Wednesday, Oct 10, 2001

Genentech Reports 34 Percent Increase in Product Sales for Third Quarter

25 Percent Increase in Earnings Per Share and 22 Percent Increase in Net Income, Exclusive of Impact of Redemption

South San Francisco, Calif. -- October 10, 2001 --

Genentech, Inc. (NYSE: DNA) today announced a 25 percent increase in earnings per share1 and a 22 percent increase in net income driven by a 34 percent increase in product sales for the third quarter of 2001, exclusive of the ongoing impact of the 1999 redemption of Genentech's Special Common Stock and related accounting treatment2.

For the three months ended September 30, 2001:

  • Earnings per share for the third quarter of 2001 increased 25 percent to 20 cents per share, compared to 16 cents per share for the third quarter of 2000, exclusive of the ongoing impact of the 1999 redemption of Genentech's Special Common Stock and related accounting treatment.

  • Net income for the third quarter of 2001 increased 22 percent to $105.4 million, compared to $86.2 million for the third quarter of 2000, exclusive of the ongoing impact of the 1999 redemption of Genentech's Special Common Stock and related accounting treatment.

  • Due to recurring charges related to the redemption, the company recorded third quarter net income of $42.7 million, or net income of 8 cents per share, as compared to a net income of $5.8 million, or a net income of 1 cent per share, in the third quarter of 2000.

  • Revenues for the third quarter of 2001 increased 24 percent to $556.1 million from $447.3 million in the third quarter of 2000. This revenue growth was driven primarily by sales of Genentech's BioOncology products, Rituxan® (Rituximab) and Herceptin® (Trastuzumab). Total product sales increased 34 percent in the third quarter of 2001 to $448.7 million from $334.2 million in the third quarter of 2000.

"Our strong third-quarter performance reflects the continuation of our growth strategy and demonstrates progress towards achieving our financial goals for the year," said Arthur D. Levinson, Ph.D., Genentech's chairman and chief executive officer. "Along with solid sales performances from our marketed products, Rituxan and Herceptin, we made progress in moving projects through our pipeline, including the approval and launch of Cathflo Activase. We continue to remain focused on our corporate goals and dedicated to our mission of developing breakthrough medicines for the people who need them."

Product Sales

Marketed products sales increased 34 percent in the third quarter of 2001 to $448.7 million from $334.2 million in the third quarter of 2000.

Rituxan sales in the third quarter of 2001 increased 80 percent to $212.8 million from $117.9 million in the third quarter of 2000. This sales increase is due primarily to increased market penetration for the treatment of non-Hodgkin's lymphoma.

Herceptin sales in the third quarter of 2001 increased 16 percent to $83.9 million compared to $72.6 million in the third quarter of 2000. Since launch, an increase in the penetration into the metastatic breast cancer market has contributed to a positive sales trend and consistent quarter-over-quarter growth in the United States.

Combined sales of Genentech's three cardiovascular products, Activase® (Alteplase, recombinant), TNKase™ (Tenecteplase) and Cathflo™ Activase® (Alteplase), during the third quarter of 2001 decreased 4 percent to $48.6 million compared to $50.7 million in the third quarter of 2000.

Growth hormone sales during the third quarter of 2001 increased 11 percent to $67.7 million compared to $61.1 million in the third quarter of 2000.

Pulmozyme® (dornase alfa) Inhalation Solution sales increased 9 percent to $32.8 million in the third quarter of 2001 compared to $30.0 million in the third quarter of 2000.

Total Costs and Expenses

Costs and expenses increased as anticipated in the third quarter of 2001 as compared to the third quarter of 2000.

Research and development (R&D) expenses increased in the third quarter of 2001 to $128.2 million compared to $113.6 million in 2000. R&D expenses as a percent of revenues in the third quarter of 2001 were 23 percent, compared to approximately 25 percent in the third quarter of 2000. R&D expenses as a percent of revenues are expected to vary over the next several periods dependent on possible in-licensing agreements and as products progress through late-stage clinical trials.

Primarily due to the increase in product sales, cost of sales increased to $96.0 million in the third quarter of 2001 from $75.6 million, exclusive of expenses related to the redemption and push-down accounting in the third quarter of 2000.

Marketing, general and administrative (MG&A) expenses increased during the third quarter of 2001 to $109.4 million compared to $94.1 million in the third quarter of 2000 due primarily to higher royalty expenses.

Collaboration profit-sharing expenses increased to $65.8 million in the third quarter of 2001 from $37.6 million in the third quarter of 2000. The increase was due primarily to increased Rituxan profit-sharing expense due to higher Rituxan sales.

Genentech, Inc. is a leading biotechnology company that discovers, develops, manufactures, and markets human pharmaceuticals for significant unmet medical needs. Fifteen of the currently approved biotechnology products stem from or are based on Genentech science. Genentech manufactures and markets ten biotechnology products directly in the United States. The company has headquarters in South San Francisco, California, and is traded on the New York Stock Exchange under the symbol DNA.

1 All earnings (loss) per share data and number of shares reflect the stock split effective October 2000.

2 The accounting treatment under U.S. Generally Accepted Accounting Principles (GAAP) requires Genentech to establish a new accounting basis for the company's assets and liabilities. This accounting treatment is the result of Roche's exercise of its option to redeem Genentech's Special Common Stock in June 1999. The company's new accounting basis is based on the cost of Roche's 1990 through 1997 purchases of Genentech shares and the redemption of Genentech's Special Common Stock on June 30, 1999. Roche's cost of acquiring Genentech was "pushed down" to Genentech and reflected on Genentech's financial statements beginning June 30, 1999. The effect of push-down accounting on Genentech's third quarter 2001 and 2000 consolidated statements of operations include recurring charges for the amortization of goodwill and other intangibles and for 2000, the costs related to the sale of inventory that was written up at the redemption.

Webcast:

Genentech will be offering a live webcast of a discussion by Genentech management of the earnings and other business results on Wednesday, October 10, 2001 at 2:30pm PT. The live webcast may be accessed on Genentech's website at http://www.gene.com. This webcast will also be available after the call via the website until close of business October 17, 2001. An audio replay of the webcast will be available beginning at 4:30pm PT on October 10, 2001 until 4:30pm PT October 17, 2001. Access numbers for this replay are: 1-800-633-8284 (domestic) and 1-858-587-5842 (international); passcode number is 19704373.

Genentech Business and Product Development Events in the Third Quarter, 2001

Marketed and Pipeline Product Events

BioOncology

  • Tarceva™ (OSI-774): With partners OSI Pharmaceuticals and Roche, announced initiation of a Phase III clinical trial evaluating the use of Tarceva in combination with Carboplatin (paraplatin) and Paclitaxel (taxol) for the treatment of non-small cell lung cancer.

  • Avastin™ (Bevacizumab): With Eastern Cooperative Oncology Group, initiated Phase II/III clinical trial to evaluate Avastin in combination with Carboplatin (paraplatin) and Paclitaxel (taxol) for patients with advanced nonsquamous non-small cell lung cancer.

Cardiovascular Medicine

  • Cathflo™ Activase® (Alteplase): Announced that Cathflo Activase, a tissue plasminogen activator (t-PA), was approved by the U.S. Food and Drug Administration (FDA) for the restoration of function to central venous access devices (CVADs). Cathflo Activase is the only marketed thrombolytic available for this indication and offers medical professionals a viable treatment option for a CVAD complication that can hinder patient care.

  • TNKase™ (Tenecteplase): Announced ASSENT 3 trial results at the European Society of Cardiology meeting demonstrating full-dose TNKase with the low-molecular-weight heparin, Lovenox® (enoxaparin sodium) as a promising reperfusion therapy regimen.

  • Tracleer™ (Bosentan): Partner Actelion Ltd. announced that a FDA Advisory Committee voted unanimously to recommend approval of Tracleer, an oral dual endothelin receptor antagonist, for the treatment of pulmonary arterial hypertension.

Opportunistic

  • Xanelim™ (Efalizumab): With partner XOMA, Ltd., presented initial positive results from the second of two pivotal Phase III investigational trials of Xanelim at the American Academy of Dermatology "ACADEMY 2001" meeting. Based on discussions with the FDA, the companies will be conducting an additional pharmacokinetic study before submitting the Biologics License Application.

  • Xolair™ (Omalizumab): Productive discussions are ongoing with the FDA. Additional meetings with the FDA are scheduled during the next several weeks and these discussions will enable the companies to give a more accurate timeline for re-submission.

Corporate Business Events

  • A U.S. Appeals Court reinstated an earlier ruling preventing Bio-Technology General Corp. (BTG) from selling its human growth hormone product and sent the case back to the lower court for a determination of whether BTG infringes Genentech's patent.

  • Began litigation for a trial to decide a contract dispute between Genentech and City of Hope, a cancer research and treatment center in Duarte, California. The contract dispute relates to a 1976 agreement covering sponsored research conducted by two City of Hope scientists, Arthur Riggs and Keiichi Itakura, that Genentech funded.

  • In July, passed a full Good Manufacturing Practices inspection by the FDA Team Biologics confirming the company is in a full state of manufacturing compliance.

  • Announced that Genentech was named, for the tenth time, one of the "100 Best Companies for Working Mothers" by Working Mother Magazine.

  • Announced the appointment of Andrew C. Chan, M.D., Ph.D., to senior director of immunology in Genentech's Research department.

  • Donated over $1 million to the American Red Cross Sept. 11 Disaster Relief Fund on behalf of the company and its employees.

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

                                                                      Three Months
                                                                   Ended September 30,
                                                   -------------------------------------------------
                                                            2001                       2000
                                                   ----------------------     ----------------------
                                                    Actual      Pro Forma(1)    Actual      Pro Forma(1)
                                                   --------     ---------     --------     ---------
                                                                             (Restated)(2)  (Restated)(2)
Revenues:
   Product sales                                   $448,700      $448,700     $334,173      $334,173
   Royalties                                         66,051        66,051       51,818        51,818
   Contract and other                                 8,941         8,941       35,637        35,637
   Interest                                          32,473        32,473       25,712        25,712
                                                   --------      --------     --------      --------
      Total revenues                                556,165       556,165      447,340       447,340
Costs and expenses:
   Cost of sales                                     96,030        96,030       91,356        75,584
   Research and development                         128,195       128,195      113,636       113,636
   Marketing, general and administrative            109,365       109,365       94,087        94,087
   Collaboration profit sharing                      65,796        65,796       37,639        37,639
   Recurring charges related to redemption           79,404             -       97,780             -
   Interest                                           1,719         1,719        1,175         1,175
                                                   --------      --------     --------      --------
      Total costs and expenses                      480,509       401,105      435,673       322,121
Income before taxes                                  75,656       155,060       11,667       125,219
Income tax provision                                 32,915        49,619        5,907        39,012
                                                   --------      --------     --------      --------
Net income                                         $ 42,741      $105,441     $  5,760      $ 86,207
                                                   ========      ========     ========      ========
Earnings per share:
   Basic                                           $   0.08      $   0.20     $   0.01      $   0.16
                                                   ========      ========     ========      ========
   Diluted                                         $   0.08      $   0.20     $   0.01      $   0.16
                                                   ========      ========     ========      ========
Weighted average shares used to compute 
  earnings per share:
    Basic                                           527,328       527,328      522,928       522,928
                                                   ========      ========     ========      ========
    Diluted                                         533,670       533,670      541,483       541,483
                                                   ========      ========     ========      ========

(1) Pro Forma amounts exclude recurring charges related to the redemption, costs in 2000 related to the sale of inventory that was written up at the redemption and their related tax effects.

(2) The results for the quarter ended September 30, 2000 have been restated to reflect the adoption of the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 on revenue recognition as of January 1, 2000.

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

                                                                      Nine Months
                                                                  Ended September 30,
                                                 --------------------------------------------------
                                                           2001                        2000
                                                 -----------------------    -----------------------
                                                   Actual      Pro Forma(1)    Actual     Pro Forma(1)
                                                 ----------   ----------    ----------   ----------
                                                                            (Restated)(2) (Restated)(2)
Revenues:
   Product sales                                 $1,250,862   $1,250,862    $  926,765   $  926,765
   Royalties                                        193,128      193,128       148,805      148,805
   Contract and other                                68,359       58,355       105,998      105,998
   Interest                                          99,772       99,772        69,448       69,448
                                                 ----------   ----------    ----------   ----------
      Total revenues                              1,612,121    1,602,117     1,251,016    1,251,016
Costs and expenses:
   Cost of sales                                    256,013      256,013       295,148      204,724
   Research and development                         387,984      387,984       340,605      340,605
   Marketing, general and administrative            345,084      345,084       263,960      263,960
   Collaboration profit sharing                     170,077      170,077        86,870       86,870
   Recurring charges related to redemption          242,411            -       294,399            -
   Interest                                           4,554        4,554         3,701        3,701
                                                 ----------   ----------    ----------   ----------
      Total costs and expenses                    1,406,123    1,163,712     1,284,683      899,860
Income (loss) before taxes and cumulative 
   effect of accounting change                      205,998      483,405       (33,667)     351,156
Income tax provision (benefit)                       92,220      140,290        (1,951)     109,441
                                                 ----------   ----------    ----------   ----------
Income (loss) before cumulative effect
   of accounting change                             113,778      298,115       (31,716)     241,715
Cumulative effect of accounting change,
   net of tax (2)(3)                                   (5,638)           -       (57,800)           -
                                                 ----------   ----------    ----------   ----------
Net income (loss)                                $  108,140   $  298,115    $  (89,516)  $  241,715
                                                 ==========   ==========    ==========   ==========
Earnings (loss) per share:
   Basic: Earnings (loss) before cumulative
            effect of accounting change          $     0.22   $     0.57    $    (0.06)  $     0.46
          Cumulative effect of accounting 
            change, net of tax                        (0.01)           -         (0.11)           -
                                                 ----------   ----------    ----------   ----------
          Net earnings (loss) per share          $     0.21   $     0.57    $    (0.17)  $     0.46
                                                 ==========   ==========    ==========   ==========
 Diluted: Earnings (loss) before cumulative
            effect of accounting change          $     0.21   $     0.56    $    (0.06)  $     0.45
          Cumulative effect of accounting 
            change, net of tax                        (0.01)           -         (0.11)           -
                                                 ----------   ----------    ----------   ----------
          Net earnings (loss) per share          $     0.20   $     0.56    $    (0.17)  $     0.45
                                                 ==========   ==========    ==========   ==========
Weighted average shares used to compute 
  earnings (loss) per share:
    Basic                                           526,709      526,709       521,097      521,097
                                                 ==========   ==========    ==========   ==========
    Diluted                                         534,783      534,783       521,097      540,060
                                                 ==========   ==========    ==========   ==========

(1) Pro Forma amounts exclude recurring charges related to the redemption, costs in 2000 related to the sale of inventory that was written up at the redemption and their related tax effects. In addition, pro forma excludes the cumulative effect of the changes in accounting principle net of tax, adopted in 2001 and 2000, and the changes in fair value of certain derivatives ($10.0 million) recorded in Q1 2001 under Statement of Financial Accounting Standard 133 (FAS 133).

(2) The results for the three- and nine-months ended September 30, 2000 have been restated to reflect the adoption of the SEC's Staff Accounting Bulletin No. 101 on revenue recognition as of January 1, 2000, and the related cumulative effect of a change in accounting principle associated with contract revenues recognized in prior periods. The related deferred revenue is being recognized over the term of the agreements.

(3) Genentech adopted Accounting for Derivative Instruments and Hedging Activities on January 1, 2001, and recorded a cumulative effect of a change in accounting principle related to recording derivative instruments at fair value.

GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)

                                                                 September 30,
                                                        ------------------------------
                                                            2001               2000
                                                        -----------        -----------
                                                                            (Restated)
Selected balance sheet data:
Cash and short-term investments                         $ 1,500,443        $   996,786
Accounts receivable                                         309,054            238,993
Inventories                                                 340,069            237,834
Long-term marketable securities                           1,022,419          1,567,247
Property, plant and equipment, net                          797,146            743,378
Goodwill                                                  1,340,814          1,493,114
Other intangible assets                                   1,154,469          1,321,244
Other long-term assets                                      320,300            167,366
Total assets                                              6,865,633          6,918,181
Total current liabilities                                   643,789            413,220
Long-term debt                                                    -            149,692
Total liabilities                                         1,057,786          1,321,406
Total stockholders' equity                                5,807,847          5,596,775
Year-to-date:
Capital expenditures                                        118,753             78,999
Pro forma depreciation and amortization expense              80,682             72,866

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