Monday, Jul 15, 1996

Genentech Reports 1996 Second Quarter Results

South San Francisco, Calif. -- July 15, 1996 --

Genentech, Inc. (NYSE: GNE) announced today that earnings for the second quarter of 1996 were $21.7 million, or 18 cents per share, compared to $37.2 million, or 31 cents per share, in the second quarter of 1995. This earnings decline stems largely from an increase in the effective tax rate. Revenues increased 5 percent to $243.8 million, from $233.0 million in the same quarter of 1995. This increase results primarily from increased contract and royalty revenues, and reflects increased sales of marketed products on a pro forma basis as described below.

"From an operational stand-point, our second quarter was encouraging," said Arthur D. Levinson, Genentech's president and chief executive officer. "During the quarter, our marketed products maintained or increased their market share, we received regulatory approval to market a new indication for our flagship product, we won two important patent battles related to our growth hormone products, we received support from Roche to develop a key product in our development pipeline outside of the United States, and we began to erect our new bulk manufacturing plant in Vacaville.

"At the same time," added Levinson, "in line with our commitment to invest aggressively in the future, we have implemented a new approach for research and development funding and manufacturing by international subsidiaries of certain of our development products. This approach increases our effective tax rate in the next several years, but has the potential to lower our tax rate and thereby increase earnings in the long-term."

New Approach Geared Toward Long Term

The new approach for manufacturing involves funding future research and development (R&D) costs of certain developmental products, and manufacturing these products by international subsidiaries of Genentech. As a result of this approach, Genentech's tax rate increased to 48 percent in the second quarter and is expected to be 33 percent for the last half and full year of 1996. The second quarter rate includes a "catch up" for the year-to-date period to this 33 percent rate.

As a result of this decision (and of rate increases expected following the recognition of the balance of the company's federal credit carryforwards), Genentech expects its effective tax rate to increase through 1999 and then decline as these developmental products are brought to market.

Increased Royalties and Decreased MG&A Expenses 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. These changes have led to a reduction in reported product sales compared to the second quarter of 1995, but also to increased royalty revenues and decreased marketing, general and administrative (MG&A) expenses. Product sales in the second quarter of 1996 were $148.3 million compared to $144.8 million in the second quarter of 1995, 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. Reported total product sales in the second quarter of 1996 were $148.3 million compared to $161.2 million in the second quarter of 1995. Royalties in the second quarter of 1996 increased to $53.2 million from $49.4 million in the second quarter of 1995. MG&A expenses in the second quarter of 1996 decreased to $61.0 million from $67.8 million in the second quarter of 1995.

Marketed Products

Sales of Activase® (Alteplase, recombinant t-PA) increased to $72.3 million compared to $70.5 million in the second quarter of 1995 on a pro forma basis. Reported sales were $72.3 million compared to $74.1 million in the second quarter of 1995. During the quarter, Activase's market share as a thrombolytic therapy for the treatment of acute myocardial infarction (heart attack) reached approximately 80 percent from approximately 70 percent since the April 1995 regulatory approval of an accelerated dosing regimen for this indication and from 75 percent in the first quarter of 1996. Despite Activase's continued market share growth, the overall size of the thrombolytic therapy market during the second quarter has declined by 5 percent compared to the second quarter of 1995 as a result of some heart attack patients receiving therapy through ongoing large scale clinical trials and others receiving mechanical reperfusion rather than thrombolytic therapy.

Also, during the quarter, the U.S. Food and Drug Administration cleared Activase for marketing for the treatment of eligible adult patients with acute ischemic stroke or brain attack within three hours of symptom onset. Activase is the first therapy to be indicated for the management of stroke, the country's leading cause of adult disability.

Sales of Genentech's two growth hormone products Protropin® (somatrem for injection) and Nutropin® (somatropin [rDNA origin] for injection) decreased to $54.1 million from $55.2 million in the second quarter of 1995 on a pro forma basis. Reported sales were $54.1 million compared to $55.9 million in the second quarter of 1995. This decrease results from pricing pressures from distribution channels. However, even in the face of new competition, Genentech continues to maintain the two-thirds market share in the U.S. growth hormone market that it has held for several years.

In June, 1995, Genentech was granted a preliminary injunction against Bio-Technology General and its affiliates (BTG), that was upheld in April, 1996, prohibiting sales of BTG's growth hormone product in the United States. In June, 1996, Genentech was granted a preliminary injunction against Novo Nordisk A/S and its affiliates (Novo), prohibiting sales of Novo's growth hormone product in the United States. Neither Novo's nor BTG's product is currently on the market, though a third product from Pharmacia & Upjohn Inc. has been on the market since December, 1995.

Pulmozyme sales increased to $20.8 million from $18.1 million in the second 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 $20.8 million from $30.3 million in the second quarter of 1995.

Contract Revenues

Contract and other revenues in the second quarter of 1996 increased to $27.0 million from $7.9 million in the second quarter of 1995. This increase resulted primarily from $19.3 million from Roche, primarily for its exercise of its option (per Genentech's 1995 arrangement with Roche) to develop insulin-like growth factor (IGF-1) for diabetes outside of the United States.

Research and Development

Research and development (R&D) expenses in the second quarter of 1996 increased 29 percent to $112.6 million from $87.2 million in the second quarter of 1995. This increase was related to expenses for clinical development for Genentech's various cardiovascular products; for Genentech's nerve growth factor (NGF), currently in Phase II clinical trials for the treatment of peripheral neuropathy; and for IGF-1, currently in Phase II and III clinical trials for the treatment of diabetes. For the quarter, Genentech invested 46 percent of revenues into R&D.

Product and Business Development

In addition to the very positive news of approval of the ischemic stroke indication for Activase, Genentech had these additional product or business development milestones:

Agreed with Xoma Corporation to develop anti-CD11a antibody for the treatment of psoriasis and organ transplant rejection.

Discontinued development of Actimmune® (interferon gamma-1b) for the treatment of renal cell carcinoma after Phase III trials did not show efficacy for this indication.

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 June 30,

1996 1995
Revenues
   Product sales $ 148,305 $ 161,236
   Royalties   53,224 49,424
   Contract and other   27,032 7,861
   Interest   15,201 14,532
      Total revenues   243,762 233,053
       
Costs and expenses
   Cost of sales   27,153 24,312
   Research and development   112,603 87,167
   Marketing, general and administrative   60,987 67,814
   Special charge (merger related)   - 8,000
   Interest   1,333 2,039
      Total costs and expenses   202,076 189,332
       
Income before taxes   41,686 43,721
Income tax provision   19,967 6,558
       
Net income $ 21,719 $ 37,163
       
Net income per share $ 0.18 $ 0.31
       
Weighted average number of shares used in
   computing per share amounts:
  123,257 120,899
 
Six Months
Ended June 30,

1996 1995
Revenues
   Product sales $ 300,642 $ 323,303
   Royalties   106,117 96,573
   Contract and other   49,132 24,083
   Interest   30,755 28,061
      Total revenues   486,646 472,020
       
Costs and expenses
   Cost of sales   53,032 51,062
   Research and development   228,236 182,126
   Marketing, general and administrative   113,029 132,137
   Special charge (merger related)   - 8,000
   Interest   2,892 3,910
      Total costs and expenses   397,189 377,235
       
Income before taxes   89,457 94,785
Income tax provision   29,521 14,218
       
Net income $ 59,936 $ 80,567
       
Net income per share $ 0.49 $ 0.67
       
Weighted average number of shares used in
   computing per share amounts:
  123,309 120,696
 
June 30,
1996 1995
Selected balance sheet data (unaudited)
   Cash and short-term investments $ 753,591 $ 744,531
   Accounts receivable   189,829   185,416
   Inventories   85,447   92,888
   Long-term marketable securities   391,718   241,228
   Property, plant and equipment, net   534,484   483,731
   Other long-term assets   109,500   88,299
   Total assets   2,107,294   1,890,829
   Total current liabilities   221,697   228,435
   Long-term debt   150,000   175,503
   Total liabilities   397,043   426,646
   Total stockholders' equity   1,710,251   1,464,183