Genentech Reports 1996 Third Quarter Results

Pipeline Successes Increase R&D Expenses, Impacting Earnings

South San Francisco, Calif. -- October 21, 1996 -- Genentech, Inc. (NYSE:GNE) announced today that earnings for the third quarter of 1996 were $50.9 million, or 41 cents per share, compared to $40.2 million, or 33 cents per share, in the third quarter of 1995. This increase results primarily from an increase in revenues and also from a reduction in the company's tax provision as described below. It also reflects increased R&D expenses as Genentech aggressively pursues the potential of the products in its development pipeline. Revenues increased to $251.7 million, from $223.9 million in the same quarter of 1995. This increase results from increased contract and royalty revenues.

"As in recent quarters, our moderate earnings for this quarter result from our own success with our pipeline products," said Genentech's president and chief executive officer Arthur D. Levinson Ph.D. "We continue to take a long-term financial view while investing aggressively to back our pipeline. As products begin to emerge from our pipeline, they have the potential to significantly improve our earnings as we approach the next century."

Change In Effective Tax Rate

Genentech is reviewing its operating plan for 1997 and beyond. In connection with that review, the company has decided not to implement, at this time, the previously announced approach for research and development funding and manufacturing by international subsidiaries of certain of its development products, which are progressing in clinical trials. As a result of the latest change, the company's tax rate is expected to be 20 percent for the fourth quarter and for the full year 1996. The third quarter results include a reduction in the tax provision of $11.6 million in order to adjust the year-to-date rate from 33 percent to 20 percent. This results in a net $1.8 million tax benefit for the quarter. Genentech expects that its effective tax rate will increase in 1997 to around 35 percent and continue at or near this rate dependent on statutory tax rates and credits for the next several years.

Increased Royalties as Roche Assumes ex-U.S. Sales

In late 1995, Genentech began receiving royalties rather than recording sales on European sales of Pulmozyme and Canadian sales of all Genentech products as Roche assumed responsibility for those sales per Genentech's 1995 arrangement with Roche. On a quarter to quarter basis, these changes have led to a reduction in reported product sales to $142.5 million in the third quarter 1996 from $158.5 million in the third quarter 1995, but on a pro forma basis that considers the new arrangement with Roche - including sales to Roche in 1996 and excluding Canadian and European customer sales in 1995 - sales increased by $1.3 million to $142.5 million in the third quarter 1996 over the year earlier period. Reflecting the 1995 arrangement with Roche, royalties in the third quarter of 1996 increased to $54.4 million from $45.6 million in the third quarter of 1995. While overall marketing, general and administrative (MG&A) expenses increased, marketing and sales expenses declined due to this new arrangement with Roche, offset by an increase in general and administrative expenses resulting from quarterly variation in corporate expenses. Total MG&A expenses in the third quarter of 1996 were $61.9 million compared to $55.2 million in the third quarter of 1995.

Marketed Products

Sales of Activase® (Alteplase, recombinant, t-PA) were $65.4 million compared to $69.7 million in the third quarter of 1995 on a pro forma basis. Reported sales were $65.4 million compared to $73.2 million in the third quarter of 1995. During the quarter, Activase's market share as a thrombolytic therapy for the treatment of acute myocardial infarction (heart attack) remained approximately 80 percent. Despite Activase's strong market share, the overall size of the thrombolytic therapy market during the third quarter has declined by about 6 percent compared to the third quarter of 1995 as a result of some heart attack patients receiving mechanical reperfusion rather than thrombolytic therapy and others receiving therapy through ongoing large scale clinical trials.

Activase was licensed by the U.S. Food and Drug Administration (FDA) in June 1996 for treating ischemic stroke within three hours of the onset of symptoms. As anticipated, this new therapy is undergoing a review and adoption period while medical centers and physicians become acquainted with the therapy.

Sales of Genentech's two growth hormone products Protropin® (somatrem for injection) and Nutropin® (somatropin [rDNA origin] for injection) increased to $57.6 million from $53.4 million in the third quarter of 1995 on a pro forma basis. Reported sales were $57.6 million compared to $54.2 million in the third quarter of 1995. Even in the face of new competitive growth hormone products, Genentech continues to maintain the two-thirds market share in the U.S. growth hormone market. Potential competitive products from Bio-Technology General and from Novo Nordisk A/S remain off the market due to preliminary injunctions issued against them.

Pulmozyme® (dornase alfa) Inhalation Solution sales increased to $18.0 million from $17.1 million in the third quarter of 1995 on a pro forma basis, with the increase driven primarily by sales of Pulmozyme to Roche for ex-U.S. sales. Principally due to Roche's assumption of ex-U.S. sales, recorded Pulmozyme sales decreased to $18.0 million from $30.1 million in the third quarter of 1995. On October 9, the Pulmonary-Allergy Drug Advisory Committee to the FDA recommended Pulmozyme, the company's aerosol treatment for cystic fibrosis (CF), for marketing clearance for treatment of CF patients with advanced disease. The committee further recommended that Genentech continue to study long-term outcome of CF patients.

Contract Revenues

Contract and other revenues in the third quarter of 1996 increased to $38.9 million from $4.5 million in the third quarter of 1995. This increase resulted primarily from $28.4 million from Roche for its exercise of its option (per Genentech's 1995 arrangement with Roche) to develop nerve growth factor (NGF) outside of the U.S.

Research and Development

Research and development (R&D) expenses in the third quarter of 1996 increased 33 percent to $114.8 million from $86.0 million in the third quarter of 1995. This increase was related to expenses for scale-up, material production and clinical trials for products in late stage development, including insulin-like growth factor-1 (IGF-1) , currently in Phase III trials for diabetes, and IDEC-C2B8, which recently completed Phase III clinical trials for treating non-Hodgkins B-cell lymphoma, with results expected by year end; costs to license technology from collaborative partners; and expenses for the increased number of projects in early stage development, including two projects which are currently being prepared to enter Phase I clinical trials - vascular endothelial growth factor (VEGF) for coronary ischemic disease, and an anti-VEGF antibody for cancer. For the quarter, Genentech invested 46 percent of revenues into R&D.

Product Development Progress

Four products in Genentech's development pipeline reached significant milestones during the quarter.

Completed Phase II trials of NGF for diabetic peripheral neuropathy and reported results, which demonstrated initial safety and efficacy, last week at the annual American Neurological Association (ANA) meeting. Genentech is currently planning for Phase III trials.

Xoma Corporation filed an Investigational New Drug application (IND) for Genentech's anti-CD11a antibody and began preparation for a Phase I safety trial in patients with psoriasis to begin at the end of this month.

Roche filed an IND for Genentech's anti-CD18 antibody in patients with hemorrhagic shock, and began preparation for a Phase I safety trial to begin at the end of this month.

With Tanox Biosystems, Inc. and Ciba-Geigy, Ltd. settled lawsuits filed against each other related to the development of anti-IgE antibodies. Also, reached an agreement in principle under which Genentech and Ciba-Geigy and Tanox will combine their existing anti-IgE antibody programs under a cross license agreement in a cooperative development effort.

Genentech, Inc. is a leading biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. Ten of the currently marketed biotechnology products stem from Genentech science, five of which Genentech markets directly in the United States. Genentech is headquartered in South San Francisco, California, and is traded on the New York and Pacific Stock Exchanges under the symbol GNE.

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GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

	Three Months Ended September 30,

	1996		1995
Revenues
Product sales	$	142,463	$	158,478
Royalties		54,429		45,642
Contract and other		38,859		4,494
Interest		15,956		15,297
Total revenues		251,707		223,911

Costs and expenses
Cost of sales		24,836		24,639
Research and development		114,772		85,971
Marketing, general and administrative		61,864		55,249
Special charge (primarily merger related)		-		9,000
Interest		1,094		1,994
Total costs and expenses		202,566		176,583

Income before taxes		49,141		47,328
Income tax provision		(1,801)		7,099

Net income	$	50,942	$	40,229

Net income per share	$	0.41	$	0.33

Weighted average number of shares used in computing per share amounts:		123,589		121,334

	Nine Months Ended September 30,

	1996		1995
Revenues
Product sales	$	443,105	$	481,781
Royalties		160,546		142,215
Contract and other		87,991		28,577
Interest		46,711		43,358
Total revenues		738,353		695,931

Costs and expenses
Cost of sales		77,868		75,431
Research and development		343,008		268,097
Marketing, general and administrative		174,893		187,386
Special charge (primarily merger related)		-		17,000
Interest		3,986		5,904
Total costs and expenses		599,755		553,818

Income before taxes		138,598		142,113
Income tax provision		27,720		21,317

Net income	$	110,878	$	120,796

Net income per share	$	0.90	$	1.00

Weighted average number of shares used in computing per share amounts:		123,402		120,909

	September 30,
	1996		1995
Selected balance sheet data
Cash and short-term investments	$	665,577	$	824,856
Accounts receivable		196,413		176,249
Inventories		92,045		92,700
Long-term marketable securities		510,582		255,371
Property, plant and equipment, net		549,059		485,544
Other long-term assets		111,245		91,712
Total assets		2,170,985		1,965,577
Total current liabilities		216,490		230,393
Long-term debt		150,000		176,082
Total liabilities		391,561		432,990
Total stockholders' equity		1,779,424		1,532,587