July 20, 2001

Marge Harris Xanelim Patient

As announced on July 10th, we received the Completion of Review letter about Xolair™ (Omalizumab) from the U.S. Food and Drug Administration (FDA). This letter means there will be no approval in 2001 for Xolair and that the initial proposed label claim will likely be adult patients with moderate-to-severe, allergic asthma in order to facilitate the FDA's review of the application. The reason for the delay in approval is that the FDA has asked for more information to help it better evaluate the use of the drug in larger patient populations. No major issues were raised regarding the effectiveness of the drug, and no new issues were introduced regarding the safety of the drug. How we proceed is dependent on further discussions with the FDA. We are still very committed to moving forward with Xolair, as we believe it will address a significant unmet medical need. It's important to remember that this therapy represents an entirely new class of drugs. Innovation brings with it some risk, and challenges are to be expected.

We believe the Xolair news will have a minimal impact on our financial performance for 2001. We will be looking for potential ways to offset future Xolair impacts, if necessary, with other components of our strategy. For instance, we have $2.6 billion in cash and marketable securities which could potentially be used to make acquisitions of products that could benefit from our research, product development, manufacturing and commercial expertise. It is also possible that growing demand for some of our other products could offset the revenue that is expected to be lost from the Xolair delay. With 18 products in the pipeline, we expect to continue on track towards our 5X5 goals, specifically, our 2005 goal of 25 percent average annual EPS growth.

At ASCO, Genentech presented encouraging results from three Herceptin® (Trastuzumab) studies, one of which demonstrated a 50 percent increase in survival benefit in metastatic breast cancer patients on Herceptin therapy who were selected by FISH (fluorescence in situ hybridization) testing of tumor tissue for HER2 gene amplification. The other two studies demonstrated increased response rates and other endpoints when using FISH compared to IHC testing.

In another study presented at ASCO, Genentech reported positive preliminary results from a Phase II clinical trial investigating Rituxan plus chemotherapeutic agent Fludarabine for patients with previously untreated chronic lymphocytic leukemia (CLL).

Also during the quarter, the FDA approved expanded use of Rituxan for the treatment of low-grade non-Hodgkin's lymphoma (NHL). The new product labeling includes retreatment with Rituxan after a prior course of Rituxan therapy, initial treatment with eight weekly infusions of Rituxan, compared to four infusions, and treatment of bulky disease (tumors greater than 10 centimeters) for patients with relapsed or refractory, low-grade or follicular, CD20 positive B-cell non-Hodgkin's lymphoma (NHL).

During the quarter, we became aware of the distribution of counterfeit versions of Nutropin AQ® [somatropin (rDNA origin) injection], our liquid formulation growth hormone drug. In conjunction with the FDA, we undertook an aggressive campaign to educate pharmacists, health care professionals and their patients about how to identify the counterfeit product.

In another study presented at ASCO, investigators evaluated the efficacy of Avastin™ (Bevacizumab), formerly known as anti-VEGF, plus chemotherapy in non-squamous lung cancer patients and found that the combination of therapies extended time to disease progression and increased survival as compared to chemotherapy alone. In April, the FDA designated Avastin in combination with chemotherapy as a fast-track approval product for metastatic breast cancer.

In conjunction with partner XOMA Ltd., we announced initial positive results from one of two Phase III investigational trials of Xanelim™ (Efalizumab) for adults with moderate-to-severe psoriasis at the Second Joint Meeting of the International Psoriasis Symposium and European Congress on Psoriasis held in San Francisco.

In a Phase III pulmonary arterial hypertension study with partner Actelion Ltd, the oral endothelin receptor antagonist Tracleer™ (Bosentan) met its primary endpoint. The new data will supplement the U.S. and European market authorization filing.

As part of our 25th anniversary celebration at the beginning of this quarter, I had the great privilege of breaking ground for the Founders Research Center expansion project, which will add 280,000 square feet to provide new laboratories and house additional scientists and staff. Due to be completed in early 2003, the Center will be the world's single largest biotechnology research facility.

Genentech continues to attract top-notch individuals to its ranks and cultivate a corporate culture that retains and rewards high-performing employees. In this quarter, we promoted Thomas T. Thomas, CFA, to Treasurer and David Ebersman to Senior Vice President, Product Operations.

I would like to share some thoughts with you on some important developments in government policy, including the Medicare Outpatient Drug Benefit legislation, drug pricing issues, and the new patient confidentiality regulations.

Drug pricing continues to draw attention and criticism. We are committed to passage of a Medicare drug benefit this year. Our paramount objective is to expand access to life-saving therapies for seniors, while also preserving our ability to make robust investment in our ongoing research and innovation. Our principles for a drug benefit that we could support are: private, market-based delivery of the benefit; catastrophic coverage for impoverished seniors; and choices for consumers and the opportunity to customize. If drugs are covered by Medicare and a market-based system of cost containment is in place, I believe the criticism will fade and we can focus on the quality of therapy.

We are opposed to government-imposed price controls because we believe they will ultimately limit patients' access to care. Price controls will hurt the investment biotechnology and pharmaceutical companies can make in researching and developing new cures and innovative treatments. As you may know, studies by outside parties have shown that on average it takes more than 10 years and $500 million to bring a drug to market from research through approval, including cost of failures and cost of capital. We believe Americans enjoy one of the best healthcare systems in the world due to the fact that the U.S. has a market-based healthcare system that rewards and encourages biomedical innovation.

At Genentech, we offer various forms of assistance to those with no insurance or who are underinsured. We believe that any patient who needs one of our medicines should get it — regardless of economic or insurance status.

The Department of Health and Human Services recently issued new patient confidentiality regulations, and we are now meeting with department staff to develop guidelines that can elucidate our concerns regarding the patient-informed consent requirement. We support clarification of the regulations to allow us to collect patient data for both pre- and post-approval use in anonymous form and aggregate data sets. Both are important to public health and within the spirit of the regulations.

On behalf of the many patients worldwide who benefit from our innovative therapies, it behooves us to make our voices heard and attempt to influence legislation that affects our industry. Advocating on Capitol Hill and educating politicians and others about the nature of biotechnology has become and will remain an ongoing priority for us.

In the past quarter century, we've established ourselves as the pioneer of the biotech industry, engaged in extraordinary innovation, and delivered life-changing and life-enhancing therapies to patients across the globe. With a pipeline of 18 projects, world-class research and development, and finely tuned operations and commercial organizations in place, our future looks positive. I feel confident that we have laid the groundwork for success in the coming years and that we will continue to create remarkable new therapies for significant unmet medical needs which have the potential to provide strong financial returns

Sincerely,

Arthur D. Levinson, Ph.D.
Chairman and Chief Executive Officer

This letter contains forward looking statements relating to product sales and our future growth, earnings and financial performance. Such statements involve risks and uncertainties which may cause actual results to differ materially, and such risks and uncertainties are discussed in our Quarterly Report on Form 10-Q for the quarter ending March 31, 2001 ("Form 10-Q") under the title "Forward-Looking Information and Cautionary Factors That May Affect Future Results." For a discussion of the risk factors that may affect product sales, see "We Face Growing and New Competition" and "Other Competitive Factors Could Affect Our Product Sales"; and future growth, earnings and financial performance, see all of the risk factors under the title "Forward-Looking Information and Cautionary Factors That May Affect Future Results."