Monday, Oct 27, 1986

Genentech Proposes Early Partnership Buyout

South San Francisco, Calif. -- October 27, 1986 --

Genentech, Inc. (NASDAQ:GENE) today announced plans to make an early purchase of its first two R&D partnerships, Genentech Clinical Partners, Ltd. (GCP) and Genentech Clinical Partners II (GCP II). The company also announced that its Board of Directors has approved a 2-for-1 stock split to be effective, pending shareholder approval, in mid-December.

Upon completion of the buyouts, Genentech will own exclusive U.S. rights to the products now owned by the partnerships -- Protropin® human growth hormone, gamma interferon and Activase™ tissue plasminogen activator (t-PA).

"These partnerships have been good for Genentech, and we believe the proposed transactions will be good for Genentech as well as our investors," stated Robert A. Swanson, the company's chief executive officer.

Genentech will offer to buy the assets of GCP for 3.3 million shares of Genentech common stock, or 3,000 shares for ever $50,000 partnership unit purchased. Genentech will also offer to buy the assets of GCP II for approximately 1.7 million shares of Genentech common stock, or 2,500 shares for every $50,000 partnership unit purchased. Genentech stock closed last Friday at $81.25 per share.

The purchases of the partnerships will be made with stock. They will not affect Genentech's normal 1986 operating results, which are proceeding according to plan. The transactions will have a positive cash impact on Genentech. "The development programs of these two partnerships are doing very well, and we want to reacquire the rights to them now, while the price of the stock is in its present range. We expect the acquisition of these partnerships to have a positive impact on future earnings," Swanson said.

Under the terms of the original partnership agreements, it was expected that Genentech could have begun the buyout of GCP in 1988; the buyout of GCP II could not have begun until two years after receiving Food and Drug Administration marketing approval of Activase t-PA.

Approval by the holders of a majority of the partnership units of each partnership will be required to effect the transactions. Genentech today filed registration statements with the Securities and Exchange Commission covering these transactions.

Genentech intends to account for the transactions in the fourth quarter of 1986. The buyout is being made with common stock, valued at closing, expected to be around year end. Although there will be some dilution from these additional shares, there will be a positive impact on total shareholders' equity as a result of these transactions.

In any case any limited partners would like to sell a portion of their new shares, Genentech intends to establish a facility to effect an orderly distribution of these shares.

Because most of the products owned by the partnerships continue to be in the R&D phase, current accounting rules for the purchase of in-process R&D require Genentech to record a significant portion of the purchase price of the partnerships as a one-time non-cash expense. The remainder of the purchase price, which principally relates to Protropin, an FDA approved product, will be capitalized and amortized over the product's useful life.

Accounting rules require that the company reflect the acquisition of the in-process R&D through its income statement, which will appear as a one-time non-cash expense of approximately $300 million in the fourth quarter of 1986, based upon a stock price of $80.

"Genentech's operating income so far this year has doubled compared to last year, and we expect this trend to continue," Swanson said. "The non- recurring expense recorded in the fourth quarter will have a one-time negative effect on earnings per share in that period."

Genentech believes these transactions will have a positive impact of the company for the following reasons. First, product rights and all profits from future sales will belong solely to Genentech. Second, if Genentech were to wait for the partnerships to complete their R&D programs, it would be buying completely developed products that would have to be capitalized and amortized. Third, Genentech will deduct the purchase price of the buyouts for tax purposes and therefore reduce future taxes.

The partnership provided primary funding of clinical testing and product development of three Genentech products. GCP raised $55 million in 1982 and GCP II raised $34 million in 1983.

GCP's Protropin was approved by the FDA in October 1985 for the treatment of children with growth hormone inadequacies. Genentech manufactures and markets Protropin in the U.S. on behalf of a joint venture between Genentech and GCP. Gamma interferon is in human clinical testing as a treatment for various cancers and viral indications.

GCP II's Activase has been tested extensively in the treatment of life- threatening blood clots. Genentech filed a Product License Application with the FDA in April 1986 for approval to market the product for the treatment of heart attacks.

Stock Split

The 2-for-1 stock split is subject to shareholder approval in connection with a proposed reincorporation in Delaware. Shareholders will receive their additional stock after the effective date of the reincorporation. The post-split price will not be quoted until that date.

Genentech is a leading biotechnology company, focusing on the development, manufacture and marketing of pharmaceuticals produced by recombinant DNA technology.

A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration becomes effective. This press release shall not constitute an offer to sell or the solicitations of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

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