first quarter of 2000.
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and
measure those instruments at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting
under FAS 133. The Company is currently evaluating the impact of FAS 133 on
its financial position and results of operations.
Note 3. Relationship with Roche Holdings, Inc.
On October 25, 1995, the Company and Roche Holdings, Inc. (Roche) entered
into a new agreement (the Agreement) to extend until June 30, 1999, Roche's
option to cause the Company to redeem (call) the outstanding 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 shares of
Common Stock for a price equal to the Company's cost to redeem the Special
Common Stock. During the quarter beginning July 1, 1998, the call price is
$78.00 per share and increases by $1.50 per share each quarter through the
end of the option period on June 30, 1999, on which date the price will be
$82.50 per share. If Roche does not cause the redemption as of June 30,
1999, the Company's stockholders will have the option (the put) to cause the
Page 7
<PAGE>
Company to redeem none, some or all of their shares of Special Common Stock
at $60.00 per share (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) within thirty business days commencing July
1, 1999. Roche Holding Ltd, a Swiss corporation, has guaranteed Roche's
obligation under the put.
In the event that sufficient shares of the Company's Special Common Stock
are tendered pursuant to the put to result in Roche owning at least 85% of
the total outstanding shares of the Company's outstanding equity, the
Company has in place an Incentive Units Program (the Program) that would
result in amounts becoming payable to eligible employees if specified
performance benchmarks are achieved by the Company during the term of the
Program. These amounts would vary depending on which benchmarks are
achieved. At June 30, 1998, no such amounts were payable under the Program.
In conjunction with the Agreement and revisions agreed upon in principle in
the second quarter of 1997, F. Hoffmann-La Roche Ltd (HLR) was granted an
option for ten years for licenses to use and sell certain of the Company's
products in non-U.S. markets (the License Agreement). Under the License
Agreement, HLR may exercise its option to license any such future product of
the Company either when the Company determines to move such product into
development or at the end of Phase II clinical trials. The License Agreement
provides that the Company and HLR will share the U.S. and European
development costs regardless of the location or purpose of studies.
Under the Agreement, independent of its right to cause the Company to redeem
the Special Common Stock, Roche may increase its ownership of the Company up
to 79.9% by making purchases on the open market. Roche held approximately
66.0% of the outstanding common equity of the Company as of June 30, 1998.
Contract revenue for the reimbursement of ongoing development expenses for
nerve growth factor (NGF), for which HLR exercised its development option
under the License Agreement in 1996, was $4.2 million and $8.8 million for
the three- and six-month periods ended June 30, 1998.
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 Protropin, registered
trademark, and other matters. In July 1997, an action was filed in the U.S.
District Court for the Northern District of California alleging that the
Company's manufacture, use and sale of its Nutropin, registered trademark,
human growth hormone products infringed a patent (the Goodman Patent) owned
by the Regents of the University of California (UC). This action is
substantially the same as a previous action filed in 1990 against the Company
by UC alleging that the Company's manufacture, use and sale of its Protropin
human growth hormone products infringed the Goodman Patent. The 1997 case
has been stayed pending the conclusion of the 1990 case, which is expected to
commence trial on February 1, 1999. In 1995, the Company received and
responded to grand jury document subpoenas from the U.S. District Court for
the Northern District of California for documents relating to the Company's
past clinical, sales and marketing activities associated with human growth
hormone. In February 1997 and February 1998, the Company received grand jury
document subpoenas from the same court related to the same subject matter.
The government is actively investigating this matter, and the Company
believes that it is a subject of that investigation. Certain employees and
Page 8
<PAGE>
an ex-employee received letters from the government informing them that they
are targets of the investigation.
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
these 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 are summarized below:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(thousands)
<S> <C> <C>
Raw materials and supplies $ 13,152 $ 17,544
Work in process 91,660 84,831
Finished goods 12,028 13,651
--------- ---------
Total $ 116,840 $ 116,026
========= =========
</TABLE>
Note 6. Subsequent Events
On July 6, 1998, the Company entered into an agreement with HLR to provide
HLR exclusive marketing rights outside of the U.S. for Herceptin, registered
trademark, (Trastuzumab). Under the agreement, HLR paid a $40.0 million up-
front fee and has agreed to pay cash milestones tied to product development
activities, to contribute equally with the Company on global development
costs and to make royalty payments on product sales.
Also in July 1998, the Company and Novo Nordisk A/S (Novo) agreed to settle a
lawsuit brought in October 1997 by Novo in the U.S. District Court for the
District of New Jersey alleging infringement of a patent held by Novo
relating to the Company's manufacture, use and sale of its Nutropin human
growth hormone products, and a lawsuit brought by the Company in the U.S.
District Court for the Southern District of New York relating to the
Company's patents for human growth hormone and insulin. Under the settlement
agreement, Novo and the Company will cross-license worldwide certain patents
relating to human growth hormone. At the end of August 1998, Novo will
receive a worldwide license under the Company patents relating to insulin and
the Company will receive certain payments.
Page 9
<PAGE>
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, 1998, and the related condensed consolidated
statements of income for the three-month and six-month periods ended June 30,
1998 and 1997, and the condensed consolidated statements of cash flows for
the six-month periods ended June 30, 1998 and 1997. 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, 1997, 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 20, 1998, 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, 1997, 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 10, 1998
Page 10
<PAGE>
GENENTECH, INC.
FINANCIAL REVIEW
RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On October 25, 1995, Genentech, Inc. (the Company) and Roche Holdings, Inc.
(Roche) entered into a new agreement (the Agreement) to extend until June 30,
1999, Roche's option to cause the Company to redeem (call) 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 shares of the Company's common
stock (the Common Stock) for a price equal to the Company's cost to redeem
the Special Common Stock. If Roche does not cause the redemption as of June
30, 1999, the Company's stockholders will have the option to cause the
Company to redeem none, some or all of their shares of Special Common Stock
at $60.00 per share (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) within thirty business days commencing July
1, 1999.
In conjunction with the Agreement and revisions agreed upon in principle in
the second quarter of 1997, F. Hoffmann-La Roche Ltd (HLR) was granted an
option for ten years for licenses to use and sell certain of the Company's
products in non-U.S. markets (the License Agreement). The License Agreement
provides that the Company and HLR will share the U.S. and European
development costs regardless of the location or purpose of studies. Under
the License Agreement, HLR may exercise its option to license any such future
products of the Company either when the Company determines to move such
product into development or at the end of Phase II clinical trials. See the
Relationship with Roche Holdings, Inc. note in the Notes to Condensed
Consolidated Financial Statements for further information.
As a result of the License Agreement, contract revenue for the quarter ended
June 30, 1998, and on a year-to-date basis totaled $4.2 million and $8.8
million for the reimbursement of ongoing development expenses related to
nerve growth factor (NGF), for which HLR exercised its development option
under the License Agreement in 1996.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
REVENUES 1998 1997 % Change 1998 1997 % Change
- ---------------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 268.0 $ 233.5 15% $ 532.7 $ 490.8 9%
======= ======= ======== ======= ======= ========
PRODUCT SALES
- ----------------------------
Activase $ 54.1 $ 68.3 (21)% $ 109.8 $ 143.3 (23)%
Protropin, Nutropin
and Nutropin AQ 62.3 55.6 12 113.2 111.5 2
Pulmozyme 24.1 20.2 19 43.6 42.5 3
Rituxan 34.8 - - 72.5 - -
Actimmune 1.0 0.9 11 1.9 1.9 0
------- ------- -------- ------- ------- --------
Total product sales $ 176.3 $ 145.0 22% $ 341.0 $ 299.2 14%
======= ======= ======== ======= ======= ========
</TABLE>
Page 11
<PAGE>
Rituxan, trademark, (Rituximab) was approved by the FDA in November 1997 for
the treatment of patients with relapsed or refractory low-grade or
follicular, CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the
immune system. Net sales of Rituxan were $34.8 million and $37.7 million in
the first and second quarter of 1998, respectively. Although not enough time
has passed for these figures to be indicative of the future trend of Rituxan
sales, the Company believes that the initial pent-up demand reflected in
sales for the fourth quarter of 1997 and the first quarter of 1998 is being
replaced by demand from increased use. Rituxan was co-developed by the
Company and IDEC Pharmaceuticals Corporation (IDEC), from whom the Company
licenses Rituxan.
During the first quarter of 1998, the Company received FDA approval for the
large-scale (12,000-liter) manufacture of Rituxan. The Rituxan that the
Company manufactures will supplement the Rituxan manufactured by IDEC for the
Company. During the second quarter, the Company's and IDEC's partner HLR
received approval from the European Commission to market Rituxan under the
tradename MabThera, trademark, for marketing in the European Union. MabThera
was approved for treating non-Hodgkin's lymphoma patients who have had two or
more relapses or are resistant to chemotherapy. HLR holds marketing rights
for MabThera outside of the U.S. and Japan. HLR has agreed to pay to the
Company royalties and a mark-up on MabThera supplied to HLR.
Net sales of Activase, registered trademark, (Alteplase, recombinant), a
tissue plasminogen activator (t-PA), decreased in the three- and six-month
periods ended June 30, 1998 from the comparable periods in 1997. These
decreases were primarily due to a decline in market share as a result of
competition from Centocor, Inc.'s (Centocor) Retavase, registered trademark.
These decreases also resulted, to a lesser extent, from a decline in the size
of the thrombolytic market due to increasing use of angioplasty and from a
decrease in the available commercial market due to patients receiving therapy
through two large ongoing Phase III clinical trials. Even though Activase's
market share and the thrombolytic market size declined from the prior year,
the market share and size during 1998 have remained constant.
In March 1998, the Company received two new patents related to variant forms
of t-PA. Based on these patents, the Company filed an infringement action
against Centocor in the Northern District of California which alleges that
Centocor's sale, offer for sale, use in, and importation into, the U.S. of
Retavase (Reteplase, recombinant), a t-PA, infringes these two new patents of
the Company. The Company is seeking a permanent injunction and damages.
In early July 1998, the Company and partner Boehringer Ingelheim GmbH
announced preliminary findings from the European Cooperative Acute Stroke
Study II (ECASS II) in stroke patients presenting within 0 to 6 hours of
symptom onset. This study failed to show a statistically significant
clinical benefit in stroke patients treated with Actilyse, registered
trademark, (the European tradename for Alteplase, recombinant) compared to
placebo. The Company's Activase (the U.S. tradename for Alteplase,
recombinant) is approved for the treatment of acute ischemic stroke within 3
hours of symptom onset.
Also in July 1998, the Company announced that the Data Safety Monitoring
Board (DSMB) of its U.S. clinical trial ATLANTIS (Alteplase ThromboLysis for
Acute Noninterventional Therapy in Ischemic Stroke), recommended termination
of the study. ATLANTIS is a placebo-controlled, double-blinded pivotal study
observing Activase in acute ischemic stroke patients three to five hours from
symptom onset. As a result of the DSMB's recommendation, the Company has
decided not to file for a label extension for Activase in acute ischemic
stroke beyond the currently approved three-hour window.
Page 12
<PAGE>
Net sales of the Company's three growth hormone products - Protropin,
registered trademark, (somatrem for injection), Nutropin, registered
trademark, [somatropin (rDNA origin) for injection] and Nutropin AQ,
registered trademark, [somatropin (rDNA origin) injection] - increased in the
three- and six-month periods ended June 30, 1998 from the comparable periods
in 1997. These increases primarily reflect fluctuations in distributors'
ordering patterns and treatment of new adult patients with growth hormone
deficiency following regulatory approval of Nutropin and Nutropin AQ for this
indication in December 1997.
Net sales of Pulmozyme, registered trademark, (dornase alfa) increased in the
three- and six-month periods ended June 30, 1998 from the comparable periods
in 1997 primarily due to fluctuations in ordering patterns and new patients
in all age groups, including very young patients following regulatory
approval for this age group. In February 1998, the Company received approval
from the U.S. Food and Drug Administration (FDA) for a label extension for
Pulmozyme. With this revised labeling, Pulmozyme may now also be used to
treat very young children with cystic fibrosis, ages three months to four
years, adding to the product's previous approvals for patients five years of
age and older.
During the quarter ended June 30, 1998, the Company licensed U.S. marketing
and development rights to interferon gamma, including Actimmune, registered
trademark, (Interferon gamma-1b), to Connetics Corporation. Following a
transition period, the Company will no longer sell Actimmune.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
ROYALTIES, CONTRACT AND ------------------ ------------------
OTHER, AND INTEREST INCOME 1998 1997 % Change 1998 1997 % Change
- ---------------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Royalties $ 57.4 $ 55.4 4% $ 121.9 $ 120.7 1%
Contract and other 14.0 16.7 (16) 28.9 38.1 (24)
Interest income 20.3 16.4 24 40.9 32.8 25
</TABLE>
Royalty revenues increased in the second quarter of 1998 from the second
quarter of 1997 due to higher royalties from HLR. On a year-to-date basis,
royalty revenues were comparable to last year. Although royalty revenues in
1998 were higher than last year due to higher licensee sales, this increase
was offset by the reversal of reserves against certain royalty revenues in
the first quarter of 1997. See also above discussion of Rituxan and new
Roche royalties related to Rituxan.
Contract and other revenues decreased in the second quarter of 1998 from the
comparable period in 1997 due to higher gains on the sale of biotechnology
equity securities in the second quarter of 1997 partly offset by higher
contract revenues from collaborators in 1998. On a year-to-date basis
compared to last year, contract and other revenues were lower primarily as a
result of fluctuations in contract revenues from HLR. Two projects, Rituxan
and IGF-I, for which HLR exercised its development option in 1996, have wound
down. Rituxan was commercialized in the fourth quarter of 1997 and IGF-I in
Type I and II diabetes mellitus was discontinued in September 1997.
Interest income increased in the second quarter of 1998 and on a year-to-date
basis from the comparable periods in 1997 primarily due to a higher portfolio
balance. The total investment portfolio, consisting of cash and cash
Page 13
<PAGE>
equivalents, and short- and long-term marketable securities, increased to
$1,388.3 million as of June 30, 1998 from $1,156.9 million as of June 30,
1997 and from $1,286.5 million as of December 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
COSTS AND EXPENSES 1998 1997 % Change 1998 1997 % Change
- ---------------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales $ 37.2 $ 25.6 45% $ 70.8 $ 53.3 33%
Research and development 92.9 110.9 (16) 191.1 233.6 (18)
Marketing, general and
administrative 80.6 63.0 28 155.5 125.0 24
Interest expense 1.2 0.9 33 2.2 1.9 16
------- ------- -------- ------- ------- --------
Total costs and expenses $ 211.9 $ 200.4 6% $ 419.6 $ 413.8 1%
======= ======= ======== ======= ======= ========
</TABLE>
Cost of sales increased in the second quarter of 1998 and on a year-to-date
basis from the comparable periods in 1997 primarily as a result of a shift in
the product mix, including the introduction of Rituxan and higher costs.
Research and development expenses decreased in the second quarter of 1998 and
on a year-to-date basis from the comparable periods in 1997 primarily due to
fewer large late-stage clinical trials in 1998. On a year-to-date basis for
1998, the Company invested approximately 36% of revenues into R&D compared to
48% in the comparable period in 1997. This percentage decrease reflects the
Company's goal to decrease R&D spending as a percent of revenues as products
progress through late-stage clinical trials and revenues increase.
Marketing, general and administrative (MG&A) expenses increased in the second
quarter of 1998 and on a year-to-date basis from the comparable periods in
1997. These increases were due to higher marketing and sales (M&S) expenses
related to the introduction of Rituxan and the resultant profit sharing with
IDEC and as a result of competitive conditions with other marketed products.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
INCOME TAXES 1998 1997 % Change 1998 1997 % Change
- --------------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Taxes $ 15.7 $ 9.3 69% $ 31.7 $ 21.6 47%
</TABLE>
The Company's effective income tax rate for the second quarter of 1998 and on
a year-to-date basis was 28% which was the same as the comparable periods in
1997. The effective tax rate in each period was less than the U.S. statutory
rate of 35% primarily due to research and development tax credits.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
NET INCOME 1998 1997 % Change 1998 1997 % Change
- -------------------------- -------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 40.4 $ 23.8 70% $ 81.4 $ 55.4 47%
Earnings per share:
Basic $ 0.32 $ 0.19 $ 0.65 $ 0.45
Diluted $ 0.31 $ 0.19 $ 0.63 $ 0.44
</TABLE>
Page 14
<PAGE>
The increase in net income in the second quarter of 1998 and on a year-to-
date basis from the comparable periods in 1997 was driven primarily by sales
of Rituxan and lower R&D; partially offset by a decrease in Activase sales,
higher M&S expenses and higher cost of sales.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL
RESOURCES June 30, 1998 December 31, 1997
- --------------------------- ------------------- -------------------
<S> <C> <C>
Cash and cash equivalents, $ 1,388.3 $ 1,286.5
short-term investments
and long-term marketable
securities
Working capital $ 1,004.9 904.4
</TABLE>
Cash generated from operations, maturities of investments and stock issuances
were used to make investments in marketable securities and capital additions.
Cash and cash equivalents at June 30, 1998, were higher by $101.8 million
compared to December 31, 1997, and working capital increased by $100.5
million in the first half of 1998.
Capital expenditures totaled $43.3 million in the first half of 1998 compared
to $76.5 million in the comparable period of 1997. The decrease in 1998
compared to 1997 was due to the completion of certain construction projects
to improve existing manufacturing, laboratory and office facilities.
FORWARD-LOOKING STATEMENTS
The following section contains forward-looking statements that are based on
the Company's current expectations. Because the Company's actual results may
differ materially from these and any other forward-looking statements made by
or on behalf of the Company, this section also includes a discussion of
important factors that could affect the Company's actual future results,
including its product sales, royalties, contract revenues, expenses and net
income.
Product Sales: The Company's product sales may vary from period to period
for several reasons including, but not limited to: the overall competitive
environment for the Company's products; the amount of sales to customers in
the U.S.; the amount and timing of the Company's sales to HLR; the timing and
volume of bulk shipments to licensees; the availability of third-party
reimbursements for the cost of therapy; the effectiveness and safety of the
products; the rate of adoption and use of the Company's products for approved
indications and additional indications; and the potential introduction of new
products, including Herceptin, registered trademark, (Trastuzumab), which the
Company filed during the quarter under Fast Track review for regulatory
approval, and additional indications for existing products in 1998 and
beyond.
Competition: The Company faces growing competition in two of its therapeutic
markets. Activase lost market share and could lose additional market share
in the thrombolytic market to Centocor's Retavase and the resulting adverse
effect on sales could be material. Retavase received FDA approval in October
1996 for the treatment of acute myocardial infarction (AMI). In addition,
there is an increasing use of angioplasty in lieu of thrombolytic therapy for
the treatment of AMI, which is expected to continue. In the growth hormone
Page 15
<PAGE>
market, the Company continues to face increased competition from five other
companies with growth hormone products. Three of these competitors have also
received approval to market their existing human growth hormone products for
additional indications. The Company expects that such competition could have
an adverse effect on its sales of Protropin, Nutropin and Nutropin AQ and
such effect could be material.
Other competitive factors affecting the Company's product 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 degree of
patent protection afforded to particular products, the outcome of litigation
involving the Company's patents and patents of competing companies for
products and processes related to production and formulation of those
products, the increasing use and development of alternate therapies, and the
rate of market penetration by competing products.
Royalty and Contract Revenues: Royalty and contract revenues in future
periods could vary significantly from 1997 levels. Major factors affecting
these revenues 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 reimbursements, if any; variations in HLR's sales and other licensees'
sales of licensed products; the expiration of royalties from Lilly beginning
in August 1998, which contribute substantially to current royalty revenues;
fluctuations in foreign currency exchange rates; the initiation of other new
contractual arrangements with other companies; the timing of non-U.S.
approvals, if any, for products licensed to HLR; whether and when contract
benchmarks are achieved; and the conclusion of existing arrangements with
other companies and HLR.
R&D: The Company intends to continue to develop new products and is
committed to aggressive R&D investment. 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; they may fail to receive necessary
regulatory approvals; they 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 that may delay, limit or prevent regulatory approvals. The
length of time necessary to complete clinical trials and to submit an
application for marketing approval for a final decision by a regulatory
authority varies significantly and may be difficult to predict.
The Company currently has several products in late-stage clinical testing and
anticipates that its R&D expenses will continue at a high percentage of
revenues over the short-term though they are expected to decline in 1998 from
1997 levels. Over the long-term, as revenues increase, R&D as a percent of
revenues should decrease to the 20% to 25% range. 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, in-licensing activities, including
the timing and amount of related development funding or milestone payments,
and future levels of revenues.
In December 1997, the Company and Alteon Inc. (Alteon) entered into a
collaborative agreement to develop and market pimagedine, an advanced
Page 16
<PAGE>
glycosylation end-product formation inhibitor. Based on the recommendations
of an External Safety Monitoring Committee, with which the FDA and the
Company concurred, in the first quarter of 1998, Alteon discontinued a Phase
III clinical trial of pimagedine in Type II diabetics with progressive kidney
disease and is continuing a Phase III trial of pimagedine in Type I diabetics
with progressive kidney disease. A third Phase III trial in diabetic
patients with end-stage renal disease is ongoing.
Income Tax Provision: The Company expects its effective tax rate to be
approximately 28% in 1998 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.
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 companies' patents cannot be predicted. Patent
disputes are frequent and can preclude commercialization of products. The
Company has in the past been, is currently, and may in the future be involved
in 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 at a material cost or cease using the technology or product in
dispute. The presence of patents or other proprietary rights belonging to
other parties may lead to the termination of R&D of a particular product.
The Company believes it has strong patent protection or the potential for
strong patent protection for a number of its products that generate sales and
royalty revenue or that the Company is developing; however, the courts will
determine the ultimate strength of patent protection of the Company's
products and those on which the Company earns royalties.
Year 2000: Some of the Company's older computer software programs were
written using two digit fields rather than four digit fields to define the
applicable year (i.e., "98" in the computer code refers to the year "1998").
As a result, time-sensitive functions of those software programs may
misinterpret dates after January 1, 2000, to refer to the twentieth century
rather than the twenty-first century (i.e., "02" could be interpreted as
"1902" rather than "2002"). This could cause system failures or
miscalculations resulting in inaccuracies in computer output or disruptions
of operations, including, among other things, inaccurate processing of
financial information and/or temporary inabilities to process transactions,
manufacture products, or engage in similar normal business activities.
The Company has developed a strategy to address the potential exposures
related to the impact on its computer systems for the Year 2000 and beyond.
An inventory of key financial, informational and operational systems has been
completed. Detailed plans for implementation and testing of any necessary
modifications to these key computer systems to ensure they are Year 2000
compliant have been or are in process of being developed to address computer
system problems as required by December 31, 1999. The Company believes that
with these detailed plans and completed modifications, the Year 2000 issue
will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed in a timely fashion, the Year 2000 issue could have a material
impact on the operations of the Company.
In addition to risks associated with the Company's own computer systems, the
Company has relationships with, and is to varying degrees dependent upon, a
Page 17
<PAGE>
large number of third parties that provide information, goods and services to
the Company. These include financial institutions, suppliers, vendors,
research partners and governmental entities. If large numbers of these third
parties experience failures in their computer systems due to Year 2000 non-
compliance, it could affect the Company's ability to process transactions,
manufacture products, or engage in similar normal business activities. While
some of these risks are outside the control of the Company, the Company has
instituted a program to identify key third parties, update contracts and
address any non-compliance issues.
The total cost of the Year 2000 systems assessments and conversions is funded
through operating cash flows and the Company is expensing these costs. The
financial impact of making the required systems changes cannot be known
precisely at this time, but is not expected to be material to the Company's
financial position, results of operations or cash flows.
Liquidity: The Company believes that its cash, cash equivalents and short-
term investments, together with funds provided by operations and leasing
arrangements, will be sufficient to meet its foreseeable operating cash
requirements. In addition, the Company believes it could access additional
funds from the capital and debt markets. 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, expenses, in-licensing
activities, including the timing and amount of related development funding or
milestone payments, and capital expenditures.
Roche Holdings, Inc.: At June 30, 1998, Roche held approximately 66.0% of
the Company's outstanding common equity. The Company expects to continue to
have material transactions with Roche, including royalty and contract
revenues, product sales and joint product development costs.
Market Risk: The Company is exposed to market risk, including changes to
interest rates, foreign currency exchange rates and equity investment prices.
To reduce the volatility related to these exposures, the Company enters into
various derivative transactions pursuant to the Company's investment and risk
management policies and procedures in areas such as hedging and counterparty
exposure practices. The Company does not use derivatives for speculative
purposes.
The Company maintains risk management control systems to monitor the risks
associated with interest rates, foreign currency exchange rates and equity
investment price changes, and its derivative and financial instrument
positions. The risk management control systems use analytical techniques,
including sensitivity analysis, and market values. Though the Company intends
for its risk management control systems to be comprehensive, there are
inherent risks which may only be partially offset by the Company's hedging
programs should there be unfavorable movements in interest rates, foreign
currency exchange rates or equity investment prices.
Interest Rates - The Company's interest income is sensitive to changes
in the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents,
short-term investments, convertible equity loans, preferred stock investments
and long-term investments. To mitigate the impact of fluctuations in U.S.
interest rates, the Company may enter into swap transactions, which involve
the receipt of fixed rate interest and the payment of floating rate interest
without the exchange of the underlying principal. By investing the Company's
cash in an amount equal to the notional amount of the swap contract, with a
Page 18
<PAGE>
maturity date equal to the maturity date of the floating rate obligation, the
Company hedges itself from any potential earnings impact due to changes in
interest rates.
Foreign Currency Exchange Rates - The Company receives royalty revenues
from licensees selling products in countries throughout the world. As a
result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company's licensed products
are sold. The Company is exposed to changes in exchange rates in Europe,
Asia and Canada. The Company's exposure to foreign exchange rates primarily
exists with the German Mark. When the U.S. dollar strengthens against the
currencies in these countries, the U.S. dollar value of non-U.S. dollar-based
revenue decreases; when the U.S. dollar weakens, the U.S. dollar value of the
non-U.S. dollar-based revenues increases. Accordingly, changes in exchange
rates, and in particular a strengthening of the U.S. dollar, may adversely
affect the Company's royalty revenues as expressed in U.S. dollars. In
addition, as part of its overall investment strategy, the Company has three
portfolios that are managed by external money managers. These portfolios
consist primarily of non-dollar denominated investments. As a result, the
Company is exposed to changes in the exchanges rates of the countries in
which these non-dollar denominated investments are made.
To mitigate this risk, the Company hedges certain of its anticipated revenues
by purchasing option contracts with expiration dates and amounts of currency
that are based on 25% to 90% of probable future revenues so that the
potential adverse impact of movements in currency exchange rates on the non-
dollar denominated revenues will be at least partly offset by an associated
increase in the value of the option. The duration of these options is
generally one to four years. The Company may also enter into foreign
currency forward contracts (forward contracts) to lock in the dollar value of
a portion of these anticipated revenues. The duration of these forward
contracts is generally less than one year. Also, to hedge the non-dollar
denominated investments in the externally managed portfolios, the external
money managers also enter into forward contracts.
Equity Investment Securities - As part of its strategic alliance
efforts, the Company invests in equity securities of biotechnology companies
that are subject to fluctuations from market value changes in stock prices.
To mitigate this risk, certain equity securities are hedged with costless
collars. A costless collar is a purchased put option and a written call
option in which the cost of the purchased put and the proceeds of the written
call offset each other; therefore, there is no initial cost or cash outflow
for these instruments at the time of purchase. The purchased put protects
the Company from a decline in the market value of the security below a
certain minimum level (the put "strike" level); while the call effectively
limits the Company's potential to benefit from an increase in the market
value of the security above a certain maximum level (the call "strike"
level). In addition, as part of its strategic alliance efforts, the Company
has made interest bearing loans that are convertible into the equity
securities of the debtor.
Credit Risk of Counterparties: The Company could be exposed to losses
related to the above financial instruments should one of its counterparties
default. This risk is mitigated through credit monitoring procedures.
Legal Proceedings: The Company is a party to various legal proceedings,
including patent infringement cases and various cases involving product
liability and other matters. See the Legal Proceedings note in the Notes to
Condensed Consolidated Financial Statements for further information.
Page 19
<PAGE>
GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Previously reported.
See Item 3 of the Company's report on Form 10-K for the period ended
December 31, 1997.
See also Item 1 of the Company's report on Form 10-Q for the period ended
March 31, 1998.
See also the Legal Proceedings and Subsequent Events notes in the Notes to
Condensed Consolidated Financial Statements of Part I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on April 30, 1998, two
matters were voted upon. A description of each matter and tabulation of
votes follows:
1. Election of five directors:
Votes
----------------------------
Nominee For Withheld
----------------------- ------------ -----------
Franz B. Humer 111,743,535 4,453,091
Jonathan K.C. Knowles 115,522,912 673,714
Arthur D. Levinson 115,693,449 503,177
Donald L. Murfin 115,757,658 438,968
John T. Potts, Jr. 115,744,089 452,537
There were no abstentions or broker nonvotes.
The terms of directors Boyer, Fayne Levinson, Munro, Smith and Tappan
continued after the Annual Meeting of Stockholders.
2. Ratification of Ernst & Young, LLP as the Company's
Independent Accountants for the year ending December 31, 1998:
Votes
----------------------------------------
For Against Abstain
----------- ----------- -----------
116,039,036 57,247 100,343
There were no broker nonvotes.
Page 20
<PAGE>
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, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 1997 Annual Report to
Stockholders have not changed significantly.
Page 21
<PAGE>
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 11, 1998 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 Executive Vice President and
Chief Financial Officer
/S/JOHN M. WHITING
----------------------------
John M. Whiting
Controller and
Chief Accounting Officer
Page 22
Exhibit 15.1
August 11, 1998
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
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 10, 1998
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, 1998.
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
<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, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 189,952
<SECURITIES> 1,198,324
<RECEIVABLES> 180,086<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 116,840
<CURRENT-ASSETS> 1,272,117
<PP&E> 1,102,726
<DEPRECIATION> 409,351
<TOTAL-ASSETS> 2,606,695
<CURRENT-LIABILITIES> 267,241
<BONDS> 150,000
0
0
<COMMON> 2,517
<OTHER-SE> 2,156,502
<TOTAL-LIABILITY-AND-EQUITY> 2,606,695
<SALES> 340,982
<TOTAL-REVENUES> 532,712
<CGS> 70,771
<TOTAL-COSTS> 70,771
<OTHER-EXPENSES> 191,151
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 2,154
<INCOME-PRETAX> 113,043
<INCOME-TAX> 31,652
<INCOME-CONTINUING> 81,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,391
<EPS-PRIMARY> 0.65<F2>
<EPS-DILUTED> 0.63
<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.
<F2>REPRESENTS BASIC EARNINGS PER SHARE.
</FN>
</TABLE>
