Monday, Oct 21, 1996

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