10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended: December 31, 1994 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. A Delaware Corporation 94-2347624 (I.R.S. employer identification number) 460 Point San Bruno Boulevard (415) 225-1000 South San Francisco, California 94080-4990 (telephone number) Securities registered pursuant to Section 12(b) of the Act: ============================================================================== Title of Each Class Name of Each Exchange on Which Registered ------------------------------------------------------------------------------ Redeemable Common Stock, New York Stock Exchange $.02 par value Pacific Stock Exchange ============================================================================== Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of voting stock held by nonaffiliates of the registrant is $1,938,520,599 as of March 13, 1995. (A) Number of shares of Common Stock outstanding as of March 13, 1995: 67,133,409 Number of shares of Redeemable Common Stock outstanding as of March 13, 1995: 50,427,615 Documents incorporated by reference: PARTS INCORPORATED DOCUMENT BY REFERENCE (1) Annual Report to stockholders for the year ended II December 31, 1994 (specified portions) (2) Definitive Proxy Statement with respect to the 1995 III Annual Meeting of Stockholders filed by Genentech, Inc. (SEC file No. 1-9813) with the Securities and Exchange Commission (hereinafter referred to as "Proxy Statement") ----------------------------------------------------------------------------- (A) Excludes 79,457,425 shares of Common Stock and Redeemable Common Stock held by Directors, Officers and stockholders whose ownership exceeds five percent of either the Common Stock or Redeemable Common Stock outstanding at March 13, 1995. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant PART I ITEM 1. BUSINESS Genentech, Inc. (the "Company") is an international biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. Genentech was organized in April 1976 as a California corporation and was reincorporated in Delaware in January 1987. The science of biotechnology product discovery and development is at the core of the Company's business and has led to ten of the approved pharmaceutical products of biotechnology. In September 1990, Roche Holdings, Inc. (Roche) acquired approximately 60% of the Company's voting stock in a merger transaction (Merger). The common stock Roche acquired in the Merger and redeemable common stock subsequently purchased on the open market represented approximately 65% of the outstanding equity of the Company as of March 13, 1995. Roche has the option to purchase all shares of outstanding redeemable common stock at $58.75 per share in the first calendar quarter of 1995, increasing to $60.00 per share on April 1, 1995. The redemption right expires on June 30, 1995. For the period of July 1, 1995 until June 30, 1996, Roche may submit a bid to purchase the remaining shares of the Company. The bid must not be for less than $60.00 per share and is subject to the approval of the Board of Directors and, subsequently, the non-Roche shareholders. Independent of its right to have the Company redeem the redeemable common stock, Roche is permitted to acquire additional shares of the Company's stock through open market or privately negotiated purchases, provided that Roche's aggregate holdings do not exceed 75% of the Company's stock outstanding on a fully diluted basis. As used in this report, except where the context otherwise indicates, the "Company" means Genentech, Inc. and its subsidiaries, including subsidiary operations in Europe, Canada and Japan. Products Genentech has five products that it has developed and currently manufactures and markets in the United States: Activase, registered trademark, (Alteplase, recombinant) recombinant tissue plasminogen activator; Protropin, registered trademark, (somatrem for injection) recombinant growth hormone; Nutropin, registered trademark, [somatropin (rDNA origin) for injection] human growth hormone; Pulmozyme, registered trademark, (dornase alfa) inhalation solution; and Actimmune, registered trademark, (Interferon gamma-1b) recombinant interferon gamma. Genentech also markets Activase, Protropin and Pulmozyme in Canada. Activase: Tissue plasminogen activator (t-PA) is an enzyme that is produced naturally by the body to dissolve blood clots. However, when a blood clot obstructs blood flow in the coronary artery and causes a heart attack, the body is unable to produce enough t-PA to dissolve the clot rapidly enough to prevent damage to the heart. Through recombinant DNA technology, Genentech produces Activase, a recombinant form of t-PA, in sufficient quantity for therapeutic use. The United States Food and Drug Administration (FDA) approved Activase for marketing in the United States in 1987 for the treatment of acute myocardial infarction (AMI or heart attack) and in 1990 for use in the treatment of acute pulmonary embolism (blood clots in the lungs). Phase III clinical trials are currently underway to evaluate Activase for ischemic stroke (stroke caused by blood clots in the arteries to the brain). Phase I studies are being performed to evaluate a second generation of t-PA which is anticipated to be easier to administer, work faster, cause less unwanted bleeding and require smaller doses than Activase. In exchange for royalty payments, Genentech has licensed marketing rights to recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd. (Kyowa) and Mitsubishi Kasei Corporation (Mitsubishi). Kyowa and Mitsubishi are marketing forms of recombinant t-PA under the trademarks Activacin, registered trademark, and GRTPA, registered trademark, respectively. In a number of countries outside of the United States, Canada and Japan, Genentech has licensed t-PA marketing rights to Boehringer Ingelheim International GmbH (Boehringer). Boehringer markets recombinant t-PA under the trademark Actilyse, registered trademark. Prior to February 1995 t-PA was marketed in Canada by Genentech under the Activase trademark and by Boehringer under the trademark Lysatec. In February 1995, Genentech purchased all t-PA Canadian marketing rights from Boehringer. Protropin: Human growth hormone is a naturally occurring human protein produced in the pituitary gland. It regulates metabolism and is responsible for growth in children. A recombinant growth hormone product developed by Genentech, Protropin was approved by the FDA in 1985 for marketing in the United States for the treatment of growth hormone inadequacy in children. In exchange for royalty payments, Genentech has licensed rights to recombinant growth hormone outside the United States and Canada to Pharmacia AB (formerly Kabivitrum AB), which manufactures and markets recombinant growth hormone under the trademarks Somatonorm, registered trademark, and Genotropin, registered trademark. Under the terms of the agreement with Pharmacia, Genentech will have the right to begin selling growth hormone in certain European countries in late 1995, and Pharmacia will have the right in late 1995 to begin selling their own growth hormone in the United States and Canada provided they have received regulatory approval. Nutropin: Nutropin is a human growth hormone similar to Protropin; however, it does not have the additional amino acid, methionine, found in the Protropin chemical structure. It was approved by the FDA in March 1994 for marketing for the treatment of growth hormone inadequacy in children. Nutropin was approved in November 1993 and launched in January 1994 for marketing in the United States for the treatment of growth hormone inadequacy in children due to chronic renal insufficiency (CRI); CRI causes irreversible damage to the kidneys and a variety of medical problems, including growth hormone inadequacy. The condition affects an estimated 3,000 children in the United States. Nutropin has been designated an Orphan Drug for treatment of growth hormone inadequacy in children with CRI in the United States. The Company is awaiting regulatory approvals to market a liquid formulation of Nutropin, aimed at providing improved convenience in administration. Phase III clinical trials are underway to evaluate Nutropin as a treatment for children with short stature associated with Turner Syndrome (a genetic disorder). Phase II clinical trials are currently underway with Nutropin to treat growth hormone inadequacy in adults. Pulmozyme: Pulmozyme is marketed in the United States, Canada and Europe for the management of cystic fibrosis, for which it has Orphan Drug designation in the United States. There are an estimated 53,000 patients with cystic fibrosis worldwide, a significant portion of whom are expected to be candidates for treatment. In 1992, the Company entered into a collaboration with F. Hoffmann-LaRoche, Ltd. (HLR) to codevelop and copromote Pulmozyme in Europe. In connection with this collaboration and the Company's efforts to expand its markets, Genentech Europe Limited (GEL), a Bermuda company, was established. GEL and affiliates are currently copromoting Pulmozyme in the United Kingdom, Ireland, Germany and the Netherlands. Presently, HLR is responsible for promoting the drug for cystic fibrosis in the remaining western European countries in the collaboration. In addition to sharing profits related to Pulmozyme sales from all Western European collaborative countries with HLR, the Company has received and will continue to receive milestone payments and technical support from HLR. Also, as part of the agreement with HLR, and in return for royalties on product sales, the Company has granted HLR an exclusive license to distribute Pulmozyme in countries outside of Western Europe, the United States and Canada. Phase III international trials are ongoing to study the use of Pulmozyme to treat Chronic Obstructive Pulmonary Disease (COPD), a clinical syndrome of airway inflammation, infection and obstruction that leads to lung destruction. Actimmune: Actimmune is approved in the United States for the treatment of chronic granulomatous disease (CGD), a rare, inherited disorder of the immune system which affects an estimated 250 to 400 Americans. Actimmune received designation by the FDA in 1990 as an Orphan Drug for the treatment of CGD in the United States. Phase III clinical trials are ongoing to investigate the use of Actimmune to treat renal cell carcinoma, a cancer of the kidneys. Depending on clinical trial results, the Company hopes to expand the market potential of Actimmune over time by obtaining new approvals for indications with larger populations, but such expansion is not assured. Additionally, the Company receives royalty payments from Boehringer from the sale of interferon gamma in certain countries outside of the United States, Canada and Japan. Licensed Products: In addition to the royalties mentioned above, the Company also receives royalties on the following human health care products:

In December 1994, the Company and Lilly reached an agreement regarding all patent infringement and breach of contract actions then pending between the two parties. Under the terms of the settlement, Lilly agreed to pay the Company up to $145 million ($25 million initially and 16 quarterly payments of $7.5 million), subject to certain restrictions, and the Company granted Lilly licenses, options to licenses, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. See "Item 3 Legal Proceedings" for further information. Products in Development: As part of Genentech's program of research and development, a number of other products are in various stages of development. Product development efforts cover a wide range of disorders or medical conditions, including cancer, respiratory disorders, cardiovascular diseases, endocrine disorders, inflammatory and immune problems, AIDS and neurological disorders. In addition to the new indications for existing products discussed above, below is a summary of products in clinical development:

Business Experience Mr. Raab was elected Chief Executive Officer in February 1990. He joined the Company in February 1985 as President, Chief Operating Officer and Director. Mr. Raab was President, Chief Operating Officer and Director of Abbott Laboratories, a health care company, from July 1981 to January 1985. Mr. Brewer was elected Senior Vice President in December 1992. Mr. Brewer has held a number of other positions in the Marketing Department including Vice President of Sales and Marketing. He joined the Company in April 1984 as Product Manager for endocrine products. Mr. Lavigne was elected Senior Vice President in July 1994. He was elected Chief Financial Officer in August 1988 and elected Vice President in July 1986. Prior to that, he had been Controller since May 1983 and an officer of the Company since February 1984. Mr. Lavigne joined the Company in July 1982 as Assistant Controller. Dr. Levinson was elected Senior Vice President in December 1992. Dr. Levinson has held a number of other positions, including Vice President of Research, subsequent to joining the Company in May 1980 as a Senior Scientist. Mr. McLaughlin has served as Senior Vice President and Secretary since July 1994. He was elected Senior Vice President, General Counsel and Secretary in 1993, and elected Vice President, General Counsel and Secretary in 1989. He joined the Company as Vice President of Government Affairs in September 1987 from Royer, Shacknai & Mehle, a Washington, D.C. law firm, where he was a partner. Mr. McLaughlin was Counsel to the House Energy and Commerce Subcommittee on Health and the Environment and earlier served as counsel to the House Subcommittee on Consumer Protection and Finance. Dr. Sherman was elected Senior Vice President and Chief Medical Officer in February 1995 and had served as Vice President of Medical Affairs since February 1989. He joined the Company in 1985 as Director of Clinical Research. Prior to joining the Company, he was Professor of Medicine, Associate Chairman of the Department of Internal Medicine and Director of the Clinical Research Center at the University of Iowa. Mr. Young was elected Senior Vice President in August 1988. He was Vice President of Manufacturing and Process Science from April 1983 until 1988. Mr. Young joined the Company in September 1980 as Director of Manufacturing from Eli Lilly and Company. Mr. Baird joined the Company in February 1992 as Vice President of Corporate Communications. Prior to joining Genentech, Mr. Baird was employed by G.D. Searle & Co. for five years as Vice President of Corporate Communications. Mr. Beier joined the Company in March 1989 as Vice President of Government Affairs. Prior to joining Genentech, Mr. Beier spent 10 years as counsel to the Committee on the Judiciary of the United States House of Representatives where he was responsible for intellectual property and international trade issues. Dr. Garnick was elected Vice President of Quality in April 1994. He was Senior Director of Quality Control from 1990 to 1994 and Director of Quality Control from 1988 to 1990. Dr. Garnick joined the Company in August 1984 from Armour Pharmaceutical. Mr. Glick was elected Vice President in July 1991. He joined the Company in June 1987 as Director of Tax and was elected Treasurer in July 1990. Before joining Genentech, Mr. Glick was employed by Levi Strauss & Co. for seven years, most recently as Director of Tax Planning. Mr. Goodwin was promoted to Controller in June 1989 and elected Vice President in July 1993. Prior to Mr. Goodwin's current position, he was the Director of Financial Planning and Analysis, the Assistant Controller and the General Auditor. Before joining Genentech in April 1987, Mr. Goodwin worked for Price Waterhouse, an international public accounting firm, for 10 years, most recently as Senior Audit Manager. Dr. Henner was elected Vice President of Research Technology in July 1994. From 1990 to 1994 he was Senior Director of Research Technology. Dr. Henner joined the Company in 1981 as a Scientist in Research. Prior to joining Genentech, Dr. Henner was at Scripps Clinic and Research Foundation. Mr. Hohenschuh was elected Vice President of Manufacturing in September 1989 He was Vice President of Biochemical Manufacturing from July 1986 until 1989 and Senior Director of Biochemical Manufacturing from June 1985 to June 1986 Mr. Hohenschuh joined the Company in October 1982 as Director of Biochemical Manufacturing. Mr. Jennings was elected to Vice President of Sales and Marketing in January 1994 and had served as Vice President of Sales since December 1990. He joined the Company in September 1985 as Western Area Sales Manager. Prior to joining Genentech, Mr. Jennings was Western Region Sales Manager of Bristol-Myers' Oncology Division. Mr. Jennings held various sales and management positions during his twelve-year career with Bristol-Myers. Mr. Juelsgaard was elected Vice President, General Counsel and Assistant Secretary in July 1994, and was elected Vice President of Corporate Law in February 1993. He joined the Company in 1985 as Corporate Counsel and subsequently held the positions of Senior Corporate Counsel and Chief Corporate Counsel. Mr. Kopp joined the Company in January 1993 as Vice President and General Manager, Europe. Mr. Kopp was employed by F. Hoffmann-La Roche, Ltd from 1980 until December 1992, most recently as Regional Director for Latin America. Dr. Lawlis was elected Vice President of Process Science in July 1994. Dr. Lawlis joined the Company in February 1981 as a Scientist in Biocatalysis; most recently he was Senior Director of Process Science. Prior to joining Genentech, Dr. Lawlis was a National Institutes of Health Post Doctoral Fellow at Kansas State University. Dr. MacFarlane joined the Company in August 1989 as Vice President of Regulatory Affairs. Dr. MacFarlane was employed by Glaxo, Inc. from 1978 until he joined Genentech. At Glaxo, Dr. MacFarlane had served as Vice President of Regulatory Affairs, Director of Regulatory Affairs, and Director of Research and Professional Services. Dr. Moore was elected Vice President of Information Resources in April 1994. She was Senior Director of Information Resources from July 1992 to 1994 and Director of Computer Resources from November 1987 to June 1992. Dr. Moore joined Genentech in August 1982 as a Senior Systems Analyst in Scientific Computing. Dr. Niall was elected Vice President of Research Discovery in July 1991. He joined the Company in 1985 as Director of Protein Chemistry and subsequently held the positions of Director of Developmental Biology and Senior Director of Research Discovery. Mr. Panek was elected Vice President of Engineering and Facilities in July 1993. He joined the Company in 1982 and held a number of positions in the manufacturing division before becoming Director of Engineering and Facilities in 1988. Prior to joining Genentech, Mr. Panek was employed by Eli Lilly and Company for six years. Dr. Patzer was elected Vice President of Development in February 1993. He joined the Company in 1981 as a Scientist and subsequently held the positions of Senior Scientist, Director and Senior Director. Ms. Popovits was elected Vice President of Sales in October 1994. She was Director of Field Sales from January 1993 to 1994 and Regional Manager of the Sales Department from October 1989 to December 1992. Ms. Popovits was at Dupont Critical Care for six years prior to joining the Company in November 1987 as Division Manager in the Southeast region. Dr. Raines was elected Vice President of Intellectual Property in March 1989 and Assistant Secretary in April 1989. He joined the Company as Vice President of Patents in May 1988. Dr. Raines was employed by Warner-Lambert Company from 1973 to 1988 holding numerous positions in the Legal Division and ultimately acted as Counsel for the Intellectual Property Department. Mr. Setren was elected Vice President of Human Resources in April 1989. He joined the Company in February 1986 as Director of Human Resources. Before joining Genentech, Mr. Setren was Vice President of Human Resources at the Getz Corporation. Mr. Simon was elected Vice President of Business Development in December 1994. He was Senior Director of Business Development from December 1993 to 1994. Mr. Simon joined Genentech as a Director in Business Development in December 1989 from Xoma Corporation. Mr. Jennings is named as a defendant in a criminal proceeding pending in the U.S. District Court for the District of Minnesota alleging conspiracy, mail fraud and wire fraud in connection with prescribing Protropin. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The sections labeled "Common Stock and Redeemable Common Stock Information" and Notes 9 and 11 of the Notes to Consolidated Financial Statements appearing on pages 64, 54 through 55, and 56 through 58, respectively, of the Company's 1994 Annual Report to Stockholders are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The section labeled "11-Year Financial Summary" appearing on pages 62 and 63 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section labeled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 33 through 38 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing on pages 40 through 60, the Report of Ernst & Young LLP, Independent Auditors, appearing on page 61 and the section entitled "Quarterly Financial Data (unaudited)" appearing on page 61 of the Company's 1994 Annual Report to Stockholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) The sections labeled "Nominees" and "Section 16 Reporting" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 3 through 5 and 11 are incorporated herein by reference. (b) Information concerning the Company's Executive Officers is set forth in Part I of the Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The sections labeled "Executive Compensation", "Compensation of Directors", "Compensation of Executive Officers", "Summary of Compensation", "Stock Option Grants and Exercises", "Employment Agreements", "Loans and Other Compensation" and "Compensation Committee Interlocks and Insider Participation" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 11 through 18 and 20 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections labeled "Merger with Roche Holdings, Inc.", "Principal Stockholders of Genentech" and "Security Ownership of Management" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 1 through 2 and 10 through 11 are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section labeled "Certain Relationships and Related Transactions" appearing in the Company's Proxy Statement in connection with the 1995 Annual Meeting of Stockholders on pages 21 through 23 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements The following Financial Statements and supplementary data are included in the Company's 1994 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8 of this Form 10-K. Page(s) in 1994 Annual Report to Stockholders ---------------------- Consolidated Statements of Income for each of the three years in the period ended December 31, 1994 40 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1994 41 Consolidated Balance Sheets at December 31, 1994 and 1993 42 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1994 43 Notes to Consolidated Financial Statements 44-60 Report of Ernst & Young LLP, Independent Auditors 61 Quarterly Financial Data (unaudited) 61 2. Financial Statement Schedule The following schedule is filed as part of this Form 10-K: Schedule II- Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1994. All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits

(b) Reports on Form 8-K There were no reports on Form 8-K filed for the quarter ended December 31, 1994. -------------------- (1) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1985 and incorporated herein by reference. (2) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1986 and incorporated herein by reference. (3) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. (4) Filed as an exhibit to Form 8-K dated May 3, 1988 and incorporated herein by reference. (5) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. (6) Filed as an exhibit to Form 8-K dated February 15, 1990 and incorporated herein by reference. (7) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. (8) Filed as an exhibit to Form S-4 dated May 2, 1990 and incorporated herein by reference. (9) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (10) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (11) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (12) Filed with this document. * As required by Item 14(a)(3) of Form 10-K, the Company identifies this Exhibit as a management contract or compensatory plan or arrangement of the Company. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 2-95744, 33-9292, 33-16671, 33-39631 and 33-60816: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and shall be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Registrant Date: March 30, 1995 By: /S/BRADFORD S. GOODWIN ---------------------------------- Bradford S. Goodwin Vice President and Controller (Principal Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Louis J. Lavigne, Jr., Senior Vice President and Chief Financial Officer, and Bradford S. Goodwin, Vice President and Controller, his attorney-in-fact, with the full power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- Chief Executive Officer: /S/G. KIRK RAAB President, Chief Executive March 30, 1995 --------------------------- Officer and Director G. Kirk Raab Principal Financial Officer: /S/LOUIS J. LAVIGNE, JR. Senior Vice President and March 30, 1995 --------------------------- Chief Financial Officer Louis J. Lavigne, Jr. Director: /S/HERBERT W. BOYER Director March 30, 1995 --------------------------- Herbert W. Boyer /S/JURGEN DREWS Director March 30, 1995 --------------------------- Jurgen Drews /S/ARMIN M. KESSLER Director March 30, 1995 --------------------------- Armin M. Kessler /S/LINDA F. LEVINSON Director March 30, 1995 --------------------------- Linda F. Levinson /S/J. RICHARD MUNRO Director March 30, 1995 --------------------------- J. Richard Munro /S/DONALD L. MURFIN Director March 30, 1995 --------------------------- Donald L. Murfin /S/JOHN T. POTTS, JR. Director March 30, 1995 --------------------------- John T. Potts, Jr. /S/C. THOMAS SMITH, JR. Director March 30, 1995 --------------------------- C. Thomas Smith, Jr. /S/ROBERT A. SWANSON Director March 30, 1995 --------------------------- Robert A. Swanson /S/DAVID S. TAPPAN, JR. Director March 30, 1995 --------------------------- David S. Tappan, Jr. SCHEDULE II GENENTECH, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1994, 1993 and 1992 (in thousands)

INDEX OF EXHIBITS FILED WITH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 Exhibit No. Description ----------- ----------- 10.15 1991 Employee Stock Plan, as amended. 13.1 1994 Annual Report to Stockholders 23.1 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule EX-10.15 2 GENENTECH, INC. 1991 Employee Stock Plan, as Amended 1. Purpose The purpose of this 1991 Employee Stock Plan (the "Plan") is to provide employees of Genentech, Inc. (the "Company"), and its U.S. subsidiaries designated by the Company's Board of Directors, who wish to become stockholders of the Company an opportunity to purchase Redeemable Common Stock of the Company (the "Shares"). The Plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Eligible Employees Subject to the provisions of Sections 7, 8 and 9 below, any individual who is in the full-time employment of the Company on the day on which a Grant Date (as defined in Section 3 below) occurs is eligible to participate in an offering of Shares made by the Company hereunder. In addition, the board of Directors may at any time designate one or more of the Company's U.S. subsidiary corporations (as defined in Section 425(f) of the Code) to be included in an offering of Shares under the Plan. Full- time employment shall mean employment by the Company or its designated U. S. subsidiary for: (a) 20 hours or more per week; and (b) more than five months in the calendar year. 3. Grant Dates From time to time, the Board of Directors may fix a date (a "Grant Date") or a series of dates (each of which is a "Grant Date") on which the Company will grant rights to purchase Shares ("Rights") to employees eligible to participate. 4. Prices The purchase price per Share for Shares covered by a grant of Rights hereunder shall be determined by the Board of Directors, but in no event shall be less than the lesser of: (a) eighty-five percent (85%) of the fair market value of a Share on the Grant Date on which such Right was granted; or (b) eighty-five percent (85%) of the fair market value of a Share on the date such Right is exercised as to that Share. 5. Exercise of Rights and Method of Payment (a) Rights granted under the Plan will be exercisable on specific dates as determined by the Board of Directors. (b) The method of payment for Shares purchased upon exercise of Rights granted hereunder shall be through regular payroll deductions or by lump sum cash payment, or both, as determined by the Board of Directors. No interest shall be paid upon payroll deductions or other payments in exercise of Rights unless specifically provided for by the Board of Directors. 6. Terms of Rights Rights granted hereunder shall be exercisable during a twenty-seven (27) month period or such shorter period as determined by the Board of Directors. All Rights granted to an employee shall terminate upon termination of full-time employment of the employee. Any payments received by the Company from a participating employee with respect to a Right granted hereunder and not utilized for the purchase of Shares upon exercise of such Right shall be promptly returned to such employee by the Company after termination of such Right, except that amounts that were not so utilized because such amounts were insufficient to purchase a whole Share may be applied toward the purchase of Shares pursuant to a Right subsequently granted hereunder, if any. 7. Shares Subject to the Plan No more than three million eight hundred thousand (3,800,000) Shares may be sold pursuant to Rights granted under the Plan. Appropriate adjustments in the above figure, in the number of Shares covered by outstanding Rights granted hereunder, in the exercise price of the Rights and in the maximum number of Shares which an employee may purchase (pursuant to Section 9 below) shall be made to give effect to any mergers, consolidations, reorganizations, recapitalizations, stock splits, stock dividends or other relevant changes in the capitalization of the Company occurring after the effective date of the Plan, provided that no fractional Shares shall be subject to a Right and each Right shall be adjusted downward to the nearest full Share. Any agreement of merger or consolidation will include provisions for protection of the then existing Rights of participating employees under the Plan. Either authorized and unissued Shares or issued Shares heretofore or hereafter reacquired by the Company may be made subject to Rights under the Plan. If for any reason any Right under the Plan terminates in whole or in part, Shares subject to such terminated Right may again be subject to a Right under the Plan. 8. Limitations on Grants Anything to the contrary notwithstanding, pursuant to Section 423 of the Code: (a) No employee shall be granted a Right hereunder if such employee, immediately after the Right is granted, owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company, its parent corporation (as defined in Section 425(c) of the Code) or any subsidiary corporation, in each case computed in accordance with Section 423(b)(3) of the Code. (b) No employee shall be granted a Right which permits his Rights to purchase Shares under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) (or such other maximum as may be prescribed from time to time by the Code) of fair market value of such Shares (determined at the time such Right is granted) for each calendar year in which such Right is outstanding at any time, all in accordance with the provisions of Section 423(b)(8) of the Code. 9. Limits on Participation (a) Participation shall be limited to eligible employees who enroll under the Plan. (b) No Right granted to any participating employee shall cover more than twelve thousand (12,000) Shares. (c) No more than One Hundred Eighty Thousand (180,000) Shares may be purchased during any calendar quarter upon the exercise of Rights granted under the Plan; provided, however, that for those calendar quarters in which the Company pays regular annual bonuses to eligible employees, the maximum aggregate numbers of Shares which may be purchased upon the exercise of Rights shall be Two Hundred Thousand (200,000) Shares. If the aggregate purchases of Shares upon exercises of Rights granted under the Plan would exceed the applicable maximum number for a particular calendar quarter, the maximum permitted number of Shares shall be allocated to the exercising participants in proportion to the number of Shares they would otherwise purchase during such calendar quarter. 10. Employee's Rights as Stockholder No participating employee shall have any Rights as a stockholder in the Shares covered by a Right granted hereunder until such Right has been exercised, full payment has been made for the corresponding Shares and the purchase has been entered in the records of the Transfer Agent for the Shares. 11. Rights Not Transferable Rights under the Plan are not assignable or transferable by a participating employee. 12. Amendments or Discontinuance of the Plan The Board of Directors of the Company shall have the right to amend, modify or terminate the Plan at any time without notice; provided, however, that the then existing Rights of all participating employees shall not be adversely affected thereby, except that in the case of a participating employee of a foreign branch of the Company or a designated U.S. subsidiary corporation the Plan may be varied to conform with local laws, and provided further that, subject to the provisions of Section 7 above, no such amendment to the Plan shall, without the approval of the stockholders of the Company: (a) Increase the total number of Shares which may be offered under the Plan; (b) Amend the Plan in any manner which would render Rights granted hereunder unqualified for special tax treatment under Section 421 of the Code. 13. Effective Date and Approvals. The Plan shall become effective as of January 1, 1991. The Company's obligation to offer, sell or deliver its Shares under the Plan is subject to the approval of the Company's stockholders and any governmental approval required in connection with the authorized issuance or sale of such Shares and is further subject to the determination by the Company that all applicable securities laws have been complied with. 14. Administration of the Plan The Board of Directors or any committee or person(s) to whom it delegates its authority (the "Administrator") shall administer, interpret and apply all provisions of the Plan. The Administrator may waive such provisions of the Plan as it deems necessary to meet special circumstances not anticipated or covered expressly by the Plan. Nothing contained in this Section shall be deemed to authorize the Administrator to alter or administer the provisions of the Plan in a manner inconsistent with the provisions of Section 423 of the Code. EX-13.1 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in millions, except per share amounts) OVERVIEW Genentech, Inc. (the Company) is an international biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant medical needs. The science of biotechnological product discovery and development is at the core of the Company's business and has led to ten of the approved human pharmaceutical products of biotechnology. The Company manufactures and markets five of these products directly and receives royalties from the sales of five products which have originated from the Company's technology. RESULTS OF OPERATIONS Annual % Change

Revenues have increased in each year since the Company's inception. The increase in 1994 revenues resulted primarily from higher product sales. The increase in 1993 revenues resulted primarily from higher product sales, royalty income and contract revenues. Annual % Change

Activase: The increase in Activase, registered trademark, sales in 1994 and 1993 is attributable to an increase in the number of patients being treated with Activase as a result of the completion of the worldwide Global Utilization of Streptokinase and Activase for occluded coronary arteries (GUSTO) clinical trial and the reporting of its results in 1993. During 1994, Activase market share increased to over 70% from approximately 66% and 50% in 1993 and 1992, respectively, in the United States. Protropin and Nutropin: Net sales of Protropin, registered trademark, and Nutropin, registered trademark, continued to increase in 1994 due primarily to the introduction of Nutropin for the treatment of chronic renal insufficiency and to more growth hormone inadequate patients starting treatment. The Company has not faced new competition in the growth hormone market, although this possibility exists for 1995. If additional competitors enter the growth hormone market, the Company expects that such competition will have an adverse effect on its sales of Protropin and Nutropin which, depending on the extent and type of competition, could be material to the Company's total growth hormone sales. Factors that may influence future Protropin and Nutropin sales include: the number and market entry dates of new competitive products and their effect on the Company's market share and pricing; the availability of third party reimbursement for the costs of such therapies; and the outcome of litigation involving the Company's patents for growth hormone and related processes. Pulmozyme: Pulmozyme, registered trademark, was launched during 1994 in the United States, Canada and certain European countries. In 1994, sales totaled $88.3 million. In 1995, as approvals for marketing the product in other European countries are received, and a full year of sales is achieved in countries in which Pulmozyme sales began in 1994, the Company expects sales to grow. Other factors that may influence future sales of Pulmozyme for the management of cystic fibrosis include: the number and kinds of patients benefiting from such therapy; the availability of third party reimbursement for the costs of such therapies, physicians' personal experiences in the use and results of the therapy; the development of alternate therapies for the treatment and cure of cystic fibrosis; the development of additional indications for using Pulmozyme; and the cost of Pulmozyme therapy. To protect the Company from adverse changes in foreign currency exchange rates, the Company has purchased simple put options to hedge anticipated non-dollar denominated revenue. All options mature within one year. See Note 6 in the "Notes to Consolidated Financial Statements" for further information. Actimmune: Actimmune, registered trademark, sales increased in 1994 and 1993 primarily due to the sales of interferon gamma to licensee Boehringer Ingelheim International GmbH, which has approval to market interferon gamma in several countries in its licensed territory. Royalties, Contract and Other, and Interest Income Annual % Change

The Company receives royalty payments from the sales of various human health care products. These payments have increased in each of the past three years primarily due to increases in product sales by the Company's licensees. In 1994, the largest dollar increase was attributable to royalties earned from the sales of recombinant human insulin. In 1993, the largest dollar increase was attributable to hepatitis B vaccine royalties. Cash flows from royalty income include non-dollar denominated revenues. The Company currently purchases simple foreign currency put options to hedge these cash flows, all of which expire within the next two years. Royalty expense obligations associated with these revenues are included in marketing, general and administrative expenses. In December 1994, the Company and Eli Lilly and Company (Lilly) reached an agreement regarding all patent infringement and contract actions between the two parties, which included the Company granting to Lilly licenses, options to license, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. See Note 12 in the "Notes to Consolidated Financial Statements" for further information. Contract revenues in 1993 included $18.2 million related to fixed license fees receivable through 1996 from Schering Corporation and its affiliates for a world-wide license to certain patented technology and processes used to produce recombinant interferon alpha. Contract and other revenues will continue to fluctuate due to variations in the timing of contract benchmark achievements, the initiation of new contractual arrangements, and the conclusion of existing arrangements. Interest income was slightly higher in 1994 due to a larger investment portfolio in 1994 more than offsetting the decline in the average portfolio yield. Similarly, interest income was lower in 1993 compared to 1992 primarily due to the lower average portfolio yield in 1993. The Company enters into interest rate swaps as part of its overall strategy of managing the duration of its investment portfolio. See Note 6 in the "Notes to Consolidated Financial Statements" for further information. Due to the approximately two-year effective average duration of the portfolio, which includes the impact of the swaps, the average yield on the portfolio in any one year is primarily a function of financial instruments purchased in prior years. The average portfolio yield decline in 1993 and 1994 reflected the generally continuous decline in interest rates between 1990 and the first quarter of 1994. As discussed in Note 6, during 1994, the Company terminated certain swaps which resulted in an unamortized loss of $6.2 million being recorded at December 31, 1994. The amortization of these losses over the next four years will reduce yields during those years. Annual % Change

Cost of Sales: Cost of sales increased in 1994 and 1993 primarily due to increased product sales and provisions for inventory obsolescence. Research and Development: The increase in R&D expenses in 1994 and 1993 reflects the Company's continued commitment to developing new products and new indications for existing products. Overall increases resulted from the higher level of activity and associated costs of products in the later stages of clinical trials and the manufacture of products for clinical trials. As a percentage of revenues, research and development has declined over the last three years due to increasing revenues combined with the Company's disciplined approach to its research and development investment. The Company now has 12 products in the clinic and two products in preclinical development. At the end of 1993 the Company had nine products in the clinic and four products in preclinical development. To gain additional access to potential new products and technologies, the Company has established research collaborations, including equity investments, with companies developing technologies that fall outside the Company's research focus and with companies having the potential to generate new products through technology exchanges and investments. The Company has also entered into product-specific collaborations to acquire development and marketing rights for products. In December 1994, the Company entered into a collaboration with Scios Nova Inc. (Scios Nova) for the U.S. and Canadian development of Scios Nova's Auriculin, registered trademark, (anaritide) for the treatment of acute renal failure, which is currently in Phase III clinical trials. See Note 2 in the "Notes to Consolidated Financial Statements" for a further description of this collaboration. Marketing, General and Administrative: Marketing, general and administrative expenses increased in 1994 primarily due to the launch of Pulmozyme in Europe and higher corporate expenses, including litigation related expenses, and $12.6 million in charges due to the write-down of marketable equity securities of several of the biotechnology companies that are strategic alliance partners of the Company. The declines in the fair value of such securities were considered other than temporary. The increase in 1993 compared to 1992 was primarily due to additional Activase marketing expenses, Pulmozyme marketing costs in preparation for the anticipated U.S. and European product launches in 1994, and increased growth hormone marketing expenses in anticipation of future competition. Interest expense in 1994, 1993 and 1992, net of amounts capitalized, relates primarily to interest on the Company's 5% convertible subordinated debentures.

Approximately $26 million of the valuation allowance at December 31, 1994, reflected above relates to the tax benefits of stock option deductions which will be credited to additional paid-in capital when realized. Realization of the net deferred taxes, future effective tax rates, and future reversals of the valuation allowance (that is, recognition of deferred tax assets) depend on future earnings from existing and new products and new indications for existing products. The timing and amount of future earnings will depend on continued success in marketing and sales of the Company's current products, scientific success, results of clinical trials and regulatory approval of products under development. The net increase in the effective tax rate from 1993 to 1994 was primarily related to limitations on the utilization of existing carryforwards related to the U.S. alternative minimum tax. Expected increases in future effective tax rates are also attributable to these limitations. Additionally, possible changes in tax legislation could affect the Company's effective tax rate. Based on current projections, the Company estimates its 1995 effective tax rate to be around 15%. Annual % Change

Net income as a percent of revenue has increased each year as careful expense management, particularly R&D expense management, has allowed an increasing proportion of revenues to flow to net income. Earnings in 1995 will depend on a continuation of the positive impact of the GUSTO trial results on Activase sales, sales of Pulmozyme, Protropin and Nutropin competition, and the level of costs and expenses.

Cash generated from operating activities was used to purchase short-term investments, long-term marketable securities, and property, plant and equipment, increasing the amount of cash used in investing activities. Cash provided by financing activities increased from the issuance of redeemable common stock under employee stock plans and the exercise of warrants. Capital expenditures in 1994 include costs incurred for additional manufacturing facilities and the addition of a central process utility plant. Capital expenditures decreased in 1993 as compared to 1992 primarily due to completing construction in 1992 of the Founders Research Center, a state-of- the-art facility housing many of the Company's research activities, and substantially completing in 1992 new manufacturing facilities for Pulmozyme. PROSPECTIVE INFORMATION Market Potential/Risk: Over the longer term, the Company's (and its partners') ability to successfully market current products, expand their usage, and bring new products to the marketplace will depend on many factors, including the effectiveness and safety of the products, FDA and foreign regulatory agencies' approvals for new indications, the degree of patent protection afforded to particular products, Orphan Drug Act legislation, the possible future enactments of biotechnology product protection in the United States as well as in Europe and Japan, and the outcome in the United States of potential health care reform legislation. The Company believes it has strong patent protection or the potential for strong patent protection for a number of its products that generate royalty revenue or that the Company is developing; however, the courts will determine the ultimate strength of patent protection of the Company's products and those on which the Company earns royalties. A product that has received an Orphan Drug designation for a specific indication, when approved, will be protected from FDA approval of similar products for similar indications during the first seven years of product sales in the United States. Loss of Orphan Drug Act protection for the Company's products that are currently marketed or in development, resulting from expiration of Orphan Drug status or amendment of the Orphan Drug Act, could lead to increased competition for those products and potentially lower future product revenues. Roche Holdings, Inc.: At December 31, 1994, the Company was 65% owned by Roche Holdings, Inc. (Roche). See Note 9 in the "Notes to Consolidated Financial Statements" for further information. Foreign Exchange: The Company receives revenues from countries throughout the world. As a result, risk exists that revenues may be impacted by changes in the exchange rates between the U.S. dollar and foreign currencies. To mitigate this risk, the Company hedges certain of these revenues as discussed in Note 6 in the "Notes to Consolidated Financial Statements." Legal Proceedings: The Company is a party to various legal proceedings. See Note 12 in the "Notes to Consolidated Financial Statements" for further information. General: The Company believes that its cash, cash equivalents, and short-term and long-term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet its operating cash requirements, including capital expenditures and the development of existing and new products through internal research and development activities, product in-licensing, research collaborations, equity investments and geographic expansion. REPORT OF MANAGEMENT Genentech, Inc. is responsible for the preparation, integrity and fair presentation of its published financial statements. The Company has prepared the financial statements, presented on pages 33 to 60, in accordance with generally accepted accounting principles. As such, the statements include amounts based on judgments and estimates made by management. The Company also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements. The financial statements have been audited by the independent auditing firm, Ernst & Young LLP, which was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. The Company believes that all representations made to the independent auditors during their audit were valid and appropriate. Ernst & Young LLP's audit report appears on page 61. Systems of internal accounting controls, applied by operating and financial management, are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and reasonable, but not absolute, assurance that assets are safeguarded from unauthorized use or disposition, and that transactions are recorded according to management's policies and procedures. The Company continually reviews and modifies these systems, where appropriate, to maintain such assurance. Through the Company's audit activities, the adequacy and effectiveness of the systems and controls are reviewed and the resultant findings to management and the Audit Committee of the Board of Directors. The selection of Ernst & Young LLP as the Company's independent auditors has been approved by the Company's Board of Directors and ratified by the stockholders. An Audit Committee of the Board of Directors, composed of four non-management directors, meets regularly with, and reviews the activities of, corporate financial management, the general audit function and the independent auditors to ascertain that each is properly discharging its responsibilities. The independent auditors separately meet with the Audit Committee, with and without management present, to discuss the results of their work, the adequacy of internal accounting controls and the quality of financial reporting. G. Kirk Raab Louis J. Lavigne, Jr. Bradford S. Goodwin President and Chief Senior Vice President and Vice President and Executive Officer Chief Financial Officer Controller CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts)

CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands) Increase (Decrease) in Cash and Cash Equivalents YEAR ENDED DECEMBER 31 1994 1993 1992

CONSOLIDATED BALANCE SHEETS (dollars in thousands)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries and collaborations. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents: The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term Investments and Long-term Marketable Securities: The Company invests its excess cash balances in short-term and long-term marketable securities. These investments primarily include corporate notes, certificates of deposit and treasury notes. On January 1, 1994, the Company adopted Statement of Financial Accounting Standard (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of adopting this new standard was not material to net income. FAS 115 requires that all investment securities be classified into one of three categories: held-to-maturity, available-for-sale, or trading. Securities are considered held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. These securities are recorded as either short-term investments or long-term marketable securities on the balance sheet depending upon their contractual maturity date. Held-to- maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts. Securities are considered trading when bought principally for the purpose of selling in the near term. These securities are recorded as short-term investments and are carried at market value. Unrealized holding gains and losses on trading securities are included in interest income. Securities not classified as held-to-maturity or as trading are considered available-for-sale. These securities are recorded as long-term marketable securities and are carried at market value with unrealized gains and losses included in stockholders' equity net of related tax effects. If a decline in fair value below cost is considered other than temporary, such securities are written down to estimated fair value with a charge to marketing, general and administrative expenses. Prior to adopting FAS 115, marketable debt securities were carried at amortized cost that approximated fair value. Marketable equity securities were carried at the lower of cost or market. The cost of all securities sold is based on the specific identification method. Non-marketable Equity Investments: The carrying value, which approximates the fair value, is included in other assets in the consolidated balance sheets. The fair value of non-marketable equity investments is estimated based on the lower of amortized cost or the offering price in the most recent round of financing. Property, Plant and Equipment: The costs of buildings and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are generally amortized over the length of the applicable lease. Expenditures for maintenance and repairs are expensed as incurred. Interest on construction-in-progress of $0.6 million in 1994, $1.3 million in 1993 and $3.4 million in 1992 has been capitalized and is included in property, plant and equipment. Patents: As a result of its research and development (R&D) programs, the Company owns or is in the process of applying for patents in the United States and other countries which relate to products and processes of significant importance to the Company. Costs of patents and patent applications are capitalized and amortized for financial reporting purposes on a straight-line basis over their estimated useful lives of approximately 12 years. Contract Revenue: Contract revenue for R&D is recorded as earned based on the performance requirements of the contract. In return for contract payments, contract partners may receive certain marketing and manufacturing rights, products for clinical use and testing or R&D services. Income Taxes: The Company accounts for income taxes in conformance with FAS 109, "Accounting for Income Taxes," which requires the asset and liability approach for the financial accounting and reporting for income taxes. Net Income Per Share: Net income per share is computed based on the weighted average number of shares of the Company's redeemable common stock, common stock and redeemable common stock equivalents, if dilutive. The Company's convertible subordinated debentures are redeemable common stock equivalents but have been antidilutive to date; therefore, they have not been included in net income per share calculations. Financial Instruments: Certain of the Company's revenues are earned outside of the United States. Since the Company has nominal expenses denominated in foreign currencies, risk exists that income may be impacted by changes in the exchange rates between the U.S. dollar and foreign currencies. To mitigate this risk, the Company purchases simple foreign currency put options (options) with expiration dates and amounts of currency that match a portion of expected revenues so that the adverse impact of movements in currency exchange rates on the non-dollar denominated revenues will be largely offset by an associated increase in the value of the options. Realized and unrealized gains related to the options are deferred until the designated hedged revenues are recorded. The associated costs, which are amortized over the term of the options, are recorded as a reduction of the hedged revenues. In prior years, the Company also purchased foreign currency forward contracts as hedging instruments. These contracts are currently recorded at fair value and the associated losses are reflected in the income statement. Interest income is subject to fluctuations as U.S. interest rates change. To manage this risk, the Company periodically establishes duration targets for its investment portfolio that reflect its anticipated use of cash and fluctuations in market rates of interest. Swaps are used to adjust the duration of the investment portfolio in order to meet these duration targets. By combining a swap with a pool of short-term securities equal in size to the notional amount of the swap, an instrument with an effective interest rate and maturity equal to the term of the swap is created. The characteristics of the instrument (including interest rate, maturity, and fair value) are similar to the characteristics of a high grade corporate security which could be purchased at the same time the instrument is created. Increases (decreases) in swap variable payments caused by rising (falling) interest rates will be essentially offset by increased (reduced) interest income on the related short-term investments, while the fixed rate payments received from the swap counterparty establishes the Company's interest income. Net payments made or received on swaps are included in interest income as adjustments to the interest received on invested cash. Amounts deferred on terminated swaps are amortized to interest income over the original contractual term of the swaps by a method that approximates the level yield method. 401(k) Plan: The Company's 401(k) Plan covers substantially all its U.S. employees. Under the 401(k) Plan, eligible employees may contribute up to 15% of their eligible compensation, subject to certain Internal Revenue Service restrictions. The Company matches a portion of employee contributions, up to a maximum of 4% of each employee's eligible compensation. The match is effective December 31 of each year and is fully vested when made. During 1994, 1993 and 1992, the Company provided $5.2 million, $4.4 million, and $4.1 million, respectively, for the Company match under the 401(k) Plan. Note 1: Significant Customer and Geographic Information One major customer in 1994, 1993 and 1992 contributed 10% or more of the Company's total revenues. The portions of revenues attributable to this customer were 21% in 1994, 26% in 1993 and 31% in 1992. This customer distributes Protropin, Nutropin, Pulmozyme and Actimmune through its extensive branch network, and is then reimbursed through a variety of sources. A second customer, a wholesale distributor of all of the Company's products, contributed 11% of revenues in 1994. Approximate foreign sources of revenues were as follows (millions):

The Company sells primarily to distributors and hospitals throughout the United States, Canada and Europe, performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. In 1994, 1993 and 1992 the Company did not record any material additions to, or losses against, its provision for doubtful accounts. Note 2: Research and Development Arrangements To gain access to potential new products and technologies, the Company has established research collaborations, including both marketable and non- marketable equity investments, with companies developing technologies that fall outside the Company's research focus and with companies having the potential to generate new products through technology exchanges and investments. Potential future payments maybe due to selective collaborative partners if the partners achieve certain benchmarks as defined in the collabortive agreements. In addition to the collaborations with F. Hoffmann-La Roche, Ltd. discussed in Note 10, in December 1994, the Company entered into a collaboration with Scios Nova Inc. (Scios Nova) for the U.S. and Canadian development of Scios Nova's Auriculin or the treatment of acute renal failure, which is currently in Phase III clinical trials. Under the terms of the collaboration, both companies will copromote Auriculin in the United States and Canada, sharing profits from its commercialization. The Company received exclusive rights to all markets outside the United States and Canada subject to a royalty obligation to Scios Nova. In connection with the collaboration, the Company purchased Scios Nova non-voting preferred stock, which is convertible into shares of Scios Nova common stock, for $20 million and charged approximately $5 million to research and development expense. The Company established a line of credit for Scios Nova which is described in Note 8. In addition, the Company agreed to pay up to $50 million in benchmark payments, conditional on achieving certain predetermined commercialization goals. Note 3: Income Taxes The income tax provision consists of the following amounts (thousands):

Actual 1994 current tax liabilities are lower than reflected above by $26 million due to employee stock option related tax benefits which were credited to stockholders' equity. A reconciliation between the Company's effective tax rate and the U.S. statutory rate follows:

The components of deferred taxes consist of the following at December 31 (thousands):

The NOL and credit carryforwards, which totaled $123 million and $87 million, respectively, listed above expire in the years 1995 through 2009, except for $20 million of alternative minimum tax credits which never expire. Approximately $26 million of the valuation allowance at December 31, 1994 reflected above relates to the tax benefits of stock option deductions which will be credited to additional paid-in capital when realized. The valuation allowance decreased by $38.5 million in 1994 and $10 million in 1993. Realization of net deferred taxes, as well as future reversals of the valuation allowance (that is, recognition of deferred tax assets), depend on future earnings from existing and new products and new indications for existing products. The timing and amount of future earnings will depend on continued success in marketing and sales of the Company's current products, scientific success, results of clinical trials and regulatory approval of products under development. Note 4: Inventories Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach which approximates the first-in, first-out method. Inventories at December 31, 1994 and 1993 are summarized below (thousands):

The increase in total inventories in 1994 compared to 1993 is primarily attributable to an increase in the inventories of Activase. Note 5: Investment Securities Securities classified as trading, available-for-sale and held-to-maturity at December 31, 1994 are summarized below. Estimated fair value is based on quoted market prices for these or similar investments.

The carrying value of all investment securities (excluding non-marketable securities) held at December 31, 1994 is summarized below (thousands):

During 1994, no available-for-sale securities were sold and the Company recorded a $12.6 million charge to write down certain available-for-sale biotechnology securities for which the decline in fair value below cost was other than temporary. At December 31, 1993, the fair value of the short-term investments approximated carrying value. The fair value of the long-term marketable debt securities totaled $63.4 million. The carrying value of marketable equity securities at December 31, 1993 totaled $12.1 million and was included in other assets. The carrying value, which approximated the fair value, of non-marketable equity securities totaled $6.8 million and $10.5 million at December 31, 1994 and 1993, respectively. The Company invests its excess cash principally in marketable debt securities with terms ranging from overnight to three years. Marketable debt securities held by the Company are issued by a diversified selection of institutions with strong credit ratings. The Company's investment policy limits the amount of credit exposure with any one institution. These debt securities are generally not collateralized. The Company has not experienced any material losses due to credit impairment on its investments in marketable debt securities in the years 1994, 1993 and 1992. Note 6: Financial Instruments Foreign Currency Instruments: As discussed above, the Company currently purchases simple foreign currency put options (options) solely to hedge anticipated non-dollar denominated net revenues. At December 31, 1994, the Company had hedged approximately 85% of net foreign revenues anticipated within 12 month and 35% of net foreign revenues anticipated in the following 12 months. At December 31, 1994, the notional amount of the options totaled $78.3 million and consisted of the following currencies: Australian dollars, Canadian dollars, German marks, Spanish pesetas, French francs, British pounds, Italian lira, Japanese yen, and Swedish krona. All contracts mature within the next two years. The fair value of the options, which is based on exchange rates and market conditions at December 31, 1994, totaled $1.6 million. Previously, the Company had entered into foreign currency forward exchange contracts (forward contracts) as hedging instruments. Unrealized gains and losses were deferred until the revenue was recognized. In 1994, the Company closed out its positions by entering into offsetting contracts so that the net notional amount denominated in foreign currencies was zero. At December 31, 1994, the U.S. dollar equivalent of the notional amount of the forward sell contracts totaled $28.3 million; the forward buy contracts totaled $29.8 million. The difference, an unrealized loss of $1.5 million, was recorded as a reduction of net income in 1994 as a charge to marketing, general and administrative expenses and at December 31, 1994, is included in other accrued liabilities. All contracts mature within two years. At December 31, 1993, the Company had simple put option contracts with a notional amount of $6.8 million and forward contracts with a notional amount of $47.0 million to sell various foreign currencies within the next two years. At December 31, 1993, the fair value of the option contracts was $0.4 million and the fair value of the forward contracts was ($1.2) million. Credit exposure is limited to the unrealized gains on these contracts. All agreements are with a diversified selection of institutions with strong credit ratings which minimizes risk of loss due to nonpayment from the counterparty. The Company has not experienced any material losses due to credit impairment of its foreign currency instruments. Interest Rate Swaps: The Company enters into interest rate swaps (swaps) as part of its overall strategy of managing the duration of its cash portfolio. For each swap, the Company receives interest based on fixed rates and pays interest to counterparties based on floating rates (three or six month LIBOR) on a notional principal amount. By combining a swap with a pool of short-term securities equal in size to the notional amount of the swap, an instrument with an effective interest rate and maturity equal to the term of the swap is created. The use of swaps in this manner generates net interest income on the swap and associated pool of short-term securities equivalent to interest income that would be earned from a high grade corporate security of the same maturity as the swap, while reducing credit risk (there is no principal invested in a swap). The Company's credit exposure on swaps is limited to the value of the interest rate swaps that have become favorable to the Company and any net interest earned but not yet received. Swap counterparties typically have strong credit ratings which minimize the risk of non-performance on the swaps. The Company has not experienced any material losses due to credit impairment. The Company targets the average maturity of its investment portfolio (including swaps) based on to its anticipated use of cash and fluctuations in the market rates of interest. The maturity of the investment portfolio (including swaps) ranges from overnight funds used for near-term working capital purposes, investments maturing within the next one to five years for future working capital, capital expenditures and strategic investments, to maturities of up to seven years which is comparable to the remaining term of the Company's outstanding convertible debt. Due to the increase in market interest rates during 1994 and concern about a continuing rise in rates, the Company gradually reduced the average effective maturity of its investment portfolio (including swaps) from 2.8 years at December 31, 1993 to 1.9 years at December 31, 1994, which approximates the lower end of the range of the Company's average anticipated cash needs. The notional amount of each swap is equal to the amount of designated high quality short-term investments which either mature or reprice within the next six months. The investments include U.S. Treasury securities, U.S. government agency securities, commercial paper and corporate debt obligations. Swaps are used to extend the maturity of the investment portfolio; no speculative activity occurs. The table below outlines specific information for the swaps outstanding at December 31, 1994. The fair value is based on market prices of similar agreements. Dollars are in millions.

For the year ended December 31, 1994, the weighted average rate received on swaps was 6.30% and the weighted average rate paid on swaps was 5.12%. Net interest income received from swaps totaled $4.3 million in 1994. The carrying amount of the swaps, which reflects the net interest accrued for such swaps, totaled $6.2 million and $7.5 million at December 31, 1994 and 1993, respectively, and is included in accounts receivable. At December 31, 1993, the notional amount totaled $350 million and the fair value totaled $13.0 million. During 1994, to reduce the average effective maturity of its portfolio, the Company terminated certain swap agreements prior to maturity and is amortizing the realized gains and losses over the original contractual term of the swaps as a reduction of interest income. At December 31, 1994, net losses of $6.2 million remained unamortized; $3.1 million will be recognized in 1995 and $3.1 million will be recognized during the following three years. Financial Instruments Held for Trading Purposes: As part of its overall investment strategy, in 1994 the Company contracted with two external money managers to manage part of its investment portfolio. One portfolio, which had a carrying value of $31 million at December 31, 1994, consisted of both U.S. dollar and non-dollar denominated investments. To hedge the non-dollar denominated investments, the money manager purchases forward contracts. The fair value at December 31, 1994, of the forward contracts totaled $2.7 million; the average fair value during the year totaled $15.3 million. Net realized and unrealized trading gains totaled approximately $389,000 in 1994 and are included in interest income. Counterparties have strong credit ratings which minimizes the risk of non-performance from the counterparties. Summary of Fair Values: The table below summarizes the carrying value and fair value at December 31, 1994, of the Company's financial instruments. The fair value of the long-term debt was estimated based on the quoted market price at year end.

Note 7: Long-term Debt

Maturities of long-term debt in 1995 and 1996 are $0.9 million and $0.3 million, respectively. Exclusive of the convertible subordinated debentures, no long-term debt maturities are due in 1997 and thereafter. The fair value of the Company debt was $146 million at December 31, 1993. Convertible subordinated debentures are convertible at the option of the holder into shares of the Company's redeemable common stock at a conversion price of $74 in principal amount of the debenture. Upon conversion, the holder receives, for each $74 in principal amount of the debenture converted, one-half share of redeemable common stock and $18 in cash. Under the terms of the Merger (see Note 9), the $18 in cash is reimbursed by Roche Holdings, Inc. (Roche)to the Company. Generally, the Company may redeem the debentures until maturity. Note 8: Leases, Commitments and Contingencies

The Company has leased certain real property. Under many of its lease arrangements, the Company is responsible for taxes, insurance and maintenance related to the leased properties. Rent expense under operating leases was approximately $6.5 million, $5.1 million and $9.4 million for 1994, 1993 and 1992, respectively. Income from subleases was immaterial. Under two of its lease agreements, the Company is contingently liable to purchase three buildings at the end of their lease terms. These leases expire in 1995, but the Company has the option to extend one lease until 1997 and the other until 1998. If at the end of the final lease renewal term the Company does not purchase the property or arrange a third party purchase, then the Company would be obligated to the lessor for a guaranteed payment equal to a specified percentage of the lessor's purchase price for the properties. The Company would also be obligated to the lessor for all or some portion of this amount if the price paid by a third party for the property is below a specified percentage of the lessor's purchase price. Under these leases, the Company is also required to maintain certain financial ratios and is subject to limits on certain types and amounts of debt. The properties under these leases include a process science laboratory, which is scheduled for completion in 1995, and two office buildings. As of December 31, 1994, the total amount related to these leased facilities, for which the Company would be contingently liable, is $65.0 million. In connection with one of the leases, the Company has pledged securities worth $42.4 million as of December 31, 1994. The Company expects to develop a new manufacturing facility over the next three years with a total expected cost of $150 million. In connection therewith, the Company expects to enter into an operating lease arrangement similar to the arrangements described above. Pursuant to its collaboration agreement with Scios Nova (see Note 2), the Company established a line of credit for $30 million that Scios Nova may draw down at Scios Nova's discretion through 2002. This commitment is supported through December 31, 1997, by a bank letter of credit under which Scios Nova may draw up to $30 million directly from the bank, with immediate repayment of the funds due to the bank by the Company. Amounts drawn by Scios Nova under the bank letter of credit or directly from the Company are repayable in the form of cash or Scios Nova common stock (at the market price prevailing on the date of repayment) at Scios Nova's option any time through December 30, 2002. Interest on amounts borrowed by Scios Nova accrue to the Company at the prime rate of interest. At December 31, 1994, no amounts were drawn. Note 9: Merger With Roche Holdings, Inc. The Company's merger (Merger) with a wholly owned subsidiary of Roche Holdings, Inc. (Roche) was consummated on September 7, 1990 (Effective Date). Pursuant to the merger agreement with Roche, the Company's stockholders of record on the Effective Date received, for each share of common stock that they owned, $18 in cash from Roche and one half share of newly issued redeemable common stock from the Company. In the Merger, Roche acquired one-half of the Company's outstanding common stock for $1,537.2 million. The redeemable common stock is substantially identical to the common stock previously held by stockholders, except that it is redeemable by the Company at the election of Roche, provided that Roche first deposits in trust sufficient funds to pay the aggregate redemption price of all outstanding shares of redeemable common stock. Roche has the right to require the Company to exercise its redemption right, providing it does so for all shares of outstanding redeemable common stock at $58.75 per share in the first calendar quarter of 1995 and increasing to $60.00 per share on April 1, 1995. The redemption right expires on June 30, 1995. For the period of July 1, 1995 until June 30, 1996, Roche may submit a bid to purchase the remaining shares of the Company. The bid must not be for less than $60.00 per share and is subject to the approval of the Board of Directors and subsequently, of non-Roche stockholders. Independent of its right to have the Company redeem the redeemable common stock, Roche is permitted to acquire additional shares of the Company's stock through open market or privately negotiated purchases, provided that Roche's aggregate holdings do not exceed 75% of the Company's stock outstanding on a fully diluted basis. In connection with the Merger, the Company issued 24,433,951 shares of common stock to Roche for $487.3 million in cash. The common stock Roche acquired in the Merger and redeemable common stock purchased in the open market represents approximately 65% of the outstanding equity of the Company as of December 31, 1994. Note 10: Related Party Transactions The Company has transactions with related parties in the ordinary course of business. Pursuant to contracts, principally regarding R&D projects and product licensing agreements as described below, the Company recorded revenue of approximately $25.6 million in 1994, $14.4 million in 1993 and $12.6 million in 1992 from the following related parties: F. Hoffmann-LaRoche, Ltd. (HLR) (a wholly owned subsidiary of Roche; two officers of HLR serve on the Company's Board of Directors - Note 9) and Genencor, Inc. (in which the Company formerly owned a 25% equity interest). The Company is also developing a mammalian cell line for HLR. In 1994, the Company and HLR began developing an anti-IgE antibody and Pulmozyme in Japan. During 1994 and 1993, the Company collaborated with HLR on four projects, including oral antagonists to platelet gpIIb/IIIa, IL-8, LFA/ICAM and ras farnesyltransferase. In 1992, the Company entered into a collaboration with HLR to codevelop and copromote Pulmozyme in Europe. In connection with this collaboration and the Company's efforts to expand its markets, Genentech Europe Limited (GEL) was established. GEL and affiliates are currently promoting Pulmozyme in the United Kingdom, Ireland, Germany and the Netherlands. HLR is responsible for promoting the drug for cystic fibrosis in the remaining thirteen European countries in the collaboration. In addition to sharing profits related to Pulmozyme sales from all collaborative countries with HLR, the Company has received and will continue to receive milestone payments and technical support from HLR. Also, as part of the agreement with HLR, and in return for royalties on product sales, the Company has granted HLR an exclusive license to sell Pulmozyme in countries outside of Western Europe, the United States and Canada. The Company has three other R&D collaborations with HLR which were entered into in 1992. Note 11: Capital Stock Stock Option Plans 1984 PLANS: The 1984 Plans are the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan. The Company may grant options under the 1984 Incentive Stock Option Plan only to employees (including officers) of the Company. The Company may grant options under the 1984 Non-Qualified Stock Option Plan to employees (including officers) and consultants of the Company. Options granted under the 1984 Incentive Stock Option Plan and the 1984 Non- Qualified Stock Option Plan have a maximum term of ten and 20 years, respectively, from the date of grant. The options generally become exercisable in increments over a period of four years from the date of grant, with the first increment vesting after one year. The Company may grant options with different vesting terms from time to time. Transactions for the 1984 plans for the year ended December 31, 1994, were as follows:

1990 PLAN: The 1990 Stock Option/Stock Incentive Plan (1990 Plan) permits the granting of options intended to qualify as incentive stock options and the granting of options that do not so qualify. The Company may only grant incentive options to employees (including officers and employee-directors). The Company may only grant the non-qualified options and other non-option stock incentives under the 1990 Plan to employees (including officers and employee- directors) and consultants of the Company. All non-qualified options have a maximum term of 20 years and all incentive options have a maximum term of ten years. The options generally become exercisable in increments over a period of four years from the date of grant, with the first increment vesting after one year. The Company may grant options with different vesting terms from time to time. The 1990 Plan includes an Automatic Grant Program whereby each individual who was a non-employee member of the Board on July 18, 1990, and/or on April 30, 1992, was automatically granted, on each of those dates, a non-statutory option to purchase 15,000 shares of redeemable common stock. These options have a term of ten years from the date of grant and vest in equal increments over a three-year period from the date of grant. Each non-employee member of the Board who is elected to that position after April 30, 1992, will be automatically granted such an option as will any employee member of the Board who becomes a non-employee member of the Board immediately upon the change in status from employee to non-employee. The 1990 Plan contains a special provision whereby the Company's former Chairman of the Board was granted in 1990 a special non- statutory option for 170,000 shares of redeemable common stock with a per share exercise price of $25.70 in cancellation of outstanding options for the same number of shares with an exercise price of $44.25.

In addition, the 1990 Plan permits the Company to grant stock appreciation rights in connection with non-qualified options or incentive options and issue shares of redeemable common stock, either fully vested at the time of issuance or vesting according to a pre-determined schedule. The Company may grant three types of stock appreciation rights under the 1990 Plan: tandem stock appreciation rights, concurrent stock appreciation rights and limited stock appreciation rights. At December 31, 1994, no stock appreciation rights for redeemable common stock have been granted under the 1990 Plan. 1994 PLAN: The 1994 Stock Option Plan (1994 Plan) permits the granting of options intended to qualify as incentive stock options and the granting of options that do not so qualify. Incentive options may only be granted to employees (including officers and employee-directors). The non-qualified options may only be granted under the 1994 Plan to employees (including officers and employee-directors) and consultants of the Company. All non- qualified options have a maximum term of 20 years and all incentive options have a maximum term of ten years. The options generally become exercisable in increments over a period of five years from the date of grant, with the first increment vesting after two years. Options may be granted with different vesting terms from time to time. The 1994 Plan includes an Automatic Grant Program whereby each individual who is a non-employee member of the Board on April 30, 1995, will be automatically granted a non-statutory option to purchase 15,000 shares of redeemable common stock. These options have a term of ten years from the date of grant and vest in equal increments over a three-year period from the date of grant. Each non-employee member of the Board who is elected to that position after April 30, 1995 will be automatically granted such an option as will any employee member of the Board who becomes a non- employee member of the Board immediately upon the change in status from employee to non-employee. Beginning on April 30, 1995, non-employee members of the Board will no longer receive automatic option grants under the 1990 Plan.

Employee Stock Plans The Company adopted the 1991 Employee Stock Plan (1991 Plan) on December 4, 1990, and amended it during 1993. All full-time employees of the Company are eligible to participate in the 1991 Plan. Of the 2,900,000 shares of redeemable common stock reserved for issuance under the 1991 Plan, 1,905,018 shares have been issued as of December 31, 1994. During 1994, 2,364 of the eligible employees participated in the 1991 Plan. Warrants In consideration of the grant to the Company by certain limited partners of Genentech Clinical Partners IV (GCP IV) of an option to purchase all of such limited partners' interests in GCP IV, the Company issued warrants with each partnership interest to purchase an aggregate of 2,639,250 shares of common stock (subsequently converted to 1,319,625 shares of redeemable common stock under the terms of the Merger). All previously unexercisable warrants held by nondefaulted limited partners became exercisable upon termination of GCP IV's research program in September 1992. The warrants are exercisable through July 31, 1996. Redeemable common stock activity during 1994 related to the warrants is reflected in the following table:

Note 12: Legal Proceedings The Company is a party to various legal proceedings including patent infringement cases involving growth hormone; Activase; and antibodies to IgE, a protein central to allergic reactions; and product liability cases involving Activase. In addition, the FDA is investigating the Company's promotional practices in connection with Activase, Protropin and Pulmozyme. The Company and its directors are defendants in two suits filed in California challenging their actions in connection with the Merger. In December 1994, the Company and Eli Lilly and Company (Lilly) reached a settlement regarding all patent infringement and contract actions between the two parties. Under the terms of the settlement Lilly agreed to pay the Company up to $145 million ($25 million initially and 16 quarterly payments of $7.5 million), subject to certain restrictions, and the Company granted Lilly licenses, options to license, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. The Company will continue to pursue patent invalidity and noninfringement claims against the Regents of the University of California (UC), which has sued Genentech for infringing a patent owned by UC relating to recombinant human growth hormone (hGH). In a related matter, the Company also settled a patent infringement action against Centocor, Inc. whereby the Company granted Centocor a royalty bearing license to its Cabilly patent for Centocor's monoclonal anti-IIb/IIIa antibody. On November 29, 1994, an administrative law judge of the International Trade Commission (ITC) found, on an incomplete record, that Bio-Technology General Corp. and its affiliate (BTG) infringed two of the Company's process patents and Novo Nordisk A/S and certain of its affiliates (Novo) (BTG and Novo are collectively referred to as the Competitors) infringed one process patent covering hGH; however, the judge refused to recommend a ban on importation of hGH products for treatment of growth hormone inadequacy by the Competitors in the United States because the Company delayed in providing documents to the Competitors. The judge's recommendation was subject to review by the commissioners of the ITC. The Company filed a petition for review by the full Commission of the judge's recommendations dismissing the complaint, but the Commission declined such review. On December 1, 1994 the Company filed suit against the Competitors in the U.S. District Court in Delaware seeking damages from the Competitors, and asking for an injunction blocking the Competitors from marketing hGH in the United States Novo has brought suit against the Company in the U.S. District Court from Southern District New York, alleging that the patents in the ITC action are invalid and not infringed by Novo. BTG has brought suit against the Company in the U.S. District Court from the Southern District of New York seeking to prevent the Company from further patent infringement action against BTG and alleging unfair competition, antitrust and malicious prosecution claims. Based upon the nature of the claims made and the investigation completed to date by the Company and its counsel, the Company believes the outcome of the above actions will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Note 13: Quasi-reorganization On February 18, 1988, the Company's Board of Directors approved the elimination of the Company's accumulated deficit through an accounting reorganization of its stockholders' equity accounts (a quasi-reorganization) effective October 1, 1987, that did not involve any revaluation of assets or liabilities. The Company eliminated the accumulated deficit of $329.5 million by a transfer from additional paid-in capital in an amount equal to the accumulated deficit. Simultaneous with the quasi-reorganization, the Company FAS 96, providing for recognition of the tax benefits of operating loss and tax credit carryforward items that arose prior to a quasi-reorganization involving only the elimination of a deficit in retained earnings being reported in the income statement and then reclassified from retained earnings to additional paid-in capital. Subsequently, in September 1989, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 86 (SAB 86) which states that a quasi-reorganization cannot involve only an elimination of a deficit in retained earnings and, therefore, the tax benefits of prior operating loss and tax credit carryforwards must be reported as a direct addition to additional paid-in capital rather than being recorded in the income statement. In February 1992, the Financial Accounting Standards Board issued FAS 109 which supersedes FAS 96. FAS 109 requires companies that have previously both adopted FAS 96 and effected a quasi-reorganization that involves only a deficit elimination, as did the Company, to continue to report the tax benefits of prior operating losses and tax credit carryforwards in a manner consistent with FAS 96. FAS 109 also provides that companies effecting a quasi-reorganization after February 1992 that involves only a deficit elimination shall report the tax benefits of prior operating losses and tax credit carryforwards in a manner consistent with SAB 86. The Company will continue to report in income the recognition of operating loss and tax credit carryforward items arising prior to the quasi-reorganization due to the Company's adoption of its quasi-reorganization in the context of its interpretation of FAS 96 and the quasi-reorganization literature existing at the date the quasi-reorganization was effected. The SEC staff has indicated that it would not object to the Company's accounting for such tax benefits. If the provisions of SAB 86 had been applied, net income for the year ended December 31, 1994, would have been reduced by $39.7 million or $.33 per share (1993-net income reduced by $20.6 million or $.18 per share; 1992-net income reduced by $7.5 million or $.07 per share). REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders of Genentech, Inc. We have audited the accompanying consolidated balance sheets of Genentech, Inc. as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genentech, Inc. At December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California January 17, 1995 QUARTERLY FINANCIAL DATA (UNAUDITED) (thousands, except per share amounts)

11-YEAR FINANCIAL SUMMARY (UNAUDITED) (millions, except per share and employee data)

1994 1993 1992 1991 _______________________________________________________________________________ Total revenues $ 795.4 $ 649.7 $ 544.3 $ 515.9 Product sales 601.1 457.4 391.0 383.3 Royalties 126.0 112.9 91.7 63.4 Contract & other 25.6 37.9 16.7 20.4 Interest 42.7 41.5 44.9 48.8 ______________________________________ Total costs and expenses $ 665.8 $ 590.8 $ 522.3 $ 469.8 Cost of sales 95.8 70.5 66.8 68.4 Research & development 314.3 299.4 278.6 221.3 Marketing, general & administrative 248.6 214.4 172.5 175.3 Special charge - - - - Interest 7.1 6.5 4.4 4.8 ______________________________________ Income data Income(loss) before taxes $ 129.6 $ 58.9 $ 21.9 $ 46.2 Income tax provision 5.2 - 1.1 1.8 Net income (loss) 124.4 58.9 20.8 44.3 Net income (loss) per share 1.04 0.50 0.18 0.39 ______________________________________ Selected balance sheet data Cash & marketable securities $ 920.9 $ 719.8 $ 646.9 $ 711.4 Accounts receivable 146.3 130.5 93.9 69.0 Inventories 103.2 84.7 65.3 56.2 Property, plant & equipment, net 485.3 456.7 432.5 342.5 Other long-term assets 61.0 64.1 37.1 42.7 Total assets 1,745.1 1,468.8 1,305.1 1,231.4 Total current liabilities 220.5 190.7 133.5 118.6 Long-term debt 150.4 151.2 152.0 152.9 Total liabilities 396.3 352.0 297.8 281.7 Total stockholders' equity 1,348.8 1,116.8 1,007.3 949.7 ______________________________________ Other data Depreciation and amortization expense $ 53.5 $ 44.0 $ 52.2 $ 46.9 Capital expenditures 82.8 87.5 126.0 71.3 ______________________________________ Share information Shares used to compute EPS 119.5 117.1 114.0 112.5 Actual year-end 117.2 114.8 112.9 111.3 ______________________________________ Per share data Market price: High $ 53.50 $ 50.50 $ 39.50 $ 36.25 Low $ 41.75 $ 31.25 $ 25.88 $ 20.75 Book value $ 11.50 $ 9.73 $ 8.92 $ 8.53 ______________________________________ Number of employees 2,738 2,510 2,331 2,202 ______________________________________ 11-YEAR FINANCIAL SUMMARY (UNAUDITED) (In millions, except per share and employee data)
1990 1989 1988 1987 1986 1985 1984 ______________________________________________________________________________ $ 476.1 $ 400.5 $ 334.8 $ 230.5 $ 134.0 $ 89.6 $ 69.8 367.2 319.1 262.5 141.4 43.6 5.2 - 47.6 36.7 26.7 20.1 12.9 5.3 2.1 31.9 27.5 33.5 57.1 70.9 71.1 63.5 29.4 17.2 12.1 11.9 6.6 8.0 4.2 ______________________________________________________________________________ $ 572.7 $ 352.9 $ 311.7 $ 186.6 $ 484.6 $ 83.0 $ 66.8 68.3 60.6 46.9 23.8 10.8 1.7 - 173.1 156.9 132.7 96.5 79.8 64.9 55.0 158.1 127.9 101.9 59.5 27.3 16.4 11.8 167.7(1) - 23.3(2) - 366.7(3) - - 5.5 7.5 6.9 6.8 - - - ______________________________________________________________________________ $ (96.6) $ 47.5 $ 23.1 $ 43.9 $ (350.6) $ 6.6 $ 3.0 1.5 3.6 2.5 1.7 2.4 0.5 0.6 (98.0) 44.0 20.6 42.2 (353.0) 6.1 2.4 (1.05) 0.51 0.24 0.50 (5.10) 0.10 0.04 ______________________________________________________________________________ $ 691.3 $ 205.0 $ 152.5 $ 158.3 $ 84.3 $ 99.8 $ 32.5 58.8 66.8 63.9 92.2 24.5 26.2 12.7 39.6 49.3 63.4 58.0 14.7 4.6 - 300.2 299.1 289.4 195.7 133.1 87.9 72.9 61.7 85.0 89.7 108.7 114.9 16.6 12.6 1,157.7 711.2 662.9 619.0 376.0 238.6 133.6 101.4 75.9 95.4 82.8 37.8 27.2 18.5 153.5 154.4 155.3 168.1 31.6 6.0 11.5 264.5 242.2 263.6 263.6 83.3 35.7 32.2 893.2 469.0 399.3 355.4 292.6 202.9 101.4 ______________________________________________________________________________ $ 47.6 $ 44.6 $ 38.3 $ 23.5 $ 8.1 $ 5.7 $ 4.3 36.0 37.2 110.9 65.3 46.3 20.2 16.1 ______________________________________________________________________________ 93.0 86.0 84.5 84.4 69.3 64.0 57.5 110.6 84.3 82.9 78.7 67.0 65.6 57.6 ______________________________________________________________________________ $ 30.88 $ 23.38 $ 47.50 $ 64.75 $ 49.38 $ 18.81 $ 10.56 $ 27.50* $ 20.13 $ 16.00 $ 14.38 $ 28.00 $ 16.44 $ 8.56 $ 7.19 $ 21.75* $ 8.08 $ 5.56 $ 4.82 $ 4.52 $ 4.37 $ 3.09 $ 1.76 ______________________________________________________________________________ 1,923 1,790 1,744 1,465 1,168 893 674 ______________________________________________________________________________
COMMON STOCK AND REDEEMABLE COMMON STOCK INFORMATION Stock Trading Symbol GNE Stock Exchange Listings The redeemable common stock of the Company has been traded on the New York Stock Exchange and the Pacific Stock Exchange since September 10, 1990. The Company's common stock was traded on the New York Stock Exchange under the symbol GNE from March 2, 1988, until September 7, 1990, and on the Pacific Stock Exchange under the symbol GNE from April 12, 1988, until September 7, 1990. The Company's common stock was previously traded in the NASDAQ National Market System under the symbol GENE. No dividends have been paid on the common stock or redeemable common stock. The Company's merger with a wholly owned subsidiary of Roche Holdings, Inc. (Roche) was consummated on September 7, 1990. The Company's stockholders of record on September 7, 1990, received, for each share of common stock owned, $18 in cash from Roche and one-half share of newly issued redeemable common stock from the Company. See Note 9 to the consolidated financial statements for a further description of the merger transaction. Redeemable Common Stockholders As of December 31, 1994, there were approximately 20,512 stockholders of record of the Company's redeemable common stock. Stock Prices Redeemable Common Stock 1994 1993 __________________________________________________________________________
High Low High Low _________________________________________________ 4th Quarter $ 53 1/2 $ 42 1/8 $ 50 1/2 $ 42 5/8 3rd Quarter 52 1/2 48 1/8 44 7/8 40 1/2 2nd Quarter 51 5/8 43 1/4 44 31 1/4 1st Quarter 51 3/8 41 3/4 39 3/4 31 7/8
31 EX-23.1 4 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Genentech, Inc. of our report dated January 17, 1995, included in the 1994 Annual Report to Stockholders of Genentech, Inc. Our audits also included the financial statement schedule of Genentech, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements pertaining to the 1991 Employee Stock Plan, the 1990 Stock Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan, the shares issuable to certain warrant holders, the shares issuable to certain convertible subordinated debenture holders and the Genentech, Inc. Tax Reduction Investment Plan and in the related Prospectuses of our report dated January 17, 1995, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Genentech, Inc. Ernst & Young LLP San Jose, California March 28, 1995 EX-27.1 5
5 This schedule contains summary financial information extracted from the consolidated balance sheets, consolidated statements of income and consoliated statements of cash flows included in the company's Form 10-K for the year ended December 31, 1994, and is qualified in its entirety by reference to such financial statements and the notes thereto. 1000 YEAR DEC-31-1994 DEC-31-1994 66713 854187 150689 4422 103200 997116 700548 215255 1745124 220499 150358 2345 0 0 1346439 1745124 601064 795390 95829 95829 314322 5583 7058 129577 5183 124394 0 0 0 124394 1.04 0