10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2004
	or
[  ]	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
(State or other jurisdiction
of incorporation or organization) 94-2347624
(I.R.S. Employer
Identification Number)

1 DNA Way, South San Francisco, California  94080-4990
(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  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 $0.02 par value	1,054,316,254 Outstanding at July 23, 2004

GENENTECH, INC.
TABLE OF CONTENTS

		Page No.
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Statements of Income - for the three and six months ended June 30, 2004 and 2003	3
	Condensed Consolidated Statements of Cash Flows - for the six months ended June 30, 2004 and 2003	4
	Condensed Consolidated Balance Sheets - June 30, 2004 and December 31, 2003	5
	Notes to Condensed Consolidated Financial Statements	6-18
	Report of Independent Registered Public Accounting Firm	19
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20-53
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	54
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	55
Item 4.	Submission of Matters to a Vote of Security Holders	56
Item 6.	Exhibits and Reports on Form 8-K	57
SIGNATURES		58

In this report, "Genentech," "we," "us" and "our" refer to Genentech, Inc. "Common Stock" refers to Genentech's common stock, par value $0.02 per share, "Special Common Stock" refers to Genentech's callable putable common stock, par value $0.02 per share, all of which was redeemed by Roche Holdings, Inc. on June 30, 1999. All information relating to the number of shares, price per share and per share amounts of common stock give effect to the May 2004 two-for-one split of our common stock.

We own or have rights to various copyrights, trademarks and trade names used in our business including the following: Activase® (alteplase, recombinant) tissue-plasminogen activator; Avastin™ (bevacizumab) anti-VEGF antibody; Cathflo® Activase® (alteplase for catheter clearance); Herceptin® (trastuzumab) anti-HER2 antibody; Lucentis™ (ranibizumab, rhuFab V2) anti-VEGF antibody fragment; Nutropin® (somatropin (rDNA origin) for injection) growth hormone; Nutropin AQ® and Nutropin AQ Pen® (somatropin (rDNA origin) for injection) liquid formulation growth hormone; Nutropin Depot® (somatropin (rDNA origin) for injectable suspension) encapsulated sustained-release growth hormone; Omnitarg™ (pertuzumab) HER dimerization inhibitor; Protropin® (somatrem for injection) growth hormone; Pulmozyme® (dornase alfa, recombinant) inhalation solution; Raptiva™ (efalizumab, formerly Xanelim™) anti-CD11a antibody; and TNKase™ (tenecte plase) single-bolus thrombolytic agent. Rituxan® (rituximab) anti-CD20 antibody is a registered trademark of Biogen Idec Inc.; Tarceva™ (erlotinib HC1) is a trademark of OSI Pharmaceuticals, Inc.; and Xolair® (omalizumab) anti-IgE antibody is a trademark of Novartis AG. This report also includes other trademarks, service marks and trade names of other companies.

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PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Revenues
Product sales (including amounts from related parties:       three months - 2004-$27,668; 2003-$35,775;       six months - 2004-$55,492; 2003-$65,184)	$	913,366	$	644,324	$	1,677,066	$	1,242,806
Royalties (including amounts from related party:       three months - 2004-$84,071; 2003-$57,577;       six months - 2004-$155,368; 2003-$104,464)		151,860		122,786		305,957		236,061
Contract revenue (including amounts from related parties:       three months - 2004-$33,891; 2003-$18,415;       six months - 2004-$70,512; 2003-$20,703)		62,852		32,602		120,190		70,517
Total operating revenues		1,128,078		799,712		2,103,213		1,549,384
Costs and expenses
Cost of sales (including amounts for related parties:       three months - 2004-$26,019; 2003-$30,014;       six months - 2004-$48,664; 2003-$54,843)		186,683		123,407		301,163		238,249
Research and development       (including amounts for related parties:       three months - 2004-$40,738; 2003-$11,354;       six months - 2004-$87,202; 2003-$23,483)       (including contract related:       three months - 2004-$34,571; 2003-$16,980;       six months - 2004-$71,495; 2003-$26,452)		212,886		180,203		403,231		337,636
Marketing, general and administrative		276,654		184,258		523,968		321,480
Collaboration profit sharing (including amounts for related party:       three months - 2004-$14,827; 2003-$0;       six months - 2004-$26,649; 2003-$0)		145,221		107,307		271,652		203,854
Recurring charges related to redemption		38,209		38,586		76,418		77,172
Special charges:  litigation-related		13,458		13,363		26,857		26,608
Total costs and expenses		873,111		647,124		1,603,289		1,204,999
Operating margin		254,967		152,588		499,924		344,385
Other income, net		15,444		40,870		37,765		56,573
Income before taxes		270,411		193,458		537,689		400,958
Income tax provision		99,640		61,113		190,331		117,143
Net income	$	170,771	$	132,345	$	347,358	$	283,815
Earnings per share
Basic	$	0.16	$	0.13	$	0.33	$	0.28
Diluted	$	0.16	$	0.13	$	0.32	$	0.27
Weighted-average shares used to compute earnings per share
Basic		1,060,619		1,025,818		1,057,955		1,024,796
Diluted		1,087,087		1,045,829		1,084,618		1,040,204

See Notes to Condensed Consolidated Financial Statements.

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GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Six Months Ended June 30,
	2004		2003
Cash flows from operating activities
Net income	$	347,358	$	283,815
Adjustments to reconcile net income to net cash provided by       operating activities:
Depreciation and amortization		178,516		144,871
Deferred income taxes		(17,715)		(30,109)
Deferred revenue		(18,846)		247,363
Litigation-related liabilities		25,712		27,855
Tax benefit from employee stock options		231,305		125,197
Net gain on sales of securities available-for-sale and other		(605)		(18,840)
Write-down of securities available-for-sale		-		3,764
Loss on fixed asset dispositions		-		2,408
Changes in assets and liabilities:
Receivables and other current assets		(157,758)		(258,357)
Inventories		(58,009)		(28,872)
Investments in trading securities		(28,496)		(17,457)
Accounts payable and other current liabilities		(64,447)		(75,378)
Net cash provided by operating activities		437,015		406,260
Cash flows from investing activities
Purchases of securities available-for-sale		(684,109)		(575,354)
Proceeds from sales and maturities of securities available-for-sale		624,227		304,300
Capital expenditures		(196,633)		(140,145)
Change in other assets		(28,933)		(32,774)
Transfer to restricted cash		(52,000)		-
Net cash used in investing activities		(337,448)		(443,973)
Cash flows from financing activities
Stock issuances		366,737		285,333
Stock repurchases		(575,749)		(195,274)
Net cash (used in) provided by financing activities		(209,012)		90,059
Net (decrease) increase in cash and cash equivalents		(109,445)		52,346
Cash and cash equivalents at beginning of period		372,152		208,130
Cash and cash equivalents at end of period	$	262,707	$	260,476

See Notes to Condensed Consolidated Financial Statements.

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GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

	June 30, 2004		December 31, 2003
Assets
Current assets
Cash and cash equivalents	$	262,707	$	372,152
Short-term investments		1,356,427		1,139,620
Accounts receivable - product sales, net (including amounts from related parties:       2004-$7,118; 2003-$16,018)		464,032		315,097
Accounts receivable - royalties, net (including amounts from related party:       2004-$114,760; 2003-$113,739)		189,513		184,163
Accounts receivable - other, net (including amounts from related parties:       2004-$94,563; 2003-$71,863)		88,901		74,831
Inventories		527,649		469,640
Prepaid expenses and other current assets		167,155		201,327
Total current assets		3,056,384		2,756,830
Long-term marketable debt and equity securities		1,414,663		1,422,886
Property, plant and equipment		1,740,423		1,617,912
Goodwill		1,315,019		1,315,019
Other intangible assets		710,644		810,810
Restricted cash and other long-term assets		817,906		812,714
Total assets	$	9,055,039	$	8,736,171
Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	30,326	$	59,700
Other current liabilities (including amounts owed to related parties:       2004-$84,723; 2003-$58,138)		806,550		813,331
Total current liabilities		836,876		873,031
Long-term debt		412,250		412,250
Other long-term liabilities		920,879		930,592
Total liabilities		2,170,005		2,215,873
Commitments and contingencies
Stockholders' equity
Preferred stock		-		-
Common stock		21,141		10,495
Additional paid-in capital		7,848,238		7,370,261
Accumulated deficit, since June 30, 1999		(1,276,462)		(1,157,491)
Accumulated other comprehensive income		292,117		297,033
Total stockholders' equity		6,885,034		6,520,298
Total liabilities and stockholders' equity	$	9,055,039	$	8,736,171

See Notes to Condensed Consolidated Financial Statements.

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GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (or SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (or GAAP) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. Certain reclassifications have been made to prior year amounts to conform with current period presentation.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2003.

In February 2004, the Board approved a two-for-one stock split of our common stock in the form of a stock dividend of one share of Genentech common stock for each share held contingent on stockholder approval of an increase in our authorized common stock. On April 16, 2004, at our annual meeting of stockholders, our stockholders approved an increase in our authorized common stock. The record date for the stock split was April 28, 2004. Our stock began trading on a split-adjusted basis on May 13, 2004. All information in this report relating to the number of shares, price per share and per share amounts of common stock are presented on a post-split basis.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Genentech and all subsidiaries. Genentech also consolidates a variable interest entity for which Genentech is the primary beneficiary pursuant to Financial Accounting Standards Board (or FASB) Interpretation No. 46R (or FIN 46R), a revision to Interpretation 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51, and records the noncontrolling interest in the condensed consolidated balance sheet. Material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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.

Accounting for Stock-Based Compensation

We have elected to continue to follow the intrinsic value method of accounting for stock-based compensation as prescribed by Accounting Principles Board Opinion No. 25 (or APB 25), "Accounting for Stock Issued to Employees." We apply the disclosure provisions of Statement of Financial Accounting Standards No. 123 (or FAS 123), "Accounting for Stock-based Compensation," as amended by FAS 148, "Accounting for Stock-based Compensation - Transition and Disclosure" (or FAS 148) as if the fair value-based method had been applied in measuring compensation expense. Under APB 25, we do not recognize compensation expense unless the exercise price of our employee stock options is less than the market price of the underlying stock on the date of grant. We grant all of our options at the fair market value of the underlying stock on the date of grant. Consequently, we have not recorded such expense in the periods presented.

Page 6

We currently grant options under a stock option plan that allows for the granting of non-qualified stock options, incentive stock options and stock purchase rights to employees, directors and consultants of Genentech. Incentive stock options may only be granted to employees under this plan. Generally, non-qualified options and incentive options have a maximum term of 10 years. In general, options vest in increments over four years from the date of grant. We have an employee stock plan that allows eligible employees to purchase common stock at 85% of the lower of the fair market value on the grant date or the fair market value on the purchase date. Purchases are limited to 15% of each employee's eligible compensation and subject to certain Internal Revenue Service restrictions. All full-time employees of Genentech are eligible to participate in this plan.

We had stock option exercises of 5.3 million shares in the second quarter and 16.6 million shares in the first six months of 2004.

The following information regarding net income and earnings per share has been determined as if we had accounted for our employee stock options and employee stock plan under the fair value method prescribed by FAS 123 as amended by FAS 148. The resulting effect on net income and earnings per share pursuant to FAS 123 is not likely to be representative of the effects in future periods, due to subsequent additional option grants and periods of vesting. The fair value of options was estimated at the date of grant using a Black-Scholes option valuation model with the following weighted-average assumptions:

	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Risk-free interest rate	3.7%	2.0%	3.6%	2.3%
Dividend yield	0.0%	0.0%	0.0%	0.0%
Volatility factors of the expected market price of    our Common Stock	42.0%	45.0%	43.0%	40.8%
Weighted-average expected life of option (years)	5	5	5	5

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of our employee stock options, thus these calculations may not accurately value such options.

For purposes of disclosures pursuant to FAS 123 as amended by FAS 148, the estimated fair value of options is amortized to expense ratably over the options' vesting period.

Page 7

The following table illustrates the effect on reported net income and earnings per share as if we had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation (in thousands, except per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Net income - as reported	$	170,771	$	132,345	$	347,358	$	283,815
Deduct:  Total stock-based employee compensation    expense determined under the fair value based    method for all awards, net of related tax effects		45,611		41,223		90,316		81,431
Pro forma net income	$	125,160	$	91,122	$	257,042	$	202,384
Earnings per share:
Basic-as reported	$	0.16	$	0.13	$	0.33	$	0.28
Basic-pro forma	$	0.12	$	0.09	$	0.24	$	0.20
Diluted-as reported	$	0.16	$	0.13	$	0.32	$	0.27
Diluted-pro forma	$	0.12	$	0.09	$	0.24	$	0.19

On March 31, 2004, the FASB issued an Exposure Draft (ED), "Share-Based Payment - An Amendment of FASB Statements No. 123 and 95." The proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value based method. As proposed, companies would be required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. As proposed, the new rules would be applied on a modified prospective basis as defined in the ED, and would be effective f or public companies for fiscal years beginning after December 15, 2004. We are currently evaluating option valuation methodologies and assumptions in light of the evolving accounting standards related to employee stock options. Current estimates of option values using the Black-Scholes method (as shown above) may not be indicative of results from valuation methodologies ultimately adopted in the final rules.

Reclassifications

Certain reclassifications of prior year amounts have been made to our condensed consolidated statements of cash flows to conform to the current year presentation.

Note 2. LEASES AND CONTINGENCIES

Leases

We lease various real properties under operating leases. Three of our operating leases are commonly referred to as "synthetic leases." Under FIN 46R, each lease is evaluated to determine if it qualifies as a variable interest entity (or VIE) and whether Genentech is the primary beneficiary under which it would be required to consolidate the VIE.

The most significant of our synthetic leases relates to our manufacturing facility located in Vacaville, California. Under FIN 46R, we determined that the entity from which we lease the Vacaville facility qualified as a VIE and that we are the primary beneficiary of this VIE as we absorb the majority of the entity's expected losses. Upon adoption of the provisions of FIN 46R on July 1, 2003, we consolidated the entity.

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Our two remaining leases were entered into with BNP Paribas Leasing Corporation (or BNP), who leases directly to us various buildings that we occupy in South San Francisco, California. Under one of these leases, we are required to maintain cash collateral of $56.6 million, which we have included in our condensed consolidated balance sheets as restricted cash and other long-term assets. We have evaluated our accounting for these leases under the provisions of FIN 46R, and have determined the following:

• as of July 1, 2003 and for each quarterly reporting period through June 30, 2004, our two remaining synthetic leases entered into with BNP represent a variable interest in BNP;

• we are not the primary beneficiary of BNP as we do not absorb the majority of the entity's expected losses or expected residual returns. As part of this determination, we have received quarterly confirmations from BNP representing to us and we have reviewed their portfolio statements to confirm that the leased properties do not represent greater than 50% of the fair value of BNP's assets; and

• we believe that the leased properties are not "specified assets" that represent essentially the only source of payment for our variable interest. As part of this determination, we have received quarterly confirmations from BNP representing to us and we have reviewed their portfolio statements to confirm that the leased properties are not "specified assets" held within a silo. That is, BNP has not financed an amount equal to or greater than 95% of the fair value of the leased assets with non-recourse debt, lessor participation, targeted equity or any other type of funding (silo funding) that would result in the leased properties being the only source of payment. In addition, as part of BNP's representations and warranties, BNP has agreed not to incur additional indebtedness in the future or to change the character of other non-targeted equity or similar funding sources that in any way would result in the leased properties being essentially the only source of repayment or to make any distributions from BNP that would result in silo funding equal to or exceeding 95% of the fair value of the leased properties.

Accordingly, we are not required to consolidate either the leasing entity or the specific assets that we lease under the BNP leases.

Future minimum lease payments were computed based on December 31, 2003 market-based interest rates, which are subject to fluctuations. The minimum payments under all leases, exclusive of the residual value guarantees, executory costs and sublease income, at December 31, 2003, are as follows (in millions):

	2004		2005		2006		2007		2008		Thereafter		Total
Vacaville synthetic lease(1)	$	6.2	$	6.2	$	5.6	$	-	$	-	$	-	$	18.0
South San Francisco    synthetic leases		2.7		2.6		1.1		- -		- -		- -		6.4
Other operating leases		6.5		6.9		5.8		5.8		5.8		24.1		54.9
Total	$	15.4	$	15.7	$	12.5	$	5.8	$	5.8	$	24.1	$	79.3

___________

(1) Represents a VIE, which we consolidated effective July 1, 2003, as we are the primary beneficiary of this VIE.

The following summarizes the approximate initial fair values of the facilities at the inception of the related leases, lease terms and residual value guarantee amounts for each of our synthetic leases (in millions):

	Approximate Initial Fair Value of Leased Property			Lease Expiration		Maximum Residual Value Guarantee
Vacaville lease		$	425.0		11/2006		$	371.8
South San Francisco lease 1			56.6		07/2004			48.1
South San Francisco lease 2			160.0		06/2007			136.0
Total		$	641.6				$	555.9

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We believe that there have been no impairments in the fair value or use of the properties that we lease under synthetic leases wherein we would be required to pay amounts under any of the residual value guarantees. We will continue to assess the fair values of the underlying properties and the use of the properties for impairment at least annually.

The maximum exposure to loss on our synthetic leases includes (i) residual value guarantee payments as shown above, (ii) certain tax indemnification in the event the third-parties are obligated for certain federal, state or local taxes as a result of their participation in the transaction, and (iii) indemnification for various losses, costs and expenses incurred by the third-party participants as a result of their ownership of the leased property or participation in the transaction, and as a result of the environmental condition of the property. The additional taxes, losses and expenses as described in (ii) and (iii) are contingent upon the existence of certain conditions and, therefore, would not be quantifiable at this time. However, we do not expect these additional taxes, losses and expenses to be material. In the case of South San Francisco lease 1, we have pledged cash collateral of $56.6 million as a source of payment for Genentech's obligation for the residual value guarantee pa yments and other amounts we owe under the lease.

Contingencies

In August 2002, we entered into an agreement with Serono S.A., which, in addition to granting Serono marketing rights in specific areas of the world, includes an arrangement to potentially collaborate on co-developing additional indications of Raptiva and to share certain global development costs. We also have a supply agreement with Serono, under which we may have a loss exposure up to a maximum of $10.0 million.

We are a party to various legal proceedings, including patent infringement litigation relating to our antibody products, and licensing and contract disputes, and other matters.

We and the City of Hope National Medical Center (or COH) are parties to a 1976 agreement relating to work conducted by two COH employees, Arthur Riggs and Keiichi Itakura, and patents that resulted from that work, which are referred to as the "Riggs/Itakura Patents." Since that time, Genentech has entered into license agreements with various companies to make, use and sell the products covered by the Riggs/Itakura Patents. On August 13, 1999, the COH filed a complaint against us in the Superior Court in Los Angeles County, California, alleging that we owe royalties to the COH in connection with these license agreements, as well as product license agreements that involve the grant of licenses under the Riggs/Itakura Patents. The first trial of this suit began on August 28, 2001. On October 24, 2001, the jury hearing the lawsuit announced that it was unable to reach a verdict and on that basis the Court declared a mistrial. COH requested a retrial, and the retrial began on March 20, 200 2. On June 10, 2002, the jury voted to award the COH approximately $300 million in compensatory damages. On June 24, 2002, the jury voted to award the COH an additional $200 million in punitive damages. Such amounts were accrued as an expense in the second quarter of 2002 and were included in other long-term liabilities in the condensed consolidated balance sheets at June 30, 2004 and December 31, 2003. Genentech filed a notice of appeal of the verdict and damages awards with the California Court of Appeal. The Court of Appeal has scheduled the hearing of that appeal for August 19, 2004. The appeal process is ongoing. The amount of cash paid, if any, in connection with the COH matter will depend on the outcome of the appeal.

On June 7, 2000, Chiron Corporation filed a patent infringement suit against us in the U.S. District Court in the Eastern District of California (Sacramento), alleging that the manufacture, use, sale and offer for sale of our Herceptin antibody product infringes Chiron's U.S. Patent No. 6,054,561. This patent was granted on April 25, 2000, and will expire on June 28, 2005, and it relates to certain antibodies that bind to breast cancer cells and/or other cells. Chiron is seeking compensatory damages for the alleged infringement, additional damages (e.g., for willful infringement), and attorneys' fees and costs. On April 22, 2002, the Court issued its decision ("Markman Order") construing certain aspects of the patent claims that are in dispute. On June 25, 2002, the Court issued several decisions regarding summary judgment motions that previously had been filed by Chiron and us. In those decisions, the Court ruled as a matter of law that Herceptin infringes claims 1 to 25 of Chiron's patent, and also ruled as a matter of law in favor of Chiron on some but not all of Genentech's defenses and counterclaims regarding the alleged invalidity and/or unenforceability of the patent. The trial of this suit began on August 6, 2002. Following

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the first phase of the trial, which related to Genentech's remaining defenses and counterclaims regarding the alleged invalidity of the patent, the jury unanimously found that claims 1 to 25 of Chiron's patent were invalid, and on that basis the Court entered judgment in favor of Genentech. Chiron filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit ("Court of Appeals"), and Genentech filed a notice of cross-appeal. On April 6, 2004, we announced that a three-judge panel of the Court of Appeals unanimously affirmed the 2002 judgment of the U.S. District Court that found in favor of Genentech that all claims of Chiron's patent asserted against Genentech are invalid. On or about April 15, 2004, Chiron filed a Petition for Rehearing with the Court of Appeals seeking further review and reconsideration of that Court's decision. The Court of Appeals denied the Petition in its entirety on June 8, 2004.

On August 12, 2002, the U.S. Patent and Trademark Office (or Patent Office) declared an interference between the Chiron patent involved in the above-mentioned lawsuit (U.S. Patent No. 6,054,561) and a patent application exclusively licensed by Genentech from a university relating to anti-HER2 antibodies. An interference proceeding is declared to decide who first made a particular invention where two or more parties claim the same invention, whether the parties' claims are patentable, and consequently who is or is not entitled to a patent on the invention. In declaring this interference, the Patent Office has determined that there is a substantial question as to whether the inventors of the Chiron patent were first to invent and are entitled to this patent. If the Patent Office were to decide that the inventors of the university's patent application were first to invent and that their claims are patentable, a new patent would be issued to the university and the Chiron patent would be rev oked. On October 24, 2002, the Patent Office redeclared the interference to include, in addition to the above-referenced Chiron patent and university patent application, a number of patents and patent applications owned by either Chiron or Genentech, including Chiron's U.S. Patent No. 4,753,894 that is also at issue in the separate patent infringement lawsuit described below. The interference proceeding is ongoing and therefore the outcome of this matter cannot be determined at this time.

On March 13, 2001, Chiron filed another patent infringement lawsuit against us in the U.S. District Court in the Eastern District of California, alleging that the manufacture, use, sale and/or offer for sale of our Herceptin antibody product infringes Chiron's U.S. Patent No. 4,753,894. Chiron is seeking compensatory damages for the alleged infringement, additional damages, and attorneys' fees and costs. Genentech filed a motion to dismiss this second lawsuit, which was denied. On November 1, 2002, the parties filed a proposed stipulation to stay all proceedings in this lawsuit until (1) the interference involving U.S. Patent No. 4,753,894 is resolved or (2) two years from entry of the proposed stipulation, whichever is sooner. On or about November 13, 2002, the Court entered the stipulation, staying the proceedings as requested by the parties. This lawsuit is separate from and in addition to the Chiron suit mentioned above.

On April 11, 2003, MedImmune, Inc. filed a lawsuit against Genentech, COH, and Celltech R & D Ltd. in the U.S. District Court for the Central District of California (Los Angeles). The lawsuit relates to U.S. Patent No. 6,331,415 ("the '415 patent") that is co-owned by Genentech and COH and under which MedImmune and other companies have been licensed and are paying royalties to Genentech. The lawsuit includes claims for violation of antitrust, patent, and unfair competition laws. MedImmune is seeking to have the '415 patent declared invalid and/or unenforceable, a determination that MedImmune does not owe royalties under the '415 patent on sales of its Synagis® antibody product, an injunction to prevent Genentech from enforcing the '415 patent, an award of actual and exemplary damages, and other relief. Genentech intends to vigorously defend itself against all of the allegations and claims in this lawsuit. On January 14, 2004 (amending a December 23, 2003 Order), the U.S. Distr ict Court granted summary judgment in Genentech's favor on all of MedImmune's antitrust and unfair competition claims. MedImmune sought to amend its complaint to reallege certain claims for antitrust and unfair competition. On February 19, 2004, the Court denied this motion in its entirety and final judgment was entered in favor of Genentech and Celltech and against MedImmune on March 15, 2004 on all antitrust and unfair competition claims. MedImmune filed a notice of appeal of this judgment with the U.S. Court of Appeals for the Federal Circuit. Concurrently, in the District Court litigation, Genentech filed a motion to dismiss all remaining claims in the case. On April 23, 2004, the District Court granted Genentech's motion and dismissed all remaining claims. Final judgment was entered in Genentech's favor on May 3, 2004, thus concluding proceedings in the District Court. MedImmune filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. Because the appeal process is ongoing , the final outcome of this matter cannot be determined at this time.

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We recorded accrued interest and bond costs related to the COH trial judgment of $13.5 million and $13.4 million in the second quarters of 2004 and 2003, respectively, and $26.9 million and $26.6 million in the first six months of 2004 and 2003, respectively. In 2002, we recognized $543.9 million of litigation-related special charges, which included the COH trial judgment, including accrued interest and bond costs, and certain other litigation-related matters. In conjunction with the City of Hope judgment, we arranged to post a surety bond of $600.0 million. As part of this arrangement, we were required to pledge $630.0 million in cash and investments to secure the bond. In the second quarter of 2004, we were required to increase the surety bond to $650.0 million and pledged an additional $52.0 million, or a total of $682.0 million, in cash and investments to secure the bond at June 30, 2004. This amount is reflected in "restricted cash and other long-term assets" on the condensed con solidated balance sheets. In addition, we accrued royalty expenses related to the City of Hope judgment of $2.4 million in the first six months of 2003 and none in the first sixth months of 2004. This royalty expense is reflected in marketing, general and administrative expenses. We expect that we will continue to incur interest charges on the judgment and service fees on the surety bond each quarter through the process of appealing the City of Hope trial results. These special charges represent our estimate of the costs for the current resolution of these matters and are included in other long-term liabilities in the condensed consolidated balance sheets at June 30, 2004 and December 31, 2003. We developed these estimates in consultation with outside counsel handling our defense in these matters using the facts and circumstances of these matters known to us at that time. The amount of our liability for certain of these matters could exceed or be less than the amount of our current estimate, depending on the outcome of these matters. The amount of cash, if any, paid in connection with the City of Hope matter will depend on the outcome of the appeal.

Note 3. RELATED PARTIES

We enter into transactions with our related parties, Roche Holdings, Inc. (including Hoffmann-La Roche and other affiliates) and Novartis, in the ordinary course of business. The accounting policies we apply to our transactions with our related parties are consistent with those applied in transactions with independent third-parties and all related party agreements are negotiated on an arm's-length basis.

Relationship and Transactions with Roche Holdings, Inc. (or Roche)

On June 30, 1999, we redeemed all of our outstanding Special Common Stock held by stockholders other than Roche with funds deposited by Roche for that purpose. This event, referred to as the "Redemption," caused Roche to own 100% of our common stock on that date. The Redemption was reflected as a purchase of a business, which under GAAP required us to reflect in our financial statements the amount paid for our stock in excess of our net book value plus Roche's transaction costs at June 30, 1999. See Note 4, "Other Intangible Assets," for the amortization of our other intangible assets.

We expect from time to time to issue additional shares of common stock in connection with our stock option and stock purchase plans, and we may issue additional shares for other purposes. Our affiliation agreement with Roche provides, among other things, that we will establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. The affiliation agreement provides that we will repurchase a sufficient number of shares pursuant to this program such that, with respect to any issuance of common stock by Genentech in the future, the percentage of Genentech common stock owned by Roche immediately after such issuance will be no lower than Roche's lowest percentage ownership of Genentech common stock at any time after the offering of common stock occurring in July 1999 and prior to the time of such issuance, except that Genentech may issue shares up to an amount that would cause Roche's lowest percentage ownership to be no more than 2% below t he "Minimum Percentage." The Minimum Percentage equals the lowest number of shares of Genentech common stock owned by Roche since the July 1999 offering (to be adjusted in the future for dispositions of shares of Genentech common stock by Roche as well as for stock splits or stock combinations) divided by 1,018,388,704 (to be adjusted in the future for stock splits or stock combinations), which is the number of shares of Genentech common stock outstanding at the time of the July 1999 offering, as adjusted for the two-for-one splits of Genentech common stock in November 1999, October 2000 and May 2004. We repurchased shares of our common stock in 2004 and 2003 (see Note 9, "Stock Repurchases Program"). As long as Roche's percentage ownership is greater than 50%, prior to issuing any shares, the affiliation agreement provides that we will repurchase a sufficient number of shares of

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our common stock such that, immediately after our issuance of shares, Roche's percentage ownership will be greater than 50%. The affiliation agreement also provides that, upon Roche's request, we will repurchase shares of our common stock to increase Roche's ownership to the Minimum Percentage. In addition, Roche will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. Roche publicly offered zero-coupon notes in January 2000 which were exchangeable for Genentech common stock held by Roche. Roche called these notes in March 2004. Through April 5, 2004, the expiration date for investors to tender these notes, a total of 25,999,324 shares were issued in exchange for the notes, thereby reducing Roche's ownership of Genentech common stock to 587,189,380 shares. At June 30, 2004, Roche's ownership percentage was 55.6%. The Minimum Percentage at June 30, 2004 was 57.7% and, under the terms of the affiliation agreement, Ro che's lowest ownership percentage is to be no lower than 55.7%. See Note 9 "Capital Stock" for information regarding our stock repurchase program.

In April 2004, we further amended our July 1999 licensing and marketing agreement with Hoffmann-La Roche and its affiliates under which we grant them an option to license, use and sell our products in non-U.S. markets. This amendment added certain Genentech products under Hoffman-La Roche's commercialization and marketing rights for Canada but did not modify any material financial terms of the licensing and marketing agreement which are described in our Annual Report on Form 10-K for the year ended December 31, 2003.

We have a July 1998 licensing and marketing agreement relating to anti-HER2 antibodies (Herceptin and more recently, Omnitarg) with Hoffmann-La Roche, providing them with exclusive marketing rights outside of the United States. Under the agreement, Hoffmann-La Roche contributes equally with us on global development costs. Either Genentech or Hoffmann-La Roche has the right to "opt-out" of developing an additional indication for a product and would not share the costs or benefits of the additional indication, but could "opt-back-in" before approval of the indication by paying twice what would have been owed for development of the indication if no opt-out had occurred. Hoffmann-La Roche has also agreed to make royalty payments of 20% on aggregate net product sales outside the United States up to $500 million in each calendar year and 22.5% on such sales in excess of $500 million in each calendar year.

In April 2004, we entered into a research collaboration agreement with Hoffmann-La Roche that outlines the process by which Hoffmann-La Roche and Genentech will conduct and share in the costs of joint research on molecules in areas of mutual interest. The agreement further outlines how development and commercialization efforts will be coordinated with respect to select molecules, including the financial provisions for a number of different development and commercialization scenarios undertaken by either or both parties.

In June 2003, Hoffmann-La Roche exercised its option to license from us the rights to market Avastin for all countries outside of the U.S. under the July 1999 licensing and marketing agreement. As part of its opt-in, Hoffmann-La Roche paid us approximately $188.0 million and pays 75% of subsequent global development costs related to the metastatic colorectal cancer indication of Avastin and all others unless Hoffmann-La Roche specifically opts out of the development of certain other indications.

In September 2003, Hoffmann-La Roche exercised its option to license from us the rights to market PRO70769, a humanized antibody that binds to CD20, for all countries outside of the U.S. (other than territory previously licensed to others) under the July 1999 licensing and marketing agreement. As part of its opt-in, Hoffmann-La Roche paid us $8.4 million and pays 50% of subsequent global development costs related to PRO70769 unless Hoffmann-La Roche opts out of the development of certain other indications. We will receive royalties on net sales of Avastin and PRO70769 in countries outside of the U.S.

We recognized contract revenue from Hoffmann-La Roche, including amounts earned related to ongoing development activities, of $23.7 million and $14.7 million in the second quarters of 2004 and 2003, respectively, and $49.6 million and $16.8 million in the first six months of 2004 and 2003, respectively. All other revenues from Roche, Hoffmann-La Roche and their affiliates, principally royalties and product sales, were $111.7 million and $93.4 million in the second quarters of 2004 and 2003, respectively, and $210.6 million and $169.6 million in the first six months of 2004 and 2003, respectively. Cost of sales included amounts related to Hoffmann-La Roche of

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$25.9 million and $30.0 million in the second quarters of 2004 and 2003, respectively, and $48.4 million and $54.8 million in the first six months of 2004 and 2003, respectively. Research and development (or R&D) expenses included amounts related to Hoffmann- La Roche of $30.5 million and $6.3 million in the second quarters of 2004 and 2003, respectively, and $67.3 million and $14.7 million in the first six months of 2004 and 2003, respectively.

Relationship and Transactions with Novartis AG (or Novartis)

We understand that Novartis holds approximately 33.3% of the outstanding voting shares of Roche Holding AG. As a result of this ownership, Novartis is deemed to have an indirect beneficial ownership interest under FAS 57 "Related Party Disclosures" of more than 10% of Genentech's voting common stock.

In June 2003, we entered into an agreement with Novartis Ophthalmics AG (subsequently merged into Novartis Pharma AG), under which Novartis Ophthalmics licensed the exclusive right to develop and market Lucentis outside of North America for diseases or disorders relating to the human eye, including the indication of age-related macular degeneration (or AMD). As part of this agreement, Novartis Ophthalmics pays 50% of Genentech's expenses relating to certain AMD Phase III trials and related development expenses. Genentech may share in a portion of the development costs incurred by Novartis outside of North America. We may also receive royalties on net sales of Lucentis products, which we will manufacture and supply to Novartis, outside of North America, and certain milestone payments.

In February 2004, Genentech, Inc., Novartis Pharma AG and Tanox, Inc. settled all litigation pending among them, and finalized the detailed terms of their three-party collaboration, begun in 1996, to govern the potential development and commercialization of certain anti-IgE antibodies including Xolair® (Omalizumab) and TNX-901. This arrangement modifies the arrangement related to Xolair that we entered into with Novartis in 2000. All three parties are co-developing Xolair in the U.S., and Genentech and Novartis are co-promoting Xolair in the U.S. and both will separately make payments to Tanox; Genentech's will be in the form of royalties. Genentech records all sales and cost of sales in the U.S. and Novartis will market the product in and record all sales and cost of sales in Europe. Genentech and Novartis then share the resulting U.S. and European operating profits, respectively, according to prescribed profit-sharing percentages. The existing royalty and profit-sharing percentage s between the three parties remain unchanged. Genentech is currently supplying the product and receives cost plus a mark-up similar to other supply arrangements. Novartis plans to assume primary manufacturing responsibilities in the future.

Contract revenue from Novartis was $10.2 million and $3.7 million in the second quarters of 2004 and 2003, respectively, and $20.9 million and $3.9 million in the first six months of 2004 and 2003, respectively. Novartis collaboration profit sharing expenses were $14.8 million and $26.6 million in the second quarter and first six months of 2004 and we had no such expenses in the same periods of 2003. R&D expenses included amounts related to Novartis of $10.2 million and $5.1 million in the second quarters of 2004 and 2003, respectively, and $19.9 million and $8.8 million in the first six months of 2004 and 2003, respectively.

Note 4. OTHER INTANGIBLE ASSETS

The components of our acquisition-related other intangible assets, including those arising from the Redemption and push-down accounting, at June 30, 2004 and December 31, 2003, were as follows (in millions):

	June 30, 2004						December 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed product technology	$	1,194.1	$	808.6	$	385.5	$	1,194.1	$	769.5	$	424.6
Core technology		443.5		340.4		103.1		443.5		329.8		113.7
Tradenames		144.0		69.9		74.1		144.0		65.1		78.9
Patents		125.3		48.9		76.4		116.6		44.5		72.1
Other		626.2		554.7		71.5		661.8		540.3		121.5
Total	$	2,533.1	$	1,822.5	$	710.6	$	2,560.0	$	1,749.2	$	810.8

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Amortization expense of our other intangible assets was $61.5 million and $42.3 million in the second quarters of 2004 and 2003, respectively, and $104.5 million and $85.3 million in the first six months of 2004 and 2003, respectively. Included in the amortization expense in the second quarter of 2004 is an $18.6 million charge to marketing, general and administrative (or MG&A) expense related to the unamortized portion of the license fee that was paid to Alkermes, Inc. in 2000 upon U.S. Food and Drug Administration (or FDA) approval of Nutropin Depot. This license fee was being amortized over a 10 year estimated life and was included in MG&A expense. Our decision to discontinue commercialization of Nutropin Depot resulted in an impairment to this license, as we do not anticipate any significant future cashflows attributable to this license.

The expected future annual amortization expense of our other intangible assets is as follows (in millions):

For the Year Ending December 31,	Amortization Expense
2004 (remaining six months)	$	79.8
2005		139.3
2006		119.3
2007		118.1
2008		116.2
2009 and thereafter		137.9
Total expected future annual amortization	$	710.6

Note 5. DERIVATIVE FINANCIAL INSTRUMENTS

We record gains and losses on derivatives related to our equity hedging instruments in "other income, net" in the condensed consolidated statements of income. Such gains or losses were not material in the first six months of 2004 or 2003.

At June 30, 2004, net losses on derivative instruments expected to be reclassified from accumulated other comprehensive income to "other income, net" during the next twelve months are $6.0 million. These net losses are primarily due to the recognition of premiums related to maturing foreign currency exchange options.

Note 6. COMPREHENSIVE INCOME

Comprehensive income is comprised of net income and other comprehensive income (or OCI). OCI includes certain changes in stockholders' equity that are excluded from net income. Specifically, we include in OCI changes in the fair value of derivatives designated as effective cash flow hedges and unrealized gains and losses on our available-for-sale securities. The activity in comprehensive income, net of taxes, during the second quarters and first six months of 2004 and 2003 was as follows (in millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Net income	$	170.8	$	132.3	$	347.4	$	283.8
Change in unrealized gains (losses) on securities       available-for-sale		(29.8)		21.3		(4.1)		12.8
Change in unrealized gains (losses) on derivatives		(4.2)		1.1		(0.8)		2.2
Comprehensive income	$	136.8	$	154.7	$	342.5	$	298.8

The components of accumulated OCI, net of taxes, were as follows (in millions):

	June 30, 2004			December 31, 2003
Unrealized gains on securities available-for-sale		$	290.2		$	294.3
Unrealized gains on derivatives			1.9			2.7
Accumulated other comprehensive income		$	292.1		$	297.0

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The activity in OCI, net of taxes, during the second quarters and first six months of 2004 and 2003 related to our available-for-sale securities was as follows (in millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Unrealized gains (losses) on securities available-for-sale    (net of tax effect for second quarter of    ($20.1) in 2004 and $14.3 in 2003;    and for first six months of    ($3.0) in 2004 and $14.5 in 2003)	$	(30.1)	$	21.4	$	(4.4)	$	21.8
Reclassification adjustment for net gains included in net    income (net of tax effect of    $6.0 in the first six months of 2003)		0.3		(0.1)		0.3		(9.0)
Change in net unrealized gains (losses) on securities    available-for-sale	$	(29.8)	$	21.3	$	(4.1)	$	12.8

The activity in OCI, net of taxes, during the second quarters and first six months of 2004 and 2003, related to our cash flow hedges was not material.

Note 7. EARNINGS PER SHARE

The following is a reconciliation of the denominator used in basic and diluted earnings per share (or EPS) computations for the second quarters and first six months of 2004 and 2003 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Numerator:
Net income	$	170,771	$	132,345	$	347,358	$	283,815
Denominator:
Weighted-average shares outstanding used for       basic earnings per share		1,060,619		1,025,818		1,057,955		1,024,796
Effect of dilutive securities:
Stock options		26,468		20,011		26,663		15,408
Weighted-average shares and dilutive stock       options used for diluted earnings per share		1,087,087		1,045,829		1,084,618		1,040,204

The following is a summary of the outstanding options to purchase common stock that were excluded from the computation of diluted EPS because such options were anti-dilutive in the respective periods presented (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Number of shares	187	17,471	299	18,194
Range of exercise prices	$57.63-$59.61	$26.00-$47.83	$53.67-$59.61	$22.03-$47.83

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Note 8. INVENTORIES

The components of inventories were as follows (in millions):

	June 30, 2004			December 31, 2003
Raw materials and supplies		$	49.4		$	37.1
Work in process			406.1			383.8
Finished goods			72.1			48.7
Total		$	527.6		$	469.6

Work in process included pre-approval product candidate inventories, net of reserves, of $86.7 million at December 31, 2003. We had no inventories for pre-approval product candidates at June 30, 2004. Certain of such inventories were sold during the quarter ended March 31, 2004.

In the second quarter of 2004, in conjunction with our decision to discontinue commercialization and manufacture of Nutropin Depot, we expensed $18.8 million of Nutropin Depot inventory, which was reflected in cost of sales. We determined that this inventory could not be used to manufacture any of our other growth hormone products.

Also in the second quarter of 2004, we recorded a charge of $21.3 million related to filling failures for other products, which was reflected in cost of sales.

Note 9. CAPITAL STOCK

Stock Repurchase Program

Under a stock repurchase program approved by our Board of Directors on December 5, 2003, Genentech is authorized to repurchase up to 25,000,000 shares for an aggregate purchase price of up to $1 billion of its common stock through December 31, 2004. In this plan, as in previous stock repurchase plans, purchases may be made in the open market or in privately negotiated transactions from time to time at management's discretion. Genentech also may engage in transactions in other Genentech securities in conjunction with the repurchase program, including certain derivative securities. Genentech intends to use the repurchased stock to offset dilution caused by the issuance of shares in connection with Genentech's employee stock plans. Although there are currently no specific plans for the shares that may be purchased under the program, our goals for the program are (i) to make prudent investments of our cash resources; (ii) to allow for an effective mechanism to provide stock for our employe e stock plans; and (iii) to address provisions of our affiliation agreement with Roche relating to maintaining Roche's minimum ownership percentage. That minimum ownership percentage, which is equal to the Minimum Percentage described in Note 3 less 2%, is 55.7%.

We have entered into a 10b5-1 trading plan to repurchase shares in the open market during those periods each quarter when trading in our stock is restricted under our insider trading policy. The trading plan covers approximately 2.7 million shares and will run through December 31, 2004 (the remaining time period for our Board-approved share repurchase program).

Our shares repurchased during the past quarter were as follows:

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of shares that May Yet Be Purchased Under the Plans or Programs
April 1- 30, 2004		1,600,000		$  58.21
May 1 - 31, 2004		4,761,300		59.25
June 1 - 30, 2004		3,582,500		55.90
Total		9,943,800		$  57.87		10,085,600		14,914,400

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The par value method of accounting is used for common stock repurchases. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital with the amounts in excess of the estimated original sales price charged to accumulated deficit.

Note 10. TAXES

The effective tax rate was 36.8% in the second quarter of 2004 compared to 31.6% in the second quarter of 2003, and was 35.4% in the first six months of 2004 compared to 29.2% in the first six months of 2003. The increase in the tax rate reflects a decrease in benefits from foreign sales and from various tax credits. The tax provision for the first six months of 2004 included a benefit of $6.5 million related to a favorable change in estimates of research credits.

Note 11. SUBSEQUENT EVENT

Under our stock repurchase program approved by our Board of Directors on December 5, 2003, we repurchased 3,208,100 shares of our common stock at a cost of approximately $166.4 million during the period from July 1, 2004 through July 23, 2004. For more information on our stock repurchase program, see Note 9 "Capital Stock" above.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Genentech, Inc.

We have reviewed the condensed consolidated balance sheet of Genentech, Inc. as of June 30, 2004, and the related condensed consolidated statements of income and cash flows for the three and six-month periods ended June 30, 2004 and 2003. These financial statements are the responsibility of Genentech's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Genentech, Inc. as of December 31, 2003, 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 13, 2004 (except for the second paragraph of the note titled Subsequent Events and the twenty-first paragraph of the note titled Leases, Commitments and Contingencies, as to which the date is February 25, 2004), 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, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ ERNST & YOUNG LLP

Palo Alto, California
July 6, 2004, except for
Note 11, as to which the
date is July 23, 2004

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

GENENTECH, INC.
FINANCIAL REVIEW

OVERVIEW

Genentech, Inc. is a leading biotechnology company that discovers, develops, manufactures, and commercializes biotherapeutics for significant unmet medical needs. We manufacture and commercialize in the United States multiple biotechnology products and license several additional products to other companies.

Genentech primarily earns revenues and income and generates cash from product sales, contract revenues and royalties. We also generate other income from gains on sales of stocks in our biotechnology equity portfolio and interest from our investment portfolio. In 2004, we expect the growth of our business to be driven by sales of our new products, Avastin, Xolair and Raptiva and continued strong sales of our established oncology products, Rituxan and Herceptin. We also expect sales of our legacy products, contract revenues and royalties to continue to contribute to the bottom-line. In the second quarter of 2004, our total operating revenues were $1,128.2 million, our net income was $170.8 million and our current assets at June 30, 2004 were approximately $3,056.4 million. In the first six months of 2004, our total operating revenues were $2,103.2 million and our net income was $347.4 million.

Our short-term business objectives are driven by our 5x5 goals, which began in 1999 and continue through 2005. Our most important goal is to achieve 25 percent average annual non-GAAP EPS growth; we are tracking well toward this goal. Our goal of achieving 25 percent non-GAAP net income as a percentage of revenues will probably not be met, primarily due to our profit sharing arrangement for Rituxan. We have exceeded our goal of five new products or indications approved, as seven new products or indications have been approved since 1999. We are well positioned to exceed our goal of five significant products in late stage clinical development by the end of 2005. At this time, we are uncertain if we will meet our goal of $500 million in new revenue from alliances and/or acquisitions, as we changed our strategic focus to pursue earlier stage rather than later stage opportunities.

Our long-term business objectives are reflected in our Horizon 2010 strategy and goals set forth below.

• To become the number one U.S. oncology company in sales by 2010. We recognize that this goal is highly ambitious and that there will be formidable competition from other companies, particularly given the rate of new business consolidations in our industry. We face many challenges in meeting this goal, such as U.S. Food and Drug Administration (or FDA) approval, clinical trial success, and advantageous government reimbursement rates.

• To position ourselves for continued leadership in our oncology franchise by bringing five new oncology products or indications for existing products into clinical development and into the market.

• To build a leading immunology franchise by expanding the fundamental understanding of immune disorders, bringing at least five new immunology products or indications into clinical development, and obtaining FDA approval of at least five new indications or products by 2010.

• To increase our leadership in developing biotherapeutics for disorders of tissue growth and repair, with a major focus on angiogenic disorders, and to move at least three new projects into late-stage research or developmental research and three or more new projects into clinical development by 2010.

• To achieve average annual non-GAAP EPS growth rates sufficient to be considered a growth company.

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Achieving these goals depends on our ability to quickly capitalize on advances in basic research, to balance speed in clinical development with designing high quality trials, to shape the markets for our products, to influence the practice of medicine, to increase our manufacturing capability and to maintain our unique corporate culture during a period of rapid growth.

As a business in a highly regulated and competitive industry, we face many opportunities, risks and challenges. There are many economic and industry-wide factors that affect our business, including increasing complexity and cost of pharmaceutical research and development, leadership changes at the FDA, increases in clinical development timeframes, declines in numbers of new products that the FDA is approving, changes in reimbursement under recent Medicare legislation and initiatives towards generic biologics and employee stock option expensing.

The Medicare Prescription Drug, Improvement and Modernization Act (or the Medicare Act) was enacted into law in December 2003. We are monitoring closely the impact on our business of the reform of the Average Wholesale Price (AWP) mechanism as the basis of oncology reimbursement under Medicare. To date, there has been minimal impact on physician prescribing.

With respect to generic biologics, we believe that current technology cannot prove a generic biotechnology product to be safe and effective outside the New Drug Application (or NDA) and Biologics License Application (or BLA) process. We have filed a Citizen Petition with the FDA requesting that the agency re-assess its approach to approvals of follow-on biologics and put processes in place to protect trade secret and confidential commercial data and information from use and disclosure by others.

In regards to employee stock options, the Financial Accounting Standards Board (or FASB) has proposed a rule to expense employee stock options. We believe the FASB's direction towards requiring companies to expense these options may have unintended negative consequences. At this time, it is unclear what accounting rules will ultimately be adopted for employee stock options, however, the potential changes could materially impact our results of operations.

This past year we experienced the largest annual growth in employee numbers in our history. Our continued growth depends on our ability to bring highly qualified and talented people into all areas of our company. It also depends on our ability to retain our employees. Integrating this number of new employees into our company will be a significant challenge for management and we have focused our attention on this important area.

On our operations, we continue to plan for manufacturing needs in both the short- and long-term. We have ramped up manufacturing efforts in both our South San Francisco and Vacaville facilities in an effort to meet increased product demand. We recently announced a decision to expand our Vacaville facility; the expansion of this facility is expected to cost approximately $600 million over the next several years. That additional capacity is planned to be available in 2009. In addition, we entered into a long-term manufacturing agreement with Lonza Biologics, under which Lonza will manufacture commercial quantities of Rituxan at Lonza's production facility in Portsmouth, New Hampshire. We also made progress on our facility in Porriño, Spain (Genentech España) and expect to bring it online later this year to produce Avastin for clinical trials. Finally, as part of our capacity planning to support our growth and expansion, and efforts to add additional capacity, we are having ongoing dialogue with third-party manufacturers and evaluating potential sites with existing manufacturing capabilities, as well as sites where we can build new facilities. We also have additional avenues we are pursuing to attempt to meet future product supply needs for ourselves and our collaborators. All of these projects and efforts are critical to providing sufficient capacity to meet expected demand for our products although we recognize that there are some inherent uncertainties associated with forecasting future demand, especially for newly introduced products, and that manufacturing of biologics is a complex process. We are also undertaking efforts to secure additional filling capacity in order to mitigate the current risk associated with having a single licensed filling facility for many of our products. Until that process is completed, we have potential supply risk for many of our products that are single-sourced from our own filling facility or from a single contract filling site.

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Intellectual property protection of our products is also crucial to our business. We are often involved in challenges over contracts and intellectual property and we work to resolve these disputes in confidential negotiations. We expect legal challenges in this area to continue. We plan to continue to build upon and defend our intellectual property position. The resources required to do this are significant.

In the second quarter and first six months of 2004, we saw growth in our operating revenues, net income and earnings per share as compared to the second quarter and first six months of 2003. Sales of Avastin, launched on February 26, 2004, were $133.0 million in the second quarter of 2004 as compared to $38.1 million in the prior quarter. Our sales data suggests that Avastin is being combined with a wide range of 5FU-based chemotherapies, reflecting Avastin's broad indication in metastatic colorectal cancer. Sales of Xolair were $43.7 million in the second quarter of 2004. This is a 46% increase from the first quarter of 2004. This growth reflects ongoing market penetration and high patient compliance. Sales of Raptiva were $13.4 million in the second quarter of 2004. Over 8,000 patients have been prescribed Raptiva since launch and approximately 80% of these patients have not been previously treated with biologics. The rate of growth in prescriptions for Raptiva has been affected by the recent approval of etanercept for psoriasis. Specifically, a significant etanercept trial has launched and we currently estimate it could potentially take several thousand patients out of the market. We expect to see the impact of the etanercept trial in our third quarter revenues. Rituxan sales increased 17% in the second quarter and first six months of 2004 as compared to the same periods in 2003, and increased only modestly from the previous two quarters. This trend reflects a slowing of the Rituxan growth rate, inventory adjustments made by wholesalers at the beginning of the year and limited reaction to the Medicare legislation. We believe the opportunities for long-term Rituxan sales growth lie in potential new indications, particularly in immunology, and in the potential use of Rituxan in the maintenance setting in treating non-Hodgkin's lymphoma. Sales of Herceptin increased 8% in the second quarter and 14% in the first six months of 2004 as compared to the same periods in 2003, and incr eased only modestly from the previous two quarters. We believe the potential for long-term Herceptin sales growth lies in the adjuvant setting for HER2 positive breast cancer, for which clinical studies are still ongoing. In the past two quarters, sales of our growth hormone products and thrombolytics grew slowly while sales of Pulmozyme declined. Royalties and contract revenues increased due to higher sales by licensees and product development reimbursements from collaborators, respectively. Operating expenses increased as a result of increased marketing, general and administrative (or MG&A) and research and development (or R&D) expenses and we expect this trend to continue this year. Cost of sales as a percentage of sales has also increased primarily due to our decision to discontinue commercialization of Nutropin Depot and the related charge of $18.8 million, pretax, in the second quarter of 2004. In addition, during the quarter, we recorded a provision of $21.3 million, pretax, related to f illing failures for other products.

In June 2004, we announced with OSI Pharmaceuticals, Inc. (or OSI) and Roche that a Phase III study of Tarceva monotherapy in second- and third-line metastatic non-small cell lung cancer demonstrated a 42.5 percent improvement in median survival and a 41 percent improvement in one-year survival rates compared to best supportive care. In late June, OSI announced that the NDA for Tarceva was accepted into the U.S. Food and Drug Administration's Pilot 1 Program for Continuous Marketing Applications. The Pilot 1 Program is designed for products that have been designated Fast Track status and have demonstrated significant promise in clinical trials as a therapeutic advance over available therapy for the disease or condition. OSI is responsible for obtaining the approval by the FDA and is working to complete the NDA for Tarceva during the summer of 2004.

Also in June 2004, we entered into two agreements with OSI with respect to promotion, marketing and manufacturing responsibilities for Tarceva, if it is approved for distribution in the United States. The first agreement further clarifies certain general principles outlined in the original 2001 co-development and commercialization agreement regarding the two parties' roles and responsibilities. We will continue to be responsible for the marketing, launch and promotion of Tarceva and OSI will assist with the promotion of Tarceva in the U.S. The second agreement outlines OSI's responsibilities for commercial manufacturing and supply of Tarceva in the U.S. market.

Marketed Products

Rituxan (rituximab) anti-CD20 antibody is 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, including retreatment,

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times 8 dosing and bulky disease. We co-developed Rituxan with Biogen Idec Inc. (or Biogen Idec), formerly known as IDEC Pharmaceuticals Corporation, one of the predecessor companies, from whom we licensed Rituxan.

Herceptin (trastuzumab) anti-HER2 antibody is a humanized antibody for the treatment of certain patients with metastatic breast cancer whose tumors overexpress the Human Epidermal growth factor Receptor type 2 (or HER2) protein. Herceptin is approved for use as a first-line therapy in combination with Taxol® (paclitaxel), a product made by Bristol-Myers Squibb Company (or Bristol-Myers), and as a single agent in second- and third-line therapy in patients with metastatic breast cancer who have tumors that overexpress the HER2 protein.

Nutropin Depot [somatropin (rDNA origin) for injectable suspension] is a long-acting growth hormone for the treatment of growth failure associated with pediatric growth hormone deficiency. It uses ProLease®, an injectable extended-release drug delivery system, which was developed by our collaborator Alkermes, Inc. On June 1, 2004, we and Alkermes announced our decision to discontinue commercialization of Nutropin Depot. We expect sales of Nutropin Depot to continue through the third quarter of 2004 or until inventory is depleted.

Nutropin [somatropin (rDNA origin) for injection] is a growth hormone for the treatment of growth hormone deficiency in children and adults, growth failure associated with chronic renal insufficiency prior to kidney transplantation and short stature associated with Turner syndrome. Nutropin is similar to Protropin (see below); however, it does not have the additional N-terminal amino acid, methionine, found in the Protropin chemical structure.

Protropin (somatrem for injection) is a growth hormone approved for the treatment of growth hormone inadequacy in children. Manufacture of Protropin was discontinued at the end of 2002 because physicians are typically initiating therapy with one of the Nutropin family products and the demand for Protropin has declined, but sales are expected to continue through 2004 or until inventory is depleted.

Nutropin AQ [somatropin (rDNA origin) for injection] is a liquid formulation growth hormone for the same indications as Nutropin and is aimed at providing improved convenience in administration.

TNKase (tenecteplase) is a single-bolus thrombolytic agent for the treatment of acute myocardial infarction (heart attack).

Activase (alteplase, recombinant) is a tissue plasminogen activator (or t-PA) approved for the treatment of acute myocardial infarction (heart attack), acute ischemic stroke (blood clots in the brain) within three hours of the onset of symptoms and acute massive pulmonary embolism (blood clots in the lungs).

Cathflo Activase (alteplase, recombinant) is a thrombolytic agent for the restoration of function to central venous access devices that have become occluded due to a blood clot.

Pulmozyme (dornase alfa, recombinant) is an inhalation solution for the treatment of cystic fibrosis.

Xolair (omalizumab) is an anti-IgE antibody, which we commercialize with Novartis, for the treatment of moderate-to-severe persistent asthma in adults and adolescents.

Raptiva (efalizumab) is an anti-CD11a antibody, co-developed with XOMA Ltd., for the treatment of chronic moderate-to-severe plaque psoriasis in adults age 18 or older who are candidates for systemic therapy or phototherapy.

Avastin (bevacizumab) is an antibody that binds to and inhibits vascular endothelial growth factor (VEGF). It was approved by the FDA on February 26, 2004 for use in combination with intravenous 5-fluorouracil-based chemotherapy as a treatment for patients with first-line (or previously untreated) metastatic cancer of the colon or rectum.

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Licensed Products

We receive royalties from F. Hoffmann-La Roche (or Hoffmann-La Roche) on sales of:

• Herceptin and Pulmozyme outside of the United States (or U.S.),

• Rituxan outside of the U.S. excluding Japan, and

• growth hormone products, Activase, Cathflo Activase and TNKase in Canada.

We also receive royalties on additional licensed products that are marketed by other companies. Some of our products are sold under different trademarks or trade names when sold outside of the U.S.

Available Information

The following information can be found on our website at http://www.gene.com or can be obtained free of charge by contacting our Investor Relations Department at (650) 225-1599 or by sending an e-mail message to investor.relations@gene.com:

• our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission;

• our policies related to corporate governance, including Genentech's Good Operating Principles (Genentech's code of ethics applying to Genentech's directors, officers and employees) as well as Genentech's Code of Ethics applying to our chief executive officer and senior financial officials; and

• the charter of the Audit Committee of our Board of Directors.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

The accompanying discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States (or GAAP). The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our condensed consolidated financial statements and accompanying notes. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.

We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.

Legal Contingencies

We are currently involved in certain legal proceedings as discussed in Note 2, "Leases and Contingencies" in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q. We assess the likelihood of any adverse judgments or outcomes to these legal matters as well as potential ranges of probable losses. As of June 30, 2004, we have accrued $634.0 million, which represents our estimate of the costs for the current resolution of these matters. We developed these estimates in consultation with outside counsel handling our defense in these matters using the facts and circumstances known to us at that time. The nature of these matters is highly uncertain

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and subject to change. As a result, the amount of our liability for certain of these matters could exceed or be less than the amount of our current estimates, depending on the outcome of these matters. An outcome of such matters different than previously estimated could materially impact our financial position or our results of operations in any one quarter.

Revenue Recognition

We recognize revenue from the sale of our products, royalties earned and contract arrangements. Our revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration we receive is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

• We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed and determinable, and collectibility is reasonably assured. Allowances are established for estimated uncollectible amounts, product returns and discounts.

• We recognize revenue from royalties based on licensees' sales of our products or technologies. Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured. Royalty estimates are made in advance of amounts collected using historical and forecasted trends.

• Contract revenue generally includes upfront and continuing licensing fees, manufacturing fees, milestone payments and reimbursements of development costs and post-marketing costs.

• Nonrefundable upfront fees, including milestone payments, for which no further performance obligations exist are recognized as revenue on the earlier of when payments are received or collection is assured.

• Nonrefundable upfront licensing fees, including product opt-ins, milestone payments, and certain guaranteed, time-based payments that require continuing involvement in the form of development, manufacturing or other commercialization efforts by us are recognized as revenue:

• ratably over the development period if development risk is significant, or

• ratably over the manufacturing period or estimated product useful life if development risk has been substantially eliminated.

• Manufacturing payments are recognized as revenue as the related manufacturing services are rendered, generally on a straight-line basis over the longer of the manufacturing obligation period or the expected product life.

• Milestone payments are recognized as revenue when milestones, as defined in the contract, are achieved.

• Reimbursements of development, post-marketing and certain collaboration-related commercialization costs are recognized as revenue as the related costs are incurred.

Income Taxes

Income tax expense is based on pretax financial accounting income under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and

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liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. We believe that our estimates are reasonable and that our reserves for income tax related uncertainties are adequate. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future levels of R&D spending, future levels of capital expenditures, and changes in overall levels of pretax earnings.

Inventories

Inventories consist of currently marketed products, products manufactured under contract and product candidates awaiting regulatory approval, which are capitalized based on management's judgment of probable near term commercialization. The valuation of inventory requires us to estimate obsolete or excess inventory. The determination of obsolete or excess inventory requires us to estimate the future demands for our products, and in the case of pre-approval inventories, an assessment of the likelihood of the regulatory approval for the product. We may be required to expense previously capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among other potential factors, a denial or delay of approval by the necessary regulatory bodies. In the event that a pre-approval product candidate receives regulatory approval, subsequent sales of previously reserved inventory will result in increased gross margins.

Nonmarketable Equity Securities

As part of our strategic efforts to gain access to potential new products and technologies, we invest in equity securities of certain private biotechnology companies. Our nonmarketable equity securities are carried at cost unless we determine that an impairment that is other than temporary has occurred, in which case we write the investment down to fair value. We periodically review our investments for impairment; however, the impairment analysis requires significant judgment in identifying events or circumstances that would likely have significant adverse effect on the fair value of the investment. The analysis may include assessment of the investee's (i) revenue and earnings trend, (ii) business outlook for its products and technologies, (iii) liquidity position and the rate at which it is using its cash, and (iv) likelihood of obtaining subsequent rounds of financing. If an investee obtains additional funding at a valuation lower than our carrying value, we presume that the investme nt is other than temporarily impaired. We have experienced impairments in our portfolio due to the decline in equity markets over the past few years. However, we are not able to determine at the present time which specific investments are likely to be impaired in the future, or the extent or timing of the individual impairments.

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RESULTS OF OPERATIONS
(in millions, except per share amounts)

	Three Months Ended June 30,								Six Months Ended June 30,
	2004			2003			% Change		2004			2003			% Change
Product sales	$	913.4		$	644.3		42	%	$	1,677.1		$	1,242.8		35	%
Royalties		151.9			122.8		24			305.9			236.1		30
Contract revenue		62.9			32.6		93			120.2			70.5		70
Total operating revenues		1,128.2			799.7		41			2,103.2			1,549.4		36
Cost of sales		186.7			123.4		51			301.2			238.2		26
Research and development		212.9			180.2		18			403.2			337.6		19
Marketing, general and administrative		276.7			184.3		50			523.9			321.5		63
Collaboration profit sharing		145.2			107.3		35			271.7			203.9		33
Recurring charges related to redemption		38.2			38.6		(1)			76.4			77.2		(1)
Special charges: litigation-related		13.5			13.4		1			26.8			26.7		-
Total costs and expenses		873.2			647.2		35			1,603.2			1,205.1		33
Operating margin		255.0			152.5		67			500.0			344.3		45
Other income, net		15.4			40.9		(62)			37.7			56.6		(33)
Income tax provision		99.6			61.1		63			190.3			117.1		63
Net income	$	170.8		$	132.3		29		$	347.4		$	283.8		22
Operating margin as a % of operating revenues		23	%		19	%				24	%		22	%
COS as a % of product sales		20			19					18			19
R&D as a % of operating revenues		19			23					19			22
MG&A as a % of operating revenues		25			23					25			21
NI as a % of operating revenues		15			17					17			18

___________

Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments.

Total Operating Revenues

Total operating revenues increased 41% in the second quarter and 36% in the first six months of 2004 from the comparable periods in 2003. These increases were due to higher product sales, royalty income and contract revenues. These increases are further discussed below.

Total Product Sales

	Three Months Ended June 30,						Six Months Ended June 30,
Product Sales	2004		2003		% Change		2004		2003		% Change
Rituxan	$	424.7	$	363.4	17	%	$	825.3	$	704.4	17	%
Herceptin		117.7		109.1	8			231.2		202.8	14
Avastin		133.0		-	-			171.1		-	-
Growth Hormone		88.4		81.6	8			173.9		158.3	10
Thrombolytics		51.5		47.6	8			97.8		95.1	3
Pulmozyme		41.0		42.6	(4)			84.4		82.2	3
Xolair		43.7		-	-			73.7		-	-
Raptiva		13.4		-	-			19.7		-	-
Total product sales	$	913.4	$	644.3	42		$	1,677.1	$	1,242.8	35

Total net product sales increased 42% in the second quarter and 35% in the first six months of 2004 from the comparable periods in 2003. The increase was due to higher sales across most of our existing products, in particular Rituxan, and sales of our new products, specifically Avastin, Xolair and Raptiva. Increased volume, including new

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product shipments, accounted for substantially all, or $269.1 million, of the net sales increase in the second quarter of 2004 and an increase of 32%, or $396.0 million, in the first six months of 2004. Changes in net sales prices across the portfolio had no material impact on net sales results in the second quarter of 2004, and accounted for an increase of 3%, or $38.0 million, in the first six months of 2004.

Rituxan

Net sales of Rituxan increased 17% to $424.7 million in the second quarter and 17% to $825.3 million in the first six months of 2004 from the comparable periods in 2003. This growth was driven by greater penetration of the non-Hodgkin's lymphoma (or NHL) and chronic lymphocytic leukemia (or CLL) markets in the U.S. (specifically front line indolent NHL, front line CLL, and maintenance use).

Roche recently announced the positive opinion of the European Union's Committee for Human Medicinal Products (or CHMP), for the frontline use of Rituxan in combination with CVP (cyclophoshamide, vincristine, prednisone) chemotherapy for the treatment of Indolent NHL. Data presented at the American Society of Clinical Oncology (or ASCO) in June showed increased Progression Free Survival (PFS) in Indolent NHL patients treated with a Rituxan maintenance regimen versus observation. Other Rituxan data presented at ASCO included positive outcomes of European trials in front line aggressive NHL and mantle cell lymphoma, and results of a multivariate analysis in front line CLL showing improvement in complete response and overall survival from the addition of Rituxan to chemotherapy.

Rituxan sales increased modestly from the previous quarter reflecting a slower growth rate than we have previously seen. We currently believe there will be limited impact on Rituxan's usage under the Medicare Prescription Drug Improvement and Modernization Act, enacted in December 2003 (or the Medicare Act).

Herceptin

Net sales of Herceptin increased 8% to $117.7 million in the second quarter and 14% to $231.2 million in the first six months of 2004 from the comparable periods in 2003. The continued growth was primarily driven by physicians' extending the average treatment duration. Physicians have been using Herceptin in more than one line of therapy and there continues to be growing adoption in the combination of Herceptin, carboplatin and taxane, a combination otherwise known as TCH. The TCH regimen has an improved time to disease progression and can therefore lead to a longer treatment duration. We currently believe there will be limited impact on Herceptin's usage under the new Medicare Act. Also impacting our second quarter increase and our future sales growth is a price increase that was effective on April 1, 2004.

Avastin

We received FDA approval to market Avastin on February 26, 2004 and made initial product shipments to distributors that same day. Avastin has achieved total net sales of $133.0 million in the second quarter and $171.1 million since it was launched in February. Our sales have been driven primarily by use in colorectal cancer, which represents more than 95% of current Avastin use. In both the first-line and relapsed/refractory settings, Avastin is being combined with a wide range of 5FU-based chemotherapies, reflecting Avastin's broad indication. Early market penetration rates indicate that we may reach peak penetration sooner than expected, but estimates of the overall size of the market remain the same.

At present, all Medicare carriers and all of our targeted commercial payers are covering Avastin and reimbursement has proceeded as expected. Future sales and the adoption of the use of Avastin are subject to a number of risks and uncertainties. Avastin is currently being studied in combination with 5-FU/ Leucovorin and Oxaliplatin (the "FOLFOX Regimen") in patients with relapsed, metastatic colorectal cancer in a large randomized study through the Eastern Cooperative Oncology Group (the "E3200 Trial"). If the results from the E3200 Trial are positive for the combination of Avastin and 5-FU/Leucovorin and Oxaliplatin or show a similar magnitude of benefit as previous colorectal cancer studies with Avastin, use of Avastin may increase as physicians increase their use of Avastin in

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combination with Oxaliplatin-based regimens in the relapsed, and also the first-line setting. However, if the results of the E3200 Trial are negative for the combination of Avastin and 5-FU/Leucovorin and Oxaliplatin, potential sales of Avastin may be materially adversely affected as physicians may limit their use of Avastin to 5-FU/Leucovorin and/or irinotecan regimens. Physicians may also restrict their use of Avastin to first-line patients only.

Growth Hormone

Combined net sales of our four growth hormone products, Nutropin Depot, Nutropin AQ, Nutropin, and Protropin, increased 8% in the second quarter and 10% in the first six months of 2004 from the comparable periods in 2003. The net sales growth resulted from continued strong demand for the Nutropin products and price increases. The price increase on a number of growth hormone products in October 2003 accounted for a significant portion of the growth in the first six months of 2004 as compared to the first six months of 2003. The continued strong demand reflects our focus on new patient starts using our Nutropin AQ Pen (which is a delivery system for Nutropin AQ), continued growth in the adult patient market, higher dosing during puberty and an incremental increase in the length of therapy. On June 1, 2004, we and our collaborator Alkermes made a decision to discontinue commercialization of Nutropin Depot, a long-acting dosage form of recombinant growth hormone. We expect sales of Nutrop in Depot to continue through the third quarter of 2004 or until inventory is depleted. Manufacture of Protropin was discontinued at the end of 2002 because demand declined as physicians initiated therapy with other Nutropin family products, but sales are expected to continue through 2004 or until inventory is depleted.

Thrombolytics

Combined net sales of our three thrombolytic products, Activase, TNKase and Cathflo Activase, increased 8% in the second quarter and 3% in the first six months of 2004 from the comparable periods in 2003. The sales increase was primarily driven by growth in our catheter clearance market. A price increase in February 2004 on certain thrombolytic products also contributed to higher sales. Sales of our thrombolytic products used to treat acute myocardial infarction were impacted by the adoption of mechanical reperfusion strategies; however, the decline in the acute myocardial infarction market has been offset by growth in our other markets.

Pulmozyme

Our net sales of Pulmozyme decreased 4% in the second quarter, and increased 3% in the first six months of 2004 from the comparable period in 2003.

Xolair

We received FDA approval to market Xolair in June 2003 and began shipping Xolair in July 2003. Xolair achieved total U.S. net sales of $43.7 million in the second quarter and $73.7 million in the first six months of 2004, reflecting continued acceptance of the product and strong growth in our prescriber base. Novartis Pharma AG, our collaborator on Xolair, recently announced that it had submitted its application for the European approval of Xolair to the European Agency for the Evaluation of Medicinal Products (EMEA) and CHMP. Future sales and related expenses are subject to risks and uncertainties, including continued physician adoption rates, third-party coverage decisions, and high patient fulfillment rates.

Raptiva

We received FDA approval to market Raptiva in October 2003 and began shipping Raptiva in November 2003. Raptiva achieved total net sales of $13.4 million in the second quarter and $19.7 million in the first six months of 2004, reflecting continued acceptance of the product and effective reimbursement processing. Future sales and the continued acceptance of Raptiva in this biologics class is subject to risks and uncertainties, including how well Raptiva is able to compete with other new and established therapies for moderate-to-severe psoriasis. The rate of growth in prescriptions for Raptiva has been affected by the recent approval of etanercept for psoriasis. Specifically, a significant etanercept trial has launched and we currently estimate it could potentially take several thousand patients out of the market. We expect to see the impact of the etanercept trial in our third quarter revenues.

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Serono S.A., which has rights to market Raptiva in certain areas of the world, received a unanimous positive opinion from the CHMP recommending Raptiva approval in European Union (EU) countries; and Raptiva may be available in some EU nations during the fourth quarter of 2004. When approved, Raptiva would be the first biologic approved for psoriasis in the EU. Serono received authorization for Raptiva in Switzerland in March and in Argentina in June and is awaiting the outcomes of marketing applications in a number of other territories for which it is responsible.

Royalties

Royalty income increased 24% in the second quarter and 30% in the first six months of 2004 from the comparable periods in 2003. The increase was due to higher third-party sales by various licensees, primarily Hoffmann-La Roche (see "Related Party Transactions" below) for higher sales of Herceptin and Rituxan products. We expect that in 2004 the increase in royalty income will be at a slower rate than 2003.

Cash flows from royalty income include revenues denominated in foreign currencies. We currently purchase simple foreign currency put option contracts (or options) and forwards to hedge these foreign royalty cash flows. The term of these options and forwards are generally one to five years. See the "We Are Exposed to Risks Relating to Foreign Currency Exchange Rates and Foreign Economic Conditions" section of the Forward-Looking Information below for a discussion of market risks related to these financial instruments.

Contract Revenues

Contract revenues increased 93% in the second quarter and 70% in the first six months of 2004 from the comparable periods in 2003. The increase was primarily driven by revenues from our collaborators for amounts earned on development efforts related to Avastin, Rituxan and Lucentis. See "Related Party Transactions" below for more information on contract revenue from Hoffmann-La Roche and Novartis.

We expect that contract revenues will continue to increase in 2004, but at a more modest pace than in 2003. We also expect contract revenues to fluctuate depending on the level of revenues earned for ongoing development efforts, the level of milestones received, the number of new contract arrangements and Hoffmann-La Roche's potential opt-ins for products.

Cost of Sales

Cost of sales (or COS) as a percentage of product sales was 20% and 19% in the second quarter of 2004 and 2003, respectively. This increase was primarily due to an $18.8 million charge related to Nutropin Depot inventory and our decision to discontinue its commercialization, and a provision of $21.3 million related to filling failures for other products, partially offset by decreases resulting from higher sales of more favorable margin products (primarily Rituxan). COS as a percentage of product sales was 18% and 19% in the first six months of 2004 and 2003, respectively. This decrease primarily reflects higher sales of more favorable margin products (primarily sales of Rituxan, and to a lesser extent, sales of previously reserved pre-launch products) and lower production costs due to manufacturing efficiencies primarily related to Herceptin and Rituxan partially offset by the Nutropin Depot and filling failure charges mentioned above.

In the fourth quarter of 2003, we entered into an arrangement with Lonza Biologics, a subsidiary of Lonza Group Ltd, to provide additional manufacturing capacity for Rituxan. We do not expect this arrangement to have a significant impact on our overall cost of sales as a percentage of product sales. We expect our COS as a percentage of sales for the full year 2004 to be somewhat comparable to the rate in 2003.

Research and Development

R&D expenses increased 18% in the second quarter and 19% in the first six months of 2004 from the comparable periods in 2003. These increases were largely due to higher spending on clinical development of products, including Lucentis, Rituxan and Omnitarg, partially offset by lower spending on Raptiva; increased post-marketing clinical studies for Raptiva, Avastin and Rituxan; and increased headcount and related expenses in support of research

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activities. We expect increases in R&D expenses over time to be driven mainly by the development of our pipeline products. Our expectations for higher revenues in the future will likely cause R&D as a percentage of operating revenues to decline over time.

The major components of R&D expenses for the three months and the six months ended June 30, 2004 and 2003 were as follows (in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
Research and Development	2004		2003		% Change		2004		2003		% Change
Product development	$	127.5	$	119.9	6	%	$	239.8	$	221.8	8	%
Post-marketing studies		30.4		17.8	71			58.6		33.3	76
Total development		157.9		137.7	15			298.4		255.1	17
Research		48.9		33.2	47			92.3		67.5	37
In-licensing		6.1		9.3	(34)			12.5		15.0	(17)
Total	$	212.9	$	180.2	18		$	403.2	$	337.6	19

Marketing, General and Administrative

Overall MG&A expenses increased 50% in the second quarter and 63% in the first six months of 2004 from the comparable periods in 2003. The increases in both periods were due to: (i) increases of $30.8 million and $75.1 million in the second quarter and first six months of 2004, respectively, for marketing and promotional programs in support of commercial and pipeline products, primarily Avastin, Raptiva, Xolair, Rituxan and Herceptin; (ii) increases of $24.4 million and $45.5 million in the second quarter and first six months of 2004, respectively, related to headcount growth and increased commercial training programs in support of all products, including increases in field sales incentive compensation; (iii) increase of $27.6 million in the first six months of 2004 related primarily to spending on our information systems technologies and headcount growth in our corporate support functions; (iv) increases of $18.6 million and $35.6 million in the second quarter and first six month s of 2004, respectively, for our royalty expenses, primarily related to Biogen Idec; and (v) a charge of $18.6 million in the second quarter of 2004 related to the Nutropin Depot license and our decision to discontinue commercializing Nutropin Depot (see Note 4, "Other Intangible Assets," in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information on this charge).

MG&A expenses could trend higher in the near term as we continue the launch of Avastin and as we prepare for the potential launch of Tarceva. However, as we expect revenues to rise, MG&A as a percentage of operating revenues will likely decline over the longer term.

Collaboration Profit Sharing

Collaboration profit sharing consists primarily of the net operating profit sharing with Biogen Idec on commercial activities underlying Rituxan sales and, to a much lesser extent, the sharing of the commercial net operating results of Xolair with Novartis. Collaboration profit sharing increased 35% in the second quarter and 33% in the first six months of 2004 from the comparable periods in 2003. These increases were driven by increased Rituxan profit sharing with Biogen Idec due to higher Rituxan sales and new Xolair profit sharing with Novartis due to Xolair sales, which began in July 2003.

Collaboration profit sharing expense is expected to continue to increase in 2004 consistent with the expected collaboration operating results associated with increased Rituxan and Xolair sales.

Recurring Charges Related to Redemption

We began recording recurring charges related to the Redemption and push-down accounting in the third quarter of 1999. The charges in the second quarter and first six months of 2004 were comparable to the same periods of 2003 and were comprised of the amortization of other intangible assets in all periods presented.

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Special Charges: Litigation-Related

The charges in the second quarter and first six months of 2004 were comparable to the same periods of 2003 and were comprised of the accrued interest and associated bond costs related to the City of Hope National Medical Center (or COH) trial judgment (see Note 2, "Leases and Contingencies," in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for further information regarding our litigations). In conjunction with the City of Hope judgment, we arranged to post a surety bond of $600.0 million. As part of this arrangement, we were required to pledge $630.0 million in cash and investments to secure the bond. In the second quarter of 2004, we were required to increase the surety bond to $650.0 million and pledged an additional $52.0 million, or a total of $682.0 million, in cash and investments to secure the bond at June 30, 2004. This amount is reflected in "restricted cash and other long-term assets" on the condensed consolidated balance sheets. We expect that we will continue to incur interest charges on the COH trial judgment and service fees on the related surety bond each quarter through the process of appealing the COH trial results. These special charges represent our best estimate of the costs for the current resolution of these matters and are included in other long-term liabilities in the condensed consolidated balance sheets at June 30, 2004 and December 31, 2003. We developed these estimates in consultation with outside counsel handling our defense in these matters using the facts and circumstances of these matters known to us at that time. The amount of our liability for certain of these matters could exceed or be less than the amount of our current estimate, depending on the outcome of these matters. The amount of cash paid, if any, in connection with the COH matter will depend on the outcome of the appeal.

Other Income, Net

As part of our strategic alliance efforts, we invest in debt and equity securities of certain biotechnology companies with which we have or have had collaborative agreements. "Other income, net" includes realized gains and losses from the sale of certain of these biotechnology equity securities as well as changes in the recoverability of our debt securities. In addition, "other income, net" includes write-downs for other-than-temporary declines in the fair value of certain of these biotechnology debt and equity securities, interest income and interest expense.

	Three Months Ended June 30,						Six Months Ended June 30,
Other Income, Net  (in millions)	2004		2003		% Change		2004		2003		% Change
Gains on sales of biotechnology    equity securities and other	$	0.4	$	19.7	(98)	%	$	1.1	$	20.2	(95)	%
Write-downs of biotechnology    debt and equity securities		(0.1)		- -	- -			(0.1)		(3.7)	(97)
Interest income		16.5		21.2	(22)			39.5		40.1	(1)
Interest expense		(1.4)		-	-			(2.8)		-	-
Total other income, net	$	15.4	$	40.9	(62)		$	37.7	$	56.6	(33)

"Other income, net" decreased 62% in the second quarter and 33% in the first six months of 2004 from the comparable periods in 2003 due primarily to minimal gains on our biotechnology equity securities, lower interest income (driven by lower yields, partially offset by a higher average cash balance) and higher interest expense related to our long-term variable interest entity debt, which we consolidated on July 1, 2003. Although we have had minimal biotechnology marketable equity securities write-downs to-date in 2004, we may determine in future periods, depending on market conditions, that certain of such unhedged securities are impaired and require a write-down to market value.

Income Tax Provision

The effective tax rate was 36.8% in the second quarter of 2004 compared to 31.6% in the second quarter of 2003, and was 35.4% in the first six months of 2004 compared to 29.2% in the first six months of 2003. The increase in the tax rate reflects a decrease in benefits from foreign sales and from various tax credits. The tax provision for the first six months of 2004 included a benefit of $6.5 million related to a favorable change in estimates of research credits.

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We anticipate that our effective tax rate for the entire year 2004 will be lower than that for the second quarter of 2004. Various factors may have favorable or unfavorable effects on our effective tax rate during the remainder of 2004 and in subsequent years. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, future levels of R&D spending, future levels of capital expenditures, and changes in overall levels of pretax earnings.

Net Income and Earnings Per Share

	Three Months Ended June 30,						Six Months Ended June 30,
Net Income and Earnings Per Share	2004		2003		% Change		2004		2003		% Change
Net income	$	170.8	$	132.3	29	%	$	347.4	$	283.8	22	%
Earnings per share:
Basic		0.16		0.13	23			0.33		0.28	18
Diluted		0.16		0.13	23			0.32		0.27	19

Net income and diluted earnings per share in the second quarter of 2004 increased from the comparable periods in 2003. The increases were primarily due to higher operating revenues in 2004, driven mostly by higher product sales, offset only in part by higher operating expenses.

In-Process Research and Development

At June 30, 1999, the Redemption date, we determined that the acquired in-process technology was not technologically feasible and that the in-process technology had no future alternative uses. As a result, $500.5 million of in-process research and development (or IPR&D) related to Roche's 1990 through 1997 purchases of our common stock was charged to additional paid-in capital, and $752.5 million of IPR&D related to the Redemption was charged to operations at June 30, 1999.

Except as otherwise noted below, there have been no significant changes to the in-process projects since December 31, 2003. We do not track all costs associated with research and development on a project-by-project basis. Therefore, we believe a calculation of cost incurred as a percentage of total incurred project cost as of the FDA approval is not possible. We currently estimate, however, that the research and development expenditures that will be required to complete the in-process projects will total at least $140.0 million as of June 30, 2004, as compared to $700.0 million as of the Redemption date. This estimate reflects costs incurred since the Redemption date, discontinued projects, and decreases in the cost to complete estimates for other projects, partially offset by an increase in certain cost estimates related to early stage projects and changes in expected completion dates.

Significant changes to the in-process projects since December 31, 2003 are as follows:

• Avastin (bevacizumab) -- We announced on February 26, 2004, that the FDA approved Avastin to be used in combination with intravenous 5-fluorouracil-based chemotherapy as a treatment for patients with first-line (or previously untreated) metastatic cancer of the colon or rectum. We began shipping Avastin on February 26, 2004.

• Rituxan (rituximab) -- Genentech, Inc. and Biogen Idec Inc. developed an updated filing strategy for Rituxan in aggressive non-Hodgkin's lymphoma (NHL) that has been agreed upon by the FDA and will result in a filing in 2005. Genentech, Inc., Biogen Idec Inc., and Roche announced on June 5, 2004, positive data from a randomized Phase III trial evaluating Rituxan, known as MabThera® in Europe, in combination with chemotherapy as a front-line treatment for aggressive non-Hodgkin's lymphoma (NHL).

Our Overview, Results of Operations and Liquidity and Capital Resources, contain forward-looking statements regarding the expected number of products in late-stage development through 2005, expected Rituxan and Herceptin sales growth opportunities, the timeframe of Avastin manufacturing in Porrino, the filing timeframe for the Tarceva NDA and the Rituxan sBLA, the impact of Medicare legislation on our sales of Rituxan and Herceptin, the costs for

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completion of in-process projects, the expected amount of capital expenditures, increases in Rituxan and Xolair sales and increases in total revenues, royalty income and contract revenues, and the expected growth in non-GAAP EPS through 2005. Actual results could differ materially. For a discussion of the risks and uncertainties associated with late-stage development, Rituxan and Herceptin sales growth opportunities, timeframe for manufacturing in Porrino, regulatory filing timeframes and costs for completion of in-process projects and capital expenditures, see "The Successful Development of Biotherapeutics is Highly Uncertain and Requires Significant Expenditures," "We May Be Unable to Obtain or Maintain Regulatory Approvals for Our Products," "Difficulties or Delays in Product Manufacturing Could Harm Our Business," "Protecting Our Proprietary Rights Is Difficult and Costly," "The Outcome of, and Costs Relating to, Pending Litigation or Other Legal Actions are Uncertain," and "We May B e Unable to Retain Skilled Personnel and Maintain Key Relationships" sections of "Forward-Looking Information and Cautionary Factors That May Affect Future Results" below; for the impact of Medicare legislation, see "Decreases in Third Party Reimbursement Rates May Affect Our Product Sales"; for sales of Rituxan and Xolair, see all of the foregoing and "We May Be Unable to Manufacture Certain of Our Products If There Is BSE Contamination of Our Bovine Source Raw Material," "We Face Competition," "Other Factors Could Affect Our Product Sales," "We May Incur Material Product Liability Costs," "Insurance Coverage is Increasingly More Difficult to Obtain or Maintain," and "We Are Subject to Environmental and Other Risks"; for royalty income and contract revenues, see "Our Royalty and Contract Revenues Could Decline"; and for total revenues, see all of the foregoing and for expected non-GAAP EPS growth, see all of "Forward-Looking Information and Cautionary Factors That May Affect Future Results" below. We discl aim any obligation and do not undertake to update or revise any forward-looking statements in this Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources (in millions)	June 30, 2004			December 31, 2003
Cash, cash equivalents, short-term investments and     long-term marketable securities		$	3,033.8		$	2,934.7
Working capital			2,219.5			1,883.8

Cash, cash equivalents, short-term investments and long-term marketable securities were $3.0 billion at June 30, 2004, an increase of $99.1 million or 3.4% from December 31, 2003. This increase was primarily a result of cash generated from operations, income from investments and proceeds from stock issuances, partially offset by cash used for the repurchase of common stock, purchase of marketable securities and for capital investments.

Cash Provided by Operating Activities

Cash provided by operating activities is primarily driven by increases in our net income. However, operating cash flows differ from net income as a result of non-cash charges or differences in the timing of cash flows and earnings recognition. Significant components of cash provided by operating activities are as follows:

Deferred revenues declined $18.8 million during the first half of 2004 compared to an increase of $247.4 million during the first half of 2003. The increase in 2003 was primarily due to a $188.0 million opt-in payment from Hoffmann-La Roche on the development and commercialization of Avastin, and a $46.6 million upfront payment and R&D reimbursement fee from Novartis AG on a new arrangement to develop and market Lucentis. Opt-in and upfront payments from collaborators are recognized in earnings over various number of years depending on the stage of the product and the contractual arrangement. Refer to our "Revenue Recognition" policy above for further information.

Our "accounts receivable - product sales" was $464.0 million at June 30, 2004, an increase of $148.9 million from December 31, 2003. The average collection period of our "accounts receivable-product sales" as measured in days sales outstanding (or DSO) was 46 days this quarter compared to 40 days as of December 31, 2003. The increase in our "accounts receivable-product sales" and our DSO was primarily due to higher sales of new products, in particular Avastin, and the related payment cycles. For new product launches, we offer extended payment terms to promote our products and to allow customers and doctors purchasing the drug sufficient time to process reimbursements. The

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average collection period of our accounts receivable as measured in DSO can vary and is dependent on various factors, including the type of revenue (i.e., product sales, royalties, or contract revenue) and the payment terms related to those revenues and whether the related revenue was recorded at the beginning or at the end of a period.

Our inventories increased $58.0 million in the first half of 2004 primarily due to the ongoing manufacture of our Rituxan, Pulmozyme and Activase products, partially offset by the charges related to our decision to discontinue commercializing Nutropin Depot and filling failures for other products. See Note 8, "Inventories," in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information on these charges.

Cash Used in Investing Activities

Cash used in investing activities primarily relate to purchases, sales and maturities of investments and capital expenditures. Capital expenditures were $196.6 million in the first six months of 2004 compared to $140.1 million in the first six months of 2003. Capital expenditures in 2004 were made to purchase land and office buildings in South San Francisco, including the repayment of one of our synthetic leases, and for equipment purchases and ongoing construction costs in support our manufacturing, R&D and corporate infrastructure needs. In 2004, we expect to spend approximately $600.0 million on property, plant and equipment. This increase in spending over 2003 will primarily support our expected future manufacturing capacity needs, increases in property purchases, including repayments on our synthetic leases, and increases in equipment and information systems related purchases.

In addition, restricted cash increased by $52.0 million due to the additional cash and investments we were required to pledge to secure the surety bond for the COH judgment, which increased to $650.0 million at June 30, 2004. See Note 2, "Leases and Contingencies" in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information regarding the COH litigation and related surety bond.

Cash Provided by or Used in Financing Activities

Cash provided by or used in financing activities is primarily related to activity under our employee stock plans and our stock repurchase plan. In the first half of 2004, we received $366.7 million related to stock option exercises and stock issuances under our employee stock purchase plan. We also used cash for stock repurchases of $575.7 million in the first half of 2004, pursuant to our stock repurchase program approved by our Board of Directors. Refer to Note 9, "Capital Stock," in the Notes to Condensed Consolidated Financial Statements for further information on our stock repurchase programs approved by our Board of Directors.

Our total cash, cash equivalents, short-term investments and marketable securities are expected to decline over the next several years due to cash requirements for capital expenditures, share repurchases under our stock repurchase program, synthetic lease repayments and other uses of working capital. We believe these funds, together with funds provided by operations and leasing arrangements, will be sufficient to meet our foreseeable future operating cash requirements. In addition, we believe we could access additional funds from the debt and, under certain circumstances, capital markets. See below for a discussion of our leasing arrangements. See "Our Affiliation Agreement With Roche Could Adversely Affect Our Cash Position" below in the "Forward-Looking Information and Cautionary Factors" section and Note 2, "Leases and Contingencies," in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for factors that could negatively affect our cash posi tion.

OFF-BALANCE SHEET ARRANGEMENTS

We have certain contractual arrangements that create risk for Genentech and are not recognized in our condensed consolidated balance sheet. Discussed below are those off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operation, liquidity, capital expenditures or capital resources.

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Leases

We lease various real properties under operating leases. Three of our operating leases are commonly referred to as "synthetic leases." Under Interpretation No. 46R (or FIN 46R), each synthetic lease is evaluated to determine if it qualifies as a variable interest entity (or VIE) and whether Genentech is the primary beneficiary under which it would be required to consolidate the VIE.

The most significant of our synthetic leases relates to our manufacturing facility located in Vacaville, California. Under FIN 46R, we determined that the entity from which we lease the Vacaville facility qualified as a VIE and that we are the primary beneficiary of this VIE as we absorb the majority of the entity's expected losses. Upon adoption of the provisions of FIN 46R on July 1, 2003, we consolidated the entity.

Our two remaining leases were entered into with BNP Paribas Leasing Corporation (or BNP), who leases directly to us various buildings that we occupy in South San Francisco, California. Under one of these leases, we are required to maintain cash collateral of $56.6 million, which we have included in our condensed consolidated balance sheets as restricted cash and other long-term assets. We have evaluated our accounting for these leases under the provisions of FIN 46R, and have determined the following:

• as of July 1, 2003 and for each quarterly reporting period through June 30, 2004, our two remaining synthetic leases entered into with BNP represent a variable interest in BNP;

• we are not the primary beneficiary of BNP as we do not absorb the majority of the entity's expected losses or expected residual returns. As part of this determination, we have received quarterly confirmations from BNP representing to us and we have reviewed their portfolio statements to confirm that the leased properties do not represent greater than 50% of the fair value of BNP's assets; and

• we believe that the leased properties are not "specified assets" that represent essentially the only source of payment for our variable interest. As part of this determination, we have received quarterly confirmations from BNP representing to us and we have reviewed their portfolio statements to confirm that the leased properties are not "specified assets" held within a silo. That is, BNP has not financed an amount equal to or greater than 95% of the fair value of the leased assets with non-recourse debt, lessor participation, targeted equity or any other type of funding (silo funding) that would result in the leased properties being the only source of payment. In addition, as part of BNP's representations and warranties, BNP has agreed not to incur additional indebtedness in the future or to change the character of other non-targeted equity or similar funding sources that in any way would result in the leased properties being essentially the only source of repayment or to make any distributions from BNP that would result in silo funding equal to or exceeding 95% of the fair value of the leased properties.

Accordingly, we are not required to consolidate either the leasing entity or the specific assets that we lease under the BNP leases.

See Note 2, "Leases and Contingencies" in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q, for our future minimum lease payments under all leases at December 31, 2003.

The following summarizes the approximate initial fair values of the facilities at the inception of the related leases, lease terms and residual value guarantee amounts for each of our synthetic leases (in millions):

	Approximate Initial Fair Value of Leased Property			Lease Expiration		Maximum Residual Value Guarantee
Vacaville lease		$	425.0		11/2006		$	371.8
South San Francisco lease 1			56.6		07/2004			48.1
South San Francisco lease 2			160.0		06/2007			136.0
Total		$	641.6				$	555.9

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We believe that there have been no impairments in the fair value or use of the properties that we lease under synthetic leases wherein we believe that we would be required to pay amounts under any of the residual value guarantees. We will continue to assess the fair values of the underlying properties and the use of the properties for impairment at least annually.

The maximum exposure to loss on our synthetic leases includes (i) residual value guarantee payments as shown above, (ii) certain tax indemnification in the event the third-parties are obligated for certain federal, state or local taxes as a result of their participation in the transaction, and (iii) indemnification for various losses, costs and expenses incurred by the third-party participants as a result of their ownership of the leased property or participation in the transaction, and as a result of the environmental condition of the property. The additional taxes, losses and expenses as described in (ii) and (iii) are contingent upon the existence of certain conditions and, therefore, would not be quantifiable at this time. However, we do not expect these additional taxes, losses and expenses to be material. In the case of South San Francisco lease 1, we have pledged cash collateral of $56.6 million as a source of payment for Genentech's obligation for the residual value guarantee pa yments and other amounts we owe under the lease.

Contractual Obligations

During the first six months of 2004, the only significant change in our reported payments due under contractual obligations at December 31, 2003 is a payment of $56.6 million expected to occur in the third quarter of 2004 related to our buyout of a synthetic lease.

CONTINGENCIES

We have an agreement with Serono S.A.; our agreement, in addition to granting marketing rights to Serono in specific areas of the world, includes an arrangement to potentially collaborate on co-developing additional indications of Raptiva and to share certain global development costs. We also have a supply agreement with Serono, under which we may have a loss exposure up to a maximum of $10.0 million.

We are a party to various legal proceedings, including patent infringement litigation relating to our antibody products, and licensing and contract disputes, and other matters. See Note 2, "Leases and Contingencies" in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information.

RELATED PARTY TRANSACTIONS

We enter into transactions with our related parties, Roche Holdings, Inc. (including Hoffmann-La Roche and other affiliates) and Novartis, in the ordinary course of business. The accounting policies we apply to our transactions with our related parties are consistent with those applied in transactions with independent third-parties and all related party agreements are negotiated on an arm's-length basis.

Redemption of Our Special Common Stock

On June 30, 1999, we redeemed all of our outstanding Special Common Stock held by stockholders other than Roche Holdings, Inc. (or Roche) at a price of $10.31 per share in cash with funds deposited by Roche for that purpose. We refer to this event as the "Redemption." As a result, on that date, Roche's percentage ownership of our outstanding Common Stock increased from 65% to 100%. Consequently, under GAAP, we were required to use push-down accounting to reflect in our financial statements the amounts paid for our stock in excess of our net book value. Push-down accounting required us to record $1,685.7 million of goodwill and $1,499.0 million of other intangible assets onto our balance sheet on June 30, 1999. See also above in the "Recurring Charges Related to Redemption" section of Results of Operations and Note 3, "Related Parties," in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q.

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Roche's Ability to Maintain Its Percentage Ownership Interest in Our Stock

We expect from time to time to issue additional shares of common stock in connection with our stock option and stock purchase plans, and we may issue additional shares for other purposes. Our affiliation agreement with Roche provides, among other things, that we establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. The affiliation agreement provides that we will repurchase a sufficient number of shares pursuant to this program such that, with respect to any issuance of common stock by Genentech in the future, the percentage of Genentech common stock owned by Roche immediately after such issuance will be no lower than Roche's lowest percentage ownership of Genentech common stock at any time after the offering of common stock occurring in July 1999 and prior to the time of such issuance, except that Genentech may issue shares up to an amount that would cause Roche's lowest percentage ownership to be no more than 2% below the "M inimum Percentage." The Minimum Percentage equals the lowest number of shares of Genentech common stock owned by Roche since the July 1999 offering (to be adjusted in the future for dispositions of shares of Genentech common stock by Roche as well as for stock splits or stock combinations) divided by 1,018,388,704 (to be adjusted in the future for stock splits or stock combinations), which is the number of shares of Genentech common stock outstanding at the time of the July 1999 offering, as adjusted for the two-for-one splits of Genentech common stock in November 1999, October 2000 and May 2004. We repurchased shares of our common stock in 2004 and 2003 (see discussion in Note 9, "Stock Repurchases," in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q). As long as Roche's percentage ownership is greater than 50%, prior to issuing any shares, the affiliation agreement provides that we will repurchase a sufficient number of shares of our common stock such that, i mmediately after our issuance of shares, Roche's percentage ownership will be greater than 50%. The affiliation agreement also provides that, upon Roche's request, we will repurchase shares of our common stock to increase Roche's ownership to the Minimum Percentage. In addition, Roche will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. Roche publicly offered zero-coupon notes in January 2000 which were exchangeable for Genentech common stock held by Roche. Roche called these notes in March 2004. Through April 5, 2004, the expiration date for investors to tender these notes, a total of 25,999,324 shares were issued in exchange for the notes, thereby reducing Roche's ownership of Genentech common stock to 587,189,380 shares. At June 30, 2004, Roche's ownership percentage was 55.6%. The Minimum Percentage at June 30, 2004 was 57.7% and, under the terms of the affiliation agreement, Roche's lowest ownership percentage is to be no lo wer than 55.7%. See Note 9 "Capital Stock" for information regarding our stock repurchase program.

Transactions with Roche

In April 2004, we further amended our July 1999 licensing and marketing agreement with Hoffmann-La Roche and its affiliates under which we grant them an option to license, use and sell our products in non-U.S. markets. This amendment added certain Genentech products under Hoffman-La Roche's commercialization and marketing rights for Canada but did not modify any material financial terms of the licensing and marketing agreement which are described in our Annual Report on Form 10-K for the year ended December 31, 2003.

We have a July 1998 licensing and marketing agreement relating to anti-HER2 antibodies (Herceptin and more recently, Omnitarg) with Hoffmann-La Roche, providing them with exclusive marketing rights outside of the United States. Under the agreement, Hoffmann-La Roche contributes equally with us on global development costs. Either Genentech or Hoffmann-La Roche has the right to "opt-out" of developing an additional indication for a product and would not share the costs or benefits of the additional indication, but could "opt-back-in" before approval of the indication by paying twice what would have been owed for development of the indication if no opt-out had occurred. Hoffmann-La Roche has also agreed to make royalty payments of 20% on aggregate net product sales outside the United States up to $500 million in each calendar year and 22.5% on such sales in excess of $500 million in each calendar year.

In April 2004, we entered into a research collaboration agreement with Hoffmann-La Roche that outlines the process by which Hoffmann-La Roche and Genentech will conduct and share in the costs of joint research on molecules in

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areas of mutual interest. The agreement further outlines how development and commercialization efforts will be coordinated with respect to select molecules, including the financial provisions for a number of different development and commercialization scenarios undertaken by either or both parties.

In June 2003, Hoffmann-La Roche exercised its option to license from us the rights to market Avastin for all countries outside of the U.S. under the July 1999 licensing and marketing agreement. As part of its opt-in, Hoffmann-La Roche paid us approximately $188.0 million and pays 75% of subsequent global development costs related to the metastatic colorectal cancer indication of Avastin and all others unless Hoffmann-La Roche specifically opts out of the development of certain other indications.

In September 2003, Hoffmann-La Roche exercised its option to license from us the rights to market PRO70769, a humanized antibody that binds to CD20, for all countries outside of the U.S. (other than territory previously licensed to others) under the July 1999 licensing and marketing agreement. As part of its opt-in, Hoffmann-La Roche paid us $8.4 million and pays 50% of subsequent global development costs related to PRO70769 unless Hoffmann-La Roche opts out of the development of certain other indications. We will receive royalties on net sales of Avastin and PRO70769 in countries outside of the U.S.

We recognized contract revenue from Hoffmann-La Roche, including amounts earned related to ongoing development activities, of $23.7 million and $14.7 million in the second quarters of 2004 and 2003, respectively, and $49.6 million and $16.8 million in the first six months of 2004 and 2003, respectively. All other revenues from Roche, Hoffmann-La Roche and their affiliates, principally royalties and product sales, were $111.7 million and $93.4 million in the second quarters of 2004 and 2003, respectively, and $210.6 million and $169.6 million in the first six months of 2004 and 2003, respectively. Cost of sales included amounts related to Hoffmann-La Roche of $25.9 million and $30.0 million in the second quarters of 2004 and 2003, respectively, and $48.4 million and $54.8 million in the first six months of 2004 and 2003, respectively. R&D expenses included amounts related to Hoffmann-La Roche of $30.5 million and $6.3 million in the second quarters of 2004 and 2003, respectively, and $67.3 million and $14.7 million in the first six months of 2004 and 2003, respectively.

Transactions with Novartis AG (or Novartis)

We understand that Novartis holds approximately 33.3% of the outstanding voting shares of Roche Holding AG. As a result of this ownership, Novartis is deemed to have an indirect beneficial ownership interest under FAS 57 "Related Party Disclosures" of more than 10% of Genentech's voting stock.

In June 2003, we entered into an agreement with Novartis Ophthalmics AG (subsequently merged into Novartis Pharma AG), under which Novartis Ophthalmics licensed the exclusive right to develop and market Lucentis outside of North America for diseases or disorders relating to the human eye, including the indication of age-related macular degeneration (or AMD). As part of this agreement, Novartis Ophthalmics pays 50% of Genentech's expenses relating to certain AMD Phase III trials and related development expenses. Genentech may share in a portion of the development and commercialization costs incurred by Novartis outside of North America. We will also receive royalties on net sales of Lucentis products, which we will manufacture and supply to Novartis, outside of North America.

In February 2004, Genentech, Inc., Novartis Pharma AG and Tanox, Inc. settled all litigation pending among them, and finalized the detailed terms of their three-party collaboration, begun in 1996, to govern the potential development and commercialization of certain anti-IgE antibodies including Xolair® (Omalizumab) and TNX-901. This arrangement modifies the arrangement related to Xolair that we entered into with Novartis in 2000. All three parties are co-developing Xolair in the U.S., and Genentech and Novartis are co-promoting Xolair in the U.S. and both will separately make payments to Tanox; Genentech's will be in the form of royalties. Genentech records all sales and cost of sales in the U.S. and Novartis will market the product in and record all sales and cost of sales in Europe. Genentech and Novartis then share the resulting U.S. and European operating profits, respectively, according to prescribed profit-sharing percentages. The existing royalty and profit-sharing percentage s between the three parties remain unchanged. Genentech is currently supplying the product and receives cost plus a mark-up similar to other supply arrangements. Novartis plans to assume primary manufacturing responsibilities in the future.

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Contract revenue from Novartis was $10.2 million and $3.7 million in the second quarters of 2004 and 2003, respectively, and $20.9 million and $3.9 million in the first six months of 2004 and 2003, respectively. Novartis collaboration profit sharing expenses were $14.8 million and $26.6 million in the second quarter and first six months of 2004 and we had no such expenses in the same periods of 2003. R&D expenses included amounts related to Novartis of $10.2 million and $5.1 million in the second quarters of 2004 and 2003, respectively, and $19.9 million and $8.8 million in the first six months of 2004 and 2003, respectively.

STOCK OPTIONS

Option Program Description

Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and to align stockholder and employee interests. Our program primarily consists of our amended and restated 1999 Stock Plan (the "Plan"), a broad-based plan under which stock options are granted to employees, directors and other service providers. Substantially all of our employees participate in our stock option program. In the past, we granted options under our amended and restated 1996 Stock Option/Stock Incentive Plan, our amended and restated 1994 Stock Option Plan and our amended and restated 1990 Stock Option/Stock Incentive Plan. Although we no longer grant options under these plans, exercisable options granted under these plans are still outstanding. In addition, our stockholders approved in April 2004 our 2004 Equity Incentive Plan under which stock options, restricted stock, stock appreciation rights and performance shares and units may be granted to our employees, directors and consultants in the future.

All stock option grants are made at the fair market value of the underlying stock at the date of grant after a review by, and with the approval of, the Compensation Committee of the Board of Directors.

General Option Information

Summary of Option Activity
(Shares in thousands)

		Options Outstanding
	Shares Available for Grant	Number of Shares	Weighted Average Exercise Price
December 31, 2002	8,098	110,838	$	19.19
Grants	(21,780)	21,780		40.55
Exercises	-	(32,078)		34.14
Cancellations(1)	4,414	(4,414)		23.80
Additional shares reserved	50,000	-		-
December 31, 2003	40,732	96,126		25.18
Grants	(1,433)	1,433		54.11
Exercises	-	(16,573)		20.28
Cancellations(1)	1,064	(1,064)		27.35
Additional shares reserved(2)	80,000	-		-
June 30, 2004 (Year to date)	120,363	79,922		26.69

(1)	We currently only grant shares under our amended and restated 1999 Stock Plan. Cancellations from options granted under previous plans are not added back to the shares reserved for issuance under the 1999 Stock Plan.
(2)	Additional shares are shares reserved under the 2004 Equity Incentive Plan approved by stockholders on April 16, 2004. No shares have been granted under this Plan.

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In-the-Money and Out-of-the-Money Option Information
(Shares in thousands)

	Exercisable				Unexercisable				Total
As of June 30, 2004	Shares	Weighted Average Exercise Price			Shares	Weighted Average Exercise Price			Shares	Weighted Average Exercise Price
In-the-Money	38,465		$	22.29	40,977		$	30.44	79,442		$	26.49
Out-of-the-Money(1)	-			-	480			58.99	480			58.99
Total Options Outstanding	38,465				41,457				79,922

(1) Out-of-the-money options are those options with an exercise price equal to or greater than the fair market value of Genentech Common Stock, $56.20, at the close of business on June 30, 2004.

Distribution and Dilutive Effect of Options

Employee and Executive Officer Option Grants

	2004			2003			2002
Net grants during the year as % of outstanding shares		0.04	%		1.69	%		1.98	%
Grants to Named Executive Officers* during the period     as % of outstanding shares		0.00	%		0.18	%		0.25	%
Grants to Named Executive Officers during the year     as % of total options granted		0.00	%		8.54	%		10.27	%

* "Named Executive Officers" refers to our CEO and our four other most highly compensated executive officers as defined under Item 402(a)(3) of Regulation S-K of the federal securities laws.

Equity Compensation Plan Information

Our stockholders have approved all of our equity compensation plans under which options are outstanding.

FORWARD-LOOKING INFORMATION AND CAUTIONARY FACTORS
THAT MAY AFFECT FUTURE RESULTS

This Form 10-Q contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by or on behalf of Genentech, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our product sales, royalties, contract revenues, expenses, net income and earnings per share.

The Successful Development of Biotherapeutics is Highly Uncertain and Requires Significant Expenditures

Successful development of biotherapeutics is highly uncertain and is dependent on numerous factors, many of which are beyond our control. Products that appear promising in research or early phases of development may fail to reach later stages of development or the market for several reasons including:

• Preclinical tests may show the product to be toxic or lack efficacy in animal models.

• Clinical trial results that may show the product to be less effective than desired (e.g., the trial failed to meet its primary or secondary objectives) or to have harmful or problematic side effects.

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• Failure to receive the necessary regulatory approvals or a delay in receiving such approvals. Among other things, such delays may be caused by slow enrollment in clinical studies, extended length of time to achieve study endpoints, additional time requirements for data analysis or Biologics License Application (or BLA) preparation, discussions with the U.S. Food and Drug Administration (or FDA), an FDA request for additional preclinical or clinical data, or unexpected safety or manufacturing issues.

• Difficulties formulating the product or scaling the manufacturing process.

• Manufacturing costs, pricing or reimbursement issues, or other factors that make the product uneconomical.

• The proprietary rights of others and their competing products and technologies that may prevent the product from being developed or commercialized.

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.

Factors affecting our research and development (or R&D) expenses include, but are not limited to:

• The number of and the outcome of clinical trials currently being conducted by us and/or our collaborators. For example, our R&D expenses may increase based on the number of late-stage clinical trials being conducted by us and/or our collaborators.

• The number of products entering into development from late-stage research. For example, there is no guarantee that internal research efforts will succeed in generating sufficient data for us to make a positive development decision or that an external candidate will be available on terms acceptable to us. In the past, some promising candidates did not yield sufficiently positive preclinical results to meet our stringent development criteria.

• Hoffmann-La Roche's decisions whether to exercise its options to develop and sell our future products in non-U.S. markets and the timing and amount of any related development cost reimbursements.

• In-licensing activities, including the timing and amount of related development funding or milestone payments. For example, we may enter into agreements requiring us to pay a significant upfront fee for the purchase of in-process research and development (or IPR&D), which we may record as an R&D expense.

• As part of our strategy, we invest in R&D. R&D as a percentage of revenues can fluctuate with the changes in future levels of revenue. Lower revenues can lead to more limited spending on R&D efforts.

• Future levels of revenue.

We May Be Unable to Obtain or Maintain Regulatory Approvals for Our Products

The biotechnology and pharmaceutical industries are subject to stringent regulation with respect to product safety and efficacy by various international, federal, state and local authorities. Of particular significance are the FDA's requirements covering R&D, testing, manufacturing, quality control, labeling and promotion of drugs for human use. A biotherapeutic cannot be marketed in the United States until it has been approved by the FDA, and then can only be marketed for the indications and claims approved by the FDA. As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of a New Drug Application (or NDA) or a BLA, are substantial and can require a number of years. In addition, after any of our products receive regulatory approval, they remain subject to ongoing FDA regulation, including, for example, changes to the product label, new or revised regulatory requirements for manufacturing p ractices, written advisements to physicians and a product recall.

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We cannot be sure that we can obtain necessary regulatory approvals on a timely basis, if at all, for any of the products we are developing or manufacturing or that we can maintain necessary regulatory approvals for our existing products, and all of the following could have a material adverse effect on our business:

• Significant delays in obtaining or failing to obtain required approvals as described in "The Successful Development of Biotherapeutics is Highly Uncertain and Requires Significant Expenditures" above.

• Loss of, or changes to, previously obtained approvals.

• Failure to comply with existing or future regulatory requirements.

• Changes to manufacturing processes, manufacturing process standards or Good Manufacturing Practices following approval or changing interpretations of these factors.

Moreover, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing, which may affect our ability to obtain or maintain approval of our products.

Difficulties or Delays in Product Manufacturing Could Harm Our Business

We currently produce all of our products at our manufacturing facilities located in South San Francisco, California and Vacaville, California or through various contract-manufacturing arrangements. Problems with any of our or our contractors' manufacturing processes could result in failure to produce adequate product supplies or product defects, which could require us to delay shipment of products, recall products previously shipped or be unable to supply products at all.

In addition, any prolonged interruption in the operations of our or our contractors' manufacturing facilities could result in cancellations of shipments, loss of product in the process of being manufactured, or a shortfall or stock-out of available product inventory, any of which could have a material adverse impact on our business. A number of factors could cause prolonged interruptions, including the inability of a supplier to provide raw materials used for manufacture of our products, equipment malfunctions or failures, damage to a facility due to natural disasters, including earthquakes as our South San Francisco and Vacaville facilities are located in an area where earthquakes could occur, changes in FDA regulatory requirements or standards that require modifications to our manufacturing processes, action by the FDA or by us that results in the halting or slowdown of production of one or more of our products due to regulatory issues, a contract manufacturer going out of business or f ailing to produce product as contractually required or other similar factors. Because our manufacturing processes and those of our contractors are highly complex and are subject to a lengthy FDA approval process, alternative qualified production capacity may not be available on a timely basis or at all. Difficulties or delays in our or our alliance companies' contractors' manufacturing and supply of existing or new products could increase our costs, cause us to lose revenue or market share, damage our reputation and could result in a material adverse effect on our product sales, financial condition and results of operations.

We currently plan to expand our Vacaville facility, to build new facilities or enter into contracts for additional manufacturing capacity in the future. Any delay in the construction of the facilities, the ability to contract for additional manufacturing capacity or the receipt of FDA licensure may cause insufficient available capacity for the manufacture of our products. Insufficient available capacity to manufacture or have manufactured for us existing or new products could cause shortfalls of available product inventory and an inability to supply market demand of one or more of our products for either a short period of time or an extended period of time. Alternatively, we may have an excess of available capacity which could lead to an idling of a portion of our manufacturing facilities and incurring idle plant charges, resulting in an increase in our costs of sales. All of our efforts planning for additional manufacturing capacity are critical to providing for sufficient capacity to meet expected demand for our products, and we recognize that there are some inherent uncertainties associated with forecasting future demand, especially for newly introduced products, and that the manufacturing of biologics is a complex process.

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We May Be Unable to Manufacture Certain of Our Products if There is BSE Contamination of Our Bovine Source Raw Material

Most biotechnology companies, including Genentech, have historically used bovine source raw materials to support cell growth in cell production processes. Bovine source raw materials from within or outside the United States are increasingly subject to greater public and regulatory scrutiny because of the perceived risk of contamination with bovine spongiform encephalopathy (or BSE). We have taken, and are continuing to take, precautions to minimize the risk of BSE contamination in our bovine source raw materials. We closely document the use of bovine source raw materials in our processes, take stringent measures to use the purest ingredients available and are working towards transitioning our processes to remove bovine source raw materials from final formulations. We are also in compliance with applicable U.S. and European guidelines on the handling and use of bovine source raw materials. Because of these efforts as well as those of the FDA, we believe that the risk of BSE contami nation in our source materials is very low. However, should BSE contamination occur during the manufacture of any of our products that require the use of bovine source raw materials, it would negatively impact our ability to manufacture those products for an indefinite period of time (or at least until an alternative process is approved), and could result in a material adverse effect on our product sales, financial condition and results of operations.

Decreases in Third Party Reimbursement Rates May Affect Our Product Sales

The Medicare Prescription Drug Improvement and Modernization Act, enacted in December 2003 (or the Medicare Act), provides for, among other things, a reduction in the Medicare reimbursement rates for many drugs, including our oncology products, possibly offset to some extent by increased physician payment rates for drug administration services related to certain of our oncology products. The Congressional rationale for this legislation was that (1) the payment for drugs by the Medicare program should more closely reflect the acquisition costs for those drugs, and (2) the reimbursement for the service codes associated with the administration of drugs should be increased to better reflect practice expense costs associated with those services. The Medicare Act as well as other changes in government legislation or regulation or in private third-party payers' policies toward reimbursement for our products may reduce or eliminate reimbursement of our products' costs to physicians. Decreases i n third party reimbursement for our products, namely Rituxan and especially with respect to 2004, could reduce physician usage of the product and have a material adverse effect on our product sales, results of operations and financial condition. We are unable to predict what impact the Medicare Act or other future regulation, if any, relating to third-party reimbursement, will have on sales of Rituxan or our oncology or other products.

Protecting Our Proprietary Rights Is Difficult and Costly

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Accordingly, we cannot predict with certainty the breadth of claims allowed in these companies' patents. Patent disputes are frequent and can preclude the commercialization of products. We have in the past been, are currently, and may in the future be, involved in material patent litigation, such as the matters discussed in Note 2, "Leases and Contingencies" in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q. Patent litigation is costly in its own right and could subject us to significant liabilities to third parties. In addition, an adverse decision could force us to either obtain third-party licenses at a material cost or cease using the technology or commercializing the product in dispute.

The presence of patents or other proprietary rights belonging to other parties may lead to our termination of the R&D of a particular product.

We believe that we have strong patent protection or the potential for strong patent protection for a number of our products that generate sales and royalty revenue or that we are developing. However, it is for the courts in the U.S. and in other jurisdictions ultimately to determine the strength of that patent protection.

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The Outcome of, and Costs Relating to, Pending Litigation or Other Legal Actions are Uncertain

Litigation to which we are currently or have been subjected relates to, among other things, our patent and other intellectual property rights, licensing arrangements with other persons, product liability and financing activities. We cannot predict with certainty the eventual outcome of pending litigation, which may include an injunction against the manufacture or sale of a product or potential product or a significant jury verdict or punitive damages award, or a judgment that certain of our patent or other intellectual property rights are invalid or unenforceable. Furthermore, we may have to incur substantial expense in defending these lawsuits.

Our activities relating to the sale and marketing of our products are subject to regulation under the Federal Food, Drug and Cosmetic Act and other federal statutes, including those relating to government program fraud and abuse. We believe our sales and marketing activities are in compliance with these laws. Violations of these laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). If the government were to bring charges against or convict us of violating these laws, there could be a material adverse effect on our business, including our financial condition and results of operations.

We May Be Unable to Retain Skilled Personnel and Maintain Key Relationships

The success of our business depends, in large part, on our continued ability to attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel, and on our ability to develop and maintain important relationships with leading research institutions and key distributors. Competition for these types of personnel and relationships is intense.

Roche has the right to maintain its percentage ownership interest in our common stock. Our affiliation agreement with Roche provides that, among other things, we will establish a stock repurchase program designed to maintain Roche's percentage ownership in our common stock if we issue or sell any shares. This and potential changes in stock option accounting rules could have an effect on the number of shares we are able to grant under our stock option plans. We therefore cannot assure you that we will be able to attract or retain skilled personnel or maintain key relationships.

We Face Competition

We face competition in certain of our therapeutic markets. First, in the thrombolytic market, Activase and TNKase have lost market share and could lose additional market share to Centocor's Retavase® (approved in 1996 for the treatment of acute myocardial infarction) and to the use of mechanical reperfusion therapies to treat acute myocardial infarction; the resulting adverse effect on sales has been and could continue to be material. We expect that the use of mechanical reperfusion in lieu of thrombolytic therapy for the treatment of acute myocardial infarction will continue to grow. In addition, we face potential competition in the catheter clearance market from the reintroduction of Abbott Laboratories' Abbokinase® (urokinase) in October 2002.

Second, in the growth hormone market, we face competition from other companies currently selling growth hormone products and delivery devices. Competitors have also received approval to market their existing growth hormone products for additional indications. As a result of that competition, we have experienced a loss in market share in the past. As a result of this competition, market share of our growth hormone products may decline. In addition, we have certain patents related to the production of growth hormone that have expired and as a consequence those patents no longer exclude others from making growth hormone using the processes claimed by those patents. Any competitive entry as a result of expiration of our patents may cause further decline in our market share.

Third, Raptiva competes with established therapies for moderate-to-severe psoriasis including oral systemics such as methotrexate and cyclosporin, as well as ultraviolet light therapies. In addition, Raptiva competes with Biogen Idec's Amevive® (alefacept)and Amgen's ENBREL® (etanercept), co-marketed by Wyeth, both FDA approved for adult patients with moderate-to-severe psoriasis in January 2003 and April 2004, respectively. ENBREL® was previously

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approved and marketed for psoriatic arthritis, a condition associated with psoriasis. Other products are known to be in development for the psoriasis market.

Avastin has been approved for use as first-line therapy for metastatic colorectal cancer patients in combination with intravenous 5-fluorouracil ("5-FU")-based chemotherapy. In the Avastin pivotal trial, first-line patients were treated with an irinotecan-based regimen, 5-FU/Leucovorin and CPT-11 (or "the Saltz Regimen"). In a Phase II trial, Avastin was found to provide benefit for first line patients when used in combination with 5-FU/Leucovorin alone. The use of these regimens is likely to decline as more physicians adopt Oxaliplatin-based regimens in the first-line setting. Avastin is currently being studied in combination with 5-FU/ Leucovorin and Oxaliplatin (the "FOLFOX Regimen") in patients with relapsed, metastatic colorectal cancer in a large randomized study through the Eastern Cooperative Oncology Group (the "E3200 Trial"). If the results from the E3200 Trial are positive for the combination of Avastin and 5-FU/Leucovorin and Oxaliplatin or show a similar magnitude of bene fit as previous colorectal cancer studies with Avastin, use of Avastin may increase as physicians increase their use of Avastin in combination with Oxaliplatin-based regimens in the relapsed, and also the first-line setting. However, if the results of the E3200 Trial are negative for the combination of Avastin and 5-FU/Leucovorin and Oxaliplatin, potential sales of Avastin may be materially adversely affected as physicians may limit their use of Avastin to 5-FU/Leucovorin and/or irinotecan regimens. Physicians may also restrict their use of Avastin to first-line patients only.

Other Factors Could Affect Our Product Sales

Other factors that could affect our product sales include, but are not limited to:

• The timing of FDA approval, if any, of competitive products.

• Our pricing decisions, including a decision to increase or decrease the price of a product, and the pricing decisions of our competitors.

• Government and third-party payer reimbursement and coverage decisions that affect the utilization of our products and competing products.

• Negative data from new clinical studies could cause the utilization and sales of our products to decrease.

• The degree of patent protection afforded our products by patents granted to us and by the outcome of litigation involving our patents.

• The outcome of litigation involving patents of other companies concerning our products or processes related to production and formulation of those products or uses of those products. For example, as described in Note 2, "Leases and Contingencies" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q, at various times other companies have filed patent infringement lawsuits against us alleging that the manufacture, use and sale of certain of our products infringe their patents.

• The increasing use and development of alternate therapies. For example, the overall size of the market for thrombolytic therapies, such as our Activase product, continues to decline as a result of the increasing use of mechanical reperfusion.

• The rate of market penetration by competing products. For example, we have lost market share to new competitors in the thrombolytic and, in the past, growth hormone markets.

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Our Royalty and Contract Revenues Could Decline

Royalty and contract revenues in future periods could vary significantly. Major factors affecting these revenues include, but are not limited to:

• Hoffmann-La Roche's decisions whether to exercise its options and option extensions to develop and sell our future products in non-U.S. markets and the timing and amount of any related development cost reimbursements.

• Variations in Hoffmann-La Roche's sales and other licensees' sales of licensed products.

• The expiration or termination of existing arrangements with other companies and Hoffmann-La Roche, which may include development and marketing arrangements for our products in the U.S., Europe and other countries outside the United States.

• The timing of non-U.S. approvals, if any, for products licensed to Hoffmann-La Roche and to other licensees.

• Fluctuations in foreign currency exchange rates.

• The initiation of new contractual arrangements with other companies.

• Whether and when contract benchmarks are achieved.

• The failure of or refusal of a licensee to pay royalties.

• The expiration or invalidation of our patents or licensed intellectual property.

• Decreases in licensees' sales of product due to competition, manufacturing difficulties or other factors that affect the sales of product.

We May Incur Material Product Liability Costs

The testing and marketing of medical products entail an inherent risk of product liability. Liability exposures for biotherapeutics could be extremely large and pose a material risk. Our business may be materially and adversely affected by a successful product liability claim or claims in excess of any insurance coverage that we may have.

Insurance Coverage Is Increasingly More Difficult to Obtain or Maintain

While we currently have insurance for our business, property and our products, first- and third-party insurance is increasingly more costly and narrower in scope, and we may be required to assume more risk in the future. If we are subject to third-party claims or suffer a loss or damage in excess of our insurance coverage, we may be required to share that risk in excess of our insurance limits. Furthermore, any first- or third-party claims made on our insurance policy may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all in the future.

We are Subject to Environmental and Other Risks

We use certain hazardous materials in connection with our research and manufacturing activities. In the event such hazardous materials are stored, handled or released into the environment in violation of law or any permit, we could be subject to loss of our permits, government fines or penalties and/or other adverse governmental action. The levy of a substantial fine or penalty, the payment of significant environmental remediation costs or the loss of a permit or other authorization to operate or engage in our ordinary course of business could materially adversely affect our business.

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Fluctuations in Our Operating Results Could Affect the Price of Our Common Stock

Our operating results may vary from period to period for several reasons including:

• The overall competitive environment for our products as described in "We Face Competition" above.

• The amount and timing of sales to customers in the United States. For example, sales of a product may increase or decrease due to pricing changes, fluctuations in distributor buying patterns or sales initiatives that we may undertake from time to time.

• The amount and timing of our sales to Hoffmann-La Roche and our other collaborators of products for sale outside of the United States and the amount and timing of sales to their respective customers, which directly impacts both our product sales and royalty revenues.

• The timing and volume of bulk shipments to licensees.

• The availability and extent of government and private third-party reimbursements for the cost of therapy.

• The extent of product discounts extended to customers.

• The effectiveness and safety of our various products as determined both in clinical testing and by the accumulation of additional information on each product after the FDA approves it for sale.

• The rate of adoption and use of our products for approved indications and additional indications. Among other things, the rate of adoption and use of our products may be affected by results of clinical studies reporting on the benefits or risks of a product.

• The potential introduction of new products and additional indications for existing products.

• The ability to successfully manufacture sufficient quantities of any particular marketed product.

• The number and size of any product price increases we may issue.

Our Stock Price, Like That of Many Biotechnology Companies, Is Highly Volatile

The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. In addition, the market price of our common stock has been and may continue to be highly volatile.

In addition, the following factors may have a significant impact on the market price of our common stock:

• Announcements of technological innovations or new commercial products by us or our competitors.

• Publicity regarding actual or potential medical results relating to products under development or being commercialized by us or our competitors.

• Developments or outcome of litigation, including litigation regarding proprietary and patent rights.

• Regulatory developments or delays concerning our products in the United States and foreign countries.

• Issues concerning the safety of our products or of biotechnology products generally.

• Economic and other external factors or a disaster or crisis.

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• Period-to-period fluctuations in our financial results.

Future Stock Repurchases Could Adversely Affect Our Cash Position

Our Board of Directors has authorized a stock repurchase program. Generally, under this program, Genentech can purchase its stock in the open market or in privately negotiated transactions from time to time at management's discretion. Genentech can also engage in transactions in other Genentech securities in conjunction with the repurchase program, including derivative securities.

Under a stock repurchase program approved by our Board of Directors on December 5, 2003, Genentech is authorized to repurchase up to 25,000,000 shares of our common stock for an aggregate price of up to $1 billion through December 31, 2004. A total of 10,085,600 shares at a cost of approximately $581.8 million has been purchased under the plan through June 30, 2004. See also item below regarding our affiliation agreement with Roche and the potential impact of future stock repurchases.

Our Affiliation Agreement with Roche Could Adversely Affect Our Cash Position

Our affiliation agreement with Roche provides that we establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock based on an established Minimum Percentage. For more information on our stock repurchase program, see Note 9, "Capital Stock" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. See Note 3, "Related Parties" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for information regarding the Minimum Percentage.

While the dollar amounts associated with future stock repurchase programs cannot currently be estimated, future stock repurchases could have a material adverse impact on our liquidity, credit rating and ability to access additional capital in the financial markets, and may have the effect of limiting our ability to use our capital stock as consideration for acquisitions.

Future Sales of Our Common Stock by Roche Could Cause the Price of Our Common Stock to Decline

As of June 30, 2004, Roche owned 587,189,380 shares of our common stock or 55.6% of our outstanding shares. All of our shares owned by Roche are eligible for sale in the public market subject to compliance with the applicable securities laws. We have agreed that, upon Roche's request, we will file one or more registration statements under the Securities Act in order to permit Roche to offer and sell shares of our common stock. Sales of a substantial number of shares of our common stock by Roche in the public market could adversely affect the market price of our common stock.

Roche Holdings, Inc., Our Controlling Stockholder, May Have Interests That Are Adverse to Other Stockholders

Roche as our majority stockholder, controls the outcome of most actions requiring the approval of our stockholders. Our bylaws provide, among other things, that the composition of our board of directors shall consist of at least three directors designated by Roche, three independent directors nominated by the nominating committee and one Genentech executive officer nominated by the nominating committee. As long as Roche owns in excess of 50% of our common stock, Roche directors will comprise two of the three members of the nominating committee. However, at any time until Roche owns less than 5% of our stock, Roche will have the right to obtain proportional representation on our board. Roche intends to continue to allow our current management to conduct our business and operations as we have done in the past. However, we cannot assure stockholders that Roche will not institute a new business plan in the future. Roche's interests may conflict with minority shareholder interests.

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Our Affiliation Agreement with Roche Could Limit Our Ability to Make Acquisitions and Could Have a Material Negative Impact on Our Liquidity

The affiliation agreement between us and Roche contains provisions that:

• Require the approval of the directors designated by Roche to make any acquisition or any sale or disposal of all or a portion of our business representing 10% or more of our assets, net income or revenues.

• Enable Roche to maintain its percentage ownership interest in our common stock.

• Require us to establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock based on an established Minimum Percentage. For information regarding Minimum Percentage, see Note 3, "Related Parties," in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a discussion of our relationship with Roche and Roche's ability to maintain its percentage ownership interest in our stock. For more information on our stock repurchase program, see Note 9, "Capital Stock" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

These provisions may have the effect of limiting our ability to make acquisitions and while the dollar amounts associated with a stock repurchase program cannot currently be estimated, stock repurchases could have a material adverse impact on our liquidity, credit rating and ability to access additional capital in the financial markets.

Our Stockholders May Be Unable to Prevent Transactions That Are Favorable to Roche but Adverse to Us

Our certificate of incorporation includes provisions relating to:

• Competition by Roche with us.

• Offering of corporate opportunities.

• Transactions with interested parties.

• Intercompany agreements.

• Provisions limiting the liability of specified employees.

Our certificate of incorporation provides that any person purchasing or acquiring an interest in shares of our capital stock shall be deemed to have consented to the provisions in the certificate of incorporation relating to competition with Roche, conflicts of interest with Roche, the offer of corporate opportunities to Roche and intercompany agreements with Roche. This deemed consent might restrict the ability to challenge transactions carried out in compliance with these provisions.

Potential Conflicts of Interest Could Limit Our Ability to Act on Opportunities That Are Adverse to Roche

Persons who are directors and/or officers of Genentech and who are also directors and/or officers of Roche may decline to take action in a manner that might be favorable to us but adverse to Roche. Three of our directors, Mr. William Burns, Dr. Erich Hunziker and Dr. Jonathan K.C. Knowles, currently serve as officers and employees of Roche Holding Ltd and its affiliates.

We Are Exposed to Market Risk

We are exposed to market risk, including changes to interest rates, foreign currency exchange rates and equity investment prices. To reduce the volatility relating to these exposures, we enter into various derivative hedging

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transactions pursuant to our investment and risk management policies and procedures. We do not use derivatives for speculative purposes.

We maintain risk management control systems to monitor the risks associated with interest rates, foreign currency exchange rates and equity investment price changes, and our derivative and financial instrument positions. The risk management control systems use analytical techniques, including sensitivity analysis and market values. Though we intend for our risk management control systems to be comprehensive, there are inherent risks that may only be partially offset by our hedging programs should there be unfavorable movements in interest rates, foreign currency exchange rates or equity investment prices.

The estimated exposures discussed below are intended to measure the maximum amount we could lose from adverse market movements in interest rates, foreign currency exchange rates and equity investment prices, given a specified confidence level, over a given period of time. Loss is defined in the value at risk estimation as fair market value loss. The exposures to interest rate, foreign currency exchange rate and equity investment price changes are calculated based on proprietary modeling techniques from a Monte Carlo simulation value at risk model using a 21-trading days holding period and a 95% confidence level. The value at risk model assumes non-linear financial returns and generates potential paths various market prices could take and tracks the hypothetical performance of a portfolio under each scenario to approximate its financial return. The value at risk model takes into account correlations and diversification across market factors, including interest rates, foreign currencies and equity prices. Hedge instruments are modeled as positions on the actual underlying securities. No proxies were used. Market volatilities and correlations are based on a one-year historical times-series as of December 31, 2003.

      Our Interest Income is Subject to Fluctuations in Interest Rates

Our material interest-bearing assets, or interest-bearing portfolio, consisted of cash, cash equivalents, restricted cash and investments, short-term investments, marketable debt securities, long-term investments and interest-bearing forward contracts. The balance of our interest-bearing portfolio, including restricted and unrestricted cash and investments, was $3,255.2 million or 36% of total assets at June 30, 2004. Interest income related to this portfolio was $39.5 million in the first six months of 2004. Our interest income is sensitive to changes in the general level of interest rates, primarily U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest-bearing portfolio. To mitigate the impact of fluctuations in U.S. interest rates, for a portion of our portfolio, we may enter into swap transactions that involve the receipt of fixed rate interest and the payment of floating rate interest without the exchange of the underlying principal.

Based on our overall interest rate exposure at December 31, 2003, including derivative and other interest rate sensitive instruments, a near-term change in interest rates, within a 95% confidence level based on historical interest rate movements could result in a potential loss in fair value of our interest rate sensitive instruments of $19.5 million.

      We Are Exposed to Risks Relating to Foreign Currency Exchange Rates and Foreign Economic Conditions

We receive royalty revenues from licensees selling products in countries throughout the world. As a result, our 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 our licensed products are sold. We are exposed to changes in exchange rates in Europe, Asia (primarily Japan) and Canada. Our exposure to foreign exchange rates primarily exists with the Swiss Franc. When the dollar strengthens against the currencies in these countries, the dollar value of foreign-currency denominated revenue decreases; when the dollar weakens, the dollar value of the foreign-currency denominated revenues increases. Accordingly, changes in exchange rates, and in particular a strengthening of the dollar, may adversely affect our royalty revenues as expressed in dollars. Expenses arising from our foreign manufacturing facility as well as non-dollar expenses incurred in our collaborations ar e offsetting exchange rate exposures on these royalties. Currently, our foreign royalty revenues exceed our foreign expenses. In addition, as part of our overall investment strategy, a portion of our portfolio is primarily in non-dollar denominated investments. As a result, we are exposed to changes in the exchange rates of the countries in which these non-dollar denominated investments are made.

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To mitigate our net foreign exchange exposure, our policy allows us to hedge certain of our anticipated royalty revenues by purchasing option or forward contracts with expiration dates and amounts of currency that are based on up 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 or forward. Generally, the term of these options is one to five years. To hedge the non-dollar expenses arising from our foreign manufacturing facility, we may enter into forward contracts to lock in the dollar value of a portion of these anticipated expenses.

Based on our overall currency rate exposure at December 31, 2003, including derivative and other foreign currency sensitive instruments, a near-term change in currency rates within a 95% confidence level based on historical currency rate movements would not materially affect the fair value of our foreign currency sensitive instruments.

      Our Investments in Equity Securities are Subject to Market Risks

As part of our strategic alliance efforts, we invest in equity instruments of biotechnology companies. Our biotechnology equity investment portfolio totaled $517.2 million or 6% of total assets at June 30, 2004. These investments are subject to fluctuations from market value changes in stock prices. To mitigate the risk of market value fluctuation, certain equity securities are hedged with zero-cost collars and forward contracts. A zero-cost 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 us from a decline in the market value of the security below a certain minimum level (the put "strike" level), while the call effectively limits our potential to benefit from an increase in the market value of the security above a certain maximum level (the call "strike" le vel). A forward contract is a derivative instrument where we lock-in the termination price we receive from the sale of stock based on a pre-determined spot price. The forward contract protects us from a decline in the market value of the security below the spot price and limits our potential benefit from an increase in the market value of the security above the spot price. Throughout the life of the contract, we receive interest income based on the notional amount and a floating-rate index. In addition, as part of our strategic alliance efforts, we hold convertible preferred stock, including dividend-bearing convertible preferred stock, and have made interest-bearing loans that are convertible into the equity securities of the debtor or repaid in cash. Depending on market conditions, we may determine that in future periods certain of our other unhedged equity security investments are impaired, which would result in additional write-downs of those equity security investments.

Based on our overall exposure to fluctuations from market value changes in marketable equity prices at December 31, 2003, a near-term change in equity prices within a 95% confidence level based on historic volatilities could result in a potential loss in fair value of our equity securities portfolio of $22.4 million.

      We Are Exposed to Credit Risk of Counterparties

We could be exposed to losses related to the financial instruments described above should one of our counterparties default. We attempt to mitigate this risk through credit monitoring procedures.

The Company's Effective Tax Rate May Vary Significantly

Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include but are not limited to changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future levels of R&D spending, future levels of capital expenditures, and changes in overall levels of pretax earnings.

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New and Potential New Accounting Pronouncements May Impact Our Future Financial Position and Results of Operations

There may be potential new accounting pronouncements or regulatory rulings, which may have an impact on our future financial position and results of operations. In particular, there are a number of rule changes and proposed legislative initiatives following the recent corporate bankruptcies and failures which could result in changes in accounting rules, including the accounting for employee stock options as an expense. On March 31, 2004, the FASB issued an Exposure Draft (ED), "Share-Based Payment - An Amendment of FASB Statements No. 123 and 95." The proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using Account ing Principles Board Opinion No. 25 (or APB 25), "Accounting for Stock Issued to Employees," and generally would require instead that such transactions be accounted for using a fair-value based method. As proposed, companies would be required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. As proposed, the new rules would be applied on a modified prospective basis as defined in the ED, and would be effective for public companies for fiscal years beginning after December 15, 2004. We are currently evaluating our option valuation methodologies and assumptions in light of these evolving accounting standards related to employee stock options. These and other potential changes could materially impact our results of operations.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our market risks at June 30, 2004 have not changed significantly from those discussed in Item 7A of our Form 10-K for the year ended December 31, 2003 on file with the Securities and Exchange Commission. See Note 5, "Derivative Financial Instruments," in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 and the "Forward-Looking Information and Cautionary Factors That May Affect Future Results -- We Are Exposed to Market Risk" section of Item 2 of this Form 10-Q for additional discussions of our market risks.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures.  The Company's principal executive and financial officers reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15 and 15(d)-15) as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Company's principal executive and financial officers concluded that the Company's disclosure controls and procedures are effective in timely providing them with material information relating to the Company, as required to be disclosed in the reports the Company files under the Exchange Act.

(b) Changes in internal control over financial reporting.  There was no change in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

In connection with the Chiron patent infringement lawsuit relating to U.S. Patent No. 6,054,561, the Court of Appeals denied Chiron's Petition for Rehearing in its entirety on June 8, 2004.

In connection with the City of Hope lawsuit, the California Court of Appeal has scheduled the hearing of Genentech's appeal for August 19, 2004.

See also Item 3 of our report on Form 10-K for the year ended December 31, 2003 and Part II, Item 1 of our report on Form 10-Q for the quarter ended March 31, 2004.

See also Note 2, "Leases and Contingencies," in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q.

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Our shares repurchased during the past quarter were as follows:

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of shares that May Yet Be Purchased Under the Plans or Programs
April 1- 30, 2004		1,600,000		$  58.21
May 1 - 31, 2004		4,761,300		59.25
June 1 - 30, 2004		3,582,500		55.90
Total		9,943,800		$  57.87		10,085,600		14,914,400

___________

(1) Under a stock repurchase program approved by our Board of Directors on December 5, 2003, Genentech is authorized to repurchase up to 25,000,000 shares for an aggregate purchase price of up to $1 billion of its common stock through December 31, 2004. See also Note 9, "Capital Stock," in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q.

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Item 4.  Submission of Matters to a Vote of Security Holders

            At Genentech's Annual Meeting of Stockholders held on April 16, 2004, five matters were voted upon. A description of each matter and a tabulation of the votes for each of the matters follows:

1. To approve an amendment to the bylaws with respect to the number of authorized directors:

Votes
For	Against	Abstain
447,974,068	3,801,649	115,612

2A. To elect four non-Roche director nominees to hold office until the 2005 Annual Meeting of Stockholders or until their successors are duly elected and qualified:

	Votes
Nominee	For	Withheld
Herbert W. Boyer, Ph.D.	433,187,351	18,703,978
Arthur D. Levinson, Ph.D.	441,939,160	9,952,169
Sir Mark Richmond, Ph.D.	445,674,071	6,217,258
Charles A. Sanders, M.D.	445,373,268	6,518,061

2B(1). IF PROPOSAL 1 IS APPROVED: To elect the three Roche director nominees to hold office until the 2005 Annual Meeting of Stockholders or until their successors are duly elected and qualified:

	Votes
Nominee	For	Withheld
William M. Burns	439,768,461	12,122,868
Erich Hunziker, Ph.D.	439,934,741	11,956,588
Jonathan K.C. Knowles, Ph.D.	430,833,228	21,058,101

Proposal 2(B)(2) was not voted on at the Annual Meeting because Proposal 1 was approved by a majority of the holders of our outstanding common stock as of the record date for the Annual Meeting.

3. To approve an amendment to the Amended and Restated Certificate of Incorporation to increase the authorized shares of common stock from 1,200,000,000 to 3,000,000,000:

Votes
For	Against	Abstain
443,242,924	8,557,934	90,471

4. To approve the 2004 Equity Incentive Plan.

Votes
For	Against	Abstain
349,842,841	77,200,759	171,721

There were 24,676,008 broker nonvotes.

5. To ratify Ernst & Young LLP as our independent auditors for 2004.

Votes
For	Against	Abstain
447,777,352	4,026,550	87,427

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Item 6.  Exhibits and Reports on Form 8-K

(a)		Exhibits
	(i)		3.4	Restated Bylaws.
	(ii)		3.5	Certificate of Third Amendment of Amended and Restated Certificate of Incorporation.
	(iii)		10.18	Amendment, dated March 10, 2000, to Amended and Restated Agreement between Genentech and F. Hoffman-La Roche Ltd regarding Commercialization of Genentech's Products Outside the United States
	(iv)		10.19	Amendment, dated June 26, 2000, to Amended and Restated Agreement between Genentech and F. Hoffman-La Roche Ltd regarding Commercialization of Genentech's Products Outside the United States
	(v)		10.20	Third Amendment, dated April 30, 2004, to Amended and Restated Agreement between Genentech and F. Hoffman-La Roche Ltd regarding Commercialization of Genentech's Products Outside the United States
	(vi)		10.21	Collaborative Agreement Among F. Hoffmann-La Roche LTD, Hoffmann-La Roche Inc. and Genentech, dated April 13, 2004
	(vii)		15.1	Letter regarding Unaudited Interim Financial Information.
	(viii)		31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	(iv)		31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	(x)		32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		Reports on Form 8-K.
			On April 7, 2004, we filed a Report on Form 8-K under Item 5 - Other Events, reporting the issuance of a press release, announcing our earnings for the quarter ended March 31, 2004.

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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.

		GENENTECH, INC.
Date:	July 26, 2004	/s/ARTHUR D. LEVINSON
		Arthur D. Levinson, Ph.D. Chairman and Chief Executive Officer
Date:	July 26, 2004	/s/LOUIS J. LAVIGNE, JR.
		Louis J. Lavigne, Jr. Executive Vice President and Chief Financial Officer
Date:	July 26, 2004	/s/JOHN M. WHITING
		John M. Whiting Vice President, Controller and Chief Accounting Officer

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EX-3.4

EXHIBIT 3.4

BYLAWS

OF

GENENTECH, INC.

* * * * *

ARTICLE 1

OFFICES

            SECTION 1.01. Registered Office. The registered office shall be Corporation Service Company, 1013 Centre Road, City of Wilmington, County of New Castle, State of Delaware. The name of its registered agent at such address is Corporation Service Company.

            SECTION 1.02. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

            SECTION 1.03. Books. The books of the Corporation may be kept within or without of the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE 2

MEETINGS OF STOCKHOLDERS

            SECTION 2.01. Time and Place of Meetings. All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a designation by the Board of Directors).

            SECTION 2.02. Annual Meetings; Election of Directors. An annual meeting of stockholders, commencing with the year 2000, shall be held at such date and time as directors may determine to transact such business as may properly be brought before the meeting. Prior to a Termination Event (as defined below), directors shall be nominated and elected at the annual meeting in accordance with Section 3.02 and Section 3.03. After a Termination Event has occurred, directors shall (subject to Section 3.03(c)) be elected by stockholders by ballot at the annual meeting, unless they are elected by written consent in lieu of an annual meeting as permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("Delaware Law"). For purposes of these bylaws, a "Termination Event" means the disposition by Roche and its "Affiliates" (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of beneficial ownership of Common Stock of the Corporation which disposition has the effect of causing Parent's Voting Interest (as defined herein) to be less than 40%.

            SECTION 2.03. Special Meetings. Special meetings of stockholders may be called by the Board of Directors or the Chairman of the Board and shall be called by the Secretary at the request in writing of holders of record of a majority of the outstanding capital stock of the Corporation entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.

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            SECTION 2.04. Notice of Meetings and Adjourned Meetings; Waivers of Notice. (a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by Delaware Law, such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Unless these bylaws otherwise require, when a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

            (b) A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

            SECTION 2.05. Quorum. Unless otherwise provided under the certificate of incorporation or these bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders present in person or represented by proxy shall adjourn the meeting, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified.

            SECTION 2.06. Voting. (a) Unless otherwise provided in the certificate of incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Any share of capital stock of the Corporation held by the Corporation shall have no voting rights. Unless otherwise provided in Delaware Law, the certificate of incorporation or these bylaws, the affirmative vote of a majority of the shares of capital stock of the Corporation present, in person or by written proxy, at a meeting of stockholders and entitled to vote on the subject matter shall be the act of the stockholders.

            (b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by written proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

            SECTION 2.07. Action by Consent. (a) Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery ma de to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of stockholders to take the action were delivered to the Corporation as provided in Section 2.07(b).

- 2 -

            (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this section and Delaware Law to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

            SECTION 2.08. Organization. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, or in his absence or if one shall not have been elected, the director designated by the vote of the majority of the directors present at such meeting, shall act as chairman of the meeting. The Secretary (or in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof.

            SECTION 2.09. Order of Business; Conduct of Meetings. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. In addition, the Board may adopt by resolution such rules and regulations for the conduct of meetings of stockholders as it shall deem appropriate. Except to the extent inconsistent with law and such rules and regulations as adopted by the Board, the chairman of any meeting of stockholders shall have the right and authority to convene and to adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations, or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the m eeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting may determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. The chairman of the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a matter or business was not properly brought before the meeting and, if such chairman should so determine, declare to the meeting that any such matter or business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

            SECTION 2.10. Inspectors of Election. The Corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of sha res of capital stock of the Corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the Corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the Corporation represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election.

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ARTICLE 3

DIRECTORS

            SECTION 3.01. General Powers. Except as otherwise provided in Delaware Law or the certificate of incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

            SECTION 3.02. Composition of Board of Directors; Terms of Directors. (a) Subject to the other provisions hereof, the number of directors comprising the Board shall be seven or such greater number as the Board of Directors may determine from time to time, and shall include at least three nominees of Roche Holdings, Inc. ("Roche") (unless reduced in accordance with Section 3.03(c) of these bylaws), one executive officer of the Corporation nominated by the nominating or proxy committee, and at least three or more Independent Directors (as defined herein) nominated by the nominating or proxy committee. For purposes of these bylaws, the term "Independent Director" means a director of the Corporation who is not (i) an officer of the Corporation, (ii) an employee, director, principal stockholder or partner of Roche or any affiliate of Roche, or (iii) an employee, director, principal stockholder or partner of an entity (other than the Corporation or any of its subsidiaries) that was dependent upon Roche or any affiliate of Roche for more than 10% of its revenues or earnings in its most recent fiscal year. After a Termination Event has occurred, this Section 3.02(a) shall be of no further force or effect, and directors shall be elected as set forth in Section 2.02.

            (b) The directors of the Corporation shall be nominated as provided in these bylaws, and shall serve until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and these bylaws. The term of office of each director shall be one year, provided that this shall not prevent any director from serving multiple or successive terms.

            SECTION 3.03. Roche's Right to Proportional Representation. (a) Upon the request of Roche at any time by notice to the Corporation (a "Governance Notice"), Roche shall be immediately entitled to representation on the Board such that Roche shall have a number of directors designated by Roche equal to Parent's Voting Interest times the total number of directors, rounded up to the next whole number if Parent's Voting Interest is greater than 50% and rounded down to the next whole number if Parent's Voting Interest is less than or equal to 50%. For purposes of these bylaws, "Parent's Voting Interest" means the percentage of the outstanding common stock, par value $0.02 per share ("Common Stock"), of the Corporation beneficially owned by Roche and its affiliates. Notwithstanding any other provisions of these Bylaws, and without limiting the Corporation's obligations pursuant to Section 4.04(g) o f the Affiliation Agreement between the Corporation and Roche Holdings, Inc. dated as of July 22, 1999, as amended as of October 22, 1999 (as so amended and as hereafter amended by the Corporation and Roche, the "Affiliation Agreement"), (a) Parent's Voting Interest, (b) the ownership of Roche and/or its affiliates and (c) Roche's total voting power for purpose of Section 3.04(d)(i)(A) and (B) shall at all times be calculated for purposes of the Bylaws as if the Corporation had, as of the time of such calculation, purchased all shares that would, as of such time, have been required to be purchased by the Corporation pursuant to Section 4.04(g) of the Affiliation Agreement (determined without regard to the exception at the end of Section 4.04(g)(2) of the Affiliation Agreement).

            (b) Upon receipt of a Governance Notice, the Board and the Corporation shall immediately take or cause to be taken all action not previously taken to cause the numbers of directors constituting the Board to be increased, and to cause the Board to fill the vacancies created by any such increase by electing Roche's nominees for such vacancies, as necessary in order to achieve the proportionality required by Section 3.03(a). Any directors elected to fill a vacancy shall serve until the next annual meeting of stockholders.

            (c) After a Termination Event has occurred, Sections 3.03(a) and 3.03(b) shall be of no further force or effect, and Roche shall thereafter be entitled to nominate a number of directors (and their successors) which is proportional to Parent's Voting Interest, rounded down to the next whole number, until and unless Parent's Voting Interest is less than 5%. Both prior to and after a Termination Event, Roche may designate an affiliate of Roche to make nominations of directors and committee members on its behalf.

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            SECTION 3.04. Committees. (a) The Board shall designate a nominating or proxy committee, an executive committee, an audit committee and a compensation committee. No action by any such committee shall be valid unless taken at a meeting for which adequate notice has been duly given to or waived by the members of such committee. Such notice shall include a description of the general nature of the business to be transacted at the meeting and no other business may be transacted at such meeting. Any committee member unable to participate in person at any meeting shall be given the opportunity to participate by telephone.

            (b) Any such committee, to the extent provided by resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware Law to be submitted to the stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. The Corporation shall be governed by the provisions of Section 141(c)(2) of Delaware Law, as amended effective July 1, 1996.

            (c) Each committee of the Board (other than any special committee or committee of Independent Directors that may be constituted for purposes of making any determination provided for by agreement between the Corporation and Roche) shall at all times include at least one director designated by Roche (and, following a Governance Notice, no less than a proportional number of directors designated by Roche). Any director designated by Roche to serve on any committee may designate as his or her alternate another director designated by Roche.

            (d) The nominating or proxy committee shall at all times have three members. At any time that Roche owns 80% or more of the total voting power of the Corporation stock (within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended), the nominating or proxy committee shall include two nominees of Roche and one Independent Director. At any time that Roche owns less than 80% of the total voting power, the nominating or proxy committee shall include (i) a number of nominees of Roche that is equal to the product of (A) the percentage owned by Roche of the total voting power and (B) three, rounded up to the next whole number if Roche's total voting power is greater than 50% and rounded down to the next whole number if Roche's total voting power is less than or equal to 50%, provided that (X) Roche shall at no time have more than two nominees, and (Y) if Roche's ownership of less than 80% of the t otal voting power is the result of a breach by the Corporation of any obligation under any agreement with Roche, the nominating or proxy committee shall include two nominees of Roche, and (ii) a number of Independent Directors equal to three minus the number of nominees of Roche determined pursuant to the preceding clause (i).

            (e) After a Termination Event has occurred, Sections 3.04(c) and 3.04(d) shall terminate and be of no further force or effect.

            SECTION 3.05. Nomination of Directors. The nominating or proxy committee shall require, for the nomination of any person not designated by Roche, the approval of a majority of the nominating or proxy committee.

            SECTION 3.06. Quorum and Manner of Acting. Unless the certificate of incorporation or these bylaws require a greater number, a majority of the total number of directors shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the directors present at meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat shall adjourn the meeting, from time to time, without notice other than annou ncement at the meeting, until a quorum shall be present.

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            SECTION 3.07. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a determination by the Board of Directors).

            SECTION 3.08. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 3.10 herein or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice.

            SECTION 3.09. Regular Meetings. After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given.

            SECTION 3.10. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Chairman of the Board, President or Secretary on the written request of three directors. Notice of special meetings of the Board of Directors shall be given to each director at least three days before the date of the meeting in such manner as is determined by the Board of Directors.

            SECTION 3.11. Action by Consent. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

            SECTION 3.12. Telephonic Meetings. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

            SECTION 3.13. Resignation. Any director may resign at any time by giving written notice to the Board of Directors or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

            SECTION 3.14. Vacancies. Except as otherwise provided in the certificate of incorporation or these bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof (or any particular holder or holders) are entitled to elect one or more directors by the certificate of incorporation or these bylaws, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof (or particular holder or holders) then in office, or by a sole remaining director so elected. Each director so chosen shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in accordance with Delaware Law.

            SECTION 3.15. Removal. Directors may be removed only as provided in the Certificate of Incorporation.

            SECTION 3.16. Compensation. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses.

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ARTICLE 4

OFFICERS

            SECTION 4.01. Principal Officers. The principal officers of the Corporation shall be a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more Controllers, as the Board may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of President and Secretary.

            SECTION 4.02. Election, Term of Office and Remuneration. The principal officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine.

            SECTION 4.03. Subordinate Officers. In addition to the principal officers enumerated in Section 4.01 herein, the Corporation may have one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees.

            SECTION 4.04. Removal. Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors.

            SECTION 4.05. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

            SECTION 4.06. Powers and Duties. The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors.

ARTICLE 5

GENERAL PROVISIONS

            SECTION 5.01. Fixing the Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting.

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            (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by Delaware Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of bu siness, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by Delaware Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

            (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

            SECTION 5.02. Dividends. Subject to limitations contained in Delaware Law and the certificate of incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation.

            SECTION 5.03. Year. The fiscal year of the Corporation shall commence on January 1 and end on December 31 of each year.

            SECTION 5.04. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced.

            SECTION 5.05. Voting of Stock Owned by the Corporation. The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock.

            SECTION 5.06. Amendments. These bylaws or any of them, may be altered, amended or repealed, or new bylaws may be made, by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors, provided that Sections 2.02, 3.02, 3.03, 3.04, 3.05, 3.14, 3.15 and 5.06 of these bylaws may only be altered, amended, repealed or rescinded as provided in the Certificate of Incorporation.

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EX-3.5

EXHIBIT 3.5

CERTIFICATE OF THIRD AMENDMENT
OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION

Genentech, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

FIRST:  That at a meeting of the Board of Directors of Genentech, Inc. resolutions were duly adopted setting forth a proposed amendment of the Amended and Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows:

RESOLVED, that the Amended and Restated Certificate of Incorporation of this corporation be amended by changing "Section 4.01(a)" of the Article thereof numbered "4" so that, as amended, said Section of said Article shall be and read as follows:

            Section 4.01. Capital Stock. (a) The Corporation is authorized to issue two classes of stock to be designated, respectively, preferred stock and common stock. The total number of shares which the Corporation is authorized to issue is three billion one hundred million (3,100,000,000) shares. One hundred million (100,000,000) shares shall be designated preferred stock, par value $0.02 per share ("Preferred Stock"). Three billion (3,000,000,000) shares shall be designated common stock, par value $0.02 per share ("Common Stock"). The common stock of the Corporation shall be all of one class.

SECOND:  That thereafter, pursuant to resolution of its Board of Directors, the regular meeting of the stockholders of said corporation was duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment.

THIRD:  That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

FOURTH:  That the capital of said corporation shall not be reduced under or by reason of said amendment.

IN WITNESS WHEREOF, said Genentech, Inc. has caused this Third Certificate of Amendment to be signed by Stephen G. Juelsgaard, an Authorized Officer, this 16th day of April, 2004.

GENENTECH, INC.
By:	/s/ Stephen G. Juelsgaard
Name: Title:	Stephen G. Juelsgaard Executive Vice President, General Counsel and Secretary

EX-10.18

EXHIBIT 10.18

Amendment to Amended and Restated Agreement Between Genentech, Inc.
and F. Hoffmann-La Roche Ltd Regarding Commercialization of Genentech's
Products Outside the United States

            This Amendment to Amended and Restated Agreement Between Genentech, Inc. and F. Hoffmann-La Roche Ltd Regarding Commercialization of Genentech's Products Outside the United States (hereinafter, "Amendment") is made, effective as of March 10, 2000 ("Amendment Effective Date"), by and among F. Hoffmann-La Roche Ltd, Grenzacherstrasse 124, CH 4070 Basel, Switzerland ("ROCHE"), Genentech, Inc., 1 DNA Way, South San Francisco, California USA 94080, Genentech Europe Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV and Genentech Biopharmaceuticals Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV ("GENENTECH").

WHEREAS, ROCHE and GENENTECH have entered into that certain Amended and Restated Agreement Between Genentech, Inc. and F. Hoffmann-La Roche Ltd Regarding Commercialization of Genentech's Products Outside the United States (hereinafter, the "Commercialization Agreement").

WHEREAS, ROCHE now wishes to not commercialize and market in Canada GENENTECH's interferon gamma, Actimmune and to amend the Commercialization Agreement with respect to this.

NOW, THEREFORE, THE PARTIES HERETO HEREBY AGREE AS FOLLOWS:

1. All capitalized terms in this Amendment shall have the meanings given in the Commercialization Agreement unless otherwise expressly defined herein.
    
2. Article 1, Section 5 of the Commercialization Agreement is hereby amended to delete Actimmune interferon gamma from the definition of "Canada Products."
    
3. Except as expressly amended herein above, all of the terms and conditions of the Commercialization Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly authorized representative as of the Amendment Effective Date.

GENENTECH, INC.		HOFFMANN-LA ROCHE LTD
By:	/s/ STEPHEN G. JUELSGAARD	By:	/s/ STEFAN ARNOLD
Name:	Stephan G. Juelsgaard	Name:	Stefan Arnold
Title:	Senior Vice President and General Counsel	Title:	Vice Director
		By:	/s/ R. SCHAFFNER
		Name:	R. Schaffner
		Title:	MP Director
GENENTECH EUROPE LIMITED
By:	/s/ LOUIS J. LAVIGNE, JR.
Name:	Louis J. Lavigne, Jr.
Title:	Vice President and Chief Financial Officer
GENENTECH BIOPHARMACEUTICALS LIMITED
By:	/s/ LOUIS J. LAVIGNE, JR.
Name:	Louis J. Lavigne, Jr.
Title:	Vice President and Chief Financial Officer

EX-10.19

EXHIBIT 10.19

Amendment to Amended and Restated Agreement Between Genentech, Inc.
and F. Hoffmann-LaRoche Ltd Regarding Commercialization of Genentech's
Products Outside the United States

            This Amendment to Amended and Restated Agreement Between Genentech, Inc. and F. Hoffmann-LaRoche Ltd Regarding Commercialization of Genentech's Products Outside the United States (hereinafter, "Amendment") is made, effective as of June 26, 2000 ("Amendment Effective Date"), by and among F. Hoffmann-LaRoche Ltd, Grenzacherstrasse 124, CH 4070 Basel, Switzerland ("ROCHE"), Genentech, Inc., 1 DNA Way, South San Francisco, California USA 94080, Genentech Europe Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV and Genentech Biopharmaceuticals Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV ("GENENTECH").

WHEREAS, ROCHE and GENENTECH have entered into that certain Amended and Restated Agreement Between Genentech, Inc. and F. Hoffmann-LaRoche Ltd Regarding Commercialization of Genentech's Products Outside the United States (hereinafter, the "Commercialization Agreement").

WHEREAS, ROCHE and GENENTECH now wish to have ROCHE commercialize and market in Canada GENENTECH's tissue plasminogen activator Product, tenecteplase ("TNKase") under certain terms and conditions, and to amend the Commercialization Agreement with respect to such terms and conditions and related matters.

NOW, THEREFORE, THE PARTIES HERETO HEREBY AGREE AS FOLLOWS:

1. All capitalized terms in this Amendment shall have the meanings given in the Commercialization Agreement unless otherwise expressly defined hereinbelow.
    
2. The following sentence is hereby added at the end of Article 1, Section 5 of the Commercialization Agreement: "The term Canada Products shall also include TNKase tissue plasminogen activator, tenecteplase (hereinafter, "TNKase")."
    
3. The following two sentences are hereby added at the end of Article II, Section 5(a):

"The Parties acknowledge that GENENTECH has obtained a license to the trademark "TNK" with respect to its tissue plasminogen activator Product tenecteplase in the United States of America, but that GENENTECH has no license to the trademark "TNK" in any country other than the United States. The Parties acknowledge that ROCHE's Canadian affiliate has filed an application for registration of the trademark "TNKase" in Canada. ROCHE does not believe that a license under third party trademark rights is required for ROCHE's Canadian affiliate to register or to use the "TNKase" trademark in connection with tenecteplase in Canada. ROCHE shall defend, indemnify and hold harmless GENENTECH from and against all third party costs, claims, suits, expenses (including reasonable attorneys' fee) and damages arising out of or resulting from any claim of infringement or inducement to infringe any third party's trademark rights, or any contractual claim related thereto, that is based on any such registration or use of the "TNKase" trademark. "

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4. The following new Section 4(c) shall be added to Article VI of the Commercialization Agreement:

"(c) Notwithstanding the royalty provisions of Article VI, Section 4(a) above, with respect to the Canada Product TNKase only, ROCHE shall pay GENENTECH as follows:

1. a non-refundable license fee of two million U.S. dollars ($2,000,000), which shall be paid within ten (10) days of signature of this Amendment by the Parties;
2. a non-refundable milestone payment of four million U.S. dollars ($4,000,000), which shall be paid within thirty (30) days after the first regulatory approval for marketing of TNKase in Canada;
3. a royalty of twelve and one-half percent (12.5%) on Net Sales of TNKase in Canada. The payment of such royalties on TNKase shall continue until the latter to occur of: 1) the last expiration of a Valid Claim of a GENENTECH Patent which would be infringed by the sale of TNKase in Canada but for the license granted herein or 2) a period of 25 years from the Amendment Effective Date;
4. an additional royalty of ten percent (10%) on Net Sales of TNKase in Canada. Such additional royalty payments shall cease when ROCHE has paid GENENTECH a combined total of $27 million U.S. dollars under this Section 4(c)(iv) and under Section 4(b) above.
    
5. The Parties acknowledge and hereby agree that the payments under Section (c)(i) and (ii) above shall be made as ROCHE's share of GENENTECH's Development Costs related to development leading to the first regulatory approval of TNKase for acute myocardial infarction. For any other GENENTECH Development Costs incurred with respect to TNKase (for example, for Development Costs for any other indication, formulation, dosing regimen or regulatory approval), GENENTECH shall be reimbursed by ROCHE for ten percent (10%) of all such Development Costs, pursuant to Article IV, Section 3(a) of the Commercialization Agreement. GENENTECH will keep ROCHE's Canadian affiliate reasonably informed of GENENTECH's significant and material development activities for TNKase to aid ROCHE in its budget planning for its share of such Development Costs.
    
6. This Amendment specifically cancels and supersedes that certain letter agreement between Hoffman-La Roche Limited and Genentech, Inc. dated June 22, 1999 related to the subject matter hereof and signed by John Melville and William Young.
    
7. Except as expressly amended herein, all of the terms and conditions of the Commercialization Agreement shall remain in full force and effect.
    
8. This Agreement may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument.

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IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly authorized representative as of the Amendment Effective Date.

GENENTECH, INC.		HOFFMANN-LA ROCHE LTD
By:	/s/ ART LEVINSON	By:	/s/ STEFAN ARNOLD
Name:	Art Levinson	Name:	Stefan Arnold
Title:	Chief Executive Officer	Title:	Vice Director
		By:	/s/ RON SCOTT
		Name:	Ron Scott
		Title:	Vice Director
GENENTECH EUROPE LIMITED
By:	/s/ ART LEVINSON
Name:	Art Levinson
Title:	Chief Executive Officer
GENENETECH BIOPHARMACEUTICALS LIMITED
By:	/s/ ART LEVINSON
Name:	Art Levinson
Title:	Chief Executive Officer

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EX-10.20

EXHIBIT 10.20

Third Amendment to the Amended and Restated Agreement
Between Genentech, Inc. and F. Hoffmann-LaRoche Ltd
Regarding Commercialization of Genentech's Products Outside the United States

This Third Amendment to the Amended and Restated Agreement Between Genentech, Inc. and F. Hoffmann-LaRoche Ltd Regarding Commercialization of Genentech's Products Outside the United States (hereinafter, the "Third Amendment") is made, effective as of April 30, 2004 (the "Amendment Effective Date"), by and among F. Hoffmann-La Roche Ltd, Grenzacherstrasse 124, CH 4070 Basel, Switzerland ("ROCHE") and Genentech, Inc., 1 DNA Way, South San Francisco, California USA 94080 ("GENENTECH").

WHEREAS, ROCHE, GENENTECH, Genentech Europe Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV ("GENENTECH EUROPE") and Genentech Biopharmaceuticals Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV ("GENENTECH BIOPHARMACEUTICALS") entered into that certain Amended and Restated Agreement Between Genentech, Inc. and F. Hoffmann-LaRoche Ltd Regarding Commercialization of Genentech's Products Outside the United States of July 1, 1999, as amended March 10, 2000, and June 26, 2000 (hereinafter, the "Commercialization Agreement").

WHEREAS, GENENTECH EUROPE and GENENTECH BIOPHARMACEUTICALS were dissolved, and all their assets and rights, if any, in and to the Commercialization Agreement were assigned to GENENTECH, effective February 26, 2001.

WHEREAS, ROCHE and GENENTECH now wish to have ROCHE commercialize and market in Canada certain of GENENTECH's products under certain terms and conditions, and to amend the Commercialization Agreement with respect to such terms and conditions and related matters.

NOW, THEREFORE, THE PARTIES HERETO HEREBY AGREE AS FOLLOWS:

1. All capitalized terms in this Third Amendment shall have the meanings given in the Commercialization Agreement unless otherwise expressly defined herein below.
    
2. The following sentence is hereby added at the end of Article I, Section 5 of the Commercialization Agreement:

The term Canada Products shall also include GENENTECH's (i) tissue plasminogen activator product, alteplase ("Cathflo®"), (ii) injectable recombinant human growth hormone product, somatropin (rDNA origin) ("Nutropin AQ®"), and (iii) injectable recombinant human growth hormone product configured for injection by GENENTECH's AQ Pen®, somatropin (rDNA origin) ("Nutropin AQ Pen Cartridge®").
 

3. In partial consideration for the additional rights granted to ROCHE by GENENTECH hereunder this Third Amendment with respect to:

1. the Canada Product Cathflo® only, ROCHE shall pay GENENTECH a non-refundable license fee of One Million-One Hundred and Six Thousand-Nine Hundred and Nine U.S. Dollars ($1,106,909), which shall be paid within ten (10) days of the Amendment Effective Date; and
2. the Canada Products Nutropin AQ® and Nutropin AQ Pen Cartridge® only (collectively), ROCHE shall pay GENENTECH a total non-refundable license fee of Eight Hundred and Twenty Thousand-Eight Hundred and Eighty-Six U.S. Dollars ($820,886), which shall be paid within ten (10) days of the Amendment Effective Date.

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4. The Parties acknowledge and hereby agree that the payments made under Section 3 of this Third Amendment shall, in accordance with Section 3.A.) of Appendix A, be made as ROCHE's share of GENENTECH's Development Costs incurred for development of each such product through the Amendment Effective Date (i.e., 10% of all such Development Costs with respect to Cathflo® and, notwithstanding the sentence immediately following Section 3.B.) of Appendix A, 5% of all such Development Costs with respect to Nutropin AQ® and Nutropin AQ Pen Cartridge®).
    
5. Notwithstanding the foregoing, nothing in this Third Amendment shall in any way modify Article 4 - Section 3(a) of the Commercialization Agreement with respect to Genentech's Development Costs incurred in connection with the development of any Canada Product after the Amendment Effective Date.
    
6. Except as expressly amended herein, all of the terms and conditions of the Commercialization Agreement shall remain in full force and effect.
    
7. This Third Amendment may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument.

[the remainder of this page is intentionally left blank]

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IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly authorized representative as of the Amendment Effective Date.

GENENTECH, INC.		HOFFMANN-LA ROCHE LTD
By:	/s/ STEPHEN G. JUELSGAARD	By:	/s/ R. SCHAFFNER
Name:	Stephan G. Juelsgaard	Name:	R. Schaffner
Title:	Executive Vice President and General Counsel	Title:	VP
		By:	/s/ MELANIE FREY WICK
		Name:	Melanie Frey Wick
		Title:	Legal Counsel

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EX-10.21

EXHIBIT 10.21

COLLABORATIVE

AGREEMENT

AMONG

F. HOFFMANN-LA ROCHE LTD

HOFFMANN-LA ROCHE INC.

AND

GENENTECH, INC.

A G R E E M E N T

This agreement ("Agreement") is effective as of April 13, 2004 is among

F. Hoffmann-La Roche Ltd, Grenzacherstrasse 124, CH 4002 Basel, Switzerland ("Roche Basel");

Hoffmann-La Roche Inc., 340 Kingsland Street, Nutley, New Jersey 07110 ("Roche Nutley", collectively, Roche Basel and Roche Nutley are referred to as "ROCHE");

            and

Genentech, Inc., One DNA Way, South San Francisco, California 94080 USA ("GENENTECH")

WHEREAS, GENENTECH, and ROCHE have each established independent pharmaceutical research efforts.

WHEREAS, GENENTECH and ROCHE wish to potentially conduct joint research on molecules in areas of mutual interest, such as oncology, immunology and protein therapeutics, with any specific joint research to be mutually agreed to by them as provided herein;

WHEREAS, GENENTECH and ROCHE believe that sharing certain responsibilities for research, development, and commercialization with respect to select molecules will maximize opportunities to identify and develop such molecules in a more efficient manner than either company might accomplish independently;

WHEREAS, GENENTECH and ROCHE believe that this Agreement may provide an economic benefit to both of them and has the potential to hasten the commercialization of such molecules;

WHEREAS, Roche Holdings Ltd., a corporation organized under the laws of Switzerland, and GENENTECH concluded, effective September 8, 1990, a Mutual Confidentiality Agreement ("Mutual Confidentiality Agreement") covering the ongoing disclosure of all confidential scientific, financial, technical and business information of any nature in any tangible form of expression among GENENTECH on the one hand and Roche Holdings Ltd. and its subsidiaries and affiliates throughout the world, except GENENTECH, on the other hand.

NOW, THEREFORE, ROCHE AND GENENTECH AGREE AS FOLLOWS:

ARTICLE I - DEFINITIONS

Capitalized terms used in this Agreement and the Financial Appendix attached to this Agreement shall have the meanings set forth below:

1.1     "Affiliate" shall mean --

a)     an organization greater than fifty percent (>50%) of the voting stock of which is owned and/or controlled directly or indirectly by either Party;

b)     an organization which directly or indirectly owns and/or controls greater than fifty percent (>50%) of the voting stock of either Party; or

c)     an organization which is directly or indirectly under common control of either Party through common share holdings.

The foregoing notwithstanding, for the purposes of this Agreement, GENENTECH shall not be considered to be an Affiliate of ROCHE and ROCHE shall not be considered to be an Affiliate of GENENTECH.

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1.2     "Agreement" shall mean this Agreement, including all Appendices attached hereto, together with any valid amendments or modifications of the foregoing, and any agreements entered into in connection with this Agreement.

1.3     "Approval Application" or "Registration" shall mean the submission to an appropriate regulatory authority of an appropriate application seeking approval for the sale of a Product in any country.

1.4     "Clinical Requirements" shall mean the quantities of a Drug Candidate or Product which are required by a Party for the conduct of preclinical and clinical studies of that Drug Candidate or Product by that Party. The term Clinical Requirements as used herein with respect to a Party shall also include the Clinical Requirements of that Party's permitted licensees, if any.

1.5     "Commercial Requirements" shall mean the quantities of a Product which are required by a Party for or in connection with that Party's sale of that Product. The term Commercial Requirements as used herein with respect to a Party shall also include the Commercial Requirements of that Party's permitted licensees or distributors if any.

1.6     "Development Costs" shall have the meaning set forth in the Financial Appendix to this Agreement.

1.7     "Drug Candidate" shall mean a Molecule resulting from the joint research efforts of the Parties pursuant to a Joint Research Plan, including all derivatives of that specific molecule as well as its precursors, that has been selected by the JRC and by each Party's internal selection process to enter Phase I Clinical Trials.

1.8     "Effective Date" shall mean the date set forth in the introductory paragraph of this Agreement.

1.9     "Fully Burdened Manufacturing Cost" shall have the meaning set forth in the Financial Appendix to this Agreement.

1.10     "Joint Collaboration" shall mean a specific joint effort agreed to by the Parties that is based on and governed by a specific Joint Research Plan focused on a Target agreed to by the Joint Research Committee in writing and is specifically designed to identify one or more Drug Candidates to that Target and to subsequently develop and commercialize a Product or Products containing or based on such Drug Candidate or Drug Candidates.

1.11    "Joint Development Plan" shall mean a written, comprehensive description of the prospective development efforts of each of the Parties to achieve Approval Application/Registration and subsequent approval for the sale of a Product in the Major Countries with respect to the Product which the Parties have agreed to in writing, and which shall be subsequently appended to this Agreement.

1.12    "Joint Research Plan" shall mean a written, comprehensive description of the previous and prospective research efforts of each of the Parties hereunder with respect to a specific Joint Collaboration for the identification of a Drug Candidate, which the Parties have each agreed to in writing.

1.13    "Know-How" shall mean any and all proprietary technical information, know-how, data, test results, knowledge, techniques, discoveries, inventions, specifications, designs, regulatory filings, and other information (whether or not patentable) which are now or hereafter during the term of this Agreement in the possession or control of a Party and are unique to a Drug Candidate or Product or to the development, manufacture, use or sale of a Drug Candidate or Product or which arise from or as a result of the efforts performed or costs borne by a Party under the Joint Research Plan or Joint Development Plan; provided, however, that Know-How shall not include any of the foregoing (i) which are now or until the identification of a Drug Candidate in the possession or control of a Party as a result of a license taken from a third party and which such Party is not free to transfer or license to the other Party or which such Party may transfer or license but such transfer or license would necessitate the payment of a fee or royalty to the licensor at the time of transfer or license or subsequently (unless provision is made hereunder for the payment of such fee or royalty) or (ii) which are known from publicly available information.

1.14    "Major Country" shall mean the US, Italy, France, United Kingdom, Germany or Japan.

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1.15    "Manufacturing Technology" shall mean all Know-How of a Party necessary to make or have made a Product in the manner that such Product is manufactured by that Party to produce Clinical Requirements and/or Commercial Requirements.

1.16    "Molecule" shall mean a molecule, such as a compound, antibody or peptide, which is selected for further research in a Joint Collaboration.

1.17    "Net Sales" shall have the meaning set forth in the Financial Appendix to this Agreement.

1.18    "Operating Profits and Losses" shall have the meaning set forth in the Financial Appendix to this Agreement.

1.19    "Party" shall mean GENENTECH or ROCHE and, when used in the plural, shall mean both of them.

1.20    "Patents" shall mean any and all patent applications and patents (including inventor's certificates) throughout the world, including any substitutions, extensions, reissues, renewals, divisions, continuations or continuations-in-part thereof or therefor which are now or hereafter during the term of this Agreement owned or controlled by a Party and which, but for the licenses granted herein, would be infringed by the development, manufacture, use or sale of a Drug Candidate or a Product; provided, however, that Patents shall not include any of the foregoing which are now owned or controlled by a Party as a result of a license taken from a third party and which such Party is not free to transfer or license to the other Party or which the Party may transfer or license but such transfer or license would necessitate the payment of a fee or royalty at the time of transfer or license or subsequently (unless provision is made hereunder for the payment of such fee or royalty) to the lic ensor.

1.21    "Phase I Clinical Trial" shall mean a controlled study in humans of the safety of a Product for a specific indication or indications in healthy volunteers or patients having the disease or condition for which the Product is being studied.

1.22    "Phase II Clinical Trial" shall mean a controlled study in humans of both the safety and efficacy of a Product for a specific indication or indications in patients having the disease or condition for which the Product is being studied.

1.23    "Phase III Clinical Trial" shall mean a controlled study in humans of the efficacy and safety of a Product which is prospectively designed to demonstrate statistically whether the Product is effective for use in a particular indication in a manner sufficient to obtain regulatory approval to market that Product in one or more particular countries and, where a Joint Development Committee exists for a Product, a study which a Joint Development Committee designates as a Phase III Clinical Trial.

1.24    "Product" shall mean any pharmaceutical formulation containing a Drug Candidate. The term Product shall include: (a) all bulk forms of the active ingredient of the Product ("Bulk Product"); (b) all forms of the Product which are finished but not packaged ("Finished Product"); or (c) finished, packaged final dosage units of Product ("Final Product").

1.25    "Responsible Party" shall mean that Party, pursuant to Section 7.1, which is responsible for the development of a manufacturing process and facilities for a Drug Candidate and Product for a particular Joint Collaboration.

1.26    "ROW" shall mean all countries of the world except the US.

1.27    "Target" shall mean a molecule or variants of that molecule to which a Drug Candidate or Product, as its primary mechanism of action, physically binds to or interacts with.

1.28    "Territory" shall mean the US and ROW.

1.29    "US" shall mean the United States of America, its territories and possessions.

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Other capitalized terms that are used in this Agreement and not defined above are defined in the Financial Appendix to this Agreement or as follows:

Claims	Section 12.2
Decision Point	Section 3.9
Genentech Opt-in Option 1	Section 4.3c(b)
Genentech Opt-in Option 2	Section 4.3c(c)
Information	Section 10.1
JCC	Section 5.7
JDC	Section 4.4a
JFC	Section 6.1
JRC	Section 3.1
Lead Party	Section 5.1
Licensee	Section 8.1
Licensor	Section 8.1
Management Committee	Section 2.1
Non-terminating Party	Section 13.3
Opt-out Option	Section 4.3a(a)
Principal Party	Section 11.2
Roche Opt-in Option 1	Section 4.3b(b)
Roche Opt-in Option 2	Section 4.3b(c)
Terminating Party	Section 13.3

ARTICLE II - MANAGEMENT OF THE COLLABORATION

2.1	Management Committee. Within sixty (60) days after the Effective Date, the Parties shall form a management committee comprised of three (3) representatives from ROCHE, including initially its Head of Global Research, and three (3) representatives from GENENTECH, including initially its Head of Research ("Management Committee"). The Management Committee shall meet at least once per year to review the research, development and commercialization status of Molecules, Drug Candidates, and Products. The Management Committee shall be responsible for reviewing and approving the worldwide budget (including but not limited to worldwide inventory levels) submitted by the joint research committee ("JRC"), joint development committee ("JDC") and/or joint commercialization committee ("JCC") (as applicable). The Management Committee shall have the authority to create other committees as needed and oversee the activities of all other committees. Each Party shall be free to change any or all of its repre sentation effective immediately upon written notice to the other Party. All decisions of the Management Committee shall require consensus of the representatives of the Committee to be effective, provided, however, that in cases where such consensus cannot be reached, the matter will be referred to a senior officer at ROCHE and a senior officer at GENENTECH for decision.
2.2	Other Committees. Initially, the Parties shall form a JRC as set forth in Section 3.1 below and a joint finance committee ("JFC") as set forth in Section 6.1 below. Thereafter, as the need arises, the Management Committee may form a JDC as set forth in Section 4.4a below and a JCC as set forth in Section 5.7 below.
2.3	Review of Status. From time to time, the Parties shall review the committee structure and composition set forth in this Agreement with a view towards simplifying the committee system where feasible.

ARTICLE III - RESEARCH AND DEVELOPMENT UP TO PHASE I

3.1     Creation of Joint Research Committee. The Parties shall form a JRC consisting of three (3) representatives of each Party. Each Party shall notify the other Party within thirty (30) days after the Effective Date of its initial appointees to the JRC. Each Party shall be free to change any or all of its representatives effective immediately

- 5 -

upon written notice to the other Party. Upon three (3) months prior written notice to the other Party, either Party can terminate the Joint Research Committee and any prospective duties of the Joint Research Committee. Such termination shall not terminate any Joint Research Plan then in effect.

3.2     Meetings. The JRC shall meet periodically as the Parties may agree. In addition, if the JRC has not met for a period of more than six (6) months, then either Party may call a meeting of the JRC on thirty (30) days' prior written notice to the other Party. The sites of the meetings shall alternate between the principal research sites of the Parties unless otherwise agreed. The Party hosting the meeting shall designate the chairperson for that meeting, and the Party visiting the other shall designate the secretary for that meeting. By mutual agreement of the Parties, the JRC may meet by video-conference or use other means of conducting joint meetings.

3.3     Decision-making. All decisions and recommendations of the JRC shall require consensus of the representatives of the Committee to be effective. If consensus cannot be reached, GENENTECH shall have the final decision-making authority with respect to whether or not to conduct research efforts to be performed by GENENTECH, and ROCHE shall have the final decision-making authority with respect to whether or not to conduct research efforts to be performed by ROCHE.

3.4     Duties of the JRC. The Parties will disclose, to the extent each so unilaterally determines, to each other in confidence through the JRC their research efforts in oncology, immunology and protein therapeutics for the purpose of identifying projects for potential collaboration. The JRC shall direct all research efforts pursuant to this Agreement where the Parties have agreed to a Joint Collaboration. The JRC shall establish a Joint Research Plan for each Joint Collaboration. It shall be responsible for making any other decisions it is required to make pursuant to this Agreement and making recommendations to the Parties regarding other decisions necessary or appropriate to implement research efforts under a Joint Research Plan.

3.5     Joint Research Plan. The purpose of a Joint Research Plan is to identify and select a Drug Candidate for pre-clinical and clinical development. A Joint Research Plan should attempt to avoid unnecessary duplication by the Parties, maximize utilization of the resources of the Parties, and appropriately allocate responsibilities and contributions of the Parties. The Parties shall share equally the total costs incurred in implementing the responsibilities and obligations under a Joint Research Plan provided that such costs have been mutually agreed to in advance. The JRC and JFC shall jointly prepare the budget for the Joint Research Plan. Consistent with the above principles, a Joint Research Plan should include --

            (a)    identification of the prior efforts of the Parties related to the subject of the particular Joint Collaboration;

            (b)    identification of specific tasks for each of the Parties;

            (c)    identification of resource requirements of the Joint Research Plan and allocation of those resources between the Parties; and

            (d)    timelines for each stage of the process of identifying a Drug Candidate.

From time to time, the JRC may agree to update and amend a Joint Research Plan by changing its scope or the responsibilities of the Parties and in such case such amendment shall be effective only if committed to writing and signed by both Parties.

3.6     Exclusivity. If a Target is selected for research by the JRC, then during the term of the Joint Research Plan neither Party shall conduct research activities utilizing such Target other than those activities set forth in the Joint Research Plan. If a Party terminates its research efforts under a Joint Research Plan pursuant to Section 3.8, then that Party shall not conduct research on that Target for two (2) years after such termination. Notwithstanding the foregoing, if a Party terminates its research efforts under a Joint Research Plan pursuant to Section 3.8, the previous sentence shall not restrict either Party from licensing from a third party any molecule falling within the limitations set forth therein, provided that such molecule is the subject of human clinical trials at the time of licensing.

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3.7     Outside Collaborations. If a Party wants to enter into an agreement with a third party concerning a Molecule, a Drug Candidate or a Product, then such Party shall consult with the other Party to see if the other Party has any reasonable objection to the agreement. If the other Party has a reasonable objection to the agreement, no such agreement shall be concluded until the objections are resolved. Neither Party, without consulting with and obtaining the written consent of the other Party, shall enter into an agreement with a third party concerning a Molecule, a Drug Candidate or a Product which results in any additional royalty required to be paid by the other Party with respect to such Molecule, Drug Candidate or Product or which creates a material encumbrance on the rights of the other Party which are granted in this Agreement with respect to such Molecule, Drug Candidate or a Product. Nothing herein shall be construed to prevent a Party from providing to any third p arty in any manner it chooses, any materials or reagents that result from its own efforts and were not received from the other Party.

3.8     Termination of Research Efforts.

      (a)    If one Party wishes to cease research efforts with respect to a Target, then it may do so. Such Party shall either (i) share equally all of the mutually agreed to costs in implementing the responsibilities and obligations of the Joint Research Plan for such Target, in which case the Joint Research Plan shall remain in effect, and retain a right to receive a royalty of one percent (1%) of worldwide Net Sales of products derived from Molecules identified under such Joint Research Plan or (ii) discontinue sharing costs in implementing the responsibilities and obligations under the Joint Research Plan for such Target, in which case the Joint Research Plan shall no longer remain in effect, and forfeit rights to receive remuneration under this Agreement.

      (b)    If a Party elects to proceed under Section 3.8(a)(i) above, then the research efforts that would have been performed by the Party that ceases to perform such research efforts may be performed by the Party actively fulfilling its obligations under the Joint Research Plan or by another party at the active Party's direction, provided that the total costs for the Joint Research Plan shall remain the same as mutually agreed to as set forth in Sections 3.5 and 2.1. In addition, the active Party shall have the sole right, but not the obligation, to conduct, either itself or together with any third party, the development and commercialization of the Molecules that were identified under such Joint Research Plan (and products derived therefrom) in all Territories and shall bear all prospective costs and expenses and all profits and losses associated with such development and commercialization, subject to payment of the royalty set forth in Section 3.8( a)(i) above. The obligation to pay such royalties (on a product-by-product and country-by-country basis) shall terminate fifteen (15) years after the first commercial sale of such product in such country.

      (c)    If a Party elects to proceed under Section 3.8(a)(ii) above, then the other Party shall have the sole right, but not the obligation, to conduct, either itself or together with any third party, the research, development and commercialization of the Molecules that were identified under such Joint Research Plan (and products derived therefrom) in all Territories and shall bear all prospective costs and expenses and all profits and losses associated with such research, development and commercialization.

      (d)    For clarity, if a Party elects to cease research efforts with respect to a Target under this Section 3.8, the following provisions shall not apply to such Target and Molecules identified under such Joint Research Plan: Sections 3.9, 6.1 through 6.5 and Articles IV, V, VII and IX.

3.9     Decision Point. Prior to the dosing of the first patient in a Phase I Clinical Trial, the Parties shall meet to discuss in good faith whether a Molecule should be designated a Drug Candidate and how such Drug Candidate shall be developed ("Decision Point"). The Parties agree that unless determined otherwise, each Drug Candidate shall be subject to Joint Development where both Genentech and Roche share equally in the development efforts and Development Costs. In lieu of Joint Development, the Parties may agree to: (1) Genentech Development, where GENENTECH is fully responsible for all development efforts and Development Costs, subject to ROCHE opt-in; or (2) Roche Development, where ROCHE is fully responsible for all development efforts and Development Costs, subject to GENENTECH opt-in.

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ARTICLE IVA - JOINT DEVELOPMENT

4.1a    Decision for Joint Development. If the Parties agree to jointly develop a Drug Candidate, then the provisions of this Article IVA shall apply.

4.2a    Joint Development. Subject to Article 4.3a below, the Parties will undertake using commercially reasonable efforts to develop a Drug Candidate, including performing preclinical and clinical research necessary to seek appropriate regulatory marketing approval or registration of a Product based on the Drug Candidate. The Parties shall share equally in the worldwide Development Costs, including the development of a manufacturing process for the Drug Candidate.

4.3a    Opt-out Option.

      (a)    At any time until the approval of the first Approval Application/ Registration in a Major Country, each Party shall have the option ("Opt-out Option") to decline to participate in future development and commercialization efforts and Operating Profit and Loss sharing for a particular Drug Candidate. To exercise its Opt-out Option, the exercising Party must provide written notice of such to the other Party at least six (6) months in advance of such exercise if a Phase I Clinical Trial, Phase II Clinical Trial or Phase III Clinical Trial is then underway or otherwise provide written notice of such to the other Party at least one (1) month in advance of such exercise. The Opt-out Party shall be responsible for its portion of Development Costs through the end of the month in which the Opt-out Option becomes effective. If one Party exercises its Opt-out Option, then the other Party shall have the sole right, but not the obligation, to conduct, ei ther itself or together with any third party, the development and commercialization of the Drug Candidate and all Products resulting therefrom in the entire Territory and shall bear all prospective costs and expenses and all profits and losses associated with such development and commercialization except that with respect to any development effort such as a clinical study which has been agreed to by the JDC prior to the exercise of a Party's Opt-out Option and for which a binding contractual commitment has been entered into with a third Party, the Parties shall share such costs in accordance with Section 4.2a above. Upon a Party's exercise of its Opt-out Option with respect to a Drug Candidate, the Joint Development Plan for that Drug Candidate shall cease to be in effect.

      (b)    If both Parties exercise their respective Opt-out Option for a particular Drug Candidate and neither Party desires to pursue the development or commercialization of such Drug Candidate and Products resulting therefrom, then the Parties shall cooperate in seeking one or more suitable third parties to develop and commercialize such Drug Candidate and Products on terms and conditions mutually agreeable to both Parties and under which both Parties share the economic benefits of such an arrangement in the same proportion as they contributed to the worldwide Development Costs. Thus, if both Parties simultaneously exercise their Opt-out Option for a particular Drug Candidate, then the Parties would share equally the economic benefits derived from such an arrangement.

      (c)    If a Party exercises its Opt-out Option for a particular Drug Candidate and the other Party does not exercise its Opt-out Option for that particular Drug Candidate, then the Party exercising its Opt-out Option shall not develop or have developed (i) the Drug Candidate during the period that such Drug Candidate is actively being developed or commercialized by the other Party, (ii) any Molecule that was the subject of such Joint Collaboration during the period that such Drug Candidate is actively being developed or commercialized by the other Party, (iii) any molecule that is derived from a Molecule of such Joint Collaboration during the period that such Drug Candidate is actively being developed or commercialized by the other Party, or (iv) any molecule whose primary mechanism of action is directed at the Target that was the subject of the Joint Collaboration for a period of one (1) year following the exercise of that Opt-out Option. Notwithst anding the above, if a Party exercises its Opt-out Option for a particular Drug Candidate, then either Party may license from a third party any molecule with the characteristics set forth in clause (iv) above (and develop such molecule), provided that such molecule is the subject of human clinical trials at the time of licensing. For clarity, the restrictions under this Section 4.3a(c) shall terminate upon termination of the Agreement in its entirety.

4.4a    Creation of Joint Development Committee. Upon agreement to jointly develop Drug Candidate, unless either Party exercises its Opt-out Option, the Management Committee shall create a JDC for that Joint Collaboration which

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shall consist of three (3) representatives of each Party. Each Party promptly shall notify the other Party of its initial appointees to that JDC. Each Party shall be free to change any or all of its representatives effective upon written notice to the other Party.

4.5a    Meetings. The JDC shall meet regularly as it shall determine, but at least three (3) times per year, to discuss development of the Drug Candidate. The sites of the meetings shall alternate between the principal offices of the Parties unless otherwise agreed. The Party hosting the meeting shall designate the chairperson for that meeting and the Party visiting the other shall designate the secretary for that meeting. By mutual agreement of the Parties, meetings of the JDC may be held by video-conference or by other means of conducting joint meetings.

4.6a    Decision-making. All decisions of a JDC shall be by consensus of the Committee representatives; provided, however, that in cases where such consensus cannot be reached, the matter will be referred to the head of the Development organization at ROCHE and the head of the Development organization at GENENTECH for decision. Notwithstanding the foregoing, under certain circumstances set forth in Section 5.2, one Party shall have the tie-breaking decisional authority on the JDC as set forth therein.

4.7a    Duties of a Joint Development Committee. A JDC shall be responsible for directing and coordinating all development efforts relating to Drug Candidate and Product, including regulatory filings, with respect to a specific Joint Collaboration. A JDC shall be responsible for making any other decisions it is required to make pursuant to this Agreement and making recommendations to the Parties regarding other decisions necessary or appropriate to implement development efforts for a specific Drug Candidate and resulting Products. If a Party desires to pursue an indication for a Drug Candidate or Product in addition to that which is decided by the JDC, then the JDC shall refer this matter to the Management Committee to determine conditions under which a Party may pursue such indication.

4.8a    Joint Development Plan. A JDC shall create a Joint Development Plan within two (2) months after the Committee's creation. The purpose of the Joint Development Plan is to provide for the development of a Product for which regulatory marketing approval will be sought. The Joint Development Plan should avoid unnecessary duplication by the Parties in any activity and have a goal of an appropriate allocation of responsibilities in light of the specific form of Joint Collaboration involved. Consistent with the above principles, the Joint Development Plan should include --

            (a)    identification of specific tasks for each of the Parties;

            (b)    identification of resource requirements of the Joint Development Plan and allocation of those resources between the Parties, including, at a minimum, five (5) year financial budgets as detailed in the Financial Appendix; and

            (c)    timelines for each stage of preclinical and clinical investigation and other development activities of the Product.

From time to time, a JDC may agree upon further investigations or other development efforts to be undertaken by the Parties pursuant to this Agreement, including the scope and procedures for such investigations and the responsibilities of each Party with respect to such investigations, and that JDC shall update and amend the Joint Development Plan involved in writing as necessary.

ARTICLE IVB -- GENENTECH DEVELOPMENT

4.1b    Decision for Genentech Development. If the Parties agree that GENENTECH shall develop a Drug Candidate, then the provisions of this Article IVB shall apply.

4.2b    Genentech Development. Subject to Article 4.3b below, GENENTECH will use commercially reasonable efforts to develop a Drug Candidate which has been approved as such by both Parties, including performing pre-clinical and clinical research necessary to seek appropriate regulatory marketing approval or registration of a

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Product based on the Drug Candidate. GENENTECH shall bear financial responsibility for worldwide Development Costs, including the development of a manufacturing process. GENENTECH shall provide ROCHE with reports outlining the results of each completed material pre-clinical and clinical study, and an analysis of such results. These reports shall be forwarded to ROCHE within thirty (30) days after the relevant study is completed and analyzed.

4.3b    Opt-in Option.

      (a)    Within sixty (60) days after each of the successful completion of the first Phase II Clinical Trial and successful completion of the first Phase III Clinical Trial for a particular Drug Candidate, GENENTECH shall notify ROCHE of such completion. In connection with such notification, GENENTECH shall provide ROCHE with all relevant information regarding the Drug Candidate, including the results of pre-clinical and clinical studies concluded to that date, third party rights (patent rights and royalty obligations) of which Genentech is aware and manufacturing process and cost information to the extent not previous provided to ROCHE and the amount of Development Costs for that Drug Candidate incurred by GENENTECH between the Decision Point and that date.

      (b)    At any time until ninety (90) days after receipt by ROCHE of all the information set forth in Section 4.3b(a) above for a given Drug Candidate that has just successfully completed the first Phase II Clinical Trial, ROCHE shall have the option ("Roche Opt-in Option 1") to elect to participate in future development and commercialization efforts and Operating Profit and Loss sharing for the given Drug Candidate. To exercise Roche Opt-in Option 1, ROCHE must provide written notice to GENENTECH within the ninety (90) day period after receipt of the information set forth in Section 4.3b(a) above. If ROCHE exercises Roche Opt-in Option 1, then ROCHE and GENENTECH shall share equally in development efforts and shall share equally Development Costs as set forth in Section 4.2a above beginning on the first day of the month in which Roche Opt-in Option 1 becomes effective. In consideration for exercising Roche Opt-in Option 1, ROCHE shall reimburse to GENENTECH (a) sixty-two and one-half percent (62.5%) of the unreimbursed Development Costs incurred by GENENTECH between the Decision Point and the first day of the month in which Roche Opt-in Option 1 becomes effective and (b) interest on fifty percent (50%) of all such unreimbursed Development Costs incurred by GENENTECH, calculated at LIBOR plus two percent (2%), compounded on an annual basis, through the date of the exercise of Roche Opt-in Option 1, collectively payable within thirty (30) days after ROCHE receives an accounting from GENENTECH for such Development Costs.

      (c)     At any time until ninety (90) days after receipt by ROCHE of all the information set forth in Section 4.3b(a) above for a given Drug Candidate that has just successfully completed the first Phase III Clinical Trial, ROCHE shall have the option ("Roche Opt-in Option 2") to elect to participate in future development and commercialization efforts and Operating Profit and Loss sharing for the given Drug Candidate. To exercise Roche Opt-in Option 2, ROCHE must provide written notice to GENENTECH within the ninety (90) day period after receipt of the information set forth in Section 4.3b(a) above. If ROCHE exercises Roche Opt-in Option 2, then ROCHE and GENENTECH shall share equally in development efforts and Development Costs as set forth in Section IVA above beginning on the first day of the month in which ROCHE exercises Roche Opt-in Option 2. In consideration for exercising Roche Opt-in Option 2, ROCHE shall reimburse to GENENTECH (a) sevent y-five percent (75%) of the unreimbursed Development Costs incurred by GENENTECH between the Decision Point and the first day of the month in which ROCHE exercises Roche Opt-in Option 2, and (b) interest on fifty percent (50%) of all such unreimbursed Development Costs incurred by GENENTECH, calculated at LIBOR plus two percent (2%), compounded on an annual basis, through the date of exercise of Roche Opt-in Option 2, collectively payable within thirty (30) days after ROCHE receives an accounting from GENENTECH for such Development Costs.

4.4b    Creation of Joint Development Committee. As soon as possible after ROCHE exercises Roche Opt-in Option 1 or Roche Opt-in Option 2, the Parties shall create a JDC as provided for in Section 4.4a. The JDC shall meet as provided for in Section 4.5a. Decisions shall be made as provided for in Section 4.6a. The duties of the JDC shall be as provided for in Section 4.7a, using a Joint Development Plan as provided for under Section 4.8a. For all activities contemplated under Article IVB involving the JDC, the activities described in Article IVA shall be modified to reflect the state of development at the time the Opt-in was exercised by ROCHE.

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ARTICLE IVC - ROCHE DEVELOPMENT

4.1c    Decision for Roche Development. If the Parties agree that ROCHE shall develop a Drug Candidate, then the provisions of this Article IVC shall apply.

4.2c    Roche Development. Subject to Article 4.3c below, ROCHE will use commercially reasonable efforts to develop a Drug Candidate which has been approved as such by both Parties, including performing preclinical and clinical research necessary to seek appropriate regulatory marketing approval or registration of a Product based on the Drug Candidate. ROCHE shall bear financial responsibility for worldwide Development Costs, including the development of a manufacturing process. ROCHE shall provide GENENTECH with reports outlining the results of each completed material pre-clinical and clinical study, and an analysis of such results. These reports shall be forwarded to GENENTECH within thirty (30) days after the relevant study is completed and analyzed.

4.3c    Opt-in Option.

      (a)    Within sixty (60) days after each of the successful completion of the first Phase II Clinical Trial and the successful completion of the first Phase III Clinical Trial for a particular Drug Candidate, ROCHE shall notify GENENTECH of such completion. In connection with such notification, ROCHE shall provide GENENTECH with all relevant information regarding the Drug Candidate, including the results of pre-clinical and clinical studies concluded to that date third party rights (patent rights and royalty obligations) of which ROCHE is aware and manufacturing process and cost information to the extent not previously provided to GENENTECH and the amount of Development Costs for that Drug Candidate incurred by ROCHE between the Decision Point and that date.

      (b)    At any time until ninety (90) days after receipt by GENENTECH of all the information set forth in Section 4.3c(a) above for a given Drug Candidate that has just successfully completed the first Phase II Clinical Trial, GENENTECH shall have the option ("Genentech Opt-in Option 1") to elect to participate in future development and commercialization efforts and Operating Profit and Loss sharing for the given Drug Candidate. To exercise Genentech Opt-in Option 1, GENENTECH must provide written notice to ROCHE within the ninety (90) day period after receipt of the information set forth in Section 4.3c(a) above. If GENENTECH exercises Genentech Opt-in Option 1, then GENENTECH and ROCHE shall share equally in development efforts and shall share equally in the Development Costs as set forth in Section 4.2a above beginning on the first day of the month in which Genentech Opt-in Option 1 becomes effective. In consideration for exercising Opt-in Optio n 1, GENENTECH shall reimburse to ROCHE (a) sixty-two and one-half percent (62.5%) of the unreimbursed Development Costs incurred by ROCHE between the Decision Point and the first day of the month in which Genentech Opt-in Option 1 becomes effective and (b) interest on fifty percent (50%) of all such unreimbursed Development Costs incurred by ROCHE, calculated at LIBOR plus two percent (2%), compounded on an annual basis, through the date of the exercise of Genentech Opt-in Option 1, collectively payable within thirty (30) days after GENENTECH receives an accounting from ROCHE for such Development Costs.

      (c)    At any time until ninety (90) days after receipt by GENENTECH of all the information set forth in Section 4.3c(a) above for a given Drug Candidate that has just successfully completed the first Phase III Clinical Trial, GENENTECH shall have the option ("Genentech Opt-in Option 2") to elect to participate in future development and commercialization efforts and Operating Profit and Loss sharing for the given Drug Candidate. To exercise Genentech Opt-in Option 2, GENENTECH must provide written notice to ROCHE within the ninety (90) day period after receipt of the information set forth in Section 3.3b(a) above. If GENENTECH exercises Genentech Opt-in Option 2, then GENENTECH and ROCHE shall share equally in development efforts and Development Costs as set forth in Section IVA above beginning on the first day of the month in which GENENTECH exercises Genentech Opt-in Option 2. In consideration for exercising Genentech Opt-in Option 2, GENENTECH shall reimburse to ROCHE (a) seventy-five percent (75%) of the unreimbursed Development Costs incurred by ROCHE between the Decision Point and the first day of the month in which GENENTECH exercises Opt-in Option 2, and (b) interest on fifty percent (50%) of all such unreimbursed Development Costs incurred by ROCHE, calculated at LIBOR plus two percent (2%), compounded on an annual basis, through the date of exercise of Genentech Opt-in Option 2, collectively payable within thirty (30) days after GENENTECH receives an accounting from ROCHE for such Development Costs.

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4.4c    Creation of Joint Development Committee. As soon as possible after GENENTECH exercises Genentech Opt-in Option 1 or Genentech Opt-in Option 2, the Management Committee shall create a JDC as provided for in Section 4.4a. The JDC shall meet as provided for in Section 4.5a. Decisions shall be made as provided for in Section 4.6a. The duties of the JDC shall be as provided for in Section 4.7a, using a Joint Development Plan as provided for under Section 4.8a. For all activities contemplated under Article IVC involving the JDC, the activities describe in Article IVA shall be modified to reflect the state of development at the time the Opt-in was exercised by GENENTECH.

ARTICLE V - MARKETING, PROMOTION, AND SALES

5.1     Marketing and Sales Scenarios. Five possible marketing, promotion and sales scenarios can arise depending upon whether development is made pursuant to Article IVA or Article IVB or Article IVC, and whether an Opt-in Option has been exercised in the case of Article IVB and Article IVC. Scenario 1 is where development proceeded under Article IVA (and neither Party has exercised its Opt-out Option). Scenario 2 is where development proceeded under Article IVB and ROCHE has not opted in. Scenario 3 is where development proceeded under Article IVB and ROCHE has opted in. Scenario 4 is where development proceeded under Article IVC and GENENTECH has not opted in. Scenario 5 is where development proceeded under Article IVC and GENENTECH has opted in. In all scenarios, the Party that markets the Product in a given country is fully responsible for all marketing and sales activity in such country, except that if the Parties have co-promotion rights in the US, their respective res ponsibilities shall be as set forth in Appendix B (the Party booking sales in the US is referred to in such Appendix as the "Lead Party").

5.2     Scenario 1. Under Scenario 1, GENENTECH has the first right to book sales in the US for a particular Product, to have the tie-breaking decisional authority on the JDC and JCC with respect to developing and commercializing that Product in the US, and to share Operating Profits and Losses in the US in the ratio of 48:52 (GENENTECH:ROCHE) for the first Product and 49:51 (GENENTECH:ROCHE) for each Product thereafter. In order to exercise this right, Genentech shall provide written notice to Roche of such exercise at any time prior to thirty (30) days after completion of the first Phase II Clinical Trial utilizing that Product. If GENENTECH does not exercise this right, then ROCHE shall have the next right to book sales in the US for such Product, to have the tie-breaking decisional authority on the JDC and JCC with respect to developing and commercializing that Product in the US, and share Operating Profits and Losses in the US in the ratio of 48:52 (ROCHE:GENENTECH) for th e first Product and 49:51 (ROCHE:GENENTECH) for each Product thereafter. In order to exercise such right, ROCHE shall provide written notice to GENENTECH of such exercise within sixty (60) days after completion of the first Phase II Clinical Trial utilizing that Product. If neither Party wants to exercise its right set forth under this Section 5.2 to book sales at the applicable ratio and to have certain tie-breaking decisional authority, then the Parties shall use a random selection process to determine which Party will book sales in the US. In that case, the Parties shall make decisions by consensus on the JDC and JCC with respect to developing and commercializing that Product in the US and shall share Operating Profits and Losses in the US in the ratio of 50:50. Thereafter, for the next such Product for which neither Party exercises its right hereunder with respect to booking of US sales and decisional authority, the Party which did not book sales for the preceding similarly situated Product shall boo k US sales. For each such similarly situated Product thereafter, the Parties shall alternate booking of US sales. At the request of a Party, the Parties shall discuss and review whether one Party has disproportionately benefited from the selection process described in the previous four sentences and if so, the Parties shall consider in good faith appropriate adjustments so that the Parties are treated equitably. In the US, the Parties co-promote all Products. In the ROW, ROCHE markets, sells, promotes and books sales for all Products. The Parties shall share Operating Profits and Losses in the ROW in the ratio of 50:50.

5.3     Scenario 2. Under Scenario 2, GENENTECH markets, sells, promotes and books sales for Products in the US and ROW.

5.4     Scenario 3. Under Scenario 3, in the US, GENENTECH books sales and the Parties co-promote all Products. In the ROW, ROCHE markets, sells, promotes and books sales for all Products.

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5.5     Scenario 4. Under Scenario 4, ROCHE markets, sells, promotes and books sales for Products in the US and ROW.

5.6     Scenario 5. Under Scenario 5, in the US, ROCHE books sales and the Parties co-promote all Products. In the ROW, ROCHE markets, sells, promotes and books sales for all Products.

5.7     Joint Commercialization Committee. (a) Under Scenarios 1, 3 and 5 above, a JCC shall be established by the Management Committee for the purpose of overseeing and managing the worldwide commercialization of a Product. The JCC's responsibilities shall include: (i) developing appropriate global marketing plans for the Product, including appropriate budgets associated with such plans; (ii) developing global positioning and marketing strategies for a Product; (iii) reviewing and approving Product trade dress; (iv) approving the pricing of a Product in all countries; and (v) developing strategies with respect to, and planning and coordinating, external communications by the Parties with respect to commercialization of a Product.

      (b)    The JCC shall have an equal number of members appointed by each Party. The JCC shall initially be comprised of three (3) members from each Party. Each Party shall notify the other Party of any change in the identities of its appointed members prior to making any such change.

      (c)    In general, all decisions of the JCC shall be made by consensus of the Committee representatives; provided, however, that in cases where such consensus cannot be reached, the matter will be referred to the head of the Commercial organization at ROCHE and the head of the Commercial organization at GENENTECH for decision (or their respective designees). Notwithstanding the foregoing, under Scenario 1, under certain circumstances set forth in Section 5.2, one Party shall have the tie-breaking decisional authority on the JCC as set forth therein.

ARTICLE VI - PROFIT AND LOSS SHARING; ROYALTIES

6.1     Joint Finance Committee. Within sixty (60) days after the Effective Date, the Parties shall form a JFC comprised of two (2) representatives from ROCHE and two (2) representatives from GENENTECH. The JFC shall meet on an as needed basis to review and discuss financial activities and issues relating to this Agreement.

6.2     Profit and Loss Sharing. Under Scenario 1 (except if a Party has exercised its Opt-out Option or the Parties have agreed otherwise), the Parties agree to share all Operating Profits and Losses in the manner set forth in Section 5.2 above. Under Scenario 3 and Scenario 5, the Parties agree to share all worldwide Operating Profits and Losses on a 50:50 basis. The definitions principles and mechanisms for the sharing of Operating Profits and Losses are set forth in the Financial Appendix attached hereto as Appendix A and incorporated by reference. The term of such sharing of Operating Profits and Losses for a particular Product shall continue so long as that Product is sold anywhere in the world. Under Scenario 1, if a Party has exercised its Opt-out Option, then it shall be entitled to royalties pursuant to Section 6.4.

6.3     Royalties. Under Scenario 2 and Scenario 4, the Party that markets the Product shall pay to the other Party a royalty on worldwide Net Sales of one percent (1%) on such Product.

6.4     Royalties after Exercise of Opt-out Option. If a Party has exercised its Opt-out Option and the other Party has not exercised its Opt-out Option for a particular Drug Candidate or Product resulting therefrom, then the Party that

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markets such resulting Product shall pay to the Party that exercised its Opt-out Option a royalty on worldwide Net Sales of such Product as follows:

If Opt-out Occurs	Royalty
Before administration of Drug Candidate to a human	1%
From administration of Drug Candidate to a human until initiation of first Phase III Clinical Trial	3%
From initiation of first Phase III Clinical Trial through first Approval Application/Registration	5%

6.5     Term of Royalties. On a Product-by Product and country-by-country basis, the obligation to pay royalties under Sections 6.3 and 6.4 above with respect to a Product shall terminate fifteen (15) years after the first commercial sale of such Product in such country.

6.6     Payment of Third Party Royalties. For clarity, without limiting the foregoing, the Party that owes royalties to the other Party under Section 3.8(a)(i), 6.3 or 6.4 shall also be financially responsible for any and all applicable third party royalties or license fees for the applicable Product for which it has sole marketing rights.

6.7     Restrictions on Transfer of Funds.

      (a)    If a Party ships a Product into a country for sale in that country and, at the time of shipment, such country has legal restrictions which prevent the prompt remittance of part or all of the royalty on Net Sales of the Product in that country, such Party shall be obligated to make the royalty payments in immediately available funds to such account as the other Party shall designate.

      (b)    If a Party ships a Product into a country for sale in that country and such country subsequently imposes legal restrictions which prevents the prompt remittance of part or all of the royalty on Net Sales of that shipment of the Product in that country, such Party shall be obligated to --

            (i)    pay such portion of the royalty payments as permitted by the law of the country in immediately available funds to such account as the other Party shall designate, and

            (ii)    pay the remainder of such royalty payments to such account as the other Party shall designate in a bank in such country.

In event of (ii) above, the Parties shall discuss in good faith the best means of utilizing the funds on deposit in such country. Shipments of Product into such country after the imposition of legal restrictions which prevents the prompt remittance of part or all of the royalty on Net Sales shall be subject to subsection (a) of this Section 6.7.

6.8     Records. A Party making royalty payments agrees to keep for at least three (3) years, records of all sales of Products in each country in sufficient detail to permit the other Party to confirm the accuracy of the calculations with respect to payment of royalties. Once a year, at the request and the expense of the Party requesting the audit and upon at least ten (10) days' prior written notice, the receiving Party will elect whether to have the other Party's officially appointed world-wide auditor or another internationally-recognized independent certified public accountant, whose appointment will not be unreasonably withheld by the other Party, examine the previously unaudited records of the other Party in a manner sufficient to report to the receiving Party on the accuracy of the paying Party's royalty and sharing of Operating Profit and Losses calculations. Such audit shall occur at the time

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the paying Party normally conducts audits of this type, and shall be limited to results in the twelve (12) calendar quarters prior to audit notification. Both parties reserve the right to redact confidential information not relevant to making such verification from such records prior to examination by such accountant. Written results of any such examination shall be made available to both Parties. If such examination reveals an underpayment of royalties, Operating Profits and Losses, or Development Costs for the time period being examined by five percent (5%) or more, the paying Party shall pay all costs of such examination. If such examination concludes that additional royalties, Operating Profits and Losses, or Development Costs are owed, then the additional amounts shall be paid within thirty (30) days of the date such accountant's written report is available. If such examination concludes that there has been an overpayment of royalties, Operating Profits and Losses, or Development Costs by a Party, then the excess shall be credited against the next payment owed by that Party. This Section 6.8 shall survive any termination of this Agreement for a period of six (6) years.

ARTICLE VII - PRODUCTION AND SUPPLY

7.1     Party Responsibilities. For Joint Development under Article IVA, provided that neither Party has exercised its Opt-out Option, both Parties shall determine responsibility for the development of a manufacturing process and facilities for all Drug Candidates and Products and specify a Responsible Party. The Responsible Party shall evaluate both internal and third party manufacturing to achieve maximum value (including quality and cost) for supplying Drug Candidates and Products. For GENENTECH Development under Article IVB, GENENTECH shall be the Responsible Party and solely responsible for the development of a manufacturing process and facilities for all Drug Candidates and Products and for producing and supplying to both Parties (i) all quantities of Drug Candidates needed by a Party to conduct research and (ii) Clinical Requirements and Commercial Requirements. For ROCHE Development under Article IVC, ROCHE shall be the Responsible Party and solely responsible for the development of a manufacturing process and facilities for all Drug Candidates and Products and for producing and supplying to both Parties (i) all quantities of Drug Candidates needed by a Party to conduct research and (ii) Clinical Requirements and Commercial Requirements. The Parties shall, at least three (3) months before the initiation of Phase III Clinical Trials for a given Product, negotiate in good faith and conclude a production and supply agreement for Clinical Requirements of such Product, which requirements shall be supplied at the cost set forth in Section 7.2 below.

7.2     Supply of Clinical Requirements. Unless the other Party exercises its Opt-out Option for a Drug Candidate, the Responsible Party shall use commercially reasonable efforts to supply the other Party with the other Party's Clinical Requirements for that Drug Candidate pursuant to a mutually agreeable production schedule based on the other Party's reasonable forecast of its Clinical Requirements. The other Party shall reimburse the Responsible Party for the Responsible Party's Fully Burdened Manufacturing Cost for such Clinical Requirements with payment for shipments of such Clinical Requirements to be made within ninety (90) days after the receipt and acceptance of each shipment of Clinical Requirements. The Responsible Party shall not be obligated to supply Clinical Requirements to the other Party other than in accordance with the quantities mutually agreed to and at the approximate dates of delivery mutually agreed to. All transportation and packing and similar costs sh all be borne by the other Party. Title and risk of loss shall pass to the other Party upon delivery by the Responsible Party to the other Party. The Parties shall agree on specifications for the Clinical Requirements, and the Clinical Requirements delivered by the Responsible Party shall meet those specifications. The Responsible Party shall not favor the supply of its own clinical requirements of a Product over the other Party's Clinical Requirements.

7.3     Supply of Commercial Requirements. Unless the other Party exercises its Opt-out Option for a Drug Candidate or Product, the Responsible Party shall supply the other Party with the other Party's Commercial Requirements for that Product and the other Party agrees to purchase its Commercial Requirements for that Product from the Responsible Party. The other Party shall reimburse the Responsible Party for such Commercial Requirements at one hundred and twenty percent (120%) of the Responsible Party's Fully Burdened Manufacturing Cost. The supply and purchase of Commercial Requirements shall be pursuant to a Supply Agreement with terms and conditions to be negotiated, finalized and executed prior to the filing of the first Approval Application/Registration for that Product.

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7.4     Third Party Contractor. The Responsible Party may contract the supply of Clinical Requirements or Commercial Requirements to an independent third party, provided that the other Party is provided the opportunity to produce such supply itself at a price that is the same or lower than the price proposed by such independent third party manufacturer.

7.5     Manufacturing Termination Option. Upon three (3) years' prior written notice to the other Party, the Responsible Party may cease the production of the other Party's Commercial Requirements pursuant to the provisions of this Section 7.5. If the Responsible Party provides such notice, then the other Party, at its request, shall have the Manufacturing Technology transferred to it or to a third party free of charge (except for royalties or license fees required to be paid to third parties under existing contractual obligations with respect to the Manufacturing Technology) pursuant to an agreed upon technology transfer agreement and plan, in which case the other Party will have an exclusive, royalty free, sublicenseable right to use the Manufacturing Technology solely to make, have made, use and sell that Product.

7.6     Responsible Party's Inability to Manufacture. If the Responsible Party is unable or unwilling for any reason to supply the other Party's reasonable Clinical Requirements or Commercial Requirements as required by this Agreement and such inability or unwillingness results in, or is reasonably likely to have, an adverse material impact on the other Party's ability to conduct clinical trials or to sell a Product as permitted hereunder or to otherwise exercise its rights or fulfill it obligations hereunder, then the other Party shall provide notice of such adverse material impact or the likelihood of such adverse material impact to the Responsible Party and the other Party shall have the right to manufacture the Product in addition to any other remedy that may be available to it.

7.7     Exercise of Opt-out Option. If the Responsible Party exercises its Opt-out Option, the other Party shall thereafter have the royalty-free (subject to the other Party's payment of applicable third party royalties or license fees) right and license to produce and supply all of the other Party's Clinical Requirements and Commercial Requirements for that Drug Candidate or Product for use and sale throughout all the Territories. Upon exercise by the Responsible Party of its Opt-out Option, the Responsible Party shall transfer in an expeditious manner as is reasonable all of the Manufacturing Technology for that Drug Candidate or Product to the other Party pursuant to an agreed upon technology transfer agreement and plan.

ARTICLE VIII - LICENSE GRANTS

8.1     License Grants. Subject to the rights and obligations contained herein, (i) each Party ("Licensor") grants to the other Party ("Licensee") an exclusive right and license to use the Licensor's Know-How and practice the Licensor's Patents, to sell and offer for sale Products in portion of the Territory for which this Agreement authorizes such Party to sell Products; (ii) Licensor grants to Licensee a semi-exclusive right and license to use Licensor's Know-How and practice the Licensor's Patents to use and import Drug Candidates and Products in the portion of the Territory for which this Agreement authorizes such Party to market Products; (iii) Licensor grants Licensee a semi-exclusive right and license to use the Licensor's Know-How and to practice the Licensor's Patents to make or have made Product in accordance with the provisions of Article VII.

8.2     Sublicenses. Each Party shall have the right to grant sublicenses under this Agreement or any of its provisions (i) except that neither Party shall have any right to grant a sublicense to another party to use, market or sell a Product in the US during such time as the other Party maintains a right or contingent right to co-promote that Product in the US; and (ii) a Party shall have the right to grant a sublicense to use, market or sell a Product in any country to another party at any time that the other Party has no right or contingent right to co-promote that Product in that country.

8.3     Trademarks. Unless one Party has exercised its Opt-out Option, the Parties shall discuss in good faith the selection and use of one or more trademarks to be used worldwide for each Product.

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ARTICLE IX - COMMERCIALIZATION DILIGENCE

Any exclusive license granted to a Party by the other Party in Article VIII above shall be conditioned, in each Major Country in the Territory for which the other Party has exclusive rights, on the other Party using commercially reasonable efforts to expeditiously conduct development activities with respect to the Drug Candidate and Product involved, to obtain regulatory approval to sell that Product, and to sell that Product in a manner so as to maximize that Product's revenue potential. Such efforts shall be at least as diligent as those used for its own products having an analogous commercial potential. Unless the other Party has exercised its Opt-out Option, the other Party shall inform the Party granting the exclusive license of the progress of its efforts to develop, register, market and sell such Product in those countries in that Territory for which the other Party has exclusive rights. Such progress reports shall be made annually by September 30th of each year. For each such country in the Te rritory for which the other Party has exclusive rights such progress reports shall include information on

            a)    status of, and plans for, clinical trials needed for registration of that Product;

            b)    status of, and plans for, registering that Product for sale; and

            c)    forecasted sales of that Product or the Net Sales of that Product if any are registered.

ARTICLE X - CONFIDENTIALITY AND PUBLICATIONS

10.1     Confidential Information. During the course of this Agreement, the Parties may receive from each other information belonging solely to the disclosing Party, which is proprietary and confidential and of significant commercial value to the disclosing Party. Such information as well as Know-How owned solely by a Party, so long as such Know-How is not generally ascertainable from publicly available information, shall be deemed "Information" as that term is used in the Mutual Confidentiality Agreement and the Parties agree that such Information shall be subject to the terms and provisions of the Mutual Confidentiality Agreement. All Know-How and confidential information which is derived from activities which are paid for by both Parties shall be jointly owned by both Parties and each Party shall be free to use or disclose such Know-How or confidential information in any manner it chooses.

10.2     Sharing of Data. The Parties agree that free and open communication of ideas and sharing of data and materials relating to a Joint Research Plan or a Joint Development Plan are essential to this collaboration. The Parties agree to report and update each other (including their respective Joint Committee representatives) on a regular basis regarding the progress and results of their respective activities under the Joint Research Plan or Joint Development Plan. Any such report or update shall be considered confidential information (as defined in Section 10.1) of the disclosing Party for purposes of this Agreement if such report or update satisfies the requirements of Section 10.1.

10.3     Publications. Notwithstanding Section 10.1, each Party shall be free to publish or publicly disclose the results of its research and development activities hereunder to the extent that such publication or public disclosure will not result in the disclosure of Information of the other Party. Each Party shall submit any proposed publication which may contain Information of the other Party at least thirty (30) days in advance to the other Party to allow that Party to review such planned publication. The reviewing Party shall have the authority to require deletion from any such planned publication of any Information of the reviewing Party. This Agreement shall not prohibit or restrict either Party from publishing or publicly disclosing the results of research or development conducted solely by the Party using materials and information not supplied to it by the other Party pursuant to this Agreement.

10.4     Restrictions on Transfer of Proprietary Materials. Each Party agrees, with respect to any proprietary materials, substances, reagents or the like (except Product) received from the other Party (Materials), that such materials shall be subject to the provisions of Mutual Agreement for Supply of Research Material entered into between GENENTECH and Roche Holding Ltd. as of July 7, 1991.

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ARTICLE XI - INVENTIONS AND PATENTS

11.1    Sole Inventions. Either Party may independently and separately make inventions in the course of this Agreement relating to a Molecule, Drug Candidate, or Product or to its administration, formulation or clinical use. In such event, the Party making the invention shall be the sole owner of that invention and of any patent applications and patents thereon (including inventor's certificates) and shall be solely responsible for the filing, prosecution and maintenance of all such patent applications and patents, subject to the licenses granted under this Agreement. The non-inventing Party shall have no right to practice inventions claimed in any patent resulting from a sole invention of the other Party or any Know-How owned solely by the other Party for any purpose outside of this Agreement. Each Party shall be free to use all Patents or Know-How or any other technology or information owned solely by it or owned together with the other Party for any purpose at any time without c harge, consistent with the provisions of this Agreement.

11.2    Joint Inventions. Any inventions relating to a Molecule, Drug Candidate, or Product or to its administration, formulation or clinical use and arising from the Parties' efforts under this Agreement and that are jointly made by both Parties (i.e., an invention in which one or more inventors from each Party, including individuals normally obliged to assign an invention to a Party, have made an inventive contribution as determined by United States Patent Law), and any patent applications and patents thereon, shall be jointly owned by the Parties. The filing, prosecution and maintenance of any patent applications thereon will be under the control of the Party from whom the majority of data underlying such patent application arises ("Principal Party"). The Principal Party shall have the right (but not the obligation), consistent with its obligations under this Agreement, to undertake such filings, prosecutions and maintenance at its sole expense, provided that: (a) the Principal P arty provides the other Party with a copy of any such proposed patent application one (1) month before the filing of such patent application by the Principal Party; (b) the Principal Party informs the other Party within eight (8) months from the filing of the priority application whether and in which countries it intends to file convention applications; (c) the Principal Party provides the other Party promptly with copies of all material communications received from or filed in patent office(s) with respect to such filings; and (d) the Principal Party provides the other Party a reasonable time prior to taking or failing to take any action that would affect the scope or validity of rights under any patent applications or patents (including but not limited to substantially narrowing or canceling any claim, abandoning any patent or not filing or perfecting the filing of any patent application in any country), with notice of such proposed action or inaction sufficiently in advance that the other Party has a reas onable opportunity to review and make comments. If the Principal Party breaches the foregoing obligations regarding updating and consultation, and such breach is not cured within thirty (30) days of a written notice from the other Party to the Principal Party describing such breach, or if the Principal Party does not inform the other Party that it intends to file or undertake a prosecution action with respect to a patent application within forty-five (45) days of, or fails to undertake the filing of or a prosecution action with respect to a patent application or to take an appropriate action to maintain a patent in any country within ninety (90) days of, a written notice by the other Party to the Principal Party stating that the other Party believes filing of or taking a or prosecution action with respect to such an application or taking an appropriate action to maintain a patent is appropriate, then the other Party may undertake such filing, prosecution and maintenance at its sole expense, in which case th e Principal Party shall assign all its rights to such invention to the other Party, and any patent application and subsequently issued patent thereon shall be owned solely by the other Party. If a Party has exercised its Opt-out Option, then the other Party shall have control of the filing, prosecution and maintenance of all such patent applications throughout the Territory. Each Party shall be free to practice inventions claimed in any joint patents in any manner they choose without compensation to the other Party.

11.3    Third Party Infringement.

      (a)    If GENENTECH or ROCHE becomes aware of any infringement by a third party of any Patents in any country, whether solely or jointly held, then each Party shall inform the other in writing of all available evidence and details available concerning such infringement. Before taking any action, the Parties shall consult with each other as to the best manner in which to proceed. Either Party which is the sole owner of a Patent shall have the sole right but not the obligation to bring, defend, and maintain any appropriate suit or action or to control the conduct thereof against the infringer. If a Party which is the sole owner of a Patent declines to bring, defend and maintain any appropriate suit or action or to control the conduct thereof against the infringer, then upon consent of the owner, the

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other Party may bring, defend and maintain such action on the solely owned Patent, and the sole owner of the Patent shall provide reasonable cooperation to with the other Party in such action at the other Party's expense. Whenever there is profit and loss sharing among the Parties (i.e. Scenario 1 [without an exercised Opt-out Option], Scenario 3, or Scenario 5) and the Parties have agreed to a particular patent litigation, then the Parties shall share equally all expenses regarding that patent litigation and share equally all recoveries due to any such action. If there are royalty payments (i.e. Scenario 1 [where the Opt-out Option has been exercised], Scenario 2, or Scenario 4), then the marketing Party shall pay all expenses and keep all recoveries from such action (subject to payment of such royalties to the other Party by including such recovery in the calculation of Net Sales) if the marketing Party is solely pursuing such action. If the Party bringing an action on a solely owned Patent requests the other Party to join in such suit or action, the other Party shall provide reasonable cooperation and execute all papers and perform such other acts as may be reasonably required.

      (b)    If GENENTECH and/or ROCHE are sued or threatened with suit in any country by a third party who claims that the manufacture, use or sale of a Product is an infringement of one or more claims of a patent owned or controlled by the third party, then if GENENTECH and ROCHE are sharing Operating Profits and Losses pursuant to Section 6.2, GENENTECH and ROCHE shall share equally the costs in defending such suit or threatened suit. If the settlement of a lawsuit or threatened lawsuit or other action which the Parties consent to the terms of or a judgment arising out of a lawsuit requires any payments to a third party or license from a third party in order to manufacture, use or sell Product in a country, then the Party receiving royalties for Net Sales in that country agrees to reduce the royalty specified in this Agreement such that GENENTECH and ROCHE share equally the cost of any such payments and/or license fees including royalties.

11.4    Third Party Patents. If the Responsible Party is producing Clinical Requirements or Commercial Requirements for the other Party and either Party becomes aware of any patents or other appropriate intellectual property belonging to a third party which either Party reasonably believes that, in the absence of a license thereto, the Responsible Party would infringe by virtue of the Responsible Party's manufacture of that Product, then the Responsible Party shall advise the other Party of such. The Parties shall thereafter discuss a means of resolving such potential infringement including one Party or the other (or jointly) taking a license to such patent or other intellectual property. If as a result of an agreement between the Parties, the Responsible Party acquires a license to such patent or other intellectual property, then the associated intellectual property acquisition and licensing costs shall be deemed to be part of the Other Operating Income/Expense as defined in the Fi nancial Appendix. If the Responsible Party insists that such a license is necessary but the other Party does not agree, or if the other Party is not willing to agree to terms for such a license that are acceptable to the Responsible Party and to the third party patent or intellectual property owner, then the other Party shall defend, indemnify and hold harmless the Responsible Party and the other Party from and against all third party costs, claims, suits, expenses (including reasonable attorney's fees) and damages arising out of or resulting from any infringement by the Responsible Party of such patent or intellectual property which covers the manufacture of that Drug Candidate or Product. If the other Party insists that such a license is necessary but the Responsible Party does not agree or if the Responsible Party is not willing to agree to terms for such a license that are acceptable to the other Party and to the third party patent or intellectual property owner, then the Responsible Party shall defend , indemnify and hold harmless the other Party from and against all third party costs, claims, suits, expenses (including reasonable attorneys fees) and damages arising out of or resulting from any infringement by the Responsible Party or the other Party of such patent or intellectual property which covers the manufacture of that Product. The provisions of the previous two sentences shall not be transferable to any other party or person.

ARTICLE XII - LIABILITY

12.1     No Liability. Neither Party shall be liable to the other Party for indirect, incidental or consequential damages arising out of the terms or conditions of this Agreement or to that Party's performance or lack thereof hereunder.

12.2     ROCHE Indemnification. ROCHE shall defend, indemnify and hold harmless GENENTECH from and against all costs, claims, suits, expenses (including reasonable attorneys' fees) and damages (collectively "Claims") arising out of or resulting from ROCHE's negligence or misconduct in its manufacture of Drug Candidate or

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Products or from ROCHE's marketing, sale or use of Products or Drug Candidates. The foregoing indemnification shall not extend to any Claims which arise or result from GENENTECH's negligence or willful misconduct or from any defect in GENENTECH's manufacture of Products or Drug Candidates. The foregoing indemnification shall be conditioned upon GENENTECH (i) providing written notice to ROCHE within twenty (20) days after GENENTECH has been given written notice of such Claim; (ii) permitting ROCHE the opportunity to assume full responsibility (at ROCHE's expense) for the investigation and defense of any such Claim; and (iii) not settling or compromising any such Claim without ROCHE's prior written consent.

12.3     GENENTECH Indemnification. GENENTECH shall defend, and indemnify and hold harmless ROCHE from and against all costs, claims, suits, expenses (including reasonable attorneys' fees) and damages (collectively Claims) arising out of or resulting from GENENTECH's negligence or misconduct in its manufacture of Drug Candidates or Products or from GENENTECH's marketing, sale or use of Products or Drug Candidates. The foregoing indemnification shall not extend to any Claims which arise as a result from ROCHE's negligence or willful misconduct or from any defect in ROCHE's manufacture of Products or Drug Candidates. The foregoing indemnification shall be conditioned upon ROCHE (i) providing written notice to GENENTECH within twenty (20) days after ROCHE has knowledge of such Claim; (ii) permitting GENENTECH the opportunity to assume full responsibility (at GENENTECH's expense) for the investigation and defense of any such Claim; and (iii) not settling or compromising of any such Claim without GENENTECH's prior written consent.

ARTICLE XIII - TERM AND TERMINATION

13.1     Term. Unless terminated earlier pursuant to this Article XIII, this Agreement is effective as of the Effective Date and shall remain in full force and effect for so long as the Parties collaborate on research under this Agreement or, with respect to a Drug Candidate or Product, for so long as a Drug Candidate or Product continues to be sold by a Party or a sublicensee.

Upon expiration of the term of this Agreement, each Party shall have a fully paid up license under the other Party's Patents and Know-How and any other intellectual property, except trademarks, to make, have made, use and sell that Drug Candidate and Product in that country.

13.2     Termination.

      (a)    The Parties may mutually agree in a writing signed by both Parties to terminate this Agreement with respect to any Drug Candidate or Product in any country in the Territory.

      (b)    Either Party may terminate this Agreement with respect to any Drug Candidate or Product

                  (i)    in any country in the Territory effective upon any material breach by the other Party of the terms or conditions of this Agreement with respect to such Drug Candidate or Product in such country, which breach cannot be, or is not, cured within sixty (60) days of a written notice by the non-breaching Party specifying such breach and stating its intention to terminate this Agreement, or

                  (ii)    in the entire Territory effective upon the other Party becoming insolvent or bankrupt or making an assignment for the benefit of its creditors, upon appointment of a trustee or receiver for the other Party or all or substantially all of its assets, or upon the filing of a voluntary or involuntary petition by or against the other Party under any bankruptcy or insolvency law, the reorganization or rearrangement provisions of the United States Bankruptcy Code or any similar law.

      (c)    In such event of a termination under Sections 13.2(b)(i) of this Article, the terminating Party --

                  i)    shall have all rights and licenses granted by the terminating Party to the other Party herein with respect to that Drug Candidate or Product and the supply obligations of the other Party for that Drug Candidate or Product, if any, with respect to that country shall automatically terminate as of the date of termination with respect

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to that country and the terminating Party shall thereafter have all rights to make, have made, use and sell that Product in that country;

                  ii)    the terminated Party shall promptly transfer and assign to the dossier and the registration and all associated data, information, results and documents for that Drug Candidate or Product in that country to the terminating Party;

                  iii)    the Parties shall discuss and agree on a transfer of inventory for that Drug Candidate or Product from the terminated Party to the terminating Party; and

                  iv)    for a period of three (3) years thereafter the terminated Party shall not produce or sell that Drug Candidate or Product in that country unless the other Party consents in writing.

13.3     Unilateral Termination. Either Party shall have the right to unilaterally terminate its efforts to use, market and sell Products, on a Product-by-Product basis, in any country by giving ninety (90) days' notice to the other Party. If that Party (for the purposes of this Section 13.3 only, the "Terminating Party") decides to terminate its efforts in any country, then at the other Party's election, the other Party (the "Non-terminating Party") shall be granted a sole and exclusive license to all of the Terminating Party's rights with respect to all Products in that country at the royalty rates set forth in Section 6.3 above (and all Operating Profit and Loss sharing between the parties in effect at the time (if any) shall terminate). If the Non-terminating Party is granted such a license, the Terminating Party will transfer to the Non-terminating Party free of charge (except for the Terminating Party's reasonable out-of-pocket expenses which shall be reimbursed by the No n-terminating Party) all information, data, Product registrations and dossiers and any other regulatory and other documentation that the Terminating Party has developed or acquired for that Product for that country. In the event of a unilateral termination pursuant to this Section 13.3, for a period of three (3) years after such termination the Terminating Party shall not conduct research and development on or produce or sell that Drug Candidate or Product in that country.

13.4     Effect of Termination. Termination of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of either Party prior to such termination, and shall not relieve either Party of any obligations that have accrued prior to such termination or any obligations that survive such termination. The provisions of Article VII, X, XI, XII, XIV and to the extent applicable, Section 6.6 shall survive any termination of this Agreement.

ARTICLE XIV - MISCELLANEOUS

14.1     Warranties. Each Party hereby represents and warrants that, as of the date hereof, it has the full right and authority to enter into this Agreement, and that it is not aware of any impediment that would inhibit its ability to perform its obligations under this Agreement.

14.2     Disclaimer of Certain Warranties. INFORMATION, REAGENTS AND MATERIALS TRANSFERRED FROM ONE PARTY TO ANOTHER IN THE COURSE OF THIS AGREEMENT ARE SUPPLIED AS IS WITHOUT WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY, TITLE, FREEDOM FROM INFRINGEMENT OR FITNESS FOR A PARTICULAR USE.

14.3     Entire Agreement, Amendment. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof, supersedes all prior agreements (except as provided for herein), understandings and communications, oral or written, relating to the subject matter hereof, and shall not be modified, altered or amended except by mutual written agreement of the Parties. For clarity, the Amended and Restated Agreement between Genentech, Inc. and F. Hoffman-La Roche Ltd Regarding Commercialization of Genentech's Products Outside the United States shall not apply to any Molecules, Drug Candidates or Products under this Agreement.

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14.4     Failure to Enforce. The failure by either Party at any time or for any period of time to enforce any term or provision of this Agreement shall not be construed as a waiver of such term or provision or of the right of either Party to enforce each and every such term and provision.

14.5     Force Majeure. If either Party shall be delayed, interrupted in or prevented from the performance of any obligation hereunder by reason of Force Majeure including an act of God, fire, flood, war (declared or undeclared), terrorism, public disaster, strike or labor differences, governmental enactment, rule or regulation, or any other cause beyond such Party's control, such Party shall not be liable to the other therefor and the time for performance of such obligation shall be extended for a period equal to the duration of the contingency which occasioned the delay, interruption or prevention. The Party invoking such Force Majeure rights must notify the other Party within a period of fifteen (15) days, from the first and the last day of the Force Majeure unless the Force Majeure renders such notification impossible in which case notification will be made as soon as possible. If the delay resulting from the Force Majeure exceeds six (6) months, both Parties shall consult each other to find an appropriate solution.

14.6     Arbitration.  (a)  In the event of any dispute, controversy or claim arising out of or relating to this Agreement, the Parties shall try to settle such disputes, controversies or claims amicably between themselves. If the Parties are unable to so settle any such dispute, controversy or claim, then any dispute, controversy or claim arising out of or relating to any provision of this Agreement or the interpretation, enforceability, performance, breach, termination or validity hereof, including, without limitation, this arbitration clause shall be solely and finally settled by arbitration in the manner specified in this Section.

      (b)    If the Parties fail to agree, then any controversy, dispute or claim which may arise out of or in connection with this Agreement, or the breach, termination or validity thereof, shall be settled by final and binding arbitration, pursuant to the Rules of Compilation and Arbitration of the International Chamber of Commerce (Paris) as hereinafter provided.

                  (i)    The arbitration tribunal shall consist of three (3) arbitrators. Each Party shall nominate in the request for arbitration and the answer thereto one arbitrator and the two arbitrators so named will then jointly appoint the third arbitrator as chairman of the arbitration tribunal. If one Party fails to nominate its arbitrator or if the Parties arbitrators cannot agree on the person to be named as chairman within sixty (60) days, the Court of Arbitration of the International Chamber of Commerce shall make the necessary appointments for arbitrator or chairman.

                  (ii)    The place of arbitration shall be in New York City if GENENTECH requests arbitration or San Francisco, California if ROCHE requests arbitration or such other venue as the Parties may mutually agree, and the arbitration proceedings shall be held in English. The procedural law of the place of arbitration shall apply where the Rules are silent.

                  (iii)    The award of the arbitration tribunal shall be final and judgment upon such an award may be entered in any competent court or application may be made to any competent court for acceptance of such an award and order of enforcement.

14.7     Notices.  Requests, notices and reports required or permitted under this Agreement shall be in writing and shall be sent by telefax or telecopier (with written confirmation) or express mail to the address set forth below or such other address as a Party may designate from time to time in accordance with this Section:

to ROCHE:	F. Hoffmann-La Roche Ltd
		Corporate Law Grenzacherstrasse 124 CH-4002 Basel, Switzerland
	Hoffmann-La Roche Inc.
		Corporate Secretary 340 Kinglsland Street Nutley, New Jersey 07110

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to GENENTECH:	Genentech, Inc.
		Corporate Secretary One DNA Way South San Francisco, California 94080 U.S.A.
With a copy to:	Genentech, Inc.
		Vice President of Business Development One DNA Way South San Francisco, California 94080 U.S.A.

14.8     Use of Names. Neither Party will use or refer to this Agreement in any promotional activity, or use the marks of the other Party, without express prior written permission of the other Party. Both Parties shall refrain from making any public announcement or disclosure of this Agreement and its terms without the prior written consent of the other Party except as required by law.

14.9     Successors and Assigns. Neither Party may assign this Agreement or any rights hereunder without the prior written consent of the other Party, which consent shall not be unreasonably withheld. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and assignees.

14.10     Headings. The section headings of this Agreement are for convenience only and are not a part of this Agreement.

14.11     Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

14.12     Severability. The Parties hereby expressly state that it is not their intention to violate any applicable rule, law or regulation. If any of the provisions of this Agreement are held to be void or unenforceable with regard to any particular country by a court of competent jurisdiction, then, to the extent possible, such void or unenforceable provision shall be replaced by a valid and enforceable provision which will achieve as far as possible the economic business intentions of the Parties. The provisions held to be void or unenforceable shall remain, however, in full force and effect with regard to all other countries.

14.13     Governing Law. This Agreement shall be governed by and construed for all purposes in accordance with the laws of the State of California.

14.14     Relationship. Neither Party is in any way the legal representative, agent or fiduciary of the other Party, nor authorized or empowered to assume any obligation of any kind, implied or expressed, on behalf of the other Party, without the express written consent of the other Party.

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.

GENENTECH, INC.		F. HOFFMANN-LA ROCHE LTD
By:	/s/ ARTHUR D. LEVISON	By:	/s/ BRAD BOLZON
Name:	Arthur D. Levinson	Name:	Brad Bolzon
Title:	Chief Executive Officer	Title:	Executive Vice President Pharma Partnering
		By:	/s/ STEFAN ARNOLD
		Name:	Stefan Arnold
		Title:	Deputy Director
HOFFMANN-LA ROCHE INC.
By:	/s/ DENNIS E. BURNS
Name:	Dennis E. Burns
Title:	Vice President Global Head of Business Development

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APPENDIX A

FINANCIAL PLANNING, ACCOUNTING AND REPORTING
FOR THE
ROCHE/GENENTECH COLLABORATIVE AGREEMENT

This Appendix A to the Collaborative Agreement ("Agreement") dated as of April 13, 2004, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc. (collectively referred to as "ROCHE") and Genentech, Inc. ("GENENTECH") addresses the financial planning, accounting policies and procedures to be followed in determining Operating Profits or Losses, royalties and related sharing of revenue and expenses, including Development Costs. Terms not defined in this Appendix shall have the meanings set forth in the Agreement.

This Appendix sets forth the principles for reporting actual results and budgeted plans of the combined operations, the frequency of reporting, the use of a single functional currency for reporting, and the methods of determining settlement payments between the Parties and auditing of accounts.

For purposes of this Appendix only, the consolidated accounting of operations for the collaboration shall be referred to as GenRoche Development. GenRoche Development is not a legal entity and has been defined for identification purposes only.

A.1.       Principles of Reporting

The results of operations of GenRoche Development will be presented in the following format (as to all Molecules, Drug Candidates, and Products and also on a product-by-product basis), with the categories as defined in Section A.3 below:

A.1.1(a)   Commercial Income Statement

ROCHE          GENENTECH          Total

Net Sales

less Distribution Costs

less Cost of Sales

less Marketing Costs

less Sales Costs

less Other Operating Income/Expense

= Operating Profit (Loss)

A.1.1(b)   Development Costs

             Development Costs (as to all individual Molecules, Drug Candidates, and Products and also on an aggregate basis) chargeable to GenRoche Development will be reported separate from the Operating Profit (Loss).

A.1.1(c)   Royalties

            Royalties, pursuant to Sections 3.8(a)(i), 6.3 or 6.4 of the Agreement, will be accounted for and reported on a Product-by-Product basis.

            It is the intention of the Parties that the interpretation of these definitions will be consistent with US GAAP (Generally Accepted Accounting Principles) for GENENTECH and IFRS (International Financial Reporting Standards) and FGAR (The Roche Financial Group Accounting and Reporting Manual) for ROCHE.

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A.1.2   Subcomponent Reporting

            For reporting purposes only, expenses will be identified for the budget, forecast, and quarterly actuals reporting events within this Section A.1 by the following detail sub-components within the Commercial Income Statement expense components specified under Section A.1.1(a) and A.1.1(b):

Cost of Sales - Fully Burdened Manufacturing Cost ("FBMC") and Period Costs.

Cost of Sales - Fully Burdened Manufacturing Cost ("FBMC") and Period Costs.

Marketing - Product Promotion Costs (including market research, registries, and post-launch clinical studies) and Management & Infrastructure Costs

Sales - Field Force Costs

Development - on a project/product/indication/work package basis

A.2.     Frequency of Reporting

            The fiscal year of GenRoche Development will be a calendar year. An Annual Budget for each year will be defined and agreed between the Parties on or before December 1 of the previous year. Reporting by each Party for GenRoche Development revenues, expenses and royalties will be performed as follows (with copies provided to the JFC and to the other Party):

Reporting Event	Frequency	Timing of Submission
Actuals	Quarterly	Q1-Q3: Q4:	+30 days +45 days
Development Costs (Actuals)	Monthly	Jan-Nov: Dec:	+30 days +45 days
Settlement Payments	Quarterly	+90 days
Annual Budget	Annually	October-December
Forecasts (current and following 5 quarters)	Quarterly	Within first 10 (ten) business days of the third month of quarter excluding Q4, where the Forecasting event is replaced by the Annual Budget
Long Range Plan (next 5 calendar years)	Annually	May-July *

* - ROCHE acknowledges that GENENTECH's current internal Long Range Plan timing is completed annually in December and that until such time as the two Parties are further coordinated on the timing of their efforts, GENENTECH submissions may be out-dated.

The committee appointed by the Management Committee with oversight responsibility for the particular Molecules, Drug Candidates, and Products (i.e. the JRC, JDC or JCC, as applicable) ("Committee(s)") will be responsible for the applicable portions of the Budget and Long Range Plan with regard to Products. The applicable Committee(s) will develop budgets for research, development and commercialization in coordination with the JFC for review and approval by the Management Committee.

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Unless otherwise mutually agreed by the Parties, ROCHE will be responsible for the preparation of consolidated global and ROW reporting (actuals, budgets, forecasts, and long range plans), calculation of the profit/loss sharing and determination of the consolidated Settlement Payments. In the US, the Lead Party will be responsible for the preparation of consolidated US reporting (actuals, budgets, forecasts, and long range plans and reporting such to ROCHE), calculation of the profit/loss sharing, development costs, and determination of the US-related Settlement Payments. ROCHE will provide the JFC (and GENENTECH) within five (5) working days of the submission date shown above, the Commercial Income Statement, a statement showing the global consolidated results (and forecasts) and calculations of the profit/loss sharing, development costs and royalties and resulting Settlement Payments required in a format agreed to by the Parties.

Reports of actual results compared to budget (as to all Molecules, Drug Candidates, and Products and also on a product-by-product basis) will be made, if requested, to the applicable Committee on a quarterly basis. After acceptance by the JFC as to amounts, the JFC will forward the report to the applicable Committee for its acceptance. The Parties will work together to keep actual spend within the Annual Budget. Any deviations greater than five percent (5%) above the Annual Budget will have to be accepted by the JFC. In this event, each Party will be given the time to receive internal approval from their respective decision making bodies before making any firm commitment on additional spending.

On a monthly basis, within seven (7) working days following that particular month end, each party will supply the other party with Net Sales (as to all Products and also on a product-by-product basis) in units, local currency and US dollars (by GENENTECH) or Swiss Francs (by ROCHE) by country of each month's sales according to the selling Party's sales reporting system, which shall be consistent with the definitions in Section A.3.

The JFC will meet as appropriate, at least twice a year and alternating between the locations of GENENTECH and ROCHE, to review and approve the reporting events (Actuals, Annual Budget, Forecasts and Long Range Plan) as to all Molecules, Drug Candidates, and Products and also on a product-by-product basis. The minimum scope that the JFC will cover in this work is:

- FTE rate to be charged between the parties

- inventory levels and write offs

- sales returns and allowances

- other financial matters, including each Party's methodologies for charging costs to GenRoche Development.

A.3.     Definitions

            A.3.1    "Allocable Overhead" means costs incurred by a Party or for its account which are attributable to a Party's supervisory services, occupancy costs, corporate bonus (to the extent not charged directly), and its payroll, information systems, human relations or purchasing functions and which are allocated to company departments based on space occupied or headcount or other activity-based method. Allocable Overhead shall not include any costs attributable to general corporate activities including, by way of example, executive management, investor relations, business development, legal affairs and finance.

            A.3.2    "Cost of Capital" means each Party's interest charges on the average inventory values (including consideration of any valuation differences) of the Products for commercial quantities of Bulk Product, product specific raw materials, intermediates, Finished Product and Final Product held by that Party during the year (i.e. twelve months) immediately prior to a Product launch (with the last day of such year being the date of the Product launch) ("Product Launch Year") and for the two years (i.e. the 24 month period ending on the second anniversary date of the Product Launch) immediately following a Product launch (individually and collectively known as the "Post Launch Year(s)"). The interest rate to be used to determine the charge will be the average annual LIBOR rate during each such year plus four percent (4%), and the amount will be charged in one lump sum immediately following the Product Launch (for the Product Launch Year) and immediately following the fourth fiscal quarter of each individual Post Launch Year, in order to properly reflect the average annual calculations above. The Cost of

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Capital shall be charged only for a Product launched in the US or Europe. With respect to Product in Europe, such calculation shall not be made on a country-by-country basis, but shall be made only once per Product with respect to the Product Launch Year and the Post Launch Years (with the Product Launch Year being the year immediately prior to first launch of that Product anywhere in Europe).

            A.3.3    "Costs of Sales" for Bulk Product, Finished Product, or Final Product, as the case may be, shall mean the sum of:

      i)    FBMC, and

      ii)    Period Costs.

            In the event Product is supplied for pre-clinical or clinical purposes, such Cost of Sales shall not include item i) above to the extent it has already been considered or charged within Development Costs, nor shall it include any mark-up outlined in section A.8.2 herein.

            A.3.4    "Development Costs" means costs attributable to the Joint Research Plan or Joint Development Plan actually incurred in the Territory, as to each Molecule, Drug Candidate, and Product, including Allocable Overhead, required to obtain and/or maintain the authorization and/or ability to manufacture, formulate, fill, and/or ship such Molecule, Drug Candidate, or Product in commercial quantities as part of this Agreement.

Development Costs consist of two main accounting elements, fixed costs and variable costs:

                  (A)    Fixed costs include the two main components of primary fixed costs and secondary fixed costs (i.e. Allocable Overhead). The primary cost types include personnel (including all fringe benefits), relocation, travel, entertainment and training incurred by the functions directly operating the development program. The work scope of these functions include activities within the areas of development operations, clinical quality insurance, medical science, genetics integrated medicine, drug regulatory and technical development. To these primary fixed costs should be added the secondary fixed costs (i.e. Allocable Overhead) which are attributable to costs, for example, for IT-software and hardware, IT-external costs, depreciation, occupancy costs, corporate bonus (to the extent not charged directly), and its payroll, information systems, human relations and purchasing. These secondary fixed costs are allocated to company departments based on space occupied or headcount or other activity-based method; and

                  (B)    Variable costs are external costs invoiced from Third Parties such as CROs (Contract Research Organizations), investigators, consultants, laboratories and suppliers of pre-clinical and clinical material for running studies (product development) and may also include material sourced from Third Parties or from in-house manufacturing, as well as filing fees necessary for the regulatory process. Any pre-clinical and clinical material manufactured in-house by either Party will be supplied at FBMC, and will not include any mark-up.

            Development Costs shall include but are not limited to the cost of the development of research plans and programs, screening, lead optimization, in vitro and in vivo testing, studies on the toxicological, pharmacokinetic, metabolic or clinical aspects of such Molecules, Drug Candidates and Products conducted internally or by individual investigators, or consultants necessary for the purpose of obtaining and/or maintaining approval of such Molecules, Drug Candidates and Products by a government organization in a country, and costs for preparing, submitting, reviewing or developing data or information for the purpose of a submission to a governmental authority to obtain and/or maintain approval of such Molecules, Drug Candidates and Products in a country as well as costs of process development, process improvements, scale-up costs and recovery (including plant costs), Phase IV clinical trials required by the FDA or equivalent, an d costs of qualification lots. Development Costs shall include data management, statistical designs and studies, document preparation, and other expenses associated with the clinical testing program.

            Development costs shall not include patent costs, pre-Registration marketing costs (e.g. trademark costs, advertising agency selection costs, pre-marketing studies), post-Registration clinical studies which are not enabling for Registration of the Molecules, Drug Candidates and Products and post-Registration marketing studies and registries.

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            In determining Development Costs, on or before October 31st of each year, the Parties will agree on respective FTE-rates that will be charged for the following calendar year. Resources will be allocated to the programs from the functions directly operating the programs on a fractional FTE-basis, and time-recording will be used by all personnel within these functions to record actual time spent on the programs. Each Party will also use its applicable project cost system with the purpose of tracking and reporting costs on a project/product indication/work package level. It is also understood between the Parties that they will jointly work to exchange data in a standard electronic form.

            A.3.5    "Distribution Costs" means any other direct costs borne by either Party in the US and ROW (and not invoiced to a Third Party) for logistics, transport, credit

and collections, customs clearance and storage of Products (if necessary) at the request of another Party, an Affiliate or a Third Party (i.e., freight, customs, duty, and insurance); provided, however, that unless the Parties mutually agree otherwise, Distribution Costs will be calculated as 2% of Net Sales for each and every Product sold in the US and 3% of Net Sales for each and every Product sold in the ROW.

            A.3.6    "Failures" shall mean Bulk Product, Finished Product, or Final Product as the case may be, that is considered a yield loss because it does not meet the specifications, was not manufactured or tested in accordance with the procedures or was not manufactured in accordance with cGMPs.

            A.3.7    "Fully Burdened Manufacturing Cost" or "FBMC" shall mean for Bulk Product, Finished Product, or Final Product as the case may be, the standard manufacturing cost, as defined by that Parties' standard cost accounting practices and policies. In the event of any transfer of Product among ROCHE, GENENTECH, GenRoche Development, its Affiliates or sublicensees, FBMC shall exclude any profit or other mark-up by any such parties, unless otherwise agreed by the Parties.

            Such FBMC shall include direct labor, materials, product testing costs (including quality control and quality assurance bulk testing and in-process testing e.g. adventitious virus and mycoplasma testing), and Allocable Overhead for manufacturing or contracting for each stage of the manufacturing process of the product shipped. In addition, FBMC includes Failures that are considered normal yield losses that could be reasonably expected and/or justified in this area of technology. The Parties will discuss and agree annually between November and January the main drivers of FBMC for the up-coming year. On or before January 31st of each year, these main drivers will be used to agree on a standard FBMC to be charged for that year. This standard FBMC will be calculated using ROCHE's exchange rates used for the Annual Budget. Such FBMC will be charged for that entire calendar year.

      Such FBMC shall not include any costs associated with process development, scale up costs, qualification lots and any other costs if they are included in Development Costs.

            A.3.8    "Marketing Costs" means, as to each Drug Candidate and Product, the Product Promotion Costs and Management & Infrastructure Costs, including Allocable Overhead, of marketing, promotion, advertising, professional education, product related public relations, relationships with opinion leaders and professional societies, market research, healthcare economics studies, any specifically identifiable Third Party contract services and other similar activities directly related to such Drug Candidates and Products and approved by the Parties. Such costs will include both internal costs (e.g., salaries, benefits, supplies and materials, etc.) as well as external costs for outside services and expenses (e.g., consultants, agency fees, meeting costs, etc.). The internal marketing costs include Allocable Overhead charges to marketing each Drug Candidate and Product that is consistent with each Party's inter nal process used for all of its products.

Product Promotion Costs include but are not limited to: i) all Drug Candidate- and Product-related media advertising and promotion literature, e.g., journals, newspapers, TV, radio, agency fees, internet, etc., including production costs, agency fees, handouts, mailing and other printed materials, ii) samples of Drug Candidates and Products, iii) providing Drug Candidates and Products to customers in the Territory for free where the purpose of the free supply is promotional in nature, iv) organizing and participating in congresses and sponsoring local delegates, v) mini symposia, such as evening events, and vi) running marketing studies including the costs of compassionate use

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programs. Product Promotion Costs shall also include activities related to obtaining reimbursement from payers and costs to procure or obtain sales and marketing data.

	Product Promotion Costs shall also include the external pre-Registration marketing expenses related to the above activities performed before first commercial sale as well as the post-Registration preclinical, clinical and marketing studies and registries that may be conducted (other than post-Registration preclinical studies which are intended to support label-enabling clinical studies, and other than post-Registration clinical studies and registries which are enabling for Registration of the Drug Candidates or Products or required by the FDA or equivalent, all of which costs are Development Costs).
	By way of illustration, Product Promotion Costs for such post-Registration preclinical, clinical and marketing studies and registries described above that may be conducted shall include the internal and external costs, in accordance with the Forecast and Long Range Plan (and not included in the Joint Development Plan), associated with the following:
-	trial clinical material costs if commercially available products are used, that have not otherwise been previously charged to the collaboration;
-	cost of post-Registration preclinical studies (unless intended to support label-enabling clinical studies) and clinical trials (phase III b and phase IV, unless required by the FDA or equivalent), registries, and marketing studies conducted as part of the Forecast and Long Range Plan;
-	monitoring costs (travel expenses, training, etc., excluding salaries) for clinical personnel;
-	development of protocols/case report forms;
-	per patient costs, fees per trial, investigator sponsored trials, etc.;
-	statistical evaluations (data handling and computer analysis, etc.);
-	final study report (translation, publications, etc.);
-	investigators' meeting, study coordination; and
-	investigators' clinical study costs.

Management & Infrastructure Costs means all Drug Candidate-specific and Product-specific fixed costs relating to the marketing function for the particular Drug Candidate or Product. These costs include salaries, bonuses, training, fringe benefits, travel and other fixed costs, not included in Field Force Costs, as well as bad debt expenses. Management & Infrastructure Costs also include Allocable Overhead for Drug Candidate-specific and Product-specific resources allocable from functions such as management and administration of marketing, health economics, registration, planning, communication, and controlling.

Marketing Costs will specifically exclude the costs of activities which promote (i) either Party's business as a whole without being product specific (such as corporate image advertising), or (ii) non-Drug Candidates or non-Products.

For clarity, if a Party exercises its opt-in right for a Drug Candidate or Product under Article IVB or IVC, the Parties shall share Marketing Costs incurred from the date of exercise onwards, in accordance with the ratios in Section 6.2.

            A.3.9    "Net Sales" means the amount of gross sales of the Product invoiced to independent Third Parties less deductions of returns and return reserves (including allowances actually given for spoiled, damaged, out-dated, rejected, returned Product sold, withdrawals and recalls), rebates (price reductions, rebates to social and welfare systems, charge backs or reserves for chargebacks, cash payment incentives, government mandated rebates and

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similar types of rebates e.g., Pharmaceutical Price Regulation Scheme, Medicaid), volume (quantity) discounts, cash discounts, taxes (value added or sales taxes, government mandated exceptional taxes and other taxes directly linked to the gross sales amount). For clarity, for purposes of determining when a sale of a Product occurs, the sale shall be deemed to occur when a Product is shipped to an independent Third Party.

            A.3.10    "Operating Profit(s) or Loss(es)" means, as to all Products (or, where applicable, on a product-by-product basis), GenRoche Development's Net Sales less the following items: Distribution Costs, Cost of Sales, Marketing Costs, Sales Costs, and Other Operating Income/Expense, for a given period.

            A.3.11    "Other Operating Income/Expense" means other operating income or expense from or to third parties which is not part of the primary business activity of GenRoche Development, but is considered and approved by the JFC as income or expense generated from GenRoche Development operations, and limited to the following:

• Gains/Losses on Product Divestments

• Patent and Third Party infringement costs (as defined and to the extent permitted and elected per the Agreement)

• Product liability insurance to the extent the Parties obtain a joint policy

• Third Party Royalties

• Cost of Capital

• other (to be approved by JFC)

            A.3.12    "Period Costs" - shall be comprised of:

• above normal Failures

• write-offs of expired Product

• valuation differences

            Such Period Costs include Failures valued at FBMC, if they are not included in the FBMC. In any case, Failures that go beyond what could be reasonably expected and/or justified in this area of technology shall remain the sole costs of the Responsible Party.

            Such Period Costs include costs associated with the write-off of expired products valued at FBMC to the extent that the actual quantity of material purchased/manufactured is not larger than the amount of the firm orders. The Responsible Party shall consider the worldwide sales and production needs when establishing its manufacturing campaign plans. A supply agreement to be entered between the Parties shall determine which and when forecasts shall become firm orders.

            Such Period Costs shall include the valuation difference for inventory in stock resulting from any change of standard FBMC at that respective point in time. At least annually, the Responsible party will review and compare its standard FBMC for a Product when that particular material was produced to its new standard FBMC and make a retroactive adjustment to the inventory value, which should be charged to GenRoche Development as a Valuation Difference.

            A.3.13    "Sales Costs" means as to each Product, Field Force Costs specifically attributable to the sales of such Product to all markets, including the managed care market, approved by the appropriate Party or joint Committee and included in the Annual Budget. To the extent practicable, Sales Costs will be identified on a product-by-product basis. Otherwise such Sales Costs shall be attributed between the products in a reasonable manner as determined by the JFC. Field Force Costs, including Allocable Overhead, shall include costs associated with Sales Representatives, including compensation, benefits, travel, supervision and training of the Sales Representatives, sales meetings, and other sales expenses. Field Force Costs will not include the start-up costs associated with either Party's sales force, including recruiting, relocation and other similar costs.

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            A.3.14    "Third Party" shall mean any individual or entity other than ROCHE, GENENTECH, or their respective Affiliates.

            A.3.15    "Third Party Royalties" shall mean both Parties' allocable intellectual property acquisition, licensing and royalty costs that are payable to Third Parties as a result of licenses for the manufacture, formulation, filling, use or sale of a Product. Third Party Royalties related to a Product shall be shared between the Parties and charged to Other Operating Income/Expense within GenRoche Development.

A.4     Audit and Interim Reviews

            A.4.1    The Parties' rights and obligations with respect to audit are set forth in Section 6.8 of the Agreement.

            A.4.2    In addition, each Party ("Disclosing Party") shall provide the other Party ("Receiving Party"), as reasonably requested, with sharable work product generated by such Disclosing Party or its accountants with respect to the financial operations of the collaboration in preparation for and support of such Receiving Party's obligation to comply with the reporting obligations mandated under the Sarbanes Oxley Act of 2002 (including implemented federal regulations thereunder); provided, such Disclosing Party shall have the right to redact such work product to (i) remove any reference to any projects that are not subject to the Agreement or any molecule, drug candidate or product other than a Molecule, Drug Candidate or Product, and (ii) to preserve any right of confidentiality not otherwise governed by the terms of Article X of the Agreement; provided further, such Receiving Party shall only use such infor mation disclosed hereunder to assist it in complying with the reporting obligations mandated under the Sarbanes Oxley Act of 2002. All costs incurred by the Disclosing Party in complying with such request shall be reimbursed by the Receiving Party.

            A.4.3    At either Party's written request, the other Party shall, to the extent commercially reasonable and practicable, commission, facilitate, support, and/or assist the other Party's officially appointed world-wide auditor with the execution of an agreed-upon procedures engagement (and written report thereon), whose scope, frequency and timing will be mutually agreed upon by the Parties (but shall be limited to one review per calendar year), to support the requesting Party's relevant internal control understanding and compliance assertions. Such reviews will be conducted at the expense of the requesting Party.

A.5.     Settlement Payments between the Parties

            A.5.1    General Terms.  Settlement Payments between the Parties will be approved by the applicable Committees, and will be detailed as Operating Profit or Loss, Development Costs and/or royalties (pursuant to Sections 3.8(a)(i), 6.3 or 6.4 of the Agreement). Settlement Payments will be made quarterly based on actual results within ninety (90) days after the end of each quarter. The JFC will review and agree on the appropriate amount and nature of payments and payees required to achieve each Party's accounting and tax requirements.

            A.5.2    Currency and Taxes

All Settlement Payments under this Agreement shall be in US Dollars.

Whenever calculation of Net Sales or any of the expenses (Distributions Costs, Period Costs, Marketing Costs, Sales Costs, Development Costs, and Other Operating Expenses, but not the FBMC component of Cost of Sales) or royalties (pursuant to Sections 3.8(a)(i), 6.3 or 6.4 of the Agreement) requires conversion from any foreign currency, ROCHE shall convert the amount in foreign currencies as computed in the ROCHE's central Swiss Francs Sales Statistics for the countries concerned. ROCHE shall first convert the amount into Swiss Francs and then into US Dollars, using the average year-to-date rate of exchange for such currencies as retrieved from the Reuters' system for the applicable period, in accordance with ROCHE's then current standard practices. Sales by GENENTECH shall first be calculated in the currency in which sales took place and then converted to United States Dollars using the average year-to-date rate of exchange for such currencies as retrieved from the Reuters' system for the applicable pe riod, in accordance with GENENTECH's then current standard practices.

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Any payment hereunder not made when due shall bear interest thereon, computed at the LIBOR rate of interest as reported by Data Stream from time to time, plus two percent (2%) calculated on the number of days such Settlement Payment (or portion thereof) is delinquent, unless such payment is disputed through the applicable Committee. A Party shall make all payments hereunder by bank wire transfer in immediately available funds to such account as the other Party shall designate before such payment is due, free and clear of any taxes, duties, levies, fees or charges, except for withholding taxes (to the extent applicable).

Any taxes, levies or duties paid or required to be withheld under the appropriate local tax laws by one of the Parties ("Withholding Party") on account of monies payable to the other Party ("Other Party") hereunder shall be deducted from the amount of monies otherwise payable to the Other Party. The Withholding Party shall secure and send to the Other Party proof of any such taxes, duties or levies paid or required to be withheld by Withholding Party for the benefit of the Other Party.

A.6.     Accounting for Development Costs, Marketing Costs and Sales Costs

All Development Costs, Marketing Costs and Sales Costs will be based on the appropriate costs definition stated in Section A.3 of this Appendix.

Each Party shall report Development Costs in a manner consistent with its project cost system. In general, these project cost systems report actual time spent on specific projects, apply the actual labor costs, capture actual costs of specific projects and allocate other expenses to projects. For Marketing Costs and Sales Costs, the Parties will report costs based on spending in marketing and sales departments, respectively. The Parties acknowledge that the methodologies used will be based on systems in place and consistent with Section A.10 of this Appendix.

A.7.     Sharing of Operating Profits and Losses and Development Costs

The Parties agree to share the Operating Profit or Loss and Development Costs resulting from the collaborative arrangement according to the following manner:

            A.7.1    Operating Profits and Losses. With regard to all Products, for each calendar year or portion thereof, ROCHE and GENENTECH shall obtain the respective percentages outlined in Section 6.2 of the Agreement of any operating profits or losses, calculated on a Product-by-Product basis.

            A.7.2    Development Costs. With regard to all Molecules, Drug Candidates, and Products, for each calendar year or portion thereof, ROCHE and GENENTECH shall incur and/or carry the respective percentages outlined in Section 4.2a of the Agreement of any Development Costs, calculated on an individual Molecule, Drug Candidate or Product-by-Product basis.

A.8.     Supply Price of Product

The total amount due for the supply of Product between the Parties shall be the amount defined below:

            A.8.1    Supply of Clinical and Pre-Clinical Requirements - The sales price of Drug Candidate or Product (including placebos) for clinical or pre-clinical purposes shall be the FBMC for such clinical requirements. Product manufactured as qualification lots and supplied for clinical purposes shall only be charged to the extent not previously included in Development Costs charged to GenRoche Development.

            A.8.2    Supply of Commercial Requirements - The sales price of Product for commercial purposes shall be one hundred twenty percent (120%) of FBMC, invoiced in US Dollars and paid within thirty (30) days after shipment. Product supplied by a third party manufacturer shall be at cost. Product manufactured as qualification lots and supplied for commercial purposes shall only be charged to the extent not included in Development Costs.

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A.9.     Start of Operations

Operation of GenRoche Development will be deemed to have commenced on the Effective Date. Costs incurred on development projects or any other form of collaborative effort on any Product which has commenced prior to or is ongoing as of the Effective Date, are not a part of this Agreement and are not chargeable to GenRoche Development.

A.10.     Guidelines for Charging Costs

The following guidelines shall be used in determining amounts chargeable to GenRoche Development subject to the cost definitions in Section A.3 of this Appendix. Disputes over the allocation of costs are subject to the tie breaking procedures outlined in Sections 3.3, 4.6a, and 5.7(c) of the Agreement.

A.10.1	If an expense is specifically and exclusively (i.e., for no other product) used for the development or commercialization of a Molecule, Drug Candidate or Product, then one hundred percent (100%) of the expense will be charged to GenRoche Development.
A.10.2	If an expense is not specifically and exclusively (i.e., for other products in addition to a Molecule, Drug Candidate or Product) used for the development or commercialization of a Molecule, Drug Candidate or Product, then the following shall apply:
(a)	If the portion of that expense used for the development or commercialization of a Molecule, Drug Candidate or Product can be objectively determined through specific means (e.g., man hours of effort, amounts consumed, etc.), then the amount so used will be charged to GenRoche Development.
(b)	If the portion of that expense used for the development or commercialization of a Molecule, Drug Candidate or Product cannot be objectively determined through specific means, then only the direct and incremental costs related to the Molecule, Drug Candidate or Product shall be charged to GenRoche Development.

A. 11.     Effective Accounting Date Termination for GenRoche Development

For reporting and accounting purposes with respect to GenRoche Development, the end of GenRoche Development will be the nearest month end to the effective termination date of the Agreement.

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APPENDIX B
PARTIES' RESPONSIBILITIES

	Copromotion Roles and Responsibilities	Responsible	Approval/Decision Making	Comments
Marketing (including, not limited to)	Commercial Budget	Lead Party	Management Committee ("MC")
	Commercial Strategy and Brand Plan	Lead Party	Lead Party	Pursuant with the current contract, Lead Party has the responsibility for generating the commercial plan and strategies. Because the MC has final approval of the budget for the commercial plan, it is expected that every attempt will be made to ensure that both companies agree to the commercial plan and strategies.
	Promotional Materials	Lead Party	Lead Party
	Journal Advertising	Lead Party	Lead Party
	Promotional Concept Development	Lead Party	Lead Party
	Nurse and Pharmacist Education	Lead Party	Lead Party
	Marketing Message Development	Lead Party	Lead Party
	Disease state education	Lead Party	Lead Party
	Medical Education (CME and non-CME)	Lead Party	Lead Party
	Advisory Boards (National and Regional)	Lead Party	Lead Party
	Speaker Bureau Development and execution	Lead Party	Lead Party
	SympPartnering Partya	Lead Party	Lead Party
	Key Opinion Leader Interactions and Support	Lead Party	Lead Party
	Grant activities	Lead Party	Lead Party
	Speaker Slide Kits	Lead Party	Lead Party
	Trade Show activities	Lead Party	Lead Party
	Publications Planning and execution	Lead Party	Lead Party
	Patient Education	Lead Party	Lead Party
	Internet Marketing	Lead Party	Lead Party
	Product Sampling Plan	Lead Party	Lead Party
Public Relations (including, not limited to)	Product and launch related PR	Lead Party	Lead Party
	Spokesperson selection and training	Lead Party	Lead Party
	Press briefings	Lead Party/Partnering Party	JCC	If the JCC fails to decide on items assigned to it, dispute resolution will follow the path outlined in the contract
	ODAC Preparations	Lead Party/Partnering Party	JCC
	PR Surrounding BLA Filing	Lead Party/Partnering Party	JCC
	BR.21 PR announcements	Lead Party/Partnering Party	JCC
	Patient Advocacy Group Relations	Lead Party	Lead Party
Distribution and Reimbursement (including, not limited to)	Distribution and Logistics	Lead Party	Lead Party
	Distributor/wholesaler communications	Lead Party	Lead Party
	Reimbursement Support Program	Lead Party	Lead Party
	Reimbursement materials	Lead Party	Lead Party

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	Clinical Trial Transition Plan to Commercial Product (Pre-launch)	Lead Party	Lead Party
	Indigent Patient Program	Lead Party	Lead Party
	Managed Care activities	Lead Party	Lead Party
	Public Payer Planning (Government Affairs)	Lead Party	Lead Party
	Contracting Strategy, Development & Negotiations	Lead Party	Lead Party
	Contract & Government Programs Administration (All Aspects including all calculations & reporting for both Commercial & Government Contracts.	Lead Pary	Lead Party
	Health Economics Acitivities	Lead Party	Lead Party
	Customer Service/Order Management	Lead Party	Lead Party
	Field Managed Care	Lead Party	Lead Party
	Field Managed Care Marketing Programs/Customer Ed	Lead Party	Lead Party
	Formulary support	Lead Party	Lead Party
	Pharmacy activities, education, stocking programs	Lead Party	Lead Party
	Channel Inventory Management	Lead Party	Lead Party
	Distribution Data Warehousing & Reporting (SIM)	Lead Party	Lead Party
	Product Returns/Wastage Programs	Lead Party	Lead Party
	Report New Product Pricing & Price Increases to Pricing Compendia & Customers	Lead Party	Lead Party
	Quality Complaints & Replacement (QA)	Lead Party	Lead Party
Medical Communications (including, not limited to)	Customer Inquiries	Lead Party	Lead Party
	Standard Letters	Lead Party	Lead Party
	Customer FAQs	Lead Party	Lead Party
	AMCP Dossier/Compendia Listing	Lead Party	Lead Party
Sales (including, not limited to)	Sales force sizing	Lead Party	Lead Party	Sales force sizing will be reviewed by the JCC as part of the commercial brand plan. The MC will approve the budget
	Territory determination and alignment	Lead Party	Lead Party	Partnering Party will review territory alignments at the JCC
	Customer call targets and call plans	Lead Party	Lead Party	Partnering Party will review call targets at the JCC Partnering Party may reject call targets, but may not add to the list.
	Promotional pieces	Lead Party	Lead Party	Partnering Party Regulatory to review and provide comments, final decision making with Lead Party
	Measuring impact of promotional plans (promotion response)
	Sales product training - content development	Lead Party	Lead Party
	Ongoing product sales training - delivery	Lead Party	Lead Party	Each organization pays their own travel & entertainment expenses for their own personnel to attend sales training and launch meetings
	Product Launch / Sales meetings	Lead Party	Lead Party
	Sales communications materials	Lead Party	Lead Party	Lead Party shall develop Product related sales communications materials and provide to Partnering Party for distribution to Partnering Party sales force
	Quarterly Plan of Action	Lead Party	Lead Party

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	Call reporting systems and execution	Lead Party	Lead Party	Partnering Party shall provide call reporting and CRM information to Lead Party in a format that is compatable with Lead Party systems
	Lead Party Incentive Plan	Lead Party	Lead Party	Partnering Party and Lead Party shall ensure that the incentive comp plans of the two companies are in alignment
	Lead Party Territory Budget	Lead Party	Lead Party	Partnering Party and Lead Party shall ensure that the territory budgets of the two companies are in alignment (Product related territory education and T&E budgets)
	Sales Operations Management	Lead Party	Lead Party
Market Research (including, not limited to)	Market research activities	Lead Party	Lead Party
	Promotional Ad concept testing	Lead Party	Lead Party
	Launch metrics development	Lead Party	Lead Party
	Launch metrics tracking	Lead Party	Lead Party
	Competitive Intelligence	Lead Party	Lead Party
	Revenue forecasting	Lead Party	Lead Party	Revenue forcast will be reviewed at the JCC
	Sales data collection, valadation, reporting and analysis	Lead Party	Lead Party
	Pricing	Lead Party	Lead Party	Pricing will be reviewed at the JCC

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EX-15.1

EXHIBIT 15.1

July 26, 2004

The Board of Directors and Stockholders of Genentech, Inc.

We are aware of the incorporation by reference in the Registration Statements pertaining to the Genentech, Inc. Tax Reduction Investment Plan, the 2004 Equity Incentive Plan, the 1999 Stock Plan, the 1996 Stock Option/Stock Incentive Plan, the 1994 Stock Option Plan, the 1990 Stock Option/Stock Incentive Plan, and the 1991 Employee Stock Plan, and the Registration Statement (Form S-3 No. 333-37072) related to the resale of common shares deliverable upon the exchange of Liquid Yield Option Notes, and in the related Prospectuses, as applicable, contained in such Registration Statements of our report dated July 6, 2004, except for Note 11, as to which the date is July 23, 2004, relating to the unaudited condensed consolidated interim financial statements of Genentech, Inc. that are included in its Form 10-Q for the quarter ended June 30, 2004.

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,

/s/ERNST & YOUNG LLP

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Arthur D. Levinson, certify that:

            1.   I have reviewed this quarterly report on Form 10-Q of Genentech, Inc.;

            2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

            3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

            4.   The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

       a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

       b)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

       c)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

            5.   The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

       a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

       b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	July 26, 2004	By:	/s/ARTHUR D. LEVINSON
			Arthur D. Levinson, Ph.D. Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Louis J. Lavigne, Jr., certify that:

            1.   I have reviewed this quarterly report on Form 10-Q of Genentech, Inc.;

            2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

            3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

            4.   The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

       a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

       b)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

       c)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

            5.   The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

       a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

       b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	July 26, 2004	By:	/s/ LOUIS J. LAVIGNE, JR.
			Louis J. Lavigne, Jr. Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

            I, Arthur D. Levinson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Genentech, Inc. on Form 10-Q for the quarterly period ended June 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report of Genentech, Inc. on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Genentech, Inc.

By:	/s/ Arthur D. Levinson, Ph.D.
Name: Title: Date:	Arthur D. Levinson, Ph.D. Chief Executive Officer July 26, 2004

            I, Louis J. Lavigne, Jr., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Genentech, Inc. on Form 10-Q for the quarterly period ended June 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report of Genentech, Inc. on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Genentech, Inc.

By:	/s/ Louis J. Lavigne, Jr.
Name: Title: Date:	Louis J. Lavigne, Jr. Executive Vice President and    Chief Financial Officer July 26, 2004

A signed original of this written statement required by Section 906 has been provided to Genentech, Inc. and will be retained by Genentech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.