10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

________________________

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

or

o 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerþ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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	1,052,956,387Outstanding at July 28, 2006

GENENTECH, INC.

TABLE OF CONTENTS

		Page No.
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Statements ofIncome— for the three and six months ended June 30, 2006 and 2005	3
	Condensed Consolidated Statements of Cash Flows— for the six months ended June 30, 2006 and 2005	4
	Condensed Consolidated Balance Sheets— June 30, 2006 and December 31, 2005	5
	Notes to CondensedConsolidatedFinancial Statements	6-18
	Report of IndependentRegistered Public Accounting Firm	19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-40
Item 3.	QuantitativeandQualitative Disclosures About Market Risk	41
Item 4.	Controls andProcedures	41
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42-54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 4.	Submission of Matters to a Vote of Security Holders	55
Item 6.	Exhibits	56
SIGNATURES		57

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. (or “Roche”) on June 30, 1999.

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) 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; Omnitarg™ (pertuzumab) HER dimerization inhibitor; Pulmozyme® (dornase alfa, recombinant) inhalation solution; Raptiva® (efalizumab) anti-CD11a antibody; and TNKase® (tenecteplase) single-bolus thrombolytic agent. Rituxan® (rituximab) anti-CD20 antibody is a registered trademark of Biogen Idec Inc.; Tarceva® (erlotinib) 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 millions, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues
Product sales (including amounts from related parties: three months—2006-$75; 2005-$28; six months—2006-$133; 2005-$82)	$	1,810		$	1,274		$	3,454		$	2,460
Royalties (including amounts from related parties: three months—2006-$207; 2005-$107; six months—2006-$373; 2005-$212)		316			200			602			432
Contract revenue (including amounts from related parties: three months—2006-$34; 2005-$30; six months—2006-$63; 2005-$57)		73			53			129			96
Total operating revenues		2,199			1,527			4,185			2,988
Costs and expenses
Cost of sales (including amounts for related parties: three months—2006-$65; 2005-$39; six months—2006-$115; 2005-$89)		284			274			546			530
Research and development (including amounts for related parties: three months—2006-$77; 2005-$47; six months—2006-$146; 2005-$94) (including contract related: three months—2006-$51; 2005-$37; six months—2006-$87; 2005-$64)		390			278			764			521
Marketing, general and administrative		471			352			912			663
Collaboration profit sharing (including amounts for a related party: three months—2006-$48; 2005-$29; six months—2006-$91; 2005-$52)		259			199			485			375
Recurring charges related to redemption		26			34			52			69
Special items: litigation-related		14			20			27			31
Total costs and expenses		1,444			1,157			2,786			2,189
Operating income		755			370			1,399			799
Other income (expense):
Interest and other income, net		121			35			174			55
Interest expense		(18	)		(4	)		(37	)		(7	)
Total other income, net		103			31			137			48
Income before taxes		858			401			1,536			847
Income tax provision		327			105			584			267
Net income	$	531		$	296		$	952		$	580
Earnings per share
Basic	$	0.50		$	0.28		$	0.90		$	0.55
Diluted	$	0.49		$	0.27		$	0.89		$	0.54
Shares used to compute basic earnings per share		1,053			1,058			1,054			1,052
Shares used to compute diluted earnings per share		1,073			1,084			1,074			1,077

See Notes to Condensed Consolidated Financial Statements

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GENENTECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities
Net income	$	952		$	580
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		199			181
Employee stock-based compensation		149			-
Deferred income taxes		(85	)		(54	)
Deferred revenue		2			(22	)
Litigation-related liabilities		26			26
Tax benefit from employee stock options		-			327
Excess tax benefit from stock-based compensation arrangements		(90	)		-
Gain on sales of securities available-for-sale and other		(69	)		(2	)
Write-down of securities available-for-sale and other		-			4
Changes in assets and liabilities:
Receivables and other current assets		(184	)		(117	)
Inventories		(174	)		(11	)
Investments in trading securities		(15	)		(8	)
Accounts payable, other accrued liabilities, and other long-term liabilities		205			(82	)
Net cash provided by operating activities		916			822
Cash flows from investing activities
Purchases of securities available-for-sale		(898	)		(313	)
Proceeds from sales and maturities of securities available-for-sale		545			399
Capital expenditures		(538	)		(730	)
Change in other assets		17			(35	)
Net cash used in investing activities		(874	)		(679	)
Cash flows from financing activities
Stock issuances under employee stock plans		187			465
Stock repurchases		(540	)		(161	)
Excess tax benefit from stock-based compensation arrangements		90			-
Net cash (used in) provided by financing activities		(263	)		304
Net (decrease) increase in cash and cash equivalents		(221	)		447
Cash and cash equivalents at beginning of period		1,225			270
Cash and cash equivalents at end of period	$	1,004		$	717
Supplemental cash flow data
Cash paid during the year for:
Interest	$	47		$	6
Income taxes		498			290
Non-cash investing and financing activities
Capitalization of construction in progress related to financing lease transaction		61			73
Exchange of note receivable for a prepaid royalty and other long-term asset		-			29

See Notes to Condensed Consolidated Financial Statements.

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GENENTECH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

	June 30, 2006			December 31, 2005
Assets
Current assets
Cash and cash equivalents	$	1,004		$	1,225
Short-term investments		1,189			1,140
Accounts receivable—product sales (net of allowances: 2006-$76; 2005-$83; including amounts from related parties: 2006-$29; 2005-$4)		663			554
Accounts receivable—royalties (including amounts from related parties: 2006-$251; 2005-$173)		386			297
Accounts receivable—other (net of allowances: 2006 and 2005-$1; including amounts from related parties: 2006-$116; 2005-$132)		177			199
Inventories		909			703
Prepaid expenses and other current assets		283			268
Total current assets		4,611			4,386
Long-term marketable debt and equity securities		1,734			1,449
Property, plant and equipment, net		3,760			3,349
Goodwill		1,315			1,315
Other intangible assets		523			574
Restricted cash and investments		735			735
Other long-term assets		506			339
Total assets	$	13,184		$	12,147
Liabilities and stockholders’ equity
Current liabilities
Accounts payable (including amounts to related parties: 2006-$23; 2005-$1)		279		$	339
Deferred revenue		47			44
Taxes payable		150			62
Other accrued liabilities (including amounts to related parties: 2006-$191; 2005-$132)		1,303			1,215
Total current liabilities		1,779			1,660
Long-term debt		2,132			2,083
Deferred revenue		219			220
Litigation-related and other long-term liabilities		774			714
Total liabilities		4,904			4,677
Commitments and contingencies
Stockholders’ equity
Common stock		21			21
Additional paid-in capital		9,663			9,263
Accumulated other comprehensive income		193			253
Accumulated deficit, since June 30, 1999		(1,597	)		(2,067	)
Total stockholders’ equity		8,280			7,470
Total liabilities and stockholders’ equity	$	13,184		$	12,147

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 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. 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, 2005. 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.

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 the results for the full year or any future period.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of Genentech and all wholly owned subsidiaries. Material intercompany accounts and transactions have been eliminated.

Use of Estimates and Reclassifications

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

Certain reclassifications of prior period amounts have been made to our Condensed Consolidated Financial Statements to conform to the current period presentation.

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 rebates, healthcare provider contractual chargebacks, prompt pay sales discounts, product returns, wholesaler inventory management incentives, and bad debts. In our domestic commercial collaboration agreements, we have primary responsibility for the United States (or “U.S.”) product sales commercialization efforts, including selling and marketing, customer service, order entry, distribution, shipping and billing. We record net product sales and related production and selling cost in our income statement line items on a gross basis since we have the manufacturing risk and/or inventory risk, and credit risk, and meet the criteria as a principal under Emerging Issues Task Force (or “EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent” (or “EITF 99-19”).

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·   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 reasonably estimated and collectibility is reasonably assured. For the majority of our royalty revenues, estimates are made using historical and forecasted sales trends and used as a basis to record amounts in advance of amounts collected.

·   Contract revenue generally includes upfront and continuing licensing fees, manufacturing fees, milestone payments and net reimbursements from collaborators on development, post-marketing and commercial costs. Most of our contract arrangements with up-front license fees were entered into prior to the effective date of July 1, 2003 for EITF Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables” (or “EITF 00-21”). Accordingly, our accounting policy on contract revenue, as described below, is focused on describing transactions entered into prior to the effective date of EITF 00-21.

·   Nonrefundable upfront fees, including product opt-ins, 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, and certain guaranteed, time-based payments that require our 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.

·   Upfront manufacturing fees are recognized as revenue as the related manufacturing services are rendered, generally on a straight-line basis over the performance period of the longer of the manufacturing obligation period or the expected product life. Manufacturing profit is recognized when the product is shipped and title passes.

·   Fees associated with substantive milestones, which are contingent upon future events for which there is reasonable uncertainty as to their achievement at the time the agreement was entered into, are recognized as revenue when these milestones, as defined in the contract, are achieved.

·   Fees received on multiple element agreements, or amendments to such agreements, entered into after the effective date of EITF 00-21, are evaluated under the provisions of EITF 00-21. We use objective evidence of fair value to allocate revenue to each element in multiple element agreements and recognize revenue for each element when the criteria for revenue recognition for that element have been met. If the revenue recognition criteria have not been met, then revenue for that element is deferred until such criteria are met or until the culmination of the period(s) over which the last undelivered element is delivered. In the absence of objective evidence of fair value for each element, the multiple elements are combined into a single unit of accounting and the revenue recognition criteria are applied to the entire agreement.

·   Commercial collaborations resulting in a net reimbursement of development, post-marketing and commercial costs are recognized as revenue as the related costs are incurred. The corresponding development and post-marketing expenses are included in research and development expenses and the corresponding commercial costs are included in marketing, general and administrative (or “MG&A”) expenses in the Condensed Consolidated Statements of Income.

Product Sales Allowances

Revenues from product sales are recorded net of allowances for estimated rebates, healthcare provider contractual chargebacks, prompt pay sales discounts, product returns, wholesaler inventory management allowances, and bad

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debts, all of which are established at the time of sale. These allowances are based on estimates of the amounts earned or to be claimed on the related sales. These estimates take into consideration our historical experience, current contractual and statutory requirements, specific known market events and trends such as competitive pricing and new product introductions, and forecasted customer buying patterns and inventory levels, including the shelf lives of our products. Rebates, healthcare provider contractual chargebacks, prompt pay sales discounts and product returns are product-specific, which can be affected by the mix of products sold in any given period. All our product sales allowances are based on estimates. If actual future results vary, we may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment. Our product sales allowances and accruals are as follows:

·   Rebate allowances and accruals are comprised of both direct and indirect rebates. Direct rebates are contractual price adjustments payable to wholesalers and specialty pharmacies that purchase products directly from us. Indirect rebates are contractual price adjustments payable to healthcare providers and organizations, such as clinics, hospitals, pharmacies and group purchasing organizations that do not purchase products directly from us. Both types of allowances are based upon definitive contractual agreements or legal requirements (such as Medicaid) after the final dispensing of the product by a pharmacy, clinic or hospital to a benefit plan participant. Rebate accruals are recorded in the same period the related revenue is recognized resulting in a reduction to product sales revenue and the establishment of a contra asset (if due to a wholesaler or specialty pharmacy) or a liability (if due to a third party, such as a healthcare provider) as appropriate, which are included in sales allowances or other accrued liabilities, respectively. Rebates are primarily estimated using historical data, including patient usage, customer buying patterns, applicable contractual rebate rates and contract performance by the benefit providers. Rebate estimates are evaluated quarterly and may require adjustments to better align our estimates with actual results. As part of this evaluation, we review changes to Medicaid legislation, changes to state rebate contracts, changes in the level of discounts, and changes in product sales trends. Although rebates are accrued at the time of sale, rebates are typically paid out, on average, up to 4 to 5 months after the sale.

·   Healthcare provider contractual chargebacks are the result of contractual commitments by us to provide products to healthcare providers at specified prices or discounts. These contracted health care providers include (i) hospitals that service a disproportionately high share of economically indigent and Medicaid patients for which they receive little or no reimbursement (i.e. Disproportionate Share Hospitals or “DSH”), (ii) government-owned hospitals that receive discounts, and (iii) hospitals that have contract pricing for certain products usually by way of a group purchasing agreement. Chargebacks occur when a contracted health care provider purchases our products through an intermediary wholesaler at fixed contract prices that are lower than the list prices we charge the wholesalers. The wholesaler, in turn, charges us back for the difference between the price initially paid by the wholesaler and the contract price paid to the wholesaler by the healthcare providers. Chargebacks are accrued at the time of sale and are estimated based on historical trends, which closely approximate actual results as we generally issue credits within a few weeks of the time of sale.

·   Prompt pay sales discounts are credits granted to wholesalers for remitting payment on their purchases within contractually defined cash repayment incentive periods. The contractually defined cash repayment periods are generally 30 days (plus 4 grace days for a total of 34 days). Based upon our experience that it is rare that a wholesaler does not comply with the contractual terms to earn the prompt pay sales discount, we accrue, at the time of original sale 100% of the prompt pay discounts related to the sale.

·   Wholesaler inventory management allowances are credits granted to wholesalers for compliance with various contractually-defined inventory management programs. These programs provide monetary incentives in the form of a credit for wholesalers to maintain consistent inventory levels at approximately 2 to 3 weeks of sales depending on the product. These wholesaler inventory management credits are calculated based on quarterly product purchases multiplied by a factor to determine the maximum possible credit for a product for the preceding quarter. Adjustments to reduce the maximum credit are made if the wholesaler does not meet and/or comply with the negotiated metrics. These metrics include data timeliness, completeness and accuracy and deviations outside of the contracted inventory days on hand for each product. The maximum credits are accrued at the time of sale, and are typically granted to wholesaler accounts within 90 days after the sale.

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·   Product returns allowances are established in accordance with our returns policy, which allows buyers to return our products within two months prior to six months following product expiration. Most products are sold to our wholesalers with at least six months of dating prior to expiration. As part of our estimating process, we compare historical return data to their related sales on a production lot basis. Historical rates of return are determined by product and are adjusted for known or expected changes in the marketplace specific to each product. In addition, we review expiration dates to determine the remaining shelf life of each product not yet returned. Although product return allowances are accrued at the time of sale, the majority of returns take place up to two years after the sale.

·   Bad debt allowances are based on our estimated uncollectible accounts receivable. Given our historical experience with bad debts, combined with our credit management policies and practices, we do not presently maintain significant bad debt allowances.

Allowances against receivable balances primarily relate to product returns, wholesaler-related direct rebates, prompt pay sales discounts, wholesaler inventory management allowances, and bad debts, and are recorded in the same period the related revenue is recognized, resulting in a reduction to product sales revenue and the reporting of product sales receivable net of allowances. Accruals related to indirect rebates and contractual chargebacks for healthcare providers are recognized in the same period the related revenue is recognized, resulting in a reduction to product sales revenue, and are recorded as other accrued liabilities.

Commercial Collaboration Accounting

We have domestic commercial collaboration profit sharing agreements with Biogen Idec Inc. on Rituxan, Novartis Pharma AG on Xolair, and with OSI Pharmaceuticals, Inc. on Tarceva. In these agreements, we have primary responsibility for the U.S. commercialization including sales and marketing, customer service, order entry, distribution, shipping and billing. We record net product sales and related production and selling costs for our domestic collaborations in our income statement on a gross basis since we have the manufacturing and/or inventory risk, and credit risk, and meet the criteria as a principal under EITF 99-19. The collaboration profit sharing expense line primarily includes the profit sharing results with Biogen Idec on Rituxan, with Novartis Pharma AG on Xolair, and with OSI Pharmaceuticals on Tarceva.

We have a European commercial collaboration profit sharing agreement with Novartis Pharma AG on Xolair. We do not record the net product sales and related production and selling costs for our European collaboration in our income statement on a gross basis since we do not meet the criteria as a principal under EITF 99-19, and instead record our net share of the European collaboration profits as contract revenue (or collaboration losses as collaboration profit sharing expense). The results of our European commercial collaboration profit sharing agreement have not been significant in any periods presented. See also Note 5, “Relationship with Roche and Related Party Transactions,” regarding Novartis related collaboration cost and profit sharing expenses.

Recent Accounting Pronouncements

On June 28, 2006, the Financial Accounting Standards Board (or “FASB”) ratified the consensus reached by the EITF on EITF Issue No. 06-02, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences” (or “EITF 06-02”). EITF 06-02 states that if all the conditions of paragraph 6 of FASB 43 are met, compensation costs for sabbatical and other similar benefit arrangements should be accrued over the requisite service period. Paragraph 6 of FASB 43 states that a liability should be accrued for employees’ future absences if the following are met:  (a) the employer’s obligation is attributable to employees’ services already rendered; (b) the obligation relates to rights that vest or accumulate; (c) payment of the compensation is probable; and (d) the amount can be reasonably estimated. EITF 06-02 is effective for fiscal years beginning after December 15, 2006. Upon adoption of EITF 06-02, we expect to record a one-time charge as a cumulative effect of a change in accounting principle and an annual sabbatical accrual that will reduce diluted net income per share by approximately $0.02 to $0.03 per share and $0.01 to $0.02 per share, respectively, for 2007. These charges are non-cash items.

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Earnings Per Share

Basic earnings per share (or “EPS”) are computed based on the weighted-average number of shares of our Common Stock outstanding. Diluted EPS are computed based on the weighted-average number of shares of our Common Stock and other dilutive securities.

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations (in millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Numerator:
Net income	$	531	$	296	$	952	$	580
Denominator:
Weighted-average shares outstanding used to compute basic EPS		1,053		1,058		1,054		1,052
Effect of dilutive stock options		20		26		20		25
Weighted-average shares outstanding and dilutive securities used to compute diluted EPS		1,073		1,084		1,074		1,077

Outstanding employee stock options to purchase approximately 20 million and 19 million shares of our Common Stock in the second quarter and first six months of 2006, respectively, were excluded from the computation of diluted EPS because the effect would have been anti-dilutive.

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 estimated fair value of derivatives designated as effective cash flow hedges and unrealized gains and losses on our available-for-sale securities.

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

	June 30, 2006		December 31, 2005
Net unrealized gains on securities available-for-sale	$	190	$	230
Net unrealized gains on cash flow hedges		3		23
Accumulated other comprehensive income	$	193	$	253

The activity in comprehensive income, net of income taxes, was as follows (in millions):

	Three Months Ended June 30,					Six Months Ended June 30,
	2006			2005		2006			2005
Net income	$	531		$	296	$	952		$	580
Change in unrealized gains (losses) on securities available-for-sale		(43	)		22		(40	)		(55	)
Change in unrealized gains (losses) on cash flow hedges		(19	)		24		(20	)		37
Comprehensive income	$	469		$	342	$	892		$	562

Derivative Financial Instruments

At June 30, 2006, estimated net gains on cash flow hedge derivative instruments, consisting of foreign currency exchange options and marketable equity collars, expected to be reclassified from accumulated OCI to “other income, net” during the next twelve months, are $5 million.

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Note 2. Employee Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “FAS 123R”), which supersedes our previous accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees” (or “APB 25”). FAS 123R requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options and stock issued under our employee stock plans. FAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our Condensed Consolidated Statements of Income. Also, certain of these costs are capitalized into inventory on our Condensed Consolidated Balance Sheets, and generally will be recognized as an expense when the related products are sold. We adopted FAS 123R using the modified prospective transition method, which requires that compensation expense be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption. The modified prospective transition method does not require restatement of prior periods to reflect the effect of FAS 123R.

In November 2005, the FASB issued FASB Staff Position (or “FSP”) No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” We have adopted the simplified method to calculate the beginning balance of the additional paid-in-capital (or “APIC”) pool of the excess tax benefit, and to determine the subsequent effect on the APIC pool and Condensed Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that were outstanding upon our adoption of FAS 123R.

Prior to the adoption of FAS 123R, we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under FAS No. 123, “Accounting for Stock-Based Compensation” (or “FAS 123”). Under the intrinsic value method, no employee stock-based compensation expense had been recognized in our Condensed Consolidated Statements of Income for any period prior to our adoption of FAS 123R on January 1, 2006, as the exercise price of the stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Employee Stock Plans

We currently have an employee stock purchase plan, adopted in 1991 and amended thereafter (or “the 1991 Plan”). The 1991 Plan allows eligible employees to purchase Common Stock at 85% of the lower of the fair market value of the Common Stock on the grant date or the fair market value on the purchase date. The offering period under the 1991 Plan is currently 15 months, and the purchase price is established during each new offering period. Purchases are limited to 15% of each employee’s eligible compensation and subject to certain Internal Revenue Service restrictions. In general, all of our full-time employees are eligible to participate in the 1991 Plan. Of the 52,400,000 shares of Common Stock reserved for issuance under the 1991 Plan, 46,395,661 shares have been issued as of June 30, 2006.

We currently grant options under a stock option plan adopted in 1999 and amended thereafter (or “the 1999 Plan”), that allows for the granting of non-qualified stock options, incentive stock options and stock purchase rights to our employees, directors and consultants. 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, and options vest in increments over four years from the date of grant, although we may grant options with different vesting terms from time to time. When an employee over the age of 65 retires, the number of options that would have vested in the 12 month period following the retirement date, if the retiree had remained an employee, automatically becomes fully vested. The expiration date of the exercisable options remains the original expiration date at the time the options were granted. Upon employee termination, unexercised vested options will expire at the end of three months or the expiration of the option, whichever is earlier. No stock purchase rights or incentive stock options have been granted under the 1999 Plan to date. In the second quarter of 2006, we announced our decision to continue our broad-based stock option program for 2006.

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Adoption of FAS 123R

Employee stock-based compensation expense recognized in the second quarter and first six months of 2006 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures at a rate of five percent. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Employee stock-based compensation expense recognized under FAS 123 was as follows (in millions, except for per share data):

	Three Months Ended June 30, 2006			Six Months Ended June 30, 2006
Research and development	$	34		$	67
Marketing, general and administrative		41			82
Total employee stock-based compensation expense		75			149
Tax benefit related to employee stock-based compensation expense		(28	)		(54	)
Net effect on net income	$	47		$	95
Effect on earnings per share:
Basic	$	0.05		$	0.09
Diluted	$	0.04		$	0.09

As of June 30, 2006, total compensation cost related to unvested stock options not yet recognized was $664 million, which is expected to be allocated to expense and production costs over a weighted-average period of 24 months.

The carrying value of inventory on our Condensed Consolidated Balance Sheet as of June 30, 2006 includes employee stock-based compensation costs of $33 million. Substantially all of the products sold in the first six months of 2006 were manufactured in previous periods when we did not include employee stock-based compensation expense in our production costs. In future periods, when product manufactured after the adoption of FAS 123R is sold or written off, or reserves are required for obsolescence or lack of demand, we will recognize employee stock-based compensation expense in cost of sales.

The following pro forma net income and EPS were determined as if we had accounted for employee stock-based compensation for our employee stock plans under the fair value method prescribed by FAS 123 in prior periods and had capitalized certain costs into inventory manufactured in those prior periods, with the resulting effect on cost of sales for the quarter and six months ended June 30, 2006 when previously manufactured products were sold. (In millions, except for per share data):

	Three Months Ended June 30, 2006			Six Months Ended June 30, 2006
Net income as reported	$	531		$	952
Deduct: Total employee stock-based compensation expense includable in cost of sales, net of related tax effects		(8	)		(16	)
Pro forma net income	$	523		$	936
Earnings per share:
Basic-as reported	$	0.50		$	0.90
Basic-pro forma	$	0.50		$	0.89
Diluted-as reported	$	0.49		$	0.89
Diluted-pro forma	$	0.49		$	0.87

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Pro Forma Information for Periods Prior to Adoption of FAS 123R

The following pro forma net income and EPS were determined as if we had accounted for employee stock-based compensation for our employee stock plans under the fair value method prescribed by FAS 123. (In millions, except for per share data):

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net income as reported	$	296		$	580
Deduct: Total employee stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects		(41	)		(81	)
Pro forma net income	$	255		$	499
Earnings per share:
Basic-as reported	$	0.28		$	0.55
Basic-pro forma	$	0.24		$	0.47
Diluted-as reported	$	0.27		$	0.54
Diluted-pro forma	$	0.23		$	0.45

Valuation Assumptions

The employee stock-based compensation expense recognized under FAS 123R and presented in the pro forma disclosure required under FAS 123 was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The weighted-average assumptions used are as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2006	2005	2006	2005
Risk-free interest rate	4.9%	3.7%	4.8%	3.8%
Dividend yield	0.0%	0.0%	0.0%	0.0%
Expected volatility	29.0%	32.0%	29.0%	32.0%
Expected term (years)	4.2	4.2	4.2	4.2

Due to the redemption of our Special Common Stock in June 1999 by Roche, there is limited historical information available to support our estimate of certain assumptions required to value our employee stock options and the stock issued under our employee stock purchase plan. In developing our estimate of expected term, we have assumed that our historical stock option exercise experience is a relevant indicator of future exercise patterns. We base our determination of expected volatility predominantly on the implied volatility of our traded options with consideration of our historical volatilities and volatilities of comparable companies.

Stock Option Activity

The following is a summary of option activity for the first six months of 2006 (shares in millions):

				Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted- Average Exercise Price
December 31, 2005		84			83		$	46.64
Grants		(1	)		1			84.59
Exercises		-			(4	)		30.28
Cancellations		1			(1	)		60.10
June 30, 2006		84			79		$	48.09

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The intrinsic value of options exercised during the second quarters of 2006 and 2005 was $109 million and $653 million, respectively, and was $233 million and $769 million in the first six months of 2006 and 2005, respectively. The estimated fair value of shares vested during the second quarters of 2006 and 2005 was $93 million and $65 million, respectively, and was $182 million and $130 million in the first six months of 2006 and 2005, respectively. The weighted-average estimated fair value of stock options granted during the second quarters of 2006 and 2005 was $25.32 and $22.52 per option, respectively, and was $26.43 and $19.34 per option for the first six months of 2006 and 2005, respectively, based on the assumptions in the Black-Scholes valuation model discussed above.

The following table summarizes outstanding and exercisable options at June 30, 2006 (in millions, except exercise price data):

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares Outstanding		Weighted-Average Remaining Contractual Life (in years)		Weighted-Average Exercise Price		Number of Shares Outstanding		Weighted-Average Remaining Contractual Life (in years)		Weighted-Average Exercise Price
$6.27 - $8.89		0.5		5.41	$	7.69		0.5		5.41	$	7.69
$10.00 - $14.35		12.9		5.41	$	13.71		11.7		5.33	$	13.66
$15.04 - $22.39		8.6		4.84	$	20.83		8.5		4.81	$	20.89
$22.88 - $33.00		0.3		4.81	$	27.55		0.3		4.82	$	27.55
$35.63 - $53.23		35.7		7.29	$	46.83		19.3		6.95	$	45.01
$53.95 - $75.90		1.5		8.28	$	59.23		0.6		8.21	$	58.25
$79.10 - $98.80		19.4		9.26	$	85.93		0.1		8.99	$	81.82
		78.9						41.0

At June 30, 2006, the aggregate intrinsic value of the outstanding options was $2,742 million and the aggregate intrinsic value of the exercisable options was $2,090 million.

Stock Repurchase Program

Under a stock repurchase program approved by our Board of Directors in December 2003 and most recently extended in April 2006, we are authorized to repurchase up to 100 million shares of our Common Stock for an aggregate amount of up to $6.0 billion through June 30, 2007. During the first six months of 2006, we repurchased approximately seven million shares at an aggregate cost of $540 million. Since the program’s inception, we have repurchased approximately 56 million shares at a total price of $3.9 billion. We intend to use the repurchased stock to offset dilution caused by the issuance of shares in connection with our employee stock plans and also to maintain Roche’s minimum percentage ownership interest in our stock.

Note 3. Condensed Consolidated Financial Statement Detail

Inventories

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

	June 30, 2006		December 31, 2005
Raw materials and supplies	$	97	$	79
Work in process		561		438
Finished goods		251		186
Total	$	909	$	703

Included in work in process are approximately $54 million at June 30, 2006 and $85 million at December 31, 2005 of inventories primarily comprised of currently marketed products manufactured at facilities awaiting regulatory approval. As of June 30, 2006, approximately $33 million in employee stock-based compensation costs were capitalized in inventory pursuant to FAS 123R.

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Note 4. Contingencies

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

On October 4, 2004, we received a subpoena from the U.S. Department of Justice, requesting documents related to the promotion of Rituxan, a prescription treatment now approved for three indications:  (1) the treatment of relapsed or refractory, low-grade or follicular, CD20-positive, B-cell non-Hodgkin’s lymphoma, (2) the first-line treatment of diffuse large B-cell, CD20-positive, non-Hodgkin’s lymphoma in combination with CHOP or other anthracycline-based chemotherapy regimens (approved on February 10, 2006), and (3) for use in combination with methotrexate to reduce signs and symptoms in adult patients with moderately- to severely- active rheumatoid arthritis who have had an inadequate response to one or more TNF antagonist therapies (approved on February 28, 2006). We are cooperating with the associated investigation, which we have been advised is both civil and criminal in nature. The government has called and is expected to call former and current Genentech employees to appear before a grand jury in connection with this investigation. The outcome of this matter cannot be determined at this time.

On July 29, 2005, a former Genentech employee, whose employment ended in April 2005, filed a qui tam complaint under seal in the United States District Court for the District of Maine against Genentech and Biogen Idec, alleging violations of the False Claims Act and retaliatory discharge of employment. On December 20, 2005, the United States filed notice of its election to decline intervention in the lawsuit. The complaint was subsequently unsealed and we were served on January 5, 2006. The outcome of this matter cannot be determined at this time.

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, we have 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. On June 10, 2002, a jury voted to award the COH approximately $300 million in compensatory damages. On June 24, 2002, a 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 are included in the accompanying Condensed Consolidated Balance Sheets in “litigation-related and other long-term liabilities” at June 30, 2006 and December 31, 2005. We filed a notice of appeal of the verdict and damages awards with the California Court of Appeal. On October 21, 2004, the California Court of Appeal affirmed the verdict and damages awards in all respects. On November 22, 2004, the California Court of Appeal modified its opinion without changing the verdict and denied Genentech’s request for rehearing. On November 24, 2004, we filed a petition seeking review by the California Supreme Court. On February 2, 2005, the California Supreme Court granted that petition. The amount of cash paid, if any, or the timing of such payment in connection with the COH matter will depend on the outcome of the California Supreme Court’s review of the matter, however, it may take longer than one year to further resolve the matter.

We recorded accrued interest and bond costs of $14 million in the second quarters of 2006 and 2005, and $27 million in the first six months of 2006 and 2005 related to the COH trial judgment. In conjunction with the COH judgment, we posted a surety bond and were required to pledge cash and investments of $735 million at June 30, 2006 and December 31, 2005 to secure the bond. These amounts are reflected in “restricted cash and investments” in the accompanying Condensed Consolidated Balance Sheets. 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 COH trial results.

On April 11, 2003, MedImmune, Inc. (or “MedImmune”) 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 (or “the ‘415 patent” or “Cabilly patent”) that we co-own with COH and under which MedImmune and other companies have been licensed and are paying royalties to us. The lawsuit includes claims for violation of antitrust, patent, and unfair competition laws. MedImmune is seeking a ruling that the ‘415 patent is invalid and/or unenforceable, a determination that MedImmune does not owe royalties under the ‘415 patent on sales

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of its Synagis® antibody product, an injunction to prevent us from enforcing the ‘415 patent, an award of actual and exemplary damages, and other relief. On January 14, 2004 (amending a December 23, 2003 Order), the U.S. District Court granted summary judgment in our favor on all of MedImmune’s antitrust and unfair competition claims. On April 23, 2004, the District Court granted our motion to dismiss all remaining claims in the case. On October 18, 2005, the U.S. Court of Appeals for the Federal Circuit affirmed the judgment of the District Court in all respects. MedImmune filed a petition for certiorari with the United States Supreme Court on November 10, 2005, seeking review of the decision to dismiss certain of its claims. The Supreme Court granted MedImmune’s petition on February 21, 2006 and briefing on the merits of this case before the Supreme Court is ongoing. Oral argument before the Supreme Court in this matter is scheduled for October 4, 2006. The outcome of this matter cannot be determined at this time.

On May 13, 2005, a request was filed by a third party for reexamination of the ‘415 or Cabilly patent. The request sought reexamination on the basis of non-statutory double patenting over U.S. Patent No. 4,816,567. On July 7, 2005, the U.S. Patent Office ordered reexamination of the ‘415 patent. On September 13, 2005, the Patent Office issued an initial “non-final” Office action rejecting the claims of the ‘415 patent. We filed our response to the Office action on November 25, 2005. The Patent Office has not yet acted on this response. On December 23, 2005, a second request for reexamination of the ‘415 patent was filed by another third party. On January 23, 2006, the Patent Office granted that reexamination request. On June 6, 2006, the two reexaminations were merged into one proceeding. We expect, based on past practice, that we will receive another non-final Office action combining the arguments from the two reexamination requests and rejecting certain or all claims of the ‘415 patent. Such action would again give us an opportunity to respond. Because the above-described reexamination is ongoing, the final outcome of this matter cannot be determined at this time. The ‘415 patent, which expires in 2018, relates to methods we and others use to make certain antibodies or antibody fragments, as well as cells and DNA used in these methods. We have licensed the ‘415 patent to other companies and derive significant royalties from those licenses. The claims of the ‘415 patent remain valid and enforceable throughout the reexamination process.

In the second quarter of 2006 we made a “go” decision for a Phase III study of our second-generation humanized anti-CD20 molecule (ocrelizumab) in rheumatoid arthritis. We also filed an Investigational New Drug (or “IND”) application with the U.S. Food and Drug Administration (or “FDA”) for this molecule to treat neuromyelitis optica (or “NMO”). Biogen Idec Inc. disagrees that Genentech has the ability to develop this molecule for NMO or rheumatoid arthritis without Biogen Idec’s agreement. We and Biogen Idec are seeking to resolve our differences relating to that disagreement. Because discussions are ongoing, the final outcome of this matter cannot be determined at this time.

On March 24, 2004, Dr. Kourosh Dastghieb filed a lawsuit against Genentech in the U.S. District Court for the Eastern District of Pennsylvania. The lawsuit stems from Dastghieb’s claim that, based on a purported relationship with Genentech in the mid-1990’s, he is entitled to profits or proceeds from Genentech’s Lucentis product. Dastghieb asserts multiple claims for monetary damages, including a claim under an unjust enrichment theory that he is entitled to the entire net present value of projected Lucentis sales, which he claims is between approximately $1.4 billion and $4.1 billion. Genentech denies that he is entitled to any such damages. Trial of this matter is scheduled to begin on October 19, 2006. Because the litigation proceedings are ongoing, the outcome of this matter cannot be determined at this time.

Note 5. Relationship with Roche and Related Party Transactions

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

We 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 with respect to any issuance of our Common Stock in the future, we will repurchase a sufficient number of shares so that immediately after such issuance, the percentage of our Common Stock owned by Roche will be no lower than 2% below the “Minimum Percentage” (as defined below), provided however, as long as Roche’s percentage ownership is greater than 50%, prior to issuing any shares, we will repurchase a sufficient number of shares of our Common Stock such that, immediately after our issuance of shares, Roche’s percentage ownership will be greater than 50%. The Minimum Percentage equals the lowest number of shares of our Common Stock owned by

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Roche since the July 1999 offering (adjusted for dispositions of shares of our Common Stock by Roche as well as for stock splits or stock combinations) divided by 1,018,388,704, the number of shares of our Common Stock outstanding at the time of the July 1999 offering, as adjusted for stock splits. We have repurchased shares of our Common Stock since 2001. 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. The Minimum Percentage at June 30, 2006 was 57.7% and, under the terms of the affiliation agreement, Roche’s ownership percentage is to be no lower than 55.7%. At June 30, 2006, Roche’s ownership percentage was 55.8%.

Related Party Transactions

We enter into transactions with our related parties, Roche and other Roche affiliates (including Hoffmann-La Roche) and Novartis AG and other Novartis affiliates (or “Novartis”), under existing agreements 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.

In our royalty and supply arrangements with related parties, we are the primary obligor because we bear the manufacturing risk, general inventory risks, and the risk to defend our intellectual property. Because we are the primary obligor, we record our transactions gross in accordance with EITF 99-19; otherwise, our transactions are recorded net.

Hoffmann-La Roche

Under our existing arrangements with Hoffmann-La Roche, including our licensing and marketing agreements, we recognized contract revenue from Hoffmann-La Roche, including amounts earned related to ongoing development activities, of $21 million and $19 million in the second quarters of 2006 and 2005, respectively, and $40 million and $35 million in the first six months of 2006 and 2005, respectively. All other revenues from Roche, Hoffmann-La Roche and their affiliates, principally royalties and product sales, totaled $280 million and $134 million in the second quarters of 2006 and 2005, respectively, and $504 million and $290 million in the first six months of 2006 and 2005, respectively. Cost of sales (or “COS”) included amounts related to Hoffmann-La Roche of $64 million and $27 million in the second quarters of 2006 and 2005, respectively, and $113 million and $74 million in the first six months of 2006 and 2005, respectively. Our reported research and development (or “R&D”) expenses included $58 million and $37 million in the second quarters of 2006 and 2005, respectively, and $101 million and $73 million in the first six months of 2006 and 2005, respectively, related to development activities undertaken on projects on which we collaborate with Hoffmann-La Roche.

In July 2006, we signed two new product supply agreements with F. Hoffmann-La Roche which supplement and supersede existing product supply agreements with F. Hoffmann-La Roche. Under a short-term supply agreement, F. Hoffmann-La Roche has agreed to purchase specified amounts of Herceptin, Avastin and Rituxan through 2008. Under a longer-term supply agreement, F. Hoffmann-La Roche has agreed to purchase specified amounts of Herceptin and Avastin through 2012 and, on a perpetual basis, either party may order other collaboration products from the other party, including Herceptin and Avastin after 2012, pursuant to certain forecast terms. The longer-term supply agreement also provides that either party may terminate its obligation to purchase and/or supply Avastin and/or Herceptin with six years notice on or after December 31, 2007.

Novartis

Based on information available to us at the time of filing this Form 10-Q, we believe the Novartis Group holds approximately 33.3% of the outstanding voting shares of Roche Holding Ltd. As a result of this ownership, the Novartis Group is deemed to have an indirect beneficial ownership interest under FAS 57 “Related Party Disclosures” of more than 10% of our voting stock.

We have an agreement with Novartis Pharma AG (a wholly owned subsidiary of Novartis AG) under which Novartis

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Pharma AG has the exclusive right to develop and market Lucentis outside of the U.S. for indications related to diseases or disorders of the eye. As part of this agreement, the parties share the cost of certain of our ongoing development expenses for Lucentis.

We, along with Novartis Pharma AG and Tanox, Inc., are co-developing Xolair in the U.S. We and Novartis Pharmaceutical Corporation are co-promoting Xolair in the U.S. and we both make certain joint and individual payments to Tanox; our joint and individual payments are in the form of royalties. We record all sales and cost of sales in the U.S. and Novartis markets the product and records all sales and COS in Europe. We and Novartis share the resulting U.S. and European operating profits, respectively, according to prescribed profit-sharing percentages. We are currently supplying Xolair and receive cost plus a mark-up similar to other supply arrangements. Beginning in the third quarter of 2006, Novartis will supply Xolair and receive cost plus a mark-up. On January 20, 2006, Novartis received FDA approval to manufacture bulk supply of Xolair at their Huningue production facility in France. Production costs of Xolair may initially be higher than those currently reflected in our COS as a result of the production shift from us to Novartis until production economies of scale can be achieved by Novartis.

Contract revenue from Novartis related to manufacturing, commercial and ongoing development activities was $13 million and $11 million in the second quarters of 2006 and 2005, respectively, and $23 million and $22 million in the first six months of 2006 and 2005, respectively. Revenue from Novartis related to product sales was not material in the second quarters and the first six months of 2006 and 2005. COS was not material in the second quarter and first six months of 2006, and was $12 million in the second quarter of 2005 and $15 million in the first six months of 2005, which included a one-time payment in the second quarter of 2005 related to our release from future manufacturing obligations. Our reported R&D expenses included $19 million and $10 million in the second quarters of 2006 and 2005, respectively, and $45 million and $21 million in the first six months of 2006 and 2005, respectively, related to development activities undertaken on products on which we collaborate with Novartis. Collaboration profit sharing payments from us to Novartis were $48 million and $29 million in the second quarters of 2006 and 2005, respectively, and $91 million and $52 million in the first six months of 2006 and 2005, respectively.

Note 6. Income Taxes

Our effective income tax rate was 38% in the second quarter and first six months of 2006 compared to 26% in the second quarter of 2005 and 32% in the first six months of 2005. The increases in the income tax rate from 2005 primarily relate to a one-time benefit of approximately $39 million from recognizing additional R&D tax credits in the second quarter of 2005. In addition, the increases in the tax rate reflect higher income before taxes and the December 31, 2005 expiration of provisions in federal tax law for the R&D tax credit. If legislation to extend the R&D tax credit is passed, we will record a tax benefit for R&D tax credits at that time.

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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, 2006, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2006 and 2005, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2006 and 2005. These financial statements are the responsibility of the Company’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, 2005, 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 February 10, 2006, 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, 2005, 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 7, 2006

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

GENENTECH, INC.

FINANCIAL REVIEW

Overview

The Company

Genentech is a leading biotechnology company that discovers, develops, manufactures, and commercializes biotherapeutics for significant unmet medical needs. We commercialize multiple biotechnology products, and also receive royalties from companies that are licensed to market products based on our technology.

Major Developments in the Second Quarter of 2006

In the second quarter of 2006, our total operating revenues were $2,199 million, an increase of 44% from $1,527 million in the second quarter of 2005, and our net income was $531 million, an increase of 79% from $296 million in the second quarter of 2005. In the first half of 2006, our total operating revenues were $4,185 million, an increase of 40% from $2,988 million the first half of 2005, and our net income was $952 million, an increase of 64% from $580 million in the first half of 2005. Net income in 2006 includes the effect of stock-based compensation expense related to employee stock options and employee stock purchases under Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “FAS 123R”), which decreased our net income by $47 million after taxes in the second quarter and $95million after taxes in the first six months of 2006.

Significant milestones during the second quarter of 2006 were as follows:

We received the following U.S. Food and Drug Administration (or “FDA”) approvals:

·   Lucentis for the treatment of neovascular (wet) age-related macular degeneration (or “AMD”); and

·   Avastin in combination with intravenous 5-fluorouracil (or “5-FU”)-based chemotherapy for second-line metastatic colorectal cancer.

We submitted the following FDA filings:

·   a Supplemental Biologics License Application (or “sBLA”) for use of Avastin in first-line treatment of advanced, non-small cell lung cancer other than predominant squamous histology, in combination with platinum based chemotherapy; and

·   an sBLA for use of Avastin in combination with taxane chemotherapy for patients who have not previously received chemotherapy for their locally recurrent or metastatic breast cancer. We requested, and the FDA granted, a Priority Review of the application with an action date no later than November 23, 2006. However, the FDA has requested that we provide additional documentation from the trial underlying the filing, and we believe the time required to respond to their requests will extend the review period beyond the November 23, 2006 action date.

We recently made changes to our distribution model for Avastin, Herceptin and Rituxan and renegotiated our distribution agreements with a number of our major wholesalers. This resulted in a number of changes in our commercial terms, effective July 1, 2006. As part of these changes, the point at which we recognize products sales revenue for all of our products changed from the time at which we ship our products to the time at which our products arrive at the designated receiving location. We do not expect the net effect of these changes to be material to our results of operations for the full year 2006. We did see fluctuations in wholesaler ordering patterns in the second quarter for Avastin, Herceptin and Rituxan which we believe were immaterial to our second quarter sales.

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Our Strategy and Goals

Our business objectives for the years 2006 through 2010 include bringing at least 20 new molecules into clinical development, bringing at least 15 major new products or indications onto the market, becoming the number one U.S. oncology company in sales and achieving certain financial growth measures. These objectives are reflected in our revised Horizon 2010 strategy and goals summarized on our website at http://www.gene.com.

Economic and Industry-wide Factors

Our long-term strategy and goals are challenged by economic and industry-wide factors that affect our business. The key factors that affect our future growth are discussed below:

·   Our long-term business growth, commercial performance and clinical success depend upon our ability to continue to develop and commercialize important novel therapeutics to treat unmet medical needs, such as cancer. We recognize that the successful development of biotherapeutics is highly difficult and uncertain and that it will be challenging for us to continue to discover and develop innovative treatments. Our business requires significant investment in research and development (or “R&D”) over many years, often for products that fail during the R&D process. Once a product receives FDA approval, it remains subject to ongoing FDA regulation, including changes to the product label, new or revised regulatory requirements for manufacturing practices, written advisement to physicians, and/or product recalls.

·   We face significant competition in the diseases of interest to us from pharmaceutical companies, pharmaceutical divisions of chemical companies, and biotechnology companies. The introduction of new competitive products or follow-on biologics or new information about existing products may result in lost market share for us, reduced utilization of our products, and/or lower prices, even for products protected by patents.

·   Intellectual property protection of our products is crucial to our business. Loss of effective intellectual property protection on one or more products could result in lost sales to competing products and may negatively affect our sales, royalty revenues and operating results. We are often involved in disputes over contracts and intellectual property and we work to resolve these disputes in confidential negotiations or litigation. We expect legal challenges in this area to continue. We plan to continue to build upon and defend our intellectual property position.

·   Manufacturing biotherapeutics is difficult and complex, and requires facilities specifically designed and validated to run biotechnology production processes. The manufacture of a biotherapeutic requires developing and maintaining a process to reliably manufacture and formulate the product at an appropriate scale, obtaining regulatory approval to manufacture the product, and is subject to changes in regulatory requirements or standards that may require modifications to the manufacturing process.

·   As the Medicare and Medicaid programs are the largest payers for our products, rules relating to coverage and reimbursement continue to represent an important area of focus. New regulations relating to hospital and physician payment continue to be implemented annually. To date, we have not seen any detectable effects of the new rules on our product sales, and we anticipate minimal effects on our revenues in 2006. On July 1, 2006, the new Competition Acquisition Program (or “CAP”) option went into effect, as mandated under the Medicare Modernization Act of 2003 (or “MMA”), and is now available to physicians providing services under Medicare Part B. Under the CAP, physicians can choose to either obtain drugs directly from a designated CAP vendor, or continue to purchase drugs directly and be reimbursed by CMS at the Average Selling Price + 6% rate. We anticipate that the effect of the CAP option on our sales will be immaterial.

·   We believe our business model is only sustainable with appropriate pricing and reimbursement for our products to offset the costs and risks of drug development. The pricing of our products has received negative press coverage and public scrutiny. We will continue to meet with patient groups, payers and other stakeholders in the healthcare system to understand their issues and concerns. However, the future reimbursement environment for our products is uncertain.

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·   Our ability to attract and retain highly qualified and talented people in all areas of the company, and our ability to maintain our unique culture, will be critical to our success over the long-term. We are working diligently across the company to make sure that we successfully hire, train and integrate new employees into the Genentech culture and environment. In keeping with our desire to maintain and protect our culture, we have made a decision to continue our broad-based stock option program in 2006 consistent with the size of programs we have seen from other companies in the pharmaceutical/biotechnology industry with comparable market capitalizations.

Marketed Products

We commercialize in the United States (or “U.S.”) the biotechnology products listed below:

Avastin (bevacizumab) is an anti-VEGF humanized antibody approved for use in combination with intravenous 5-fluorouracil based chemotherapy as a treatment for patients with first- or second-line metastatic cancer of the colon or rectum.

Rituxan (rituximab) is an anti-CD20 antibody which we commercialize with Biogen Idec Inc. It is approved for:

·   The treatment of patients with relapsed or refractory, low-grade or follicular, CD20-positive, B-cell non-Hodgkin’s lymphoma, including retreatment and bulky disease;

·   The first-line treatment of patients with diffuse large B-cell, CD20-positive, non-Hodgkin’s lymphoma (or “DLBCL”) in combination with CHOP (cyclophosphamide, doxorubicin, vincristine and prednisone) or other anthracycline-based chemotherapy regimens; and

·   Use in combination with methotrexate for reducing signs and symptoms in adult patients with moderately-to-severely active rheumatoid arthritis (or “RA”) who have had an inadequate response to one or more tumor necrosis factor (or “TNF”) antagonist therapies.

Herceptin (trastuzumab) is a humanized anti-HER2 antibody approved for the treatment of certain patients with metastatic breast cancer. Herceptin is approved for use as a first-line therapy in combination with paclitaxel and as a single agent in second- and third-line therapy for patients with metastatic breast cancer who have tumors that overexpress the human epidermal growth factor receptor 2 (or “HER2”) protein.

Tarceva (erlotinib), which we commercialize with OSI Pharmaceuticals, Inc., is a small-molecule tyrosine kinase inhibitor of the HER1/epidermal growth factor receptor (or “EGFR”) signaling pathway. Tarceva is approved for the treatment of patients with locally advanced or metastatic non-small cell lung cancer (or “NSCLC”) after failure of at least one prior chemotherapy regimen. It is also approved, in combination with gemcitabine chemotherapy, for the first-line treatment of patients with locally advanced, unresectable or metastatic pancreatic cancer.

Xolair (omalizumab) is a humanized anti-IgE antibody, which we commercialize with Novartis Pharma AG (or “Novartis”). Xolair is approved for the treatment of moderate-to-severe persistent allergic asthma in adults and adolescents 12 years and older whose asthmatic allergic reaction to perennial aeroallergen cannot be adequately controlled with the use of inhalers.

Raptiva (efalizumab) is a humanized anti-CD11a antibody approved for the treatment of chronic moderate-to-severe plaque psoriasis in adults age 18 or older who are candidates for systemic therapy or phototherapy.

Lucentis (ranibizumab) is an anti-VEGF antibody fragment approved for the treatment of neovascular wet age-related macular degeneration.

Nutropin (somatropin [rDNA origin] for injection) and Nutropin AQ are growth hormone products approved for the treatment of growth hormone deficiency in children and adults, growth failure associated with chronic renal insufficiency prior to kidney transplantation, short stature associated with Turner syndrome and long-term treatment of idiopathic short stature.

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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).

TNKase (tenecteplase) is a modified form of t-PA approved for the treatment of acute myocardial infarction (heart attack).

Cathflo Activase (alteplase, recombinant) is a t-PA approved in adult and pediatric patients 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 of deoxyribonuclease (rhDNase) I, approved for the treatment of cystic fibrosis.

Licensed Products

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

·   Herceptin, Pulmozyme, and Avastin outside of the U.S.,

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

·   Nutropin products, Activase and TNKase in Canada.

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 all 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 Principles of Corporate Governance, 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 CEO, CFO 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 Condensed Consolidated Financial Statements requires management 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, and we have established internal controls related to the preparation of these estimates. Actual results and the timing of the results could differ materially from these estimates.

We believe the following policies to be critical to understanding our financial condition, results of operations, and our expectations for 2006 because these policies require management to make significant estimates, assumptions and judgments about matters that are inherently uncertain.

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Contingencies

We are currently, or have been, involved in certain legal proceedings, including patent infringement litigation. We are also involved in licensing and contract disputes, and other matters. Refer to Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information on these matters. We assess the likelihood of any adverse judgments or outcomes for these legal matters as well as potential ranges of probable losses. We record an estimated loss as a charge to income if we determine that, based on information available at the time, the loss is probable and the amount of loss can be reasonably estimated. Included in “litigation-related and other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet at June 30, 2006 is $701 million, which represents our estimate of the costs for the current resolution of these matters.The nature of these matters is highly uncertain 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 final outcome of these matters. An outcome of such matters different than previously estimated could have a material effect on our financial position or our results of operations in any one quarter.

Product Sales Allowances

Revenues from product sales, which are principally generated in the U.S., are recorded net of allowances and accruals for rebates, healthcare provider contractual chargebacks, prompt pay sales discounts, product returns, wholesaler inventory management allowances, and bad debts, all of which are established at the time of sale. These allowances are based on estimates of the amounts earned or to be claimed on the related sales. The amounts charged to our Condensed Consolidated Statements of Income for total product sales allowances, in the periods presented herein, have been relatively consistent at approximately 7-8% of gross sales. In order to prepare our Condensed Consolidated Financial Statements, we are required to make estimates regarding the amounts earned or to be claimed on the related product sales.

Definitions for the product sales allowance types are as follows:

·   Rebate allowances and accruals are comprised of both direct and indirect rebates. Direct rebates are contractual price adjustments payable to wholesalers and specialty pharmacies that purchase products directly from us. Indirect rebates are contractual price adjustments payable to healthcare providers and organizations such as clinics, hospitals, pharmacies and group purchasing organizations that do not purchase products directly from us;

·   Prompt pay sales discounts are credits granted to wholesalers for remitting payment on their purchases within established cash repayment incentive periods;

·   Product return allowances are established in accordance with our Product Returns Policy. Our returns policy allows product returns within the period beginning two months prior to expiration and ending six months following product expiration;

·   Wholesaler inventory management allowances are credits granted to wholesalers for compliance with various contractually-defined inventory management programs. These programs were created to align purchases with underlying demand for our products and to maintain consistent inventory levels, typically at 2 to 3 weeks of sales depending on the product;

·   Bad debt allowances are based on our estimated uncollectible accounts receivable; and

·   Healthcare provider contractual chargebacks are the result of contractual commitments by us to provide products to healthcare providers at specified prices or discounts.

We believe that our estimates related to product returns allowances, wholesaler inventory management payments, and bad debts are not material amounts, based upon the historical levels of credits and allowances as a percentage of product sales. We believe our estimates related to healthcare provider contractual chargebacks and prompt pay sales discounts do not have a high degree of estimation complexity or uncertainty as the related amounts are settled within

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a short period of time. We consider rebate allowances and accruals to be the only process that involves both material amounts, and requires a higher degree of subjectivity and judgment necessary to account for the rebate allowances or accruals. As a result of the uncertainties involved in estimating rebate allowances and accruals, there is a likelihood that materially different amounts could be reported under different conditions or using different assumptions.

Our rebates are based upon definitive contractual agreements or legal requirements (such as Medicaid) after the final dispensing of the product by a pharmacy, clinic or hospital to a medical benefit plan participant. These rebates are primarily estimated using historical data, including patient usage, customer buying patterns, applicable contractual rebate rates and contract performance by the benefit providers. Direct rebates are accrued at the time of sale and recorded as allowances against trade accounts receivable; indirect (including Medicaid) rebates are accrued at the time of sale and recorded as liabilities. Rebate estimates are evaluated quarterly and may require changes to better align our estimates with actual results. As part of this evaluation, we review changes to Medicaid legislation, changes to State rebate contracts, changes in the level of discounts, and significant changes in product sales trends. Although rebates are accrued at the time of sale, rebates are typically paid out, on average, up to 4 to 5 months after the sale. We believe our rebate allowances and accruals estimation process provides a high degree of confidence in the amounts established and that the annual allowance amounts provided for would not vary by more than approximately ±3% based on our estimate that our changes in rebate allowances and accruals estimates related to prior years have not exceeded 3%. To illustrate our sensitivity to changes in the rebate allowances and accruals process, as much as a ±10% change in the rebate allowances and accruals provision we recognized in 2005 (which is in excess of three times the level of variability we have recently observed for rebates) would have an approximately $13 million effect on our income before taxes (or less than ±$0.01 per share, after tax). The total rebate allowances and accruals recorded in our Condensed Consolidated Balance Sheets were $58 million as of June 30, 2006 and $50 million as of December 31, 2005.

All of the aforementioned categories of allowances and accruals are evaluated quarterly and adjusted when trends or significant events indicate that a change in estimate is appropriate. Such changes in estimate could materially affect our results of operations or financial position; however, to date they have not been material. However, it is possible that we may need to adjust our estimates in future periods. As of June 30, 2006, our Condensed Consolidated Balance Sheet reflected estimated product sales allowance reserves and accruals totaling approximately $126 million and for the six months ended June 30, 2006, our net product sales were approximately $3,454 million.

Royalties

For substantially all of our agreements with licensees, we estimate royalty revenue and royalty receivables in the periods these royalties are earned, in advance of collection. Our estimate of royalty revenue and receivables in those instances is based upon communication with some licensees, historical information and forecasted sales trends. Differences between actual revenues and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, such adjustments have not been material to our condensed consolidated financial condition or results of operations.

Income Taxes

Income tax expense is based on income before taxes and is computed using the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates projected to be 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. Various internal and external factors may have favorable or unfavorable effects on our future effective income 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, changes in estimates of prior years’ items, past and future levels of R&D spending, and changes in overall levels of income before taxes.

Inventories

Inventories consist of (i) currently marketed products, (ii) products manufactured under contract, (iii) product candidates awaiting regulatory approval, and (iv) currently marketed products manufactured under a new process or at facilities awaiting regulatory approval, all of which are capitalized based on management’s judgment of probable

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near term commercialization. In addition, inventories include employee stock-based compensation costs capitalized under FAS 123R. The valuation of inventory requires us to estimate the value of inventory that may become obsolete prior to use or that may fail to be released. The determination of obsolete inventory requires us to estimate the future demands for our products, and in the case of pre-approval inventories, an estimate of the regulatory approval date for the product, the manufacturing facility or the new manufacturing process. We may be required to expense previously capitalized inventory costs upon a change in our judgment, due to, among other potential factors, a denial or delay of approval on a product, a manufacturing facility or a new manufacturing process by the necessary regulatory bodies, or new information that suggests that the inventory will not be saleable.

Employee Stock-Based Compensation—Adoption of FAS 123R

On January 1, 2006, we began accounting for employee stock-based compensation in accordance with FAS 123R. Under the provisions of FAS 123R, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of the award. Due to the redemption of our Special Common Stock in June 1999 (or “Redemption”) by Roche Holdings, Inc. (or “Roche”), there is limited historical information available to support our estimate of certain assumptions required to value our stock options. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures), the expected volatility, and a comparison to relevant peer group data. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, our valuation assumptions used to value employee stock-based awards granted in future periods may change.

Further, FAS 123R requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. Accordingly, we recognized employee stock-based compensation as part of our operating expenses and we allocated, in the second quarter of 2006, $34 million to R&D, $41 million to marketing, general and administrative (or “MG&A”), and we recognized a related tax benefit of $28 million. In the first six months of 2006, we allocated $67 million to R&D, $82 million to MG&A, and we recognized a related tax benefit of $54 million. In addition, we capitalized $33 million of employee stock-based compensation costs in inventory as a cost of production during the first six months of 2006. We adopted FAS 123R on a modified prospective basis. Substantially all of the products sold in the first six months of 2006 were manufactured in previous periods when we did not include employee stock-based compensation expense in our production costs; therefore, we did not record any employee stock-based compensation expense as a component of cost of sales during the first six months of 2006. In future periods, when product manufactured after the adoption of FAS 123R is sold or written off, or reserves are required for obsolescence or lack of demand, we will recognize employee stock-based compensation expense in cost of sales. The allocation of employee stock-based compensation costs to each operating expense line and to inventory are estimated based on specific employee headcount information at each grant date and revised, if necessary, in future periods if actual employee headcount information differs materially from those estimates. As a result, the amount of employee stock-based compensation costs we record in future periods in each operating expense line and capitalize in inventory may differ significantly from what we have recorded in the current period. As of June 30, 2006, total compensation cost related to nonvested stock options not yet recognized was $664 million, which is expected to be allocated to expense and production costs over a weighted-average period of 24 months. For the full year 2006, we expect employee stock-based compensation expense to be in the range of $0.15 to $0.17 per diluted share.

At this time, we do not include FAS 123R employee stock-based compensation as a reimbursable expense in our collaborations. Therefore, stock-based compensation expense has not affected contract revenue and collaboration profit sharing expense lines.

There was no stock-based compensation expense related to employee stock options and employee stock purchases recognized under FAS 123R during the three- and six-month periods ended June 30, 2005.

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Results of Operations

(In millions, except for per share data)

	Three Months Ended June 30,									Six Months Ended June 30,
	2006			2005			% Change			2006			2005			% Change
Product sales	$	1,810		$	1,274			42	%	$	3,454		$	2,460			40	%
Royalties		316			200			58			602			432			39
Contract revenue		73			53			38			129			96			34
Total operating revenues		2,199			1,527			44			4,185			2,988			40
Cost of sales		284			274			4			546			530			3
Research and development		390			278			40			764			521			47
Marketing, general and administrative		471			352			34			912			663			38
Collaboration profit sharing		259			199			30			485			375			29
Recurring charges related to redemption		26			34			(24	)		52			69			(25	)
Special items: litigation-related		14			20			(30	)		27			31			(13	)
Total costs and expenses		1,444			1,157			25			2,786			2,189			27
Operating income		755			370			104			1,399			799			75
Other income (expense):
Interest and other income, net		121			35			246			174			55			216
Interest expense		(18	)		(4	)		350			(37	)		(7	)		429
Total other income, net		103			31			232			137			48			185
Income before taxes		858			401			114			1,536			847			81
Income tax provision		327			105			211			584			267			119
Net income	$	531		$	296			79		$	952		$	580			64
Earnings per share:
Basic	$	0.50		$	0.28			79		$	0.90		$	0.55			64
Diluted	$	0.49		$	0.27			81		$	0.89		$	0.54			65
Pretax operating margin		34	%		24	%					33	%		27	%
Cost of sales as a % of product sales		16			22						16			22
Research and development as a % of operating revenues		18			18						18			17
Marketing, general and administrative as a % of operating revenues		21			23						22			22
Net income as a % of operating revenues		24			19						23			19

___________

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

Total Operating Revenues

Total operating revenues increased 44% in the second quarter of 2006 and 40% in the first six months of 2006 from the comparable periods in 2005. These increases were primarily due to higher product sales and royalty income, and are further discussed below.

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Total Product Sales

(In millions)

	Three Months Ended June 30,							Six Months Ended June 30,
	2006		2005		% Change			2006		2005		% Change
Net U.S. Product Sales
Avastin	$	423	$	246		72	%	$	821	$	449		83	%
Rituxan		526		450		17			1,003		890		13
Herceptin		320		152		111			610		282		116
Tarceva		103		70		47			196		118		66
Xolair		105		80		31			200		145		38
Raptiva		22		21		5			43		38		13
Lucentis		10		-		-			10		-		-
Nutropin products		98		97		1			185		187		(1	)
Thrombolytics		62		52		19			121		102		19
Pulmozyme		47		48		(2	)		96		92		4
Total U.S. product sales		1,716		1,216		41			3,285		2,303		43
Net product sales to collaborators		94		58		62			169		157		8
Total product sales	$	1,810	$	1,274		42		$	3,454	$	2,460		40

Total product sales increased 42% to $1,810 million in the second quarter and 40% to $3,454 million in the first six months of 2006 from the comparable periods in 2005. Total U.S. product sales increased 41% to $1,716 million in the second quarter and 43% to $3,285 million in the first six months of 2006 from the comparable periods in 2005. The increases in U.S. product sales were due to higher sales across most products, in particular higher sales of our oncology products. Increased U.S. sales volume accounted for 88%, or $439million, of the increase in U.S. net product sales in the second quarter of 2006, and 88%, or $869 million, of the increase in the first six months of 2006. Changes in net U.S. sales prices across the portfolio accounted for most of the remaining increase in net U.S. product sales in the second quarter and first six months of 2006.

Avastin

Net U.S. sales of Avastin increased 72% to $423 million in the second quarter and 83% to $821 million in the first six months of 2006 from the comparable periods in 2005. The increases in sales were primarily a result of increased use of Avastin in first-line non-small cell lung cancer (or “NSCLC”), an unapproved use, in first-line metastatic colorectal cancer (or “mCRC”) in combination with 5FU-based chemotherapy, an approved indication, and in first-line metastatic breast cancer, an unapproved use. Growth in the use of Avastin for the treatment of NSCLC and metastatic breast cancer was due to greater adoption rates during the second quarter and first six months of 2006 as compared to the same periods in 2005. In first-line mCRC patients, we estimate that Avastin penetration was over 70% during the second quarter of 2006 compared to penetration of 64% during the second quarter of 2005. Duration of treatment among patients in the first-line mCRC setting who completed Avastin therapy increased modestly relative to the second quarter of 2005, but was comparable to the first quarter of 2006.

Due to competing products that have entered the market since the first quarter of 2006, we have seen a slight decline in the adoption of Avastin in renal cell carcinoma, an unapproved use of Avastin. There were no price increases in the first sixth months of 2006 or for the full year 2005.

We anticipate that a significant portion of Avastin growth for the remainder of 2006 will come from potential new (but currently unapproved) indications, including metastatic first-line NSCLC and metastatic first-line breast cancer.

In May 2006, Thompson Micromedex, the reviewers and publishers of the U.S. Pharmacopeia Drug Information® (or “USP DI”) compendium, accepted Avastin for the treatment of first-line metastatic breast cancer in combination with paclitaxel. A review that is deemed acceptable by the USP DI supports Medicare reimbursement by statute and facilitates reimbursement with private payers.

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On April 11, 2006, we submitted an sBLA to the FDA for use of Avastin in first-line treatment of advanced, non-small cell lung cancer other than predominant squamous histology, in combination with platinum based chemotherapy.

On May 25, 2006, we submitted an sBLA to the FDA for Avastin in combination with taxane chemotherapy for patients who have not previously received chemotherapy for locally recurrent or metastatic breast cancer. We requested, and the FDA granted, a Priority Review of the application with an action date no later than November 23, 2006. However, the FDA has requested that we provide additional documentation from the trial underlying the submission, and we believe the time required to respond to their requests will extend the review period beyond the November 23, 2006 action date.

On June 26, 2006, we announced that we stopped a Phase III trial of Avastin in combination with gemcitabine chemotherapy as first-line treatment for advanced pancreatic cancer at the recommendation of an independent data monitoring board, based on an interim analysis indicating that it is very unlikely that significant differences in overall survival would occur between treatment arms as the data mature.

On July 31, 2006, Roche announced that an international Phase III study of Avastin in combination with chemotherapy (FOLFOX or XELOX) for the treatment of previously untreated metastatic colorectal cancer met a primary endpoint and showed a 20 percent improvement in progression-free survival compared to chemotherapy alone (FOLFOX or XELOX). The benefit observed in this study was statistically significant, but the magnitude of the benefit was less than that observed in previous studies of Avastin in metastatic colorectal cancer. In addition, some variability in treatment benefit was observed in a variety of subsets studied and further analyses will be required to fully understand this variability.

Rituxan

Net U.S. sales of Rituxan increased 17% to $526 million in the second quarter and 13% to $1,003 million in the first six months of 2006 from the comparable periods in 2005. Net U.S. sales in the first half of 2005 included $10 million for a reorder to replace a shipment that was destroyed while in transit to a wholesaler. The sales growth resulted from increased use of Rituxan in NHL and chronic lymphocytic leukemia (or “CLL”), including areas of unapproved use. We estimate that Rituxan’s overall adoption rate in combined markets of non-Hodgkin’s lymphoma (or “NHL”), including areas of unapproved use, and CLL, an unapproved use, was 82% at the end of the second quarter of 2006 compared to 78% at the end of the second quarter of 2005. Also contributing to the increase in product sales were price increases effective on July 6, 2005, October 5, 2005 and March 29, 2006.

We and Biogen Idec submitted an sBLA to the FDA for the use of Rituxan in combination with chemotherapy as first-line treatment for low-grade or follicular, CD20-positive, NHL. The FDA requested that we separate our single submission into three separate submissions. The first submission, for Rituxan in combination with CVP (cyclophosphamide, vincristine, prednisone) chemotherapy, has been granted priority review with an FDA action date of September 29, 2006. The second submission for Rituxan following CVP chemotherapy for patients who achieved a response of stable disease or better, has been granted priority review with an FDA action date of September 29, 2006. However, the FDA has requested additional documentation from the trial underlying this submission, and our response to the FDA may extend beyond the action date. The third submission, for Rituxan in combination with CHOP chemotherapy, was accepted for standard review. However, the Phase II study that the filing was based on was not designed as a stand-alone, registrational study, and accordingly, we have withdrawn the submission.

Rituxan, for the treatment of adult patients with moderately-to-severely active RA, was launched in the first quarter of 2006. There are significant hurdles to reliably measuring the portion of Rituxan sales attributable to RA and we do not expect to be able to precisely attribute revenues to the RA indication (or any other non-oncology indication) in the near term.

Herceptin

Net U.S. sales of Herceptin increased 111% to $320 million in the second quarter and 116% to $610 million in the first six months of 2006 from the comparable periods in 2005. The sales growth resulted from increased use of

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Herceptin in the treatment of early stage HER2-positive breast cancer, an unapproved use, increased treatment of first-line HER2-positive metastatic breast cancer and increased cumulative duration of therapy relative to the comparable periods in 2005. In first-line HER2-positive metastatic breast cancer patients, we estimate that Herceptin’s penetration was 70% during the second quarter 2006 compared to penetration of 63% during the second quarter of 2005. We believe that continued Herceptin sales growth will primarily occur in early stage patients.Also contributing to the increase in product sales, to a lesser extent, was a price increase effective on March 29, 2006.

Tarceva

Net U.S. sales of Tarceva increased 47% to $103 million in the second quarter and 66% to $196 million in the first six months of 2006 from the comparable periods in 2005, in part due to growth in penetration in second-line NSCLC and first-line pancreatic cancer. In the first sixth months of 2006, we estimate that Tarceva’s penetration averaged 34% in second-line NSCLC and 39% in first-line pancreatic cancer. Also affecting our product sales were price increases effective on April 5, 2005 and November 9, 2005. Future sales growth in NSCLC will depend on further gains in penetration against chemotherapy within second-line NSCLC and increased duration of therapy.

Xolair

Net U.S. sales of Xolair increased 31% to $105 million in the second quarter and 38% to $200 million in the first six months of 2006 from the comparable periods in 2005. The sales growth was primarily driven by an increase in patient usage and, to a lesser extent, price increases effective on July 21, 2005 and April 4, 2006.

Raptiva

Net U.S. sales of Raptiva increased 5% to $22 million in the second quarter and 13% to $43 million in the first six months of 2006 from the comparable periods in 2005. The increases in product sales were primarily due to price increases effective on April 21, 2005 and November 17, 2005.

Lucentis

We received FDA approval to market Lucentis on June 30, 2006 and made initial product shipments of $10 million to distributors that same day.

Nutropin Products

Combined net U.S. sales of our Nutropin products increased 1% to $98 million in the second quarter of 2006 compared to the second quarter of 2005 and decreased 1% to $185 million in the first six months of 2006 from the comparable period in 2005. Nutropin sales volume decreased in 2006 from the comparable periods in 2005 due to declining new patient market share and the loss of managed care product placement due to price discounting by competitors. The decrease in sales volume was partially offset by a price increase effective on January 10, 2006.

Thrombolytics

Combined net U.S. sales of our three thrombolytics products, Activase, Cathflo Activase, and TNKase, increased 19% to $62 million in the second quarter and 19% to $121 million in the first six months of 2006 from the comparable periods in 2005. The increases were due to growth in Cathflo Activase sales in the catheter clearance market and increased Activase sales in the acute ischemic stroke market. Also contributing to the increases in product sales was a price increase effective on February 14, 2006.

Pulmozyme

Net U.S. sales of Pulmozyme in the second quarter of 2006 were $47 million, essentially flat compared to the second quarter of 2005. In the first six months of 2006, Pulmozyme sales increased 4% to $96 million from the comparable period in 2005, primarily reflecting a greater focus on aggressive treatment of cystic fibrosis early in the course of the disease and, to a lesser extent, a price increase effective on April 26, 2005.

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Sales to Collaborators

Product sales to collaborators, the majority of which were for non-U.S. markets, increased 62% to $94 million in the second quarter and 8% to $169 million in the first six months of 2006 from the comparable periods in 2005. The increases were primarily due to higher sales of Avastin to Hoffmann-La Roche; partially offset by the decrease of Enbrel® sales to Amgen due to the cancellation of our obligation to manufacture Enbrel® for Amgen in the second quarter of 2005.

For the full year 2006, given Roche’s higher supply needs, we expect sales to collaborators to increase by approximately 40% over the $326 million in 2005.

Royalties

Royalty revenues increased 58% to $316 million in the second quarter and 39% to $602 million in the first six months of 2006 from the comparable periods in 2005. The increases were primarily due to higher sales by Hoffmann-La Roche of our Herceptin, Avastin and Rituxan products. Of the overall royalties received, royalties from Hoffmann-La Roche represented approximately 65% in the second quarter of 2006 and 62% in the first six months of 2006 as compared to approximately 55% in the second quarter of 2005 and 50% in the first six months of 2005. For the full year 2006, we expect royalties to increase by approximately 35% compared to $935 million in 2005, based on higher sales forecasts from our licensees, in particular Roche.

We have confidential licensing agreements with a number of companies on U.S. Patent No. 6,331,415 and No. 4,816,567 (the “Cabilly patents”), under which we receive royalty revenue on sales of products that are covered by one or more of the Cabilly patents. The ‘567 patent expired in March 2006, while the ‘415 patent expires in December 2018. The licensed products for which we receive the most significant Cabilly royalties are Humira®, Remicade®, Synagis® and ERBITUX®. Cabilly royalties affect three lines on our Condensed Consolidated Statement of Income:  (i) We record gross royalties we receive from Cabilly patent licensees as royalty revenue; (ii) On royalties we receive from Cabilly licensees, we in turn pay City of Hope National Medical Center (or “COH”) a percentage of our royalty income and these payments to COH are recorded with our MG&A expenses as royalty expense; (iii) We pay royalty expenses directly to COH on sales of our products that are covered by the Cabilly patents and these payments to COH are recorded in cost of sales (or “COS”). The overall net after-tax contribution from revenues and expenses related to the Cabilly patents was approximately $11 million in the second quarter of 2006, or approximately $0.01 per diluted share, and $30 million in the first six months of 2006, or approximately $0.03 per diluted share. We expect our full year 2006 Cabilly related net income after taxes to be approximately $0.06 per diluted share. See also Note 4, “Contingencies” in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information on our Cabilly patent reexamination.

Cash flows from royalty income include revenues denominated in foreign currencies. We currently purchase foreign currency put option contracts (or “options”) and enter into foreign currency forward contracts to hedge these foreign currency cash flows. The terms of these options and forwards are generally one to five years. See also Note 1, “Summary of Significant Accounting Policies—Derivative Financial Instruments” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Contract Revenues

Contract revenues increased 38% to $73 million in the second quarter and 34% to $129 million in the first six months of 2006 from the comparable periods in 2005. The increases were primarily due to higher contract revenues from Biogen Idec, driven by higher reimbursements related to R&D development efforts primarily on Rituxan (immunology and hematology/oncology) and our second-generation humanized anti-CD20 molecule (ocrelizumab). Also contributing to the increases were higher contract revenues from Hoffmann-La Roche driven by higher reimbursements related to R&D development efforts primarily on ocrelizumab and Avastin. See “Related Party Transactions” below for more information on contract revenue from Hoffmann-La Roche.

Contract revenues vary each quarter and are dependent on a number of factors, including the timing and level of reimbursements from ongoing development efforts, milestones and opt-in payments received, and new contract

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arrangements. For the full year 2006, we expect contract revenues to be relatively flat as compared to $210 million in 2005.

Cost of Sales

COS as a percentage of product sales was 16% in the second quarter and first six months of 2006 compared to 22% in the second quarter and first six months of 2005. This decrease is primarily due to increased sales volume of our higher margin products (primarily oncology products), one-time charges of $41 million in the second quarter of 2005, representing payments to Amgen Inc. and another collaborator to cancel and amend certain future manufacturing obligations, and the discontinuation of our lower margin Enbrel® sales to Amgen in the second quarter of 2005.

For the full year 2006, we expect COS to be approximately 16% of net product sales, compared to 18% in 2005. We expect continued quarter-to-quarter variability based on product volume and mix changes, and there is always potential for an increase in COS if we have unforeseen manufacturing, contract manufacturing, or inventory related issues.

Research and Development

R&D expenses increased 40% to $390 million in the second quarter and 47% to $764 million in the first six months of 2006 from the comparable periods in 2005. The higher levels of expenses reflect increased activity across our entire product portfolio, including increased spending on late-stage clinical trials (notably Avastin and Rituxan Immunology) and early stage projects, higher research expenses due to increased headcount and headcount related expenses and higher clinical manufacturing expenses in support of our clinical trials. Also contributing to the increases were post-marketing studies on new and existing indications for Avastin, Rituxan and Tarceva. In addition, R&D expenses included $34 million in the second quarter and $67 million in the first six months of 2006 of employee stock-based compensation expense related to FAS 123R.

R&D as a percentage of operating revenues was 18% in the second quarters of 2006 and 2005. R&D as a percentage of operating revenues was 18% in the first six months of 2006 compared to 17% in the same period of 2005. We expect R&D absolute dollar spending in 2006 to increase over 2005 levels due to continued investment in our late stage pipeline, the addition of new internally-generated programs in the early stage pipeline and planned incremental in-licensing investments in the second half of 2006.

The major components of R&D expenses were as follows (in millions):

	Three Months Ended June 30,							Six Months Ended June 30,
Research and Development	2006		2005		% Change			2006		2005		% Change
Product development (including post marketing)	$	301	$	210		43	%	$	584	$	390		50	%
Research		75		55		36			149		106		41
In-licensing		14		13		1			31		25		24
Total R&D	$	390	$	278		40		$	764	$	521		47

Marketing, General and Administrative

MG&A expenses increased 34% to $471 million in the second quarter and 38% to $912 million in the first six months of 2006 from the comparable periods in 2005. The increases were primarily due to:  (i) an increase of $63 million in the second quarter and $130 million for the first six months of 2006 in commercial spending primarily in support of launch activities related to Lucentis for AMD and Rituxan for RA and pre-launch activities related to Avastin for the potential lung and breast cancer indications; (ii) $41 million in the second quarter and $82 million for the first six months of 2006 of employee stock-based compensation expense related to FAS 123R; and (iii) an increase of $15 million in the second quarter and $37 million for the first six months of 2006 in support of our continued corporate growth and infrastructure needs, including headcount growth and the related growth in facilities and systems infrastructure, and higher legal costs.

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MG&A as a percentage of operating revenues was 21% in the second quarter of 2006 as compared to 23% for the comparable period in 2005 and 22% for the first six months of 2006 and 2005. MG&A absolute dollar spending is expected to increase during the remainder of 2006 primarily driven by higher costs in support of recently launched products and anticipated launches of potential new product indications, and continued support of our corporate growth and infrastructure needs, including headcount growth and the related growth in facilities and systems infrastructure, and also to support patient access programs.

Collaboration Profit Sharing

Collaboration profit sharing expenses increased 30% to $259 million in the second quarter and 29% to $485 million in the first six months of 2006 from the comparable periods in 2005 primarily due to higher sales of Rituxan, Xolair and Tarceva and the related profit sharing expenses. For the full year 2006, our collaboration profit sharing expenses are expected to grow in proportion to our Rituxan, Xolair and Tarceva sales growth.

Recurring Charges Related to Redemption

We record recurring charges related to the June 1999 redemption of our Special Common Stock and push-down accounting (see discussion below in “Relationship with Roche—Redemption of Our Special Common Stock”). These charges were $26 million in the second quarter of 2006 and $34 million in the second quarter of 2005; and $52 million in the first six months of 2006 and $69 million for the first six months of 2005, and were comprised of the amortization of Redemption-related other intangible assets in the periods presented.

Special Items: Litigation-Related

We recorded accrued interest and bond costs related to the COH trial judgment of $14 million for the second quarter of 2006 and $20 million in the second quarter of 2005, and $27 million for the first six months of 2006 and $31 million for the first six months of 2005. We expect that we will continue to incur interest charges on the judgment and service fees on the surety bond each quarter throughout the process of appealing the COH trial results. The amount of cash paid, if any, or the timing of such payment in connection with the COH matter will depend on the outcome of the California Supreme Court’s review of the matter; however, we expect that it may take longer than one year to resolve this matter. Also included in this line are net amounts paid in the second quarter and first six months of 2005 related to other litigation settlements. See Note 4, “Contingencies,” in the Notes to the Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information regarding our litigation.

Operating Income

Operating income was $755 million in the second quarter of 2006, a 104% increase from the second quarter of 2005, and $1,399 million in the first six months of 2006, a 75% increase from the comparable period in 2005. Our operating income as a percentage of operating revenues (or “pretax operating margin”) was 34% in the second quarter of 2006 and 24% in the second quarter of 2005, and was 33% in the first six months of 2006 and 27% in the first six months of 2005.

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Other Income, Net

	Three Months Ended June 30,									Six Months Ended June 30,
Other Income, Net	2006			2005			% Change			2006			2005			% Change
	(In millions)
Gains on sales of biotechnology equity securities and other	$	66		$	1			*	%	$	69		$	1			*	%
Write-downs of biotechnology debt, equity securities and other		-			-			-			-			(4	)		(100	)
Interest income		54			34			59			103			58			78
Interest expense		(18	)		(4	)		350			(37	)		(7	)		429
Other miscellaneous income		1			-			*			2			-			*
Total other income, net	$	103		$	31			232		$	137		$	48			185

___________

* Calculation not meaningful.

The components of other income, net changed primarily due to gains on sales of biotechnology equity securities resulting from Amgen’s acquisition of Abgenix and from Pfizer’s acquisition of Rinat, and the effects of our debt issuance in July 2005. Investment income increased as a result of the higher interest rates and bond yields in 2006 combined with higher average cash balances. Interest expense increased due to the debt service costs incurred in the second quarter and first six months of 2006.

For the full year 2006 we expect interest income, net of interest expense to be approximately 30% higher than 2005 levels, subject to changes in interest rates.

Income Tax Provision

Our effective income tax rate was 38%in the second quarter and first six months of 2006, as compared to 26% in the second quarter and 32% in the first six months of 2005. The increases in the income tax rate over 2005 primarily relate to a one-time benefit of approximately $39 million from recognizing additional R&D tax credits in the second quarter of 2005. In addition, the increases in the tax rate reflect higher income before taxes and the December 31, 2005 expiration of provisions in federal tax law for the R&D tax credit. If legislation to extend the R&D tax credit is passed, we will record a tax benefit for R&D tax credits at that time.

Various factors may have favorable or unfavorable effects on our effective tax rate during the remainder of 2006 and in subsequent years. These factors include, but are not limited to, changing interpretations of existing tax laws, changes in tax laws and rates, past and future levels of R&D spending, and changes of estimates of prior years’ items, and changes in overall levels of income before taxes, all of which may result in periodic revisions to our effective tax rate.

Liquidity and Capital Resources

Liquidity and Capital Resources	June 30, 2006		December 31, 2005
	(In millions)
Unrestricted cash, cash equivalents, short-term investments and long-term marketable debt and equity securities	$	3,927	$	3,814
Net receivable - equity hedge instruments		68		73
Total unrestricted cash, cash equivalents, short-term investments, long-term marketable debt and equity securities, and equity hedge instruments	$	3,995	$	3,887
Working capital	$	2,832	$	2,726
Current ratio		2.6:1		2.6:1

Unrestricted cash, cash equivalents, short-term investments and long-term marketable securities, including the fair value of the equity hedge instruments, were approximately $4.0 billion at June 30, 2006, an increase of approximately $108 million from December 31, 2005. This increase primarily reflects cash generated from

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operations, partially offset by cash used for purchases of available-for-sale securities, repurchases of our Common Stock, capital expenditures and an increase in tax payments. To mitigate the risk of market value fluctuation, certain of our biotechnology marketable equity securities are hedged with zero-cost collars and forward contracts, which are carried at fair value. See Note 1, “Summary of Significant Accounting Policies—Comprehensive Income,” in the Notes to the Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information regarding activity in our marketable investment portfolio and derivative instruments.

See “Our affiliation agreement with Roche could limit our ability to make acquisitions” below in the “Forward-Looking Information and Cautionary Factors” section and Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for factors that could negatively affect our cash position.

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:

Our “accounts receivable—product sales” was $663 million at June 30, 2006, an increase of $109 million from December 31, 2005. The increase is primarily due to higher product sales of Herceptin, Avastin, and Rituxan. The average collection period of our “accounts receivable—product sales” as measured in days of sales outstanding (or “DSO”) was 33 days in the second quarter 2006, as compared to 36 days in the second quarter of 2005 and 34 days in the first quarter 2006. The decline in DSO from the second quarter of 2005 reflects the termination of the extended payment term incentive program in the first quarter of 2005. For newly launched products, we may offer, for a limited period of time, extended payment terms to wholesalers. In conjunction with our launch of Lucentis on June 30, 2006, we have offered extended payment terms to certain wholesalers, generally an additional 90 days. As a result, we expect a slight increase in our DSO in the fourth quarter of 2006 resulting from those extended payment terms.

Our inventory balance was $909 million at June 30, 2006, an increase of $206 million from December 31, 2005. The increase is primarily due to bulk production of our Herceptin and Avastin products. Inventory also increased in the first six months of 2006 due to non-cash employee stock-based compensation costs of $33 million that were capitalized in inventory pursuant to our adoption of FAS 123R.

Cash Used in Investing Activities

Cash used in investing activities primarily relates to purchases, sales and maturities of investments and capital expenditures. Capital expenditures were $538 million during the first six months of 2006 compared to $730 million during the first six months of 2005. Capital expenditures in the first six months of 2006 included ongoing construction of our second manufacturing facility in Vacaville, California, start-up and validation costs at our manufacturing facility in Oceanside, California, the purchase of a second facility in Oceanside, purchase of equipment and information systems, and ongoing expenditures to support our corporate infrastructure needs. Included in capital expenditures in the first six months of 2005 is $408 million in cash plus $9 million in closing costs related to the purchase of our manufacturing facility in Oceanside, California.

We currently anticipate that our capital expenditures for the full year 2006 will be approximately $1.4 billion, primarily driven by manufacturing expansion due to ongoing construction of our second manufacturing facility in Vacaville, start-up and validation of our Oceanside manufacturing facilities and, for projects related to existing facilities, increases in office space, and land purchases.

Cash Used in Financing Activities

Cash used in financing activities is primarily related to activity under our employee stock plans and our stock repurchase program. We used cash for stock repurchases of $540 million during the first six months of 2006 and $161 million during the first six months of 2005 pursuant to our stock repurchase program approved by our Board of

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Directors. We also received $187 million during the first six months of 2006 and $465 million during the first six months of 2005 related to stock option exercises and stock issuances under our employee stock plans.

Prior to our adoption of FAS 123R, the tax benefit from stock option exercises was reported as operating cash flows. FAS 123R requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. At June 30, 2006, the excess tax benefit from stock-based compensation arrangements was $90 million.

During 2006, our total cash, unrestricted cash equivalents, short-term investments and marketable securities are expected to decline modestly relative to the level at December 31, 2005 due to cash requirements for capital expenditures, share repurchases under our stock repurchase program, and other uses of working capital. We believe our existing unrestricted funds, together with funds provided by operations and our debt issuance in July 2005 will be sufficient to meet our expected future operating cash requirements. See “Our affiliation agreement with Roche Holdings, Inc. could adversely affect our cash position” below in Part II, Item 1A “Risk Factors” of this Form 10-Q for factors that could negatively affect our cash position.

On April 19, 2006, the Board of Directors approved an extension of our stock repurchase program for the repurchase of up to an additional $2.0 billion of our Common Stock for a total of $6.0 billion through June 30, 2007. The Board also amended the current repurchase program by increasing the maximum number of shares that can be repurchased from 80 million to 100 million shares. Under this stock repurchase program, 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 employee stock plans; and (iii) to address provisions of our affiliation agreement with Roche relating to maintaining Roche’s minimum ownership percentage. See below in “Relationship with Roche” for more information on Roche’s minimum ownership percentage. We have entered into Rule 10b5-1 trading plans 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 current trading plan covers approximately four million shares and will run through June 30, 2007.

Our shares repurchased during the first six months of 2006 were as follows (shares in millions):

	Total Number of Shares Purchased in 2006		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
January 1-31, 2006		0.9	$	88.37
February 1-28, 2006		0.7		85.31
March 1-31, 2006		1.0		84.24
April 1-30, 2006		0.7		80.31
May 1-31, 2006		2.1		78.83
June 1-30, 2006		1.2		79.30
Total		6.6	$	81.92		56		44

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.

Off-Balance Sheet Arrangements

We have certain contractual arrangements that create potential risk for Genentech and are not recognized in our Condensed Consolidated Balance Sheets. 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

In December 2004, we entered into a Master Lease Agreement with Slough SSF, LLC for the lease of property adjacent to our South San Francisco campus. For accounting purposes, due to the nature of our involvement with the construction of the buildings, we are considered to be the owner of the assets during the construction period through the lease commencement date, even though the funds to construct the building shell and some infrastructure costs are paid by the lessor. In the first six months of 2006, we capitalized $61 million of construction costs in property, plant and equipment, for a project-to-date capitalized total of $155 million. We have also recognized a corresponding amount as a construction financing obligation in “long-term debt” in the accompanying Condensed Consolidated Balance Sheets. We expect, at the time of completion of the project, if all the buildings and infrastructure were completed by the lessor, our construction asset and related obligation may be as much as $365 million, excluding costs related to leasehold improvements. Our aggregate lease payments as contemplated by the Master Lease Agreement through 2020 will be approximately $544 million.

Contractual Obligations

During the first six months of 2006, we believe there have been no significant changes in our payments due under contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

Contingencies

We are party to various legal proceedings, including patent infringement litigation and licensing and contract disputes, and other matters. See Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements of Part 1, Item 1 of this Form 10-Q for further information.

Relationship with Roche

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 $1,686 million of goodwill and $1,499 million of other intangible assets on our balance sheet on June 30, 1999. Refer to Note 5, “Other Intangible Assets,” in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2005 for further information about these intangible assets.

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

We 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 with respect to any issuance of Common Stock by us in the future, we will repurchase a sufficient number of shares so that immediately after such issuance the percentage of our Common Stock owned by Roche will be no lower than 2% below the “Minimum Percentage” (as defined below), provided however, as long as Roche’s percentage ownership is greater than 50%, prior to issuing any shares, we will repurchase a sufficient number of shares of our Common Stock such that, immediately after our issuance of shares, Roche’s percentage ownership will be greater than 50%. The Minimum Percentage equals the lowest number of shares of our Common Stock owned by Roche since the July 1999 offering (to be adjusted for dispositions of shares of our Common Stock by Roche as well as for stock splits or stock combinations) divided by 1,018,388,704, the number of shares of our Common Stock outstanding at the time of the July 1999 offering, as adjusted for stock splits. We have repurchased shares of our Common Stock since 2001 (see discussion above in Liquidity and Capital Resources). 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. The Minimum Percentage at June 30, 2006

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was 57.7% and, under the terms of the affiliation agreement, Roche’s ownership percentage is to be no lower than 55.7%. At June 30, 2006, Roche’s ownership percentage was 55.8%.

Related Party Transactions

We enter into transactions with our related parties, Roche and other Roche affiliates (including Hoffmann-La Roche) and Novartis AG and other Novartis affiliates (or “Novartis”), under existing agreements 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.

In our royalty and supply arrangements with related parties, we are the primary obligor because we bear the manufacturing risk, general inventory risk, and the risk to defend our intellectual property. Because we are the primary obligor, we record our transactions gross in accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent.” Otherwise our transactions are recorded net.

Hoffmann-La Roche

Under our existing arrangements with Hoffmann-La Roche, including our licensing and marketing agreement, we recognized contract revenue from Hoffmann-La Roche, including amounts earned related to ongoing development activities, of $21 million in the second quarter of 2006 and $19 million in the second quarter of 2005, and $40 million in the first six months of 2006 and $35 million in the first six months of 2005. All other revenues from Hoffmann-La Roche and their affiliates, principally royalties and product sales, which are included in product sales to collaborators, totaled $280 million in the second quarter of 2006 and $134 million in the second quarter of 2005, and $504 million in the first six months of 2006 and $290 million in the first six months of 2005. COS included amounts related to Hoffmann-La Roche of $64 million in the second quarter of 2006 and $27 million in the second quarter of 2005, and $113 million in the first six months of 2006 and $74 million in the first six months of 2005. Our reported R&D expenses included $58 million in the second quarter of 2006 and $37 million in the second quarter of 2005, and $101 million in the first six months of 2006 and $73 million in the first six months of 2005, related to development activities undertaken on projects on which we collaborate with Hoffmann-La Roche.

In July 2006, we signed two new product supply agreements with F. Hoffmann-La Roche which supplement and supersede existing product supply agreements with F. Hoffmann-La Roche. Under a short-term supply agreement, F. Hoffmann-La Roche has agreed to purchase specified amounts of Herceptin, Avastin and Rituxan through 2008. Under a longer-term supply agreement, F. Hoffmann-La Roche has agreed to purchase specified amounts of Herceptin and Avastin through 2012 and, on a perpetual basis, either party may order other collaboration products from the other party, including Herceptin and Avastin after 2012, pursuant to certain forecast terms. The longer-term supply agreement also provides that either party may terminate its obligation to purchase and/or supply Avastin and/or Herceptin with six years notice on or after December 31, 2007.

Novartis

Based on information available to us at the time of filing this Form 10-Q, we believe the Novartis Group holds approximately 33.3% of the outstanding voting shares of Roche Holding Ltd. As a result of this ownership, the Novartis Group is deemed to have an indirect beneficial ownership interest under FAS 57 “Related Party Disclosures” of more than 10% of our voting stock.

We have an agreement with Novartis Pharma AG (a wholly owned subsidiary of Novartis AG) under which Novartis Pharma AG has the exclusive right to develop and market Lucentis outside of the U.S. for indications related to diseases or disorders of the eye. As part of this agreement, the parties share the cost of certain of our ongoing development expenses for Lucentis.

We, along with Novartis Pharma AG and Tanox, Inc., are co-developing Xolair in the U.S. We and Novartis Pharmaceutical Corporation are co-promoting Xolair in the U.S. and we both make certain joint and individual payments to Tanox; our joint and individual payments are in the form of royalties. We record all sales and cost of sales in the U.S. and Novartis markets the product and records all sales and COS in Europe. We and Novartis share

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the resulting U.S. and European operating profits, respectively, according to prescribed profit-sharing percentages. We are currently supplying Xolair and receive cost plus a mark-up similar to other supply arrangements. Beginning in the third quarter of 2006, Novartis will supply Xolair and receive cost plus a mark-up. On January 20, 2006, Novartis received FDA approval to manufacture bulk supply of Xolair at their Huningue production facility in France. Production costs of Xolair may initially be higher than those currently reflected in our COS as a result of the production shift from us to Novartis until production economies of scale can be achieved by Novartis.

Contract revenue from Novartis related to manufacturing, commercial and ongoing development activities was $13 million in the second quarter of 2006 and $11 million in the second quarter of 2005, and $23 million in the first six months of 2006 and $22 million in the first six months of 2005. Revenue from Novartis related to product sales was not material in the second quarters and first six months of 2006 and 2005. COS was not material in the second quarter and first six months of 2006, and was $12 million in the second quarter of 2005 and $15 million in the first six months of 2005, which included a one-time payment in the second quarter of 2005 related to our release from future manufacturing obligations. Our reported R&D expenses included $19 million in the second quarter of 2006 and $10 million in the second quarter of 2005, and $45 million in the first six months of 2006 and $21 million in the first six months of 2005 related to development activities undertaken on products on which we collaborate with Novartis. Collaboration profit sharing payments from us to Novartis were $48 million in the second quarter of 2006 and $29million in the second quarter of 2005, and $91 million in the first six months of 2006 and $52 million in the first six months of 2005.

Stock Options

Option Program Description

Our employee 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 with the approval of the Compensation Committee of the Board of Directors. See “The Compensation Committee Report” appearing in our 2006 Proxy Statement for further information concerning the policies and procedures of the Compensation Committee regarding the use of stock options.

General Option Information

Summary of Option Activity

(Shares in millions)

				Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted-Average Exercise Price
December 31, 2004		102			94		$	32.32
Grants		(20	)		20			84.01
Exercises		-			(29	)		25.88
Cancellations		2			(2	)		42.16
December 31, 2005		84			83		$	46.64
Grants		(1	)		1			84.59
Exercises		-			(4	)		30.28
Cancellations		1			(1	)		60.10
June 30, 2006 (Year to date)		84			79		$	48.09

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In-the-Money and Out-of-the-Money Option Information

(Shares in millions)

	Exercisable				Unexercisable				Total
As of June 30, 2006	Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price
In-the-Money		41	$	30.80		20	$	48.71		61	$	36.61
Out-of-the-Money(1)		-		-		18	$	86.27		18	$	86.27
Total Options Outstanding		41				38				79

___________

(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, $81.80, at the close of business on June 30, 2006.

Dilutive Effect of Options

Net grants, as a percentage of outstanding shares, were 0.05% for the six months ended June 30, 2006, 1.70% for the year ended December 31, 2005 and 1.83% for the year ended December 31, 2004.

Equity Compensation Plan Information

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

******

This report contains forward-looking statements regarding the effect of accounting changes concerning sabbatical leave on our earnings per share; our Horizon 2010 strategy of bringing 20 new molecules into clinical development, 15 major new products or indications onto the market, becoming the number one U.S. oncology company in sales and achieving certain financial growth measures; our ability to successfully integrate new employees; Avastin, Herceptin and Tarceva sales growth and launches of new products; Cabilly related net income; royalty and contract revenues; cost of sales as a percentage of net product sales; research and development and marketing, general and administrative spending; sales to collaborators; interest income; capital expenditures and construction costs; collaboration profit sharing expenses; the level of our cash, unrestricted cash equivalents, short-term investments and marketable securities, our ability to meet our foreseeable operating cash requirements; our level of contractual obligations; the effects of new regulations relating to hospital and physician payment and the Competition Acquisition Program on our revenues; the effect of product distribution changes on our results of operations; rebate allowances and accruals, days of sales outstanding, employee stock-based compensation expense, and supply of Xolair by Novartis.

These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in “Risk Factors” identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors include, but are not limited to, unexpected safety, efficacy or manufacturing issues, additional time requirements for data analysis, BLA preparation and decision making, FDA actions or delays, failure to obtain FDA approval, competition, pricing, the ability to supply product and meet demand for our products, product withdrawals and new product approvals and launches, our ability to protect our proprietary rights, unanticipated expenses such as litigation or legal settlement expenses or equity securities write-downs, fluctuations in royalties and contract revenues, increased costs of sales, research and development and management, general and administrative expenses, fluctuations in interest rates, increased capital expenditures including greater than expected construction and validation costs, our indebtedness and ability to pay our indebtedness, actions by Roche that are adverse to our interests, decreases in third party reimbursement rates, timely payment by customers for our products, reaction to and acceptance by distributors of changes to our distribution strategy, sabbatical leave expense, the ability of management and others to integrate new employees, the ability of Novartis to manufacture and supply Xolair, and the number of options granted to employees, Genentech’s stock price and certain valuation assumptions concerning Genentech stock. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this Form 10-Q.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our market risks at June 30, 2006 have not changed materially from those discussed in Item 7A of our Form 10-K for the year ended December 31, 2005 on file with the Securities and Exchange Commission. See also Note 1, “Summary of Significant Accounting Policies—Derivative Financial Instruments” section in the Notes to Condensed Consolidated Financial Statements in Part I of this Form 10-Q.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures:  The Company’s principal executive and financial officers reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) 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.

Changes in Internal Controls over Financial Reporting: There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.  Legal Proceedings

See Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for a description of legal proceedings, including patent infringement litigation, as well as certain business and contract disputes and other matters.

See also Item 3 of Part I of our report on Form 10-K for the year ended December 31, 2005 and Item 1 of Part II of our report on Form 10-Q for the quarter ended March 31, 2006.

Item 1A.  Risk Factors

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 we make or that are made on our behalf, 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. Products that appear promising in research or development may be delayed or 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 may show the product to be less effective than desired or to have harmful or problematic side effects.

·   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 Biologic Licensing 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, efficacy or manufacturing issues.

·   Difficulties formulating the product, scaling the manufacturing process or in getting approval for manufacturing.

·   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.

·   The contractual rights of our collaborators or others 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. If our large-scale clinical trials are not successful, we will not recover our substantial investments in the product.

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Factors affecting our research and development (or “R&D”) productivity and the amount of our 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.

·   Decisions by F. Hoffmann-La Roche (or “Hoffmann-La Roche”) 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 R&D, which we may record as an R&D expense.

·   Participation in a number of collaborative research arrangements. On many of these collaborations, our share of expenses recorded in our financial statements is subject to volatility based on our collaborators’ spending activities as well as the mix and timing of activities between the parties.

·   Charges incurred in connection with expanding our product manufacturing capabilities, as described in “Difficulties or delays in product manufacturing or in obtaining materials from our suppliers could harm our business and/or negatively affect our financial performance” below.

·   Future levels of revenue.

We may be unable to obtain or maintain regulatory approvals for our products

We 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 (or “U.S.”) until it has been approved by the FDA, and then can only be marketed for the indications 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 a BLA, are substantial and can require a number of years. In addition, even if 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 practices, written advisements to physicians and/or a product recall.

We may not obtain necessary regulatory approvals on a timely basis, if at all, for any of the products we are developing or manufacturing or we may not 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, including those resulting from post-approval safety or efficacy issues.

·   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.

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In addition, 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 or require us to make significant expenditures to obtain or maintain such approvals.

Difficulties or delays in product manufacturing or in obtaining materials from our suppliers could harm our business and/or negatively affect our financial performance

Manufacturing biotherapeutics is difficult and complex, and requires facilities specifically designed and validated for this purpose. It can take longer than five years to design, construct, validate, and license a new biotechnology manufacturing facility. We currently produce our products at our manufacturing facilities located in South San Francisco, California; Vacaville, California; Porriño, Spain; and increasingly, 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 could result in 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, we may need to record period charges associated with manufacturing or inventory failures or other production-related costs or incur costs to secure additional sources of capacity. Furthermore, there are inherent uncertainties associated with forecasting future demand, especially for newly introduced products of ours or of those for whom we produce products, and as a consequence we may have inadequate capacity to meet our own actual demands and/or the actual demands of those for whom we produce product.

In order to maintain adequate supply to keep up with growing demand for our products, we must successfully implement a number of manufacturing capacity enhancement projects on schedule, utilize nearly 100 percent of our production capacity in the next several quarters and maintain a state of regulatory compliance at all production sites. If we, or any of our contract manufacturers, for any reason fail to obtain licensure for our capacity enhancement projects on schedule, fail to operate at or near full capacity utilization, fail to maintain a state of regulatory compliance, or if actual demand significantly exceeds our internal forecasts, we may be unable to maintain an adequate supply of our products to meet all demand. Key capacity enhancement projects, which we must successfully implement, include the following:  (i) licensure of Wyeth Pharmaceuticals contract manufacturing facility at Andover, Massachusetts to produce Herceptin bulk drug substance by the end of 2006; (ii) licensure of additional capacity at our Porriño, Spain facility in the second half of 2006 to produce Avastin bulk drug substance; (iii) licensure of yield improvement processes for Rituxan and Avastin by the end of 2006; (iv) licensure of our Oceanside, California manufacturing facility during the first half of 2007; and (v) construction, qualification and licensure of our new plant in Vacaville, California in 2009.

If we experience a significant malfunction in our filling facility or those of a contract manufacturer, we could experience a shortfall or stock-out of one or more products, which, if it were to continue for a significant period of time, could result in a material adverse effect on our product sales and our business.

Furthermore, certain of our raw materials and supplies required for the production of our principal products or products we make for others are available only through sole-source suppliers (the only recognized supplier available to us) or single-source suppliers (the only approved supplier for us among other sources), and we may not be able to obtain such raw materials without significant delay or at all. If such sole-source or single-source suppliers were to limit or terminate production or otherwise fail to supply these materials for any reason, such failures could also have a material adverse effect on our product sales and our business.

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 effect 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 obsolescence, malfunctions or failures;

·   product contamination problems;

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·   damage to a facility, including our warehouses and distribution facilities, due to natural disasters, including, but not limited to, earthquakes; as our South San Francisco, Oceanside and Vacaville facilities are located in areas 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 or products we make for others due to regulatory issues;

·   a contract manufacturer going out of business or failing to produce product as contractually required;

·   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 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 face competition

We face competition from pharmaceutical companies, pharmaceutical divisions of chemical companies, and biotechnology companies.

The introduction of new competitive products or follow-on biologics or new information about existing products may result in lost market share for us, reduced utilization of our products, and/or lower prices, even for products protected by patents.

Avastin: Avastin competes with Erbitux® (Imclone/Bristol-Myers Squibb), which is an EGFR-inhibitor approved for the treatment of irinotecan refractory or intolerant metastatic colorectal cancer patients. In December 2005, the FDA approved Nexavar® (sorafenib Bayer Corporation/Onyx Pharmaceuticals, Inc.) for the treatment of patients with advanced renal cell carcinoma (or “RCC”), or kidney cancer (unapproved uses of Avastin). In January 2006, the FDA approved Sutent® (sunitinib malate, Pfizer, Inc.) for use in advanced RCC and Gleevec-refractory / intolerant gastrointestinal stromal tumor (unapproved uses of Avastin). Avastin could face competition from products in development that currently do not have regulatory approval, including panitumumab and AMG 706 (Amgen). Amgen announced that the FDA granted priority review for panitumumab; approval is expected for third-line metastatic colorectal cancer in the second half of 2006. Amgen also stated that it will initiate head-to-head clinical trials between AMG 706 and Avastin this year. Additionally, there are more than 30 potential molecules which target VEGF inhibition, and over 130 companies that are developing molecules which, if approved, may compete with Avastin.

Rituxan: Rituxan’s competitors include Bexxar® (GlaxoSmithKline) and Zevalin® (Biogen Idec), both of which are radioimmunotherapies indicated for the treatment of patients with relapsed or refractory low-grade, follicular, or transformed B-cell non-Hodgkin’s lymphoma (or “NHL”). While indicated for the treatment of NHL, both products currently represent limited competition for Rituxan. Other potential competitors include Campath® (Berlex, Inc.), which is indicated for B-cell chronic lymphocytic leukemia (an unapproved use of Rituxan), and Velcade® (Millennium Pharmaceuticals, Inc.) which is indicated for multiple myeloma (an unapproved use of Rituxan). In addition to the products detailed above, we are aware of other anti-CD20 molecules in development that, if successful in clinical trials, may compete with Rituxan.

Rituxan’s current biologic competitors in rheumatoid arthritis include Enbrel® (Amgen/Wyeth), Humira® (Abbott), Remicade® (Johnson & Johnson), Orencia® (Bristol-Myers Squibb), and Kineret® (Amgen). These products are indicated for a broader RA patient population than Rituxan.

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Herceptin: Herceptin could face competition in the future from experimental drugs and products in development that do not currently have regulatory approval for any use outside of clinical trials, including Tykerb® (lapatinib ditosylate), which is being developed by GlaxoSmithKline (or “GSK”). On April 3, 2006, GSK announced that it halted enrollment in its Phase III clinical trial to evaluate its drug Tykerb® because of positive results in treating HER2-positive metastatic breast cancer in women whose disease had progressed following treatment with Herceptin and other cancer therapies. Results, which were presented at this year’s ASCO meeting, showed that Tykerb® in combination with capecitabine increased time to progression compared to capecitabine alone. GSK said it will file for regulatory approval of Tykerb® in the second half of this year.

Tarceva: Tarceva competes with the chemotherapeutic products Taxotere® (Sanofi-Aventis) and Alimta® (Eli Lilly and Company), both of which are indicated for the treatment of relapsed NSCLC. In front-line pancreatic cancer, Tarceva primarily competes with Gemzar® monotherapy and Gemzar® (Eli Lilly) in combination with other chemotherapeutic agents. Tarceva could also face competition in the future from products in late-phase development that currently do not have regulatory approval for use in NSCLC or pancreatic cancer. Examples of potential competitors in Phase III NSCLC trials are Erbitux® (Bristol-Myers Squibb), Xyotax® (Cell Therapeutics Inc.), Telcyta® (Telik, Inc.), Nexavar® (sorafenib, Bayer/ Onyx) and Zactima® (Astra Zeneca). Examples of potential competitors in Phase III pancreatic cancer trials are: Xeloda® (Roche), Erbitux® (Bristol-Myers Squibb).

Xolair: While Xolair has no direct competitors, it faces competition from other asthma therapies, including inhaled corticosteroids, long-acting beta agonists, combination products such as fixed dose inhaled corticosteroids/long-acting beta agonists and leukotriene inhibitors, as well as oral corticosteroids and immunotherapy.

Raptiva: 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 FDA approved biologic agents Amevive® (Astellas) and Enbrel® (Amgen). Raptiva also competes with the biologic agents Remicade® (Centocor, Inc.) and Humira® (Abbott Laboratories), both of which are currently used off-label in the psoriasis market. In October 2005, Centocor, Inc. filed with the FDA for approval of Remicade® for the treatment of psoriasis.

Lucentis: We are aware that some retinal specialists are currently using Avastin to treat the wet form of age-related macular degeneration (or “AMD”), an unapproved use, and that there may be continued Avastin use, and proposed head-to-head trials of Avastin and Lucentis, in this setting. Laser photocoagulation, Macugen® (Pfizer/OSI Pharmaceuticals), and Visudyne® (Novartis) alone, or in combination with the off-label steroid kenalog, are also currently being used to treat wet AMD.

Nutropin: In the growth hormone market, we face competition from other companies currently selling growth hormone products. Nutropin’s current competitors are Genotropin® (Pfizer), Norditropin® (Novo Nordisk), Humatrope® (Eli Lilly and Company), Tev-Tropin® (Teva Pharmaceutical Industries Ltd.), and Saizen® (Serono, Inc.). In addition, generic biologics are beginning to enter the growth hormone market. The FDA recently approved the first follow-on version of a protein product, Omnitrope® (Sandoz) as a biologic similar to Genotropin® (Pfizer). Furthermore, as a result of multiple competitors, we have experienced, and may continue to experience, a loss of patient share and increased competition for managed care product placement. Obtaining placement on the preferred product lists of managed care companies may require that we discount the price of Nutropin in the future.

Thrombolytics: We face competition in our acute myocardial infarction market with sales of TNKase and Activase affected by the adoption by physicians of mechanical reperfusion strategies. We expect that the use of mechanical reperfusion in lieu of thrombolytic therapy for the treatment of acute myocardial infarction will continue to grow. TNKase, for acute myocardial infarction, also faces competition from Retavase® (PDL BioPharma Inc.), which engages in competitive price discounting. Cathflo Activase may face competition in the catheter clearance market from Nuvelo’s Alfimeprase®, currently in ongoing Phase III clinical trials.

Pulmozyme: Pulmozyme faces competition from the use of hypertonic saline, an emerging, inexpensive approach to clearing the lungs of cystic fibrosis patients.

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In addition to the commercial and late stage development products listed above, there are numerous products in earlier stages of development at other biotechnology and pharmaceutical companies that, if successful in clinical trials, may compete with our products.

Decreases in third party reimbursement rates may affect our product sales, results of operations and financial condition

Sales of our products will depend significantly on the extent to which reimbursement for the cost of our products and related treatments will be available to physicians from government health administration authorities, private health insurers and other organizations. Third party payers and governmental health administration authorities increasingly attempt to limit and/or regulate the reimbursement for medical products and services, especially branded prescription drugs. Changes in government legislation or regulation, such as the Medicare Act, or changes in private third-party payers’ policies toward reimbursement for our products may reduce reimbursement of our products’ costs to physicians. Decreases in third-party reimbursement for our products could reduce physician usage of the product and may have a material adverse effect on our product sales, results of operations and financial condition.

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 litigation and other legal proceedings relating to our proprietary rights, such as the Cabilly reexaminations discussed in Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item I of this Form 10-Q. Such litigation and other legal proceedings are costly in their own right and could subject us to significant liabilities to third-parties. 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. An adverse decision with respect to one or more of our patents or other intellectual property rights could cause us to incur a material loss of royalties and other revenue from licensing arrangements that we have with third-parties, and could significantly interfere with our ability to negotiate future licensing arrangements.

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, or to a loss of our entire investment in the product and subject us to infringement claims.

If there is an adverse outcome in our pending litigation or other legal actions our business may be harmed

Litigation or other legal actions 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 proceedings, which may include an injunction against the development, manufacture or sale of a product or potential product or a judgment with significant monetary award, including the possibility of punitive damages, 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 proceedings and such matters could divert management’s attention from ongoing business concerns.

Our activities relating to the sale and marketing of our products are subject to regulation under the U.S. Federal Food, Drug and Cosmetic Act and other federal statutes. 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). In 1999 we agreed to pay $50 million to settle a federal investigation relating to our past clinical, sales and marketing activities associated with human growth hormone. We are currently being investigated by the Department of Justice with respect to our promotional practices of Rituxan, and may in the future be investigated for our promotional practices relating to any of our products. If the government were to bring charges against or convict us of violating these laws, or if we were subject to third party litigation relating to the same promotional practices, there could be a material adverse effect on our business, including our financial condition and results of operations.

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We are subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations or court decisions addressing some of our practices, it is possible that our practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payers (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Violations of fraud and abuse 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 a court were to find us liable for violating these laws, or if the government were to allege against or convict us of violating these laws, there could be a material adverse effect on our business, including on our stock price.

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 our production processes. Bovine source raw materials from within or outside the U.S. are increasingly subject to greater public and regulatory scrutiny because of the perceived risk of contamination with bovine spongiform encephalopathy (or “BSE”). Should BSE contamination occur during the manufacture of any of our products that require the use of bovine source raw materials, it would negatively affect our ability to manufacture those products for an indefinite period of time (or at least until an alternative process is approved), negatively affect our reputation and could result in a material adverse effect on our product sales, 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 (i) attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel, (ii) successfully integrate large numbers of new employees into our corporate culture, and (iii) develop and maintain important relationships with leading research and medical institutions and key distributors. Competition for these types of personnel and relationships is intense.

Among other benefits, we use stock options to attract and retain personnel. The number of shares management and our board of directors choose to grant under our stock option plans may be affected by our affiliation agreement with Roche, which provides that 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. In addition, stock option accounting rules require us to recognize all employee stock-based compensation costs as expenses. These or other factors could reduce the number of shares management and our board of directors chooses to grant. We cannot be sure that we will be able to attract or retain skilled personnel or maintain key relationships or that the costs of retaining such personnel or maintaining such relationships will not materially increase.

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, as well as the pricing decisions of our competitors, any of which could affect the utilization of our products.

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

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·   Negative safety or efficacy data from new clinical studies conducted either in the U.S. or internationally by any party could cause the sales of our products to decrease or a product to be recalled.

·   Negative safety or efficacy data from post-approval marketing experience could cause sales of our products to decrease or a product to be recalled.

·   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.

·   The increasing use and development of alternate therapies.

·   The rate of market penetration by competing products.

·   Our distribution strategy, including the termination of, or change in, an existing arrangement with any major wholesalers who supply our products.

Any of these factors could have a material adverse effect on our sales and results of operations.

Our results of operations are affected by our royalty and contract revenues

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 U.S.

·   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 milestones are achieved.

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

·   The expiration or invalidation of our patents or licensed intellectual property. For example, patent litigations, interferences, oppositions, and other proceedings involving our patents often include claims by third-parties that such patents are invalid, unenforceable, or unpatentable. If a court, patent office, or other authority were to determine that a patent under which we receive royalties and/or other revenues is invalid, unenforceable, or unpatentable, that determination could cause us to suffer a loss of such royalties and/or revenues, and could cause us to incur other monetary damages.

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

Our affiliation agreement with Roche Holdings, Inc. 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 discussion above in “Liquidity and Capital Resources—Cash Used in Financing Activities.” See Note 5, “Relationship with Roche and Related Party Transactions,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for information regarding the Minimum Percentage.

Roche’s Minimum Percentage is diluted by the exercise of stock options to purchase shares of our Common Stock by our employees and the purchase of shares of our Common Stock through our employee stock plan. In order to maintain Roche’s Minimum Percentage we repurchase shares of our Common Stock under the stock repurchase program. See Note 2, “Employee Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for information regarding employee stock plans. While the dollar amounts associated with future stock repurchase programs cannot currently be determined, future stock repurchases could have a material adverse effect on our liquidity, credit rating and ability to access additional capital in the financial markets.

Our affiliation agreement with Roche could limit our ability to make acquisitions

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 5, “Relationship with Roche and Related Party Transactions,” 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.

Future sales of our Common Stock by Roche could cause the price of our Common Stock to decline

As of June 30, 2006, Roche owned 587,189,380 shares of our Common Stock, or 55.8% 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 seek to influence our business in a manner that is adverse to us or adverse to other stockholders who may be unable to prevent actions by Roche

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 nomination committee and one Genentech executive officer nominated by the nominations committee. Our bylaws also provide that Roche will have the right to obtain proportional representation on our board until such time that Roche owns less than 5% of our stock. Currently, three of our directors, Mr. William Burns, Dr. Erich Hunziker and Dr. Jonathan K.C. Knowles,

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also serve as officers and employees of Roche Holding Ltd and its affiliates. As long as Roche owns in excess of 50% of our Common Stock, Roche directors will comprise two of the three members of the nominations committee. Our certificate of incorporation includes provisions relating to competition by Roche affiliates with us, offering of corporate opportunities, transactions with interested parties, intercompany agreements, and provisions limiting the liability of specified employees. We cannot assure you that Roche will not seek to influence our business in a manner that is contrary to our goals or strategies or the interests of other stockholders. Moreover, 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.

Additionally, 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.

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 and costly to obtain or maintain

While we currently have a certain amount of insurance to minimize our direct exposure to certain business risks, premiums are generally increasing and coverage is narrowing in scope. As a result, we may be required to assume more risk in the future or make significant expenditures to maintain our current levels of insurance. If we are subject to third-party claims or suffer a loss or damages in excess of our insurance coverage, we will incur the cost of the portion of the retained risk. Furthermore, any claims made on our insurance policies may affect our ability to obtain or maintain insurance coverage at reasonable costs.

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 or private actions. 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.

We also have acquired, and may continue to acquire in the future, land and buildings as we expand our operations. Some of these properties are “brownfields” for which redevelopment or use is complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant. Certain events could occur which may require us to pay significant clean-up or other costs in order to maintain our operations on those properties. Such events include, but are not limited to, changes in environmental laws, discovery of new contamination, or unintended exacerbation of existing contamination. The occurrence of any such event could materially affect our ability to continue our business operations on those properties.

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 U.S. 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.

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·   The amount and timing of our sales to Hoffmann-La Roche and our other collaborators of products for sale outside of the U.S. and the amount and timing of sales to their respective customers, which directly affects 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 by physicians and use of our products for approved indications and additional indications. Among other things, the rate of adoption by physicians 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.

·   Pricing decisions we may adopt.

Our integration of new information systems could disrupt our internal operations, which could harm our revenues and increase our expenses

Portions of our information technology infrastructure may experience interruptions, delays or cessations of service or produce errors. As part of our Enterprise Resource Planning efforts, we are implementing new information systems, but we may not be successful in implementing all of the new systems, and transitioning data and other aspects of the process could be expensive, time consuming, disruptive and resource intensive. Any disruptions that may occur in the implementation of new systems or any future systems could adversely affect our ability to report in an accurate and timely manner the results of our consolidated operations, our financial position and cash flows. Disruptions to these systems also could adversely affect our ability to fulfill orders and interrupt other operational processes. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect our financial results.

Our stock price, like that of many biotechnology companies, is 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 volatile.

In addition, the following factors may have a significant effect 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.

·   Concerns about the pricing of our products and the potential effect of such on their utilization or our product sales.

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

·   Regulatory developments or delays concerning our products in the U.S. and foreign countries.

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

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

·   Period to period fluctuations in our financial results.

Our effective income tax rate may vary significantly

Various internal and external factors may have favorable or unfavorable effects on our future effective income 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, changes in estimates of prior years’ items, past and future levels of R&D spending, and changes in overall levels of income before taxes.

To pay our indebtedness will require a significant amount of cash and may adversely affect our operations and financial results

As of June 30, 2006, we had approximately $2.0 billion of long-term debt. Our ability to make payments on and to refinance our indebtedness, including our long-term debt obligations, and to fund planned capital expenditures, R&D, as well as stock repurchases and expansion efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are and will remain beyond our control. Additionally, our indebtedness may increase our vulnerability to general adverse economic and industry conditions, require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, R&D, expansion efforts and other general corporate purposes, and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

Accounting pronouncements may affect our future financial position and results of operations

Under Financial Accounting Standards Board (or “FASB”) Interpretation No. 46R (or “FIN 46R”), a revision to Interpretation 46, “Consolidation of Variable Interest Entities,” we are required to assess new business development collaborations as well as to reassess, upon certain events, some of which are outside our control, the accounting treatment of our existing business development collaborations based on the nature and extent of our variable interests in the entities as well as the extent of our ability to exercise influence over the entities with which we have such collaborations. Our continuing compliance with FIN 46R may result in our consolidation of companies or related entities with which we have a collaborative arrangement and this may have a material effect on our financial condition and/or results of operations in future periods.

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “FAS 123R”). As a result, we have included employee stock-based compensation costs in our results of operations for the second quarter and six months ended June 30, 2006, as discussed in Note 2, “Employee Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item I of this Form 10-Q. Our adoption of FAS 123R is expected to result in compensation expense that will reduce diluted net income per share by approximately $0.15 to $0.17 per share for 2006. However, our estimate of future employee stock-based compensation expense is affected by our stock price, the number of stock-based awards our board of directors may grant in 2006, as well as a number of complex and subjective valuation assumptions and the related tax effect. These valuation assumptions include, but are not limited to, the volatility of our stock price and employee stock option exercise behaviors.

On June 28, 2006, the Financial Accounting Standards Board (or “FASB”) ratified the consensus reached by the EITF on EITF Issue 06-02, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences.” EITF 06-02 states that if all the conditions of paragraph 6 of FASB 43 are met, compensation costs for sabbatical and other similar benefit arrangements should be accrued over the requisite service period. Paragraph 6 of FASB 43 states that a liability should be accrued for employees’ future absences if the following are met:  (a) the employer’s obligation is attributable to employees’ services already rendered; (b) the obligation relates to rights that vest or accumulate; (c) payment of the compensation is probable;

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and (d) the amount can be reasonably estimated. EITF 06-02 is effective for fiscal years beginning after December 15, 2006. Upon adoption of EITF 06-02, we expect to record a one-time charge as a cumulative effect of a change in accounting principle and an annual sabbatical accrual that will reduce diluted net income per share by approximately $0.02 to $0.03 per share and $0.01 to $0.02per share, respectively, for 2007. These charges are non-cash items.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Under a stock repurchase program approved by our Board of Directors in December 2003 and most recently extended in April 2006, we are authorized to repurchase up to 100,000,000 shares of our Common Stock for an aggregate amount of up to $6.0 billion through June 30, 2007. In this stock repurchase program, purchases may be made in the open market or in privately negotiated transactions from time to time at management’s discretion. We also may engage in transactions in other Genentech securities in conjunction with the repurchase program, including certain derivative securities. We intend to use the repurchased stock to offset dilution caused by the issuance of shares in connection with our 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 employee stock plans; and (iii) to address provisions of our affiliation agreement with Roche relating to maintaining Roche’s minimum ownership percentage. See Note 5, “Relationship with Roche and Related Party Transactions” in the Notes to Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q for more information on Roche’s minimum ownership percentage. We have entered into Rule 10b5-1 trading plans 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 current trading plan covers approximately four million shares and will run through June 30, 2007.

Our shares repurchased during the second quarter of 2006 were as follows (shares in millions):

	Total Number of Shares Purchased in 2006		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, 2006		0.7		80.31
May 1-31, 2006		2.1		78.83
June 1-30, 2006		1.2		79.30
Total		4.0	$	79.23		56		44

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.

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

At our Annual Meeting of Stockholders held on April 20, 2006, three matters were voted upon. A description of each matter and a tabulation of the votes for each of the matters follows:

1.   To elect seven director nominees to hold office until the 2007 Annual Meeting of Stockholders or until their successors are duly elected and qualified:

	Votes
Nominee	For	Withheld
Herbert W. Boyer, Ph.D.	869,366,536	119,986,434
William M. Burns	874,582,459	114,770,511
Erich Hunziker, Ph.D.	874,580,028	114,772,942
Jonathan K.C. Knowles, Ph.D.	874,621,459	114,731,511
Arthur D. Levinson, Ph.D.	892,193,525	97,159,445
Debra L. Reed	962,940,000	26,412,970
Charles A. Sanders, M.D.	961,218,278	28,134,692

2.   To approve an amendment to the 1991 Employee Stock Plan.

Votes
For	Against	Abstain	Non-Votes
915,864,503	18,606,878	580,226	54,301,363

To ratify Ernst & Young LLP as our independent registered public accounting firm for 2006.

Votes
For	Against	Abstain
980,494,217	8,438,269	420,484

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Item 6.  Exhibits

Exhibit No.	Description	Location
10.1	Genentech, Inc. Employee Stock Plan, as amended	Filed on a Current Report on Form 8-K with the U.S. Securities and Exchange Commission on April 25, 2006, and incorporated herein by reference.
10.2	Amended and Restated Collaboration Agreement between Genentech, Inc. and Idec Pharmaceuticals Corporation dated as of June 19, 2003.*	Filed herewith
10.3	Letter Amendment dated as of August 21, 2003, to the Amended and Restated Collaboration Agreement between Genentech, Inc. and Idec Pharmaceuticals Corporation.	Filed herewith
15.1	Letter regarding Unaudited Interim Financial Information.	Filed herewith
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	Filed herewith
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	Filed herewith
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	Furnished herewith

___________

*   Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934.

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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:	August 2, 2006	/s/ARTHUR D. LEVINSON
		Arthur D. Levinson, Ph.D. Chairman and Chief Executive Officer
Date:	August 2, 2006	/s/DAVID A. EBERSMAN
		David A. Ebersman Executive Vice President and Chief Financial Officer
Date:	August 2, 2006	/s/JOHN M. WHITING
		John M. Whiting Vice President - Finance and Chief Accounting Officer

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EX-10.2

EXHIBIT 10.2

AMENDED AND RESTATED

COLLABORATION AGREEMENT

GENENTECH, INC. AND

IDEC PHARMACEUTICALS CORPORATION

1

COLLABORATION AGREEMENT

THIS AMENDED AND RESTATED COLLABORATION AGREEMENT (this “Agreement) is made effective as of the 19th day of June, 2003 (the "Restated Effective Date") by and between IDEC Pharmaceuticals Corporation, a Delaware corporation having its principal place of business at 3030 Callan Road, San Diego, California 92121 ("IDEC") and GENENTECH, INC., a Delaware corporation having its principal place of business at 1 DNA Way, South San Francisco, California 94080 ("Genentech"), each on behalf of itself and its Affiliates. IDEC and Genentech are sometimes referred to herein individually as a "Party" and collectively as the "Parties," and references to "IDEC" and "Genentech" shall include their respective Affiliates.

RECITALS

1.Genentech and IDEC entered into that certain Collaboration Agreement dated as of March 16, 1995 related to the development and commercialization of Licensed Products, including without limitation C2B8 (the “Original Agreement”).

2.In the Original Agreement, IDEC granted to Genentech, and Genentech obtained, rights to co-promote Licensed Products in the United States and Canada and to develop and market Licensed Products in the rest of the world (excluding certain Asian countries, which were added to the Original Agreement by amendment at a later date).

3.Simultaneously with the execution of the Original Agreement, IDEC and Genentech entered into a Preferred Stock Purchase Agreement (the "Stock Purchase Agreement") of even date therewith, pursuant to which Genentech purchased $5 million of Preferred Stock of IDEC in accordance with the terms and conditions thereof.

4.Simultaneously with the execution of the Original Agreement, IDEC and Genentech entered into the Expression Technology License of even date therewith granting Genentech rights to certain enabling technology (the "Expression Technology License").

5.Following the execution of the Original Agreement, the Parties entered into a first amendment to the Collaboration Agreement of November 30, 1995 (the “First Amendment”) expanding Genentech’s rights to develop and market Licensed Products in the world to include certain Asian countries.

6.Following the execution of the Original Agreement, the parties entered into an amendment of June 15, 1998 (the "Second Amendment") approving the assignment of certain rights of Genentech in Canada with respect to C2B8 to F. Hoffmann La Roche Ltd.

7.The Parties desire to amend and restate the Original Agreement to include certain additional products (“New Products”, as defined below) whose mechanism of action is initiated by interaction with the CD20 B-cell determinant, including without limitation the humanized molecule created by Genentech known as G2H7, in each case on the terms and subject to the conditions set forth in this Agreement.

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8.In an effort to be efficient in the drafting of this Agreement, the Parties have elected to preserve substantial portions of the historical content of the Original Agreement, the First Amendment and the Second Amendment in this Agreement (with the expressed understanding that such content is not given any renewed or additional meaning by its inclusion herein).

9.The Parties desire to coordinate the commercial efforts related to Licensed Products with the development efforts related to New Products, and subsequently to synchronize the commercial efforts and financial treatment of all Licensed Products and New Products marketed by the Parties in the Co-Promotion Territory.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

ARTICLE 1.

DEFINITIONS

Capitalized terms not otherwise defined herein have the meaning given them in the Schedule of Master Definitions attached hereto as Appendix 1.

ARTICLE 2.

SCOPE OF COLLABORATION; DEVELOPMENT COSTS

2.1Initial Licensed Product. The Parties will focus their initial efforts on the development of C2B8 in the Field.

2.2Y2B8 and In2B8 Option and Phase II Trial. If IDEC decides, or the Parties mutually agree, to commence a Phase II Clinical Trial of IDEC's [*] ("Y2B8") and IDEC's [*] ("In2B8") (the "Y2B8 Phase II Trial"), IDEC shall give notice, including the number of evaluable patients, of such proposed Y2B8 Phase II Trial (the "Y2B8 Phase II Notice") to Genentech. If Genentech notifies IDEC within sixty (60) days of receipt of the Y2B8 Phase II Notice that it intends to participate with IDEC in the Y2B8 Phase II Trial, then Genentech shall bear [*]of the costs of the Y2B8 Phase II Trial up to a maximum Genentech contribution of [*]. Once Genentech has reached its maximum contribution, [*] for the Y2B8 Phase II Trial in excess of this amount shall be borne 100% by IDEC. If IDEC does not receive timely notice from Genentech of its intention to participate in the Y2B8 Phase II Trial, then IDEC may proceed with the Y2B8 Phase II Trial provided that IDEC shall bear the cost of the Y2B8 Phase II Trial. Upon completion of the Y2B8 Phase II Trial and delivery to Genentech of a final report with respect thereto, Genentech shall have 120 days to exercise an option to include Y2B8 and In2B8 as Licensed Products (the "Y2B8 Option"). The Y2B8 Option shall be exercisable by written notice to IDEC ("Notice of Y2B8/In2B8 Exercise") together with payment in the amount of [*] (the "Option Fee"). Notwithstanding the foregoing, if Genentech shall have elected to participate with IDEC in the Y2B8 Phase II Trial and contribute up to [*] toward the costs of such Y2B8 Phase II Trial, then the Option Fee shall be reduced to [*]. Within 60 days of the Notice of Y2B8/1n2B Exercise, the Parties shall agree upon the terms and conditions governing the development and commercialization of products derived

3

from Y2B8 and In2B8, taking into account the commercial value of Y2B8 and In2B relative to C2B8. In any event, no later than publication of the Pivotal Phase III Clinical Trial results of C2B8, the Parties shall discuss in good faith the initiation of the Y2B8 Phase II Trial.

2.3Development Costs for C2B8.

(a)Except as set forth below, or unless otherwise agreed to in writing by Genentech, IDEC shall bear all costs for development and obtaining Regulatory Approval of C2B8 in the Field in the Co-Promotion Territory through the date of Regulatory Approval of C2B8 in the United States, including but not limited to certain manufacturing process improvements for the current production process and using the existing cell line. Genentech agrees, however, that it shall bear the costs of the following development activities incurred in connection with C2B8 through the date of the first Regulatory Approval in the United States:

(i)accelerated product stability studies conducted by Genentech as set forth in Appendix I of the Development Plan and, if a replacement formulation is deemed necessary by the JDC, reasonable assistance for development of such formulation and attendant studies;

(ii)assistance with assays as set forth in Appendix I to the Development Plan;

(iii)assistance provided by [*] or equivalents from Genentech, deployed at the direction of the persons designated by the JDC to supervise the Pivotal Phase III Clinical Trial; and

(iv)the process development and manufacturing approvals of a reamplified cell-line or the current cell-line if a reamplified cell-line scale-up is not feasible as specified in Section 8.1.

(b)Subject to Section 2.7 and Section A.11 of Exhibit A, all Development Costs for Licensed Products incurred by the Parties for development or marketing in the Co-Promotion Territory after the first Regulatory Approval for C2B8 in the United States shall be charged against Operating Profits (or Losses).

(c)Subject to Section A.11 of Exhibit A, Genentech shall bear all Development Costs for Licensed Products for development or marketing in the Field in the Licensed Territory, unless otherwise agreed in writing by the Parties.

2.4Initial New Product. From and after the date of the payment in Section 7.1(b)(i), G2H7 shall be deemed a New Product, the development and commercialization of which shall be governed by this Agreement. Following the Restated Effective Date, the Parties shall focus their initial efforts with regard to New Products on the development of G2H7 in the Field in the Co-Promotion Territory.

2.5IDEC’s Rights Regarding New Products Other Than G2H7.

(a)Opt-in Notice for New Products Other Than G2H7. For so long as the Parties are entitled to receive a share of Operating Profits or Losses on any Franchise Product hereunder, Genentech agrees to keep IDEC informed as to the existence of research and/or development

4

activities regarding Potential New Products other than G2H7. With respect to [*] Potential New Products and Genentech Potential New Products, within thirty (30) days of the date that Genentech’s portfolio planning committee (or successor committee or process thereto, “PPC”) makes a formal decision, as recorded in the minutes of the relevant PPC meeting, to commence clinical development of such a Potential New Product (or a similar development decision is made as part of any successor process), Genentech shall provide IDEC with the same development assessment package that was provided to the PPC as the basis of its development decision (or otherwise reviewed in connection with such decision), including an identification as to whether such product is a [*] Potential New Product [*] Potential New Product. Without limiting the foregoing, such development assessment package shall include a summary of the preclinical data and the proposed Development Plan including proposed clinical study designs, manufacturing cost estimates, timelines, program cost, target product profile(s), and market forecast. With respect to [*] Potential New Products, [*] Genentech will provide to IDEC a summary of Genentech’s rights (and IDEC’s potential rights) to develop and commercialize such [*] Potential New Product, as well as relevant information about the product, including preclinical and clinical data and reports [*].

(b)Exercise of Opt-In by IDEC. IDEC shall have sixty (60) days from the date of Genentech's notice to IDEC of the availability of a Potential New Product to provide written notice to Genentech that it elects to participate in the development and commercialization of such Potential New Product. In order for IDEC to preserve any rights under Section 2.5(c) with respect to Genentech Potential New Products, notice of an election to not opt-in with respect to such product under this Section 2.5(b) must be provided to Genentech within such sixty (60) day period.

(i)Genentech Potential New Products. Within ten (10) days following an election to participate in a Genentech Potential New Product, IDEC shall pay Genentech the opt-in fee set forth in Section 7.1(b)(ii) or (iii), as the case may be. From and after the date of the payment of such fee, such Genentech Potential New Product shall be deemed a New Product under this Agreement, and IDEC shall have the right to participate with Genentech with respect to such product [*] New Product.

(ii)[*] Potential New Products. For a period of thirty (30) days following an election by IDEC to participate in an [*] Potential New Product, Genentech and IDEC shall use good faith efforts to agree upon the amount of the opt-in fee IDEC shall pay in order to obtain the right to include such [*] Potential New Product as a New Product hereunder; such amount to be in any event [*] cost of such product attributable to rights in the United States. In determining such cost, the Parties shall take into consideration [*] in developing such product to such stage, including without limitation any [*]. If the Parties are unable to agree upon the amount of the opt-in fee for such [*] Potential New Product, either Party may, by written notice to the other, have such matter referred to an independent investment banker, mutually agreeable to both Parties, to determine the amount of such opt-in fee; such determination to be binding upon both Parties. Within ten (10) days following the Parties agreement upon, or the independent investment banker’s determination of, such opt-in fee, IDEC shall pay Genentech such amount. From and after the date of the payment of such fee, such Potential New Product shall be deemed a New Product under this Agreement, and:

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(1) IDEC shall have the right to participate with Genentech with respect to such product in the United States [*]; or

(2) to the extent that Genentech was able at the time of Genentech’s [*] in the development and commercialization activities with [*] participate in the development and commercialization [*].

Notwithstanding anything to the contrary in this Agreement, it is understood and agreed that, with respect to [*] Potential New Products for which IDEC has timely opted-in and paid the opt-in fee hereunder, Genentech is under no obligation under this Agreement to offer or grant to IDEC any rights to such [*] Potential New Products outside the United States, or make any payments to IDEC with respect to Genentech’s development and commercialization of such [*] Potential New Products outside the United States.

Failure by IDEC under this Section 2.5(b) to provide a timely election notice or to timely pay the opt-in fee, or rejection by IDEC of a independent investment banker’s determination of the amount of the opt-in fee (when provided in the manner set forth above with respect to [*] Potential New Products), will be deemed to be an election not to participate in such Potential New Product (and following any such failure or rejection, Genentech shall (except as provided in Section 2.5(c) with respect to Genentech Potential New Products) have no further obligation to offer such Potential New Product to IDEC and IDEC shall have no further rights under this Agreement with respect to such Potential New Product).

(c)[*]. With respect to each Genentech Potential New Product for which IDEC was provided the opportunity to opt-in pursuant to Section 2.5(a) before the same shall have [*] and for which IDEC pursuant to Section 2.5(b) timely elected to not opt-in (but not including a failure to elect to opt-in), promptly following [*] for such Genentech Potential New Product, Genentech shall provide IDEC with [*] data package for such Genentech Potential New Product that summarizes the clinical data and the proposed Development Plan going forward, including proposed clinical study designs, timelines and program costs. IDEC shall have sixty (60) days from the date of Genentech's notice to IDEC of such development assessment package to provide written notice to Genentech that it elects to participate in the development and commercialization of such Genentech Potential New Product. Within ten (10) days following an election to participate in such Genentech Potential New Product, IDEC shall pay Genentech the opt-in fee set forth in Section 7.1(b)(iv). From and after the date of the payment of such fee, such Genentech Potential New Product shall be deemed a New Product under this Agreement, and the Parties shall [*] New Product as provided herein. Failure by IDEC under this Section 2.5(c) to provide a timely election notice or to timely pay the opt-in fee will be deemed to be an election not to participate in such Genentech Potential New Product, and following any such failure, Genentech shall have no further obligation to offer such Genentech Potential New Product to IDEC and IDEC shall have no further rights under this Agreement with respect to such Genentech Potential New Product.

2.6IDEC Right of Negotiation for Third Party Anti-CD20 Products.

(a)Right of Negotiation. If Genentech decides to seek a license to develop and/or commercialize a Third Party Anti-CD20 Product, Genentech shall promptly notify IDEC of such

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decision in writing (such occurrence to “seek a license” shall be deemed to have occurred no later than the date that [*]. IDEC shall have thirty (30) days to elect in writing to participate in negotiations, and a failure to timely so elect shall be deemed a decision not to participate in such negotiations (and following any such failure, Genentech shall have no further obligation to offer such Third Party Anti-CD20 Product to IDEC and IDEC shall have no further rights under this Agreement with respect to such Third Party Anti-CD20 Product). In the event that IDEC timely notifies Genentech of its desire to participate in such negotiations, then for a period of ninety (90) days, Genentech and IDEC shall use good faith efforts to agree upon terms with the Third Party for a license to such Third Party Anti-CD20 Product that includes the participation of IDEC and Genentech, vis-à-vis each other, in the United States [*] provided, at Genentech’s reasonable discretion, Genentech may choose to negotiate with such Third Party alone (but to the extent reasonably possible, on terms and conditions reasonably acceptable to IDEC). In the event that IDEC and Genentech have not agreed upon terms with such Third Party within ninety (90) days of IDEC’s election to participate, or if the Parties have not entered into a definitive agreement with such Third Party within one hundred and eighty (180) days of IDEC’s election to participate, then Genentech may enter into a definitive agreement on its own and at its sole discretion with such Third Party for such Third Party Anti-CD20 Product; provided, Genentech will use its commercially reasonable and diligent efforts to obtain the right for IDEC to participate with Genentech with respect to such product in the United States.

(b)Third Party Anti-CD20 Product In-licensed After the Restated Effective Date.

(i)Notice. If, following IDEC’s timely notification to Genentech pursuant to Section 2.6(a) to participate in negotiations with a Third Party for a Third Party Anti-CD20 Product, Genentech enters into a definitive agreement with such Third Party for such Third Party Anti-CD20 Product without IDEC, then Genentech shall promptly notify IDEC of the existence of such definitive agreement and provide IDEC with a summary of the terms, including any data package provided by such Third Party to Genentech, under which IDEC may participate with Genentech in the United States for such Third Party Anti-CD20 Product (such terms, vis-à-vis each other, other than the amount of the opt-in fee to be paid by IDEC to Genentech pursuant to this Section 2.6(b), to the extent reasonably possible under such Third Party agreement, to be on [*].

(ii)Opt-in Fee. The opt-in fee under Section 2.6(b)(i) above, to be determined by Genentech [*] shall be based on the terms of the agreement with such Third Party attributable to rights in the United States, and shall be intended to compensate Genentech for [*] of Genentech’s costs in acquiring the rights in the United States to such product under such agreement with such Third Party [*]. The Parties shall seek to agree on the amount of such opt-in fee, and to the extent the Parties are unable to agree within a twenty (20) day period, such dispute shall be subject to Section 17.2.

(c)Third Party Anti-CD20 Product In-licensed Prior to the Restated Effective Date.

(i)Notice. With respect to any Third Party Anti-CD20 Products for which Genentech obtained a license to develop and commercialize such product from a Third Party prior to the Restated Effective Date, within thirty (30) days of the date that Genentech’s PPC makes a formal decision, as recorded in the minutes of the relevant PPC meeting, [*] Genentech shall provide IDEC with the same development assessment package that was provided to the PPC as the basis of its [*]

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including a summary of the terms of the license from such Third Party under which IDEC may participate with Genentech in the United States for such Third Party Anti-CD20 Product, (such terms, other than the amount of the opt-in fee to be paid by IDEC to Genentech pursuant to this Section 2.6(c)(i), to the extent reasonably possible under such Third Party agreement, to be on [*] Without limiting the foregoing, such development assessment package shall include a summary of the preclinical data and the proposed Development Plan including proposed clinical study designs, manufacturing cost estimates, timelines, program cost, target product profile(s), and market forecast, and any data package provided by such Third Party to Genentech.

(ii)Opt-in Fee. The opt-in fee under Section 2.6(c)(i) above, to be determined by Genentech [*] shall be [*] cost of such product attributable to rights in the United States[*]. The Parties shall seek to agree on the amount of such opt-in fee, and to the extent the Parties are unable to agree within a twenty (20) day period, such dispute shall be subject to Section 17.2.

(d)Election. IDEC shall have thirty (30) days from the date of Genentech’s notice under Section 2.6(b)(i) or 2.6(c)(i) above to elect in writing to participate with Genentech on such terms under such definitive agreement, including without limitation the opt-in fee (and to the extent the amount of the opt-in fee is not agreed upon at the time of such election, the amount of the opt-in fee as determined by the arbitration panel under Section 17.2; such amount to be paid upon the earlier of agreement by the Parties on such amount, or final determination by such arbitration panel of such amount), and a failure to so elect shall be deemed a decision not to participate with Genentech with respect to such Third Party Anti-CD20 Product, and following any such failure, Genentech shall have no further obligation to offer such Third Party Anti-CD20 Product to IDEC and IDEC shall have no further rights under this Agreement with respect to such Third Party Anti-CD20 Product.

(e)Any agreement which IDEC and Genentech enter into under this Section 2.6 to develop and commercialize a Third Party Anti-CD20 Product in the United States shall provide for licenses from each Party to the other Party necessary to develop and commercialize such product under such agreement; such licenses, to the extent permissible under the terms of the license from such related Third Party, to be commensurate in scope with the licenses granted under Section 9.2.

(f)Notwithstanding anything to the contrary in this Agreement, it is understood and agreed that Genentech is under no obligation to offer or grant to IDEC any rights to any Third Party Anti-CD20 Product outside the United States, or make any payments to IDEC with respect to Genentech’s development and commercialization of any Third Party Anti-CD20 Product outside the United States.

(g)Genentech represents and warrants that, to the best of its knowledge, it has not, prior to the Restated Effective Date initiated clinical development with (i) any proteins or peptides that meet the definition of Potential New Products (other than G2H7), or (ii) any Third Party Anti-CD20 Product for which Genentech obtained a license to develop and commercialize such product from a Third Party prior to the Restated Effective Date, in each case as recorded in the minutes of its PPC.

2.7Development Costs for New Products. Unless otherwise agreed in writing by the Parties, from and after the Restated Effective Date, and notwithstanding a Party’s share in Operating Profits (or Losses), all Development Costs for New Products for development or marketing in the

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Co-Promotion Territory shall be shared by the Parties[*] by Genentech and [*] by IDEC until [*] After [*] the Parties will share in the Development Costs for Franchise Products for development or marketing in the Co-Promotion Territory commensurate with the profit/loss sharing relationship specified in Section A.9.3 and the guidelines for charging costs specified in Section A.11 of Exhibit A for such products. Genentech shall bear [*] Development Costs for New Products for development or marketing in the Licensed Territory, unless otherwise agreed in writing by the Parties.

ARTICLE 3.

MANAGEMENT OF THE COLLABORATION

3.1Management Committee.

(a)Within thirty (30) days of the Original Effective Date, the Parties will establish a Management Committee to oversee and manage the collaboration in the Co-Promotion Territory contemplated by this Agreement. The Management Committee will be composed of three representatives appointed and replaced by IDEC and three representatives appointed and replaced by Genentech. All such representatives will be senior officers and/or managers of IDEC or Genentech. Either Party may replace any or all of its representatives at any time upon prior written notice to the other Party. The Management Committee will meet at least once each calendar quarter, or more frequently, as agreed by the Management Committee, and will operate by consensus, except as expressly set forth herein. If the Management Committee is unable to resolve a dispute regarding any issue presented to it, such dispute shall be resolved in accordance with Article 17 below.

(b)The Management Committee shall perform the following functions:

(i)determine the overall strategy for the collaboration in the manner contemplated by this Agreement, including without limitation, overseeing and determining the strategy for the coordination, development and commercialization of Licensed Products and New Products so as to maximize the Operating Profits of all Franchise Products;

(ii)coordinate the activities of the Parties hereunder;

(iii)establish a governance structure for the collaboration including overseeing the establishment and organization of one or more Operating Committees, or other structure to implement this Agreement. The establishment of certain Operating Committees is provided for in Sections 3.2, 3.3 and 3.4 of this Agreement. Each Operating Committee contemplated by this Agreement shall be subordinate to the Management Committee. If any Operating Committee contemplated by this Agreement is not constituted or continued, any reference to such Committee in this Agreement shall be deemed to be a reference to the Management Committee or such other committees or structures to which the Management Committee may delegate responsibility;

(iv)settle disputes or disagreements that are unresolved by an Operating Committee unless otherwise indicated in this Agreement; and

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(v)perform such other functions as appropriate to further the purposes of this Agreement as determined by the Parties.

3.2Joint Development Committee.

(a)Within thirty (30) days of the Original Effective Date, the Parties will establish the Joint Development Committee to oversee and control all development of Franchise Products in the Co-Promotion Territory, in the Field, including pre-clinical research, clinical research, manufacturing, regulatory filings and post-approval development studies. The JDC will be composed of three representatives appointed by each of IDEC and Genentech. Each representative will have one vote on all matters within the JDC's purview. Such representatives will include individuals with expertise and responsibilities in the areas of preclinical development, clinical development, process sciences, manufacturing or regulatory affairs. Either Party may replace any or all of its representatives at any time upon written notice to the other Party. The JDC will meet at least once each calendar quarter, or more frequently, as agreed by the JDC. The JDC will operate by consensus, except as expressly set forth herein. If the JDC is unable to resolve a dispute regarding any issue presented to it, such dispute shall be resolved in accordance with Article 17 below.

(b)The JDC shall coordinate, expedite and guide the development of Franchise Products, including review and approval of Development Plans for New Products, to obtain Regulatory Approvals in the Co-Promotion Territory, and in a manner consistent with maximizing the Operating Profits for all Franchise Products, as set forth in Article 4. The JDC will update the Development Plans from time to time as it deems necessary.

(c)The JDC shall also be the forum for exchange of information on Genentech's substantive development of Franchise Products in the Licensed Territory, unless an IDEC representative is permitted to attend meetings of a Genentech development committee as set forth in Section 6.4. While the IDEC representatives may comment on such development, Genentech shall have the final say.

(d)If any Genentech European development partner so requests, IDEC will consider in good faith allowing a representative of such partner to attend the JDC meetings.

(e)The term of the JDC will be determined by the Management Committee.

3.3Joint Commercialization Committee.

(a)Within thirty (30) days of the Original Effective Date, the Parties will establish the Joint Commercialization Committee. When established, the JCC shall be composed of two representatives appointed by each of IDEC and Genentech. Either Party may replace any or all of its representatives at any time upon prior written notice to the other Party. The JCC will be an operational committee made up of individuals with expertise and responsibilities in the areas of product development and marketing, sales management or market research. The JCC will meet on a quarterly basis, except that from submission of a BLA for a Franchise Product in the Co-Promotion Territory until the end of the second year of sales for such Franchise Product in the Co-

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Promotion Territory, the JCC shall meet more frequently in order to prepare for and oversee the launch of such Franchise Product. The JCC will operate by consensus, except as expressly set forth herein. Each representative will have one vote. If the JCC is unable to resolve a dispute regarding any issue presented to it, such dispute shall be resolved in accordance with Section 17.1.

(b)The purposes of the JCC shall be to (i) monitor, review and approve commercialization plans with regard to the commercialization of Franchise Products in the Co-Promotion Territory, including, in accordance with Section 5.4, top-line annual marketing and sales budgets (as described in Section A.1(a) of Exhibit A), annual forecasts of sales and production requirements, the annual marketing plan, broad product positioning, initial product pricing, and Phase IV clinical strategy (e.g. overall plans for investigator sponsored trials and publication studies) as well as (ii) select trademarks for Franchise Products.

(c)The JCC shall have no involvement in the commercialization of Licensed Products in the Licensed Territory, which shall be solely the responsibility of Genentech at its expense.

(d)The term of the JCC will be determined by the Management Committee.

3.4Joint Finance Committee.

(a)Within thirty (30) days of the Original Effective Date, the Parties will establish the Joint Finance Committee to be composed of two representatives appointed by each of IDEC and Genentech. Either Party may replace any or all of its representatives at any time upon prior written notice to the other Party. Such representatives will include individuals with expertise and responsibilities in the areas of accounting, cost allocation, budgeting and financial reporting. The JFC will operate by consensus, except as expressly set forth herein. If the JFC is unable to resolve a dispute regarding any issue presented to it, such dispute shall be resolved in accordance with Article 17.

(b)The JFC shall operate under the direction of the Management Committee to provide services to and consult with the JDC and the JCC in order to address the financial, budgetary and accounting issues which arise in connection with the Development Plans and updates thereto as described in Exhibit A, as well as commercialization plans and updates thereto.

(c)The JFC shall have no involvement in the development of Licensed Products in the Licensed Territory, which shall be the responsibility of Genentech, subject to the terms and conditions of this Agreement.

(d)The JFC will cease operating and have no further function hereunder on the date on which the Parties are no longer sharing Operating Profits or Losses with respect to any Franchise Product in the Co-Promotion Territory.

3.5Collaboration Co-Chairpersons. Within sixty (60) days of the Restated Effective Date, each Party shall designate a Collaboration Co-Chairperson. Each such Collaboration Co-Chairperson shall be a vice president, unless otherwise agreed, and shall serve as a member or an ex-officio member of the Management Committee and each Operating Committee and shall be

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responsible (together, or as the Collaboration Co-Chairpersons may elect to divide responsibilities) to set the agenda of, call and take minutes of meetings of each Committee. In the event of any reasonable dispute between the Collaboration Co-Chairpersons as to any matter to include in the agenda of a meeting, such matter shall by default be included in the agenda.

ARTICLE 4.

DEVELOPMENT IN THE CO-PROMOTION TERRITORY

4.1Development Efforts for C2B8. IDEC and Genentech each agree to collaborate diligently in the development of C2B8 in the Field and to use commercially reasonable and diligent efforts to develop and bring C2B8 to market in the Field as soon as practicable. The Parties further agree to execute and substantially perform the Development Plan for C2B8 and to cooperate with the other in carrying out such Development Plan. Upon the entry of New Products into the development pipeline in accordance with Section 2.4 or 2.5, it is anticipated that the parties may elect to develop and commercialize one or more such New Product(s) in a manner that might adversely affect the development and/or commercialization of C2B8, but in any event such efforts shall be directed towards maximizing the Operating Profits of the Franchise Products in the aggregate. As used in this Agreement, the term commercially reasonable and diligent efforts will mean those efforts consistent with the exercise of prudent scientific and business judgment, as applied to other pharmaceutical products of similar potential and market size by the Party in question.

4.2Drug Approval Applications for C2B8. Consistent with the Development Plan, IDEC (or Genentech, if appropriate) shall file Drug Approval Applications and seek Regulatory Approvals for C2B8 in the Co-Promotion Territory. Prior to submitting any Drug Approval Application, the Parties, through the JDC, shall consult, cooperate in preparing and mutually agree on such Applications and their content and scope. Each Party shall own all regulatory submissions including all Drug Approval Applications for C2B8 that such Party files in the Co-Promotion Territory. The Parties will endeavor to include on all package labels and inserts for C2B8 sold in the Co-Promotion Territory, where appropriate (i.e., to the extent such materials identify or otherwise make reference to either of the Parties), the names and logos of each of IDEC and Genentech with equal prominence, to the extent permitted by the applicable regulatory authorities.

4.3.Development Efforts for New Products. IDEC and Genentech each agree to collaborate diligently in the development of New Products in the Co-Promotion Territory in the Field and to use commercially reasonable and diligent efforts to develop and bring each New Product to market in the Co-Promotion Territory in the Field as soon as practicable so as to maximize the potential Operating Profits as to Franchise Products in the aggregate in the Co-Promotion Territory. The Parties further agree to execute and substantially perform the Development Plan for each New Product and to cooperate with the other in carrying out each such Development Plan.

4.4Drug Approval Applications for New Products. Consistent with the Development Plans for New Products, unless otherwise agreed in writing, Genentech shall file Drug Approval Applications and seek Regulatory Approvals for New Products in the Co-

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Promotion Territory. Prior to submitting any Drug Approval Application, the Parties, through the JDC, shall consult, cooperate in preparing and mutually agree upon such Application and its content and scope. Each Party shall own all regulatory submissions including all Drug Approval Applications for New Products that such Party files in the Co-Promotion Territory. The Parties will endeavor to include on all package labels and inserts for New Products sold in the Co-Promotion Territory, when appropriate (i.e., to the extent such materials identify or otherwise make reference to either of the Parties), the names and logos of each of IDEC and Genentech with equal prominence, to the extent permitted by the applicable regulatory authorities.

4.5Development Activities for Franchise Products. With regard to the development of New Products, including, without limitation, G2H7, and with regard to all Franchise Products (including, without limitation, C2B8) [*] Genentech will be responsible for proposing strategic plans (including plans to initiate a company sponsored trial), as well as Development Plans, for such Franchise Products. Such Development Plans shall include, where appropriate and without limitation, clinical development plans, timelines, and overall budgets (consisting of aggregate estimated annual expenditures and top line expenses for clinical development) for such Franchise Products. Such strategic plans and Development Plans and other materials shall be delivered to the JDC for review and approval by unanimous consent. Once a Development Plan has been approved by the JDC, Genentech shall be responsible for implementing such Development Plans, except to the extent that the JDC allocates particular activities, by unanimous consent, to IDEC. In addition, and notwithstanding the dispute resolution provisions of Sections 3.1 through 3.4, with regard to the development of New Products, including without limitation G2H7, and with regard to all Franchise Products (including without limitation C2B8) [*] Genentech shall have final decision-making control over the implementation of each such Development Plan, including without limitation, clinical development, provided, however, that Genentech shall not have the right to (i) exceed the annual aggregate budget approved with a Development Plan [*] without the unanimous approval of the JDC, (ii) assign tasks to IDEC that were not otherwise approved by unanimous consent of the JDC, or (iii) materially amend a Development Plan without the unanimous approval of the JDC. For the avoidance of doubt, it is understood and agreed that Genentech’s implementation of a Development Plan shall not be deemed a material amendment to such Development Plan, unless such implementation would (x) materially modify the strategic direction agreed upon by the Parties thereunder, or (y) result in an agreed upon timeline thereunder being [*].

4.6Clinical Trials Not Approved by the JDC. In the event that Genentech proposes a particular clinical trial as part of a Development Plan (other than a clinical trial proposed for C2B8 prior to the First New Product FDA Approval ) and such trial is not approved by the JDC within thirty (30) days of the date that such trial was proposed to the JDC (or in the event such trial was proposed to the JDC other than at a meeting of the JDC, within thirty (30) days of the date that the JDC first meets (whether in person or by teleconference) following the date such trial was proposed to the JDC), then Genentech shall have the right to conduct such trial at its own expense. During such thirty (30) day period, Genentech shall timely provide all information reasonably requested by any member of the JDC that would be material to making a determination as whether such proposed clinical trial should be approved. If in such circumstance, Genentech elects to conduct such trial within a reasonable period of time thereafter, and such trial meets all of its primary endpoints, then IDEC shall reimburse Genentech for [*] of the Development Costs related

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to such trial that IDEC would otherwise have been responsible for if the JDC had approved such trial (i.e[*] total Development Costs).

ARTICLE 5.

COMMERCIALIZATION IN THE CO-PROMOTION TERRITORY

5.1Commercialization Efforts

(a)Commercialization Efforts for Licensed Products. IDEC and Genentech each agree to (i) collaborate diligently in the commercialization of C2B8 and (ii) use commercially reasonable and diligent efforts to commercialize C2B8 promptly and in such a manner as to maximize Operating Profits as to Franchise Products in the aggregate in the Co-Promotion Territory. The Parties agree that Genentech will play the primary role and IDEC the secondary role in all sales, marketing and product launch activities and tactical execution of marketing and sales promotional programs in the Co-Promotion Territory. The Parties shall be guided by a standard of reasonableness in economic terms and of fairness to each of the Parties, striving to balance as best they can the legitimate interests and concerns of the Parties and to realize the economic potential of C2B8.

(b)Commercialization Efforts for New Products. IDEC and Genentech each agree to (i) collaborate diligently in the commercialization of New Products in the Co-Promotion Territory and (ii) use commercially reasonable and diligent efforts to commercialize New Products promptly and in such a manner as to maximize Operating Profits as to Franchise Products in the aggregate in the Co-Promotion Territory. The Parties agree that, as to New Products, Genentech will be responsible for all marketing and product launch activities and tactical execution of marketing and sales promotional programs in the Co-Promotion Territory. Genentech and IDEC shall deploy a co-promotion sales force according to section 5.2 below. The Parties shall be guided by a standard of reasonableness in economic terms and of fairness to each of the Parties, striving to balance as best they can the legitimate interests and concerns of the Parties and to realize the economic potential of New Products in the Co-Promotion Territory.

5.2Sales Efforts in the Co-Promotion Territory.

(a)Although Genentech has the primary marketing role, IDEC shall have the right to deploy a co-promotion sales force in the Co-Promotion Territory; such IDEC sales force shall comprise [*] of Sales Representatives consistent with [*] between IDEC and Genentech, or as otherwise determined by the unanimous consent of the JCC. As of [*] such sales forces deployed by Genentech and/or IDEC shall be solely dedicated to selling (i) Franchise Products and (ii) products that are not Franchise Products [*]

(b)In addition, Genentech shall have the right, at its election, to [*] as follows:

(i)Genentech shall provide written notice to IDEC of the specific date upon which [*] (such notice to be provided at least [*] .

(ii)To the extent [*] and

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(iii)To the extent [*]

IDEC shall timely provide Genentech with invoices for any [*] incurred under this Section 5.2(b), and Genentech shall pay such invoices within sixty (60) days thereof. Genentech shall have the right to audit such invoiced[*] no more than once a calendar year, such audit to be conducted in accordance with Section A.6 of Exhibit A.

As used herein:

[*]

"IDEC Sales Force FTEs" means that number of additional incremental IDEC FTEs actually allocated by IDEC to its sales force in a given calendar year to convert a portion of such sales force to a sales force dedicated to selling [*] (“Y2B8”) (and to the extent IDEC elects to allocate any of such sales force dedicated to selling [*] to also selling non-Franchise Products [*] it is understood that [*] provided such FTE's shall not include that portion of any FTEs allocated by IDEC to selling [*] prior to the date of Genentech’s written notice to IDEC under Section 5.2(b)(i) above nor as of the Restated Effective Date;

"FTE" means the equivalent of a full-time employee (or [*] assigned to selling, supporting or overseeing the sale activity of [*] in the Co-Promotion Territory over a calendar year (including normal vacation, sick days and holidays), and in the case of less than a full-time employee (or [*] the portion of an FTE year devoted by an employee (or [*] to the [*] sales force shall be determined by dividing the number of days (or partial days) during any calendar year devoted by such employee (or [*] to the [*] sales force by the total number of working days of a full-time employee (or [*] during such calendar year; and

"FTE Rate" means [*] per FTE per calendar year.

(c)Unless the JCC shall otherwise unanimously agree: (i) each Party shall be entitled to assign its respective sales force to such markets and accounts as it shall determine in its reasonable discretion, and (ii) there shall be no prohibition on the sales forces of both Parties calling on any individual customer; provided in each case, such sales force shall conduct such activities in accordance with coordinated messages approved by the JCC.

(d)The Parties shall recover their Sales Costs in accordance with Exhibit A.

5.3Sales and Distribution. Unless otherwise agreed in writing, Genentech shall have the sole responsibility with respect to the following:

(a)Booking sales for and distributing Franchise Products. If IDEC receives any orders for Franchise Products, it shall refer such orders to Genentech.

(b)Handling all returns of Franchise Products. If Franchise Products are returned to IDEC, it shall promptly be shipped to the facility responsible for shipment of Franchise Products in the country in question to the attention of the Returned Goods Department or another location as may be designated by Genentech.

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(c)Handling all recalls of Franchise Products. IDEC will make available to Genentech, upon request, all of its pertinent records which Genentech may reasonably request to assist Genentech in effecting any recall.

(d)Handling all aspects of order processing, invoicing and collection, Franchise Products distribution, warehousing, inventory and receivables, and collection of data of sales to hospitals and other end users (e.g., DDD data).

(e)Handling all other customer service related functions.

5.4Commercialization Plans and Materials.

(a)Marketing and Promotional Materials for Licensed Products. All marketing and promotional materials related to Licensed Products shall be prepared by Genentech, and all marketing and promotional strategies and campaigns shall be subject to review and approval by the JCC. Genentech shall be entitled to select any Third Parties involved in the preparation of such materials. With respect to written and visual promotional or educational materials, to the extent such materials identify or otherwise make reference to either of the Parties, IDEC and Genentech shall both be presented and described with equal prominence and emphasis as having joined and participated in the development and joint commercialization of Licensed Products, as permitted by the applicable laws and regulations of each country in which such materials are to be presented. All documentary information, promotional materials and oral presentations (where practical) regarding the detailing and promoting of Licensed Products shall maximize the brand equity of the products and state this arrangement and display, where appropriate (i.e., to the extent such materials identify or otherwise make reference to either of the Parties), the names and logos of each of IDEC and Genentech, with equal prominence.

(b)Commercialization Plans and Materials for Franchise Products. With regard to the commercialization of New Products, including without limitation G2H7, and with regard to all Franchise Products (including without limitation C2B8) [*] Genentech will be responsible for proposing strategic plans and strategies, as well as commercialization plans, for such Franchise Products. Such commercialization plans shall include, where appropriate and without limitation, life cycle plans, long range plans, three year brand plans, pricing strategies and Annual Commercial Operating Budgets for such Franchise Products. Such commercialization plans shall be delivered to the JCC for review and approval by unanimous consent (such delivery to take place upon completion of such plan or upon completion of an updated plan, as the case may be, regardless of when such completion occurs during the calendar year). Once a commercialization plan has been approved by the JCC, Genentech shall be responsible for implementing such commercialization plan, except to the extent that the JCC allocates particular activities, by unanimous consent, to IDEC. In addition, and notwithstanding the dispute resolutionprovisions of Sections 3.1 through 3.4, with regard to the commercialization of New Products, including without limitation G2H7, and with regard to all Franchise Products (including without limitation C2B8) [*] Genentech shall have final decision-making control over the implementation of each such commercialization plan, including without limitation, marketing and promotional activities and materials (e.g., medical education, medical information, public relations, investigator sponsored studies, publication planning, sales resource analysis and key opinion leader development),

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provided, however, that Genentech shall not have the right to (i) exceed (in the aggregate) the Annual Commercial Operating Budget approved with such commercialization plan by [*] without the unanimous approval of the JCC, (ii) assign tasks to IDEC that were not otherwise approved by unanimous consent of the JCC, (iii) assign an initial pricing for a Franchise Product, unless such initial pricing is within [*] of the current price for C2B8, or (iv) materially amend a commercialization plan without the unanimous approval of the JCC. For the avoidance of doubt, it is understood and agreed that Genentech’s implementation of a commercialization plan shall not be deemed a material amendment to such commercialization plan, unless such implementation would materially modify the strategic direction agreed upon by the Parties thereunder. All documentary information, promotional materials and oral presentations (where practical) regarding the detailing and promoting of New Products shall maximize the brand equity of the products and display, where appropriate (i.e., to the extent such materials identify or otherwise make reference to either of the Parties), the names and logos of each of IDEC and Genentech with equal prominence.

5.5Training Program. Genentech shall develop training programs relating to Franchise Products for the sales forces of each respective Party and for any Third Parties engaged in selling or promotion, and shall assign responsibility to itself, IDEC or a Third Party for the preparation of materials and conduct of training. The Parties agree to utilize such training programs on an ongoing basis to assure a consistent, focused promotional strategy. The initial training as to any Franchise Product shall be carried out at a time which is mutually acceptable to the Parties, and which is prior to but reasonably near the date on which the first Regulatory Approval for such Franchise Product is expected in the Co-Promotion Territory. As additional members are added to the Parties' respective sales forces, training will be given to groups of the newly selected members.

ARTICLE 6.

DEVELOPMENT AND COMMERCIALIZATION IN LICENSED TERRITORY

6.1Development Efforts. Genentech will use commercially reasonable and diligent efforts to develop C2B8, including pursuing preclinical development and clinical development of C2B8 and obtaining Regulatory Approvals therefor in all countries in the Licensed Territory, taking into account the scientific and commercial potential of C2B8, including, without limitation, each of the potential indications in the Field for C2B8. Within ninety (90) days of the Original Effective Date, Genentech agrees to provide IDEC with a written development strategy for C2B8 in the Licensed Territory indicating (i) whether Genentech will develop C2B8 alone or with a partner in Europe, (ii) the identity of its European partner (if any), and (iii) a list of clinical trials which Genentech would conduct for C2B8 approval in Europe assuming adequate quantities of C2B8 are available.

6.2Marketing Efforts. Genentech will use commercially reasonable and diligent efforts to commercialize C2B8 in each country in which Regulatory Approval is granted, taking into account the scientific and commercial potential for C2B8, including without limitation each of the potential indications therefor.

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6.3Development Costs and Marketing Costs. Genentech shall bear all Development Costs and Marketing Costs for C2B8 for development or marketing in the Licensed Territory. Genentech shall have the sole responsibility for, and right to make all decisions regarding, all development and marketing activities in the Licensed Territory.

6.4Cooperation on Development Efforts. To facilitate cooperation between the Parties on the worldwide development and marketing of C2B8, Genentech shall keep IDEC informed of all substantive development activities in the Licensed Territory, and agrees to use its good faith efforts to have an IDEC representative attend meetings of any development committee or similar body governing development activities of Licensed Products in the Licensed Territory. Genentech shall consider in good faith any comments made by such IDEC representative. The Parties agree that they will do nothing during C2B8 development activities to imperil early Regulatory Approvals in any country in any territory. Genentech further agrees that its European development plan for Licensed Products will not specify clinical trials on a time line that would delay or slow Regulatory Approval in the United States.

ARTICLE 7.

MILESTONES, PROFIT SHARING, ROYALTIES AND OTHER PAYMENTS

7.1(a)Payments by Genentech upon Execution of Original Agreement. Genentech made the following payments to IDEC at the times set forth herein or in the operative agreement:

(i)[*] within 10 days of the Original Effective Date;

(ii)[*]; and

(iii)$5,000,000 to purchase shares of IDEC Preferred Stock as set forth in the Stock Purchase Agreement.

(b)Payment by IDEC upon Execution of this Agreement; Opt-in Fees. IDEC shall make the following payments to Genentech at the times set forth herein:

(i)[*] within 10 days of the Restated Effective Date;

(ii)[*] within 10 days of making an opt-in election pursuant to Section 2.5(b) for the first New Product other than G2H7 for which such an election is made, provided, however, that if a fee is paid under Section 7.1(b)(iv) before any fee is paid under this Section 7.1(b)(ii), then this Section 7.1(b)(ii) shall be deemed void ab initio and the word “second” in Section 7.1(b)(iii) shall be deemed changed to “first”;

(iii)[*] within 10 days of making an opt-in election pursuant to Section 2.5(b) for the second and each subsequent New Product other than G2H7 for which such an election is made.

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(iv)[*] within 10 days of making an opt-in election pursuant to Section 2.5(c) for the first and each subsequent New Product other than G2H7 for which such an election is made.

7.2Additional Equity Purchases. Genentech shall make certain additional equity purchases in accordance with the terms and conditions of the Stock Purchase Agreement.

7.3Special Pre-Approval Debt or Equity Purchase. Genentech shall, at the election of IDEC, make an additional investment or loan in accordance with the terms and conditions of an Option Agreement of even date of the Original Effective Date between IDEC and Genentech (the "Option Agreement").

7.4Milestone Payments. Subject to the terms of the equity purchases set forth in the Stock Purchase Agreement and the credit as provided in the Option Agreement, Genentech made or shall make the following payments to IDEC, within 30 days after the first achievement of each of the following milestones for C2B8:

MILESTONEPayment

(a)Upon Regulatory Approval in the United States[*]

(b)Upon Regulatory Approval in the First[*]

Major European Country

(c)Patent Milestone Event[*]

7.5Share of Operating Profits or Losses. Upon the first Regulatory Approval in the United States, IDEC and Genentech shall share in Operating Profits or Losses from sales of Franchise Products in the Co-Promotion Territory as provided in Exhibit A.

7.6Term of Operating Profits or Losses. The Parties shall share Operating Profits or Losses hereunder in the Co-Promotion Territory until the earlier of the date the Parties mutually agree to terminate the collaboration in the Co-Promotion Territory, or as provided in Section 15.2.

7.7Royalties.

(a)Licensed Products. Genentech shall pay IDEC a royalty on Royalty-Bearing Sales of Licensed Products in the Licensed Territory as follows: (i) the royalty rate shall be [*]of Royalty-Bearing Sales in the Licensed Territory in any calendar year, and (ii) the royalty rate shall [*] of Royalty-Bearing Sales in the Licensed Territory in any calendar year.

(b)New Products. Genentech shall pay IDEC a [*] royalty on Royalty-Bearing Sales in the Licensed Territory of G2H7 and each other New Product; provided however, that no such royalty shall be due on any [*] Potential New Product that was deemed a New Product pursuant to Section 2.5(b)(ii), nor on any Third Party Anti-CD20 Product for which IDEC enters into a written agreement with Genentech pursuant to Section 2.6.

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(c)Royalties owed to any Third Party on account of sales of Franchise Products in the Co-Promotion Territory will be charged against Co-Promotion Profits, except that IDEC will pay any payments owed to ML/MS Partners on account of any sales of Licensed Products in any territory.

(d)Genentech shall pay any Third Party royalties (except to ML/MS Partners) owed on account of sales of Franchise Product in the Licensed Territory, including royalties owed due to the manufacture of Franchise Products by Genentech or IDEC. Genentech shall receive a credit of [*] of the royalties it pays on account of the manufacture, use or sale of Licensed Products against royalties it owes to IDEC. Prior to the Original Effective Date , Genentech discussed with IDEC the significant Third Party royalties that it believed at such time would be payable on sales of Licensed Products. In addition, Genentech shall receive a credit of [*] of the royalties it pays on account of the manufacture, use or sale of New Products against royalties it owes to IDEC; provided, however that the royalty that would otherwise be due under Section 7.7(b) shall not be reduced below a [*] royalty.

(e)The Parties (i) shall, within ninety (90) days following the Original Effective Date, amend the Cabilly license dated December 7, 1993 between Genentech and IDEC (the "Cabilly License") to waive any royalties owed by IDEC to Genentech on manufacture, use or sale of Licensed Products covered by the Cabilly License in the Co-Promotion Territory, and (ii) to the extent IDEC would be obligated to pay royalties (if any) under the Cabilly License in order to manufacture, use or sell any New Products in the Co-Promotion Territory, Genentech agrees to amend such license to waive any such royalties; provided, however, that any payment Genentech must make to any Third Party on account of the development, manufacture, use or sale of Franchise Products covered by the patents included in the Cabilly License shall be included in Cost of Sales of such Franchise Products.

(f)If the Parties mutually agree to develop an anti-CD19 protein under this Agreement covered by a claim of a Patent included in the Cabilly License, Genentech will make available a license for CD19 antigens to Patents included in the Cabilly License as part of the commercial terms for the development of such product.

7.8Royalty Payment Reports. Royalty payments under this Agreement shall be made to IDEC or its designee quarterly within sixty (60) days following the end of each calendar quarter for which royalties are due. Each royalty payment shall be accompanied by a report summarizing the Royalty-Bearing Sales during the relevant three-month period.

7.9Term of Royalty Obligations.

(a)Genentech shall pay royalties hereunder with respect to Franchise Products in each country in the Licensed Territory for eleven (11) years from the date of first commercial sale of such Franchise Product in such country.

(b)Upon expiration of the royalty term for a Licensed Product in a country as described above, Genentech shall thereafter have an exclusive, fully paid-up, irrevocable license under the

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IDEC Patents, IDEC Know-how and IDEC regulatory submissions to make, use, sell, offer for sale, have sold and import that Licensed Product in that country. Upon expiration of the royalty term for a New Product in a country as described above, Genentech shall thereafter have an non-exclusive, fully paid-up, irrevocable license under the IDEC Patents, IDEC Know-how and IDEC regulatory submissions to make, use, sell, offer for sale, have sold and import that New Product in that country.

7.10Taxes. IDEC shall pay any and all taxes levied on account of, or measured exclusively by, any payment including royalties it receives under this Agreement. If laws or regulations require that taxes be withheld, Genentech will (i) deduct those taxes from the remittable royalty, (ii) timely pay the taxes to the proper taxing authority, and (iii) send proof of payment to IDEC within sixty (60) days following that payment.

7.11Blocked Currency. In each country where the local currency is blocked and cannot be removed from the country, at the election of Genentech, royalties accrued in that country shall be paid to IDEC in the country in local currency by deposit in a local bank designated by IDEC.

7.12Foreign Exchange. For the purpose of computing Royalty-Bearing Sales for Franchise Products sold in a currency other than United States Dollars, such currency shall be converted into United States Dollars in accordance with Genentech's customary and usual translation procedures consistently applied.

7.13Payments to or Reports by Affiliates. Any payment required under any provision of this Agreement to be made to either Party or any report required to be made by any Party shall be made to or by an Affiliate of that Party if designated by that Party as the appropriate recipient or reporting entity.

7.14Sales By Sublicensees. In the event Genentech grants licenses or sublicenses to others to make or sell Franchise Products in the Licensed Territory, such licenses or sublicenses shall include an obligation for the licensee or sublicensee to account for and report its Royalty-Bearing Sales of such Franchise Products on the same basis as if such sales were Royalty-Bearing Sales by Genentech, and Genentech shall pay royalties to IDEC as if the Royalty-Bearing Sales of the licensee or sublicensee were Royalty-Bearing Sales of Genentech.

ARTICLE 8.

MANUFACTURE AND SUPPLY

8.1Process Development, Manufacturing Approvals of C2B8. IDEC shall be responsible for, at its own expense, process development, scale-up, validation and FDA licensure of its existing C2B8-producing CHO cell line to the 2,750 liter fermenter scale. As soon as practicable after the Original Effective Date, IDEC will transfer to Genentech a re-amplified CHO C2B8-producing cell line, and, within 30 days of the Original Effective Date, transfer the technology to be licensed to Genentech under the terms and conditions of the Expression Technology License of even date herewith, and provide reasonable training of Genentech personnel as requested by Genentech necessary to allow Genentech to scale up C2B8 process with the re-amplified cell line. Immediately after receipt of IDEC's re-amplified CHO C2B8 producing cell line by Genentech, Genentech will begin work, at its own expense, on the scale-up of a re-amplified cell line in

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optimal growth media to produce C2B8 at commercial scale. If Genentech determines that such scale up is not commercially feasible, it will so notify the JDC. Upon the decision of the JDC to go forward, Genentech will, at its own expense, attempt to scale up another cell line selected by the JDC or the cell line used for 2,750 liter fermenter scale production. If Genentech has successfully scaled up a cell line to its commercial scale and IDEC is then manufacturing C2B8, Genentech will, at its own expense, transfer the optimized cell line and information sufficient to allow IDEC to manufacture C2B8 by essentially the same process used by Genentech except for the size of the fermentation vessel. If bridging or any other studies are required to permit the use or sale of C2B8 produced by Genentech by the optimized process, the costs of such clinical studies shall be paid by Genentech, but shall be charged against Operating Profits over the first three years after the first commercial sale of C2B8 produced by the optimized process. IDEC will otherwise be responsible, at its own expense, for all expenses incurred in obtaining Regulatory Approvals for the manufacturing process used to produce C2B8, except that Genentech, at its own expense, will pay the expenses incurred to receive FDA licensure of Genentech facilities. Notwithstanding anything to the contrary in this Section 8.1, costs incurred by either Party under this Section 8.1 after Regulatory Approval in the United States shall be charged to Operating Profits.

8.2Manufacture and Supply of C2B8. IDEC shall, pursuant to a Supply Agreement to be entered into between the Parties prior to the date of the first submission of an application or registration for Regulatory Approval, supply all requirements for C2B8 in final vial form for commercial sale in all territories for the first two years after the first Regulatory Approval in the United States or Europe, whichever comes earlier (the "Initial Commercial Period"). The average annual Cost of Goods Sold of C2B8 packaged in final vial form during the Initial Commercial Period shall be the lower of (i) [*] or (ii) [*] IDEC may continue to supply, at its option, commercial requirements for C2B8 up to the capacity of its current manufacturing plant [*] in San Diego (the "Supply Option"). The Supply Option shall be exercised, if at all, by written notice on or before the date of the first Regulatory Approval including a good faith estimate of IDEC's planned production levels. If the parties determine that the FDA will not grant establishment licenses to two manufacturing facilities using different scales of production, then the parties will use best efforts to develop a manufacturing capacity plan by the first Regulatory Approval. Subsequent to the Initial Commercial Period, if both Parties are manufacturing Licensed Product at the same time, the Cost of Goods Sold for both Parties used for calculation of Operating Profits shall be the lower of Genentech's or IDEC's actual cost of Goods Sold for commercial production of C2B8 packaged in final vial form. After the Initial Commercial Period, Genentech shall manufacture all requirements of C2B8 for commercial sale in excess of that which IDEC has agreed to produce.

8.3Transfer of Materials and Know-how for C2B8.

(a)IDEC shall on Genentech's request at any time transfer to, and fully enable Genentech with, the then most current version of all biological materials, know-how, reagents and expertise necessary for Genentech to undertake the manufacture of C2B8. IDEC shall periodically update biological materials and information related to C2B8 previously transferred to Genentech. All transfers of materials and information to Genentech shall be free of charge to Genentech; provided, however, IDEC's obligation to train Genentech personnel in the use of such material and information shall be limited to [*] person hours.

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(b)At the time Genentech completes the commercialization scale-up described in Section 8.1, if IDEC continues to manufacture commercial quantities of C2B8, Genentech will transfer to, and fully enable IDEC with, the then most current version of all biological materials, know-how, reagents and expertise applicable to the actual manufacturing process in use by IDEC necessary for IDEC to undertake the manufacture of C2B8 provided that IDEC uses such biological materials, know-how, reagents and expertise solely to manufacture C2B8. Genentech's obligation to train IDEC personnel in the use of such materials or information shall be limited to [*] person hours.

(c)IDEC agrees to allow Genentech to audit, at its expense, any Regulatory Approval documentation in the possession of IDEC concerning products other than the Licensed Products to determine if such products utilize Genentech Patents or Genentech Know-how. Such audit(s) shall be conducted by an independent party to be mutually agreed upon by Genentech and IDEC, and shall be limited to one audit during any twelve month period.

8.4Transfer Price of Products for C2B8. The transfer price for C2B8 supplied to Genentech for sale in the Licensed Territory will be the [*]. IDEC will invoice Genentech within 10 days after each shipment of C2B8 to the Licensed Territory on a shipment by shipment basis. Genentech shall pay each invoice within thirty (30) days of receipt of both of C2B8 and invoice.

8.5Manufacture of C2B8 for Clinical Trials.

(a)IDEC will supply at no cost all quantities of C2B8 for pre-clinical studies and clinical trials in the Co-Promotion Territory directed toward obtaining the first Regulatory Approval in the Co-Promotion Territory.

(b)IDEC shall supply to Genentech, at IDEC's [*] until the beginning of the Initial Commercial Period and at [*] thereafter, all quantities of C2B8 for preclinical studies and clinical trials in the Licensed Territory or for expanded needs beyond those set forth in the original Development Plan.

8.6Manufacture and Supply of Franchise Products (other than C2B8). Genentech shall be responsible, and have complete decision making control for all process development, scale-up, validation and FDA licensure for the manufacture of all Franchise Products (other than C2B8) in the Co-Promotion Territory, the cost of which shall be considered Development Costs pursuant to this Agreement. In addition, Genentech, either itself or through a third party manufacturer, shall be responsible for the manufacture and supply of clinical and commercial supply of New Products for the Co-Promotion Territory (Genentech shall use commercially reasonable and diligent efforts to maintain a reasonable Cost of Goods Sold for manufacture and supply of all Franchise Products).

8.7Right of First Negotiation for Manufacture and Supply of Franchise Products in the Co-Promotion Territory. In the event Genentech decides to seek a Third Party (other than F. Hoffmann La Roche AG) to manufacture and supply a particular Franchise Product in the Co-Promotion Territory, Genentech shall promptly notify IDEC in writing. IDEC shall have thirty (30) days from the date of Genentech’s notice to IDEC to provide written notice to Genentech that

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it elects to negotiate with Genentech the rights under which it may manufacture and supply such Franchise Product in the Co-Promotion Territory, and a failure to timely so elect shall be deemed a decision not to negotiate for such rights. In the event that IDEC timely notifies Genentech of its desire to engage in such negotiations, then for a period of ninety (90) days, Genentech and IDEC shall use good faith efforts to agree upon terms under which IDEC would manufacture and supply such Franchise Product in the Co-Promotion Territory. In the event that IDEC and Genentech have not entered into a definitive agreement within ninety (90) days of IDEC’s election to negotiate, then Genentech shall be free to grant to any Third Party the right to manufacture and supply such Franchise Product in the Co-Promotion Territory on any terms that Genentech considers appropriate.

ARTICLE 9.

LICENSES

9.1Licensed Products

(a)Licenses To Genentech Within The Field. IDEC grants to Genentech a worldwide license (including Asia, pursuant to the First Amendment) under the IDEC Patents and IDEC Know-how and IDEC regulatory submissions in the Field to develop, make, have made, use, sell, offer for sale, have sold and import Licensed Products. Such license shall be co-exclusive with IDEC in the Co-Promotion Territory and exclusive even as to IDEC in the Licensed Territory.

(b)Nonexclusive License To IDEC. Genentech grants IDEC a nonexclusive license in the United States and Canada to use Genentech Know-how and Genentech Patents in the Field solely for the purposes of developing, manufacturing, having manufactured, using, selling, offering for sale, having sold and importing C2B8 and such additional Licensed Products as the Parties mutually agree to develop in the Co-Promotion Territory. IDEC covenants and agrees not to develop, make, have made, use, sell, offer for sale, have sold or import any product using any of the Genentech Know-how or Genentech Patents outside of the Field. If Genentech is sublicensing any Third Party patents under this grant, IDEC shall pay any royalties owed to any such Third Party on account of the manufacture, use or sale of any Licensed Products by IDEC. Genentech further grants to IDEC a co-exclusive (with Genentech) license to use Genentech regulatory submissions in the Field solely for the purposes of developing, manufacturing, having manufactured, using, selling, offering for sale, having sold and importing C2B8 and such additional Licensed Products as the Parties mutually agree to develop in the Co-Promotion Territory.

9.2New Products

(a)Nonexclusive License to Genentech. IDEC grants to Genentech a worldwide, nonexclusive license under the IDEC Patents, IDEC Know-how and IDEC regulatory submissions in the Field to develop, make, have made, use, sell, offer for sale, have sold and import G2H7 and each other New Product.

(b)License to IDEC in the Co-Promotion Territory. Genentech grants to IDEC a co-exclusive (with Genentech) license under the Genentech Patents, Genentech NP

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Patents, Genentech Know-how and Genentech regulatory submissions in the Field in the United States to develop, use, sell, offer for sale, have sold and import G2H7 and each other New Product. Genentech does not grant any license or rights to IDEC regarding development or commercialization of New Products outside the Field or outside of the United States, and nothing in this Agreement shall be construed as granting IDEC any license or right to control the development and/or commercialization of New Products outside the Field and outside the United States.

9.3Sublicensing. Genentech may grant sublicenses to its rights under this Agreement with the prior written consent of IDEC, such consent not to be unreasonably withheld. IDEC hereby consents to such a sublicense to F. Hoffmann La Roche or any of its affiliates. Unless otherwise agreed, each sublicensee shall be subject to all of the obligations of Genentech hereunder applicable to that part of the territory being licensed.

9.4Inclusion of Asia in the Licensed Territory. If a license in Asia becomes available on an exclusive basis with respect to C2B8, IDEC shall notify Genentech in writing. If such notification is prior to or on December 31, 1995, then Genentech shall pay IDEC [*] upon signing of an amendment to this Agreement to include such territory in the Licensed Territory. After December 31, 1995, Genentech shall have the option to include Asia in the Licensed Territory, if available, on sixty (60) days written notice, for the [*] license issue fee payable pursuant to this Section. IDEC agrees to use its best efforts within 90 days of the Original Effective Date to obtain at least a co-exclusive license for Genentech in the Asian territory. The consideration to IDEC for a co-exclusive license involving Genentech in the Asian territory shall not be less than [*] of which Genentech shall pay no more than [*]. If Asia is added to the Licensed Territory, it shall be subject to the same terms and conditions set forth in this Agreement, provided that Genentech shall have no obligation to make any additional payments with respect to such added Asian territory other than royalties as specified in this Agreement. Notwithstanding the foregoing provisions of this Section 9.4, the Parties acknowledge that Asia, pursuant to the First Amendment, is included within the Licensed Territory.

9.5Shared Information. All of the information described in Section 14.1 below shall be deemed IDEC Know-how and Genentech Know-how for purposes of this Article 9 and the licenses granted herein.

9.6Third Party Rights. In the event that IDEC or Genentech becomes aware of any Third Party rights that may be relevant to development, manufacture or commercialization of the Franchise Products in the Co-Promotion Territory, that Party shall promptly notify the other Party. To the extent that the Parties mutually agree that such rights are necessary to develop, manufacture or commercialize the Franchise Products in the Co-Promotion Territory, the Parties shall discuss an appropriate course of action to obtain a license to such rights in order to further the objectives of the Parties under this Agreement.

ARTICLE 10.

TRADEMARKS

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10.1(a)Product Trademarks for Licensed Products. All Licensed Products shall be sold in the Co--Promotion Territory under trademarks selected by the JCC and owned jointly by Genentech and IDEC in the Co-Promotion Territory and Licensed Territory. The JCC shall use best efforts to select a worldwide trademark. Each Party hereby grants the other a fully-paid co--exclusive license to use its trademarks in the Co-Promotion Territory for the Co-Promotion activities provided for in this Agreement. IDEC shall control preparation, prosecution and maintenance of applications related to such trademarks and the costs in the Co-Promotion Territory ("Trademark Costs") shall (i) prior to Regulatory Approval in the United States, be paid by IDEC, and (ii) after Regulatory Approval in the United States, be included in Other Operating Income/Expense pursuant to Exhibit A. Genentech shall control preparation, prosecution, maintenance and applications related to trademarks in the Licensed Territory and shall pay all costs incurred with respect thereto, and will notify IDEC if Genentech believes in good faith that sole ownership of the trademark in a particular country in the Licensed Territory is the best method to protect the trademark, in which case Genentech shall be the sole owner of such trademark.

(b)Trademarks for New Products. G2H7 and each other New Product shall be sold in the Co-Promotion Territory under trademarks selected by the JCC and owned jointly by Genentech and IDEC in the Co-Promotion Territory. The JCC shall use best efforts to select a worldwide trademark. Each Party hereby grants the other a fully-paid co-exclusive license to use its trademarks in the Co-Promotion Territory for the Co-Promotion activities provided for in this Agreement. Genentech shall control preparation, prosecution and maintenance of applications related to such trademarks and the Trademark Costs associated with New Products in the Co-Promotion Territory shall be included in Other Operating Income/Expense pursuant to Exhibit A. Genentech shall solely own, and control preparation, prosecution, maintenance and applications related to such trademarks outside the United States and shall pay all costs incurred with respect thereto.

10.2Infringement of Trademarks. Each Party shall notify the JCC promptly upon learning of any actual, alleged or threatened infringement of a trademark applicable to a Franchise Product (the "Trademark") in the Co-Promotion Territory or of any unfair trade practices, trade dress imitation, passing off of counterfeit goods, or like offenses in the Co--Promotion Territory. Upon learning of such offenses from a Party regarding a jointly owned Trademark, the JMC shall confer with the Parties regarding which Party and counsel should be assigned to defend the Trademark. The Party defending the Trademark shall take all reasonable and appropriate steps to protect, defend and maintain the Trademark for use by the Parties in connection with the Franchise Product. Upon learning of such an offense from a Party regarding a Trademark owned solely by one of the Parties, and not provided for above in this Section, the JCC shall confer with the Parties regarding the defense of such Trademark. The decision whether and how to defend such a Trademark owned solely by one Party will rest with such Party.

10.3Costs of Defense for Jointly Owned Trademark. All of the costs, expenses and legal fees in bringing, maintaining and prosecuting any action to maintain, protect or defend a jointly owned Trademark in the Co-Promotion Territory, and any recovery shall be included in the Other Operating Income/Expense. All of the costs, expenses and legal, fees in bringing, maintaining and prosecuting any action to maintain, protect or defend a Trademark in the Licensed Territory shall be paid by, and any recovery shall be paid to, Genentech.

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ARTICLE 11.

CONFIDENTIALITY

11.1Confidentiality; Exceptions. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, for the term of this Agreement and for seven (7) years thereafter, the receiving Party shall keep confidential and shall not publish or otherwise disclose or use for any purpose other than as provided for in this Agreement any Information and other information and materials furnished to it by the other Party pursuant to this Agreement (collectively, "Confidential Information"), except to the extent that it can be established by the receiving Party that such Confidential Information:

(a)was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party;

(b)was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party;

(c)became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement;

(d)was disclosed to the receiving Party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the disclosing Party not to disclose such information to others; or.

(e)was subsequently developed by the receiving Party without use of the Confidential Information as demonstrated by competent written records.

11.2Authorized Disclosure. Each Party may disclose Confidential Information hereunder to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or conducting preclinical or clinical trials, provided that if a Party is required by law or regulation to make any such disclosure of the other Party's Confidential Information it will, except where impracticable for necessary disclosures, for example in the event of medical emergency, give reasonable advance notice to the other Party of such disclosure requirement and, except to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such Confidential Information required to be disclosed. In addition, each Party shall be entitled to disclose, under a binder of confidentiality containing provisions as protective as those of this Article 11, Confidential Information to consultants and other Third Parties only for any purpose provided for in this Agreement. Nothing in this Article 11 shall restrict any Party from using for any purpose any Information developed by it during the course of the collaboration hereunder.

11.3Survival. This Article 11 shall survive the termination or expiration of this Agreement for a period of seven (7) years.

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11.4Termination of Prior Agreement. This Agreement supersedes the Confidentiality Agreement between the Parties dated September 9, 1994. All Information exchanged between the Parties under that Agreement shall be deemed Confidential Information and shall be subject to the terms of this Article 11.

11.5Publications. Prior to the end of Phase II Clinical Trials of each Franchise Product in the Co-Promotion Territory and subject to the applicable publication provisions of any Clinical Trial Agreements with investigators, the JDC with appropriate input from the JCC will determine the overall strategy for publication in support of such Franchise Product in the Co-Promotion Territory. Except as required by law, each Party agrees that it shall not publish or present the results of studies carried out as part of the collaboration without the approval of the JDC and the opportunity for prior review by the other Party. Each Party shall provide to the other the opportunity to review any proposed abstracts, manuscripts or presentations (including information to be presented verbally) which relate to any Franchise Product at least thirty (30) days prior to their intended submission for publication and such submitting Party agrees, upon written request from the other Party, not to submit such abstract or manuscript for publication or to make such presentation until the other Party is given a reasonable period of time to seek patent protection for any material in such publication or presentation which it believes is patentable.

ARTICLE 12.

OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS

12.1Modified Definitions. For purposes of this Article 12, IDEC Patents, Genentech Patents and Genentech NP Patents shall not include Patents owned jointly by the Parties. "Joint Patents" shall mean Patents owned jointly by the Parties which cover the manufacture, use or sale of Franchise Products.

12.2Ownership of Intellectual Property. IDEC shall own all inventions made under this Agreement solely by it or its employees. Genentech shall own all inventions made under this Agreement solely by its employees. All inventions made under this Agreement jointly by employees of IDEC and Genentech will be owned jointly by IDEC and Genentech and each Party shall retain full ownership under any Patents resulting therefrom, with full ownership rights in any field and subject to the licenses granted in Article 9, the right to sublicense without the consent of the other Party, without accounting. The laws of the United States with respect to joint ownership of inventions shall apply in all jurisdictions giving force and effect to this Agreement. The Parties shall jointly own Joint Know-how.

12.3Disclosure of Patentable Inventions. In addition to the disclosures required under Article 14, each Party shall provide to the other, any written invention disclosure submitted to a Party's legal department in the normal course which discloses an invention made under this Agreement that is useful in the Field. Such invention disclosures shall be provided to the other Party within thirty (30) days after the Party commences preparation of a patent application based on such disclosure.

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12.4Coordination. The Parties intend to prosecute and manage IDEC Patents, Genentech Patents and Genentech NP Patents for the purpose of providing the broadest protection for Franchise Products. The Parties will share information and each Party will consider the views of the other Party with respect to the scope of claims and decisions regarding the prosecution and maintenance of such Patents as necessary to achieve such purpose.

12.5Prosecution of Existing Patents.

(a)IDEC shall disclose to Genentech the complete texts of all IDEC Patents filed by IDEC prior to the Restated Effective Date which claim the manufacture, use or sale of Franchise Products as well as all information received concerning the institution or possible institution of any interference, opposition, reexamination, reissue, revocation, nullification or any official proceeding involving an IDEC Patent anywhere in the Co-Promotion Territory or Licensed Territory. Genentech shall have the right to review all such IDEC Patents and all proceedings related thereto and make recommendations to IDEC concerning them and their conduct and IDEC shall consider in good faith for the Co-Promotion Territory and take into account for the Licensed Territory Genentech's reasonable comments related thereto. IDEC agrees to keep Genentech promptly and fully informed of the course of patent prosecution or other proceedings of such IDEC Patents including by providing Genentech with copies of substantive communications, search reports and third party observations submitted to or received from patent offices within the Co-Promotion Territory or Licensed Territory. Genentech shall provide such patent consultation to IDEC related to such IDEC Patents at no cost to IDEC. All reasonable costs that IDEC incurs after the Original Effective Date in filing, prosecuting and maintaining IDEC Patents in the Co-Promotion Territory shall be borne by IDEC until the date of Regulatory Approval and thereafter shall be charged to Other Operating Income/Expense. All such reasonable costs which IDEC will incur in the Licensed Territory shall be reimbursed by Genentech; provided, however, that Genentech shall have the right to determine which countries within the Licensed Territory in which to file, prosecute and maintain IDEC Patents. Genentech shall hold all information disclosed to it under this Article 12 as confidential subject to the provisions of Article 11 of this Agreement. Genentech shall have the right to assume responsibility for any IDEC Patent or any part of any such Patent which IDEC intends to abandon or otherwise cause or allow to be forfeited provided that the claims of such IDEC Patent covers Franchise Product or formulations, methods of manufacture or methods of use thereof.

(b)Genentech shall have the right, using in-house or outside legal counsel selected at Genentech's sole discretion, to prepare, file, prosecute, maintain and obtain extensions of Genentech Patents, Genentech NP Patents or Joint Patents filed prior to the Restated Effective Date in countries of Genentech's choice throughout the Licensed Territory and in such countries within the Co-Promotion Territory as agreed by the Parties with appropriate credit to IDEC representatives, including the naming of such parties as inventors where appropriate. Genentech shall bear the costs relating to such activities in the Licensed Territory at all times and in the Co-Promotion Territory until Regulatory Approval in the United States. Such costs in the Co-Promotion Territory after Regulatory Approval in the United States shall be included in Other Operating Income/Expense pursuant to Exhibit A. Genentech shall disclose to IDEC the complete text of, and shall use reasonable efforts to solicit IDEC's advice and review of the nature and text of, all Genentech Patents, Genentech NP Patents and Joint Patents and material prosecution

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matters related thereto in reasonably sufficient time prior to filing thereof, and Genentech shall consider in good faith for the Co-Promotion Territory and take into account for the Licensed Territory IDEC's reasonable comments related thereto.

12.6Prosecution of New Patents.

(a)Genentech shall have the first right, using in-house or outside legal counsel selected at Genentech's sole discretion, to prepare, file, prosecute, maintain and obtain extensions of Genentech Patents, Genentech NP Patents or Joint Patents filed after the Restated Effective Date in countries of Genentech's choice throughout the Licensed Territory and in such countries within the Co-Promotion Territory as agreed by the Parties with appropriate credit to IDEC representatives, including the naming of such parties as inventors where appropriate. Genentech shall bear the costs relating to such activities in the Licensed Territory at all times and in the Co-Promotion Territory until Regulatory Approval in the United States. Such costs in the Co-Promotion Territory after Regulatory Approval in the United States shall be included in Other Operating Income/Expense pursuant to Exhibit A. Genentech shall disclose to IDEC the complete text of, and shall use reasonable efforts to solicit IDEC's advice and review of the nature and text of, all Genentech Patents, Genentech NP Patents and Joint Patents and material prosecution matters related thereto in reasonably sufficient time prior to filing thereof, and Genentech shall consider in good faith IDEC's reasonable comments related thereto.

(b)IDEC shall have the first right, using in-house or outside legal counsel selected at IDEC's sole discretion, to prepare, file, prosecute, maintain and obtain extensions of IDEC Patents filed after the Restated Effective Date in countries agreed to by the Parties within the Co-Promotion Territory and in countries of Genentech's choice within the Licensed Territory. IDEC shall disclose to Genentech the complete text of, and shall use reasonable efforts to solicit Genentech's advice and review of the nature and text of, such IDEC Patents and material prosecution matters related thereto in reasonably sufficient time prior to filing thereof, and IDEC shall (i) in the Co-Promotion Territory consider in good faith Genentech's reasonable comments related thereto and (ii) in the Licensed Territory take into account Genentech's reasonable comments related thereto. All reasonable costs related to preparing, filing, prosecuting, maintaining and extending IDEC Patents shall be (i) prior to Regulatory Approval in the United States, paid by IDEC and (ii) after Regulatory Approval in the United States, included in Other Operating Income/Expense pursuant to Exhibit A for activities within the Co-Promotion Territory and reimbursed by Genentech to IDEC for activities within the Licensed Territory.

(c)If Genentech, prior or subsequent to filing any Genentech Patents, Genentech NP Patents or Joint Patents, elects not to file, prosecute or maintain such Patents or certain claims encompassed by such Patents, Genentech shall give IDEC notice thereof within a reasonable period prior to allowing such Patents or certain claims encompassed by such Patents to lapse or become abandoned or unenforceable, and IDEC shall thereafter have the right, at its sole expense, to prepare, file, prosecute and maintain Patents or certain claims encompassed by such Patents that claim Franchise Products or formulations, methods of manufacture or methods of use thereof in countries of its choice throughout the world. If IDEC, prior or subsequent to filing IDEC Patents, elects not to file, prosecute or maintain such Patents or certain claims encompassed by such Patents that claim Franchise Products or formulations, methods of manufacture or methods of use

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thereof, IDEC shall give Genentech notice thereof within a reasonable period prior to allowing such Patents or certain claims encompassed by such Patents to lapse or become abandoned or unenforceable, and Genentech shall thereafter have the right, at its sole expense, to prepare, file prosecute and maintain such Patents or certain claims encompassed by such Patents in countries of its choice throughout the world.

(d)The Party filing Joint Patents shall do so in the name of and on behalf of both Genentech and IDEC. Each of IDEC and Genentech shall hold all information it presently knows or acquires under this Paragraph which is related to all such Patents as confidential subject to the provisions of Article 11 of this Agreement.

12.7Waiver.

(a)IDEC on behalf of itself and its directors, employees, officers, shareholders, agents, successors and assigns hereby waives any and all actions and causes of action, claims and demands whatsoever, in law or equity of any kind it or they may have against Genentech, its officers, directors, employees, shareholders, agents, successors and assigns, which may arise in any way except as a result of Genentech's gross negligence, recklessness, or willful misconduct in performance of its rights or obligations under Section 12.5 or Section 12.6 of this Agreement.

(b)Genentech on behalf of itself and its directors, employees, officers, shareholders, agents, successors and assigns hereby waives any and all actions and causes of action, claims and demands whatsoever, in law or equity of any kind it or they may have against IDEC, its officers, directors, employees, shareholders, agents, successors and assigns, which may arise in any way except as a result of IDEC's gross negligence, recklessness, or willful misconduct in performance of its rights or obligations under Section 12.5 or Section 12.6 of this Agreement.

12.8Further Assurances. Notwithstanding the provisions of Section 12.5 or Section 12.6 of this Agreement, each Party shall, at its own expense, provide reasonable assistance to the other Party to facilitate filing of all Patents covering inventions referred to in Section 12.2 of this Agreement and shall execute all documents deemed necessary or desirable therefor.

12.9Initial Filings If Made Outside of the United States. The Parties agree to use reasonable efforts to ensure that any IDEC Patent, Genentech Patent, Genentech NP Patent or Joint Patent filed outside of the United States prior to a U.S. filing will be in a form sufficient to establish the date of original filing as a priority date for the purposes of a subsequent U.S. filing and that the requisite foreign filing license will be obtained.

12.10Patent Enforcement.

(a)Notice. In the event that IDEC or Genentech becomes aware of actual or threatened infringement of a patent related to Franchise Product, anywhere in the world, that Party shall promptly notify the other Party in writing.

(b)IDEC Patents. IDEC shall have the first right but not the obligation to bring an infringement action or file any other appropriate action or claim directly related to infringement

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of an IDEC Patent , wherein such infringement relates to Franchise Product, against any Third Party. The costs of patent enforcement and related recoveries associated with the Co-Promotion Territory incurred by IDEC shall be included in Other Operating Income/Expense. Such patent enforcement costs in the Licensed Territory shall be borne by IDEC. If IDEC does not commence a particular infringement action within ninety (90) days after it received such written notice, Genentech, after notifying IDEC in writing, shall be entitled to bring such infringement action or any other appropriate action or claim at its own expense. The Party conducting such action shall consider in good faith the other Party's comments on the conduct of such action. Recovery from any settlement or judgment from such action in the Licensed Territory shall go first to reimburse the expenses of the Parties and the remainder shall be shared by the Parties in proportion to their respective economic interests. In any event, IDEC and Genentech shall assist one another and reasonably cooperate in any such litigation at the other's request without expense to the requesting Party.

(c)Genentech Patents and Genentech NP Patents. Genentech shall have the first right but not the obligation to bring an infringement action or file any other appropriate action or claim directly related to infringement of a Genentech Patent or Genentech NP Patent, wherein such infringement relates to Franchise Product, against any Third Party. The costs of patent enforcement and related recoveries associated with the Co-Promotion Territory incurred by Genentech shall be charged to Other Operating Income/Expense. Such patent enforcement costs in the Licensed Territory shall be borne by Genentech. Recovery from any settlement or judgment from such action in the Licensed Territory shall go first to reimburse the expenses of the Parties and the remainder shall be shared by the Parties in proportion to their respective economic interests.

(d)Joint Patents. Upon notice of an alleged infringement of a Joint Patent, the Parties will discuss in good faith an appropriate course of action to further the objectives of the Parties under this Agreement.

12.11Infringement Defense.

(a)Defense in the Co-Promotion Territory. If a Third Party asserts that a patent or other right owned by it is infringed by any Franchise Product in the Co-Promotion Territory, the JMC shall establish a plan for a common defense and select the Party responsible for managing such plan. The costs of any such action incurred by one or both of the Parties at the direction of the JMC (including the costs of any judgment, award, decree or settlement) will be chargeable to the collaboration as Other Operating Income/Expense pursuant to Exhibit A.

(b)Defense in the Licensed Territory. If a Third Party asserts that a patent or other right owned by it is infringed by any Franchise Product in the Licensed Territory, Genentech will be solely responsible for deciding how and whether to defend against any such assertions at its cost and expense. If Genentech is required to pay royalties to such Third Party as a result of such action, it will be entitled to deduct [*] of such royalties against royalties owing to IDEC under, but only to the extent permitted by, Section 7.7(d).

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ARTICLE 13.

REPRESENTATIONS AND WARRANTIES

13.1Representations and Warranties. Each of the Parties hereby represents and warrants, as of the Restated Effective Date, as follows:

(a)This Agreement is a legal and valid obligation binding upon such Party and enforceable in accordance with its terms. The execution, delivery and performance of the Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it is bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it.

(b)Such Party has not, and during the term of the Agreement will not, grant any right to any Third Party relating to its respective Patents and Know-how in the Field which would conflict with the rights granted to the other Party hereunder.

(c)Each Party represents and warrants that it has the right to grant the licenses granted herein.

(d)Except as set forth on Exhibit D of the Original Agreement, IDEC is not obligated under any agreement as of the Original Effective Date to pay any Third Party royalties with respect to C2B8

As used in this Section 13.1, “Patents” means IDEC Patent with respect to IDEC, and Genentech Patents and Genentech NP Patents with respect to Genentech; and “Know-how” means IDEC Know-how with respect to IDEC, and Genentech Know-how with respect to Genentech.

13.2Performance by Affiliates. The Parties recognize that each may perform some or all of its obligations under this Agreement through Affiliates, provided, however, that each Party shall remain responsible and be guarantor of the performance by its Affiliates and shall cause its Affiliates to comply with the provisions of this Agreement in connection with such performance.

ARTICLE 14.

INFORMATION AND REPORTS

14.1Information. Genentech and IDEC will disclose and make available to each other all preclinical, clinical, regulatory, commercial and other information, including without limitation all information relevant to the joint promotion of Franchise Products, developed by Genentech or IDEC concerning Franchise Products at any time during the term of this Agreement. Each Party will use commercially reasonable and diligent efforts to disclose to the other Party all significant information promptly after it is learned or its significance is appreciated. Each Party shall own and maintain its own database of clinical trial data accumulated from all clinical trials of Franchise Products for which it was responsible and of adverse drug event information for all Franchise Products. At the option of the requesting Party, such data shall be provided in a

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computer readable format by the providing Party, to the extent available, which shall also assist in the transfer and validation of such data to the receiving Party.

14.2Complaints. Each Party shall maintain a record of all complaints it receives with respect to any Franchise Product. Each Party shall notify the other of any complaint received by it in sufficient detail and within five (5) business days after the event, and in any event in sufficient time to allow the responsible Party to comply with any and all regulatory requirements imposed upon it in any country.

14.3Adverse Drug Events. The Parties recognize that the holder of a Drug Approval Application may be required to submit information and file reports to various governmental agencies on compounds under clinical investigation, compounds proposed for marketing, or marketed drugs. Information must be submitted at the time of initial filing for investigational use in humans and at the time of a request for market approval of a new drug. In addition, supplemental information must be provided on compounds at periodic intervals and adverse drug experiences must be reported at more frequent intervals depending on the severity of the experience. Consequently, each Party agrees to:

(a)provide to the other for initial and/or periodic submission to government agencies significant information on the drug from preclinical laboratory, animal toxicology and pharmacology studies, as well as adverse drug experience reports from clinical trials and commercial experiences with the compound;

(b)in connection with investigational drugs, report to the other within three (3) days of the initial receipt of a report of any unexpected or serious experience with the drug, or sooner if required for either Party to comply with regulatory requirements; and

(c)in connection with marketed drugs, report to the other within five (5) business days of the initial receipt of a report of any adverse experience with the drug that is serious and unexpected or sooner if required for either Party to comply with regulatory requirements. Serious adverse experiences mean any experience that suggests a significant hazard, contraindication, side effect or precaution, or any experience that is fatal or life threatening, is permanently disabling, requires or prolongs inpatient hospitalization, or is a congenital anomaly, cancer, or overdose. An unexpected adverse experience is one not identified in nature, specificity, severity or frequency in the current investigator brochure or the U.S. labeling for the drug. Each Party also agrees that if it contracts with a Third Party for research to be performed by such Third Party on the drug, that Party agrees to require such Third Party to report to contracting Party the information set forth in subparagraph (a), (b), and (c) above.

14.4Records of Net Sales and Costs. Each Party will maintain complete and accurate records which are relevant to costs, expenses, sales and payments under this Agreement and such records shall be open during reasonable business hours for a period of three (3) years from creation of individual records for examination at the other Party's expense, and, with respect to the audit provisions of Section A.6.1 and A.6.2 of Exhibit A, such examination shall not be conducted more often than once each year by an independent public accountant selected by the other Party as described in A.6 of Exhibit A. Any records or accounting information received from the other

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Party shall be Confidential Information for purposes of Article 11. Results of any such audit shall be provided to both Parties, subject to Article 11.

14.5Publicity Review. The Parties agree that the public announcement of the execution of this Agreement shall be in the form of a press release to be agreed upon on or before the Restated Effective Date and thereafter each Party shall be entitled to make or publish any public statement consistent with the contents thereof. Thereafter, IDEC and Genentech will jointly discuss and agree, based on the principles of this Section 14.5, on any statement to the public regarding this Agreement or any aspect of this Agreement subject in each case to disclosure otherwise required by law or regulation as determined in good faith by each Party. The principles to be observed by IDEC and Genentech in such public disclosures will be: accuracy, the requirements for confidentiality under Article 11, the advantage a competitor of IDEC or Genentech may gain from any public statements under this Section 14.5, and the standards and customs in the biotechnology and pharmaceutical industries for such disclosures by companies comparable to IDEC and Genentech. The terms of this Agreement may also be disclosed to (i) government agencies where required by law, or (ii) Third Parties with the prior written consent of the other Party, which consent shall not be unreasonably withheld, so long as such disclosure is made under a binder of confidentiality and so long as highly sensitive terms and conditions such as financial terms are extracted from the Agreement or not disclosed upon the request of the other Party.

ARTICLE 15.

TERM AND TERMINATION

15.1Term. This Agreement, which shall commence as of the Restated Effective Date, shall continue the collaboration contemplated by the Parties under the Original Agreement, including the First Amendment and Second Amendment thereto, as modified hereby. The Parties have specifically provided elsewhere in this Agreement the term during which certain rights and obligations hereunder shall apply. Unless sooner terminated as provided herein and except as provided in Section 15.2 below, (a) the remaining provisions of this Agreement relating to activities in the Co-Promotion Territory shall continue in effect until the date on which the Parties are no longer entitled to receive a share of Operating Profits or Losses on any Franchise Product and (b) the remaining provisions of this Agreement relating to activities in the Licensed Territory shall continue in effect until the date on which Genentech is no longer required to pay a royalty on Royalty-Bearing Sales in the Licensed Territory. Those provisions shall govern the term of the rights and obligations specifically covered thereby. Upon the expiration, but not an earlier termination, of this Agreement, all licenses granted by either Party to the other Party hereunder shall become fully paid up and irrevocable.

15.2Sale or Purchase of Co-Promotion Rights on Change of Control.

(a)Purchase Option with respect to all Franchise Products and Third Party Anti-CD20 Products. Genentech may, by written notice by certified mail, return receipt requested, to IDEC (the "Auction Notice"), indicate a single price (the "Auction Price") at which Genentech would be willing to purchase from IDEC all of the rights held by IDEC hereunder with respect to

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all Licensed Products in the Co-Promotion Territory (the "Purchase Option"). This right will be exercisable at any time if (i) a single stockholder or group of affiliated stockholders, other than Genentech or an Affiliate, who would be required to file a Schedule 13D under the Securities Exchange Act of 1934, as amended, acquires or obtains the right to acquire voting stock of IDEC so that its total holdings of such stock equal or exceed fifty percent (50%) of the then outstanding voting stock of IDEC, or (ii) a Third Party acquires or obtains the right to acquire all or substantially all of the assets of IDEC, in which case Genentech must exercise such right within ninety (90) days after the date on which such stockholder or group of stockholders passes the fifty percent (50%) threshold or the date of such acquisition. Either such event shall be referred to as a "Change of Control Event." IDEC shall promptly notify Genentech upon IDEC's receipt of written notice that such Change of Control Event will be occurring and shall use best efforts to ensure that such notice is given to Genentech at least ninety (90) days before the occurrence of such Change of Control Event. The Auction Price may be in the form of (i) cash, (ii) a royalty on sales of the Licensed Products in the Co-Promotion Territory or (iii) some combination of the foregoing. Concurrent with the initiation of an Auction Notice by Genentech under this Section 15.2, a royalty price (the "Royalty Price") at which Genentech will purchase from IDEC all of the rights held by IDEC hereunder with respect to all New Products (including G2H7),and Third Party Anti-CD20 Products for which IDEC entered into a written agreement with Genentech pursuant to Section 2.6 prior to such date,in the United States shall be set. The Royalty Price with respect to such New Products and Third Party Anti-CD20 Products shall be based on the [*] of such product at the time of Genentech's written notice to IDEC under this Section 15.2 as follows:

Stage of Product	Royalty Price
Prior to completion of the initial Phase II Clinical Trial(s) for the product:	Compensation equivalent to [*] of such product in the United States; provided, IDEC (or its successor) timely reimburses Genentech, on a calendar quarter basis, [*] of its Development Costs for developing or marketing such product in the Co-Promotion Territory through [*] for such product. Genentech shall timely provide IDEC (or its successor) with quarterly invoices for Development Costs incurred under this section, and IDEC (or its successor) shall pay such invoices within sixty (60) days thereof. IDEC (or its successor) shall have the right to audit such invoices no more than once a calendar year, such audit to be conducted as provided in accordance with Section 15.2(c)(iii).
After completion of the [*] for the product, but prior to [*] of such product:	Compensation equivalent to [*] of such product in the United States.
After [*] of the product:	With respect to such New Products, compensation to IDEC or payment by IDEC to Genentech equivalent to [*] for such New Product in the United States, and With respect to such Third Party Anti-CD20 Products, compensation to IDEC or payment by IDEC to Genentech equivalent to the amount otherwise specified to be paid on such product in the United States [*] as established pursuant to the provisions of Section 2.6.

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It is understood and agreed that Genentech shall only be required to make Royalty Price payments on such New Products or Third Party Anti-CD20 Products (which were opted in by IDEC pursuant to Section 2.6 prior to the Auction Notice) which were under development pursuant to an approved or proposed Development Plan or being commercially sold at the time of such Auction Notice, and that subsequent development of any products incorporating any protein or peptide, other than the proteins or peptides that were incorporated into such New Products or Third Party Anti-CD20 Products, shall not be subject to such Royalty Price payments.

(b)Sales Option with respect to all Licensed Products. Within thirty (30) days of receipt of the Auction Notice, IDEC shall notify Genentech in writing whether it elects to accept the Auction Price for its rights with respect to all Licensed Products or pay Genentech the Profit Sharing Ratio times the Auction Price for such Licensed Products (where "the Profit Sharing Ratio" [*] to purchase all of the rights held by Genentech hereunder with respect to Licensed Products in the Co-Promotion Territory (the "Sales Option"); provided, however, if IDEC does not notify Genentech of its election within such period, IDEC shall be deemed to have sold its rights hereunder with respect to the Licensed Products in the Co-Promotion Territory at the Auction Price under the Purchase Option. If Genentech has not received a response within twenty (20) days after Genentech sends its initial notice hereunder, Genentech shall on the twentieth (20th) day after sending such initial notice, deliver a second notice by certified mail, return receipt requested. For the avoidance of doubt, it is understood and agreed that IDEC shall have no right under this Agreement to purchase any of the rights held by Genentech hereunder with respect to New Products, and/or Third Party Anti-CD20 Products for which IDEC entered into a written agreement with Genentech pursuant to Section 2.6 prior to such date.

(c)On that date which is thirty (30) days after receipt of the Auction Notice:

(i)all rights held by IDEC (including any successor in interest) under Section 2.5 and 2.6, other than with respect to New Products and/or Third Party Anti-CD20-Products for which IDEC entered into a written agreement with Genentech pursuant to Section 2.6 prior to such date, shall terminate;

(ii)all rights held by IDEC (including any successor in interest) hereunder with respect to New Products in the United States, and Third Party Anti-CD20 Products for which IDEC entered into a written agreement with Genentech pursuant to Section 2.6 prior to such date, including the right to receive further payments from Genentech shall terminate and Genentech shall thereafter pay IDEC the Royalty Price for each such product in the United States, without offset of any kind; such obligation to continue, on a product-by-product basis, for eleven (11) years from the date of first commercial sale of such product in the United States (for avoidance of doubt, a sale for “compassionate use” shall not be deemed a first commercial sale);

(iii)Genentech or its designee shall make its Royalty Price payments to IDEC or its designee quarterly within sixty (60) days following the end of each calendar quarter for which such payments are due. Each Royalty Price payment shall be accompanied by a report

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summarizing the Net Sales or Operating Profits (or Losses), as applicable, for such New Product or Third Party Anti-CD20 Product, during the relevant calendar quarter. IDEC shall have the right, upon written notice to Genentech, and not more often than once each calendar year, to have an independent accounting firm, selected by IDEC and reasonably approved by Genentech, inspect Genentech's books of accounts for the sole purpose of verifying the correctness of calculations or such costs, expenses or payments made under this Section 15.2 with respect to sales of such products. Such audits will be conducted at the expense of IDEC; provided, however, that if the audit results in an adjustment of greater than [*] or Operating Profits (or Losses), as applicable, in any period, the cost of the audit will be borne by Genentech. Audit results will be shared with both Parties. Audits are limited to results in the two (2) years prior to audit notification;

(iv)if the Purchase Option was elected (or deemed to be elected) pursuant to Section 15.2(b) with respect to all Licensed Products, all rights held by IDEC hereunder with respect to the Licensed Products in the Co-Promotion Territory including the right to receive further payments from Genentech shall terminate and Genentech shall pay IDEC [*] of the Auction Price that is payable in cash on such date;

(v)if the Sales Option was elected pursuant to Section 15.2(b) with respect to all Licensed Products, all rights held by Genentech hereunder with respect to the Licensed Products in the Co-Promotion Territory shall terminate and IDEC shall pay Genentech [*] of the price [*] that is payable in cash on such date;

(vi)the purchasing Party's rights under the selling Party's Patents and Know-how shall become exclusive (with right of sublicense) and non-revocable with respect to all Licensed Products in the Field and in the Co-Promotion Territory (and to the extent not already included on such date, such rights shall include the right to manufacture and have manufactured under the selling Party’s Patents and Know-How), and the selling Party's license under the purchasing Party's Patents and Know-how with respect to all Licensed Products in the Field and in the Co-Promotion Territory shall terminate;

(vii)the selling Party shall (x) extend to the purchasing Party the opportunity to acquire a non-exclusive license under any Third Party rights Controlled by the selling Party as of such date, such terms, to the extent reasonably practicable, to be on the same financial terms as the selling Party has with respect to such Third Party rights; and (y) to the extent the selling Party is licensed under any Third Party rights not Controlled by the selling Party on such date, use its commercially reasonable and diligent efforts to assist the purchasing Party in obtaining a license for such Third Party rights under the same financial terms, to the extent reasonably practicable, as the selling Party has with respect to such Third Party rights, in each case, to the extent such rights are necessary for the purchasing Party to develop, manufacture or commercialize the Franchise Products purchased by the purchasing Party as of such date.

(viii)the selling Party shall use commercially reasonable and diligent efforts to transfer to the purchasing Party any technology, materials, data and regulatory submissions, existing and utilized in the development, manufacture and commercialization of the Franchise Product as of such date, so as to fully enable the purchasing Party to develop, manufacture and commercialize the Franchise Product, with the costs of such transfer to be borne by the purchasing Party;

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(ix)the selling Party shall make its personnel and other resources reasonably available to the purchasing Party as necessary to effect an orderly transition of development, manufacturing and commercialization responsibilities, with the cost of making such personnel and resources to be borne by the purchasing Party; and

(x)the remaining [*] of the Auction Price that is payable in cash shall be paid upon the later to occur of (A) thirty (30) days of the date thereafter on which the purchasing Party manufactures and sells any Licensed Product in the Co-Promotion Territory or (B) the date on which such technology transfer (including data and regulatory submissions) is substantially complete.

As used in this Section 15.2(c), “Patents” means IDEC Patent with respect to IDEC, and Genentech Patents and Genentech NP Patents with respect to Genentech; and “Know-how” means IDEC Know-how with respect to IDEC, and Genentech Know-how with respect to Genentech.

(d)In the event of a buy-out of a Franchise Product pursuant to this Sections 15.2:

(i)the Party selling its rights to the Franchise Product shall continue to supply the amounts of such Franchise Product it was obligated to supply at the time of such buy-out for a [*] to allow the purchasing Party to obtain an alternate source of supply, if necessary;

(ii)the Party purchasing the rights to the Franchise Product going forward shall also receive from the selling Party an exclusive license to use any and all jointly-owned trademarks pursuant to Section 10.1; and

(iii)the Party purchasing the rights to a Franchise Product shall, to the extent Third Party rights are passed by the selling Party to the purchasing Party, pay any and all Third Party royalties.

15.3Accrued Rights, Surviving Obligations. Termination, relinquishment or expiration of the Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of either Party prior to such termination (including paid up irrevocable licenses), relinquishment or expiration, including damages arising from any breach hereunder. Such termination, relinquishment or expiration shall not relieve either Party from obligations under Articles 11, 12, 16 and 18 herein, and any other obligations which are expressly indicated to survive termination or expiration of the Agreement.

ARTICLE 16.

INDEMNIFICATION

16.1Indemnification in the Licensed Territory.

(a)Genentech hereby agrees to save, defend and hold IDEC and its agents and employees harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and/or loss, including reasonable legal expense and attorneys' fees ("Losses") resulting directly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or

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Franchise Products sold or used in the Licensed Territory by Genentech, its Affiliates, agents or sublicensees except to the extent such Losses result from the negligence of IDEC.

(b)In the event that IDEC is seeking indemnification under Section 16.1(a), it shall inform Genentech of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit Genentech to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperate as requested (at the expense of Genentech) in the defense of the claim.

(c)IDEC hereby agrees to save, defend and hold Genentech and its agents and employees harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and/or loss, including reasonable legal expense and attorneys' fees ("Losses") resulting directly from the manufacture by IDEC of Licensed Products sold or used in the Licensed Territory by Genentech, its Affiliates, agents or sublicensees.

(d)In the event Genentech is seeking indemnification under Section 16.1(c), it shall inform IDEC of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit IDEC to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperate as requested (at the expense of IDEC) in the defense of the claim.

16.2Indemnification in the Co-Promotion Territory.

(a)Each Party hereby agrees to save, defend and hold the other Party and its agents and employees harmless from and against any and all losses resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or Franchise Products sold or used in the Co-Promotion Territory by the indemnifying Party, its Affiliates, agents or sublicensees, but only to the extent such losses result from the negligence or willful misconduct of the indemnifying Party or its employees and agents and do not also result from the negligence or willful misconduct of the Party seeking indemnification. Any other losses resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or Franchise Products in the Co-Promotion Territory shall be charged to the collaboration as an Other Operating income/Expense at the time such claim is finally determined, whether by judgment, award, decree or settlement.

(b)In the event that either Party receives notice of a claim with respect to a Franchise Product in the Co-Promotion Territory, such Party shall inform the other Party as soon as reasonably practicable. The Parties shall confer how to respond to the claim and how to handle the claim in an efficient manner.

ARTICLE 17.

DISPUTE RESOLUTION

17.1Disputes. The Parties recognize that disputes as to certain matters may from time to time arise during the term of this Agreement which relate to either Party's rights and/or

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obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article 17, if and when a dispute arises under this Agreement. Unless otherwise specifically recited in this Agreement, disputes among members of each Operating Committee will be resolved as recited in this Article 17. Any disputes among members of Operating Committees formed hereunder relating to the collaboration, and which are within the scope of such Operating Committee’s responsibilities, shall be first referred to the Management Committee by either Party at any time after such dispute has arisen and such Party believes that there has been sufficient discussion of the matter at the Operating Committee level. If the Management Committee is unable to resolve such a dispute within thirty (30) days of being requested by a Party to resolve an Operating Committee dispute, any Party may, by written notice to the other, have such dispute referred to their respective chief executive officers, for attempted resolution by good faith negotiations within fourteen (14) days after such notice is received. In the event the designated executive officers are not able to resolve such dispute, such dispute shall be resolved as follows:

(a) [*] if such dispute relates to issues of commercialization of Franchise Products that are within the scope of the JCC’s responsibilities (including post-marketing and investigator sponsored trails), Genentech shall have final decision making authority with respect to such dispute; provided however, that Genentech may not make a final decision which decision would: (i) establish or amend an Annual Commercial Operating Budget; (ii) result in the Annual Commercial Operating Budget approved with a commercialization plan being exceeded [*] (and to the extent such budget is not exceeded [*] such activities shall not be deemed an amendment to the budget for purposes of 17.1(a)(i) above); (iii) assign tasks to IDEC that were not otherwise approved by unanimous consent of the JCC; (iv) restrict a Party’s rights under Section 5.2(c), or with respect to the first sentence of Section 5.2(a) restrict a Party’s rights to deploy a co-promotion sales force in the Co-Promotion Territory as specified in Section 5.2(a)(except as modified by Section 5.2(b)), in each case, unless the JCC unanimously agrees otherwise, (v) assign an initial pricing for a Franchise Product, unless such initial pricing is within [*] of the current price for C2B8; (vi) materially amend a commercialization plan without the unanimous approval of the JCC (where “materially amend” means to materially modify the strategic direction agreed upon by the Parties under such commercialization plan ); or (vii) result in the cessation of development and/or commercialization of a Franchise Product in the Co-Promotion Territory without the consent of IDEC (such consent not to be unreasonably withheld); and

(b) with respect to all other disputes, either Party may at anytime after the 14-day period invoke the provisions of Section 17.2 hereinafter.

17.2Arbitration. The parties agree that any dispute, controversy or claim (except as to any issue relating to intellectual property owned in whole or in part by IDEC or Genentech) arising out of or relating to this Agreement, or the breach, termination, or invalidity thereof, shall be resolved through negotiation and/or binding arbitration. If a dispute arises between the parties, and if said dispute cannot be resolved pursuant to Section 17.1, the Parties agree that any unresolved controversy or claim between the parties shall be resolved by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, except as modified herein. The Company and Buyer shall each select one arbitrator and the two arbitrators

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so selected shall choose a third arbitrator to resolve the dispute. The arbitration decision shall be rendered in a writing stating the basis on which the decision was made within six months of conclusion of arbitration and shall be binding and not be appealable to any court in any jurisdiction. The prevailing Party may enter such decision in any court having competent jurisdiction. The arbitration proceeding shall be conducted at the location of the Party not originally requesting the resolution of the dispute. The Parties agree that they shall share equally the cost of the arbitration filing and hearing fees, and the cost of the arbitrator. Each Party must bear its own attorney's fees and associated costs and expenses.

17.3Jurisdiction. For the purposes of this Article 17, the Parties agree to accept the jurisdiction of the federal courts located in the Northern District of California for the purposes of enforcing awards entered pursuant to this Article and for enforcing the agreements reflected in this Article.

17.4Determination of Patents and Other Intellectual Property. Any dispute relating to the determination of validity of a Party's Patents or other issues relating solely to a Party's intellectual property shall be submitted exclusively to the federal court located in the location of the defendant, and the Parties hereby consent to the jurisdiction and venue of such court.

ARTICLE 18.

MISCELLANEOUS

18.1Assignment.

(a)With respect to: (i) Licensed Products, either Party may assign any of its rights under this Agreement in any country to any Affiliates and, with the prior written consent of the other Party, may delegate its obligations under this Agreement in any country to any Affiliates; and (ii) New Products, IDEC may, with the prior written consent of Genentech, assign and/or delegate any of its rights under this Agreement in any country to any Affiliates; provided, however, that such assignment shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. Genentech may assign and/or delegate its rights with respect to any New Product in any country to any Affiliates.

(b)Either Party may assign all of its rights and obligations under this Agreement in connection with a merger or similar reorganization or the sale of all or substantially all of its assets, or otherwise with the prior written consent of the other Party; provided, however, that IDEC may not so assign its rights and obligations if it is in breach of the provisions of Section 7.7. This Agreement shall survive any such merger or reorganization of either Party with or into, or such sale of assets to, another party and no consent (except as otherwise set forth above) for such merger, reorganization or sale shall be required hereunder.

(c)This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any assignment not in accordance with this Agreement shall be void.

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18.2Non-Solicitation. The Parties recognize that each Party has a substantial interest in preserving and maintaining confidential its Confidential Information hereunder. Each Party recognizes that certain of the other Party's employees, including those engaged in development, marketing and sale of any Franchise Product, may have access to such Confidential Information of the other Party. The Parties therefore agree not to solicit or otherwise induce or attempt to induce for purposes of employment, any employees from the other Party involved in the development, marketing or sales of any Franchise Product during the period in which any Party is developing or commercializing a Franchise Product in the Co-Promotion Territory hereunder and for a period of two years thereafter.

18.3Consents Not Unreasonably Withheld. Whenever provision is made in this Agreement for either Party to secure the consent or approval of the other, that consent or approval shall not unreasonably be withheld, and whenever in this Agreement provision is made for one Party to object to or disapprove a matter, such objection or disapproval shall not unreasonably be exercised.

18.4Retained Rights. Nothing in this Agreement shall limit in any respect the right of either Party to conduct research and development with respect to and market products outside the Field using such Party's technology.

18.5Force Majeure. Neither Party shall lose any rights hereunder or be liable to the other Party for damages or losses on account of failure of performance by the defaulting Party if the failure is occasioned by government action, war, earthquake, fire, explosion, flood, strike,

lockout, embargo, mycoplasmal contamination, act of God, or any other cause beyond the control of the defaulting Party, provided that the Party claiming force majeure has exerted all reasonable efforts to avoid or remedy such force majeure; provided however, that in no event shall a Party be required to settle any labor dispute or disturbance.

18.6Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

18.7No Right to Use Names. Except as otherwise provided herein, no right, express or implied, is granted by the Agreement to use in any manner the name "IDEC," "Genentech" or any other trade name or trademark of the other Party or its Affiliates in connection with the performance of the Agreement.

18.8Notices. All notices hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (receipt verified), telexed, mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service, to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof).

If to IDEC,

addressed to:IDEC PHARMACEUTICALS CORPORATION

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3030 Callan Road

San Diego, CA 92121

Attention:Corporate Secretary

Telephone:(858) 431-8500

Telecopy:(858) 431-8755

If to Genentech,

addressed to:GENENTECH. INC.

1 DNA Way

South San Francisco, CA 94080

Attention:Corporate Secretary

Telephone:(650) 225-1000

Telecopy:(650) 952-9881

18.9Waiver. Except as specifically provided for herein, the waiver from time to time by either of the Parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such Party's rights or remedies provided in this Agreement.

18.10 Severability. If any term, covenant or condition of this Agreement or the application thereof to any Party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant or condition to Parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the Parties that the basic purposes of this Agreement are to be effectuated.

18.11Governing Law. This Agreement shall be governed by and construed in accordance with, the laws of the State of California without giving effect to principles of conflict of laws.

18.12Ambiguities. Ambiguities, if any, in this Agreement shall not be construed against any Party, irrespective of which Party may be deemed to have authorized the ambiguous provision.

18.13Counterparts. 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.

18.14Entire Agreement. This Agreement, including all Exhibits and the Appendix attached hereto which are hereby incorporated herein by reference, sets forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto and supersedes and terminates the Original Agreement between the Parties; provided, Exhibits B and D to the Original Agreement and the First Amendment and the Second Amendment shall as of the Restated Effective Date be incorporated herein by reference and

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deemed Exhibits B and D, the First Amendment and the Second Amendment, respectively to this Agreement; provided further, with respect to any conflict between this Agreement and the Original Agreement (including Exhibits B and D, the First Amendment and the Second Amendment thereto), as to any acts or omissions by the parties that occurred after the Original Effective Date but prior to the Restated Effective Date, the terms of the Original Agreement shall prevail. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein; provided, to the extent the Parties entered into any written agreements (other than the Original Agreement, the First Amendment or the Second Amendment) with respect to Third Party intellectual property rights regarding the development, manufacture or commercialization of Licensed Products prior to the Restated Effective Date, and to the extent such agreements are in full force and effect immediately prior to the Restated Effective Date, such agreements (including without limitation, that certain Letter Agreement between the Parties of May 21, 1996 relating to the Original Agreement) shall continue in full force and effect under their respective terms and not be deemed to be superseded by this Agreement. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorized officers of the Parties.

IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate originals by their proper officers as of the date and year first above written.

IDEC PHARMACEUTICALS CORPORATION		GENENTECH, INC.
By:	/s/ WILLIAM H. RASTETTER	By:	/s/ ARTHUR D. LEVINSON
	William H. Rastetter Title:  Chairman and CEO		Arthur D. Levinson Title:  Chairman and CEO

GNE 134943.12

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APPENDIX 1

TO THE

AMENDED AND RESTATED COLLABORATION BETWEEN IDEC

PHARMACEUTICALS CORPORATION AND GENENTECH, INC.

SCHEDULE OF MASTER DEFINITIONS

1."Administration Costs" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

2."Affiliate" means an entity that, directly or indirectly, through one or more intermediaries, is controlled by IDEC or Genentech. As used herein, the term "control" will mean the direct or indirect ownership of fifty percent (50%) or more of the stock having the right to vote for directors thereof or the ability to otherwise control the management of the corporation or other business entity. For the avoidance of doubt, as of the Restated Effective Date, F. Hoffman-La Roche AG shall not be considered an Affiliate of Genentech.

3."Allocable Overhead" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

4."Ancillary Agreements" shall mean the License Agreements, Preferred Stock Purchase Agreement, Option Agreement, Registration Rights Agreement and Standstill Agreement.

5.“Annual Commercial Operating Budget” means an annual top line budget with respect to commercialization activities in any one fiscal year in respect of Franchise Products in the form attached hereto as Section A.1(a) of Exhibit A.

6"Approvable Process Event" means a determination by the JDC that the formulation of C2B8 and the process for C2B8 recovery are commercially viable as more fully described in Appendix I to the Development Plan.

7."Asia" means Japan, Bangladesh, Myanmar, Cambodia, Indonesia, People's Republic of China, Hong Kong, Republic of Korea, Laos, Malaysia, Papua New Guinea, Philippines, Singapore, Sri Lanka, Republic of China (Taiwan) and Thailand and the territories and possessions of each.

8."Business Day" means a day on which banking institutions are open for business in California.

9."C2B8" means that certain monoclonal antibody to B cells more particularly described on Exhibit B to the Collaboration Agreement.

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10."Certificate of Determination of Preferred Stock" means the Certificate of Determination of Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series A-4 Preferred Stock, Series A-5 Preferred Stock, Series A-6 Preferred Stock and Series A7 Preferred Stock, to be filed with the Secretary of State of the State of California.

11."Collaboration Agreement" shall mean the Collaboration Agreement dated the Restated Effective Date between IDEC and Genentech.

12."Combination Product Adjustment" means the following: in the event a Franchise Product is sold in the form of a combination product containing one or more active ingredients in addition to a Franchise Product, Royalty-Bearing Sales or Net Sales for such combination product will be adjusted by multiplying actual Royalty-Bearing Sales, or Net Sales as applicable, of such combination product by the fraction A/(A + B) where A is the invoice price of the Franchise Product, if sold separately, and B is the invoice price of any other active component or components in the combination, if sold separately. If, on a country-by-country basis, the other active component or components in the combination are not sold separately in said country, Royalty-Bearing Sales or Net Sales shall be calculated by multiplying actual Royalty-Bearing Sales or Net Sales of such combination product by the fraction A/C where A is the invoice price of the Franchise Product if sold separately, and C is the invoice price of the combination product. If, on a country-by-country basis, neither the Franchise Product nor the other active component or components of the combination product is sold separately in said country, Royalty-Bearing Sales or Net Sales shall be determined by the Parties in good faith.

13."Control" or "Controlled" means possession of the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement or other arrangement with any Third Party.

14."Co-Promote" means to promote jointly Franchise Products through Genentech, IDEC and their respective sales forces under a single trademark in a given country in the Co-Promotion Territory.

15."Co-Promotion Profits" shall have the same meaning as Operating Profits or Losses.

16."Co-Promotion Territory" means, with regard to Licensed Products, the United States and Canada, with regard to New Products, the United States only.

17."Cost of Goods Sold" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

18.“Cost of Sales” shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

19."Delay Option" means the option exercisable by IDEC upon written notice to Genentech at least thirty (30) days prior to the First Anniversary Date that IDEC elects to delay [*] of Genentech's investment on the First Anniversary Date such that either (i) IDEC shall receive in

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lieu of such delayed portion of the investment, a [*] payment upon the occurrence of the Patent Milestone Event or instead issue shares of Series A Preferred Stock, or if the Patent Milestone Event does not occur prior to the Third Anniversary Date, then (ii) IDEC shall receive the delayed investment in accordance with Section 2(d) of the Preferred Stock Purchase Agreement; provided that this Delay Option will not be exercisable by IDEC if the Approvable Process Event does not occur on or prior to the First Anniversary Date.

20."Development Costs" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

21."Development Plan" means the comprehensive plan for the development of a Franchise Product, designed to generate the preclinical, process development, manufacturing scale-up, clinical and regulatory information required to obtain Regulatory Approval in the Co-Promotion Territory, and which may be modified from time to time by the JDC. Development shall refer to all activities related to preclinical testing, toxicology, formulation, process development, manufacturing scale-up, quality assurance/quality control, clinical studies and regulatory affairs for a Franchise Product in connection with obtaining Regulatory Approvals of such Franchise Product.

22."Distribution Costs" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

23."Drug Approval Application" means an application for Regulatory Approval required for commercial sale or use of a Franchise Product as a drug in the Field in a regulatory jurisdiction.

24.“Excluded Patent” means the rights under any Patent within the following, as defined in Exhibit G: the Cabilly Patents and the Itakura/Riggs Patents.

25."First Anniversary Date" means the date which is twelve (12) calendar months following the Original Effective Date.

26.“First New Product FDA Approval” means the date upon which final approval is received from the United States Food and Drug Administration with respect to the first New Product (immediately following which such New Product may be manufactured and commercially sold in the United States).

27."FDA Approval Date" means the date on which the United States Food and Drug Administration grants Regulatory Approval of C2B8 for manufacture and sale in the United States.

28."FDA Approval Event" means the FDA Approval Date occurs on or before the Fifty-Four Month Anniversary Date.

29."FDA Review Event" means the date on which the relevant United States Food and Drug Administration public advisory committee meets to determine whether to recommend approval of the manufacture and sale in the United States of C2B8.

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30."Field" means the use of Franchise Product in humans.

31."Fifty-Four Month Anniversary Date" means that date which is fifty-four (54) calendar months following the Original Effective Date.

32.“Franchise Products” means Licensed Products and New Products.

33.“G2H7” means (i) that certain humanized monoclonal antibody [*].

34."Genentech" means Genentech, Inc., a Delaware corporation, and its Affiliates.

35."Genentech Know-how" means Information which (i) Genentech discloses to IDEC under the Collaboration Agreement and (ii) is within the Control of Genentech.

36.“Genentech NP Patent” means the rights under any Patent, other than a Genentech Patent or Excluded Patent, which covers a method, apparatus, material, manufacture, use, treatment, process, compound, composition, or product-by-process necessary to develop, make, use or sell a New Product in the Field in the Co-Promotion Territory, which Patent is Controlled by Genentech, including its interest in any Patents owned jointly by the Parties as provided hereunder.

37."Genentech Patent" means the rights under any Patent, other than an Excluded Patent, which covers a method, apparatus, material, manufacture, use, treatment, process, compound, composition, or product-by-process necessary to develop, make, use or sell a Licensed Product in the Field, which Patent is Controlled by Genentech, including its interest in any Patents owned jointly by the Parties as provided hereunder.

38."Gross Sales" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

39."IDEC" means IDEC Pharmaceuticals Corporation, a Delaware corporation, and its Affiliates.

40."IDEC Know-how" means Information which (i) IDEC discloses to Genentech under the Collaboration Agreement and (ii) is within the Control of IDEC.

41."IDEC Patent" means the rights under a Patent which covers a method, apparatus, material, manufacture, use, treatment, process, compound, composition or product-by-process (i) useful in the development, manufacture, use or sale of Licensed Products, or (ii) necessary to develop, make, use or sell a New Product, in each case which Patent is Controlled by IDEC, including its interest in any Patents owned jointly by the Parties as provided hereunder.

42."In2B8" shall have the meaning set forth in Section 2.2. of the Collaboration Agreement.

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43."Information" means techniques and data relating to the Franchise Products, including, but not limited to, biological materials, inventions, practices, methods, knowledge, know-how, skill, experience, test data (including pharmacological, toxicological and clinical test data), analytical and quality control data, marketing, pricing, distribution, cost, sales, manufacturing, patent data or descriptions.

44."Joint Commercialization Committee" or "JCC" means that committee established pursuant to Section 3.3 of the Collaboration Agreement.

45."Joint Development Committee" or "JDC" means that committee established pursuant to Section 3.2 of the Collaboration Agreement.

46."Joint Finance Committee" or "JFC" means that committee established pursuant to Section 3.4 of the Collaboration Agreement.

47.“Joint Know-how” means Information developed by or on behalf of a Party hereunder and which is co-funded by the Parties, including without limitation being charged against Operating Profits (or Losses).

48."Licensed Product(s)" means any compound or composition of matter [*] (including C2B8, but excluding Y2B8 and In2B8 unless the option set forth in Section 2.3 of the Collaboration Agreement is exercised) (a) developed by IDEC or (b) the intellectual property rights to which are owned or Controlled, in whole or in part, by IDEC, in either (a) or (b) as of the Original Effective Date or during the term of the Collaboration Agreement. Notwithstanding the foregoing, Licensed Products shall not be considered New Products or Third Party Anti-CD20 Products.

49."Licensed Territory" means worldwide (including Asia, pursuant to the First Amendment (as defined in the Collaboration Agreement)), excluding the Co-Promotion Territory.

50."Major European Country" means the United Kingdom, Italy, Germany, France or Spain.

51."Management Committee" means that committee established pursuant to Section 3.1 of the Collaboration Agreement.

52."Marketing Costs" shall have the meaning set forth in Exhibit A to the Collaboration Agreement

53."ML/MS Agreement" means the Preferred and Common Stock Purchase Agreement dated March 16, 1995 by and between ML/MS Associates, L.P. and IDEC, whereby IDEC reacquired the rights to certain technologies for the treatment of B-cell lymphomas funded and developed by ML/MS Partners pursuant to a Development Agreement and related agreements, dated as of February 17, 1988 and October 27, 1988.

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54."ML/MS Partners" shall mean ML Technology Ventures, L.P. and Morgan Stanley Ventures, L.P., and any assignee or successor to ML/MS Partners.

55."National Exchange" shall mean the Nasdaq National Market or any other national exchange on which the Common Stock of IDEC is listed.

56."Net Sales" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

57.“New Product” means (i) G2H7 (from and after the date of payment pursuant to Section 7.1(b)(i) of the Collaboration Agreement) and (ii) any Potential New Product for which IDEC has exercised an opt-in pursuant to Section 2.5 of the Collaboration Agreement (from and after the date of payment pursuant to Section 7.1(b)(ii), (iii) or (iv), as applicable, of the Collaboration Agreement). At the time a Potential New Product becomes a New Product, such New Product shall be defined to include the [*] was (were) the subject of such Potential New Product, as well as (x) any modifications to [*] which result from [*] are not required to obtain Regulatory Approval, and (y) modifications or derivatives to [*] which result from activities specified in the Development Plan [*].

58."Operating Committee" means a committee established by the Management Committee, including but not limited to, the Joint Development Committee, Joint Commercialization Committee and the Joint Finance Committee.

59."Operating Profits or Losses" shall have the meaning set forth in Exhibit A of the Collaboration Agreement.

60."Option Agreement" means the Option Agreement to be dated as of the Original Effective Date between Genentech and IDEC.

61."Original Agreement" shall mean that certain collaboration agreement by and between the Parties dated March 16, 1995.

62."Original Effective Date" means March 16, 1995.

63."Party" means IDEC or Genentech, as applicable.

64."Parties" means IDEC and Genentech.

65."Patent(s)" means (i) valid and enforceable letters patent, including any extension, registration, confirmation, reissue, re-examination or renewal thereof and (ii) pending applications for letters patent, including any continuation, division or continuation-in-part.

66."Patent Costs" means the fees and expenses paid to outside legal counsel and experts, and filing and maintenance expenses, (i) incurred after the Original Effective Date in connection with the establishment and maintenance of rights under Patents covering any Licensed Product, and (ii) incurred after the Restated Effective Date in connection with the establishment

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and maintenance of rights under Patents covering any New Product, including, in each case, costs of patent interference, reexamination, reissue, opposition and revocation proceedings.

67."Patent Milestone Event" means the notice of grant in the European Patent Office or issuance in a Major European Country of the first valid and enforceable letters patent covering C2B8.

68."Phase II Clinical Trial" means such studies in humans of the safety, dose ranging and efficacy of a Franchise Product which have generated sufficient data to commence a Phase III Clinical Trial.

69."Phase III Clinical Trial" means a study in humans of the efficacy and safety of a Franchise Product which is prospectively designed to demonstrate statistically whether the Franchise Product is effective for use in a particular indication in a manner sufficient to obtain Regulatory Approval to market that Franchise Product and which the Joint Development Committee designates as a Phase III Clinical Trial.

70."Phase III Milestone Event" means completion of the Pivotal Phase III Clinical Trial and presentation of the results of the entire Pivotal Phase III Clinical Trial in a peer-reviewed journal or public forum.

71."Pivotal Phase III Clinical Trial" means IDEC Protocol #102-05, as amended, and as further amended by the agreement of the JDC or as otherwise agreed by the JDC.

72.“Potential New Product” means any protein(s) or peptide(s) (other than G2H7) [*], and such protein(s) or peptide(s):

(a)was (were) acquired by [*] from a Third Party [*] (such Potential New Product a [*] Potential New Product”); or

(b)was (were) acquired by [*] from a Third Party [*] (such Potential New Product a [*] Potential New Product”) (collectively, [*] Potential New Products and [*] Potential New Products may be referred to herein as “[*] Potential New Products”); or

(c)was (were) developed by Genentech (including any protein(s) or peptide(s) acquired by [*] (such Potential New Product a [*] Potential New Product”)).

As used in this Collaboration Agreement, “protein” or “peptide” means any protein or peptide having a [*]; and “acquired” means, in addition to the direct acquisition of rights to a product, the indirect acquisition of rights to a product through the acquisition of [*]Notwithstanding the foregoing, [*] and Potential New Products and New Products shall not be considered Third Party Anti-CD20 Products.

73."Preferred Stock Purchase Agreement" means the Preferred Stock Purchase Agreement dated the Original Effective Date between IDEC and Genentech.

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74."Proceed with Formulation Event" means the affirmative decision by the JDC to proceed with the current formulation (including modified formulations, if any, not requiring a halt in current clinical trials) of C2B8 more fully described in Appendix I to the Development Plan.

75."Product License Application Filing Event" shall mean the date on which the first product license application is filed with the United States Food and Drug Administration for approval of the manufacture and sale of C2B8 in the United States.

76."Regulatory Approval" means any approvals (including pricing and reimbursement approvals), licenses, registrations or authorizations of any federal, state or local regulatory agency, department, bureau or other governmental entity, necessary for the manufacture and sale of a Franchise Product in a regulatory jurisdiction.

77."Registration Rights Agreement" means the 1995 Registration Rights Agreement dated as of the Original Effective Date between Genentech, ML/MS Associates, L.P. and IDEC.

78."Royalty-Bearing Sales" means, as to each Franchise Product in the Licensed Territory, the gross amount invoiced by Genentech or its permitted sublicensees for sales to an unrelated Third Party of a Franchise Product in the Licensed Territory, less (i) trade, cash and quantity discounts or rebates, (ii) credits or allowances given or made for rejection or return of, and for uncollectible amounts on, previously sold products or for retroactive price reductions (including rebates similar to Medicare), (iii) taxes, duties or other governmental charges levied on or measured by the billing amount, as adjusted for rebates and refunds, (iv) charges for freight and insurance directly related to the distribution of Franchise Products (to the extent not paid by the Third Party customer), and (v) credits or allowances given or made for wastage replacement, indigent patient and similar programs (but only to the extent such amounts were included in the gross amount invoiced). The amount obtained by deducting (i) through (v) from the gross amount invoiced shall then be adjusted by the Combination Product Adjustment, if applicable. For the avoidance of doubt, Royalty-Bearing Sales will, following the Restated Effective Date, be determined in a manner consistent with the practice immediately prior to the Restated Effective Date, unless otherwise agreed to in writing by the Parties.

79."Sales Costs" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

80."Sales Returns and Allowances" shall have the meaning set forth in Exhibit A to the Collaboration Agreement.

81."Sales Representative" means an employee of either Party or its Affiliates (i) who is responsible for contacting customers and others who can buy or influence the buying decision on the applicable Franchise Product in the applicable country in the Co-Promotion Territory, and (ii) whose success at such activities is a significant factor in the ongoing employment of the individual, and shall exclude an employee of either Party or an Affiliate engaged in telemarketing, professional education, and similar indirect activities in support of direct selling.

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82."Stability Benchmark Date" means the date on which the accelerated stability study has been completed and data has been reviewed by the JDC as more fully described on Appendix I to the Development Plan.

83."Standstill Agreement" means the Standstill Agreement to be dated as of the Original Effective Date between Genentech and IDEC.

84."Third Anniversary Date" means that date which is thirty-six months following the Original Effective Date.

85."Third Party" means any entity other than IDEC or Genentech.

86.“Third Party Anti-CD20 Products” means any protein or peptide [*] that is controlled (either before or after Genentech decides to seek a license to the same) by any Third Party. As used in the previous sentence, “controlled” means that such Third Party had the ability to grant a license or sublicense to develop and commercialize such product without violating the terms of any agreement or other arrangement it had with any other Third Party. Notwithstanding the foregoing, Third Party Anti-CD20 Products shall not be considered Potential New Products or New Products.

87."Third Party Royalties" means royalties payable by either Party to a Third Party in connection with the manufacture, use or sale of Franchise Products.

88."Y2B8" shall have the meaning set forth in Section 2.2 of the Collaboration Agreement.

#133618 v10

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EXHIBIT A

FINANCIAL PLANNING, ACCOUNTING AND REPORTING

FOR THE

AMENDED AND RESTATED IDEC/GENENTECH COLLABORATION AGREEMENT

This Exhibit A to the Amended and Restated Collaboration Agreement (the "Collaboration Agreement") dated as of June 19, 2003, between IDEC Pharmaceuticals Corporation ("IDEC") and Genentech, Inc. ("Genentech") addresses the financial planning, accounting policies and procedures to be followed in determining Operating Profits or Losses and related sharing of revenue and expenses in the Co-Promotion Territory. Terms not defined in this Exhibit shall have the meanings set forth in the Schedule of Master Definitions which is attached as Appendix 1 to the Collaboration Agreement, or to the extent not in the Schedule of Master Definitions, in the Collaboration Agreement.

This Exhibit sets forth the principles for reporting actual results and budgeted plans of the combined operations in the Co-Promotion Territory, the frequency of reporting, the use of a single functional currency for reporting, and the methods of determining payments to the Parties and auditing of accounts.

For purposes of this Exhibit only, the consolidated accounting of operations for the collaboration in the Co-Promotion Territory shall be referred to as GenIDEC. GenIDEC is not a legal entity and has been defined for identification purposes only.

A.1.Principles of Reporting

The results of operations of GenIDEC will be presented in the following format (as to all Franchise Products and also on a product-by-product basis), with the categories as defined in Section A.4 below:

A.1 (a)       Income Statement
	IDEC	Genentech	Total
Gross Sales less Sales Returns and Allowances = Net Sales less Cost of Sales = Gross Profits less Marketing Costs less Sales Costs less Development Costs chargeable to GenIDEC less Other Operating Income/Expense = Contribution less Distribution Costs less Administration Costs = Operating Profit (Loss)

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It is the intention of the Parties that the interpretation of these definitions will be consistent with generally accepted accounting principles in the United States.

A.1 (b)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 aggregate Income Statement expense components specified under Section A.1(a):

Cost of Sales - cost of goods sold (COGS), cost of sales royalties, freight & other

Marketing - marketing promotion, market research, marketing headcount

Sales - sales headcount, sales promotion & sales operations

Development - by indication label-enabling activities & trials, by indication post-marketing activities & trials

The requirement defined within Section 4.5, 5.4 (b) and 17.1(a) not to exceed budget by [*] without unanimous JDC or JCC approval, as applicable, shall not apply to these reporting detail sub-components, but shall only apply to the aggregate expense components specified within the Income Statement format specified within Section A.1(a).

A.2.Frequency of Reporting

The fiscal year of GenIDEC will be a calendar year.

Reporting by each Party for GenIDEC revenues and expenses 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:        +30 days Q4:                +45 days
Forecasts (rest of year - by month)	Quarterly	Mid Quarter
Budgets (one year - by month)	Annually	October 31st
Long Range Plan (current year plus 5 years)	Annually	July 31st

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Genentech will be responsible for the preparation of consolidated reporting (actuals, budgets, forecasts, and long range plans), calculation of the profit/loss sharing and determination of the cash settlement. Genentech will provide the JFC (and IDEC) within five working days of the submission date shown above, a statement showing the consolidated results (and forecasts) and calculations of the profit/loss sharing and cash settlement required in a format agreed to by the Parties.

Reports of actual results compared to budget (as to all Franchise Products and also on a product-by-product basis) will be made to the Operating Committees on a quarterly basis. After approval by the JFC as to amounts, the JFC will forward the report to the Management Committee for its approval. Line item variances from budgets judged to be significant by the JFC will only be included in calculation of Operating Profit and Loss when approved by the JCC and the Management Committee.

On a monthly basis Genentech will supply IDEC with Gross Sales (as to all Franchise Products and also on a product-by-product basis) in units, local currency and U.S. dollars by country of each month’s sales according to Genentech's sales reporting system, which shall be consistent with the definitions in Section A.4.

The Joint Finance Committee will meet as appropriate to review and approve the following (as to all Franchise Products and also on a product-by-product basis):

-   Actual Results

-   Forecasts

-   Budget

-   Inventory Levels

-   Sales Returns and Allowances

-   Other financial matters, including each Party's methodologies for charging costs and allocating Sales Representatives to GenIDEC for actuals, forecasts, budgets and long range plans and the results of applying such methodologies.

A.3.Budget and Long Range Plan

Responsibility for the Budget and Long Range Plan with regard to Licensed Products, [*] will rest with the JCC and the JDC, who will develop budgets for development and commercialization in coordination with the Joint Finance Committee, subject to final approval by the Management Committee.

Responsibility for the Budget and Long Range Plan with regard to New Products, including, without limitation, G2H7, and with regard to all Franchise Products (including, without limitation, C2B8) [*] will rest with Genentech, who will develop budgets for development and commercialization in coordination with the Joint Finance Committee, subject to final approval by the Management Committee.

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Budgets will be prepared annually for the following full calendar year containing monthly details/numbers.

Budgets will be supplemented with high level business plans and costs for clinical trials, registration applications, and plans for product introduction, sales efforts and promotion as approved by the Joint Development Committee and Joint Commercialization Committee. Budgets, once ratified by the Management Committee, can only be changed with the approval of the Management Committee (with the exception of the provisions outlined in Sections 4.5 and 5.4(b) of the Collaboration Agreement).

A five-year Long Range Plan for GenIDEC will be established on a yearly basis under the direction of the Management Committee and submitted to Genentech and IDEC by July 31st.

A.4.Definitions

A.4.1 "Administration Costs" means, as to each Franchise Product in the Co-Promotion Territory, costs chargeable to GenIDEC equal to [*] of the sum of each Party's own Marketing Costs and Sales Costs and Development Costs (each, only to the extent chargeable to GenIDEC), subject to a cap for each Party, as to all Franchise Products, in each calendar year of [*] (subject to annual increases per the PPI).

A.4.2"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 to department), 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.4.3."Cost of Goods Sold" means, as to each Franchise Product in the Co-Promotion Territory, the fully burdened cost of such Franchise Product in final therapeutic form as limited by Section 8.2 or Section 8.6. The fully burdened cost of each Franchise Product will be determined in accordance with generally accepted accounting principles in the United States as applied by the Party performing or contracting for each stage of the manufacturing process and will include direct labor, material, product testing costs and Allocable Overhead.

A.4.4."Cost of Sales" means, as to each Franchise Product in the Co-Promotion Territory, Cost of Goods Sold, Third Party Royalties (except to ML/MS Partners) (i.e., any allocable intellectual property acquisition and licensing costs) and outbound freight on sales if borne by the seller.

A.4.5."Development Costs" means, as to each Franchise Product in the Co-Promotion Territory, costs, including Allocable Overhead, required to obtain the authorization and/or ability to manufacture, formulate, fill, ship and/or sell such Franchise Product in the Field in commercial quantities in the Co-Promotion Territory. Development Costs shall include but are not limited to the cost of studies on the toxicological, pharmacokinetic, metabolic or clinical

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aspects of such Franchise Product conducted internally or by individual investigators, or consultants necessary for the purpose of obtaining and/or maintaining approval of such Franchise Product in the Field by a government organization in a country of the Co-Promotion Territory, 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 Franchise Product in the Field in a country of the Co-Promotion Territory as well as costs of process development scale-up and recovery (including plant costs). In addition, Development Costs in the Co-Promotion Territory shall include the cost of post-launch clinical studies in support of such Franchise Product in the Field in the Co-Promotion Territory. Development Costs in the Co-Promotion Territory shall include expenses for compensation, benefits and travel and other employee-related expenses, as well as data management, statistical designs and studies, document preparation, and other expenses associated with the clinical testing program. Development Costs that are to be paid solely by one but not both of the Parties as set forth in Section 2.3 of the Collaboration Agreement shall not be included in the determination of Operating Profits (Losses).

A.4.6."Distribution Costs" means, as to each Franchise Product in the Co-Promotion Territory, the costs, including Allocable Overhead, specifically identifiable to the distribution of such Franchise Product including customer services, collection of data of sales to hospitals and other end users (e.g. DDD sales data), order entry, billing, credit and collection and other activities described in Section 5.3 of the Agreement. For the purpose of this Agreement, only Genentech will charge GenIDEC for Distribution Costs an amount of [*] of Net Sales in a lump sum.

A.4.7."Gross Sales" means, as to each Franchise Product in the Co-Promotion Territory, the gross amount invoiced by either Party or their Affiliates or permitted sublicensees for sales of such Franchise Product to Third Parties in the Co-Promotion Territory.

A.4.8."Marketing Costs" means, as to each Franchise Product in the Co-Promotion Territory, the costs, excluding Allocable Overhead, of marketing, promotion, advertising, professional education, product related public relations, relationships with opinion leaders and professional societies, market research, healthcare economics studies and other similar activities directly related to such Franchise Product and approved by the Joint Commercialization Committee. Such costs will include both internal costs (e.g., salaries, benefits, supplies and materials, etc.) as well as outside services and expenses (e.g., consultants, agency fees, meeting costs, etc.). Marketing Costs shall also include activities related to obtaining reimbursement from payers and costs of sales and marketing data. 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-Franchise Products.

A.4.9."Net Sales" means Gross Sales less Sales Returns and Allowances.

A.4.10."Operating Profit or Loss" means, as to all Franchise Products (or, where applicable, on a product-by-product basis), GenIDEC’s Net Sales less the following items: Cost of Sales, Marketing Costs, Sales Costs, Development Costs, (to the extent chargeable to GenIDEC), Other Operating Income/Expense, Distribution Costs and Administrative Costs, for a given period.

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A.4.11. "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 GenIDEC, but is considered and approved by the Joint Finance Committee as income or expense generated from GenIDEC operations, and limited to the following:

-Inventory Write-Offs

-Patent Costs (as defined and to the extent permitted in the Collaboration

Agreement)

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

-Other (To be approved by JFC)

A.4.12."Sales Costs" means, as to each Franchise Product in the Co-Promotion Territory (to the extent practicable and without being overly burdensome to provide, Sales Costs will be identifed 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), costs, including Allocable Overhead, approved by the JCC and the annual budget and specifically identifiable to the sales of such Franchise Product to all markets in the Co-Promotion Territory including the managed care market. Sales Costs shall include costs associated with Sales Representatives, including compensation, benefits and travel, supervision and training of the Sales Representatives, sales meetings, and other sales expenses. Sales Costs will not include the start-up costs associated with either Party's sales force, including recruiting, relocation and other similar costs.

A.4.13."Sales Returns and Allowances" means, as to each Franchise Product in the Co-Promotion Territory, the sum of (a), (b) and (c) where (a) is a provision, determined under generally accepted accounting principles in the United States, for (i) trade, cash and quantity discounts or rebates (other than price discounts granted at the time of invoicing and which are included in the determination of Gross Sales), (ii) credits or allowances given or made for rejection or return of, and for uncollectible amounts on, previously sold products or for retroactive price reductions (including Medicare and similar types of rebates), (iii) taxes, duties or other governmental charges levied on or measured by the billing amount, as adjusted for rebates and refunds, (iv) charges for freight and insurance directly related to the distribution of such Franchise Product, and (v) credits or allowances given or made for wastage replacement, indigent patient and any other sales programs agreed to by the Parties, (b) is a periodic adjustment of the provision determined in (a) to reflect amounts actually incurred for (i), (ii), (iii), (iv) and (v), and (c) is the Combination Product Adjustment as defined in the Agreement, if any. Provisions allowed in (a) and adjustments made in (b) and (c) will be reviewed by the Joint Finance Committee.

A.5.Foreign Exchange

The functional currency for accounting for operating profit will be U.S. Dollars.

The statement of operations will be translated into U.S. dollars using the average exchange rate for the reporting period.

A.6Audit and Interim Reviews

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A.6.1Either Party shall have the right to request that an independent accounting firm selected by such requesting Party, and approved by the other Party (such approval not to be unreasonably withheld), perform an audit or interim review of the other Party's books (as to all Franchise Products and also on a product-by-product basis) in order to express an opinion regarding said Party's compliance with generally accepted accounting principles. Such audits or review will be conducted at the expense of the requesting Party.

A.6.2Either Party shall have the right to request that an independent public accounting firm selected by such requesting Party, and approved by the other Party (such approval not to be unreasonably withheld), perform an audit of the other Party's books of accounts (as to all Franchise Products and also on a product-by-product basis) for the sole purpose of verifying compliance with the Agreement. Such audits will be conducted at the expense of the requesting Party; provided, however, that if the audit results in an adjustment of greater that [*] of Operating Losses or Profits in any period, the cost of the audit will be borne by the Party audited. Audit results will be shared with both Parties. Audits are limited to results in the two (2) years prior to audit notification.

A.6.3Each Party shall provide the other Party, as reasonably requested, sharable work product generated by such Party or its accountants with respect to Franchise Products in preparation of such providing Party’s obligation to comply with the reporting obligations mandated under the Sarbanes Oxley Act of 2002 (including implemented federal regulations thereunder); provided, such providing Party shall have the right to redact such work product to (i) remove any reference to any products other than a Franchise Product, and (ii) to preserve any right of confidentiality not otherwise governed by the terms of Article 11 of the Collaboration Agreement; provided further, such receiving Party shall only use such information disclosed hereunder to assist it in complying with the reporting obligations mandated under the Sarbanes Oxley Act of 2002. All costs incurred by the providing Party in complying with such request shall be reimbursed by the receiving Party.

A.6.4At either Party’s written request, the other Party shall, to the extent commercially reasonable and practicable, commission, facilitate, support, and/or assist an independent accounting firm 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, to support the requesting Party's relevant internal control understanding and compliance assertions. All costs incurred by the other Party in complying with such request shall be reimbursed by the requesting Party.

A.7.Payments between the Parties

Balancing payments between the Parties will be approved by the Management Committee based on Operating Profit or Loss. Payments will be made quarterly based on actual results within 60 days after the end of each quarter, adjusted for reimbursement of the net expenses or income incurred or received by each Party.

A.8.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.4 of this Exhibit.

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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, the Parties will report costs based on spending in Marketing departments. The Parties acknowledge that the methodologies used will be based on systems in place and consistent with Section A.11 of this Exhibit.

For the purpose of determining Sales Costs, the Parties, through the JCC and JFC shall determine the number of Sales Representatives selling Franchise Products during the period and develop a method consistent with Sections A.4 and A.11 of this Exhibit to allocate Sales Costs to those Sales Representatives.

A.9.Sharing of Operating Profits and Losses

The Parties agree to share the Operating Profit or Loss resulting from the collaborative arrangement in the Co-Promotion Territory according to the following manner:

A.9.1Licensed Products. With regard to Licensed Products, including without limitation, C2B8, for each calendar year or portion thereof prior to the First New Product FDA Approval, IDEC and Genentech shall receive 30% and 70%, respectively, of the first $50 million in Operating Profits (calculated solely with respect to Licensed Products) and 40% and 60%, respectively, of Operating Profits (calculated solely with respect to Licensed Products) in excess of $50 million. To the extent there is an Operating Loss (calculated solely with respect to Licensed Products) on sales of Licensed Product in the Co-Promotion Territory in any calendar year, IDEC shall absorb 30% and Genentech 70% of such loss; provided, however, that: (i) Genentech shall finance the cost of building inventory necessary for product launch, bridging or other studies required under Section 8.1 of the Collaboration Agreement and other pre-launch marketing or commercial activities approved by the Joint Commercialization Committee and the Joint Finance Committee, and (ii) IDEC shall repay its 30% share of such costs following product approvals from the Operating Profits allocated to IDEC in any calendar quarter. If repayment is not complete three years following first approval, IDEC shall complete repayment in a lump sum at the end of the next calendar quarter. Interest on any such repayment will be charged at a rate equal to the sum of [*].

A.9.2New Products Prior to the First New Product FDA Approval. With regard to New Products (including without limitation G2H7), prior to the First New Product FDA Approval, in each calendar year IDEC and Genentech shall pay 30% and 70%respectively, of all Operating Losses (calculated solely with respect to New Products).

A.9.3All Franchise Products following the First New Product FDA Approval. With regard to all Franchise Products, including without limitation C2B8 and G2H7, following the First New Product FDA Approval, for each calendar year or portion thereof, IDEC and Genentech shall receive (or pay):

(i) 30% and 70%, respectively, of the first 50 million in Operating Profits (calculated with respect to all Franchise Products); except that for the calendar year in which the First New Product FDA Approval occurs, this first 50 millionOperating Profits tier shall only apply with respect to

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Operating Profits of all Franchise Products if this first 50 million Operating Profits tier has not been completely achieved, and then only to the extent it has not been achieved, with respect to Operating Profits of Licensed Products (as defined within A.9.1) prior to the First New Product FDA Approval; and

(ii) 38% and 62%, respectively, of the Operating Profits (calculated with respect to all Franchise Products) in excess of the first 50 millionin Operating Profits (calculated with respect to all Franchise Products) until the First Threshold Date (as used herein the “First Threshold Date” means the later of (x) the first date the Gross Sales in any calendar year (calculated only with respect to the New Products in the United States) reaches $150,000,000 or (v) January 1 of the calendar year following the calendar year in which the First New Product FDA Approval occurs if Gross Sales of New Products reached $150,000,000 within the same calendar year in which the First New Product FDA Approval occurred);and

(iii) 35% and 65% respectively, of the Operating Profits (calculated with respect to all Franchise Products) in excess of the first 50 million in Operating Profits (calculated with respect to all Franchise Products) following the First Threshold Date and until the Second Threshold Date (as used herein the “Second Threshold Date” means the later of (x) the first date the Gross Sales in any calendar year (calculated only with respect to New Products in the United States) reaches $350,000,000 or (y) January 1 of the calendar year following the calendar year in which the First Threshold Date occurs); and

(iv) 30% and 70%, respectively, of the Operating Profits (calculated with respect to all Franchise Products) following the Second Threshold Date; and

(v) 30% and 70%,respectively, of any Operating Losses, calculated with respect to all Franchise Products.

Within a calendar month that the First Threshold Date or the Second Threshold Date is met, Operating Profits shall be calculated by (x) pro-rating the expenses in such month on a straight line basis to pre and post threshold time frames, (y) identifying daily product sales within such calendar month by the pre and post threshold timeframes and (z) allocating their related Cost-of-Sales by the proper product sales proportions for pre and post threshold timeframes.

A.10.Start of Operations

Operation of GenIDEC will be deemed to have commenced on April 1, 1995. Costs incurred prior to April 1, 1995, are not chargeable to GenIDEC. Costs incurred with respect to a Potential New Product prior to the time such product becomes a New Product under the Collaboration Agreement are not chargeable to GenIDEC.

A.11.Guidelines for Charging Costs

The following guidelines shall be used in determining amounts chargeable to GenIDEC subject to the cost definitions in Section A.4 of this Exhibit. Disputes over the allocation of costs are not subject to Genentech’s tie breaking vote under Section 17.1.

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A.11.1 If an expense is specifically and exclusively (i.e., for no other product) used for the development or commercialization of a Franchise Product in the Field in the Co-Promotion Territory, then 100% of the expense will be charged to GenIDEC.

A.11.2 If an expense is specifically and exclusively (i.e., for no other product) used for the development or commercialization of a Franchise Product in the Field in both the Co-Promotion Territory and the Licensed Territory, then the following shall apply:

(a) If the portion of that expense used for the development or commercialization of such Franchise Product in the Field in the Licensed Territory 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 Genentech and the remaining portion will be charged to GenIDEC.

(b) If the Franchise Product is a Licensed Product and if the portion of that expense used for the development or commercialization of such Franchise Product in the Field in the Licensed Territory cannot be objectively determined through specific means, then only the direct and incremental costs related to such Franchise Product in the Field in the Licensed Territory will be charged to Genentech and the remaining portion will be charged to GenIDEC.

(c) If the Franchise Product is a New Product and if the portion of that expense used for the development or commercialization of such Franchise Product in the Field in the Licensed Territory cannot be objectively determined through specific means, then only the direct and incremental costs related to such Franchise Product in the Field in the Co-Promotion Territory will be charged to GenIDEC and the remaining portion will be charged to Genentech.

A.11.3 If an expense within the Co-Promotion Territory is not specifically and exclusively (i.e., for other products in addition to a Franchise Product) used for the development or commercialization of a Franchise Product in the Field in the Co-Promotion Territory, then the following shall apply:

(a) If the portion of that expense used for the development or commercialization of a Franchise Product in the Field in the Co-Promotion Territory 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 GenIDEC.

(b) If the portion of that expense used for the development or commercialization of a Franchise Product in the Field in the Co-Promotion Territory cannot be objectively determined through specific means, then only the direct and incremental costs related to the Franchise Product in the Field shall be charged to GenIDEC.

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Exhibit B

C2B8

“C2B8” shall have the meaning as defined in Exhibit B to the Original Agreement.

1

Exhibit D

IDEC - Third Party License Agreements

“IDEC- Third Party License Agreements” shall have the meaning as defined in Exhibit D to the Original Agreement.

1

Exhibit G

Excluded Patents

Cabilly Patents

“Cabilly Patents” shall mean the “Licensed Patents” as defined in Section 1.09 of the Cabilly License (as defined in the Collaboration Agreement).

Itakura/Riggs Patents

“Itakura/Riggs Patents” shall mean any of the U.S. patents listed below and any and all divisionals, continuations, continuations-in-part, reissues, reexaminations or extensions of these patents or of any application from which these U.S patents claim priority, as well as foreign counterparts of the foregoing.

U.S. 4,356,270

U.S. 4,366,246

U.S. 4,425,437

U.S. 4,431,739

U.S. 4,563,424

U.S. 4,571,421

U.S. 4,704,362

U.S. 4,812,554

U.S. 5,221,619

U.S. 5,420,020

U.S. 5,583,013

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EX-10.3

EXHIBIT 10.3

LETTER AMENDMENT TO AGREEMENT

This Letter Amendment to the Agreement (as defined below) (the “Letter Amendment”) effective as of August 21, 2003 (the “Letter Amendment Effective Date”), is entered into by and between IDEC PHARMACEUTICALS CORPORATION, a Delaware corporation having its principal place of business at 3030 Callan Road, San Diego, California 92121 ("IDEC") and GENENTECH, INC., a Delaware corporation having its principal place of business at 1 DNA Way, South San Francisco, California 94080 ("Genentech"), each on behalf of itself and its Affiliates.

WHEREAS, the parties to this Agreement entered into that certain “Amended and Restated Collaboration Agreement” of June 19, 2003 (the “Agreement”); and

WHEREAS, the parties wish to enter into an amendment to the Agreement in order to amend certain rights therein.

NOW THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth it is agree by and between the parties as follows:

1.All capitalized terms not defined in this Letter Amendment shall have the meanings given to them in the Agreement.

2.With respect to any disputes arising under the Agreement that are to be referred to the parties respective chief executive officers in accordance with Section 17.1, notwithstanding such provision, it is understood and agreed that such disputes shall instead be referred to William H. Rastetter (on behalf of IDEC or its successor) and Arthur D. Levinson (on behalf of Genentech or its successor), in each case, for so long as such person remains in the employment of such party (or its successor).

3.This Letter Amendment may be terminated by either party at any time prior to the expiration of the Agreement, which termination shall be effective upon receipt of such notice by the other party.

4.Except as specifically modified or amended hereby, the Agreement shall remain in full force and effect and, as modified or amended, is hereby ratified, confirmed and approved. No provision of this Letter Amendment may be modified or amended except expressly in a writing signed by both parties nor shall any terms be waived except expressly in a writing signed by the party charged therewith. This Letter Amendment shall be governed in accordance with the laws of the State of California, without regard to principles of conflicts of laws.

IN WITNESS WHEREOF, the parties have executed this Letter Amendment in duplicate originals by their proper officers as of the date and year first above written.

IDEC PHARMACEUTICALS CORPORATION		GENENTECH, INC.
By:	/s/ WILLIAM H. RASTETTER	By:	/s/ ARTHUR D. LEVINSON
	William H. Rastetter Title:  Chairman and CEO		Arthur D. Levinson Title:  Chairman and CEO

EX-15.1

EXHIBIT 15.1

July 28, 2006

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, 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, the Registration Statement (Form S-4 No. 333-128400) related to the exchange offer for Senior Notes, and in the related Prospectuses, as applicable, contained in such Registration Statements of our report dated July 7, 2006, 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, 2006.

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 officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   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

d)   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:	August 2, 2006	By:	/s/ ARTHUR D. LEVINSON
			Arthur D. Levinson, Ph.D. Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, David A. Ebersman, 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 officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   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

d)   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:	August 2, 2006	By:	/s/ DAVID A. EBERSMAN
			David A. Ebersman 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 quarter ended June 30, 2006 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
Name: Title: Date:	Arthur D. Levinson, Ph.D. Chief Executive Officer August 2, 2006

I, David A. Ebersman, 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 quarter ended June 30, 2006 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/ DAVID A. EBERSMAN
Name: Title: Date:	David A. Ebersman Executive Vice President and    Chief Financial Officer August 2, 2006