-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qjs+buF2PHGGmnSFYGsuzwX6XWglpAhIpsemz8ExR5TRQ2MlzOY6ldPkxh4pgMgC 7CmLLAln0iU6Q8jD8r7B5g== 0000318771-97-000009.txt : 19971117 0000318771-97-000009.hdr.sgml : 19971117 ACCESSION NUMBER: 0000318771-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENENTECH INC CENTRAL INDEX KEY: 0000318771 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 942347624 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09813 FILM NUMBER: 97717761 BUSINESS ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4152251000 MAIL ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD STREET 2: . CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 10-Q 1 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 September 30, 1997. 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. Common Stock $0.02 par value 76,621,009 Class Outstanding at September 30, 1997 Special Common Stock $0.02 par value 46,992,604 Class Outstanding at September 30, 1997 GENENTECH, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. Condensed Consolidated Statements of Income - for the three months and nine months ended September 30, 1997 and 1996 3 Condensed Consolidated Statements of Cash Flows - for the nine months ended September 30, 1997 and 1996 4 Condensed Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 5 Notes to Condensed Consolidated Financial Statements 6-10 Financial Review 11-19 Independent Accountants' Review Report 20 PART II. OTHER INFORMATION 21 SIGNATURES 22
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts) (unaudited) Three Months Nine Months Ended September 30 Ended September 30 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Revenues: Product sales (including amounts from related parties: three months - 1997-$5,720; 1996-$1,659; nine months - 1997-$14,718; 1996-$11,151) $ 142,306 $ 142,463 $ 441,537 $ 443,105 Royalties (including amounts from related parties: three months - 1997-$5,385; 1996-$6,812; nine months - 1997-$18,408; 1996-$19,325) 59,632 54,429 180,323 160,546 Contract and other (including amounts from related parties: three months - 1997-$29,910; 1996-$35,977; nine months - 1997-$56,311; 1996-$79,409) 29,385 38,859 67,453 87,991 Interest 17,594 15,956 50,382 46,711 --------- --------- --------- --------- Total revenues 248,917 251,707 739,695 738,353 Costs and expenses: Cost of sales (including amounts from related parties: three months - 1997-$4,750; 1996-$1,244; nine months - 1997-$12,313; 1996-$9,085) 26,565 24,836 79,817 77,868 Research and development (including contract related: three months - 1997-$29,910; 1996-$10,251; nine months - 1997-$56,311; 1996-$34,695) 118,146 114,772 351,779 343,008 Marketing, general and administrative 65,450 61,864 190,504 174,893 Interest 542 1,094 2,446 3,986 --------- --------- --------- --------- Total costs and expenses 210,703 202,566 624,546 599,755 Income before taxes 38,214 49,141 115,149 138,598 Income tax provision (benefit) 6,092 (1,801) 27,634 27,720 --------- --------- --------- --------- Net income $ 32,122 $ 50,942 $ 87,515 $ 110,878 ========= ========= ========= ========= Net income per share $ 0.25 $ 0.41 $ 0.69 $ 0.90 ========= ========= ========= ========= Weighted average number of shares used in computing per share amounts 126,776 123,589 126,326 123,402 ========= ========= ========= ========= See notes to condensed consolidated financial statements.
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GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands) (unaudited) Nine Months Ended September 30 ---------------------- 1997 1996 ---------- ---------- Cash flows from operating activities: Net income $ 87,515 $ 110,878 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 49,887 46,189 Deferred income taxes (4,445) (13,278) Gain on sales of securities available-for-sale (6,641) (472) Loss on sales of securities available-for-sale 1,821 263 Loss on fixed asset dispositions 318 601 Changes in assets and liabilities: Trading securities (107,150) (5,727) Receivables and other current assets (10,301) (24,748) Inventories (6,950) 1,603 Accounts payable, other current liabilities and other long-term liabilities 32,067 (10,291) ---------- ---------- Net cash provided by operating activities 36,121 105,018 Cash flows from investing activities: Purchases of securities held-to-maturity (360,698) (543,833) Proceeds from maturities of securities held-to-maturity 396,543 580,304 Purchases of securities available-for-sale (297,730) (237,803) Proceeds from sales of securities available-for-sale 301,507 134,814 Purchases of non-marketable equity securities - (7,523) Capital expenditures (121,350) (86,574) Change in other assets (33,822) 3,130 ---------- ---------- Net cash used in investing activities (115,550) (157,485) Cash flows from financing activities: Stock issuances 67,116 61,821 Repayment of long-term debt, including current portion - (358) ---------- ---------- Net cash provided by financing activities 67,116 61,463 ---------- ---------- Net (decrease) increase in cash and cash equivalents (12,313) 8,996 Cash and cash equivalents at beginning of period 207,264 137,043 ---------- ---------- Cash and cash equivalents at end of period $ 194,951 $ 146,039 ========== ========== See notes to condensed consolidated financial statements.
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GENENTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (thousands) (unaudited) September 30 December 31 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 194,951 $ 207,264 Short-term investments 617,961 415,900 Accounts receivable, net (including amounts from related party: 1997-$51,640; 1996-$33,377) 207,805 197,612 Inventories 98,893 91,943 Prepaid expenses and other current assets 39,980 42,365 ------------ ------------ Total current assets 1,159,590 955,084 Long-term marketable securities 444,839 535,916 Property, plant and equipment, less accumulated depreciation (1997-$362,063; 1996-$320,100) 663,779 586,167 Other assets 182,815 149,205 ------------ ------------ Total assets $ 2,451,023 $ 2,226,372 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 56,155 $ 45,501 Accrued liabilities - related party 9,653 9,908 Other accrued liabilities 203,937 194,542 ------------ ------------ Total current liabilities 269,745 249,951 Long-term debt 150,000 150,000 Other long-term liabilities 45,549 25,362 ------------ ------------ Total liabilities 465,294 425,313 Commitments and contingencies Stockholders' equity: Preferred stock - - Special common stock 940 896 Common stock 1,532 1,532 Additional paid-in capital 1,444,371 1,362,585 Retained earnings (since October 1, 1987 quasi-reorganization) 469,614 382,097 Net unrealized gain on securities available-for-sale 69,272 53,949 ------------ ------------ Total stockholders' equity 1,985,729 1,801,059 ------------ ------------ Total liabilities and stockholders' equity $ 2,451,023 $ 2,226,372 ============ ============ See notes to condensed consolidated financial statements.
Page 5 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Statement of Accounting Presentation and Significant Accounting Policies In the opinion of Genentech, Inc. (the Company), the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 1997 and 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The condensed consolidated balance sheet as of December 31, 1996 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, 1996. In January 1997, the Securities and Exchange Commission issued new derivatives and exposures to market risk disclosure requirements. To comply with these new requirements, the following supplements the disclosures included in the Company's 1996 Form 10-K and Annual Report to Stockholders. Trading: The Company uses external money managers to manage part of its investment portfolio that is held for trading purposes. When the money managers purchase securities denominated in a foreign currency, they enter into foreign currency forward contracts which are recorded at fair value with the related gain or loss recorded in interest income. Foreign Currency Instruments: Simple foreign currency put options (options) are generally terminated, or offsetting contracts are entered into, upon determination that purchased options no longer qualify as a hedge or are determined to exceed probable anticipated net foreign revenues. The realized gains and losses are recorded as a component of other revenues. For early termination of options that qualify as hedges, the gain or loss on termination will be deferred through the original term of the option and then recognized as a component of the hedged revenues. Changes in the fair value of hedging instruments that qualify as a hedge are not recognized and changes in the fair value of instruments that do not qualify as a hedge would be recognized through earnings. Interest Rate Swaps: The accrued net settlement amount on the interest rate swaps (swaps) are reflected on the balance sheet as other accounts receivable or other accrued liabilities. For early termination of swaps where the underlying asset is not sold, the amount of the terminated swap is deferred and amortized over the remaining life of the original swap. For early termination of swaps with the corresponding termination or sale of the underlying asset, the amounts are recognized through interest income. Changes in the fair value of swap hedging instruments that qualify as a hedge are not recognized and changes in the fair value of swap instruments that do not qualify as a hedge would be recognized through earnings. Equity Collar Instruments: Equity collar instruments that do not qualify for hedge accounting and early termination of these instruments with the sale of the underlying security would be recognized through earnings. For early termination of these instruments without the sale of the underlying Page 6 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) security, the time value would be recognized through earnings and the intrinsic value will adjust the cost basis of the underlying security. 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 February 1997, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards (FAS) 128, "Earnings per Share," and FAS 129, "Disclosure of Information about Capital Structure," which are required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share (EPS) and to restate all prior periods as required by FAS 128. Under the new requirements for calculating EPS, the dilutive effect of stock options will be excluded from a new EPS measure, Basic EPS. The impact is expected to result in an increase in Basic EPS for the three- and nine-month periods ended September 30, 1997 and September 30, 1996; however, this impact is expected to be immaterial. The impact of FAS 128 on the calculation of the second new EPS measure, Diluted EPS, for these quarters is also expected to be immaterial. Also, FAS 129 consolidates existing guidance relating to disclosure about a company's capital structure. Since the Company has been in compliance with existing disclosure requirements of its capital structure, adoption of FAS 129 is not expected to have a material impact on the financial position, results of operations or cash flows of the Company. The FASB also issued FAS 130, "Reporting Comprehensive Income," and FAS 131, "Disclosures about Segments of an Enterprise and Related Information," in June 1997, which requires additional disclosures to be adopted on 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. 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, if any. 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). Each share of the Company's common stock not held by Roche or its affiliates on that date automatically converted to one share of callable putable common stock (special common stock). The Agreement extends 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 October 1, 1997, the call price is $73.50 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 is $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 Company Page 7 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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 conjunction with the Agreement, 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-United States (U.S.) markets. In the second quarter of 1997, the Company and HLR agreed in principle to changes to their 1995 ex-U.S. license agreement (license agreement). Key changes to the license agreement are summarized as follows: (1) For future products, HLR may choose to exercise its option either when the Company determines to move a product into development, or at the end of Phase II (as in the 1995 agreement). U.S. and European development costs will be shared (discontinuing the distinction regarding location or purpose of studies). (2) If HLR exercises its option at the development determination point, U.S. and European development costs will be shared 50/50. (3) If HLR exercises its option at the end of Phase II, HLR will reimburse the Company for 50 percent of any development costs incurred, and subsequent U.S. and European development costs will be shared 75/25, HLR/Genentech. (4) For nerve growth factor (NGF), which HLR has already exercised its option to develop, prospective U.S. and European development costs will be shared 60/40, HLR/Genentech. (5) HLR will assume development of the oral IIbIIIa antagonist globally on its own. The Company will provide clinical and scientific input for the IIbIIIa program and may subsequently opt-in and join development at any time up to the New Drug Application (NDA) filing for the first indication. If the Company chooses to opt-in, it will reimburse HLR for 50 percent of the U.S. and European IIbIIIa development costs incurred to that date. HLR and Genentech will co-promote IIbIIIa in the U.S. with a 60/40, Genentech/HLR, profit-sharing if the NDA filing for the first indication is for acute therapy or a 50/50 profit-sharing if the NDA filing for the first indication is for chronic therapy. If the Company does not opt-in, it will receive from HLR a 6.0% royalty on worldwide sales of the oral IIbIIIa antagonist. In general, HLR pays a royalty of 12.5% until a product reaches $100 million in aggregate sales outside of the U.S., 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 products and European sales of Pulmozyme, registered trademark. The Company supplies its products to HLR, and has agreed to supply products for which HLR has exercised its option, for sales outside of the U.S. at cost plus 20%. 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 holds approximately 67.2% of the outstanding common equity of the Company as of September 30, 1997. Contract revenue for the reimbursement of ongoing development expenses for the three development projects - Rituxan, trademark, (the C2B8 antibody), insulin-like growth factor in diabetes (IGF-I) and NGF - that HLR exercised its development option for under the Agreement in 1996 were $17.2 million and $37.2 million for the quarter ended September 30, 1997, and on a year- to-date basis, respectively. Development of IGF-I was discontinued in September 1997 due to the amount of additional clinical effort and the greater period of time that would be required to address potential concerns about retinopathy when using IGF-I in Type I and Type II diabetes mellitus. Page 8 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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, and employment related cases. In addition, 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, registered trademark, human growth hormone products infringed the Goodman Patent. In February 1997, the Company received another grand jury document subpoena from the U.S. District Court for the Northern District of California for documents relating to the Company's clinical, sales and marketing activities associated with human growth hormone. The Company believes that the government is actively investigating this matter. Based upon the nature of the claims made and the investigations completed to date by the Company and its counsel, the Company believes that the outcome of these cases 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. Note Receivable Pursuant to its research and development collaboration agreement entered into with Scios Inc. (Scios) in 1995, the Company established a line of credit for $30 million that Scios may draw down at Scios' discretion through 2002. This commitment was supported by a bank letter of credit under which Scios could draw up to $30 million directly from the bank with repayment of the funds due to the bank by the Company. On March 31, 1997, Scios drew down the entire $30 million with replacement of funds paid to the bank by the Company on April 1, 1997. The $30 million drawn by Scios under the bank letter of credit plus interest (which accrues at the prime rate of interest) is repayable in the form of cash or Scios common stock (at the average market price over the thirty day period before the date of repayment) at Scios' option any time through December 30, 2002. On April 2, 1997, Scios suspended development of Auriculin, registered trademark, anaritide based upon the results of an interim analysis of data from the Phase III study in oliguric acute renal failure. Auriculin was under development in collaboration with the Company. Note 6. Inventories Inventories at September 30, 1997, and December 31, 1996, are summarized below: 1997 1996 -------- -------- (thousands) Raw materials and supplies $ 19,595 $ 17,971 Work in process 68,079 61,368 Finished goods 11,219 12,604 -------- -------- Total $ 98,893 $ 91,943 ======== ======== Page 9 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 7. Change in Effective Tax Rate The Company's effective tax rate was 16% for the third quarter of 1997 resulting in a year-to-date effective tax rate of 24% for 1997. This year- to-date effective tax rate is less than the 28% effective tax rate for the first six months of 1997 due to the legislative extension of research and development tax credits for the remainder of 1997. The income tax provision for the third quarter of 1997 was $6.1 million compared to a net $1.8 million tax benefit for the third quarter of 1996. This net tax benefit was the result of a reduction in the tax provision of $11.6 million in the third quarter of 1996 to adjust the year-to-date effective tax rate from 33% to 20%. The change in the 1996 effective tax rate resulted from an operating plan review in 1996 in which the Company decided not to implement a previously announced approach for research and development funding and manufacturing by international subsidiaries of certain of its development products. Note 8. Subsequent Event In October 1997, an action was filed in the U.S. District Court for the District of New Jersey alleging that the Company's manufacture, use and sale of its Nutropin and Nutropin AQ, registered trademark, human growth hormone products infringe U.S. Patent No. 5,633,352 (the '352 Patent) owned by Novo Nordisk A/S (Novo). The suit seeks to permanently enjoin the Company from the alleged infringement of the '352 Patent and seeks damages to compensate Novo for such alleged infringement. Based upon the nature of the claims made and the investigations completed to date by the Company and its counsel, the Company believes that the outcome of this case 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 10 ITEM 2. 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 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 (and Roche will concurrently provide the necessary redemption funds to the Company by purchasing a like number of shares of common stock) within thirty business days commencing July 1, 1999. See the Relationship with Roche Holdings, Inc. note in the Notes to Condensed Consolidated Financial Statements for further information. In conjunction with the Agreement, 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-United States (U.S.) markets. In the second quarter of 1997, the Company and HLR agreed in principle to changes to their 1995 ex-U.S. license agreement (license agreement). In general, these changes will allow for the sharing of U.S. and European development costs regardless of location or purpose of studies. Under these changes, HLR could exercise its option either when the Company determines to move a product into development or at the end of Phase II. U.S. and European development costs will be shared 50/50 if HLR exercises its option at the development determination point or 75/25, HLR/Genentech, of subsequent costs if HLR exercises its option at the end of Phase II, with 50% of any development costs incurred to date by the Company to be reimbursed by HLR. For nerve growth factor (NGF), which HLR has already exercised its option to develop, prospective U.S. and European development costs will be shared 60/40, HLR/Genentech. HLR will assume development of the oral IIbIIIa antagonist globally on its own. The Company may subsequently opt-in and join development of IIbIIIa at any time up to the New Drug Application filing for the first indication. See the Relationship with Roche Holdings, Inc. note in the Notes to Condensed Consolidated Financial Statements for further information on the key changes to the license agreement. As a result of the Agreement, contract revenue for the reimbursement of ongoing development expenses for the three development projects - Rituxan, trademark, (the C2B8 antibody), insulin-like growth factor in diabetes (IGF- I) and NGF - that HLR exercised its development option for under the Agreement in 1996 were $17.2 million and $37.2 million for the quarter ended September 30, 1997, and on a year-to-date basis, respectively. Development of IGF-I was discontinued in September 1997 due to the amount of additional clinical effort and the greater period of time that would be required to address potential concerns about retinopathy when using IGF-I in Type I and Type II diabetes mellitus. Page 11 RESULTS OF OPERATIONS (dollars in millions, except per share amounts) Quarter ended Nine months ended September 30 September 30 ---------------------- ------------------------ REVENUES 1997 1996 % Change 1997 1996 % Change - ------------------- ------ ------ -------- ------ ------ -------- Revenues $248.9 $251.7 (1)% $739.7 $738.4 0 % ====== ====== ======== ====== ====== ======== PRODUCT SALES - ------------------- Activase $ 60.7 $ 65.4 (7)% $204.0 $214.3 (5)% Protropin and Nutropin 57.0 57.6 (1) 168.5 167.6 1 Pulmozyme 23.8 18.0 32 66.3 57.7 15 Actimmune 0.8 1.5 (47) 2.7 3.5 (23) ------ ------ -------- ------ ------ -------- Total product sales $142.3 $142.5 0 % $441.5 $443.1 0 % ====== ====== ======== ====== ====== ======== Although the product mix was different, the overall product sales were comparable to the three-month period ended September 30, 1996 and slightly decreased on a year-to-date basis compared to 1996. Net sales of Activase, registered trademark, (Alteplase, recombinant), a tissue plasminogen activator (t-PA), decreased in the three- and nine-month periods ended September 30, 1997, compared to the same periods of 1996. This decrease was due to lower U.S. sales attributable to competition from Boehringer Mannheim's (BM) Retavase, registered trademark, and a decrease in the size of the thrombolytic market. As a result of competition from Retavase, Activase's market share declined to approximately 76% in the third quarter of 1997 compared to approximately 80% in the same quarter of 1996 and approximately 79% in the second quarter of 1997. In addition, the overall size of the market has declined due to the increasing use of angioplasty rather than thrombolytic therapy. In March 1997, results from the GUSTO III clinical trial which involved a head-to-head comparison of Activase and Retavase, failed to achieve its primary endpoint that Retavase has a statistically significant lower mortality rate than Activase. 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] - were comparable in the three- and nine-month periods ended September 30, 1997 over the same periods in 1996. The Company continues to maintain a 67% share of the U.S. market for treatment of children with growth hormone inadequacy. In the first quarter of 1997, Serono Laboratories, Inc. and Novo Nordisk A/S (Novo) began selling their human growth hormone products. Net sales of Pulmozyme, registered trademark, were higher in the third quarter of 1997 and on a year-to-date basis primarily due to continued penetration in the early and mild cystic fibrosis (CF) patient population for U.S. sales, and the timing of orders related to Europe and Canada sales. Page 12
Quarter ended Nine months ended September 30 September 30 ROYALTIES, CONTRACT AND ---------------------- ------------------------ OTHER, AND INTEREST INCOME 1997 1996 % Change 1997 1996 % Change - ----------------------------- ------ ------ -------- ------ ------ -------- Royalties $59.6 $54.4 10% $180.3 $160.5 12% Contract and other 29.4 38.9 (24) 67.5 88.0 (23) Interest income 17.6 16.0 10 50.4 46.7 7
Royalty income increased by 10% and 12% in the three- and nine-month periods, respectively, ended September 30, 1997, over the comparable periods of 1996 primarily due to higher than expected sales from a licensee in the first half of 1997. Additional increases on a year-to-date comparison to prior year included, increased sales from various licensees and a reversal of a $2.2 million reserve against certain royalty revenues for 1996 due to the favorable outcome of certain patent proceedings. Contract and other revenues were lower in the third quarter of 1997 and on a year-to-date basis compared to the same periods of 1996 due primarily to the absence in 1997 of Roche opt-in revenues. Contract and other revenues for 1996 included, $17.1 million in the first quarter from Roche for the exercise of its development option regarding Rituxan, $19.3 million from Roche in the second quarter for the exercise of its development option regarding IGF-1 and $28.4 million in the third quarter from Roche for the exercise of its development option regarding NGF. The decrease from 1996 was partly offset by $22.3 million and $37.7 million for the three- and nine-month periods, respectively, of higher ongoing development cost reimbursements in 1997 from Roche for various development products, and approximately $5.4 million of gains from the sale of biotechnology equity securities primarily in the second quarter of 1997. Interest income increased in the third quarter of 1997 compared to the same period in 1996 due to an increase in the average yield on the portfolio and a higher portfolio balance. On a year-to-date basis, the increase from last year was primarily due to an increase in the average yield on the portfolio. The total investment portfolio, consisting of cash and cash equivalents, and short- and long-term marketable securities, increased to $1,257.8 million as of September 30, 1997 from $1,176.2 million as of September 30, 1996 and increased from $1,159.1 million as of December 31, 1996.
Quarter ended Nine months ended September 30 September 30 ---------------------- ------------------------ COSTS AND EXPENSES 1997 1996 % Change 1997 1996 % Change - ----------------------------- ------ ------ -------- ------ ------ -------- Cost of sales $ 26.6 $ 24.8 7% $ 79.8 $ 77.9 2% Research and development 118.1 114.8 3 351.8 343.0 3 Marketing, general and administrative 65.5 61.9 6 190.5 174.9 9 Interest expense 0.5 1.1 (55) 2.4 4.0 (40) ------ ------ -------- ------ ------ -------- Total costs and expenses $210.7 $202.6 4% $624.5 $599.8 4% ====== ====== ======== ====== ====== ========
Page 13 Cost of sales as a percent of product sales was 19% in the third quarter of 1997 compared to 17% in the same period in 1996 due to the change in the product mix. On a year-to-date basis, cost of sales as a percent of product sales was 18% in 1997 which was comparable to the same period in 1996. Research and development (R&D) expenses increased 3% in both the third quarter and on a year-to-date basis for 1997, primarily due to higher costs related to collaborative arrangements with Boehringer Ingelheim International Gmbh to develop TNK, a second-generation t-PA, for acute myocardial infarction, and with Alkermes, Inc., to develop ProLease, registered trademark, human growth hormone, a sustained-release growth hormone product, in children with growth hormone inadequacy. Additional increases on a year-to-date basis included higher costs for additional large-scale clinical trials for products in late-stage development and continued testing of products currently in late-stage clinical testing. The third quarter and year-to-date increases from last year were partly offset by higher costs to license technology from collaborative partners in 1996. Marketing, general and administrative expenses increased in the third quarter and on a year-to-date basis for 1997 due primarily to increased marketing and sales (M&S) expenses related to the oncology area for promoting Roferon-A, registered trademark, in the U.S. for its approved oncology indications and pre-launch activities for Rituxan, and for programs to address competition in the Activase market. Interest expense declined in the third quarter and year-to-date periods of 1997 over the comparable periods in 1996 due to higher capitalized interest resulting from an increase in construction projects. Quarter ended Nine months ended September 30 September 30 --------------------- ------------------------ INCOME TAXES 1997 1996 1997 1996 - --------------------- ---------- --------- ---------- ---------- Income taxes $ 6.1 $(1.8) $ 27.6 $ 27.7 The Company's effective tax rate was 16% for the third quarter of 1997 resulting in a year-to-date effective tax rate of 24% for 1997. This year- to-date effective tax rate is less than the 28% effective tax rate for the first six months of 1997 due to the legislative extension of research and development tax credits for the remainder of 1997. The income tax provision for the third quarter of 1997 was $6.1 million compared to a net $1.8 million tax benefit for the third quarter of 1996. This net tax benefit was the result of a reduction in the tax provision of $11.6 million in the third quarter of 1996 to adjust the year-to-date effective tax rate from 33% to 20%. The change in the 1996 effective tax rate resulted from an operating plan review in 1996 in which the Company decided not to implement a previously announced approach for research and development funding and manufacturing by international subsidiaries of certain of its development products. Quarter ended Nine months ended September 30 September 30 ---------------------- ------------------------ NET INCOME 1997 1996 % Change 1997 1996 % Change - ---------------------- ------ ------ -------- ------ ------ -------- Net income $ 32.1 $ 50.9 (37)% $ 87.5 $110.9 (21)% Earnings per share $ .25 $ .41 $ .69 $ .90 Page 14 Net income declined in the third quarter of 1997 over the same period last year due primarily to an increase in the Company's income tax provision, lower contract and other revenues and higher M&S expenses. On a year-to- date basis, net income in 1997 decreased compared to last year due to lower contract and other revenues and higher M&S and R&D expenses, partially offset by increased royalty revenues. LIQUIDITY AND CAPITAL RESOURCES September 30, 1997 December 31, 1996 - --------------------------- -------------------- ------------------- Cash and cash equivalents, $ 1,257.8 $ 1,159.1 short-term investments and long-term marketable securities Working capital 889.8 705.1 Cash generated from operations, maturing investments and stock issuances were used to make investments in marketable securities and capital additions. Cash and cash equivalents at September 30, 1997, were lower compared to December 31, 1996, and working capital increased by $184.7 million in 1997. Capital expenditures totaled $121.4 million for 1997 compared to $86.6 million in the same period of 1996. The increase was related to improvements to existing manufacturing and office facilities and manufacturing equipment in 1997. 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. Total Product Sales: Product sales will be dependent on the overall competitive environment. Factors affecting the Company's total product sales include, but are not limited to, the amount of sales to customers in the U.S., increased competition in the growth hormone and thrombolytic markets, the amount and timing of the Company's sales to HLR, the timing and volume of bulk shipments to licensees, the possibility of the introduction of Rituxan in late 1997 and the potential introduction of additional new products and indications for existing products in 1998 and beyond. On July 25, 1997, the U.S. Food and Drug Administration (FDA) advisory panel unanimously recommended the agency grant marketing clearance to Rituxan for the treatment of patients suffering from relapsed or refractory low-grade non-Hodgkin's lymphoma. If Rituxan receives FDA approval, it will be the first monoclonal antibody sold for treating cancer in the U.S. A final FDA decision is expected later this year. Page 15 Activase Sales: The Company is facing new competition in the thrombolytic market. BM received FDA approval in October 1996 to market its product, Retavase, for the treatment of acute myocardial infarction (AMI) in the U.S. and Activase has been losing market share to this product. The Company has brought suit against BM for patent infringement. In addition, there is an increasing use of angioplasty for the treatment of AMI patients in lieu of thrombolytic therapy. The Company expects such competition to continue to have an adverse effect on its sales of Activase and such effect could be material. Other factors affecting the Company's Activase sales include, but are not limited to, the timing of FDA approval, if any, of additional competitive products, pricing decisions made by the Company, the outcome of litigation against BM involving the Company's patents for t-PA and processes related to its production and formulation, ongoing physician response to the outcome of the GUSTO III clinical trial, the increasing use of other therapies such as angioplasty techniques for the treatment of AMI, the rate of market penetration by Retavase, and the rate of adoption and use of Activase for the treatment of acute ischemic stroke. Growth Hormone Sales: The Company continues to face increased competition in the growth hormone market. Three companies received FDA approval in 1995, and a fourth company received FDA approval in October 1996 to market their growth hormone products for treatment of growth hormone inadequacy in children; although one of those companies has been preliminarily enjoined from selling its product. In the first quarter of 1997, two of those companies began selling their growth hormone products. Three of the Company's competitors have received approval to market their existing human growth hormone products for additional indications. The Company expects such competition to have an adverse effect on its sales of Protropin, Nutropin and Nutropin AQ which, depending on the extent and type of competition, could be material. Other factors affecting the Company's growth hormone sales include, but are not limited to, the timing of FDA approval, if any, of other new competitive products, the outcome of litigation involving the Company's patents and patents of others for human growth hormone and related processes, pricing decisions made by the Company, the availability of third-party reimbursement for the cost of growth hormone therapy, and the impact of sales of Nutropin as a treatment for short stature associated with Turner syndrome, and the timing and likelihood of FDA approval of Nutropin for the treatment of growth hormone inadequacy in adults. Pulmozyme Sales: Factors that may influence the future sales of Pulmozyme include, but are not limited to, 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 CF, the outcome of the Phase III clinical trial in patients with early CF, whether and when additional indications are approved, and the cost of therapy. Royalty and Contract Revenues: Royalty and contract revenues in future periods could vary significantly from 1996 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 reimbursement, if any; variations in HLR's sales of Genentech products, and other licensees' sales of licensed products; the expiration of royalties from Eli Lilly and Company in 1998; fluctuations in foreign currency exchange rates; 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. Page 16 R&D Expenses: The Company intends to continue its commitment to aggressive investment in R&D. As it continues late-stage clinical testing of products, the Company anticipates that its R&D expenses will continue at a high percentage of revenues over the short-term. Over the long-term, however, 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; future levels of the Company's product sales (including the impact of competition), royalty 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. As part of the Company and HLR's agreed upon changes to their license agreement, HLR will assume development of the oral IIbIIIa antagonist on its own. As a result, the Company will not be incurring future IIbIIIa related R&D costs unless it decides to opt-in on the development of this product. Such costs were approximately $4.5 million for 1997. In September 1997, the Company decided to discontinue development of IGF-I in Type I and Type II diabetes mellitus. As a result, the Company will not be incurring future IGF-I related R&D costs of which were approximately $13.5 million for the nine-months ended September 30, 1997. In addition, the Company announced in early October 1997 that it will opt- out of development and will return to IDEC Pharmaceuticals Corporation (IDEC) Genentech's marketing rights for IDEC-Y2B8, a radioimmunotherapy under investigation for the treatment of relapsed or refractory non- Hodgkin's B-cell lymphoma. As a result, the Company will discontinue its R&D funding to IDEC for the development of IDEC-Y2B8. Such funding for the nine-months ended September 30, 1997, were immaterial. Income Tax Provision: The Company expects its effective tax rate to be 24% in 1997 and between 25% and 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. 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; 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 which 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. Page 17 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, 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 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. 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 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, in-licensing activities, expenses and capital expenditures. Market Potential/Risk: Over the longer term, the Company's (and its partners') ability to successfully market current products, expand their usage, and bring new products to the marketplace will depend on many factors, including, but not limited to, the effectiveness and safety of the products, FDA and foreign regulatory agencies' approvals for new products and new indications, and the degree of patent protection afforded to particular products. Roche Holdings, Inc.: The Company expects to continue to have material transactions with Roche, including royalty and contract development revenues, product sales and joint product development. Foreign Exchange: The Company receives royalty revenues from countries throughout the world. As a result, the Company's financial results could be materially affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company's products are sold. The Company is exposed to changes in exchange rates in Europe, Asia and Canada. 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. To mitigate this risk, the Company hedges certain of these anticipated revenues by purchasing foreign currency put option contracts with expiration dates and amounts of currency that are based on a portion of probable revenues so the 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 Company also enters into foreign currency forward contracts to lock in the dollar value of a portion of these anticipated revenues. Page 18 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 and long-term investments. To mitigate the short- term impact of fluctuations in U.S. interest rates, the Company invests in securities with durations ranging from overnight to ten years. The purchase of a combination of both long- and short-term securities minimizes the quarterly fluctuation in the average yield of the portfolio by locking in some rates for longer periods of time than can be accomplished with only short-term investments. Equity Securities: As part of its strategic alliance efforts, the Company invests in equity instruments 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). 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 quality standards and 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. Page 19 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders Genentech, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Genentech, Inc. as of September 30, 1997, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1997 and 1996, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1997 and 1996. 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 an 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, 1996, 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, 1997, 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, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP San Jose, California October 8, 1997 Page 20 GENENTECH, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In February 1997, Genentech, Inc. (the Company), received another grand jury document subpoena from the United States District Court for the Northern District of California for documents relating to the Company's clinical, sales and marketing activities associated with human growth hormone. The Company believes that the government is actively investigating this matter. See also the Legal Proceedings and Subsequent Event notes in the Notes to Condensed Consolidated Financial Statements of Part I. See also Item 1 of the Company's reports on Form 10-Q for the periods ended June 30, 1997 and March 31, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 15.1 Letter re: Unaudited Interim Financial Information 27.1 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 30, 1997. 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: November 12, 1997 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 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 9-MOS DEC-31-1997 SEP-30-1997 194,951 1,062,800 207,805 0 98,893 1,159,590 1,025,842 362,063 2,451,023 269,745 150,000 0 0 2,472 1,983,257 2,451,023 441,537 739,695 79,817 79,817 351,779 0 2,446 115,149 27,634 87,515 0 0 0 87,515 .69 0 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.
EX-15.1 3 Exhibit 15.1 November 12, 1997 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 October 8, 1997 relating to the unaudited condensed consolidated interim financial statements of Genentech, Inc. which are included in its Form 10-Q for the quarter and nine-months ended September 30, 1997. 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 -----END PRIVACY-ENHANCED MESSAGE-----