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Ma rge Ha rri s
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South San Francisco, CA 94080-4990

(650) 225-1000
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Ro na ld Pe ar so
www.gene.com TN Ka se pa tie nt

SKU# 0724-AR-01
 O N C E U P O N A G E N E...
16 6 3
Cells first described by
Hooke.
A C O N S T E L L AT I O N O F A C H I E V E M E N T Significant scientif ic and indust ry milestones in biotechnology
18 3 0 1976
Proteins are discovered. First working synthetic 19 93
gene developed. Genentech receives
M I S S I O N
19 8 9
18 5 5 19 8 5 Epogen, the first biotech FDA approval to 20 01
S T A T E M E N T
Escherichia coli (E. coli) Genentech, the first Genentech receives FDA market Pulmozyme
product to become a Genentech celebrates
bacterium discovered (later biotechnology company, approval for Protropin for for cystic fibrosis.
blockbuster, is approved 25 years of discovery, Our mission is to be the leading
becomes a major tool for founded by Swanson growth hormone deficiency for the treatment of medical advances and biotechnology company, using human
biotechnology). and Boyer. in children — the first recom- renal disease anemia. patient benefit.
binant biotech drug manufac- genetic information to develop,
18 6 9 20 0 0
tured and marketed by a The gene responsible manufacture and market pharma-
Miescher discovers DNA First draft of the human
biotechnology company. for cystic fibrosis is ceuticals that address significant
in the sperm of trout. genome sequence
discovered. unmet medical needs. We commit
completed by the HGP
19 2 0 19 97 and Celera Genomics. ourselves to high standards of
197 7 19 8 6
Human growth hormone Genentech and IDEC integrity in contributing to the best
Recombinant anti-hemophilic
Genentech produces Pharmaceuticals Corp.
discovered by Evans and factor (rAHF), a blood interests of patients, the medical
the first human protein 19 8 3
Long. receive FDA approval for
Polymerase chain reaction clotting Factor VIII for the profession, and our employees, and
(somatostatin) in a Rituxan, the first monoclonal
(PCR) technique conceived treatment of hemophilia, is
19 4 0 bacterium (E. coli). antibody (MAb) approved for to seeking significant returns to our
(will become a major means approved and marketed as
Avery demonstrates that cancer in the United States. stockholders based on the continued
of copying genes and gene Recombinate. Factor VIII
DNA is the “transforming pursuit of excellent science.
fragments). was first produced by
factor” and material of
Genentech scientists. 19 9 4 CONTENTS
genes. 19 9 8
1978 BRCA1, the first breast
Genentech receives Letter to Stockholders 1
Genentech scientists cancer susceptibility
1953 gene, is discovered.
FDA approval to market
Financial Highlights 4
synthesize recombinant
“Double-helix” structure Herceptin, the first MAb
human insulin.
of DNA first described by 19 8 2 for metastatic breast Business Milestones 5
19 9 0
Watson and Crick. Eli Lilly and Company markets cancer in which HER2
Human Genome Project Marketed Products 6
Genentech-licensed recombinant is overexpressed.
(HGP), an international Partnerships 10
19 6 6 human insulin — the first such
effort to map all of the Enbrel is approved for
The genetic code is product on the market. 19 95 Development Pipeline 12
1979 genes in the human treatment of rheumatoid
cracked, demonstrating The first full gene
Genentech scientists body, is launched. arthritis. Monoclonal Antibodies 14
that a sequence of three sequence of a living
nucleotide bases determines synthesize recombinant organism other than Product Operations 16
each of 20 amino acids. human growth hormone. a virus is completed
19 91 Genomics 18
for the bacterium
Neupogen, the second
1973 19 8 7 Haemophilus influenzae. Research 20
biotech product to become
Cohen and Boyer develop
Genentech receives FDA a blockbuster, is approved Corporate Responsibility 22
genetic engineering tech- 19 8 0 approval to market Activase, for the treatment of low
niques to “cut and paste” Cohen and Boyer receive first Financials 24
a tissue-plasminogen white blood cells in
DNA and reproduce the U.S. patent for gene cloning. activator (t-PA), for acute chemotherapy patients. Genentech Board of
new DNA in bacteria. Directors and Management 74
myocardial infarction (AMI).
Biotech’s first IPO, Genentech,
1975 goes public on October 14.
Milstein and Kohler develop
The following products were developed and are marketed by Genentech: Activase® (Alteplase, recombinant) tissue-plasminogen activator; Herceptin® (Trastuzumab) anti-HER2 antibody; Protropin® (soma-
the first monoclonal trem for injection) growth hormone; and Pulmozyme ® (dornase alfa, recombinant) inhalation solution indicated for the management of cystic fibrosis (including patients under age 5). Rituxan ® (Rituximab)
antibodies (MAbs). anti-CD20 antibody was developed jointly by Genentech and IDEC Pharmaceuticals Corporation and is marketed by Genentech in the U.S.; it is indicated for relapsed or refractory low-grade or follicular,
CD20 positive, B-cell non-Hodgkin’s lymphoma. Enbrel® (etanercept) was developed and is marketed by Immunex Corporation; Epogen ® (Epoetin alfa) and Neupogen® (Filgrastim) were developed and are
marketed by Amgen, Inc.; Recombinate™ (antihemophilic factor, recombinant) was developed and is marketed by Baxter Healthcare Corporation.
 T O O U R S T O C K H O L D E R S

M I S S I O N
S T A T E M E N T

Our mission is to be the leading

biotechnology company, using human
fpo
genetic information to develop,
manufacture and market pharma-
ceuticals that address significant
unmet medical needs. We commit
Arthur D. Levinson, Ph.D.,
Chairman and ourselves to high standards of
Chief Executive Officer
integrity in contributing to the best
interests of patients, the medical
Twenty-five years ago, Herb Boyer and Bob Swanson had the incredible insight, bold genius and profession, and our employees, and

unwavering commitment to star t a different kind of company — one based on the belief that to seeking significant returns to our
stockholders based on the continued
recombinant DNA technology would produce commercially viable, breakthrough medicines
pursuit of excellent science.
within a relatively shor t period of time. On April 7, 1976, the two founded Genentech — and
in doing so launched the biotechnology industry. The adventure began . . .

As we enter the year 2001 and celebrate biotechnology’s first quarter century, I continue to be amazed by
the magnitude and pace of biotech discovery, and I marvel at the remarkable impact our “young” industry
has already had on the world of human health. As Chairman and CEO of Genentech, I am particularly proud
of the role our company has played in inciting the “revolution in biology” back in 1976 and in remaining at
the forefront of the biotech industry ever since.

From its humble beginnings, this industry — founded on a vision and a promise — has grown today to include
over 1,500 U.S.-based biotech companies. Nearly 100 biotech drugs and vaccines have been approved in the
United States and around the world, enhancing or extending the lives of hundreds of millions of people. And,
more than 350 new biotech drugs and vaccines are currently being evaluated in clinical trials, with hundreds
more in development. Today, scientists worldwide are closer than ever to discovering new therapies and cures
for our most serious and life-threatening diseases, including cancer, heart disease and neurodegenerative
diseases such as Alzheimer’s and Parkinson’s. All this, while we are on the verge of a terrific expansion of the
knowledge and understanding of the human genetic and biologic function. Never has there been a time when
so much has converged to enable even more significant advances in the not-too-distant future.

This year’s report documents not only Genentech’s performance for the year 2000, but also reflects on how
far we’ve come in 25 years in our ability to discover, develop, manufacture and market innovative biotech
therapies that fill significant unmet medical needs, while delivering strong financial returns to our stockholders.

In 2000, our total revenues were $1.73 billion — a 23 percent increase over 1999 revenues.1,2 Our prime produc-
tivity measure of net income as a percent of revenues was 19 percent for 2000, up from 18 percent in 1999 and
making progress toward our 5 x 5 goal of 25 percent of revenues reaching the bottom line by 2005.1,2 Earnings-
per-share growth in 2000 increased 28 percent over 1999, in line with our goal for 2005 of an on-average annual

1
 U.S.-Based
Biotech Companies

>1,500
’76 ’00

0
25-percent earnings-per-share growth.2–4 Also, for the second year in a row, product sales exceeded $1 billion, and oping a set of principles for the Medicare Outpatient Drug benefit legislation currently before Congress. We feel
in 2000 reflected a 23 percent increase over 1999 product sales.1,2 A strong commercialization effort throughout strongly that the benefit must be market-based to ensure that beneficiaries have a choice of drug service
the year drove sales growth, primarily through our biooncology products, Herceptin and Rituxan. providers. As such, we also recommend that the program be run by an entity with prior experience in admin-
istering market-based systems. We support a stop-loss benefit and a low-income subsidy, which will protect
In June of 2000, we successfully introduced two new products, TNKase, the first thrombolytic agent able to be
individuals with high drug spending from impoverishment and provide proportionately greater assistance to
administered as a five-second injection, and Nutropin Depot, the first long-acting dosage form of recombinant
those who cannot afford to buy their drugs. Finally, it is our recommendation that the program be voluntary
growth hormone (indicated for the treatment of growth failure due to inadequate endogenous growth hormone
and open to all who wish to participate. By taking this position, we hope to ensure that the benefits of our
secretion in children). Together with Novartis Pharmaceuticals Corporation and Tanox, Inc., we also submitted a
continuing discoveries will be translated into therapies that can be used by all Americans.
Biologics License Application to the U.S. Food and Drug Administration (FDA) for anti-IgE, or Xolair, the first human-
ized monoclonal antibody for the potential treatment of asthma and seasonal allergic rhinitis. Strategic alliances, partnerships and acquisitions have become an increasingly important priority for
Genentech over the past several years — and a key factor in our future growth. We are currently involved in
Going forward, the majority of our research and development efforts will remain focused on the areas of
27 such collaborative arrangements — several of which represent innovative new business models. We have
oncology and cardiovascular medicine — areas that today represent the top two leading causes of death by
had much success recently in forming alliances that solidify or strengthen our biooncology and cardiovas-
disease in the United States — as well as other areas where we see opportunities and possess strong biological
cular businesses. Our ongoing progress in these areas should help us achieve our 5 x 5 goal of generating
insights and a deep understanding of the basis of disease. We will continue to maximize our strategic advan-
$500 million in new revenues from alliances and acquisitions by the year 2005.
tage in cancer as the primary driver of growth for the company. This strategy is reflected in our current devel-
opment pipeline, which has grown to include 20 active projects — many of which are monoclonal antibodies I invite you to read through this year’s annual report and share in our very special anniversary celebration.
being evaluated in oncology indications or in opportunistic areas such as respiratory disease, inflammation and The pages that follow highlight key areas of achievement that reflect Genentech’s growth, strength and
immunology. The progress we are making in the development area puts us on course to meet another of our commitment: marketed products, partnerships, development pipeline, monoclonal antibodies, product
5 x 5 goals — to gain approval of five new products or indications by 2005. operations, genomics, research and corporate responsibility. We enter the new millennium more capable An n u a l G e n e n te c h
Reve n u e s
than ever before of delivering consistently strong commercial, scientific and financial results. “Firing on all
Our capacity and expertise in large-scale manufacturing of complex proteins are unmatched in the industry
cylinders” — from basic research to commercialization — Genentech has the resources, talent and strate- $1.73 B
and provide us with a unique and powerful competitive advantage. In 2000, we received FDA licensure for our
gies in place to propel us to new levels of accomplishment in providing valuable therapies to an expanding
Vacaville, Calif., facility, one of the world’s largest biotechnology manufacturing plants for the production of ’76 ’00
patient base and increasingly strong financial returns to our stockholders.
pharmaceutical proteins, and acquired a third facility in Porriño, Spain. 0

During a year of growth and progress in manufacturing, we have also had to address several observations In closing, I’d like to thank the thousands of employees and the stockholders who have contributed to our
resulting from an FDA-sponsored Team Biologics inspection of our South San Francisco facility. At no time did success, growth and ability to save or improve lives over the past 25 years. We have accomplished great
these observations cause any safety issues for patients nor did they have any negative impact on product quality things, but this is truly only the beginning. I would also like to pay tribute to the millions of patients who have
or on the availability of products to patients. We communicated our plans for improvements in our quality and put their trust in the power of biotechnology products, participated in clinical studies and shared their expe-
manufacturing processes to the FDA and, in February 2001, we were officially informed by the FDA that our riences with us — for they are truly the heroes and heroines of this story.
responses to their observations were acceptable. I look forward to your continued support.
Last year’s sequencing of the human genome began a whole new era in medicine — one that holds unprece- Sincerely,
dented potential for improving and saving millions of lives. Genentech’s 25 years of experience in genetic
engineering, expertise in molecular biology, and integrated multidisciplinary research foundation uniquely
position us to capitalize on the tools of genomics to accelerate the drug discovery process. Over the past
several years, we have filed more than 1,000 patent applications on full-length DNA sequences that encode
Arthur D. Levinson, Ph.D.
novel human proteins with therapeutic potential — many the result of our own highly successful Secreted
Chairman and Chief Executive Officer
Protein Discovery Initiative (SPDI). From the start, our strategy has been to include in our patent applications
data from actual biologic assays that disclose the function and utility of these sequences. We believe that this 1. Based on Pro Forma amounts, which exclude the special charges in 1999 related to the Redemption and legal settlements, recurring charges related to the Redemption
in 2000 and 1999, costs in 2000 and 1999 related to the sale of inventory that was written up at the Redemption, and their related tax effects. In addition, Pro Forma
is a responsible approach, which is consistent with the U.S. Patent and Trademark Office’s new guidelines on excludes the cumulative effect of a change in accounting principle, net of tax, in 2000. See the “Special Charges,” “Recurring Charges Related to Redemption,” “Cost of
utility, and places us in an excellent position to have new patents granted in the United States and internation- Sales,” “Income Tax,” and “Staff Accounting Bulletin No. 101” discussions on pages 29–31 in the Financial Review section of this annual report for further information on
these charges. 2. Percent change was calculated based on Pro Forma amounts and shares where applicable. 3. All share, price per share and per share amounts of
ally. To date, we hold more than 3,600 patents worldwide, with more than 2,600 patent applications pending. Common Stock and Special Common Stock reflect the two-for-one splits of our Common Stock that were effected in October 2000 and November 1999. 4. The goals
for 2005 in this letter are forward-looking statements. The Company’s actual results may differ materially. For a discussion of the factors that may affect future revenues, see
Our strong research and development organization and advantage in genomics-enabled discovery continue to “Forward-Looking Information and Cautionary Factors That May Affect Future Results—Fluctuations in Our Operating Results Could Affect the Price of Our Common Stock,”
“Our Affiliation Agreement With Roche Could Limit Our Ability to Make Acquisitions and Could Have a Material Negative Impact on Our Liquidity,” “We Face Growing and New
fuel our pipeline and will help us meet our 5 x 5 goal of having five significant products in late-stage clinical Competition,” “Other Competitive Factors Could Affect Our Product Sales,” “Our Royalty and Contract Revenues Could Decline,” “Difficulties or Delays in Product Manufacturing
Could Harm Our Business,” “We Are Exposed to Market Risk,” and the factors discussed below that could affect the development and approval of products, on pages 37–44;
trials by 2005. Toward this end, we established an internal goal last year of adding four new projects per year future earnings per share and net income as a percent of revenues, see the foregoing factors, plus “In Connection With the Redemption of Our Special Common Stock, We
to our pipeline starting in the year 2000, and I am pleased to report that we have exceeded that goal. Recorded Substantial Goodwill and Other Intangibles, the Amortization of Which May Adversely Affect Our Earnings,” “Protecting Our Proprietary Rights Is Difficult and Costly,”
“We May Incur Material Litigation Costs,” “We May Incur Material Product Liability Costs,” “We Are Exposed to Market Risk,” “Our Interest Income Is Subject to Fluctuations in
Interest Rates,” “Our Investments in Equity Securities Are Subject to Market Risks,” “Recent Accounting Pronouncements Could Impact Our Financial Position and Results of
As we continue to mine the information from the sequencing of the human genome for potential therapies, we Operations,” and “We Are Exposed to Credit Risk of Counterparties,” on pages 40–44; the development and approval of products, see “The Successful Development of
Pharmaceutical Products Is Highly Uncertain,” “We May Be Unable to Retain Skilled Personnel and Maintain Key Relationships,” and “We May Be Unable to Obtain Regulatory
must also work to preserve the potential market for those therapies. Therefore, this year, we have begun devel- Approvals for Our Products,” on pages 37–41.

3 4
F I N A N C I A L H I G H L I G H T S B U S I N E S S M I L E S T O N E S
(dollars in millions, except per share data) Highlighted below are major events that occurred in 2000 and early 2001.
2000 1999 % Change from Preceding Year (3)

MARKETED AND PIPELINE • Initiated Phase III clinical trials in collaboration • With Alkermes, Inc., announced a decision to
Years ended December 31 Actual Pro Forma(1) Actual(2) Pro Forma(1) 1998 00/99 99/98
PRODUCT EVENTS with other major pharmaceutical manufacturers proceed with a Phase II/III clinical trial of Nutropin
Total revenues $ 1,736.4 $ 1,727.7 $ 1,401.0 $ 1,401.0 $ 1,150.9 23% 22%
to test TNKase in combination with various leading Depot in growth-hormone-deficient adults.
On c o l o g y anti-thrombotic agents in the treatment of AMI.
Product sales 1,278.3 1,278.3 1,039.1 1,039.1 717.8 23 45 • With partners Roche and IDEC Pharmaceuticals • In collaboration with Genentech, Millennium
Corporation, announced positive interim results • Signed a licensing agreement with Actelion Ltd. Pharmaceuticals, Inc. initiated Phase II clinical
Cost of sales 364.9 272.1 285.6 192.2 138.6 42 39 for the development and copromotion in the trials of LDP-02 for inflammatory bowel disease.
from a Phase III study of Rituximab (Rituxan/
United States of tezosentan, which is in Phase
Research and development (R&D) expenses 489.9 489.9 367.3 367.3 396.2 33 (7) MabThera) in combination with CHOP (cyclophos- • In collaboration with Genentech, Inspire Pharma-
III trials for the potential treatment of acute ceuticals, Inc. initiated Phase II clinical trials of
Marketing, general and administrative expenses 497.0 497.0 467.9 467.9 358.9 6 30
phamide, doxorubicin, vincristine and prednisone)
heart failure. INS365 for patients with chronic bronchitis,
chemotherapy in previously untreated patients
Special charges(4) — — 1,437.7 — — — — with aggressive non-Hodgkin’s lymphoma. • Signed a second licensing agreement with and filed a new drug application for INS37217
(5) Actelion for the development and copromotion in Respiratory for the treatment of cystic fibrosis.
Recurring charges related to redemption 375.3 — 197.7 — — — — • In conjunction with F. Hoffmann-La Roche and the United States of Tracleer, also in Phase III
Cumulative effect of accounting change,
leading cancer cooperative groups, initiated
trials, for the potential treatment of pulmonary CO R P O RAT E A N D E M P LOY E E
net of tax(6) (57.8) — — — — — — large randomized Phase III clinical trials to
hypertension and acute and chronic heart failure. EVENTS
evaluate Herceptin in the adjuvant setting for
Net income (loss) (74.2) 319.8 (1,157. 5) 246.7 181.9 30 36 early-stage breast cancer. • Announced results indicating that the Phase II
(7) clinical trial of anti-CD18 for the treatment of heart • Was named in 2001 for the third consecutive
Diluted earnings (loss) per share (0.14) 0.60 (2.26) 0.47 0.35 28 34 • Announced at the American Society of Clinical year to Fortune magazine’s annual list of “100
attack did not meet its primary objectives.
R&D expense as a % of revenues — 28% — 26% 34% — — Oncology (ASCO) annual meeting, positive results Best Companies to Work for in America.”
from a Phase II study investigating Herceptin as a • Announced a collaborative agreement with
Net income as a % of revenues — 19% — 18% 16% — — single agent for patients with previously untreated COR Therapeutics, Inc. and Schering-Plough • Appointed Myrtle S. Potter as executive vice
president, commercial operations, and chief
Shares used to compute diluted earnings (loss) HER2-positive metastatic breast cancer. Corporation to copromote INTEGRILIN for non-
operating officer.
per share (millions)(7) 522.2 536.1 512.9 529.5 519.5 1 2 ST-segment acute coronary syndrome, and
• Announced, also at ASCO, preliminary positive
(7) results from Phase II trials evaluating anti-VEGF
TNKase and Activase for acute ST-segment- • Named as senior vice presidents: Richard H.
Actual shares at year-end (millions) 525.5 525.5 516.2 516.2 508.5 2 2 elevation AMI. Scheller, Ph.D., research; Robert L. Garnick,
in combination with chemotherapy in patients
Stock price at year-end(7) $ 81.50 — $ 67.25 — $ 19.93 21 237 Ph.D., regulatory, quality and compliance; and
with advanced metastatic colorectal and non- Op p o r t u n i s t i c Kimberly J. Popovits, marketing and sales.
No cash dividends were paid. small cell lung cancers, as well as positive
• With partners Novartis Pharmaceuticals Corpor-
interim Phase II results of trials evaluating anti- ation and Tanox, Inc., filed a Biologics License • Named as vice presidents: Claudia Estrin,
Cash, short-term investments decision support and commercial innovation;
VEGF as a single agent in patients with relapsed Application (BLA) with the FDA for Xolair for
and long-term marketable securities $ 2,459.4 — $ 1, 957.4 — $ 1,604.6 26 22 Roy Hardiman, corporate law, and assistant
metastatic breast cancer. the potential treatment of asthma and
Property, plant and equipment, net 752.9 — 730.1 — 700.2 3 4 secretary; R. Guy Kraines, finance; Joseph S.
• Initiated Phase III clinical trials of anti-VEGF in seasonal allergic rhinitis.
McCracken, business and commercial develop-
Total assets 6,711.8 — 6, 534.8 — 2,855.4 3 129 colorectal and breast cancers.
• Completed patient enrollment in two pivotal ment; David Nagler, human resources; Andrew
Total stockholders’ equity 5,674.2 — 5, 269.9 — 2,343.8 8 125 • Moved 2C4, a monoclonal antibody, into devel- Phase III clinical trials evaluating Xanelim anti- Scherer, engineering, facilities, strategic planning
opment for the potential treatment of a variety CD11a antibody in patients with moderate to and support; and John M. Whiting, controller and
Capital expenditures 112.7 — 95.0 — 88.1 19 8 of solid-tumor cancers. severe psoriasis, and completed enrollment in a chief accounting officer.
Number of employees 4,459 — 3,883 — 3,389 15 15 Phase I/II clinical study of Xanelim in the preven-
• With OSI Pharmaceuticals, Inc. and Roche, • Received multiproduct FDA licensure for the
tion of kidney transplant rejection. Genentech is
announced agreements for the global codevel- new, state-of-the-art manufacturing facility in
R E V E N U E S (8) DILUTED EARNINGS NET INCOME AS A developing Xanelim with XOMA Ltd.
opment and commercialization of OSI’s lead Vacaville, Calif. Also, purchased a cell culture
P E R S H A R E (8 ) P E R C E N T O F R E V E N U E S (8)
2,000 0.80 25
anti-cancer drug, OSI-774. • Launched Nutropin Depot, the first long-acting manufacturing facility in Porriño, Spain, that will
$1,727.7 dosage form of recombinant growth hormone, supplement Genentech’s existing bulk cell
1,750
19% Ca rd i ova s c u l a r Me d i c i n e indicated for the treatment of growth failure due culture production capacity.
$1,401.0 $0.60 20 18%
1,500 0.60
16% • Received U.S. Food and Drug Administration (FDA) to inadequate endogenous growth hormone
1,250 $1,150.9 $0.47
15 approval of and launched TNKase (Tenecteplase), secretion in children, and developed with partner • Roche completed the public offering of 34.6
1,000 0.40 $0.35 the first five-second, single-dose thrombolytic for million Genentech shares.*
Product Alkermes, Inc.
sales 10 the treatment of acute myocardial infarction (AMI),
750
• Completed a Phase III clinical trial of Pulmozyme • In October, announced a two-for-one stock split
500 Royalties 0.20 or heart attack. that was effective October 24, 2000 in the form
Contract,
5 in early-stage cystic fibrosis and presented posi-
250
• Submitted to the FDA and had accepted for review of a stock dividend.
interest
& other
tive results at the North American Cystic Fibrosis
0 0 0 a supplemental Biologics License Application (sBLA) Conference.
1998 1999 2000 1998 1999 2000 1998 1999 2000
for Activase for use in catheter clearance.
(1) Pro Forma amounts exclude the special charges in 1999 related to the Redemption and legal settlements, recurring charges related to the Redemption in 2000 and 1999, costs in 2000 and 1999
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 a change in accounting principle, net of tax, in
2000. See the “Special Charges,” “Recurring Charges Related to Redemption,” “Cost of Sales,” “Income Tax,” and “Staff Accounting Bulletin No. 101” discussions in the Financial Review section of this annual
report for further information on these charges. (2) Actual 1999 results include the combined New Basis and Old Basis presentation from the Consolidated Statements of Operations and the Consolidated *All share information reflects the two-for-one stock split in October 2000.
Statements of Cash Flows. In addition, we corrected the accounting related to the write up of the valuation allowance pertaining to unrealized gains on certain marketable securities. Refer to “Basis of Genentech has or owns rights to various copyrights, trademarks and trade names used in our business, including the following: Activase® (Alteplase, recombinant) tissue-plasminogen activator; Herceptin® (Trastuzumab)
Presentation and Restatement” in the Notes to Consolidated Financial Statements. (3) Percent change was calculated based on Pro Forma amounts and shares where applicable. (4) Amount includes anti-HER2 antibody; Nutropin® [somatropin (rDNA origin) for injection] growth hormone; Nutropin AQ® [somatropin (rDNA origin) injection] liquid formulation growth hormone; Nutropin Depot™ [somatropin (rDNA origin) for
$1,207.7 million related to the Redemption of our Special Common Stock and $230.0 million related to legal settlements. (5) Amounts primarily relate to the amortization of goodwill and other intangible injectable suspension] growth hormone; Protropin® (somatrem for injection) growth hormone; Pulmozyme® (dornase alfa, recombinant) inhalation solution; TNKase™ (Tenecteplase) single-bolus thrombolytic agent; Xanelim™
assets due to the Redemption of our Special Common Stock. (6) We adopted the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101 on revenue recognition effective January 1, 2000, (efalizumab) anti-CD11a antibody; and Xolair™ (Omalizumab) anti-IgE antibody. Enbrel® (etanercept) is a registered trademark of Immunex Corporation; Epogen® (Epoetin alfa) and Neupogen® (Filgrastim) are registered
and recorded a cumulative effect of a change in accounting principle, net of tax. (7) All share, price per share and per share amounts of Common Stock and Special Common Stock reflect the two-for-one trademarks of Amgen, Inc.; INTEGRILIN® (eptifibatide) Injection is a registered trademark of COR Therapeutics, Inc.; MabThera® (Rituximab) antibody is a registered trademark of Roche; Recombinate™ (antihemophilic factor,
splits of our Common Stock that were effected in October 2000 and November 1999. (8) Graphs are based on Pro Forma amounts. recombinant) is a trademark of Baxter Healthcare Corporation; Rituxan® (Rituximab) antibody is a registered trademark of IDEC Pharmaceuticals Corporation; Tracleer™ (bosentan) is a trademark of Actelion Ltd.

5 6
 Total Patients Treated
with Genentech Products

1.1 M
’76 ’00

elivering innovative medicines to patients with HERCEPTIN®

D serious or life-threatening medical conditions Anti-HER2 antibody
(Trastuzumab)

• Metastatic breast cancer in HER2 overexpressed tumors

is what Genentech is all about. Since its beginning
in 1976, the company has focused its drug
RITUXAN® (Rituximab)
discovery efforts solely on therapies that would fill Anti-CD20 antibody
unmet needs. Today, Genentech markets and • Relapsed or refractory low-grade or follicular,
A STO RY O F L I V E S manufactures nine protein-based products for CD20 positive, B-cell non-Hodgkin’s lymphoma
ENHANCED
10 serious or life-threatening medical con-
T N Ka s e™ (Tenecteplase)
Minerva Boor was diag- ditions — giving Genentech one of the leading
nosed with breast cancer Single-bolus thrombolytic agent
in 1994 at age 33. After product portfolios in the biotech industry. • For the treatment of acute myocardial infarction (AMI)
failing to respond to
chemotherapy, radiation
During the last two decades, these medi-
and a bone marrow trans- AC T I VA S E ® (Alteplase, recombinant)
plant, Minerva started cines have been used to successfully treat A tissue-plasminogen activator
Herceptin treatment in
late 1998. She’s been on over 1 million cardiovascular, oncology, • AMI
Herceptin since, with no • Acute ischemic stroke
respiratory and growth hormone patients
recurrence of cancer and
no significant side effects. worldwide — and this number continues to • Acute massive pulmonary embolism
Today, Minerva enjoys
good health and an active rise. The positive impact of Genentech’s
life with her husband and
PULMOZYME® (dornase alfa, recombinant)
therapies on the lives of patients and their Inhalation solution
two young boys.
families is a constant inspiration to • For the management of cystic fibrosis (including patients under age 5)
Genentech’s employees.
N U T R O P I N D E P OT ™ [somatropin (rDNA origin) for injectable suspension]
Growth hormone
T H E D R E A M O F B I O T E C H N O L O G Y C O M E S T R U E... • For the treatment of growth failure due to inadequate endogenous
growth hormone secretion in children

MARKETED PRODUCTS N U T R O P I N AQ ® [somatropin (rDNA origin) injection]

Liquid formulation growth hormone
Because many Genentech products are • Growth hormone deficiency (GHD) in children and adults
unique, first-ever therapies, they have • Growth failure associated with chronic renal insufficiency (CRI)
actually changed the way healthcare profes- prior to kidney transplantation
sionals treat certain diseases and disorders — • Short stature associated with Turner syndrome

while providing new hope to patients. Two NUTROPIN® [somatropin (rDNA origin) for injection]
prime examples of this innovation at work are Growth hormone
the biooncology drugs Herceptin and Rituxan, • GHD in children and adults
both of which are monoclonal antibodies — • Growth failure associated with CRI prior to kidney transplantation
precisely targeted therapeutics that can • Short stature associated with Turner syndrome
destroy cancer cells without subjecting patients
P R OT R O P I N ® (somatrem for injection)
to many of the toxic side effects seen with Growth hormone
chemotherapy and radiation treatment. • GHD in children

Developed with partner IDEC Pharmaceuticals

Genentech also copromotes the GP IIb/IIIa inhibitor INTEGRILIN® (eptifibatide) Injection,
Corporation, and approved for non-Hodgkin’s which was developed by COR Therapeutics, Inc. and Schering-Plough Corporation.
lymphoma in 1997, Rituxan became the first mono- INTEGRILIN is indicated for the treatment of patients with acute coronary syndrome
(unstable angina and non-Q-wave MI), including those who are to be managed medically
clonal antibody approved for the treatment of and those undergoing percutaneous coronary intervention (PCI); and for the treatment
of patients undergoing PCI at the time of procedure.

7 8
 C O M M E R C I A L
T A K E S O F F. . .
taying ahead of a prolific pipeline and a successful
TNKase represents an important advance in the
speed with which heart attack treatment can be S development arm has been a major focus of
delivered. A bioengineered plasminogen activator, Genentech. As the company has grown and the
TNKase is similar to Genentech’s Activase, the complexities of the healthcare industry have reimbursement assistance program. In an age in which
recombinant DNA-derived version of naturally increased, so have the skills and capabilities of strategic partnerships are an increasingly important
A N A M A Z I N G TA L E
O F S U R V I VA L occurring tissue-plasminogen activator (t-PA) Genentech’s commercial organization. part of development, Genentech is continually forming
While on duty, emergency that revolutionized AMI treatment more than new alliances and collaborations to maximize the value
room (ER) physician Introducing and marketing multiple products into
Dr. Ronald Pearson 13 years ago. TNKase’s unique features have of its portfolio, leverage its assets and garner additional
new and different markets, directing prelaunch
realized he was having a been specifically designed to prolong its half-
heart attack of his own. commercial development activities and utilizing value for patients and stockholders. The company’s
Springing into action, life, enabling it to be given as a single injection. expertise in commercialization has made it a valuable
Dr. Pearson chose to be cutting-edge sales approaches — Genentech
treated with the newly It also has been engineered with increased and sought-after partner.
brings the same level of excellence and innova-
approved thrombolytic, specificity for fibrin, a key component of intra-
TNKase. Twenty minutes tion to its commercial organization as it does to
after receiving this single- coronary clots, potentially resulting in less
injection clot-buster, research and development. In recent years,
Dr. Pearson felt his chest disturbance of the body’s natural clotting
Genentech’s commercial organization has expe-
pain subside. Two weeks system.
later, he was back at work rienced a period of expansion and maturation
in the ER.
Starting in early 2001, Genentech will copro- that has helped ensure that the company’s
mote the glycoprotein (GP) IIb/IIIa inhibitor products get to all patients who need them
INTEGRILIN, developed by COR Therapeutics, and has brought added stockholder value to
cancer and has since been used to treat more than the company.
Inc. and Schering-Plough Corporation. The
40,000 patients worldwide. Today, Rituxan remains
most widely used GP IIb/IIIa inhibitor in the
the only monoclonal antibody therapy approved for The strength of this commercial organization is
United States, INTEGRILIN helps prevent the
non-Hodgkin’s lymphoma, a disease affecting some perhaps best evidenced by Genentech’s rapidly
development of blood clots that can occlude
300,000 Americans. established presence in the oncology market
arteries in the heart, causing heart attack and
within the last three years, with the drugs
First approved in 1998, Herceptin has proved to be death. Through this collaboration, COR and
Herceptin and Rituxan — both of which
one of a very few drugs on the market to show a Schering-Plough will copromote the Genentech
produced first-year sales that surpassed any
significant survival benefit in women with HER2- cardiovascular products, TNKase and Activase. Left to right: Kim Popovits, senior vice president,
previous cancer drug. In partnership with
marketing and sales; Joe McCracken, vice president,
positive metastatic breast cancer. More than 25,000 professional societies and advocacy groups, business and commercial development; Myrtle Potter,
Four growth hormone products — including
women have been treated with Herceptin to date. executive vice president, commercial operations, and
newcomer Nutropin Depot, a long-acting formula- Genentech has ensured that physicians and chief operating officer; Diane Parks, vice president,
Clinical studies under way are evaluating Herceptin in patients are kept informed and educated about managed healthcare and commercial support; and
tion of growth hormone that offers once- or twice- Claudia Estrin, vice president, decision support and
the adjuvant setting for early-stage breast cancer. these novel therapies. commercial innovation, bring a unique blend of
monthly dosing (and may require more than one
experience, strength and innovation to Genentech’s
In the cardiovascular arena, Genentech launched the injection per dose) — and the unique cystic fibrosis commercial organization.
The commercialization team is also involved with
new thrombolytic agent, TNKase, for the treatment medicine, Pulmozyme, comprise Genentech’s
development activities that bring forward products
of acute myocardial infarction (AMI), or heart attack, “opportunistic” area of therapeutic products.
in the pipeline in the most efficient way to meet the
in mid-2000. The first “clot-buster” able to be demands of the market and the healthcare commu-
administered in a single five-second injection, nity — directing market research, sponsoring medical
education efforts and developing a leading patient

9 10
 Genentech
Partnerships & Alliances

27
rom the beginning of its existence, Genentech has collaborations with other companies. One exciting
’76

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’00
F recognized the value of strategic partnerships. The product poised to emerge from the pipeline is Xolair,
company joined forces with Eli Lilly and Company in an anti-IgE monoclonal antibody therapy with the
1978 (licensing to Lilly the rights to market recombi- potential to reduce asthma exacerbations and control
nant human insulin), and since then has formed the symptoms of seasonal allergic rhinitis, reducing
hundreds of alliances that span all areas of the busi- the need for corticosteroids and improving the
ness — from basic research and clinical development patient’s quality of life. Genentech is developing this
to manufacturing and commercialization. Partnerships, product with partners Novartis Pharmaceuticals
alliances and acquisitions have been identified as key Corporation and Tanox, Inc. and will commercialize
strategies and drivers of future growth. the product in the United States with Novartis.

A N E W W O R L D O F O P P O R T U N I T Y E M E R G E S...

P A R T N E R S H I P S
A NEW BEGINNING A number of other collaborative efforts moved
Severe asthma has kept forward in 2000. XOMA Ltd. initiated and
Drew Williams from partici-
pating in most school
completed enrollment in a Phase I/II clinical study
outings and physical activ- of Xanelim anti-CD11a antibody in the prevention
ities since early childhood.
For the past 21/2 years, of kidney transplant rejection, and completed
Drew has received the
enrollment in two Phase III studies of Xanelim in
monoclonal antibody
Xolair as part of a clinical psoriasis. Under an innovative deal structure,
study. Healthier and more
active than ever, Drew has Genentech and XOMA are working together to
been able to stop all his develop this antibody. Also, partner Millennium
other medications, except
for the occasional use of Pharmaceuticals, Inc. announced encouraging
an inhaler.
Phase I/II clinical trial results for LDP-02 in
Xolair is being developed by treating inflammatory bowel disease.
Genentech and partners
Novartis Pharmaceuticals
Corporation and Tanox, Inc. Genentech entered into several new strategic
alliances in 2000 and early 2001 that augment its
Genentech’s considerable assets make it a valuable
focus areas of cardiovascular medicine and
ally, as does the ability to design and implement
oncology. The company entered into two separate
collaborations that fit the situation rather than adhere agreements with Actelion Ltd. for the development
to a single, rigid business model. Over the years, and copromotion of tezosentan, for the potential
Genentech has also become more adept at identi- treatment of acute heart failure, and Tracleer
fying unique opportunities offered by teaming up (bosentan), for the potential treatment of pulmonary
with partners whose strengths complement its own. hypertension and acute and chronic heart failure.
A successful partnership with IDEC Pharmaceuticals Genentech and Roche entered into agreements for
Corporation, which resulted in the 1997 launch of the global codevelopment and commercialization of
the breakthrough biooncology drug Rituxan, is repre-
‫ﱗ‬ ‫ﱗ‬ ‫ﱗ‬ ‫ﱗ‬
OSI Pharmaceuticals’ lead anti-cancer drug, OSI-774,
sentative of a true collaborative effort — one that
‫ﱗ‬ ‫ﱗ‬ ‫ﱗ‬
which is now in Phase II clinical studies for non-small Abgenix, Inc. Actelion Ltd. Alkermes, Inc. Aventis S.A. Boehringer Ingelheim International GmbH

‫ﱗ‬ ‫ﱗ‬ ‫ﱗ‬ ‫ﱗ‬

benefited both companies and facilitated the delivery Cambridge Antibody Technology Ltd. COR Therapeutics, Inc. & Schering-Plough Corporation CuraGen Corporation DAKO
cell lung, head and neck, and ovarian cancers.
‫ﱗ‬ ‫ﱗ‬
IDEC Pharmaceuticals Corporation Immunex Corporation ImmunoGen, Inc. Incyte Genomics, Inc. Inspire Pharmaceuticals, Inc.
of a much-needed therapy to patients.
‫ﱗ‬ ‫ﱗ‬ ‫ﱗ‬ ‫ﱗ‬
InterMune Pharmaceuticals, Inc. Millennium Pharmaceuticals, Inc. Novartis Pharmaceuticals Corporation & Tanox, Inc.
More collaborations are on the horizon. Recent
‫ﱗ‬ ‫ﱗ‬
OSI Pharmaceuticals, Inc. Pharmacia Corporation Roche Schwarz Pharma AG Seattle Genetics, Inc.
When it comes to partnerships in the area of devel- success in sequencing the human genome is Sumitomo Pharmaceuticals Corporation UroGenesys, Inc. XOMA Ltd.
opment, Genentech’s pipeline says it all: of the changing the landscape of drug discovery and devel-
20 projects in its pipeline, 15 are evolving through opment, and Genentech is cultivating key partnerships
in this area to enhance its already strong position.
11 12
 D I S COV E R I E S A DVA N C E A N D P R O M I S E L E A D S TO P R O G R E SS . . . s a biotechnology leader, Genentech has a long-standing tradition of reinvesting a significant percentage of
A revenues back into research and development — a practice that has proved successful in transforming

DEVELOPMENT PIPELINE promising drug candidates into important new products. In the year 2000, this figure was 28 percent.

With 20 projects under way, Genentech’s development pipeline has never been more productive and promising
— thanks to a strong development organization and collaborative efforts with strategic partners. While the
pipeline reflects the company’s commitment to oncology and cardiovascular medicine, Genentech is also devel-
oping other “opportunistic” projects that utilize the company’s expertise and fill a therapeutic void in important
areas of medicine. In addition, a commitment to furthering the utility and effectiveness of current products is
evident. This year, approximately half of Genentech’s pipeline is composed of monoclonal antibody therapies —
an area in which Genentech continues to lead the industry.

P E N D I N G F DA
P H A S E I P H A S E I I P H A S E I I I A P P R OVA L
Xanelim Anti-CD11a Antibody
Moderate to severe psoriasis
Xanelim Anti-CD11a Antibody Rituxan Antibody
INS365 Intermediate- and high-grade Activase
Prevention of kidney
Chronic bronchitis non-Hodgkin’s lymphoma Intravenous catheter
transplant rejection
Resear c h

clearance

P r o d u c t
Herceptin Antibody TNKase3
Adjuvant treatment for As combination therapy with
INS37217 Respiratory1
early-stage breast cancer various anti-thrombotic agents
Cystic fibrosis
for acute myocardial infarction

Apo2 Tracleer
Nutropin Depot2 Xolair Anti-IgE Antibody
Ligand/TRAIL1 OSI-774 Pulmonary hypertension
Growth hormone Asthma
Cancer Non-small cell lung, Acute and chronic
deficiency in adults Seasonal allergic rhinitis
2C4 Antibody1 head and neck, and Thrombopoietin heart failure
Solid-tumor cancers ovarian cancers Thrombocytopenia related
AMD Fab
Anti-VEGF Antibody to cancer treatment
Age-related macular
Several types of
degeneration
E-26 LDP-02 Antibody solid-tumor cancers Tezosentan
Allergic asthma Inflammatory bowel Acute heart failure
Oncology Allergic rhinitis disease

1. Phase I trials currently under preparation. 2. Phase III trial currently under preparation. 3. ASSENT III is a Phase III trial. INTEGRITI, ENTIRE and FASTER are Phase II trials.
Cardiovascular
Xanelim anti-CD11a antibody developed with XOMA Ltd.; Apo2 Ligand/TRAIL developed with Immunex Corporation; E-26 developed with Novartis Pharmaceuticals Corporation and Tanox,
Inc.; INS37217 and INS365 developed with Inspire Pharmaceuticals; LDP-02 antibody developed with Millennium Pharmaceuticals, Inc.; OSI-774 developed with OSI Pharmaceuticals, Inc.
and Roche; Herceptin adjuvant studies in early-stage breast cancer being conducted with F. Hoffmann-La Roche and U.S. national cooperative groups; Nutropin Depot developed with
Opportunistic Alkermes, Inc.; Rituxan antibody developed with IDEC Pharmaceuticals Corporation in the United States; tezosentan developed with Actelion Ltd.; exclusive worldwide rights for throm-
bopoietin belong to Pharmacia Corporation; TNKase in combination with various anti-thrombotic agents studies being conducted with COR Therapeutics, Inc. and Schering-Plough
Corporation; Tracleer developed with Actelion Ltd.; Xolair anti-IgE antibody developed with Novartis Pharmaceuticals Corporation and Tanox, Inc.
Note: Projects are positioned in alphabetical order
within each phase of development.

13 14
Genentech MAb Projects
in Development

9 Monoclonal antibodies were first discovered in 1975,

’76 ’00
when British scientists Milstein and Kohler invented a
0 process for generating large quantities of uniform
mouse antibodies designed to target specific
umanized monoclonal antibodies (MAbs) have proteins — work that earned them a Nobel Prize in
H become a major focus of Genentech’s develop- medicine in 1984. However, early mouse MAbs
ment efforts in recent years. Spurred by the success were of limited therapeutic value, predominantly
of Rituxan and Herceptin, the first monoclonal due to the patient’s allergic response to mouse-
antibodies marketed in the United States for non- derived antibodies. Over the years, researchers
Hodgkin’s lymphoma and breast cancer, respectively, have used recombinant DNA technology to
Genentech now leads the industry in the research and create “humanized” antibodies, thereby lowering
development of this important new drug category, the risk of allergic responses and making the
whose promise extends well beyond oncology. drugs safer and more effective.

T H E P O W E R O F T A R G E T E D T H E R A P Y E M E R G E S. . .

MONOCLONAL ANTIBODIES
A LO N G JO U R N E Y With seven new humanized monoclonal
TOWA R D H E A LT H
antibody projects in development, and an
Diagnosed with psoriasis
as an infant, Marge Harris
additional two studies evaluating the further
has been plagued with utility of Herceptin and Rituxan, monoclonal
flare-ups and skin lesions
over much of her body antibodies account for approximately half of
surface throughout her
life. She’s tried virtually
Genentech’s pipeline projects. Each of these
every treatment available, studies holds the promise of offering patients
with little or no relief.
Today, Marge is partici- a much-needed therapy by filling a gap or
pating in a clinical trial of
the monoclonal antibody
deficiency in the existing treatment options.
Xanelim, which is being
developed by Genentech In addition to oncology, Genentech’s current
and XOMA Ltd. Her
flare-ups are down to a monoclonal antibody projects include potential
minimum, and she’s never
felt or looked better.
therapies for asthma and seasonal allergic
rhinitis, psoriasis, organ transplant rejection and
inflammatory bowel disease.
Specially engineered versions of the body’s own anti-
bodies, humanized monoclonal antibodies are highly Xanelim, a monoclonal antibody developed by
targeted therapeutics. Some MAbs are capable of Genentech and partner XOMA Ltd., is currently
tracking down specific cells, such as cancer cells, and in Phase III investigation for the treatment of
destroying them — without many of the debilitating, moderate to severe psoriasis — an autoimmune
toxic side effects of chemotherapy and radiation. disease that affects millions of people worldwide.
Xanelim anti-CD11a antibody works by preventing
the activation of T cells and their migration to sites
of inflammation on the skin. This ability of Xanelim
to inhibit T cells may prove useful in other autoim-
mune or T-cell-mediated diseases. Phase I/II studies
of Xanelim in kidney transplant patients began in
early 2000.

15 16
Annual Genentech Bulk
Manufacturing Capacity

241,000 Liters
’76 ’00
Following the plant’s completion in 1998, the staff
0 conducted trial production runs, produced qualifica-
tion lots of Herceptin and demonstrated the ability to
iotech’s rich promise is truly fulfilled only when
B its scientific breakthroughs are transformed into
produce bulk quantities. This cutting-edge facility
occupies 310,000 square feet on a 100-acre site,
safe, effective therapies, made available in quantities
and is the world’s largest biotechnology manufac-
sufficient to treat all those in need. This extremely
turing plant for the large-scale production of
complex and demanding task is the responsibility of
pharmaceutical proteins from mammalian cells. In
Genentech’s Product Operations (PROP) organiza-
addition to Herceptin, Vacaville currently manufac-
tion, which is composed of process science, quality,
tures Xolair, a unique anti-IgE monoclonal anti-
facilities/engineering, regulatory and manufacturing
body awaiting FDA approval for the potential
services. Each area performs specific tasks on which
treatment of asthma and seasonal allergic rhinitis.
the other areas depend — so making quality medi-
cines becomes a highly synchronized collaborative In the year 2000, Genentech also acquired a
effort — right down to the final manufacturing cell culture manufacturing facility in Porriño,
process. The success of PROP is not only critical to Spain. Built in 1976, the 40,000-square-foot
the overall success of the company, but is essential plant formerly manufactured interferon. The
to meeting the needs of patients. For this reason, facility now operates as a wholly owned
Genentech is continually evaluating, strengthening subsidiary company, Genentech España S.L.,
and expanding its Product Operations organization to and will supplement Genentech’s existing
meet the highest standards of quality and excellence. bulk cell culture production capacity.

MEETING DEMANDS AND ANTICIPATING NEEDS BECAME OUR MANDATE . . .

P R O D U C T O P E RAT I O N S
In just 25 years, Genentech has built the quality and Genentech is ready to continue evolving its
capacity of its production systems to include one of product operations at all three sites to meet the
the largest, most advanced biologics manufactur- demands of the next quarter century. The
ing operations in the world. From its South San Vacaville facility has room to expand capacity
Francisco campus to new facilities in Vacaville, Calif., another twofold, and current plans call for
and overseas, Genentech has aggressively grown its increasing output there by some 50 percent. The
product operations capabilities — and staffed them company is also expanding its expert workforce —
with highly skilled, experienced people — to antici- the solid manufacturing experience of its new
pate the demands of an ever-growing pipeline. employees in Spain goes back nearly three
decades, and in South San Francisco and Vacaville,
2000 was an important year for Genentech Product
Genentech continues to hire and retain the best and
Operations. At the South San Francisco campus, the
brightest talent in biotech.
company augmented its state-of-the-art capabilities
to begin commercial production of two newly
approved medications: TNKase and Nutropin Depot.
The Vacaville facility received FDA licensure, marking
the culmination of a major gearing-up effort.

17 18
 Total Gene-Sequence
Patents Filed by Genentech

>1,000 or the past quarter century, Genentech scientists “expressed sequence tags.” Genentech’s own
’76

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’00
F have been utilizing human genetic information and proprietary algorithms are also used to identify
new technologies to identify genes and proteins with sequence homologies and detect novel secreted and
therapeutic value — with much success. The comple- transmembrane proteins.
tion in mid-2000 of the first draft of the human
genome is something Genentech is uniquely positioned The company’s expertise is fully realized downstream
to utilize to its advantage. The company’s strong from bioinformatics when biologists like Drs. Austin
competitive edge in genomics-enabled discovery Gurney and John Stults develop physical clones of
stems from a solid, integrated foundation that provides the genes identified to hold therapeutic potential,
its researchers access to the most advanced technolo- conduct the difficult process of expressing and puri-
gies as well as the biologic expertise necessary to fying the proteins encoded by them and then
identify and validate novel drug targets. identify the function of these proteins.

O U R A D V A N T A G E I N T E N S I F I E S. . .

G E N O M I C S
Molecular biologist Molecular biologist Austin Gurney is working to find
Austin Gurney, Ph.D.;
proteomics scientist new receptor-hormone interactions. His group is
John Stults, Ph.D.;
and bioinformatics
hoping to catalog the genome by matching up all
scientist Thomas Wu, the molecular keys to the receptor locks expressed
M.D., Ph.D., exemplify
Genentech’s inte- on the surface of cells in an effort to understand
grated multidiscipli-
nary approach to
and control each of the chemical pathways in the
genomics-enabled body. Working with a lead from bioinformatics, Dr.
drug discovery.
Gurney’s group recently discovered that a certain
protein was the key that binds to and turns on a
new receptor. Concurrently, another research lab
at Genentech found that this same receptor was a
protein highly expressed in colon cancer.

A specialist in proteomics, John Stults studies the

concentration levels of proteins and how they are
Drug discovery at Genentech starts with information.
modified in their functional states. His group
An in-house bioinformatics department is staffed by
recently developed an advanced methodology for
scientists like Dr. Thomas Wu, who possess a deep
the differential analysis of normal versus tumor
understanding of molecular biology and are skilled in
proteins that is more automated and far more
computational methods for mining genomic data. A
sensitive to cell membrane proteins than tradi-
centralized database that stores experimental data on
tional methods. The increased sensitivity is also
genes and proteins is accessible to researchers
important because tumors for study are becoming
throughout the company. Through a powerful
smaller in size.
computing infrastructure, the bioinformatics depart-
ment processes large amounts of sequence data No doubt, genomics has had a significant impact on
from the Human Genome Project (HGP) around the the drug discovery process at Genentech — not only
clock. And, a collaboration with Incyte Genomics, Inc. by accelerating the identification of genes and proteins
provides Genentech with genomic data known as with potential, but also by enabling the company to
take full advantage of its core strength — biology.

19 20
 erhaps nowhere in Genentech are the intensity development and several other promising genes in and were studying the same gene. To facilitate rapid “My work,” says Filvaroff, “is focused on the structural
P and drive to succeed more apparent than in the earlier stages of research. development and maximize the complementary aspects of OA.” To this end, she is investigating a
research labs. Science has been the foundation of strengths of both companies, a collaborative agree- protein that appears to have a positive impact on
Apoptosis is a natural regulatory program for
Genentech, and the company’s commitment to the ment was formed in 1999. Today, Apo2L/TRAIL is articular cartilage, because degeneration of this
suicide that exists in all cells, including cancer
pursuit of excellent science remains foremost. Its 400 in Genentech’s development pipeline, where it tissue is a central feature of OA. Says Filvaroff, “We
cells. Its purpose is to eliminate damaged or
scientists are among the top in their fields, publishing will be evaluated for efficacy in a number of solid- think that a factor that can delay or reverse cartilage
unneeded cells from the organism; however, in
250 to 275 papers annually — a rate unmatched in the tumor cancers. breakdown will likely slow or halt progression of
cancer cells this self-regulation program is
biotech and pharmaceutical industries. As one scientist disease.” So far, various formulations of this protein
silenced, allowing tumors to survive and grow. Having a research focus on apoptosis has helped
put it, “At Genentech, we’re encouraged to act on have been tested in vitro and in vivo, and Filvaroff has
Dixit and Ashkenazi are finding new ways to keep Genentech’s molecular oncology researchers
promising leads, follow our intuition and test our hypo- forwarded her findings to Genentech’s marketing
activate the apoptosis machinery in cancer cells out front and ahead of the competition. As Dr. Dixit
theses. This enables great science versus formula.” department to gauge interest in such a therapy
as a means of attacking tumors. puts it, “The pace of our apoptosis research has
among orthopedic surgeons.
accelerated dramatically over the past two years.
T O M O R R O W ’ S T H E R A P I E S TA K E S H A P E... Every day we learn something new about this process
and how to take best advantage of it therapeutically.”

R E S E A R C H
Staff scientist A major breakthrough for Ashkenazi’s team O ST E OA R T H R I T I S
Avi Ashkenazi and
director of molec- came several years ago when they discovered A Novel Approach to an
ular oncology
the Apo2L/TRAIL gene, which encodes for a
Age-Old Disease
Vishva Dixit are
discovering ways protein that can trigger the apoptosis n addition to oncology and cardiovascular medicine,
to harness the
biological mecha-
nism of apoptosis,
machinery in certain cells. They found that
their recombinant version of this protein could
IGenentech scientists conduct research in a range of
or programmed “opportunistic” areas with significant unmet medical
cell death, in their effectively kill tumor cells, while sparing normal needs. Cell biologist Ellen Filvaroff, Ph.D., is cur-
fight against cancer.
ones. Further investigation led to the identifi- rently leading efforts to address an unmet need of
cation of the protein’s receptors and the revela- monumental proportions: osteoarthritis (OA).
tion that these “death receptors” can activate Filvaroff is tackling the problem on a number of
Filvaroff’s experiences typify Genentech’s uniquely Scientist
Scientist Ellen
Ellen Filvaroff
Filvaroff
the dormant suicide machinery of cancer cells. fronts, working to unravel the biology of human (center),
(center), along
along with
with
nurturing, integrated approach to scientific research
research associates
associates
Concurrent with Genentech’s work in this area, joints while also investigating proteins that may Min
Min Bao
Bao and
and Liping
Liping Cai,
Cai, isis
discovery. When she arrived three years ago, she searching
searching forfor new
new ways
ways to
to
scientists at Immunex Corporation had identified have beneficial effects on diseased joints.
brought an expertise in the musculoskeletal system slow
slow down
down osteoarthritis.
osteoarthritis.

Osteoarthritis affects up to 13 percent of the U.S. and was offered the opportunity to choose an area
Apo2L/TRAIL
adult population — costing the country over of focus to pursue. She thought immediately of OA.
A P O P T O S I S $50 billion each year in lost earnings and “I know a number of people with this debilitating
Basic Science as a Powerful medical care. Current treatments include phys- disease,” she says. “I thought, ‘This is a disease that
and Practical Tool ical therapy, analgesics, intra-articular steroid Genentech should be studying — with its advanced
injections and, in the most severe cases, surgery. technology and collection of cloned genes.’ ” As
cientists Vishva Dixit and Avi Ashkenazi of
S Genentech’s molecular oncology department are Death receptors
(DR4 or DR5)
To date, no drug has been shown to slow or
reverse the progression of the disease. The need
Filvaroff began her research, colleagues offered to
share their expertise, as well as pertinent findings
world-renowned leaders in the study of apoptosis,
(and the market) for such a therapy is both vast from their own studies. This, along with access to
the mechanism by which cells self-destruct. Both
and growing. OA is one of the most prevalent Genentech’s integrated network of databases and
researchers are intent on uncovering ways to use
Cancer cell chronic conditions in people over 65 (a group resources, may help Filvaroff find the answers she’s
this built-in regulatory process to fight cancer. Caspases
poised to expand as baby boomers age) and is looking for and provide osteoarthritis patients with a
“Essentially, our philosophy is to discover biological
among the leading causes of disability in adults. much-needed therapy.
pathways, understand how they operate and then put Apoptosis
them to work for us,” says Ashkenazi. This strategy
Death receptors on the Apo2L/TRAIL gene activate the caspases, or
has proved quite productive — with one molecule in suicide machinery, of cancer cells and trigger apoptosis.

21 22
21
Free Medicine Distributed
by Genentech*

$300 M
he same passion, drive and initiative that have THE PEOPLE WHO
’76

0
’00
T made Genentech the dynamic growth business it
ARE GENENTECH’S
is today spill over into its commitment to community. who share this passion. The company proactively and
In the year 2000, Genentech, as a company, and regularly works with advocacy groups to disseminate
FUTURE
*Since 1990
Genentech employees donated time, money, information and gain their insight and involvement in At over 4,400 strong, employees are Genentech’s • Diversity — Genentech will continue to build on
resources and products to a wide range of causes major development efforts, such as clinical trials most valued asset and perhaps the best predictor of its commitment to diversity — that aspect of its
and nonprofit organizations. enrollment and oversight, investigator meetings and its future growth. Three of the company’s current community that represents different thought
safety boards. high-priority initiatives in line with its overall strategy processes, backgrounds, characteristics and skill
Genentech provided nearly $2 million in support of
nonprofit organizations in 2000 through its ongoing Genentech’s commitment to patients is further to “invest in its people” are: sets that each individual brings to the pursuit of

charitable contributions program. Consistent with the evident in its support of programs designed to help the company’s common mission — as an essential
• Employee Involvement in 5 x 5 — Designed to
company’s mission to address unmet medical needs, people better live and cope with their disease. The part of its plan for growth.
further strengthen Genentech’s cohesive, empow-
the majority of these funds went to national and local Cancer Survival Toolbox™ — developed by the ered and enthusiastic employee base, this initiative
nonprofit groups working in areas of science and National Coalition for Cancer Survivorship, the encourages every employee to personally invest in
healthcare of strategic interest to the company. In Oncology Nursing Society and the Association of Genentech’s 5 x 5 plan (that is, 5 goals for the
addition, in its good-neighbor capacity, Genentech Oncology Social Work through an educational grant year 2005).
supported key nonprofit educational, civic, cultural and from Genentech BioOncology — is successfully
social service organizations in its own South San helping individuals with cancer develop practical
• Flexible Work Arrangement — To meet the
Francisco and Vacaville, Calif., communities. needs of employees balancing work and home life
skills for dealing with their diagnosis and treatment.
and to remain competitive in today’s employee
market, Genentech offers this opportunity, which
O U R C O M M I T M E N T S H I N E S T H R O U G H... focuses on what versus how employees contribute.

CORPORATE RESPONSIBILITY
Genentech employees also play a critical role in Beginning with its very first marketed product,
community work. In 2000, employees contributed to Genentech has believed that any patient who
hundreds of nonprofits, with Genentech matching needs one of its medicines should get it —
these funds dollar for dollar. On top of this, committed regardless of economic or insurance status. To
employees donated time and energy to dozens of this end, the company offers the Genentech
local events that raised awareness and funds for Assistance Program and the Genentech Endow-
causes such as cancer, cystic fibrosis, heart disease ment for Cystic Fibrosis. During the past 10 years
and HIV/AIDS. alone, over $300 million worth of free medicine
has been provided to uninsured or underinsured
Investing in the future of science is a key priority for
patients through these efforts.
Genentech, and the company has established several
science education initiatives to do just that. Among Genentech’s accomplishments in the areas of
them are the Genentech Foundation for Biomedical corporate responsibility and scientific leadership
Sciences, the Genentech Center for Clinical Research have not gone unnoticed. The company and its
and Education, and Access Excellence®, a Web-based founders have been the recent recipients of several
educational resource for teachers that will soon form prestigious awards, including the National Breast
the core educational component of the National Cancer Coalition Corporate Leadership Award and
Health Museum Web site. the National Medal of Technology, as well as two of
the top biotech industry awards, the 5th Annual
Genentech strives to push the boundaries of disease
Helix Award and the Biotechnology Heritage Award.
treatment through innovative therapies and makes a
In addition, the company has been named to
practice of partnering with patient advocacy groups
Fortune magazine’s “100 Best Companies to Work
for in America.”

23 24
 2 0 0 0 A n n u a l Re p o r t

Boor
M in er va
p ti n p a tient
Her ce

G E N E N T E C H,
D rew W ill
Xo la ir tr ia m s
ia l p a ti e

O N C E U P O N A nt

I N C.
2 0 0 0
A N N U A L
R E P O R T

Ma rge Ha rri s
Xa ne lim tri al pa
1 DNA Way tie nt

South San Francisco, CA 94080-4990

(650) 225-1000
n, M. D.
Ro na ld Pe ar so
www.gene.com TN Ka se pa tie nt

SKU# 0724-AR-01
F I N A N C I A L
R E V I E W
(dollars in millions, except per share amounts)
OVERVIEW OF OUR BUSINESS in Japan through other licensees. We also receive worldwide royalties
Genentech is a leading biotechnology company using human genet- on seven additional licensed products that are marketed by other
ic information to discover, develop, manufacture and market human companies. Six of these products originated from our technology.
pharmaceuticals that address significant unmet medical needs.
Fourteen of the approved products of biotechnology stem from our REDEMPTION OF OUR SPECIAL COMMON STOCK
F I N A N C I A L
science. We manufacture and market nine protein-based pharma- On June 30, 1999, we redeemed all of our outstanding Special
C O N T E N T S Common Stock held by stockholders other than Roche Holdings, Inc.,
ceuticals listed below, and license several additional products to
other companies. commonly known as Roche, at a price of $20.63 per share in cash
Financial Review . . . . . . . . . . 24
with funds deposited by Roche for that purpose. We refer to this event
• Herceptin (trastuzumab) antibody for the treatment of certain
Report of Independent DISTRIBUTION OF REVENUE DOLLARS (1) as the “Redemption.” As a result, on that date, Roche’s percentage
patients with metastatic breast cancer whose tumors overexpress
Auditors . . . . . . . . . . . . . . . 45 ownership of our outstanding Common Stock increased from 65% to
the human epidermal growth factor receptor2, or HER2, protein;
100%. Consequently, under U.S. generally accepted accounting prin-
Report of Management . . . . . 45 1,800 ciples, we were required to use push-down accounting to reflect in our
$1,727.7 • Rituxan (rituximab) antibody which we market together with IDEC
Total Revenues
Consolidated Statements Pharmaceuticals Corporation, commonly known as IDEC, for the financial statements the amounts paid for our stock in excess of our
of Operations . . . . . . . . . . . 46 treatment of patients with relapsed or refractory low-grade or fol- net book value. Push-down accounting required us to record $1,685.7
1,500 million of goodwill and $1,499.0 million of other intangible assets
licular, CD20-positive B-cell non-Hodgkin’s lymphoma;
Consolidated Statements $1,401.0
onto our balance sheet on June 30, 1999. Also, as a result of push-
of Cash Flows . . . . . . . . . . 47 • TNKase (tenecteplase) single-bolus thrombolytic agent for the
down accounting, we recorded special charges related to the
1,200 treatment of acute myocardial infarction;
Consolidated Balance $1,150.9 Redemption of $1,207.7 million on June 30, 1999. For more informa-
Sheets . . . . . . . . . . . . . . 48 • Activase (alteplase, recombinant) tissue plasminogen activator, or tion about special charges and push-down accounting, you should
t-PA, for the treatment of acute myocardial infarction, acute read “Special Charges ” below and the “Redemption of Our Special
Consolidated Statements of 900 Common Stock ” note in the Notes to Consolidated Financial
ischemic stroke within three hours of the onset of symptoms and
Stockholders’ Equity . . . . . 49 Statements. Roche subsequently made public offerings of our
acute massive pulmonary embolism;
Notes to Consolidated Common Stock as described below.
600
• Nutropin Depot [somatropin (rDNA origin) for injectable suspen-
Financial Statements . . . . 50
Net income sion] long-acting growth hormone for the treatment of growth
STOCK SPLITS
Quarterly Financial Data . . . 69 failure associated with pediatric growth hormone deficiency;
R&D expenses On October 24, 2000, we effected a two-for-one stock split of our
11-Year Financial 300 MG&A expenses • Nutropin AQ [somatropin (rDNA origin) injection] liquid formula- Common Stock in the form of a dividend of one share of Genentech
Summary . . . . . . . . . . 70–72 Cost of sales tion growth hormone for the same indications as Nutropin; Common Stock for each share held at the close of business on
Interest expense
October 17, 2000. Our stock began trading on a split-adjusted basis
Stock Information . . . . . . . . 72 & income taxes
• Nutropin [somatropin (rDNA origin) for injection] growth hormone on October 25, 2000. On November 2, 1999, we effected a two-for-
0
1998 1999 2000 for the treatment of growth hormone deficiency in children and one stock split of our Common Stock in the form of a dividend of
Stockholder Information . . . . 73
adults, growth failure associated with chronic renal insufficiency one share of Genentech Common Stock for each share held at the
Board of Directors, Officers, Annual % change 13% 22% 23% prior to kidney transplantation and short stature associated with close of business on October 29, 1999. Our stock began trading on
Staff Scientists and Net income as Turner syndrome; a split-adjusted basis on November 3, 1999. All information in this
Distinguished Engineers . . . 74 a % of revenues 16% 18% 19%
• Protropin (somatrem for injection) growth hormone for the treat- annual report relating to the number of shares, price per share and
ment of inadequate endogenous growth hormone secretion, or per share amounts of Common Stock, Special Common Stock and
growth hormone deficiency, in children; and Redeemable Common Stock give effect to these splits.
In this Annual Report, “Genentech,”
(1) Based on Pro Forma amounts, which exclude the special charges in 1999 related to the Redemption and legal
“we,” “us” and “our” refer to
Genentech, Inc. “Common Stock”
settlements, recurring charges related to the Redemption in 2000 and 1999, costs in 2000 and 1999 related to • Pulmozyme (dornase alfa, recombinant) inhalation solution for the PUBLIC OFFERINGS
the sale of inventory that was written up at the Redemption, and their related tax effects. In addition, Pro Forma
refers to Genentech’s common stock, excludes the cumulative effect of an accounting change, net of tax, in 2000. See the Special Charges, Recurring treatment of cystic fibrosis. On July 23, 1999, October 26, 1999, and March 29, 2000, Roche
par value $0.02 per share, “Special Charges Related to Redemption, Cost of Sales, Income Tax and Staff Accounting Bulletin No. 101 discussions in
Common Stock” refers to Genentech’s the Financial Review section of this annual report for further information on these charges. We receive royalties on sales of rituximab outside of the United States completed public offerings of our Common Stock. We did not
callable putable common stock, par receive any of the net proceeds from these offerings. On January 19,
(excluding Japan), on sales of Pulmozyme and Herceptin outside of
value $0.02 per share and “Redeemable
Common Stock” refers to Genentech’s the United States and on sales of certain products in Canada from F. 2000, Roche completed an offering of zero-coupon notes that are
redeemable common stock, par value Hoffmann-La Roche Ltd, an affiliate of Roche Holdings, Inc., that is exchangeable for an aggregate of 13,034,618 shares of our
$0.02 per share. All numbers related to
commonly known as Hoffmann-La Roche. We receive royalties on Common Stock held by Roche. Roche’s percentage ownership of
the number of shares, price per share and
per share amounts of Common Stock, sales of growth hormone products and t-PA outside of the United our outstanding Common Stock is approximately 58.4% at
Special Common Stock and Redeemable December 31, 2000.
States and Canada, and we will receive royalties on sales of rituximab
Common Stock give effect to the two-for-one
splits of our Common Stock that were effected
in October 2000 and November 1999. 24 25
F I N A N C I A L R E V I E W
(continued)

RESULTS OF OPERATIONS Total Product Sales compromise as a consequence of lung disease or malignancies that Activase/TNKase
(dollars in millions, except per share amounts) Total product sales were $1,278.3 million in 2000, an increase of had spread to the lung. On October 6, 2000, we issued a follow-up 300
23% from 1999 reflecting the effect of strong Rituxan and Herceptin letter to physicians which included an amended package insert for
As discussed in the “Basis of Presentation and Restatement ” note in 250 $236.0
sales. Total product sales were $1,039.1 million in 1999, an increase Herceptin including this information. $213.0
the Notes to Consolidated Financial Statements , our 1999 200 $206.2
financial statements have been restated to reflect: (a) our results of of 45% from 1998 also reflecting the effect of strong Rituxan sales,
150
operations prior to the Redemption (Old Basis) separately from our a full year of Herceptin sales and higher Activase sales. Product sales Rituxan
results of operations subsequent to the Redemption (New Basis) and in connection with our licensing agreement with Hoffmann-La Roche 500
100

were $67.4 million in 2000, $41.3 million in 1999 and $28.7 million $444.1
(b) revised accounting related to the write up of the valuation 50
400
allowance pertaining to unrealized gains on certain marketable in 1998. See “Relationship With Roche ” below for further informa- 0
equity securities resulting from the Redemption. Information for 1999 tion about our licensing agreement with Hoffmann-La Roche. 300 $279.4
1998 1999 2000
in this Financial Review for 1999 reflects the combined Old Basis and Annual % change 11% (13)%
200
New Basis presentation from the Consolidated Financial Statements. Herceptin $162.6
100
375 Activase/TNKase
Total Revenues 0
300 Sales of our two cardiovascular products, Activase and TNKase, were
2,500 $275.9 1998 1999 2000
$206.2 million in 2000, a decrease of 13% from 1999. TNKase
225 Annual % change 72% 59%
2,000
$188.4
received FDA approval in early June 2000 and was launched in
$1,736.4
150 late June 2000. The decrease from the prior year was due primarily
1,500 $1,401.0
$1,150.9 Rituxan to increased competition from Centocor, Inc.’s Retavase® (reteplase),
75
1,000 $30.5 Sales of Rituxan were $444.1 million in 2000, an increase of 59% and a decline in the overall size of the thrombolytic market as a result
0
500 from 1999. Sales of Rituxan were $279.4 million in 1999, an of increasing use of mechanical reperfusion as well as early inter-
1998 1999 2000
increase of 72% from 1998. These increases were primarily due to vention with other therapies in the treatment of acute myocardial
0 Annual % change 518% 46%
1998 1999 2000
increased market penetration for the treatment of B-cell non- infarction. In 1999, sales of Activase were $236.0 million, an increase
Hodgkin’s lymphoma. Sales of Rituxan were $162.6 million in 1998, of 11% from 1998. This increase was largely due to the usage of
Annual % change 22% 24%
Herceptin the first full year of sales. Rituxan was approved for marketing by the Activase in peripheral vascular occlusive disease in lieu of another
Sales of Herceptin were $275.9 million, a 46% increase from 1999. Food and Drug Administration, or FDA, in late November 1997 and company’s thrombolytic that was unavailable. This increase was off-
Total Revenues In 1999 sales of Herceptin were $188.4 million. We recorded $30.5 we launched Rituxan in December 1997. We co-developed Rituxan set in part by a continued decline in the overall size of the throm-
Total revenues for 2000 reached $1,736.4 million, a 24% increase from million of initial sales of Herceptin in the fourth quarter of 1998. with IDEC, from which we license Rituxan. IDEC and Genentech bolytic therapy market due to increasing use of mechanical reperfu-
1999. Revenues for 1999 increased 22% from 1998 primarily due to Herceptin was first marketed in September 1998 and is the first jointly promote Rituxan in the U.S. We shared responsibility with sion and competition from Centocor’s Retavase.
higher product sales. These increases are further discussed below. humanized monoclonal antibody for the treatment of HER2 overex- IDEC for manufacturing the product until the end of the third quar-
pressing metastatic breast cancer. Since the launch of Herceptin, an ter of 1999, when IDEC finished transferring all bulk manufacturing Growth Hormone
Total Product Sales increase in penetration into the breast cancer market has contributed responsibilities for Rituxan to us. Our partner Hoffmann-La Roche 300
to a positive sales trend. We have granted Hoffmann-La Roche exclu- received permission from the European Commission in 1997 to
1,500 $226.6
sive marketing rights to Herceptin outside of the United States. market rituximab under the tradename MabThera® in the European 225 $214.0 $221.2
$1,278.3
1,200 Union. Hoffmann-La Roche holds marketing rights for MabThera
$1,039.1
During the third quarter of 2000, Hoffmann-La Roche received 150
outside of the U.S., excluding Japan, and has agreed to pay us
900 approval from the European Commission to market Herceptin for the
$717.8 royalties and a mark-up on the supply of MabThera.
treatment of HER2-positive metastatic breast cancer in Europe. We 75
600
receive royalties from Hoffmann-La Roche for these European In December 1998, a letter was sent to physicians advising them
300 0
Herceptin product sales. of some deaths associated with administration of Rituxan. As a
1998 1999 2000
0 result, Genentech and IDEC updated the warning section of the
On May 3, 2000, we sent a letter to physicians advising them of Annual % change 3% 2%
1998 1999 2000 package insert to include information on infusion-related reactions
some serious adverse events that have been reported related to the
Annual % change 45% 23% and cardiovascular events.
use of Herceptin in certain patients and that have occurred subse-
Product sales as Growth Hormone
a % of revenues 62% 74% 74%
quent to its approval. In 15 patients who experienced such serious
Sales of our four growth hormone products, Nutropin Depot,
adverse events following Herceptin therapy, death ensued. Nine of
Nutropin AQ, Nutropin and Protropin, increased slightly in 2000
these patients died within 24 hours after Herceptin administration.
compared to 1999. This increase was largely due to fluctuations in
Most of these patients had significant pre-existing pulmonary
customer ordering patterns and the introduction of Nutropin Depot.

26 27
F I N A N C I A L R E V I E W
(continued)

In December 1999, we received FDA approval for Nutropin Depot, a Royalties $8.6 million of deferred revenues (see “Staff Accounting Bulletin No. December 31, 2000, lower portfolio returns were offset by higher
long-acting dosage form of recombinant growth hormone for pedi- 300
101 ” below for further discussion), offset in part by lower contract average balances. Year end balances were also higher in 2000 com-
atric growth hormone deficiency. Nutropin Depot was launched in revenues from our strategic alliances with third-party collaborators. pared to 1999.
late June 2000. In 1999, Protropin, Nutropin and Nutropin AQ sales $229.6 Contract and other revenues were $83.2 million in 1999, a decrease
225 $207.2
$189.3 Annual %
were $221.2 million, a slight increase from 1998. This increase of 28% from 1998. This decrease resulted primarily from higher Total Costs and Expenses Change
primarily reflects fluctuations in customer ordering patterns. 150 revenues in 1998 related to payments from Hoffmann-La Roche for 2000 1999 1998 00/99 99/98
Herceptin marketing rights and from Novo Nordisk A/S, commonly
75 Total costs
Pulmozyme known as Novo, for the patent infringement litigation settlement, as and expenses $ 1,732.4 $ 2,761.6 $ 898.3 (37)% 207%
0 discussed below. These decreases were partially offset by higher % of revenues 100% 197% 78%
150
1998 1999 2000 revenues in 1999 from our strategic alliances, including initial license
125 $121.8
$111.4 fees from Immunex for Enbrel and from Schwarz Pharma AG for
Annual % change (18)% 9%
100 $93.8 Nutropin AQ and Nutropin Depot and by higher gains from the sale of Cost of Sales
75 biotechnology equity securities.
Royalties 400
50 $364.9
Royalty income was $207.2 million, an increase of 9% from 1999. In July 1998, we settled a lawsuit brought by us against Novo relat-
25 300 $285.6
This increase was due to higher third-party sales from various ing to our patents for human growth hormone and insulin and a law-
0 licensees. Royalty income was $189.3 million in 1999, a decrease of suit brought by Novo alleging infringement of a patent held by Novo 200
1998 1999 2000
18% from 1998. This decrease was primarily related to the expira- relating to our manufacture, use and sale of our Nutropin human $138.6
Annual % change 19% 9%
tion of royalties from Eli Lilly and Company for sales of Humulin® growth hormone products. Under the settlement agreement, we 100

(human insulin) which expired in August 1998. The decrease in agreed with Novo to cross-license worldwide certain patents relating
0
Pulmozyme 1999 was partly offset by higher royalties from various licensees, to human growth hormone. In August 1998, Novo received a world-
1998 1999 2000
Pulmozyme sales were $121.8 million in 2000, a 9% increase from and new royalties from Immunex Corporation under a licensing wide license under our patents relating to insulin, and we received
Annual % change 106% 28%
1999. This increase was attributable to increased market penetra- agreement for Enbrel® (etanercept) biologic response modifier. Cash certain payments from Novo that were recorded in contract revenues.
tion in the early and mild patient populations for the treatment of flows from royalty income include revenues denominated in foreign COS as a % of
We recorded contract revenues from Hoffmann-La Roche of product sales 19% 27% 29%
cystic fibrosis. Sales of Pulmozyme were $111.4 million in 1999, an currency. We currently purchase simple foreign currency put option
$40.0 million in 1998 for Herceptin marketing rights outside of the
increase of 19% over 1998. This increase was due to our continued contracts (options) to hedge these royalty cash flows. All options
U.S. All other contract revenue from Hoffmann-La Roche, including
market penetration for the treatment of cystic fibrosis in the early expire within the next two years. See “Forward-Looking Information Cost of Sales
reimbursement for ongoing development expenses after the option
and mild patient populations. and Cautionary Factors That May Affect Future Results ” below for a Cost of sales, or COS, was $364.9 million in 2000, an increase of
exercise date, totaled $3.5 million in 2000, $17.2 million in 1999 and
discussion of market risks related to these financial instruments. 28% from 1999. COS as a percent of product sales was 29%, an
Annual % $21.6 million in 1998.
Actimmune ® (interferon gamma-1b) Change increase from 1999. This increase primarily reflects a change in the
2000 1999 1998 00/99 99/98 Contract and Other Revenues product mix, an increase in provisions established for nonuseable
Interest Income
200
inventory and higher sales to Hoffmann-La Roche. COS was $285.6
Actimmune $ 3.7 $ 2.7 $ 3.9 37% (31)%
125 million in 1999, an increase of 106% from 1998. COS as a percent of
$160.4
150 100 $88.7 $89.4 $90.4
net sales increased to 27% in 1999. This increase reflects the six
Actimmune $114.8 months of costs related to the sale of inventory that was written up at
100 75
In the second quarter of 1998, in return for a royalty on net sales, we $83.2
the Redemption due to push-down accounting, offset in part by
licensed U.S. marketing and development rights to interferon 50 efficiencies in production and a more favorable product mix. As a
50
gamma, including Actimmune, to Connetics Corporation. Thereafter, 25
result of push-down accounting, $92.8 million and $93.4 million of
Connetics sublicensed all of its rights to InterMune Pharmaceuticals, 0 expense was recognized in 2000 and 1999, respectively, through the
0
Inc., or InterMune. As of January 1999, we no longer sell Actimmune 1998 1999 2000 sale of inventory that was written up as a result of the Redemption.
1998 1999 2000
directly in the United States. We have agreed to sell packaged drug Annual % change (28)% 93% All inventory written up as a result of the Redemption has been sold
Annual % change 1% 1%
product to InterMune at cost plus a mark-up. as of December 31, 2000.

Contract and Other Revenues

Interest Income
Contract and other revenues were $160.4 million in 2000, an increase
Interest income in 2000 and 1999 were comparable to previous
of 93% over 1999. This increase was primarily due to higher gains
years. In our fixed income portfolio (cash, short-term and long-term
from the sale of biotechnology equity securities and the recognition of
investment portfolio, excluding marketable equity securities), at

28 29
F I N A N C I A L R E V I E W
(continued)

Research and Development Marketing, General and Administrative cash settlement of certain employee stock options and (3) an aggre- Income (Loss) Before Taxes and Cumulative
gate of approximately $160.1 million as a non-cash charge for the Effect of Accounting Change, Income Taxes
600 600
and Cumulative Effect of Accounting Change
$489.9 $497.0 remeasurement of the value of continuing employee stock options.
$467.9 2000 1999 1998
450 450 See “In-Process Research and Development ” below and the
$396.2 $358.9
$367.3 “Redemption of Our Special Common Stock ” note in the Notes to Income (loss) before taxes
300 300 and cumulative effect of
Consolidated Financial Statements for further information regarding
accounting change $ 4.0 $ (1,360.6) $ 252.6
these special charges.
150 150 Income tax provision (benefit) 20.4 (203.1) 70.7
The legal settlements charge included: (1) a $50.0 million set- Income (loss) before cumulative
0 0
tlement related to a federal investigation of our past clinical, sales effect of accounting change (16.4) (1,157.5) 181.9
1998 1999 2000 1998 1999 2000
and marketing activities associated with human growth hormone; Cumulative effect of accounting
Annual % change (7)% 33% Annual % change 30% 6% change, net of tax (57.8) — —
and (2) a $180.0 million charge for the settlement of the patent
R&D as a % MG&A as a %
of revenues 31% 33% 29%
infringement lawsuits brought by the University of California
of revenues 34% 26% 28%
relating to our human growth hormone products. See the Staff Accounting Bulletin No. 101
“Leases, Commitments and Contingencies ” note in the Notes to In the fourth quarter of 2000, we adopted the Securities and
Research and Development Marketing, General and Administrative Consolidated Financial Statements for further information regard- Exchange Commission’s Staff Accounting Bulletin No. 101 on rev-
Research and development, or R&D, expenses in 2000 were $489.9 Marketing, general and administrative, or MG&A, expenses in 2000 ing these special charges. enue recognition effective January 1, 2000 and recorded a $57.8
million, up 33% from 1999. This increase was due to higher clinical increased 6% from 1999. This increase resulted from higher market- million charge, net of tax, as a cumulative effect of a change in
costs related to later-stage clinical trials and higher in-licensing and ing and sales expenses while general and administrative expenses accounting principle related to contract revenues recognized in prior
Annual %
collaboration expenses. In-licensing expenses in 2000 included a decreased. The marketing and sales increase was driven by the con- Recurring Charges Related to Redemption Change periods. The related deferred revenue is being recognized over the
$15.0 million payment for the purchase of in-process research and tinued support of our growing bio-oncology business, including the 2000 1999 1998 00/99 99/98
term of the agreements. In 2000, we recognized $8.6 million of this
development, or IPR&D, during the first quarter of 2000 under an Rituxan profit-sharing expense with IDEC, the launch of TNKase, and deferred revenue in contract and other income. (See the “Change in
Recurring charges
agreement with Actelion Ltd., for the rights to develop and co-pro- the prelaunch support of Xolair for the potential treatment of allergic Accounting Principle” section of the “Description of Business and
related to redemption $ 375.3 $ 197.7 — 90% —
mote tezosentan in the United States for the potential treatment of asthma and seasonal allergic rhinitis. The decrease in general and Significant Accounting Policies ” note in the Notes to Consolidated
acute heart failure. Actelion is leading the development effort of administrative expenses was mostly due to the write down of certain Financial Statements for further information on our adoption of Staff
tezosentan and the project is currently in Phase III clinical trials. In biotechnology investments as a result of other than temporary Recurring Charges Related to Redemption Accounting Bulletin No. 101.)
addition, we made a $35.0 million payment to Actelion for the pur- impairment and higher legal expenses in 1999. In 1999, MG&A We began recording recurring charges related to the Redemption
chase of IPR&D for the rights to develop and co-promote Actelion’s expenses increased 30% from 1998. The increase was primarily in and push-down accounting in the third quarter of 1999. These Income Tax
endothelin receptor antagonist Tracleer™ (bosentan) in the United support of the growth of our bio-oncology products including the charges were $375.3 million in 2000 and $197.7 million in 1999. The tax provision of $20.4 million for 2000 increased over the 1999
States for the potential treatment of acute and chronic heart failure. Rituxan profit-sharing with IDEC, and competitive conditions with These charges were comprised of $364.2 million in 2000 and tax benefit of $203.1 million primarily due to increased pretax income
Actelion is leading the development efforts and commercialization of other marketed products. Additional increases came from higher $190.4 million in 1999 related to the amortization of other intangi- and non-deductible goodwill amortization related to the Redemption.
Tracleer. We determined that the above acquired IPR&D was not yet royalty, legal and corporate expenses. ble assets and goodwill, and $11.1 million in 2000 and $7.3 million The increase was partially offset by the increased benefit of R&D tax
technologically feasible and that the acquired IPR&D had no future in 1999 of compensation expense related to alternative arrange- credits. The 1999 tax benefit differed from the 1998 tax provision
alternative uses. R&D expenses were $367.3 million in 1999, down Special Charges ments provided at the time of the Redemption for certain holders of primarily because of the charges related to the Redemption and legal
7% from 1998 as a result of reduced spending as products pro- some of the unvested options. settlements. The tax provision and tax benefit in 2000 and 1999,
2000 1999 1998
gressed through late-stage clinical trials. R&D as a percentage of rev- Annual % respectively, reflect the adverse impact of non-deductible in-process
Special charges: Interest Expense Change
enues was 28% in 2000, 26% in 1999 and 34% in 1998. R&D charges and amortization of goodwill.
Related to redemption — $ 1,207.7 —
2000 1999 1998 00/99 99/98
To gain additional access to potential new products and technolo- Legal settlements — 230.0 — The tax rate of 31% in 2000 on pretax income excluding charges
Interest expense $ 5.3 $ 5.4 $ 4.6 (2)% 17%
gies, and to utilize other companies to help develop potential new related to the Redemption and cumulative effect of accounting change
products, we establish strategic alliances with various companies. is lower than the comparable tax rate of 33% in 1999 primarily due to
Interest Expense
These companies are developing technologies that may fall outside Special Charges increased R&D tax credits. The 1999 tax rate increased from 28% in
Interest expense will fluctuate depending on the amount of capital-
our research focus and through technology exchanges and invest- During 1999, we had special charges of $1,437.7 million related to 1998 primarily due to reduced research credits and realization of
ized interest related to the amount of construction projects. Interest
ments with these companies we may have the potential to generate the Redemption and the application of push-down accounting, and foreign losses.
expense, net of amounts capitalized, relates to interest on our 5%
new products. As part of these strategic alliances, we have acquired legal settlements. The Redemption related charge of $1,207.7 million
convertible subordinated debentures.
equity and convertible debt securities of such companies. We have primarily included: (1) a non-cash charge of $752.5 million for
also entered into product-specific collaborations to acquire develop- IPR&D, (2) $284.5 million of compensation expense related to early
ment and marketing rights for products.

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F I N A N C I A L R E V I E W
(continued)

Net Income (Loss) common stock not owned by Roche was purchased in 1999. opment on a project-by-project basis. Therefore, we believe a calcu- and the complexity of the project, and it is highly correlated with the
2000 1999 1998 Accordingly, 35% of $2,150.0 million of total fair value at the lation of cost incurred as a percentage of total incurred project cost project’s phase of development. PTS is periodically adjusted to reflect
Redemption date, or $752.5 million, was expensed on June 30, 1999. as of FDA approval is not possible. We estimated, however, that the actual experiences over a reasonable period of time.
Net income (loss) $ (74.2) $ (1,157.5) $ 181.9
R&D expenditures that will be required to complete the in-process
Earnings (loss) per share: The amounts of IPR&D were determined based on an analysis Status Compared to Baseline Model: We developed a baseline
projects will total at least $640.0 million as of December 31, 2000, as
Basic: using the risk-adjusted cash flows expected to be generated by the model which allocated percentages of a standard development proj-
compared to $700.0 million as of the Redemption date. This estimate
Earnings (loss) before products that result from the in-process projects. The analysis ect to each major phase of the project based on our experience. We
cumulative effect of reflects costs incurred since the Redemption date, discontinued proj-
included forecasted future cash flows that were expected to result then overlaid the time-based status of each project to this baseline
accounting change $ (0.03) $ (2.26) $ 0.36 ects and decreases in cost to complete estimates for other projects,
from the progress made on each of the in-process projects prior to model, in order to calculate a percentage complete for each project.
Cumulative effect of partially offset by an increase in certain cost estimates related to early
accounting change, the purchase dates. These cash flows were estimated by first fore-
stage projects and changes in expected completion dates. Management’s Estimate of Percentage Complete: Below is a list of
net of tax (0.11) — — casting, on a product-by-product basis, total revenues expected
the projects and their estimated percentage complete included in the
Net earnings (loss) per share $ (0.14) $ (2.26) $ 0.36 from sales of the first generation of each in-process product. A por- The foregoing discussion of our IPR&D projects, and in particular
IPR&D charge related to the Redemption.
tion of the gross in-process product revenues was then removed to the following table and subsequent paragraphs regarding the future
Diluted:
Earnings (loss) before
account for the contribution provided by any core technology, which of these projects, our additional product programs and our process We also identified five additional product programs that were at
cumulative effect of was considered to benefit the in-process products. The net in- technology program include forward-looking statements that different stages of IPR&D. As of June 30, 1999, the Redemption date,
accounting change $ (0.03) $ (2.26) $ 0.35 process revenue was then multiplied by the project’s estimated per- involve risks and uncertainties, and actual results may vary materi- we estimated that these projects would be substantially complete in
Cumulative effect of centage of completion as of the purchase dates to determine a fore- ally. For a discussion of risk factors that may affect projected com- years 1999 through 2004. The percent completion for each of these
accounting change, cast of net IPR&D revenues attributable to projects completed prior pletion dates and the progress of research and development, see additional programs ranged from an estimated 35% to 90%. These
net of tax (0.11) — —
to the purchase dates. Appropriate operating expenses, cash flow “Forward-Looking Information and Cautionary Factors That May projects did not receive material allocations of the purchase price.
Net earnings (loss) per share $ (0.14) $ (2.26) $ 0.35 adjustments and contributory asset returns were deducted from the Affect Future Results.”
In addition, our IPR&D at the Redemption date included a process
forecast to establish a forecast of net returns on the completed por-
At the Redemption date, we estimated percentage complete data technology program. The process technology program included the
Net Income (Loss) tion of the in-process technology. Finally, these net returns were dis-
for each project based on weighting of three indicators, as follows: research and development of ideas and techniques that could
The net loss of $74.2 million, or a loss of $0.14 per share in 2000 counted to a present value at discount rates that incorporate both
improve the bulk production of antibodies, including cell culture pro-
primarily reflects a full year of recurring charges for the amortization of the weighted-average cost of capital (relative to the biotech industry PTS: Probability of technical success, or PTS, is a project level sta-
ductivity, and streamlined and improved recovery processes, and
goodwill and other intangible assets related to the Redemption and and us) as well as the product-specific risk associated with the pur- tistic maintained by us on an ongoing basis, which is intended to rep-
improvements in various areas of pharmaceutical manufacturing. We
push-down accounting, the cumulative effect of a change in accounting chased IPR&D products. The product-specific risk factors included resent the current likelihood of project success, i.e., FDA approval.
principle, costs related to the sale of inventory that was written up at the each product in each phase of development, type of molecule under This is a quantitative calculation based on the stage of development
Redemption and higher R&D expenses; offset in part by higher product development, likelihood of regulatory approval, manufacturing As of the Redemption Date
June 30, 1999
sales. The net loss in 1999 of $1,157.5 million, or a loss of $2.26 per process capability, scientific rationale, pre-clinical safety and effica-
share, is attributable to the Redemption and related push-down cy data, target product profile and development plan. The discount Substantial
accounting, and legal settlements, net of their related tax effects. To a rates ranged from 16% to 19% for the 1999 valuation and 20% to Project Description/Indication Phase of Development Completion Date % Complete
lesser extent, the loss in 1999 was also due to higher MG&A expenses, 28% for the 1990 purchase valuation, all of which represent a sig- Nutropin Depot long-acting dosage form of recombinant growth hormone Awaiting Regulatory Approval 2000 85%
COS and income taxes, and lower royalty and contract and other nificant risk premium to our weighted-average cost of capital. TNKase, second generation t-PA acute myocardial infarction Awaiting Regulatory Approval 2000 90%
revenues, partly offset by higher product sales and lower R&D spending. Anti-IgE antibody allergic asthma, seasonal allergic rhinitis Phase III 2001 75%
The forecast data in the analysis was based on internal product level
Pulmozyme early-stage cystic fibrosis Phase III 2003 75%
forecast information maintained by our management in the ordinary Dornase alfa AERx™
In-Process Research and Development
course of managing the business. The inputs used by us in analyzing Delivery System cystic fibrosis Preparing for Clinical Testing 2003 45%
At June 30, 1999, the Redemption date, we determined that the
IPR&D were based on assumptions, which we believed to be reason- Rituxan antibody intermediate- and high-grade non-Hodgkin’s lymphoma Phase III 2004 60%
acquired in-process technology was not technologically feasible and
able but which were inherently uncertain and unpredictable. These Xubix (sibrafiban)
that the in-process technology had no future alternative uses. In oral IIb/IIIa antagonist orally administered inhibitor of platelet aggregation Phase III 2000 65%
assumptions may be incomplete or inaccurate, and no assurance can
1990 and 1991 through 1997, Roche purchased 60% and 5%, Activase t-PA intravenous catheter clearance Preparing for Phase III 1999 90%
be given that unanticipated events and circumstances will not occur.
respectively, of our outstanding common stock. The push-down Anti-CD11a antibody (hu1124) psoriasis Preparing for Phase III 2003 50%
effect of Roche’s aggregate purchase price is allocated based on A brief description of projects that were included in the IPR&D Herceptin antibody adjuvant therapy for breast cancer Preparing for Phase III 2007 45%
Roche’s ownership percentages as if the purchases had occurred at charge is set forth below, including an estimated percentage of com- Thrombopoietin (TPO) thrombocytopenia related to cancer treatment Preparing for Phase III 2002 55%
the original purchase dates for the 1990 and 1991 through 1997 pur- pletion as of the Redemption date. Projects subsequently added to Anti-CD18 antibody acute myocardial infarction Phase II 2004 55%
chases. Therefore, 65% of the purchase price allocated to IPR&D as the research and development pipeline are not included. Except as Anti-VEGF antibody colorectal and lung cancer Phase II 2003 35-40%
of September 7, 1990, or 65% of $770.0 million ($500.5 million) was otherwise noted below, since the Redemption date there have been Herceptin antibody other tumors Phase II 2004 40-45%
recorded as an adjustment to additional paid-in capital related to the no significant changes to the phase of development for the projects AMD Fab age-related macular degeneration Preparing for Phase I 2004 20%

1990-1997 acquisitions. The remaining 35% of our outstanding listed. We do not track all costs associated with research and devel- LDP-02 inflammatory bowel disease Phase Ib/IIa 2005 30%

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(continued)

estimated that the process technology program was approximately number of shares of Common Stock at the same exercise price; and RELATIONSHIP WITH ROCHE We have agreed not to approve, without the prior approval of the
50% complete at the Redemption date. Material cash inflows from As a result of the Redemption of our Special Common Stock, the directors designated by Roche:
• Options for the purchase of approximately 19.6 million shares of
significant projects are generally expected to commence within one then-existing governance agreement between us and Roche termi-
Special Common Stock were canceled in accordance with the • any acquisition, sale or other disposal of all or a portion of our busi-
to two years after the substantial completion date has been reached. nated, except for provisions relating to indemnification and stock
terms of our 1996 Stock Option/Stock Incentive Plan, or the 1996 ness representing 10% or more of our assets, net income or revenues;
options, warrants and convertible securities. In July 1999, we
The significant changes to the projects in the IPR&D charge since Plan. With certain exceptions, we granted new options for the pur-
entered into certain affiliation arrangements with Roche, amended • any issuance of capital stock except under certain circumstances; or
the Redemption date through December 31, 2000, include: chase of 1.333 times the number of shares under the previous
our licensing and marketing agreement with Hoffmann-La Roche,
options with an exercise price of $24.25 per share, which was the • any repurchase or redemption of our capital stock other than a
• Nutropin Depot long-acting growth hormone — project received and entered into a tax sharing agreement with Roche as follows:
July 23, 1999, public offering price of the Common Stock. The redemption required by the terms of any security and purchases
FDA approval in December 1999.
number of shares that were the subject of these new options, Affiliation Arrangements made at fair market value in connection with any of our deferred
• TNKase second generation t-PA — project received FDA approval which were issued under our 1999 Stock Plan, or the 1999 Plan, Our board of directors consists of two Roche directors, three inde- compensation plans.
in June 2000. was approximately 20.0 million. Alternative arrangements were pendent directors nominated by a nominating committee currently
Licensing Agreement
provided for certain holders of some of the unvested options controlled by Roche, and one Genentech employee. However, under
• Anti-IgE antibody — project has moved from Phase III studies to In 1995, we entered into a licensing and marketing agreement with
under the 1996 Plan. the affiliation agreement, Roche has the right to obtain proportional
awaiting regulatory approval. Hoffmann-La Roche and its affiliates granting it a ten-year option to
representation on our board at any time. Roche intends to continue
Of the approximately 16.0 million shares of converted options, license to use and sell our products in non-U.S. markets. In July 1999,
• Xubix (sibrafiban) oral IIb/IIIa antagonist — project has been to allow our current management to conduct our business and oper-
options with respect to approximately 4.0 million shares were out- we amended that agreement, the major provisions of which include:
discontinued. ations as we have done in the past. However, we cannot ensure that
standing at December 31, 2000, all of which are currently exercis-
Roche will not implement a new business plan in the future. • extending Hoffmann-La Roche’s option until at least 2015;
• Anti-CD18 antibody — project has been discontinued. able except for options with respect to approximately 320,507
shares. These outstanding options are held by 1,420 employees; no Except as follows, the affiliation arrangements do not limit Roche’s • Hoffmann-La Roche may exercise its option to license our products
• Anti-VEGF antibody — project has moved from Phase II studies to
non-employee directors hold these options. ability to buy or sell our Common Stock. If Roche and its affiliates upon the occurrence of any of the following: (1) our decision to file an
Phase III studies.
sell their majority ownership of shares of our Common Stock to a Investigational New Drug exemption application, or IND, for a prod-
Our board of directors and Roche, then our sole stockholder,
• Dornase alfa AERx — project discontinued in January 2001. successor, Roche has agreed that it will cause the successor to pur- uct, (2) completion of a Phase II trial for a product or (3) if Hoffmann-
approved the 1999 Plan on July 16, 1999. Under the 1999 Plan, we
chase all shares of our Common Stock not held by Roche as follows: La Roche previously paid us a fee of $10.0 million to extend its option
• Activase t-PA — project has completed one Phase III trial and is granted new options to purchase approximately 26.0 million shares
on a product, completion of a Phase III trial for that product;
awaiting regulatory approval. (including the 20.0 million shares referred to above) of Common • with consideration, if that consideration is composed entirely of
Stock to approximately 2,400 employees at an exercise price of either cash or equity traded on a U.S. national securities exchange, • we agreed, in general, to manufacture for and supply to Hoffmann-
• Anti-CD11a antibody — project has moved to Phase III.
$24.25 per share, with the grant of such options made effective as in the same form and amounts per share as received by Roche and La Roche its clinical requirements of our products at cost, and its
• Herceptin antibody for adjuvant therapy for breast cancer — of July 16, 1999. Of the options to purchase these 26.0 million its affiliates; and commercial requirements at cost plus a margin of 20%; however,
project has moved to Phase III. shares, options to purchase approximately 19.8 million shares were Hoffmann-La Roche will have the right to manufacture our prod-
• in all other cases, with consideration that has a value per share not
outstanding at December 31, 2000, of which options to purchase ucts under certain circumstances;
• Thrombopoietin (TPO) — project has moved to Phase III. less than the weighted-average value per share received by Roche
approximately 7.7 million shares are currently exercisable.
and its affiliates as determined by a nationally recognized invest- • Hoffmann-La Roche has agreed to pay, for each product for which
• AMD Fab — project has moved to Phase I trials.
In connection with these stock option transactions, we recorded: ment bank. Hoffmann-La Roche exercises its option upon either a decision to
• LDP-02 — project has moved to Phase II studies. file an IND with the FDA or completion of the Phase II trials, a roy-
• (1) cash compensation expense of approximately $284.5 million If Roche owns more than 90% of our Common Stock for more than
alty of 12.5% on the first $100.0 million on its aggregate sales of
• Pulmozyme — project has completed Phase III trials. associated with the cash-out of such stock options and (2) non-cash two months, Roche has agreed that it will, as soon as reasonably prac-
that product and thereafter a royalty of 15% on its aggregate sales
compensation expense of approximately $160.1 million associated ticable, effect a merger of Genentech with Roche or an affiliate of Roche.
of that product in excess of $100.0 million until the later in each
STOCK OPTION CHANGES with the remeasurement, for accounting purposes, of the converted
Roche has agreed, as a condition to any merger of Genentech with country of the expiration of our last relevant patent or 25 years
In connection with the Redemption of our Special Common Stock, options, which non-cash amount represents the difference between
Roche or the sale of our assets to Roche, that either: from the first commercial introduction of that product; and
the following changes occurred with respect to our stock options each applicable option exercise price and the redemption price of the
that were outstanding as of June 30, 1999: Special Common Stock; and • the merger or sale must be authorized by the favorable vote of a • Hoffmann-La Roche will pay, for each product for which
majority of non-Roche stockholders, provided no person will be Hoffmann-La Roche exercises its option after completion of the
• Options for the purchase of approximately 27.2 million shares of • Over a two-year period beginning July 1, 1999, an aggregate of
entitled to cast more than 5% of the votes at the meeting; or Phase III trials, a royalty of 15% on its sales of that product until
Special Common Stock were canceled in accordance with the terms approximately $27.4 million of deferred cash compensation avail-
the later in each country of the expiration of our relevant patent or
of the applicable stock option plans, and the holders received cash able to be earned by a limited number of employees who elected • in the event such a favorable vote is not obtained, the value of the
25 years from the first commercial introduction of that product;
payments in the amount of $20.63 per share, less the exercise price; the alternative arrangements described above. As of December 31, consideration to be received by non-Roche stockholders would be
however, $5.0 million of any option extension fee paid by
2000, $11.1 million and as of December 31, 1999, $7.3 million of equal to or greater than the average of the means of the ranges of
• Options for the purchase of approximately 16.0 million shares of Hoffmann-La Roche will be credited against royalties payable to us
compensation expense has been recorded related to these alterna- fair values for the Common Stock as determined by two nationally
Special Common Stock were converted into options to purchase a like in the first calendar year of sales by Hoffmann-La Roche in which
tive arrangements. recognized investment banks.
aggregate sales of that product exceed $100.0 million.

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Tax Sharing Agreement November 1999. As long as Roche’s percentage ownership is Our long-term debt consists of $149.7 million of convertible subor- For example, sales of Pulmozyme increased in 1998 due, in part,
Since the redemption of our Special Common Stock, and until Roche greater than 50%, prior to issuing any shares, Genentech has agreed dinated debentures, with interest payable at 5%, due in March 2002. As to new patients who were attracted to our product as a result of an
completed its second public offering of our Common Stock in October to repurchase a sufficient number of shares of its common stock to a result of the redemption of our Special Common Stock, upon con- FDA approval for a label extension to include cystic fibrosis
1999, we were included in Roche’s U.S. federal consolidated income provide that, immediately after its issuance of shares, Roche’s per- version, the holder receives, for each $74 in principal amount of deben- patients under the age of five.
tax group. Accordingly, we entered into a tax sharing agreement with centage ownership will be greater than 50%. We have also agreed, ture converted, $59.25 in cash, of which $18 will be reimbursed to us
• The potential introduction of new products and additional indica-
Roche. Pursuant to the tax sharing agreement, we and Roche are to upon request, to repurchase shares of our common stock to by Roche. Generally, we may redeem the debentures until maturity.
tions for existing products in 2001 and beyond.
make payments such that the net amount paid by us on account of increase Roche’s ownership to the Minimum Percentage.
consolidated or combined income taxes is determined as if we had FORWARD-LOOKING INFORMATION AND CAUTIONARY • The ability to successfully manufacture sufficient quantities of any
filed separate, stand-alone federal, state and local income tax returns LIQUIDITY AND CAPITAL RESOURCES FACTORS THAT MAY AFFECT FUTURE RESULTS particular marketed product.
as the common parent of an affiliated group of corporations filing con- 2000 1999 1998 The following section contains forward-looking information based
• The number and size of any product price increases we may issue.
solidated or combined federal, state and local returns. on our current expectations. Because our actual results may differ
December 31:
materially from this and any other forward-looking statements made The Successful Development of Pharmaceutical Products
Effective with the consummation of the second public offering on Cash, cash equivalents,
short-term investments and
by or on behalf of Genentech, this section also includes a discussion Is Highly Uncertain
October 26, 1999, we ceased to be a member of the consolidated
long-term marketable debt of important factors that could affect our actual future results, Successful pharmaceutical product development is highly uncertain
federal income tax group (and certain consolidated or combined
and equity securities $ 2,459.4 $ 1,957.4 $ 1,604.6 including, but not limited to, our product sales, royalties, contract and is dependent on numerous factors, many of which are beyond our
state and local income tax groups) of which Roche is the common
Working capital 1,340.1 849.1 950.6 revenues, expenses and net income. control. Products that appear promising in the early phases of devel-
parent. Accordingly, our tax sharing agreement with Roche now per-
Current ratio 4.0:1 2.8:1 4.3:1 opment may fail to reach the market for several reasons including:
tains only to the state and local tax returns in which we will be con- Fluctuations in Our Operating Results Could Affect
Year Ended December 31:
solidated or combined with Roche. We will continue to calculate our the Price of Our Common Stock • Preclinical and clinical trial results that may show the product to
Cash provided by (used in):
tax liability or refund with Roche for these state and local jurisdic- Our operating results may vary from period to period for several rea- be less effective than desired or to have harmful problematic side
Operating activities 193.5 (7.4) 349.9
tions as if we were a stand-alone entity. sons including: effects;
Investing activities (160.2) (96.2) (421.1)
Roche’s Right to Maintain Its Percentage Ownership • The overall competitive environment for our products. For example:
Financing activities 180.4 160.2 107.9
Interest in Our Stock Capital expenditures For example, sales of our Activase product decreased in 2000, – In June 2000, we announced that the preliminary results from
We expect from time to time to issue additional shares of common (included in investing 1999 and 1998 primarily due to competition from Centocor Inc.’s our 415-patient Phase II clinical trial of our recombinant human-
stock in connection with our stock option and stock purchase plans, activities above) (112.7) (95.0) (88.1) ized anti-CD18 monoclonal antibody fragment, which is known
Retavase and more recently to a decreasing size of the throm-
and we may issue additional shares for other purposes. The affilia- bolytic marketplace as other forms of acute myocardial infarction as rhuMAb CD18, for the treatment of myocardial infarction,
tion agreement provides that we will, among other things, establish We used cash generated from operations, income from investments treatment gain acceptance. more commonly known as a heart attack, did not meet its pri-
a stock repurchase program designed to maintain Roche’s percent- and proceeds from stock issuances to fund operations, purchase mary objectives.
age ownership interest in our common stock. In addition, Roche has marketable securities and make capital and equity investments during • The amount and timing of sales to customers in the United States.
– In 1999, our Phase III clinical trial of recombinant human nerve
a continuing option to buy stock from us at prevailing market prices 2000. In 1999, cash generated from operations, income from invest- For example, sales of our Growth Hormone products increased in growth factor, which is known as rhNGF, for use in diabetic
to maintain its percentage ownership interest. In connection with ments and proceeds from stock issuances were used to pay for the 2000 and 1999 due to fluctuations in distributor ordering patterns. peripheral neuropathy did not meet its objectives and we decided
that provision, with respect to any issuance of common stock by cash-out of stock options related to the Redemption in 1999, to pur- not to file for product approval with the FDA.
• The amount and timing of our sales to Hoffmann-La Roche of
Genentech in the future, the percentage of Genentech common chase marketable securities and to make capital and equity investments.
products for sale outside of the United States and the amount and – In 1999, our Phase II clinical study of recombinant human vas-
stock owned by Roche immediately after such issuance is to be no
Capital expenditures in 2000 and 1999 primarily consisted of equip- timing of its sales to its customers, which directly impact both our cular endothelial growth factor, which is known as VEGF, protein
lower than Roche’s lowest percentage ownership of Genentech com-
ment purchases and improvements to existing manufacturing and product sales and royalty revenues. failed to meet the primary endpoints of the study.
mon stock at any time after the offering of common stock occurring
service facilities. Capital expenditures in 1998 included improvements For example, in the third quarter of 2000, Hoffmann-La Roche’s approval
in July 1999 and prior to the time of such issuance, except that • Failure to receive the necessary regulatory approvals or delay in
to existing office and laboratory facilities and equipment purchases. of Herceptin in Europe increased our sales of Herceptin product.
Genentech may issue shares up to an amount that would cause receiving such approvals;
Roche’s lowest percentage ownership to be no more than 2% below We believe that our cash, cash equivalents and short-term invest- • The timing and volume of bulk shipments to licensees. • Manufacturing costs or other factors that make the product uneco-
the “Minimum Percentage.” The Minimum Percentage equals the low- ments, together with funds provided by operations and leasing
• The availability of third-party reimbursements for the cost of therapy. nomical; or
est number of shares of Genentech common stock owned by Roche arrangements, will be sufficient to meet our foreseeable operating
since the July 1999 offering (to be adjusted in the future for disposi- cash requirements. In addition, we believe we could access addi- • The proprietary rights of others and their competing products and
• The effectiveness and safety of our various products as determined
tions of shares of Genentech common stock by Roche) divided by tional funds from the debt and, under certain circumstances, capital technologies that may prevent the product from being commercialized.
both in clinical testing and by the accumulation of additional infor-
509,194,352 (to be adjusted in the future for stock splits or stock com- markets. See also “Our Affiliation Agreement With Roche Could mation on each product after it is approved by the FDA for sale. Success in preclinical and early clinical trials does not ensure that
binations), which is the number of shares of Genentech common Adversely Affect Our Cash Position ” below for factors that could
• The rate of adoption and use of our products for approved indica- large-scale clinical trials will be successful. Clinical results are fre-
stock outstanding at the time of the July 1999 offering adjusted for negatively affect our cash position.
tions and additional indications. quently susceptible to varying interpretations that may delay, limit or
the two-for-one splits of our common stock in October 2000 and

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prevent regulatory approvals. The length of time necessary to complete Roche will have the right to obtain proportional representation on a manner that might be favorable to us but adverse to Roche. Two Application, or BLA, in 2000 for Bexxar™ (tositumomab and iodine
clinical trials and to submit an application for marketing approval for a our board. Roche intends to continue to allow our current manage- of our directors, Dr. Franz B. Humer and Dr. Jonathan K.C. Knowles, I 131 tositumomab), which may potentially compete with our prod-
final decision by a regulatory authority varies significantly and may be ment to conduct our business and operations as we have done in the currently serve as directors, officers and employees of Roche uct Rituxan and IDEC has filed a BLA for Zevalin™ (ibritumomab
difficult to predict. past. However, we cannot assure stockholders that Roche will not Holding Ltd and its affiliates. tiuxetan), a product which could also potentially compete with
institute a new business plan in the future. Roche’s interests may Rituxan. Both Bexxar and Zevalin are radiolabeled molecules while
Factors affecting our research and development expenses include, We May Be Unable to Retain Skilled Personnel
conflict with your interests. Rituxan is not. We are also aware of other potentially competitive
but are not limited to: and Maintain Key Relationships
biologic therapies for non-Hodgkin’s lymphoma in development.
Our Affiliation Agreement With Roche Could Limit The success of our business depends, in large part, on our contin-
• The number of and the outcome of clinical trials currently being
Our Ability to Make Acquisitions and Could Have ued ability to attract and retain highly qualified management, scien- Other Competitive Factors Could Affect Our Product Sales
conducted by us and/or our collaborators.
a Material Negative Impact on Our Liquidity tific, manufacturing and sales and marketing personnel, and on our Other competitive factors that could affect our product sales include,
• The number of products entering into development from late-stage The affiliation agreement between us and Roche contains provisions that: ability to develop and maintain important relationships with leading but are not limited to:
research. research institutions and key distributors. Competition for these
• Require the approval of the directors designated by Roche to make any • The timing of FDA approval, if any, of competitive products.
types of personnel and relationships is intense.
For example, there is no guarantee that internal research efforts acquisition or any sale or disposal of all or a portion of our business For example, in June 2000 one of our competitors, Novo, received
will succeed in generating sufficient data for us to make a positive representing 10% or more of our assets, net income or revenues; Roche has the right to maintain its percentage ownership interest in FDA approval for a liquid formulation of its growth hormone prod-
development decision or that an external candidate will be avail- our common stock. Our affiliation agreement with Roche provides that, uct that will directly compete with our liquid formulation, Nutropin
• Enable Roche to maintain its percentage ownership interest in our
able on terms acceptable to us. In the past, promising candidates among other things, we will establish a stock repurchase program AQ. Also in June 2000, another of our competitors, Serono S.A.,
common stock; and
have not yielded sufficiently positive preclinical results to meet our designed to maintain Roche’s percentage ownership in our common received FDA approval to deliver its competitive growth hormone
stringent development criteria. • Establish a stock repurchase program designed to maintain stock if we issue or sell any shares. This right of Roche may limit our product in a needle-free device.
Roche’s percentage ownership interest in our common stock. flexibility as to the number of shares we are able to grant under our
• Hoffmann-La Roche’s decisions whether to exercise its options • Our pricing decisions and the pricing decisions of our competitors.
stock option plans. We therefore cannot assure you that we will be able
to develop and sell our future products in non-U.S. markets and the These provisions may have the effect of limiting our ability to make
to attract or retain skilled personnel or maintain key relationships. For example, we raised the prices of Rituxan in May 2000 and
timing and amount of any related development cost reimbursements. acquisitions and while the dollar amounts associated with the stock
Pulmozyme in June 2000 by approximately 5%.
repurchase program cannot currently be estimated, these stock We Face Growing and New Competition
• In-licensing activities, including the timing and amount of related
repurchases could have a material adverse impact on our liquidity, We face growing competition in two of our therapeutic markets and • The degree of patent protection afforded our products by patents
development funding or milestone payments.
credit rating and ability to access capital in the financial markets. expect new competition in a third market. First, in the thrombolytic granted to us and by the outcome of litigation involving our patents.
For example, in February 2000, we entered into an agreement with market, Activase has lost market share and could lose additional For example, in January 2000, a federal court judge lifted a pre-
Our Stockholders May Be Unable to Prevent Transactions
Actelion Ltd. for the purchase of rights for the development and market share to Centocor’s Retavase, either alone or in combination liminary injunction that had been in effect since 1995 against Bio-
That Are Favorable to Roche but Adverse to Us
co-promotion in the United States of tezosentan, and paid Actelion with the use of another Centocor product, ReoPro® (abciximab) and Technology General Corporation, or BTG. Although an appeal of
Our certificate of incorporation includes provisions relating to:
an upfront fee of $15.0 million which was recorded as a research to the use of other mechanical therapies to treat acute myocardial the judge’s decision is pending, BTG is now permitted to sell its
and development expense. • Competition by Roche with us; infarction; the resulting adverse effect on sales has been and could competitive growth hormone product in the United States.
continue to be material. Retavase received approval from the FDA
• As part of our strategy, we invest in R&D. R&D as a percent of • Offering of corporate opportunities; • The outcome of litigation involving patents of other companies
in October 1996 for the treatment of acute myocardial infarction.
revenues can fluctuate with the changes in future levels of rev- concerning our products or processes related to production and
• Transactions with interested parties; We expect that the use of mechanical reperfusion in lieu of throm-
enue. Lower revenues can lead to more disciplined spending of formulation of those products or uses of those products.
bolytic therapy for the treatment of acute myocardial infarction will
R&D efforts. • Intercompany agreements; and
continue to grow. For example, as further described in “Protecting Our Proprietary
• Future levels of revenue. • Provisions limiting the liability of specified employees. Rights Is Difficult and Costly,” in May 1999, June 2000 and Sep-
Second, in the growth hormone market, we continue to face
tember 2000, several companies filed patent infringement lawsuits
Roche, Our Controlling Stockholder, May Have Interests Our certificate of incorporation provides that any person purchasing or increased competition from four other companies currently selling
against us alleging that we are infringing certain of their patents.
That Are Adverse to Other Stockholders acquiring an interest in shares of our capital stock shall be deemed to growth hormone and an additional company which may enter the mar-
Roche, as our majority stockholder, controls the outcome of actions have consented to the provisions in the certificate of incorporation ket in the near future. As a result of that competition, we have experi- • The increasing use and development of alternate therapies.
requiring the approval of our stockholders. Our bylaws provide, relating to competition with Roche, conflicts of interest with Roche, the enced a loss in market share. The four competitors have also received For example, the overall size of the market for thrombolytic thera-
among other things, that the composition of our board of directors offer of corporate opportunities to Roche and intercompany agree- approval to market their existing human growth hormone products for pies, such as our Activase product, continues to decline as a result
shall consist of two Roche directors, three independent directors ments with Roche. This deemed consent may restrict your ability to additional indications. As a result of this competition, sales of our of the increasing use of mechanical reperfusion.
nominated by a nominating committee and one Genentech employ- challenge transactions carried out in compliance with these provisions. Growth Hormone products may decline, perhaps significantly.
ee nominated by the nominating committee. As long as Roche owns • The rate of market penetration by competing products.
Potential Conflicts of Interest Could Limit Our Ability Third, in the non-Hodgkin’s lymphoma market, Corixa
in excess of 50% of our common stock, Roche directors will com- For example, in the past, we have lost market share to new com-
to Act on Opportunities That Are Adverse to Roche Corporation, formerly Coulter Pharmaceutical, Inc., has filed and
prise two of the three members of the nominating committee. petitors in the thrombolytic and growth hormone markets.
Persons who are directors and/or officers of Genentech and who are received an expedited review of a revised Biologics License
However, at any time until Roche owns less than 5% of our stock,
also directors and/or officers of Roche may decline to take action in

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F I N A N C I A L R E V I E W
(continued)

In Connection With the Redemption of Our Special Common • The timing of non-U.S. approvals, if any, for products licensed to Three lawsuits have been filed against us in which the companies including, for example, changes to their label, written advisements
Stock, We Recorded Substantial Goodwill and Other Intangibles, Hoffmann-La Roche and other licensees. involved allege that we have infringed their patents by the manufac- to physicians and product recall.
the Amortization of Which May Adversely Affect Our Earnings For example, we expect the approval of Herceptin outside the ture and sale of certain of our products:
We cannot be sure that we can obtain necessary regulatory
As a result of the redemption of our special common stock, Roche United States which occurred in third quarter of 2000 to have a • In May 1999, GlaxoSmithKline plc, or Glaxo, filed a complaint in approvals on a timely basis, if at all, for any of the products we are
owned all of our outstanding common stock. Consequently, push- continuing positive impact on royalties. which it appears to claim that our manufacture, use and sale of developing or that we can maintain necessary regulatory approvals
down accounting under generally accepted accounting principles
• Fluctuations in foreign currency exchange rates. Rituxan and Herceptin antibody products infringe four Glaxo for our existing products, and all of the following could have a mate-
was required. Push-down accounting required us to establish a new
patents that relate to certain uses and preparations of antibodies. rial adverse effect on our business:
accounting basis for our assets and liabilities, based on Roche’s • The initiation of new contractual arrangements with other companies.
cost in acquiring all of our stock. In other words, Roche’s cost of • In June 2000, Chiron Corporation filed a complaint in which it claims • Significant delays in obtaining or failing to obtain required approvals.
For example, license fees from Immunex and Schwarz Pharma
acquiring Genentech was “pushed down” to us and reflected on our that our manufacture and sale of Herceptin infringe a patent it owns.
increased contract revenues in 1999. • Loss of or changes to previously obtained approvals.
financial statements. Push-down accounting required us to record
• In September 2000, Glaxo filed another complaint in which it For example, in May 2000, we issued letters to physicians advis-
goodwill and other intangible assets of approximately $1,685.7 • Whether and when contract benchmarks are achieved.
appears to claim that our manufacture, use and sale of Rituxan and ing them of some serious adverse events associated with the
million and $1,499.0 million, respectively, on June 30, 1999. The For example, milestone payments from Pharmacia increased con- Herceptin antibody products infringe a Glaxo patent that relates to administration of Herceptin. In October 2000, we issued a new
amortization of this goodwill and other intangible assets will have a tract revenue in 1997. certain cell culture methods. package insert for Herceptin including this information.
significant negative impact on our financial results in future years. In
addition, we will continuously evaluate whether events and circum- • The failure of or refusal of a licensee to pay royalties. We May Incur Material Litigation Costs • Failure to comply with existing or future regulatory requirements.
stances have occurred that indicate the remaining balance of this • The expiration or invalidation of patents or licensed intellectual Litigation to which we are currently or have been subjected relates
For example, in 1999, we paid a $50.0 million settlement to the
and other intangible assets may not be recoverable. If our assets property. to, among other things, our patent and intellectual property rights,
federal government in connection with a federal investigation of
need to be evaluated for possible impairment, we may have to licensing arrangements with other persons, product liability and
Protecting Our Proprietary Rights Is Difficult and Costly our former clinical, sales and marketing activities associated with
reduce the carrying value of our intangible assets. This could have a financing activities. We cannot predict with certainty the eventual
The patent positions of pharmaceutical and biotechnology companies our human growth hormone products.
material adverse effect on our financial condition and results of outcome of pending litigation, and we might have to incur substan-
operations during the periods in which we recognize a reduction. We can be highly uncertain and involve complex legal and factual ques- tial expense in defending these lawsuits. We have in the past taken Moreover, it is possible that the current regulatory framework
may have to write down intangible assets in future periods. For more tions. Accordingly, we cannot predict the breadth of claims allowed in substantial special charges relating to litigation, including $230.0 could change or additional regulations could arise at any stage dur-
information about push-down accounting, see the “Redemption of these companies’ patents. Patent disputes are frequent and can pre- million in 1999. ing our product development, which may affect our ability to obtain
Our Special Common Stock ” note in the Notes to Consolidated clude the commercialization of products. We have in the past been, are approval of our products.
currently, and may in the future be involved in material patent litigation. We May Incur Material Product Liability Costs
Financial Statements.
Patent litigation is costly in its own right and could subject us to sig- The testing and marketing of medical products entail an inherent risk Difficulties or Delays in Product Manufacturing
Our Royalty and Contract Revenues Could Decline nificant liabilities to third parties. In addition, an adverse decision could of product liability. Pharmaceutical product liability exposures could Could Harm Our Business
Royalty and contract revenues in future periods could vary signifi- force us to either obtain third-party licenses at a material cost or cease be extremely large and pose a material risk. Our business may be We currently produce all of our products at our manufacturing facil-
cantly. Major factors affecting these revenues include, but are not using the technology or product in dispute. For example, in late 1999 materially and adversely affected by a successful product liability ities located in South San Francisco, California and Vacaville,
limited to: we settled a patent infringement lawsuit brought against us by the claim in excess of any insurance coverage that we may have. California or through various contract manufacturing arrangements.
Regents of the University of California in which the University alleged Problems with any of our or our contractors’ manufacturing
• Hoffmann-La Roche’s decisions whether to exercise its options We May Be Unable to Obtain Regulatory Approvals
that the manufacture and sale of our Protropin and Nutropin growth processes could result in product defects, which could require us to
and option extensions to develop and sell our future products in for Our Products
hormone products infringed a patent owned by the University. In con- delay shipment of products, recall products previously shipped or
non-U.S. markets and the timing and amount of any related devel- The pharmaceutical industry is subject to stringent regulation with
nection with that settlement we paid the University of California $150.0 be unable to supply products at all.
opment cost reimbursements. respect to product safety and efficacy by various federal, state and
million and donated $50.0 million for the construction of a new life sci- local authorities. Of particular significance are the FDA’s require- For example, in March 2000, we issued an important drug notifi-
• Variations in Hoffmann-La Roche’s sales and other licensees’ sales ences building on the University of California, San Francisco campus. ments covering research and development, testing, manufacturing, cation regarding a defect in the packaging of our Pulmozyme prod-
of licensed products.
The presence of patents or other proprietary rights belonging to quality control, labeling and promotion of drugs for human use. A uct. During a quality assurance inspection, we had discovered that
For example, we began receiving royalty revenues from pharmaceutical product cannot be marketed in the United States until there was a defect in the packaging of Pulmozyme which occasion-
other parties may lead to our termination of the research and devel-
Immunex’s sale of Enbrel in 1999. it has been approved by the FDA, and then can only be marketed for ally caused a small puncture in ampules of that product. We sus-
opment of a particular product.
• The conclusion of existing arrangements with other companies the indications and claims approved by the FDA. As a result of these pended shipping the product while we determined the source and
We believe that we have strong patent protection or the potential requirements, the length of time, the level of expenditures and the extent of the defect. We ultimately recalled some of the product.
and Hoffmann-La Roche.
for strong patent protection for a number of our products that gen- laboratory and clinical information required for approval of a New
For example, royalty revenues decreased in 1999 from 1998 due erate sales and royalty revenue or that we are developing. However, On December 27, 2000, we received a Warning Letter from the FDA
Drug Application, or NDA, or a BLA, are substantial and can require
to the expiration of royalty payments primarily on sales of human the courts will determine the ultimate strength of patent protection regarding our quality control at our South San Francisco manufactur-
a number of years. In addition, after any of our products receive reg-
insulin, from Eli Lilly and Company in August 1998. of our products and those on which we earn royalties. ing plant. The products cited were for cystic fibrosis, breast cancer
ulatory approval, they remain subject to ongoing FDA regulation,
and acute myocardial infarction. On February 7, 2001, we received a

40 41
F I N A N C I A L R E V I E W
(continued)

letter from the FDA accepting our responses and corrective actions • Economic and other external factors or other disaster or crisis. We maintain risk management control systems to monitor the risks confidence level based on historical interest rate movements,
with respect to the Warning Letter. For example, our stock reached a high of $122.50 per share in associated with interest rates, foreign currency exchange rates and would not materially affect the fair value of interest rate sensitive
March 2000 and decreased, as the biotech sector and stock market equity investment price changes, and our derivative and financial instruments.
In addition, any prolonged interruption in the operations of our or
in general decreased, to a low of $42.25 per share in late May 2000. instrument positions. The risk management control systems use ana-
our contractors’ manufacturing facilities could result in cancella- We Are Exposed to Risks Relating to Foreign Currency
lytical techniques, including sensitivity analysis and market values.
tions of shipments. A number of factors could cause interruptions, • Period-to-period fluctuations in financial results. Exchange Rates and Foreign Economic Conditions
Though we intend for our risk management control systems to be
including equipment malfunctions or failures, or damage to a facili- We evaluate our foreign currency exposure on a net basis. We
For example, our stock price has historically been affected by comprehensive, there are inherent risks that may only be partially off-
ty due to natural disasters or otherwise. Because our manufacturing receive royalty revenues from licensees selling products in countries
whether we met or exceeded analyst expectations. set by our hedging programs should there be unfavorable move-
processes and those of our contractors are highly complex and are throughout the world. Increasingly, however, these royalties are
ments in interest rates, foreign currency exchange rates or equity
subject to a lengthy FDA approval process, alternative qualified pro- Our Affiliation Agreement With Roche Could Adversely being offset by expenses arising from our foreign facility as well as
investment prices.
duction capacity may not be available on a timely basis or at all. Affect Our Cash Position non–U.S. dollar expenses incurred in our collaborations. Currently,
Difficulties or delays in our and our contractors’ manufacturing of Our affiliation agreement with Roche provides that we will establish The estimated exposures discussed below are intended to meas- our foreign royalty revenues exceed our expenses. As a result, our
existing or new products could increase our costs, cause us to lose a stock repurchase program designed to maintain Roche’s percent- ure the maximum amount we could lose from adverse market move- financial results could be significantly affected by factors such as
revenue or market share and damage our reputation. age ownership interest in our common stock. While the dollar ments in interest rates, foreign currency exchange rates and equity changes in foreign currency exchange rates or weak economic con-
amounts associated with these future purchases cannot currently be investment prices, given a specified confidence level, over a given ditions in the foreign markets in which our licensed products are
Our Stock Price, Like That of Many Biotechnology
estimated, these stock repurchases could have a material adverse period of time. Loss is defined in the value at risk estimation as fair sold. We are exposed to changes in exchange rates in Europe, Asia
Companies, Is Highly Volatile
effect on our cash position and may have the effect of limiting our market value loss. The exposures to interest rate, foreign currency (primarily Japan) and Canada. Our exposure to foreign exchange
The market prices for securities of biotechnology companies in gen-
ability to use our capital stock as consideration for acquisitions. exchange rate and equity investment price changes are calculated rates primarily exists with the Euro. When the U.S. dollar strength-
eral have been highly volatile and may continue to be highly volatile
based on proprietary modeling techniques from a Monte Carlo sim- ens against the currencies in these countries, the U.S. dollar value
in the future. In addition, due to the absence of the put and call that These provisions may have the effect of limiting our ability to make
ulation value at risk model using a 30-day holding period and a 95% of non–U.S. dollar-based revenue decreases; when the U.S. dollar
were associated with our special common stock, the market price of acquisitions and while the dollar amounts associated with the stock
confidence level. The value at risk model assumes non-linear finan- weakens, the U.S. dollar value of the non–U.S. dollar-based revenues
our common stock has been and may continue to be more volatile repurchase program cannot currently be estimated, these stock
cial returns and generates potential paths various market prices increases. Accordingly, changes in exchange rates, and in particular
than our special common stock was in the past. repurchases could have a material adverse impact on our liquidity,
could take and tracks the hypothetical performance of a portfolio a strengthening of the U.S. dollar, may adversely affect our royalty
credit rating and ability to access capital in the financial markets.
In addition, the following factors may have a significant impact on under each scenario to approximate its financial return. The value at revenues as expressed in U.S. dollars. In addition, as part of our
the market price of our common stock: Future Sales by Roche Could Cause the Price risk model takes into account correlations and diversification across overall investment strategy, a portion of our portfolio is primarily in
of Our Common Stock to Decline market factors, including interest rates, foreign currencies and non-dollar denominated investments. As a result, we are exposed to
• Announcements of technological innovations or new commercial
As of December 31, 2000, Roche owned 306,594,352 shares of our equity prices. Market volatilities and correlations are based on J.P. changes in the exchange rates of the countries in which these non-
products by us or our competitors.
common stock or approximately 58.4% of our outstanding shares. Morgan Riskmetrics™ dataset as of December 31, 2000. dollar denominated investments are made.
For example, our stock increased by approximately 4% on the day All of our shares owned by Roche are eligible for sale in the public
we announced FDA approval for our Nutropin Depot product. Our Interest Income Is Subject to Fluctuations in Interest Rates To mitigate our net foreign exchange exposure, we could hedge
market subject to compliance with the applicable securities laws. We
Our material interest bearing assets, or interest bearing portfolio, certain of our anticipated revenues by purchasing option contracts
• Developments concerning proprietary rights, including patents. have agreed that, upon Roche’s request, we will file one or more
consisted of cash equivalents, restricted cash, short-term invest- with expiration dates and amounts of currency that are based on
registration statements under the Securities Act in order to permit
For example, our stock price decreased by approximately 4% on ments, convertible preferred stock investments, convertible loans 25% to 90% of probable future revenues so that the potential
Roche to offer and sell shares of our common stock. We have agreed
the day one of our competitors, Chiron, announced a patent and long-term investments. The balance of our interest bearing port- adverse impact of movements in currency exchange rates on the
to use our best efforts to facilitate the registration and offering of
infringement suit against us. folio was $1,879.6 million or 28% of total assets at December 31, non-dollar denominated revenues will be at least partly offset by an
those shares designated for sale by Roche. Sales of a substantial
2000. Interest income related to this portfolio was $90.4 million or associated increase in the value of the option. Currently, the term of
• Publicity regarding actual or potential medical results relating to number of shares of our common stock by Roche in the public mar-
5% of total revenues. Our interest income is sensitive to changes in these options is generally one to two years. We may also enter into
products under development by us or our competitors. ket could adversely affect the market price of our common stock.
the general level of interest rates, primarily U.S. interest rates. In this foreign currency forward contracts to lock in the dollar value of a
For example, our stock price increased by approximately 9% on We Are Exposed to Market Risk regard, changes in the U.S. interest rates affect the interest bearing portion of these anticipated revenues. To hedge the non-dollar
the day we announced positive preliminary Phase III results from We are exposed to market risk, including changes to interest rates, portfolio. To mitigate the impact of fluctuations in U.S. interest rates, denominated investment portfolio, we enter into forward contracts.
the Anti-IgE asthma clinic. foreign currency exchange rates and equity investment prices. To for a portion of our portfolio, we have entered into swap transactions,
Based on our overall currency rate exposure at December 31, 2000,
• Regulatory developments in the United States and foreign countries. reduce the volatility relating to these exposures, we enter into vari- which involve the receipt of fixed rate interest and the payment of
1999 and 1998, including derivative and other foreign currency
ous derivative investment transactions pursuant to our investment floating rate interest without the exchange of the underlying principal.
• Public concern as to the safety of biotechnology products. sensitive instruments, a near-term change in currency rates within a
and risk management policies and procedures in areas such as
Based on our overall interest rate exposure at December 31, 2000, 95% confidence level based on historical currency rate movements
For example, on May 8, 2000, we issued a warning concerning hedging and counterparty exposure practices. We do not use deriv-
1999 and 1998, including derivative and other interest rate sensitive would not materially affect the fair value of foreign currency sensitive
our Herceptin drug after 15 deaths resulted from the administra- atives for speculative purposes.
instruments, a near-term change in interest rates, within a 95% instruments.
tion of Herceptin. Our stock price decreased by approximately 2%
at that time.

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F I N A N C I A L R E V I E W
(continued)

Our Investments in Equity Securities Are Subject to Market Risks under FAS 133. Based on our derivative positions at December 31, REPORT OF ERNST & YOUNG LLP, REPORT OF MANAGEMENT
As part of our strategic alliance efforts, we invest in equity instru- 2000, we estimate that upon adoption, we will record a charge from INDEPENDENT AUDITORS Genentech, Inc. is responsible for the preparation, integrity and fair
ments of biotechnology companies. Our biotechnology equity the cumulative effect of a change in accounting principle of approxi- presentation of its published financial statements. We have prepared
The Board of Directors and Stockholders of Genentech, Inc.
investment portfolio totaled $652.7 million or 10% of total assets at mately $9.0 million being recognized in the consolidated statement of the financial statements in accordance with accounting principles
December 31, 2000. These investments are subject to fluctuations operations and an increase of approximately $8.0 million in other We have audited the accompanying consolidated balance sheets of generally accepted in the United States. As such, the statements
from market value changes in stock prices. To mitigate this risk, comprehensive income. Genentech, Inc. as of December 31, 2000 and 1999, and the related include amounts based on judgments and estimates made by
certain equity securities are hedged with costless collars and equity consolidated statements of operations, stockholders’ equity and cash management. We also prepared the other information included in the
We Are Exposed to Credit Risk of Counterparties
swaps. A costless collar is a purchased put option and a written call flows for the year ended December 31, 2000, and for the period from annual report and are responsible for its accuracy and consistency
We could be exposed to losses related to the financial instruments
option in which the cost of the purchased put and the proceeds of June 30, 1999 to December 31, 1999 (all “New Basis”). We have also with the financial statements.
described above under “We Are Exposed to Market Risk ” should
the written call offset each other; therefore, there is no initial cost or audited the related consolidated statements of operations, stock-
one of our counterparties default. We attempt to mitigate this risk The financial statements have been audited by the independent
cash outflow for these instruments at the time of purchase. The pur- holders’ equity and cash flows for the period from January 1, 1999
through credit monitoring procedures. auditing firm, Ernst & Young LLP, which was given unrestricted
chased put protects us from a decline in the market value of the to June 30, 1999, and for the year ended December 31, 1998 (all “Old
access to all financial records and related data, including minutes of
security below a certain minimum level (the put “strike” level), while Basis”). These financial statements are the responsibility of
all meetings of stockholders, the Board of Directors and committees
the call effectively limits our potential to benefit from an increase in Genentech, Inc.’s management. Our responsibility is to express an
of the Board. We believe that all representations made to the inde-
the market value of the security above a certain maximum level (the opinion on these financial statements based on our audits.
pendent auditors during their audit were valid and appropriate. Ernst
call “strike” level). An equity swap is a derivative instrument where
We conducted our audits in accordance with auditing standards & Young LLP’s audit report is included in this Annual Report.
Genentech pays the counterparty the total return of the security
generally accepted in the United States. Those standards require that
above the current spot price and receives interest income on the Systems of internal accounting controls, applied by operating and
we plan and perform the audit to obtain reasonable assurance about
notional amount for the swap term. The equity swap protects us financial management, are designed to provide reasonable assur-
whether the financial statements are free of material misstatement.
from a decline in the market value of the security below the spot ance as to the integrity and reliability of the financial statements and
An audit includes examining, on a test basis, evidence supporting the
price and limits our potential benefit from an increase in the market reasonable, but not absolute, assurance that assets are safeguarded
amounts and disclosures in the financial statements. An audit also
value of the security above the spot price. In addition, as part of our from unauthorized use or disposition, and that transactions are
includes assessing the accounting principles used and significant
strategic alliance efforts, we hold dividend-bearing convertible pre- recorded according to management’s policies and procedures. We
estimates made by management, as well as evaluating the overall
ferred stock and have made interest-bearing loans that are convert- continually review and modify these systems, where appropriate, to
financial statement presentation. We believe that our audits provide a
ible into the equity securities of the debtor. maintain such assurance. Through our general audit activities, the
reasonable basis for our opinion.
adequacy and effectiveness of the systems and controls are
Based on our overall exposure to fluctuations from market value
In our opinion, the financial statements referred to above present reviewed and the resultant findings are communicated to manage-
changes in marketable equity prices at December 31, 2000, a near-
fairly, in all material respects, the consolidated financial position of ment and the Audit Committee of the Board of Directors.
term change in equity prices within a 95% confidence level based on
Genentech, Inc. at December 31, 2000 and 1999, and the consoli-
historic volatilities could result in a potential loss in fair value of the The selection of Ernst & Young LLP as our independent auditors
dated results of its operations and its cash flows for the year ended
equity securities portfolio of $94.0 million. We estimated that the has been approved by our Board of Directors and ratified by the
December 31, 2000, the period from June 30, 1999 to December 31,
potential loss in fair value of the equity securities portfolio was stockholders. The Audit Committee of the Board of Directors is com-
1999, the period from January 1, 1999 to June 30, 1999, and for the
$43.2 million at December 31, 1999 and $10.6 million at December posed of three non-management directors who meet regularly with
year ended December 31, 1998 in conformity with accounting prin-
31, 1998. management, the independent auditors and the general auditor,
ciples generally accepted in the United States.
jointly and separately, to review the adequacy of internal accounting
Recent Accounting Pronouncements Could Impact Our Financial
As discussed in the notes to the consolidated financial statements, the controls and auditing and financial reporting matters to ascertain
Position and Results of Operations
balance sheet as of December 31, 1999, and the statements of opera- that each is properly discharging its responsibilities.
We will adopt Statement of Financial Accounting Standards 133, or
tions, stockholders’ equity and cash flows for the periods in the year
FAS 133, “Accounting for Derivative Instruments and Hedging
ended December 31, 1999 have been restated. In addition, in 2000 the
Activities,” on January 1, 2001. FAS 133 establishes accounting and
Company changed its method of accounting for revenue recognition.
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging /s/ Arthur D. Levinson /s/ Louis J. Lavigne, Jr. /s/ John M. Whiting

activities. It requires companies to recognize all derivatives as either

Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr. John M. Whiting
assets or liabilities on the balance sheet and measure those instru-
ments at fair value. Gains or losses resulting from changes in the Chairman Executive Vice President Vice President,
values of those derivatives would be accounted for depending on the and and Controller and
use of the derivative and whether it qualifies for hedge accounting Palo Alto, California Chief Executive Officer Chief Financial Officer Chief Accounting Officer
January 17, 2001

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C O N S O L I D AT E D S TAT E M E N T S O F O P E R AT I O N S C O N S O L I D AT E D S TAT E M E N T S O F C A S H F LO W S
(thousands, except per share amounts) (thousands)

Year Ended December 31 2000 1999 1998 Year Ended December 31 2000 1999 1998
New Basis Old Basis New Basis Old Basis
(June 30 to (January 1 to (June 30 to (January 1 to
December 31)(1) June 30)(1) December 31)(1) June 30)(1)
Restated(1) Restated(1) Increase (Decrease) in Cash and Cash Equivalents Restated(1) Restated(1)

Revenues Cash flows from operating activities:

Product sales (including amounts from related parties: Net income (loss) $ (74,241) $ (1,245,112) $ 87,636 $ 181,909
2000–$67,392; 1999–$41,324; 1998–$28,738) $ 1,278,344 $ 535,671 $ 503,424 $ 717,795 Adjustments to reconcile net income (loss) to net cash
Royalties (including amounts from related parties: provided by (used in) operating activities:
2000–$46,795; 1999–$42,528; 1998–$35,028) 207,241 96,666 92,604 229,589 Depreciation and amortization 463,004 236,365 44,317 78,101
Contract and other (including amounts from related parties: In-process research and development — 752,500 — —
2000–$3,506; 1999–$17,170; 1998–$61,583) 160,363 26,398 56,844 114,795 Non-cash compensation related to stock options, net of tax — 119,153 — —
Interest 90,408 45,049 44,385 88,764 Deferred income taxes (235,315) (143,371) (924) 29,792
Total revenues 1,736,356 703,784 697,257 1,150,943 Gain on sales of securities available-for-sale (132,307) (7,092) (12,283) (9,542)
Costs and expenses Loss on sales of securities available-for-sale 3,957 884 921 1,809
Cost of sales (including amounts from related parties: Write down of securities available-for-sale 4,800 4,955 8,467 20,249
2000–$56,674; 1999–$36,267; 1998–$23,155) 364,892 187,145 98,404 138,623 Write down of non-marketable securities — — 432 16,689
Research and development (including contract related: Loss (gain) on fixed asset dispositions 1,123 902 (16) 1,015
2000–$25,709; 1999–$18,366; 1998–$27,660) 489,879 182,387 184,951 396,186
Changes in assets and liabilities:
Marketing, general and administrative 497,036 253,356 214,573 358,931
Investments in trading securities (20,963) (5,215) (4,944) 12,725
Special charges:
Receivables and other current assets (60,719) (29,299) (38,644) 33,767
Related to redemption — 1,207,700 — —
Inventories, including inventory write-up effect 9,415 49,228 10,333 (32,600)
Legal settlements — 180,008 50,000 —
Accounts payable, other current liabilities and
Recurring charges related to redemption 375,300 197,742 — — other long-term liabilities 234,777 135,084 28,277 15,937
Interest 5,276 2,641 2,719 4,552 Net cash provided by (used in) operating activities 193,531 (131,018) 123,572 349,851
Total costs and expenses 1,732,383 2,210,979 550,647 898,292 Cash flows from investing activities:
Income (loss) before taxes and cumulative effect of accounting change 3,973 (1,507,195) 146,610 252,651 Purchases of securities held-to-maturity — — (186,612) (327,690)
Income tax provision (benefit) 20,414 (262,083) 58,974 70,742 Proceeds from maturities of securities held-to-maturity — 136,140 150,357 410,729

Income (loss) before cumulative effect of accounting change (16,441) (1,245,112) 87,636 181,909 Purchases of securities available-for-sale (560,405) (294,814) (300,254) (800,788)

Cumulative effect of accounting change, net of tax (57,800) — — — Proceeds from sales of securities available-for-sale 574,145 369,311 257,752 430,936
Purchases of non-marketable equity securities (5,663) (13,781) (39,177) (29,044)
Net income (loss) $ (74,241) $ (1,245,112) $ 87,636 $ 181,909
Capital expenditures (112,681) (53,495) (41,513) (88,088)
Earnings (loss) per share:
Change in other assets (55,604) (62,430) 38,879 (17,151)
Basic: Earnings (loss) before cumulative effect of accounting change $ (0.03) $ (2.43) $ 0.17 $ 0.36
Transfer to restricted cash included in other assets — — (56,600) —
Cumulative effect of accounting change, net of tax (0.11) — — —
Net cash (used in) provided by investing activities (160,208) 80,931 (177,168) (421,096)
Net earnings (loss) per share $ (0.14) $ (2.43) $ 0.17 $ 0.36
Cash flows from financing activities:
Diluted: Earnings (loss) before cumulative effect of accounting change $ (0.03) $ (2.43) $ 0.16 $ 0.35 Stock issuances 180,379 95,912 64,291 107,938
Cumulative effect of accounting change, net of tax (0.11) — — —
Net cash provided by financing activities 180,379 95,912 64,291 107,938
Net earnings (loss) per share $ (0.14) $ (2.43) $ 0.16 $ 0.35
Net increase in cash and cash equivalents 213,702 45,825 10,695 36,693
Weighted-average shares used to compute Cash and cash equivalents at beginning of period 337,682 291,857 281,162 244,469
basic earnings (loss) per share: 522,179 513,352 512,368 503,291
Cash and cash equivalents at end of period $ 551,384 $ 337,682 $ 291,857 $ 281,162
Weighted-average shares used to compute
diluted earnings (loss) per share: 522,179 513,352 531,868 519,488 Supplemental cash flow data:
Cash paid during the year for:
Pro forma amounts assuming the new revenue recognition policy Interest, net of portion capitalized $ 5,282 $ (1,109) $ 6,469 $ 4,552
was applied retroactively (unaudited): Income taxes paid (received) (5,005) 2,842 15,898 26,189
Net income (loss) $ (16,441) $ (1,248,632) $ 79,916 $ 154,549 Stock received as consideration for outstanding loans 5,000 16,000 — —

(1) All amounts related to the Redemption of our Special Common Stock transaction are reflected in the New Basis presentation. (1) All amounts related to the Redemption of our Special Common Stock transaction are reflected in the New Basis presentation.
See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements.
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CO N S O L I DAT E D B A L A N C E S H E E T S C O N S O L I D AT E D S TAT E M E N T S O F S TO C K H O L D E R S ’ E Q U I T Y
(dollars in thousands, except par value) (thousands)
Shares

December 31 2000 1999 Retained Accumulated

Restated(1) Special Special Additional Earnings Other
Common Common Common Common Paid-in (Accumulated Comprehensive
Assets: Old Basis(1) Stock Stock Stock Stock Capital Deficit) Income (Loss) Total
Current assets: Balance December 31, 1997 190,427 306,484 $ 3,809 $ 6,130 $ 1,456,313 $ 511,141 $ 53,832 $ 2,031,225
Cash and cash equivalents $ 551,384 $ 337,682 Comprehensive income
Short-term investments 642,475 405,003 Net income 181,909 181,909
Accounts receivable—trade (net of allowances of: 2000–$14,126; 1999–$15,767) 162,121 120,497 Net unrealized gain on securities available-for-sale 5,431 5,431
Accounts receivable—other (net of allowances of: 2000–$3,184; 1999–$3,184) 63,262 61,054 Comprehensive income 187,340
Accounts receivable—related party 36,299 33,234 Issuance of stock upon exercise of options 9,840 196 86,688 86,884
Inventories 265,830 275,245 Issuance of stock under employee stock plan 1,708 35 21,029 21,064
Deferred tax assets 40,619 81,922 Income tax benefits realized from employee stock option exercises 17,332 17,332

Prepaid expenses and other current assets 26,821 11,870 Balance December 31, 1998 201,975 306,484 $ 4,040 $ 6,130 $ 1,581,362 $ 693,050 $ 59,263 $ 2,343,845

Total current assets 1,788,811 1,326,507 Period from January 1 to June 30, 1999 (Restated) (1)

Long-term marketable securities 1,265,515 1,214,757 Comprehensive income

Property, plant and equipment, net 752,892 730,086 Net income 87,636 87,636
Net unrealized (loss) on securities available-for-sale (1,158) (1,158)
Goodwill (net of accumulated amortization of: 2000–$843,494; 1999–$690,209) 1,455,778 1,609,063
Comprehensive income 86,478
Other intangible assets (net of accumulated amortization of: 2000–$1,282,090; 1999–$1,062,181) 1,280,359 1,453,268
Issuance of stock upon exercise of options 5,085 102 51,613 51,715
Other long-term assets 168,458 201,101
Issuance of stock under employee stock plan 1,014 20 12,557 12,577
Total assets $ 6,711,813 $ 6,534,782
Income tax benefits realized from employee stock option exercises 6,162 6,162
Liabilities and stockholders’ equity: Balance June 30, 1999 208,074 306,484 $ 4,162 $ 6,130 $ 1,651,694 $ 780,686 $ 58,105 $ 2,500,777
Current liabilities: New Basis (Effective June 30, 1999)(1)
Accounts payable $ 34,503 $ 33,123 Period from June 30 to December 31, 1999 (Restated)(1)
Accrued liabilities—related party 12,265 14,960 Push-down accounting:
Deferred revenue 15,433 2,000 Redemption of Special Common Stock and related
Other accrued liabilities 386,480 427,333 issuance of Common Stock (208,074) 202,710 $ (4,162) $ 4,054 $ 5,361,972 $ — $ (20,337) $ 5,341,527
Eliminate Retained Earnings (Old Basis) 780,686 (780,686) —
Total current liabilities 448,681 477,416
Adjustments related to the 1990 through 1997 purchase period:
Long-term debt 149,692 149,708
In-process research and development (500,500) (500,500)
Deferred tax liabilities 349,848 626,466
Amortization of goodwill, intangibles and fair value
Deferred revenue 87,600 2,972 adjustment to inventories, net of tax (1,221,644) (1,221,644)
Other long-term liabilities 1,789 8,363 Comprehensive loss

Total liabilities 1,037,610 1,264,925 Net loss (1,245,112) (1,245,112)

Net unrealized gain on securities available-for-sale 221,731 221,731
Commitments and contingencies
Comprehensive loss (1,023,381)
Stockholders’ equity:
Issuance of stock upon exercise of options 6,551 131 90,056 90,187
Preferred stock, $0.02 par value; authorized: 100,000,000 shares; none issued — —
Issuance of stock under employee stock plan 476 9 6,057 6,066
Common stock, $0.02 par value; authorized: 600,000,000 shares; outstanding:
Income tax benefits realized from employee stock option exercises 76,825 76,825
2000–525,476,771 and 1999–516,220,558 10,510 10,324
Balance December 31, 1999 — 516,221 $ — $ 10,324 $ 6,245,146 $ (1,245,112) $ 259,499 $ 5,269,857
Additional paid-in capital 6,651,428 6,245,146
Comprehensive loss
Accumulated deficit, since June 30,1999 (1,319,353) (1,245,112)
Net loss (74,241) (74,241)
Accumulated other comprehensive income 331,618 259,499
Net unrealized gain on securities available-for-sale 72,119 72,119
Total stockholders’ equity 5,674,203 5,269,857 Comprehensive loss (2,122)
Total liabilities and stockholders’ equity $ 6,711,813 $ 6,534,782 Issuance of stock upon exercise of options 8,259 166 148,241 148,407
Issuance of stock under employee stock plan 997 20 31,968 31,988
Income tax benefits realized from employee stock option exercises 226,073 226,073
Balance December 31, 2000 — 525,477 $ — $ 10,510 $ 6,651,428 $(1,319,353) $ 331,618 $ 5,674,203

(1) All amounts related to the Redemption of our Special Common Stock transaction are reflected in the New Basis presentation. (1) All amounts related to the Redemption of our Special Common Stock transaction are reflected in the New Basis presentation.
See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements.
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N OT E S TO CO N S O L I DAT E D F I NA N C I A L STAT E M E N T S

In this Annual Report, “Genentech,” “we,” “us” and “our” refer to Genentech, amount of contract and other income in 1999 decreased by $20.3 mil- the agreement, the product is approved for marketing, or nearly vertible debt of other biotechnology companies. All of our equity
Inc. “Common Stock” refers to Genentech’s common stock, par value $0.02 lion, and net income decreased by $13.6 million ($0.03 per share) for approvable, and development risk has been substantially eliminated. investments represent less than a 20% ownership position. Marketable
per share, “Special Common Stock” refers to Genentech’s callable putable
the quarter and six month periods ended June 30, 1999. In addition, Deferred revenue related to manufacturing obligations will be recog- equity securities are accounted for as available-for-sale investment
common stock, par value $0.02 per share and “Redeemable Common
amortization expense decreased by $0.6 million (less than $0.01 per nized on a straight-line basis over the longer of the contractual term securities as described below. Nonmarketable equity securities and
Stock” refers to Genentech’s redeemable common stock, par value $0.02 per
share. All numbers related to the number of shares, price per share and per share) during the six month period ended December 31, 1999, and of the manufacturing obligation or the expected period over which convertible debt are carried at cost. We periodically monitor the liquid-
share amounts of Common Stock, Special Common Stock and Redeemable goodwill, net of accumulated amortization, decreased by $19.7 mil- we will supply the product. We believe the change in accounting ity progress and financing activities of these entities to determine if
Common Stock give effect to the two-for-one splits of our Common Stock lion, other accrued liabilities decreased by $6.8 million and accumu- principle is preferable based on guidance provided in the Securities impairment write downs are required. We had investments of $48.5
that were effected in October 2000 and November 1999. lated deficit increased by $12.9 million at December 31, 1999. and Exchange Commission’s, or SEC, Staff Accounting Bulletin No. million at December 31, 2000, and $53.3 million at December 31,
101, “Revenue Recognition in Financial Statements.” 1999, in convertible debt of various biotechnology companies.
BASIS OF PRESENTATION AND RESTATEMENT DESCRIPTION OF BUSINESS AND
On June 30, 1999, we redeemed all of our outstanding Special The cumulative effect of the change in accounting principle was Investment securities are classified into one of three categories: held-
SIGNIFICANT ACCOUNTING POLICIES
Common Stock held by stockholders other than Roche Holdings, reported as a charge in the year ended December 31, 2000. The to-maturity, available-for-sale or trading. Securities are considered held-
Genentech is a leading biotechnology company using human genetic
Inc., commonly known as Roche, with funds deposited by Roche for cumulative effect was initially recorded as deferred revenue that will to-maturity when we have the positive intent and ability to hold the
information to discover, develop, manufacture and market human
that purpose. This event, referred to as the “Redemption” in this be recognized as revenue over the remaining term of the research securities to maturity. Held-to-maturity securities are stated at amor-
pharmaceuticals that address significant unmet medical needs.
report, caused Roche to own 100% of the outstanding common and development collaboration or distribution agreements, as appro- tized cost, including adjustments for amortization of premiums and
Fourteen of the approved products of biotechnology stem from our
stock of Genentech on that date. The Redemption of our Special priate. For the year ended December 31, 2000, the impact of the accretion of discounts. Securities are considered trading when bought
science. We manufacture and market nine protein-based pharmaceu-
Common Stock on June 30, 1999 was reflected as a purchase of a change in accounting was to increase net loss by $52.6 million, or principally for the purpose of selling in the near term. These securities
ticals, and license several additional products to other companies.
business which, under U.S. generally accepted accounting principles, $0.10 per share, comprised of the $57.8 million cumulative effect of are recorded as short-term investments and are carried at market value.
required push-down accounting to reflect in our financial statements On July 23, 1999, October 26, 1999, and March 29, 2000, Roche the change (net of tax impact) as described above ($0.11 per share), Unrealized holding gains and losses on trading securities are included
the amounts paid for our stock in excess of our net book value. The completed public offerings of our Common Stock. We did not receive net of $5.2 million of the related deferred revenue (less related tax in interest income. Securities not classified as held-to-maturity or as
Redemption created our New Basis of accounting as discussed fur- any of the net proceeds from these offerings. On January 19, 2000, impact of $3.4 million) that was recognized as revenue during the trading are considered available-for-sale. These securities are recorded
ther below. The Redemption was effective as of June 30, 1999, how- Roche completed an offering of zero-coupon notes that are exchange- year ($0.01 per share). The remainder of the related deferred revenue as either short-term investments or long-term marketable securities and
ever, the transaction was reflected as of the end of the day on June able for an aggregate of 13,034,618 shares of our Common Stock of $90.7 million will be recognized in 2001 through 2019. Pro forma are carried at market value with unrealized gains and losses included in
30, 1999 in the financial statements. We previously issued consoli- held by Roche. Roche’s percentage ownership of our outstanding amounts of net income (loss) and related per share amounts, assum- accumulated other comprehensive income in stockholders’ equity. If a
dated financial statements that presented limited information related Common Stock is approximately 58.4% at December 31, 2000. ing retroactive application of the accounting change for all periods decline in fair value below cost is considered other than temporary,
to the results of operations for the period January 1, 1999 through presented, are as follows (in thousands, except per share amounts): marketable equity securities are written down to estimated fair value
Principles of Consolidation
June 30, 1999 immediately prior to the Redemption (“Old Basis”), 2000 1999 1998
with a charge to marketing, general and administrative expenses. Other
The consolidated financial statements include the accounts of
and the period June 30, 1999 (including and subsequent to the than temporary declines in fair value on short-term and long-term
Genentech and all subsidiaries. Material intercompany balances and As Reported:
Redemption) to December 31, 1999 (“New Basis”). We did not pre- investments are charged against interest income. The cost of all securi-
transactions are eliminated. Net income (loss) $ (74,241) $ (1,157,476) $ 181,909
sent separate statements of operations, stockholders’ equity or cash ties sold is based on the specific identification method.
Net income (loss) per share—
flows reflecting the New Basis of accounting. Upon further review and Use of Estimates diluted $ (0.14) $ (2.26) $ 0.35 Long-Lived Assets
based on discussions with the Securities and Exchange Commission, The preparation of financial statements in conformity with generally Pro forma amounts with the
The carrying value of our long-lived assets is reviewed for impair-
accepted accounting principles requires management to make esti- change in accounting principle
our statements of operations, cash flows and stockholders’ equity ment whenever events or changes in circumstances indicate that the
mates and assumptions that affect the amounts reported in the related to revenue recognition
have been revised and presented on the New Basis of accounting that applied retroactively (unaudited): asset may not be recoverable. An impairment loss would be recog-
resulted from the Redemption transaction. As such, a vertical black financial statements and accompanying notes. Actual results could
Net income (loss) $ (16,441) $ (1,168,716) $ 154,549 nized when estimated future cash flows expected to result from the
line is inserted to separate the “Old Basis” and “New Basis” presen- differ from those estimates. Net income (loss) per share— use of the asset and its eventual disposition is less than its carrying
tation in the financial statements. Accordingly, the Old Basis reflects diluted $ (0.03) $ (2.28) $ 0.30
Change in Accounting Principle amount. Long-lived assets include property, plant and equipment,
the period January 1 through June 30, 1999, and all periods prior to We previously recognized non-refundable, upfront product license goodwill and other intangible assets.
the Redemption, and the New Basis reflects the period from June 30 fees as revenue when the technology was transferred and when all of Cash and Cash Equivalents
through December 31, 1999, and all subsequent periods. As a result FDA Validation Costs
our significant contractual obligations relating to the fees had been We consider all highly liquid debt instruments purchased with an
of the accounting change, we reclassified $941.5 million from accu- U.S. Food and Drug Administration, or FDA, validation costs are cap-
fulfilled. Effective January 1, 2000, we changed our method of original maturity of three months or less to be cash equivalents.
mulated deficit to additional paid-in capital. italized as part of the effort required to acquire and construct long-
accounting for non-refundable upfront product license fees and cer-
Short-Term Investments and Long-Term Marketable Securities lived assets, including readying them for their intended use, and are
We also restated our financial statements to correct the accounting tain guaranteed payments to recognize such fees over the term of the
We invest our excess cash balances in short-term and long-term amortized over the estimated useful life of the asset or the term of the
related to the write up of the valuation allowance pertaining to unreal- related development collaboration when, at the execution of the
marketable securities, primarily corporate notes, certificates of deposit, lease, whichever is shorter.
ized gains on certain marketable equity securities, resulting from the agreement, the development period involves significant risk due to
preferred stock, asset-backed securities and municipal bonds. As part
Redemption. As a result of this accounting change, the aggregate the incomplete stage of the product’s development, or over the
of our strategic alliance efforts, we also invest in equity securities,
period of the manufacturing obligation when, at the execution of
dividend bearing convertible preferred stock and interest bearing con-

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(continued)

Property, Plant and Equipment Other Assets of the manufacturing obligation or the expected period over which we We also enter into derivative forward contracts as hedging instru-
The costs of buildings and equipment are depreciated using the straight- Under certain lease agreements, we may be required from time to will supply the product. ments of our foreign denominated available-for-sale debt securities.
line method over the following estimated useful lives of the assets: time to set aside cash as collateral. At December 31, 2000 and 1999, These forward contracts are not recorded on our balance sheet. Any
Revenue associated with performance milestones is recognized
Useful Lives
other assets included $56.6 million of restricted cash related to such gains and losses from these forward contracts are recorded in interest
based upon the achievement of the milestones, as defined in the
a lease agreement. income with the related hedged revenues.
Buildings 25 years respective agreements. Revenue under R&D cost reimbursement
Certain manufacturing equipment 15 years Product Sales and Royalty Revenue contracts is recognized as the related costs are incurred. We purchase derivative instruments such as simple foreign cur-
Other equipment 4 or 8 years We recognize revenue from product sales when there is persuasive rency put options, or options, with expiration dates and amounts of
Leasehold improvements length of applicable lease Advance payments received in excess of amounts earned are clas-
evidence that an arrangement exists, delivery has occurred, the currency that are based on a portion of probable nondollar revenues
sified as deferred revenue.
price is fixed and determinable and collectibility is reasonably so that the potential adverse impact of movements in currency
The costs of repairs and maintenance are expensed as incurred.
assured. Allowances are established for estimated product returns Royalty Expenses exchange rates on the nondollar denominated revenues will be at
Capitalized interest on construction-in-progress is included in
and discounts. Royalties from licensees are based on third-party Royalty expenses directly related to product sales are classified in least partially offset by an associated increase in the value of the
property, plant and equipment. The repairs and maintenance
sales and recorded as earned in accordance with contract terms, cost of sales. Other royalty expenses, relating to royalty revenue, options. See “Financial Instruments ” note below for further infor-
expenses and capitalized interest were as follows (in millions):
when third-party results are reliably measured and collectibility is totaled $34.4 million in 2000, $39.0 million in 1999, and $38.3 mil- mation on these options. At the time the options are purchased they
2000 1999 1998 reasonably assured. have little or no intrinsic value. Realized and unrealized gains
lion in 1998 and are classified in marketing, general and administra-
Repairs and maintenance expenses $ 42.1 $ 39.9 $ 35.9 tive expenses. related to the options are deferred until the designated hedged rev-
Capitalized interest 2.2 2.1 3.0 We receive royalties on sales of rituximab, outside of the U.S.
enues are recorded. The associated costs, which are deferred and
(excluding Japan), on sales of Pulmozyme and Herceptin outside of Advertising Expenses
classified as other current assets, are amortized over the term of the
Property, plant and equipment balances at December 31 are sum- the U.S. and on sales of certain of our products in Canada from F. We expense the costs of advertising, which also includes promo-
options and recorded as a reduction of the hedged revenues.
marized below (in thousands): Hoffmann-La Roche Ltd, a subsidiary of Roche that is commonly tional expenses, as incurred. Advertising expenses were $86.5
Realized gains, if any, are recorded in the income statement with the
2000 1999 known as Hoffmann-La Roche. See “Relationship With Roche ” note million in 2000, $80.0 million in 1999, and $47.7 million in 1998.
related hedged revenues. Options are generally terminated, or off-
below for further discussion.
At cost: Income Taxes setting contracts are entered into, upon determination that pur-
Land $ 90,274 $ 89,983 We receive royalties on sales of growth hormone products and We account for income taxes by the asset and liability approach for chased options no longer qualify as a hedge or are determined to
Buildings 392,119 380,236 exceed probable anticipated net foreign revenues. The realized gains
tissue-plasminogen activator outside of the U.S. and Canada, and on financial accounting and reporting of income taxes.
Equipment 761,696 667,884
sales of rituximab in Japan through other licensees. We also receive and losses are recorded as a component of other revenues. For early
Leasehold improvements 18,456 4,655 Earnings (Loss) Per Share
worldwide royalties on seven additional licensed products that are termination of options that qualify as hedges, the gain or loss on ter-
Construction-in-progress 94,679 106,824 Basic earnings (loss) per share is computed based on the weighted-
1,357,224 1,249,582 marketed by other companies. Six of these products originated from mination will be deferred through the original term of the option and
average number of shares of our Common Stock and Special
Less: accumulated depreciation 604,332 519,496 our technology. then recognized as a component of the hedged revenues. Changes
Common Stock outstanding. Diluted earnings (loss) per share is com-
Net property, plant and equipment $ 752,892 $ 730,086 in the fair value of hedging instruments that qualify as a hedge are
Contract Revenue puted based on the weighted-average number of shares of our
not recognized and changes in the fair value of instruments that do
Contract revenue for research and development, or R&D, is recorded Common Stock, Special Common Stock and other dilutive securities.
not qualify as a hedge would be recognized in other revenues.
Goodwill as earned based on the performance requirements of the contract. See also “Earnings (Loss) Per Share ” note below. All numbers relat-
Goodwill represents the difference between the purchase price and Non-refundable contract fees for which no further performance obli- ing to the number of shares, price per share and per share amounts Interest rate swaps are derivative instruments used to adjust the
the fair value of the net assets when accounted for by the purchase gations exist, and there is no continuing involvement by Genentech, of Common Stock, Special Common Stock and Redeemable Common duration of the investment portfolio in order to meet duration targets.
method of accounting arising from Roche’s purchase of our Special are recognized on the earlier of when the payments are received or Stock give effect to the two-for-one splits of our Common Stock that Interest rate swaps, or swaps, are contracts in which two parties
Common Stock and push-down accounting. Goodwill is amortized when collection is assured. were effected on October 24, 2000 and November 2, 1999. agree to swap future streams of payments over a specified period.
on a straight-line basis over 15 years. The accrued net settlement amounts on swaps are reflected on the
Revenue from non-refundable upfront license fees and certain Financial Instruments
balance sheet as a component of interest receivable. Net payments
Other Intangible Assets guaranteed payments where we continue involvement through devel- As part of our overall portfolio, we have contracted with two external
made or received on swaps are included in interest income as adjust-
Other intangible assets arising from Roche’s purchases of our opment collaboration or an obligation to supply product is recog- money managers to manage part of our investment portfolio that is
ments to the interest received on invested cash. Amounts deferred on
Special Common Stock and push-down accounting are amortized nized ratably over the development period when, at the execution of held for trading purposes and one external manager that manages
terminated swaps are classified as other assets and are amortized to
over their estimated useful lives ranging from five to 15 years. Costs the agreement, the development period involves significant risk due our available-for-sale securities portfolio. The investment portfolios
interest income over the original contractual term of the swaps by a
of patents and patent applications related to products and processes to the incomplete stage of the product’s development, or over the consist entirely of debt securities. When the money managers pur-
method that approximates the level-yield method. For early termina-
of significant importance to us are capitalized and amortized on a period of the manufacturing obligation, when, at the execution of the chase securities denominated in a foreign currency, they enter into
tion of swaps where the underlying asset is not sold, the amount of
straight-line basis over their estimated useful lives of approximately agreement, the product is approved for marketing, or nearly approv- derivative instruments such as foreign currency forward contracts, or
the terminated swap is deferred and amortized over the remaining life
12 years. Other intangible assets are generally amortized on a able, and development risk has been substantially eliminated. forward contracts, which are recorded at fair value with the related
of the original swap. For early termination of swaps with the corre-
straight-line basis over their estimated useful lives. Deferred revenues related to manufacturing obligations are recog- gain or loss recorded in interest income.
nized on a straight-line basis over the longer of the contractual term

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(continued)

sponding termination or sale of the underlying asset, the amounts FAS 133, “Accounting for Derivative Instruments and Hedging respectively, of the outstanding stock of Genentech. In June 1999, we Push-Down Accounting Adjustments
are recognized through interest income. As of December 31, 2000, Activities,” on January 1, 2001. FAS 133 establishes accounting and redeemed all of our Special Common Stock held by stockholders other The following is a description of accounting adjustments and related
we had not terminated any of our swap contracts prior to maturity. reporting standards for derivative instruments, including certain deriv- than Roche resulting in Roche owning 100% of our Common Stock. useful lives that reflect push-down accounting in our financial state-
Changes in the fair value of swap hedging instruments that qualify as ative instruments embedded in other contracts, and for hedging activ- The push-down effect of Roche’s aggregate purchase price and the ments. These adjustments were based on management’s estimates
a hedge are not recognized and changes on the fair value of swap ities. It requires companies to recognize all derivatives as either assets Redemption price in our consolidated balance sheet as of June 30, 1999 of the value of the tangible and intangible assets acquired
instruments that do not qualify as a hedge would be recognized in or liabilities on the balance sheet and measure those instruments at fair was allocated based on Roche’s ownership percentages as if the pur-
• We recorded charges of $1,207.7 million in 1999. These charges
other income. As of December 31, 2000, our interest rate swap con- value. Gains or losses resulting from changes in the values of those chases occurred at the original purchase dates for the 1990 and 1991
primarily included: a non-cash charge of $752.5 million for
tracts qualified as a hedge and none were held for trading purposes. derivatives would be accounted for depending on the use of the deriv- through 1997 purchases, and at June 30, 1999 for the Redemption.
IPR&D; $284.5 million of compensation expense related to early
ative and whether it qualifies for hedge accounting under FAS 133. Management of Genentech determined the values of tangible and intan-
Our marketable equity securities portfolio consists primarily of cash settlement of certain employee stock options; and an aggre-
Based on our derivative positions at December 31, 2000, we estimate gible assets, including in-process research and development, or IPR&D,
investments in biotechnology companies whose risk of market fluc- gate of approximately $160.1 million of non-cash compensation
that upon adoption, we will record a charge from the cumulative effect used in allocating the purchase prices. The aggregate purchase prices
tuations is greater than the stock market in general. To manage a expense in connection with the modification and remeasurement,
of a change in accounting principle of approximately $9.0 million being for the acquisition of all of Genentech’s outstanding shares, including
portion of this risk, we enter into derivative instruments such as for accounting purposes, of continuing employee stock options,
recognized in the consolidated statement of operations and an increase Roche’s estimated transaction costs of $10.0 million, was $6,604.9 mil-
costless collar instruments or equity swaps to hedge equity securi- which represents the difference between each applicable option
of approximately $8.0 million in other comprehensive income. lion, consisting of approximately $2,843.5 million for the 1990 and
ties against changes in market value. See “Financial Instruments ” exercise price and the redemption price of the Special Common
1991 through 1997 purchases and approximately $3,761.4 million for
note below for further discussion. Gains and losses on these instru- Inventories Stock. (You should read the “Capital Stock ” note below for further
the Redemption.
ments are recorded as an adjustment to unrealized gains and Inventories are stated at the lower of cost or market. Cost is deter- information on these charges.)
losses on marketable securities with a corresponding receivable or mined using a weighted-average approach which approximates the The following table shows details of the excess of purchase price
• We recorded an income tax benefit of $177.8 million related to the
payable recorded in short-term or long-term other assets or liabili- first-in first-out method. Inventories in 2000 decreased from 1999 over net book value (in millions):
Purchase
above early cash settlement and non-cash compensation related to
ties. Equity collar or equity swap instruments that do not qualify for due primarily to the Redemption and push-down accounting offset by
Period certain employee stock options. The income tax benefit reduced
hedge accounting and early termination of these instruments with increases in inventory production. As a result of push-down account-
1990–1997 1999 Total the current tax payable in other accrued liabilities by $56.9 million
the sale of the underlying security would be recognized through ing, we recorded $186.2 million related to the write up of inventory, of
Total purchase price $ 2,843.5 $ 3,761.4 $ 6,604.9 and reduced long-term deferred income taxes by $120.9 million.
earnings. For early termination of these instruments without the sale which $92.8 million of expense was recognized through the sale of
of the underlying security, the time value component would be rec- inventory in 2000 and $93.4 million of expense was recognized Less portion of net book value • The estimated useful life of the inventory adjustment to fair value
purchased 566.6 836.4 1,403.0
ognized through earnings and the intrinsic value component would through the sale of inventory in 1999. Inventories at December 31, resulting from the Redemption was approximately one year based
Excess of purchase price over
adjust the cost basis of the underlying security. 2000 and 1999 are summarized below (in thousands): upon the expected time to sell inventories on hand at June 30,
net book value $ 2,276.9 $ 2,925.0 $ 5,201.9
2000 1999 1999. As the fair-valued inventory is sold, the related write up
401(k) Plan
amount is charged to cost of sales. In 2000, we recognized $92.8
Our 401(k) Plan, or the Plan, covers substantially all of our employ- Raw materials and supplies $ 17,621 $ 19,903 The following table shows the allocation of the excess of the pur-
million of expense related to the inventory write up adjustment. In
ees. Under the Plan, eligible employees may contribute up to 15% Work in process 233,121 228,092 chase price over net book value (in millions):
1999, we recognized $93.4 million of expense related to the inven-
of their eligible compensation, subject to certain Internal Revenue Finished goods 15,088 27,250 Purchase
Period tory write up adjustment. All inventory written up as a result of the
Service restrictions. We match a portion of employee contributions, Total $ 265,830 $ 275,245
1990–1997 1999 Total Redemption has been sold as of December 31, 2000. The entire
up to a maximum of 4% of each employee’s eligible compensation.
inventory adjustment related to Roche’s 1990 through 1997 pur-
The match is effective December 31 of each year and is fully vested Inventories $ 102.0 $ 186.2 $ 288.2
Reclassifications chases was reflected as an adjustment to additional paid-in capital.
when made. We provided $10.1 million in 2000, $8.5 million in 1999 Land — 16.6 16.6
Certain reclassifications of prior year amounts have been made to
and $7.3 million in 1998, for our match under the Plan. In-process research and development 500.5 752.5 1,253.0 • An adjustment was made to record the fair value of land as a result
conform with the current year presentation.
Developed product technology 429.0 765.0 1,194.0 of the Redemption. There were no such adjustments for the pur-
Comprehensive Income
Core technology 240.5 203.0 443.5 chase periods from 1990 through 1997.
Comprehensive income is comprised of net income and other com- REDEMPTION OF OUR SPECIAL COMMON STOCK
prehensive income. Other comprehensive income includes certain Developed license technology 292.5 175.0 467.5
Roche accounted for the Redemption as a purchase of a business. As a • Recorded $1,091.2 million of goodwill, which reflects Roche’s
changes in equity that are excluded from net income. Specifically, unre- result, we were required to push down the effect of the Redemption and Trained and assembled workforce 32.5 49.0 81.5 1990 through 1997 purchases, net of related accumulated amorti-
alized holding gains and losses on our available-for-sale securities, Roche’s 1990 through 1997 purchases of our Common and Special Tradenames 39.0 105.0 144.0 zation of $613.6 million through June 30, 1999. The accumulated
which were reported separately in stockholders’ equity, are included in Common Stock into our consolidated financial statements at the date of Key distributor relationships 6.5 73.5 80.0 amortization was recorded as an adjustment to additional paid-in
accumulated other comprehensive income. Comprehensive income for the Redemption, which results in our New Basis presentation. Under Goodwill 1,091.2 1,208.1 2,299.3 capital at June 30, 1999. Included in goodwill was $456.8 million
years ended December 31, 2000, 1999, and 1998 has been reflected in this method of accounting, our assets and liabilities, including other Deferred tax liability (456.8) (629.2) (1,086.0) related to the recording of deferred tax liabilities. Deferred taxes
the Consolidated Statements of Stockholders’ Equity. intangible assets, were recorded at their fair values not to exceed the Write up of valuation allowance were recorded for the adjustment to fair value for other intangible
aggregate purchase price plus Roche’s transaction costs at June 30, related to marketable securities — 20.3 20.3 assets and inventories as a result of Roche’s 1990 through 1997
New Accounting Standards Total $ 2,276.9 $ 2,925.0 $ 5,201.9
1999. In 1990 and 1991 through 1997 Roche purchased 60% and 5%, purchases. The deferred tax liability was calculated based on a
We will adopt Statement of Financial Accounting Standards 133, or

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(continued)

marginal tax rate of 40%. The goodwill related to the 1990 through • Our retained earnings prior to the Redemption was not carried for- technology was not established and that the in-process technology purchases of our Common Stock and Special Common Stock by
1997 purchases was amortized over 15 years. ward. This resulted in an adjustment of $780.7 million to increase had no future alternative uses. The amount related to the 1990 Roche. The pro forma results for each of the years ended December
additional paid-in capital and eliminate the retained earnings bal- through 1997 purchases was recorded as an adjustment to addi- 31, 1999 and 1998 include amortization of goodwill ($153.3 million)
• $1,208.1 million of goodwill was recorded as a result of the
ance immediately prior to the Redemption. tional paid-in capital at June 30, 1999. The amount related to the and other intangible assets ($227.6 million), and compensation
Redemption. Included in goodwill was $629.2 million related to
Redemption was charged to operations at June 30, 1999. expense ($13.7 million) related to certain stock option arrangements.
the recording of deferred tax liabilities. Deferred taxes were • The tax provision benefit of $203.1 million for 1999 consists of tax
The amounts of IPR&D were determined based on an analysis using In addition, the 1998 and 1999 pro forma results reflect the sale of
recorded for the adjustment to fair value for other intangible expense of $114.8 million on pretax income excluding the income
the risk-adjusted cash flows expected to be generated by the prod- inventories adjusted to fair value at the beginning of each period
assets, inventories and land. The deferred tax liability was calcu- and deductions attributable to push-down accounting and legal
ucts that result from the in-process projects. The analysis included (such adjustments totaling $186.2 million for the periods 1998 and
lated based on a marginal tax rate of 40% and was allocated settlements, and tax benefits of $317.9 million for 1999 related to
forecasting future cash flows that were expected to result from the 1999) related to the allocation to our financial statements of Roche’s
between short- and long-term classifications to match the asset the income and deductions attributable to push-down accounting
progress made on each of the in-process projects prior to the pur- purchase prices and our redemption of the Special Common Stock.
classifications. The goodwill related to the Redemption is being and legal settlements.
chase dates. These cash flows were estimated by first forecasting, The pro forma results also reflect the book tax benefits related to
amortized over 15 years.
• Recorded $1,040.0 million of other intangible assets, which reflects on a product-by-product basis, total revenues expected from sales each of these pretax pro forma adjustments other than goodwill
• We recorded a write up of our valuation allowance related to Roche’s 1990 through 1997 purchases, net of related accumulated of the first generation of each in-process product. A portion of the (which will have no book tax benefits) at a 40% marginal rate. The
marketable securities of $20.3 million related to Roche’s percent- amortization of $911.5 million of those assets through June 30, gross in-process product revenues was then removed to account for pro forma results exclude $1,207.7 million of non-recurring
age ownership purchased, at the time of Redemption, of the net 1999. The accumulated amortization was recorded as an adjust- the contribution provided by any core technology, which was Redemption-related charges, including charges for IPR&D, as these
unrealized gains on investments. ment to additional paid-in capital at June 30, 1999. The compo- considered to benefit the in-process products. The net in-process items are non-recurring. (Refer to above for further information on
nents of other intangible assets related to these purchases and their revenue was then multiplied by the project’s estimated percentage of these charges and adjustment.) The following table is in thousands,
• In 2000, we recorded amortization expense of $153.3 million related
estimated lives are as follows (in millions): completion as of the purchase dates to determine a forecast of net except per share amounts.
to goodwill and $211.0 million related to other intangible assets. In
1999, we recorded amortization expense of $76.6 million related to Fair Accumulated Estimated IPR&D revenues attributable to projects completed prior to the Pro Forma Pro Forma
Value Amortization Life purchase dates. Appropriate operating expenses, cash flow adjust- Year Ended December 31 1999 1998
goodwill and $113.8 million related to other intangible assets.
Developed product technology $ 429.0 $ 361.8 10 ments and contributory asset returns were deducted from the Total revenues $ 1,382,941 $ 1,133,743
• The existing deferred tax asset valuation allowance of $62.8 mil- Core technology 240.5 202.9 10 forecast to establish a forecast of net returns on the completed Total costs and expenses 1,843,578 1,479,018
lion related to the tax benefits of stock option deductions which Developed license technology 292.5 286.9 6 portion of the in-process technology. Finally, these net returns were Net loss $ (345,755) $ (226,645)
have been realized and credited to paid-in capital as a result of Trained and assembled workforce 32.5 31.6 7 discounted to a present value at discount rates that incorporate both Earnings (loss) per share:
establishing deferred tax liabilities under push-down accounting the weighted-average cost of capital (relative to the biotech industry Basic $ (0.67) $ (0.45)
Tradenames 39.0 21.9 15
Diluted (0.67) (0.45)
was eliminated at June 30, 1999. and us) as well as the product-specific risk associated with the pur-
Key distributor relationships 6.5 6.4 5
• The redemption of our Special Common Stock and the issuance of Total $ 1,040.0 $ 911.5 chased IPR&D products. The product specific risk factors included
each phase of development, type of molecule under development, SEGMENT, SIGNIFICANT CUSTOMER AND
new shares of Common Stock to Roche resulted in substantially the
likelihood of regulatory approval, manufacturing process capability, GEOGRAPHIC INFORMATION
same number of total shares outstanding as prior to the Redemption. • $1,370.5 million of other intangible assets was recorded as a
scientific rationale, pre-clinical safety and efficacy data, target Our operations are treated as one operating segment as we only
result of the Redemption. The components of other intangible
• The balances of our Common Stock and additional paid-in capital product profile and development plan. The discount rates ranged report profit and loss information on an aggregate basis to our chief
assets related to the Redemption and their estimated lives are as
at the Redemption include Roche’s cost of acquiring our shares in from 16% to 19% for the 1999 valuation and 20% to 28% for the operating decision-makers. Information about our product sales,
follows (in millions):
1990 and the cost of subsequent equity purchases, net of the 1990 purchase valuation, all of which represent a significant risk major customers and material foreign source of revenues is as
amortization of the goodwill, IPR&D and other prior period Fair Estimated follows (in millions):
Value Life
premium to our weighted-average cost of capital.
charges related to the 1990 through 1997 purchases. The excess
Developed product technology $ 765.0 10 The forecast data employed in the analysis was based on internal Product Sales
of purchase price over net book value of $2,276.9 million for 1990
Core technology 203.0 10 product level forecast information maintained by our management 2000 1999 1998
through 1997 and $2,925.0 million in 1999, and $160.1 million for
Developed license technology 175.0 6 in the ordinary course of managing the business. The inputs used
the remeasurement of continuing employee stock options at the Herceptin $ 275.9 $ 188.4 $ 30.5
Trained and assembled workforce 49.0 7 by us in analyzing IPR&D were based on assumptions, which we
remeasurement date was recorded in additional paid-in capital. Rituxan 444.1 279.4 162.6
Tradenames 105.0 15 believed to be reasonable but which are inherently uncertain and
In addition, the following adjustments were made to additional paid- Activase/TNKase 206.2 236.0 213.0
Key distributor relationships 73.5 5 unpredictable. These assumptions may be incomplete or inaccu-
in capital for the 1990 through 1997 purchase period (in millions): Growth hormone (Nutropin
Total $ 1,370.5 rate, and no assurance can be given that unanticipated events and
Depot, Nutropin AQ,
1990–1997 Purchases circumstances will not occur. Nutropin and Protropin) 226.6 221.2 214.0
In-process research and development $ (500.5) • $500.5 million and $752.5 million of IPR&D was recorded as a Pulmozyme 121.8 111.4 93.8
The following table represents unaudited consolidated pro forma
Amortization of goodwill, intangibles and fair value result of Roche’s 1990 through 1997 purchases and the Actimmune 3.7 2.7 3.9
information as if the June 30, 1999 redemption of our Special
adjustment to inventories, net of tax (1,221.6) Redemption, respectively. At the date of each purchase, Genentech Total product sales $ 1,278.3 $ 1,039.1 $ 717.8
Common Stock occurred at January 1, 1999, and January 1, 1998.
Total adjustment to additional paid-in capital $ (1,722.1) concluded that technological feasibility of the acquired in-process
The pro forma information also gives effect to the 1990 through 1997

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(continued)

Hoffmann-La Roche contributed approximately 7% of our total RESEARCH AND DEVELOPMENT ARRANGEMENTS A reconciliation between our income tax provision and the U.S. EARNINGS (LOSS) PER SHARE
revenues in 2000, 7% in 1999 and 11% in 1998. See the “Related To gain access to potential new products and technologies and to statutory rate follows (in thousands): The following is a reconciliation of the numerator and denominators
Party Transactions ” note below for further information. Three other utilize other companies to help develop our potential new products, 2000 1999 1998 of the basic and diluted earnings (loss) per share computations for
major customers, Caremark, Inc., Bergen Brunswig and Cardinal we establish strategic alliances with various companies. These New Basis Old Basis the years ended December 31, 2000, 1999, and 1998 (in thousands):
Distribution, Inc., each contributed 10% or more of our total strategic alliances include the acquisition of marketable and non- Tax at U.S. statutory 2000 1999 1998
revenues in at least one of the last three years. Although Caremark, marketable equity investments and convertible debt of companies rate of 35% $ 1,391 $(527,518) $ 51,313 $ 88,428 New Basis Old Basis
a national distributor, did not contribute over 10% of our total rev- Research credits (32,092) (5,803) (5,802) (11,919)
developing technologies that fall outside our research focus and Numerator:
enues in 2000 and 1999, it accounted for 10% in 1998 of our total Tax benefit of certain Net income (loss)—
include companies having the potential to generate new products
realized gains on numerator for basic
revenues. Caremark distributes primarily our growth hormone prod- through technology exchanges and investments. Potential future securities available- and diluted earnings
ucts through its extensive branch network and is then reimbursed payments may be due to certain collaborative partners achieving for-sale (6,604) (617) (2,388) (2,982) (loss) per share $ (74,241) $ (1,245,112) $ 87,636 $ 181,909
through a variety of sources. Bergen Brunswig, a national wholesale certain benchmarks as defined in the collaborative agreements. We Foreign losses realized — (1,363) (1,364) (10,500) Denominator:
distributor of all of our products, contributed 13% in 2000, 14% in also entered into product-specific collaborations to acquire develop- State taxes 959 (22,924) 5,371 7,491 Denominator for basic
1999 and 11% in 1998 of our total revenues. Cardinal Distribution, ment and marketing rights for products. Goodwill amortization 53,649 26,825 — — earnings (loss) per
a national wholesaler distributor of all our products, contributed Legal settlements — — 12,250 — share— weighted-
In December 1997, we entered into a collaboration agreement with IPR&D — 263,375 — — average shares 522,179 513,352 512,368 503,291
15% in 2000, 13% in 1999 and 11% in 1998 of our total revenues.
Alteon Inc. to develop and market pimagedine, an advanced glyco- Other 3,111 5,942 (406) 224 Effect of dilutive
Net foreign revenues were $164.2 million in 2000, $155.0 million in securities:
sylation end-product formation inhibitor to treat kidney disease in dia- Income tax provision
1999 and $199.6 million in 1998. Material foreign revenues by coun- Stock options — — 19,500 16,197
betic patients, and invested $37.5 million in Alteon stock. In 1998, as (benefit) $ 20,414 $(262,083) $ 58,974 $ 70,742
Denominator for
try were as follows (in millions): a result of the decline in Alteon’s stock value and the unsuccessful diluted earnings
2000 1999 1998 clinical trials with pimagedine, we took an other than temporary The components of deferred taxes consist of the following at (loss) per share—
charge of $24.2 million of our investment in Alteon. In 1999, due to December 31 (in thousands): adjusted weighted-
Europe:
average shares
Switzerland $ 72.6 $ 61.5 $ 88.8 the continued decline of Alteon’s stock value and unsuccessful nego- 2000 1999
and assumed
Germany 22.5 39.6 24.2 tiations with Alteon, we took another charge of our remaining $10.8 conversions 522,179 513,352 531,868 519,488
Deferred tax liabilities:
Italy 10.4 14.6 21.5 million investment in Alteon. Depreciation $ (130,892) $ (85,036)
Denmark — — 20.0 Unrealized gain on securities available-for-sale (229,294) (181,233)
Others 24.3 17.9 16.5 INCOME TAXES Adjustment to fair value of inventories — (38,272) Options to purchase 40,944,862 shares of our Common Stock
Canada 19.8 11.8 11.7 The income tax provision consists of the following amounts (in Adjustment to fair value of intangibles (476,313) (560,699) ranging from $12.53 to $95.66 per share were outstanding during
Asia 14.6 9.6 16.9 thousands): Other (18,999) (16,893) 2000, but were not included in the computation of diluted earnings per
Total $ 164.2 $ 155.0 $ 199.6 2000 1999 1998 Total deferred tax liabilities (855,498) (882,133) share. Options to purchase 41,551,604 shares of our Common Stock
New Basis Old Basis Deferred tax assets: ranging from $12.03 to $42.94 per share were outstanding during
Current: Capitalized R&D costs 58,333 45,436 1999, but were not included in the computation of diluted earnings per
We currently sell primarily to distributors and health care compa-
Federal $ 191,334 $(110,991) $ 76,819 $ 39,945 Federal credit carryforwards 109,917 111,711 share. Options to purchase 714,300 shares of our Special Common
nies throughout the U.S., perform ongoing credit evaluations of our Expenses not currently deductible 150,638 93,121
State 25,862 (6,165) 1,366 1,004 Stock ranging from $17.63 to $17.79 per share and 414,800 shares
customers’ financial condition and extend credit generally without State credit carryforwards 73,827 44,109
Total current 217,196 (117,156) 78,185 40,949 of Special Common Stock at $14.75 per share were outstanding dur-
collateral. In 2000, 1999 and 1998, we did not record any material Net operating losses 153,097 41,619
Deferred: ing 1998, but were not included in the computation of diluted earnings
additions to, or losses against, our provision for doubtful accounts. Other 457 1,593
Federal (151,817) (119,624) (16,397) 29,006 per share. The above option exercise prices were greater than the
State (44,965) (25,303) (2,814) 787 Total deferred tax assets 546,269 337,589
average market prices of the Common Stock and Special Common
Total deferred (196,782) (144,927) (19,211) 29,793 Total net deferred taxes $ (309,229) $ (544,544)
Stock and therefore, the effect would be anti-dilutive. See “Capital
Total income tax Stock ” note for information on option expiration dates.
provision (benefit) $ 20,414 $(262,083) $ 58,974 $ 70,742 Total tax credit carryforwards of $183.7 million expire in the years
2006 through 2017, except for $81.0 million of R&D credits and During 1998, we had convertible subordinated debentures which
Tax benefits of $226.1 million in 2000, $83.0 million in 1999 and $43.0 million of alternative minimum tax credits which have no expi- were convertible to 4,053,788 of Special Common Stock, but were
$17.3 million in 1998 related to employee stock options and stock ration date. not included in the computation of diluted earnings per share
purchase plans were credited to stockholders’ equity, and reduced because they were anti-dilutive. As a result of the Redemption, the
Net operating loss carryforwards of $456.4 million expire in the
the amount of taxes currently payable and deferred income taxes. convertible subordinated debentures are no longer convertible to
years 2017 through 2020.
Special Common Stock. For additional information, you should read
the “Long-Term Debt ” note below.

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(continued)

INVESTMENT SECURITIES In 2000, proceeds from the sales of available-for-sale securities from the counterparty. We have not experienced any material losses
Securities classified as trading and available-for-sale at December totaled $574.1 million; gross realized gains totaled $132.3 million due to credit impairment of our foreign currency instruments.
31, 2000 and 1999 are summarized below. Estimated fair value is and gross realized losses totaled $4.0 million. In 1999, proceeds
Interest Rate Swaps
based on quoted market prices for these or similar investments. from the sales of available-for-sale securities totaled $627.1 million;
Interest income is subject to fluctuations as interest rates change,
gross realized gains totaled $19.4 million and gross realized losses
Gross Gross Estimated Gross Gross Estimated primarily U.S. interest rates. To manage this risk, we have entered
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair totaled $1.8 million. We recorded charges of $0.8 million in 2000
December 31, 2000 Cost Gains Losses Value December 31, 1999 Cost Gains Losses Value
into swaps as part of our overall strategy of limiting our exposure to
and $13.4 million in 1999, to write down certain available-for-sale
(thousands) (thousands) fluctuations in U.S. short-term interest rates.
biotechnology equity securities for which the decline in fair value
TOTAL TRADING SECURITIES TOTAL TRADING SECURITIES
below cost was other than temporary. As of December 31, 2000, we had interest rate swaps and a com-
(carried at estimated (carried at estimated
fair value) $ 273,348 $ 1,827 $ (4,152) $ 271,023 fair value) $ 252,608 $ 101 $ (2,649) $ 250,060 mercial paper portfolio with notional amounts of $200.0 million.
Net change in unrealized holding gains (losses) on trading secu-
During 2000, counterparties paid us interest at a fixed rate of 7.08%
SECURITIES AVAILABLE- SECURITIES AVAILABLE- rities included in net income totaled $0.2 million in 2000, ($6.1) mil-
FOR-SALE (carried at FOR-SALE (carried at and we paid counterparties interest at a weighted-average variable
lion in 1999 and $7.4 million in 1998.
estimated fair value): estimated fair value): rate, based upon a three-month LIBOR rate, of 6.74%. The three-
Equity securities $ 120,416 $ 585,961 $ (21,546) $ 684,831 Equity securities $ 97,818 $ 499,800 $ (17,780) $ 579,838 The marketable debt securities we hold are issued by a diversified month LIBOR rate applicable to these agreements was 6.4% at
Preferred stock 88,517 4,335 (20) 92,832 U.S. Treasury securities selection of corporate and financial institutions with strong credit rat- December 31, 2000. The amounts exchanged are based on the
U.S. Treasury securities and obligations of other ings. Our investment policy limits the amount of credit exposure with notional amounts multiplied by the interest rates in effect. The
U.S. government agencies
and obligations of other any one institution. Other than asset-backed securities, these debt weighted-average variable rates are subject to change over time as
U.S. government agencies maturing:
securities are generally not collateralized. In 2000, we recorded a LIBOR fluctuates. Terms expire at various dates throughout 2003.
maturing: between 5–10 years 41,385 — (2,432) 38,953
charge of $4.0 million for credit impairment on marketable debt
between 5–10 years 84,796 2,497 (242) 87,051 Corporate debt securities We and our counterparties, which are prominent financial institu-
maturing:
securities. In 1999 and 1998, no material charges were recorded.
Corporate debt securities tions with strong credit ratings, are not required to collateralize our
maturing: within 1 year 144,996 7 (165) 144,838 respective obligations under the agreements. We are exposed to
within 1 year 169,569 2,079 (2,248) 169,400 between 1–5 years 350,652 151 (5,623) 345,180
FINANCIAL INSTRUMENTS
losses if one or more of the counterparties default. As of December
Foreign Currency Instruments
between 1–5 years 217,838 1,865 (1,463) 218,240 between 5–10 years 137,366 — (7,550) 129,816 31, 2000, we were exposed to potential credit losses of $8.2 million,
Certain of our revenues are earned outside of the U.S. Therefore, risk
between 5–10 years 103,309 935 (1,572) 102,672 Other debt securities maturing: the unrealized gains associated with these contracts. During 2000,
exists that net income may be impacted by changes in the exchange
Other debt securities maturing: within 1 year 8,044 2,122 (61) 10,105 we did not incur any credit losses associated with interest rate
rates between the U.S. dollar and foreign currencies. To hedge a por-
within 1 year 109,132 211 (123) 109,220 between 1–5 years 85,022 — (1,816) 83,206 swaps. We do not believe that any reasonable likely change in inter-
tion of anticipated nondollar denominated net revenues, we currently
between 1–5 years 138,854 284 (1,541) 137,597 between 5–10 years 39,342 — (1,578) 37,764 est rates would have a material adverse effect on our financial posi-
purchase options and may enter into forward contracts. At December
between 5–10 years 34,911 492 (279) 35,124 TOTAL AVAILABLE-FOR-SALE $ 904,625 $ 502,080 $ (37,005) $1,369,700
tion, the results of operations or cash flows. In 1999, as a result of
31, 2000, we hedged approximately 50% of probable net foreign rev-
TOTAL AVAILABLE-FOR-SALE $1,067,342 $ 598,659 $ (29,034) $1,636,967
eliminating the interest rate swap portfolio, we recognized a $5.0
enues anticipated within 12 months and 25% of probable net foreign
million gain which was recorded in interest income.
revenues through the year 2002. The notional amounts of the options
totaled $37.6 million at December 31, 2000, and $51.9 million at For further discussion, see “Forward-Looking Information and
December 31, 1999. The notional amounts consisted of the following Cautionary Factors That May Affect Future Results—We Are Exposed
The carrying value of all investment securities held at December
currencies: Australian dollars, Euro, British pounds, Canadian dollars, to Market Risk.”
31, 2000 and 1999 is summarized below (in thousands):
Japanese yen, Swiss franc and Swedish krona. All option contracts
Security 2000 1999 Equity Instruments
mature within the next two years. The fair value of the options was
To hedge against fluctuations in the market value of a portion of the
Trading securities $ 271,023 $ 250,060 based on the forward exchange rates as of December 31, 2000 and
marketable equity portfolio, we entered into costless collars that
Securities available-for-sale 1999. Total aggregate foreign exchange loss including option
expire in 2001 and will require physical or cash settlement. The fair
maturing within one year 278,620 154,943 amortization included in earnings was $4.4 million, $0.8 million and
value of the equity derivatives was determined based on closing mar-
Preferred stock 92,832 — $3.7 million for 2000, 1999 and 1998, respectively.
ket prices of the underlying securities at year end. At December 31,
Total short-term investments $ 642,475 $ 405,003
We have entered into forward contracts to hedge our foreign dollar 2000, the notional amount of the put options was $165.0 million and
Securities available-for-sale
maturing between 1–10 years, denominated available-for-sale debt securities. The notional amounts the call options was $251.0 million. At December 31, 1999, the
including equity securities $ 1,265,515 $ 1,214,757 of the forward contracts were $66.9 million and $65.0 million at notional amount of the put options was $7.1 million and the call
Total long-term marketable securities $ 1,265,515 $ 1,214,757 December 31, 2000 and 1999, respectively. options was $9.7 million.

Credit exposure is limited to the unrealized gains on these contracts. We have also entered into equity swaps that mature in 2002. An
All agreements are with a diversified selection of institutions with equity swap is a derivative instrument where Genentech pays the
strong credit ratings which minimizes risk of loss due to nonpayment counterparty the total return of the security above the current spot
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price and receives interest income on the notional amount for the OTHER ACCRUED LIABILITIES Commitments growth hormone products infringe a patent known as the “Goodman
swap term. The equity swap protects us from a decline in the market Other accrued liabilities at December 31 are as follows (in thousands): We entered into a research collaboration agreement with CuraGen patent” that is owned by UC. On November 19, 1999, we and UC
value of the security below the spot price and limits our potential ben- Corporation in November 1997, whereby we made a $5.0 million announced a proposed settlement of those lawsuits, and on or about
2000 1999
efit from an increase in the market value of the security above the spot equity investment in CuraGen and agreed to provide a convertible December 17, 1999, the parties entered into a definitive written agree-
Accrued legal settlement $ — $ 200,000
price. At December 31, 2000, the notional amount of the equity swaps equity loan to CuraGen of up to $26.0 million. In October 1999, ment on the terms of the settlement. Under the terms of the settle-
Accrued compensation 56,028 52,005
was $111.0 million. We did not enter into equity swaps in 1999. CuraGen exercised its right to borrow $16.0 million. Simultaneously, ment, Genentech agreed to pay UC $150.0 million and agreed to make
Accrued royalties 34,811 37,692
with this draw down, CuraGen repaid the loan by issuing 977,636 a contribution in the amount of $50.0 million toward construction of
Financial Instruments Held for Trading Purposes Hedge payable 32,172 33,499 shares of CuraGen stock valued at $16.37 per share at such the first biological sciences research building at the University of
As part of our 2000 overall investment strategy, we have contracted Accrued clinical and other studies 35,626 18,012 issuance, or an aggregate of $16.0 million. At December 31, 2000, California, San Francisco Mission Bay campus, and Genentech and UC
with two external money managers to manage part of our investment Accrued marketing and promotion costs 21,229 17,897 there were no outstanding loans to CuraGen. granted certain releases to one another and dismissed with prejudice
portfolio. These portfolios at December 31, 2000, consisted of U.S. Taxes payable 29,022 — the 1990 and 1997 patent infringement lawsuits and related appeals.
and nondollar denominated investments. To hedge the nondollar Also, in December 1997, we entered into a collaboration agreement
Accrued collaborations 111,254 20,708 Such amounts were included in other accrued liabilities at December
denominated investments, the money managers enter into forward with Millennium Pharmaceuticals, Inc., or Millennium, formerly
Other 66,338 47,520 31, 1999. The settlement resolves all outstanding litigation between
contracts. The notional amounts of the forward contracts at LeukoSite, Inc., to develop and commercialize Millennium’s LDP-02, a
Total other accrued liabilities $ 386,480 $ 427,333 Genentech and UC relating to our growth hormone products.
December 31, 2000 and 1999 were $110.9 million and $146.2 mil- humanized monoclonal antibody for the potential treatment of inflam-
lion, respectively. The fair value at December 31, 2000 and 1999 of matory bowel disease. Under the terms of the agreement, we made a On May 28, 1999, GlaxoSmithKline plc, or Glaxo, filed a patent infringe-
the forward contracts totaled ($5.8) million and $3.1 million, respec- LONG-TERM DEBT $4.0 million equity investment in Millennium and have agreed to provide ment lawsuit against us in the U.S. District Court in Delaware. The suit
tively. The average fair value during 2000 and 1999 totaled $2.8 mil- Our long-term debt consists of $149.7 million of convertible subor- a convertible equity loan for approximately $15.0 million to fund Phase asserts that we infringe four U.S. patents owned by Glaxo. Two of the
lion and $2.5 million, respectively. Net realized and unrealized trading dinated debentures, with interest payable at 5%, due in March 2002. II development costs. Upon successful completion of Phase II, if patents relate to the use of specific kinds of antibodies for the treatment
gains (loss) on the portfolio totaled approximately $3.5 million in As a result of the redemption of our Special Common Stock, upon Millennium agrees to fund 25% of Phase III development costs, we have of human disease, including cancer. The other two patents asserted
2000 and ($2.5) million in 1999 and are included in interest income. conversion, the holder receives, for each $74 in principal amount of agreed to provide a second loan to Millennium for such funding. As of against us relate to preparations of specific kinds of antibodies which
Counterparties have strong credit ratings which minimize the risk of debenture converted, $59.25 in cash, of which $18 will be reim- December 31, 2000, there were no outstanding loans to Millennium. are made more stable and the methods by which such preparations are
non-performance from the counterparties. bursed to us by Roche. Generally, we may redeem the debentures made. Glaxo’s complaint fails to specify which of our products or meth-
In addition, we entered into research collaborations with compa-
until maturity. ods of manufacture are allegedly infringing the four patents at issue.
Summary of Fair Values nies whereby potential future payments may be due to selective
However, we believe that the suit relates to the manufacture, use and/or
The table below summarizes the carrying value and fair value at collaboration partners achieving certain benchmarks as defined in
LEASES, COMMITMENTS AND CONTINGENCIES sale of our Herceptin and Rituxan antibody products. On July 19, 1999,
December 31, 2000 and 1999, of our financial instruments. The fair the collaboration agreements. We may also, from time to time, lend
Leases we filed our answer to the complaint, and in our answer we also stated
value of the long-term debt was estimated based on the quoted additional funds to these companies, subject to approval.
Future minimum lease payments under operating leases, net of sub- counterclaims against Glaxo. On or about October 27, 2000, Glaxo filed
market price at year end (in thousands):
lease income, at December 31, 2000, are as follows (in thousands): We are a limited partner in the Vector Later-Stage Equity Fund II, a motion for summary judgment that our Herceptin and Rituxan anti-
2000 1999 L.P., which is referred to as the Vector Fund. The General Partner is body products infringe two of the patents asserted against us in this
2001 2002 2003 2004 2005 Thereafter Total
Carrying Fair Carrying Fair Vector Fund Management II, L.L.C., a Delaware limited liability com- suit, U.S. Patent Nos. 5,543,403 and 5,545,405. On November 21,
Financial Instrument Value Value Value Value $ 47,545 48,029 46,419 41,848 32,973 1,731 $ 218,545
pany. The purpose of the Vector Fund is to invest in biotech equity and 2000, we filed an opposition to that motion. The trial of this suit was
Assets: equity-related securities. Under the terms of the Vector Fund agree- previously scheduled to begin January 29, 2001, but has been resched-
Investment securities We lease various real property under operating leases that generally ment, we contribute to the capital of the Vector Fund through install- uled to begin April 16, 2001.
(including accrued ments in cash as called by the General Partner. Our total commitment
require us to pay taxes, insurance and maintenance. Rent expense On September 14, 2000, Glaxo filed another patent infringement
interest and traded
was approximately $17.5 million in 2000, $13.9 million in 1999 and to the Vector Fund through September 2003 is $25.0 million, of which
forward contracts) $1,907,990 $1,907,990 $ 1,619,760 $1,619,760 lawsuit against us in the U.S. District Court in Delaware, alleging that
$12.7 million in 1998. Sublease income was not material in any of the $15.9 million was contributed as of December 31, 2000. The Vector
Convertible equity loans 48,492 48,492 53,295 53,295 we are infringing U.S. Patent No. 5,633,162 owned by Glaxo. The
three years presented. Fund will terminate and be dissolved in September 2007.
Purchased foreign patent relates to specific methods for culturing Chinese Hamster
exchange put options 384 3,342 1,547 1,957 Contingencies Ovary cells. Glaxo’s complaint fails to specify which of our products
Under several lease agreements, we have the option to purchase
Equity forwards 7,372 7,372 — — We are a party to various legal proceedings, including patent infringe- or methods of manufacture are allegedly infringing that patent.
the properties at an amount that does not constitute a bargain.
Outstanding interest ment litigation relating to our human growth hormone products and However, the complaint makes a general reference to Genentech’s
Alternatively, we can cause the property to be sold to a third party.
rate swaps 2,519 8,228 — —
We are contingently liable, under residual value guarantees, for antibody products, product liability litigation, licensing and contract making, using and selling “monoclonal antibodies,” and so we
Liabilities:
approximately $536.4 million. We are also required to maintain cer- disputes, and other matters. believe that the suit relates to our Herceptin and Rituxan antibody
Long-term debt 149,692 151,438 149,708 148,938 products. On October 4, 2000, we filed our answer to the complaint,
tain financial ratios and are limited to the amount of additional debt
Equity collars 32,172 41,569 33,499 33,602 In 1990 and 1997, the Regents of the University of California, or UC,
we can assume. and in our answer we also stated counterclaims against Glaxo. The
Forward contracts — 300 — 1,500 filed patent infringement lawsuits against Genentech, alleging that the
judge has scheduled the trial for this suit to begin January 25, 2002.
manufacture, use and sale of our Protropin and Nutropin human

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This lawsuit is separate from and in addition to the Glaxo suit men- filed an appeal from the District Court’s issuance of the preliminary royalties previously paid to Genentech for sales of Pharmacia’s growth our current management to conduct our business and operations as
tioned above. injunction to the United States Court of Appeals for the Federal hormone products in certain countries. Although the International we have done in the past. However, we cannot ensure that Roche will
Circuit. On April 8, 1996, the Federal Circuit affirmed the preliminary Chamber of Commerce has not yet given a decision on that claim, we not implement a new business plan in the future.
We and the City of Hope National Medical Center are parties to a 1976
injunction granted by the District Court. On May 20, 1996, the Federal do not believe its decision is likely to have a material adverse effect on
agreement relating to work conducted by two City of Hope employees, Licensing Agreement
Circuit denied BTG’s petition for rehearing, and on October 7, 1996, our financial position, result of operations or cash flows.
Arthur Riggs and Keiichi Itakura, and patents that resulted from that In 1995, we entered into a licensing and marketing agreement with
the United States Supreme Court declined to review the case.
work, which are referred to as the “Riggs/Itakura Patents.” Since that Based upon the nature of the claims made and the information avail- Hoffmann-La Roche and its affiliates granting it a ten-year option to
time, Genentech has entered into license agreements with various In 1999, the case was transferred to a different judge of the District able to date to us and our counsel through investigations and other- license to use and sell our products in non-U.S. markets. In July 1999,
companies to make, use and sell the products covered by the Court for further proceedings. A jury trial of BTG’s patent invalidity wise, we believe the outcome of these actions is not likely to have a we amended that agreement, the major provisions of which include:
Riggs/Itakura Patents. On August 13, 1999, the City of Hope filed a claim began on January 10, 2000. On January 18, 2000, the jury material adverse effect on our financial position, result of operations • extended Hoffmann-La Roche’s option until at least 2015;
complaint against us in the Superior Court in Los Angeles County, returned a verdict in Genentech’s favor on a certain factual issue or cash flows. However, were an unfavorable ruling to occur in any
• Hoffmann-La Roche may exercise its option to license our products
California alleging that we owe royalties to the City of Hope in connec- underlying BTG’s invalidity claim, but the judge nevertheless entered quarterly period, there exists the possibility of a material impact on the
upon the occurrence of any of the following: (1) our decision to file an
tion with these license agreements, as well as product license agree- judgment in favor of BTG and lifted the preliminary injunction that operating results of that period.
Investigational New Drug exemption application, or IND, for a prod-
ments that involve the grant of licenses under the Riggs/Itakura had been in effect against BTG since 1995. On February 23, 2000, we
In addition to the above, in April 1999, we paid $50.0 million to uct, (2) completion of a Phase II trial for a product or (3) if Hoffmann-
Patents. The complaint states claims for declaratory relief, breach of filed a motion with the Federal Circuit requesting that the injunction
settle a federal investigation relating to our past clinical, sales and La Roche previously paid us a fee of $10.0 million to extend its option
contract, breach of implied covenant of good faith and fair dealing, and against BTG be reinstated pending appeal and for an expedited
marketing activities associated with human growth hormone. on a product, completion of a Phase III trial for that product;
breach of fiduciary duty. On December 15, 1999, we filed our answer appeal. On May 8, 2000, the Federal Circuit denied our motion.
to the City of Hope’s complaint, denying all the claims made by the City • we have agreed, in general, to manufacture for and supply to
Genentech and BTG each filed appeals with the Federal Circuit RELATIONSHIP WITH ROCHE Hoffmann-La Roche its clinical requirements of our products at
of Hope. On or about December 22, 2000, City of Hope filed a dismissal
relating to the proceedings in the District Court, and those appeals On June 30, 1999, Roche exercised its option to cause us to redeem cost, and its commercial requirements at cost plus a margin of
of its declaratory relief claims. On January 4, 2001, we filed a motion
are now pending. Genentech filed its appeal brief with the Federal all of our Special Common Stock held by stockholders other than 20%; however, Hoffmann-La Roche will have the right to
to dismiss the case. The judge denied the motion on February 1, 2001,
Circuit on May 15, 2000. BTG filed its appeal brief on July 11, 2000. Roche, at a price of $20.63 per share in cash with funds deposited manufacture our products under certain circumstances;
but issued a temporary stay of proceedings to permit us to file a peti-
In it, BTG included a request that its antitrust claims against by Roche for such purpose and we retired all of the shares of Special
tion with the appellate court. We filed our petition on February 13, • Hoffmann-La Roche has agreed to pay, for each product for which
Genentech (which previously had been dismissed by the District Common Stock including those held by Roche. As a result of the
2001, which was denied by the appellate court on February 22, 2001. Hoffmann-La Roche exercises its option upon either a decision to
Court) be reinstated. The Federal Circuit held a hearing on the Redemption, on that date, Roche owned 100% of our outstanding
The trial of this suit has been rescheduled to begin on August 22, 2001. file an IND with the U.S. Food and Drug Administration, or FDA, or
appeals on December 4, 2000, but has not yet given a decision on Common Stock. On July 23, 1999, Roche completed a public offer-
completion of the Phase II trials, a royalty of 12.5% on the first
On December 1, 1994, Genentech filed suit against Bio-Technology the appeals. At this time, and in the future if Genentech’s appeal is ing of 88.0 million shares of our Common Stock. On October 26,
$100.0 million on its aggregate sales of that product and thereafter
General Corporation, or BTG, in the United States District Court in not successful, BTG could enter the United States market with its 1999, Roche completed a public offering of 80.0 million shares of
a royalty of 15% on its aggregate sales of that product in excess
Delaware charging BTG with infringement of two Genentech patents human growth hormone product. our Common Stock. On January 19, 2000, Roche completed an
of $100.0 million until the later in each country of the expiration of
applicable to its human growth hormone product. On February 28, offering of zero-coupon notes that are exchangeable for an aggre-
On June 7, 2000, Chiron Corporation filed a patent infringement suit our last relevant patent or 25 years from the first commercial intro-
1995, Genentech filed an Amended Complaint against BTG alleging gate of 13,034,618 shares of our Common Stock held by Roche. On
against us in the U.S. District Court in the Eastern District of duction of that product; and
infringement of an additional Genentech patent. On January 6, 1995, March 29, 2000, Roche completed a public offering of 34.6 million
California (Sacramento), alleging that the manufacture, use, sale and • Hoffmann-La Roche will pay, for each product for which
BTG filed suit against Genentech in the United States District Court shares of our Common Stock. Roche’s percentage ownership of our
offer for sale of our Herceptin antibody product infringes Chiron’s Hoffmann-La Roche exercises its option after completion of the
for the Southern District of New York seeking declaratory judgments Common Stock was approximately 58.4% at December 31, 2000.
U.S. Patent No. 6,054,561. This patent relates to certain antibodies Phase III trials, a royalty of 15% on its sales of that product until
that those patents and another Genentech patent are invalid and not
that bind to breast cancer cells and/or other cells. On August 4, In July 1999, we entered into certain affiliation arrangements with Roche, the later in each country of the expiration of our relevant patent or
infringed by BTG. Genentech’s suit in Delaware was then transferred
2000, we filed our answer to Chiron’s complaint, and in our answer amended our licensing and marketing agreement with F. Hoffmann-La 25 years from the first commercial introduction of that product;
to New York and consolidated with BTG’s suit there.
we also stated counterclaims against Chiron. The judge has sched- Roche Ltd, an affiliate of Roche commonly known as Hoffmann-La however, $5.0 million of any option extension fee paid by
At the time of filing its suit and thereafter, BTG alleged various uled the trial of this suit to begin June 25, 2002. Roche, and entered into a tax sharing agreement with Roche. Hoffmann-La Roche will be credited against royalties payable to us
antitrust, abuse of process, civil rights, malicious prosecution and in the first calendar year of sales by Hoffmann-La Roche in which
We and Pharmacia AB are parties to a 1978 agreement relating to Affiliation Arrangements
unfair competition claims against Genentech. All of those claims aggregate sales of that product exceed $100.0 million.
Genentech’s development of recombinant human growth hormone In July 1999, we amended our certificate of incorporation and bylaws
were dismissed by the District Court.
products, under which Pharmacia is obligated to pay Genentech royal- and entered into an affiliation agreement with Roche. As a result, our Tax Sharing Agreement
On August 10, 1995, the District Court issued a preliminary injunc- ties on sales of Pharmacia’s growth hormone products throughout the board changed to consist of two Roche directors, three independent Since the redemption of our Special Common Stock, and until Roche
tion which prohibited BTG, pending the Court’s final determination of world. On January 5, 1999, Pharmacia filed a request for arbitration directors nominated by a nominating committee currently controlled completed its second public offering of our Common Stock in October
the action, from importing, making, using, selling, offering for sale or with the International Chamber of Commerce to resolve several dis- by Roche, and one Genentech employee. However, under the affilia- 1999, we were included in Roche’s U.S. federal consolidated income
distributing in the United States BTG’s human growth hormone puted issues between Genentech and Pharmacia under the agreement. tion agreement, Roche has the right to obtain proportional represen- tax group. Accordingly, we entered into a tax sharing agreement with
products except for certain ongoing FDA approved clinical trials. BTG One of the claims made by Pharmacia is for a refund of some of the tation on our board at any time. Roche intends to continue to allow Roche. Pursuant to the tax sharing agreement, we and Roche are to

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(continued)

make payments such that the net amount paid by us on account of repurchase shares of its common stock to increase Roche’s owner- Common Stock of each share held at the close of business on October chase approximately 19.8 million shares were outstanding at
consolidated or combined income taxes is determined as if we had ship to the Minimum Percentage. 17, 2000. Our stock began trading on a split-adjusted basis on December 31, 2000, of which options to purchase approximately 7.7
filed separate, stand-alone federal, state and local income tax returns October 25, 2000. On November 2, 1999, we effected a two-for-one million shares are currently exercisable.
as the common parent of an affiliated group of corporations filing con- RELATED PARTY TRANSACTIONS stock split of our Common Stock in the form of a dividend of one
In connection with these stock option transactions, we recorded:
solidated or combined federal, state and local returns. We enter into transactions with Roche, Hoffmann-La Roche and its share of Genentech Common Stock for each share held at the close of
affiliates in the ordinary course of business. We recorded contract business on October 29, 1999. Our stock began trading on a split- • (1) cash compensation expense of approximately $284.5 million
Effective with the consummation of the second public offering on
revenues from Hoffmann-La Roche of $40.0 million for Herceptin, adjusted basis on November 3, 1999. associated with the cash-out of such stock options and (2) non-cash
October 26, 1999, Genentech ceased to be a member of the consol-
marketing rights outside of the U.S. in 1998 (see below). All other con- compensation expense of approximately $160.1 million associated
idated federal income tax group (and certain consolidated or com- Stock Award Plans
tract revenue from Hoffmann-La Roche, including reimbursement for with the remeasurement, for accounting purposes, of the converted
bined state and local income tax groups) of which Roche is the In connection with the redemption of our Special Common Stock,
ongoing development expenses after the option exercise date, totaled options, which non-cash amount represents the difference between
common parent. Accordingly, our tax sharing agreement with Roche the following changes occurred with respect to our stock options
$3.5 million in 2000, $17.2 million in 1999, and $21.6 million in 1998. each applicable option exercise price and the redemption price of the
now pertains only to the state and local tax returns in which we will that were outstanding as of June 30, 1999:
All other revenue from Roche, Hoffmann-La Roche and their affiliates, Special Common Stock; and
be consolidated or combined with Roche. We will continue to calcu-
principally royalties and product sales, totaled $114.2 million in 2000, • Options for the purchase of approximately 27.2 million shares of
late our tax liability or refund with Roche for these state and local • Over a two-year period beginning July 1, 1999, an aggregate of
$83.9 million in 1999, and $63.8 million in 1998. Special Common Stock were canceled in accordance with the
jurisdictions as if we were a stand-alone entity. approximately $27.4 million of deferred cash compensation available
terms of the applicable stock option plans, and the holders
In the second quarter of 1999, we entered into a license agreement to be earned by a limited number of employees who elected the alter-
Roche’s Right to Maintain Its Percentage received cash payments in the amount of $20.63 per share, less
with Immunex Corporation that grants rights under our immunoad- native arrangements described above. As of December 31, 2000 and
Ownership Interest in Our Stock the exercise price;
hesin patent portfolio to Immunex for its product Enbrel® (etanercept) 1999, $11.1 million and $7.3 million, respectively, of compensation
We expect from time to time to issue additional shares of common
biologic response modifier. In exchange for a worldwide, co-exclusive • Options for the purchase of approximately 16.0 million shares of expense has been recorded related to these alternative arrangements.
stock in connection with our stock option and stock purchase plans,
license covering fusion proteins such as Enbrel, Immunex paid us an Special Common Stock were converted into options to purchase a like
and we may issue additional shares for other purposes. Our affilia- We have a stock option plan adopted in 1999, and amended in 2000,
initial non-refundable license fee which was recorded in contract number of shares of Common Stock at the same exercise price; and
tion agreement with Roche requires us to, among other things, which variously allows for the granting of non-qualified stock
revenues net of a portion paid to Roche pursuant to an agreement
establish a stock repurchase program designed to maintain Roche’s • Options for the purchase of approximately 19.6 million shares of options, stock awards and stock appreciation rights to employees,
between Roche and us.
percentage ownership interest in our common stock. In addition, Special Common Stock were canceled, in accordance with the directors and consultants of Genentech. Incentive stock options may
Roche will have a continuing option to buy stock from us at prevail- In July 1998, we entered into an agreement with Hoffmann-La terms of our 1996 Stock Option/Stock Incentive Plan, or the 1996 only be granted to employees under this plan. Generally, non-quali-
ing market prices to maintain its percentage ownership interest. To Roche to provide them with exclusive marketing rights outside of Plan. With certain exceptions, we granted new options for the pur- fied options have a maximum term of 10 years. Incentive options
ensure that, with respect to any issuance of common stock by the U.S. for Herceptin. Under the agreement, Hoffmann-La Roche chase of 1.333 times the number of shares under the previous have a maximum term of 10 years. In general, options vest in incre-
Genentech in the future, the percentage of Genentech common paid us $40.0 million and has agreed to pay us cash milestones tied options with an exercise price of $24.25 per share, which was the ments over four years from the date of grant, although we may grant
stock owned by Roche immediately after such issuance will be no to future product development activities, to share equally global public offering price of the Common Stock. The number of shares options with different vesting terms from time to time. No stock
lower than Roche’s lowest percentage ownership of Genentech com- development costs up to a maximum of $40.0 million and to make that were the subject of these new options, which were issued appreciation rights have been granted to date.
mon stock at any time after the offering of common stock occurring royalty payments on product sales. As of December 31, 1999, under our 1999 Stock Plan, or the 1999 Plan, was approximately
We adopted the 1991 Employee Stock Plan, or the 1991 Plan, on
in July 1999 and prior to the time of such issuance, except that Hoffmann-La Roche paid an additional $10.0 million toward global 20.0 million. Certain key employees who held unvested options
December 4, 1990, and amended it during 1993, 1995, 1997 and 1999.
Genentech may issue shares up to an amount that would cause development costs. under the 1996 Plan were provided the opportunity to participate
The 1991 Plan allows eligible employees to purchase Common Stock
Roche’s lowest percentage ownership to be no more than 2% below in a cash basis long-term incentive plan in lieu of their options.
at 85% of the lower of the fair market value of the Common Stock on
the “Minimum Percentage.” The Minimum Percentage equals the CAPITAL STOCK
Of the approximately 16.0 million shares of converted options, the grant date or the fair market value on the first business day of each
lowest number of shares of Genentech common stock owned by Common Stock and Special Common Stock
options with respect to approximately 4.0 million shares were out- calendar quarter. Purchases are limited to 15% of each employee’s eli-
Roche since the July 1999 offering (to be adjusted in the future for On June 30, 1999, we redeemed all of our outstanding Special
standing at December 31, 2000, all of which are currently exercis- gible compensation. All full-time employees of Genentech are eligible
dispositions of shares of Genentech common stock by Roche) Common Stock held by stockholders other than Roche.
able except for options with respect to approximately 320,507 to participate in the 1991 Plan. Of the 21.2 million shares of Common
divided by 509,194,352 (to be adjusted in the future for stock splits Subsequently, in July and October 1999, and March 2000, Roche
shares. These outstanding options are held by 1,420 employees; no Stock reserved for issuance under the 1991 Plan, 17.5 million shares
or stock combinations), which is the number of shares of Genentech consummated public offerings of our Common Stock. On January
non-employee directors hold these options. have been issued as of December 31, 2000. During 2000, 4,013 of the
common stock outstanding at the time of the July 1999 offering 19, 2000, Roche completed an offering of zero-coupon notes that
eligible employees participated in the 1991 Plan.
adjusted for the two-for-one splits of Genentech common stock that are exchangeable for an aggregate of 13,034,618 shares of our Our board of directors and Roche, then our sole stockholder,
were effected in October 2000 and November 1999. As long as Common Stock held by Roche. See “Redemption of Our Special approved the 1999 Plan on July 16, 1999. Under the 1999 Plan, we We have elected to continue to follow Accounting Principles Board,
Roche’s percentage ownership is greater than 50%, prior to issuing Common Stock ” and “Relationship With Roche ” notes above for a granted new options to purchase approximately 26.0 million shares or APB 25, to account for employee stock options because the alter-
any shares, Genentech must repurchase a sufficient number of discussion of these transactions. (including the 20.0 million shares referred to above) of Common native fair value method of accounting prescribed by FAS 123,
shares of its common stock to ensure that, immediately after its Stock to approximately 2,400 employees at an exercise price of “Accounting for Stock-Based Compensation,” requires the use of
On October 24, 2000, we effected a two-for-one stock split of our
issuance of shares, Roche’s percentage ownership will be greater $24.25 per share. The grant date of such options was July 16, 1999. option valuation models that were not developed for use in valuing
Common Stock in the form of a dividend of one share of Genentech
than 50%. Genentech has also agreed, upon Roche’s request, to Of the options to purchase these 26.0 million shares, options to pur- employee stock options. Under APB 25, “Accounting for Stock

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(continued) (thousands, except per share amounts)

Issued to Employees,” no compensation expense is recognized A summary of our stock option activity and related information is 2000 Quarter Ended December 31 September 30 June 30 March 31
because the exercise price of our employee stock options equals the as follows: Restated(7) Restated(7) Restated(7)
market price of the underlying stock on the date of grant. Weighted-Average Total revenues $ 485,340 $ 447,340 $ 415,826 $ 387,850
Shares Price
The information regarding net income and earnings per share Product sales 351,579 334,173 309,414 283,178
Options outstanding at December 31, 1997 64,958,436 $ 11.11 Gross margin from product sales 281,835 (1)
242,817 (1)
211,757 (1)
177,043(1)
with FAS 123 has been determined as if we had accounted for our
Grants 18,379,700 16.96 Income (loss) before cumulative effect of accounting change(2) 15,274 5,760 (12,865) (24,610)
employee stock options and employee stock plan under the fair value
Exercises (9,843,628) 8.83
method prescribed by FAS 123 and the earnings per share method Cumulative effect of accounting change, net of tax — — — (57,800)
Cancellations (4,992,084) 13.66
under FAS 128. The resulting effect on net income and earnings per Net income (loss) 15,274 5,760 (12,865) (82,410)
Options outstanding at December 31, 1998 68,502,424 $ 12.82
share with FAS 123 disclosed is not likely to be representative of the Earnings (loss) per share : (5)

Grants 34,092,336 28.54

effects on net income and earnings per share with FAS 123 in future Basic 0.03 0.01 (0.02) (0.16)
Exercises (11,638,378) 12.19
years, due to subsequent years including additional grants and years Cancellations (49,404,778) 13.03 Diluted 0.03 0.01 (0.02) (0.16)
of vesting. The fair value of options was estimated at the date of grant
Options outstanding at December 31, 1999 41,551,604 $ 25.65
using a Black-Scholes option valuation model with the following Grants 9,986,353 78.70 Increase (decrease)(7):
weighted-average assumptions for 2000, 1999 and 1998, respec- Exercises (8,258,743) 17.96 Revenues $ — $ 2,158 $ 2,158 $ 2,158
tively: risk-free interest rates of 5.3%, 5.8% and 5.5%; dividend yields Cancellations (2,334,352) 30.82 Net income (loss) — 1,295 1,295 (56,505)
of 0%; volatility factors of the expected market price of our Common Options outstanding at December 31, 2000 40,944,862 $ 39.84 Earnings (loss) per share —diluted — 0.00 0.00 (0.11)
Stock of 75.0%, 45.0% and 11.9%; and a weighted-average expected
life of the option of five years. The following table summarizes information concerning currently
The Black-Scholes option valuation model was developed for use in outstanding and exercisable options: 1999 Quarter Ended December 31 September 30 June 30 April 1 March 31
Options Options to June 30
estimating the fair value of traded options which have no vesting Outstanding Exercisable New Basis(8) New Basis(8) New Basis(8) Old Basis(8) Old Basis(8)
restrictions and are fully transferable. In addition, option valuation Restated(8) Restated(8) Restated(8) Restated(8)
Weighted-
models require the input of highly subjective assumptions including Average Years Weighted- Weighted-
Total revenues $ 358,456 $ 345,328 $ — $ 374,905(6) $ 322,352
the expected stock price volatility. Because our employee stock options Remaining Average Average
Range of Number Contractual Exercise Number Exercise Product sales 268,703 266,968 — 269,355 234,069
have characteristics significantly different from those of traded options,
Exercise Prices Outstanding Life Price Exercisable Price Gross margin from product sales 174,308 (1)
174,218 (1)
— 216,674 188,346
and because changes in the subjective input assumptions can materi-
$12.531–$17.782 3,819,753 13.20 $ 14.97 3,595,599 $ 14.87 Net income (loss) (172,567) (2)
(62,506) (2)
(1,010,039) (3)
73,221 14,415(4)
ally affect the fair value estimate, in management’s opinion the existing
$20.000–$24.250 19,968,555 10.09 24.22 7,795,989 24.22 Earnings (loss) per share (5):
models do not necessarily provide a reliable single measure of the fair
$32.094–$42.938 7,238,099 10.13 42.80 1,985,115 42.67 Basic (0.33) (0.13) (1.97) 0.14 0.03
value of its employee stock options.
$55.000–$82.000 9,718,733 10.01 78.47 38,933 73.35 Diluted (0.33) (0.13) (1.97) 0.13 0.03
For purposes of disclosures with FAS 123, the estimated fair value
$88.500–$95.655 199,722 10.01 90.75 1,254 91.05
of options is amortized to expense over the options’ vesting period.
40,944,862 13,416,890
Information with FAS 123 for the periods presented (in thousands,
except per share amounts):
Using the Black-Scholes option valuation model, the weighted-
2000 1999 1998
New Basis Old Basis average fair value of options granted was $51.05 in 2000, $13.66 in
Net (loss) income—
1999 and $4.31 in 1998. Shares of Common Stock available for
(1) Reflects expense of $2.3 million, $15.8 million, $31.4 million and $43.3 million in the fourth, third, second and first quarters of 2000, respectively, related to the sale of inventory that was
as reported $ (74,241) $(1,245,112) $ 87,636 $ 181,909 future grants under all stock option plans were 8,131,998 at written up to fair value as a result of the Redemption on June 30, 1999, and related push-down accounting. For 1999, reflects expense of $46.6 million in the fourth quarter and $46.8 million in the
third quarter related to the sales of inventory that was written up to fair value as a result of the Redemption on June 30, 1999, and related push-down accounting. (2) Primarily reflects the impact
Net (loss) income— December 31, 2000.
of the Redemption and push-down accounting, including: the sale of inventory that was written up to fair value, see note (1) above; the amortization of goodwill and other intangible assets of $78.6
with FAS 123 (159,067) (1,275,577) 57,105 140,995 million, $95.2 million, $95.2 million and $95.2 million in the fourth, third, second and first quarters of 2000, respectively, and $95.2 million in both the fourth and third quarters of 1999; and $57.8
million for the remeasurement of the value of continuing employee stock options in the third quarter of 1999. This also reflects the $180.0 million charge in the fourth quarter of 1999 related to the
Earnings (loss) per SUBSEQUENT EVENT (UNAUDITED) legal settlement with the Regents of the University of California. (3) Primarily reflects a $1,147.3 million special charge related to the Redemption and push-down accounting. Included in this charge
share—as reported:
During 1999, we entered into a license and collaboration agreement with is $752.5 million for in-process research and development, $284.5 million for the early cash settlement of certain employee stock options and $102.3 million for the remeasurement of the value of
Basic (0.14) (2.43) 0.17 0.36 continuing employee stock options. (4) Primarily reflects the legal settlement of $50.0 million with the Office of the U.S. Attorney for the Northern District of California. (5) Restated to reflect the
Aradigm Corporation to develop an advanced pulmonary delivery system two-for-one stock splits in each of 2000 and 1999. (6) Includes initial license fee from Immunex Corporation for Enbrel® and from Schwarz Pharma AG for Nutropin AQ and Nutropin Depot
Diluted (0.14) (2.43) 0.16 0.35
for our Pulmozyme product in the U.S. As part of the agreement, we sustained-release growth hormone. In addition we received a milestone payment from F. Hoffmann-La Roche for Herceptin. (7) We adopted the Securities and Exchange Commission’s Staff
Earnings (loss) per Accounting Bulletin No. 101 on revenue recognition effective January 1, 2000, and recorded a $57.8 million charge, net of tax, as a cumulative effect of a change in accounting principle related to
agreed to provide Aradigm a loan of up to $10.4 million, for development contract revenues recognized in prior periods. The related deferred revenue is being recognized over the term of the agreements. The increase (decrease) in revenues, net income (loss) and
share—with FAS 123:
costs. In late January 2001, we canceled the program and forgave the earnings (loss) per diluted shares reflect the impact of this adoption. (8) As a result of the Redemption, we revised our presentation of our quarterly data to reflect the New Basis and Old Basis of
Basic (0.31) (2.49) 0.11 0.28 accounting and also corrected the accounting related to the write-up of the valuation allowance pertaining to unrealized gains on certain marketable securities, which resulted in a reduction in
Diluted (0.31) (2.49) 0.11 0.27
loan. We expect to record a charge of approximately $7.0 million to revenues of $20.3 million during the quarter ended June 30, 1999 and a reduction of goodwill of $20.3 million as of June 30, 1999. The aggregate effect of this revision was an increase in net loss
by approximately $13.6 million ($0.03 per share), as compared to amounts previously reported for the quarter ended June 30, 1999. Amortization expense and net loss was reduced by $0.3 million
development cost in the first quarter of 2001 related to this cancellation.
in each of the quarters ended September 30, 1999 and December 31, 1999 (less than $0.01 per share in each quarter).

68 69
11 - Y E A R F I N A N C I A L S U M M A R Y ( U N A U D I T E D )
(millions, except per share and employee data)

2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Restated(9)
Actual Pro Forma (10) Actual Pro Forma (10)
Total revenues $ 1,736.4 $ 1,727.7 $ 1,401.0 $ 1,401.0 $ 1,150.9 $ 1,016.7 $ 968.7 $ 917.8 $ 795.4 $ 649.7 $ 544.3 $ 515.9 $ 476.1
Product sales 1,278.3 1,278.3 1,039.1 1,039.1 717.8 584.9 582.8 635.3 601.0 457.4 391.0 383.3 367.2
Royalties 207.2 207.2 189.3 189.3 229.6 241.1 214.7 190.8 126.0 112.9 91.7 63.4 47.6
Contract & other 160.4 151.7 83.2 83.2 114.8 121.6 107.0 31.2 25.6 37.9 16.7 20.4 31.9
Interest 90.4 90.4 89.4 89.4 88.7 69.1 64.2 60.5 42.8 41.5 44.9 48.8 29.4
Total costs and expenses $ 1,732.4 $ 1,264.2 $ 2,761.6 $ 1,032.8 $ 898.3 $ 846.9 $ 820.8 $ 745.6 $ 665.8 $ 590.8 $ 522.3 $ 469.8 $ 572.7
Cost of sales 364.9(3) 272.1 285.6(3) 192.2 138.6 102.5 104.5 97.9 95.8 70.5 66.8 68.4 68.3
Research & development 489.9 489.9 367.3 367.3 396.2 470.9 471.1 363.0 314.3 299.4 278.6 221.3 173.1
Marketing, general & administrative 497.0 497.0 467.9 467.9 358.9 269.9 240.1 251.7 248.6 214.4 172.5 175.3 158.1
Special charges — — 1,437.7(5) — — — — 25.0(1) — — — — 167.7(2)
Recurring charges related to redemption 375.3(6) — 197.7(6) — — — — — — — — — —
Interest 5.3 5.3 5.4 5.4 4.6 3.6 5.1 8.0 7.1 6.5 4.4 4.8 5.5
Income (loss) data
Income (loss) before taxes and cumulative
effect of accounting change $ 4.0 $ 463.5 $ (1,360.6) $ 368.2 $ 252.6 $ 169.8 $ 147.9 $ 172.2 $ 129.6 $ 58.9 $ 22.0 $ 46.1 $ (96.6)
Income tax (benefit) provision 20.4 143.7 (203.1) 121.5 70.7 40.8 29.6 25.8 5.2 — 1.1 1.8 1.5
Income (loss) before cumulative effect
of accounting change (16.4) 319.8 (1,157.5) 246.7 181.9 129.0 118.3 146.4 124.4 58.9 20.9 44.3 (98.0)
Cumulative effect of accounting change, net of tax (57.8)(8) — — — — — — — — — — — —
Net income (loss) (74.2) 319.8 (1,157.5) 246.7 181.9 129.0 118.3 146.4 124.4 58.9 20.9 44.3 (98.0)
Earnings (loss) per share: Basic $ (0.14) $ 0.61 $ (2.26) $ 0.48 $ 0.36 $ 0.26 $ 0.25 $ 0.31 $ 0.27 $ 0.13 $ 0.05 $ 0.10 —
Diluted (0.14) 0.60 (2.26) 0.47 0.35 0.26 0.24 0.30 0.26 0.12 0.05 0.10 (0.26)(4)
Selected balance sheet data
Cash, short-term investments &
long-term marketable securities $ 2,459.4 — $ 1,957.4 — $ 1,604.6 $ 1,286.5 $ 1,159.1 $ 1,096.8 $ 920.9 $ 719.8 $ 646.9 $ 711.4 $ 691.3
Accounts receivable 261.7 — 214.8 — 149.7 189.2 197.6 172.2 146.3 130.5 93.9 69.0 58.8
Inventories 265.8 — 275.2 — 148.6 116.0 91.9 93.6 103.2 84.7 65.3 56.2 39.6
Property, plant & equipment, net 752.9 — 730.1 — 700.2 683.3 586.2 503.7 485.3 456.7 432.5 342.5 300.2
Goodwill 1,455.8 — 1,609.1 — — — — — — — — — —
Other intangible assets 1,280.4 — 1,453.3 — 65.0 54.7 40.1 42.2 16.0 13.8 12.7 25.9 42.7
Other long-term assets 168.5 — 201.1 — 131.3 122.5 109.1 63.3 45.0 50.3 24.4 16.8 19.0
Total assets 6,711.8 — 6,534.8 — 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1 1,468.8 1,305.1 1,231.4 1,157.7
Total current liabilities 448.7 — 477.4 — 291.3 289.6 250.0 233.4 220.5 190.7 133.5 118.6 101.4
Long-term debt 149.7 — 149.7 — 150.0 150.0 150.0 150.0 150.4 151.2 152.0 152.9 153.5
Total liabilities 1,037.6 — 1,264.9 — 511.6 476.4 425.3 408.9 396.3 352.0 297.8 281.7 264.5
Total stockholders’ equity 5,674.2 — 5,269.9(7) — 2,343.8 2,031.2 1,801.1 1,602.0 1,348.8 1,116.8 1,007.3 949.7 893.2
Other data
Depreciation & amortization expense $ 463.0 — $ 280.7 — $ 78.1 $ 65.5 $ 62.1 $ 58.4 $ 53.5 $ 44.0 $ 52.2 $ 46.9 $ 47.6
Capital expenditures 112.7 — 95.0 — 88.1 154.9 141.8 70.2 82.8 87.5 126.0 71.3 36.0
Share information
Shares used to compute EPS: Basic 522.2 522.2 512.9 512.9 503.3 492.2 482.5 473.1 464.0 455.6 447.7 444.1 —
Diluted 522.2 536.1 512.9 529.5 519.5 505.6 495.9 487.0 480.8 475.0 460.0 452.9 372.0(4)
Actual year-end 525.5 525.5 516.2 516.2 508.5 497.0 485.7 477.1 469.0 459.3 451.5 445.2 442.4
Per share data
Market price: High $ 117.25 — $ 22.50 — $ 19.94 $ 15.16 $ 13.85 $ 13.25* $ 13.38 $ 12.63 $ 9.88 $ 9.07 $ 7.72
$ 71.50*** $ 6.88**
Low $ 46.13 — $ 18.63 — $ 14.82 $ 13.32 $ 12.85 $ 11.13* $ 10.44 $ 7.82 $ 6.47 $ 5.19 $ 5.03
$ 24.25*** $ 5.44**
Book value $ 10.80 — $ 10.21 — $ 4.61 $ 4.09 $ 3.71 $ 3.36 $ 2.88 $ 2.43 $ 2.23 $ 2.14 $ 2.02
Number of employees 4,459 — 3,883 — 3,389 3,242 3,071 2,842 2,738 2,510 2,331 2,202 1,923

70 71 Notes to 11-Year Financial Summary on page 72.

11 - Y E A R F I N A N C I A L S U M M A R Y ( U N A U D I T E D ) S T O C K H O L D E R I N F O R M A T I O N
(continued)

NOTES Headquarters Investor Relations

We have paid no dividends. exchangeable for an aggregate of 13,034,618 shares of our ended 1997 through 2000 (previous amounts were not material) Genentech, Inc. Genentech invites stockholders, security analysts, representatives of
The Financial Summary reflects adoption of SAB 101 in 2000, FAS Common Stock held by Roche. Roche’s percentage ownership was are as follows (in millions, except per share amounts):
130 and 131 in 1998, FAS 128 and 129 in 1997, FAS 121 in 1996, approximately 58.4% at December 31, 2000. 1 DNA Way portfolio management firms and other interested parties to contact:
2000 1999 1998 1997
FAS 115 in 1994 and FAS 109 in 1992. (1) Charges related to 1995 merger and the 1995 Agreement with Roche
Pro forma: South San Francisco, California 94080-4990
All share and per share amounts reflect two-for-one stock splits ($21.0 million) and resignation of our former CEO ($4.0 million). Susan Bentley
that were effected in 2000 and 1999. (2) Charges primarily related to 1990 Roche merger. Net income (loss) $ (16.4) $(1,168.7) $ 154.5 $ 109.8 (650) 225-1000
*Special Common Stock began trading October 26, 1995. On October (3) Includes costs related to the sale of inventory that was written up at Earnings (loss) per Senior Director, Investor Relations
25, 1995, pursuant to the 1995 Agreement with Roche, each share the Redemption due to push-down accounting. share—diluted $ (0.03) $ (2.28) $ 0.30 $ 0.22
www.gene.com
of our Common Stock not held by Roche or its affiliates automati-
(650) 225-1260
(4) Information was not available to restate these amounts pur- (9) Actual 1999 results include the combined New Basis and Old Basis
cally converted to one share of Special Common Stock. suant to FAS 128. Reflects amounts previously reported adjust- periods presented in the 1999 Consolidated Statements of
**Redeemable Common Stock began trading September 10, 1990; ed for the stock splits in 2000 and 1999. Operations and Consolidated Statements of Cash Flows reflecting
prior to that date all shares were Common Stock. Pursuant to the (5) Charges related to 1999 Redemption ($1,207.7 million) and legal set- the June 30, 1999, Redemption. We revised the presentation of our Stock Listing Mike Burchmore
merger agreement with Roche, all shareholders as of September 7, 1999 results to reflect the New and Old basis of accounting and also
1990, received for each common share owned, $18 in cash from
tlements ($230.0 million).
corrected the accounting related to the write up of the valuation
Associate Director, Investor Relations
Roche and one share of newly issued Redeemable Common Stock (6) Primarily reflects amortization of other intangible assets and good- allowance pertaining to unrealized gains on certain marketable
Genentech is listed on the New York Stock Exchange under the
from Genentech. will related to the Redemption. securities from amounts previously reported. Refer to “Basis of
(650) 225-8852
(7) Reflects the impact of the Redemption and related push-down Presentation and Restatement” as disclosed in the Notes to
symbol DNA.
***Common Stock began trading July 20, 1999; prior to that date,
shares were Special Common Stock. On June 30, 1999, we accounting of $5,201.9 million of excess purchase price over net Consolidated Financial Statements . Genentech, Inc.
redeemed all of our outstanding Special Common Stock held by book value, net of charges and accumulated amortization of good- (10) Pro forma amounts exclude special charges related to legal set-
stockholders other than Roche. Roche’s percentage ownership of will and other intangible assets. tlements and the Redemption, recurring charges related to the 1 DNA Way
our outstanding equity increased from 65% to 100%. On July 23, (8) Reflects the impact of the adoption of SAB 101 on revenue recog- Redemption, costs related to the sale of inventory that was writ-
1999, October 26, 1999, and March 29, 2000, Roche completed nition effective January 1, 2000. Pro forma amounts of net income ten up at the Redemption, and their related tax effects. In addition, South San Francisco, California 94080-4990
public offerings of our Common Stock. On January 19, 2000, (loss) and related diluted per share amounts, assuming retroactive pro forma excludes the cumulative effect of the change in
Roche completed an offering of zero-coupon notes that are application of the change in accounting principle for the years accounting principle, net of tax, adopted in 2000.
e-mail: investor.relations@gene.com

Transfer Agent Additional Information

S T O C K I N F O R M A T I O N
Communications concerning transfer requirements, lost certifi- If you need additional assistance or information regarding the
cates and change of address should be directed to Genentech’s company, or would like to receive a free copy of Genentech’s Form
COMMON STOCK, SPECIAL COMMON STOCK AND 7, 1990, and on the Pacific Exchange under the symbol GNE from April
transfer agent: 10-K and 10-Q reports filed with the Securities and Exchange
REDEEMABLE COMMON STOCK INFORMATION 12, 1988, until September 7, 1990. Our Common Stock was previous-
Commission, contact the Investor Relations Department at
ly traded in the NASDAQ National Market System under the symbol EquiServe, LP
Stock Trading Symbol: DNA Genentech’s corporate offices by sending an e-mail message to
GENE. No dividends have been paid on the Common Stock, Special Stockholder Services
investor.relations@gene.com or calling (650) 225-1599. You can
Common Stock or Redeemable Common Stock. We currently intend to Post Office Box 43010
Stock Exchange Listings direct requests for literature to Genentech’s literature request line at
retain all future income for use in the operation of our business and, Providence, Rhode Island 02940-3010
Our Common Stock began trading on the New York Stock Exchange (800) 488-6519 or you can visit Genentech’s site on the World Wide
therefore, do not anticipate paying any cash dividends in the foresee-
under the symbol “DNA” on July 20, 1999. On June 30, 1999, we Telephone: (800) 733-5001 Web at www.gene.com.
able future. On October 24, 2000, we effected a two-for-one stock split
redeemed all of our outstanding Callable Putable Common Stock, or Fax: (781) 828-8813
of our Common Stock in the form of a dividend of one share of
Special Common Stock, held by stockholders other than Roche www.equiserve.com
Genentech Common Stock for each share held at the close of business Independent Auditors
Holdings, Inc. Our Special Common Stock had traded on the New York
on October 17, 2000. Our stock began trading on a split-adjusted basis
Stock Exchange and the Pacific Exchange under the symbol GNE from Ernst & Young LLP
on October 25, 2000. On November 2, 1999, we effected a two-for-one Annual Meeting
October 26, 1995, through June 16, 1999. On October 25, 1995, our Palo Alto, California
stock split of our Common Stock in the form of a dividend of one share
non-Roche stockholders approved an agreement (the Agreement) with The annual meeting of stockholders will be held at 10:00 a.m. Pacific
of Genentech Common Stock for each share held at the close of busi-
Roche Holdings, Inc. (Roche). Pursuant to the Agreement, each share time on May 10, 2001, at The Westin Hotel, 1 Old Bayshore Highway,
ness on October 29, 1999. Our stock began trading on a split-adjusted
of our Common Stock not held by Roche or its affiliates automatically Millbrae, California. Detailed information about the meeting is con- Want to learn more about Genentech?
basis on November 3, 1999.
converted to one share of Special Common Stock. From July 3, 1995, tained in the Notice of Annual Meeting and Proxy Statement sent to Visit us on the World Wide Web: www.gene.com
through October 25, 1995, our Common Stock was traded on the New Common Stockholders each stockholder of record as of March 13, 2001.
York Stock Exchange under the symbol GNE. After the close of busi- As of December 31, 2000, there were approximately 1,205 stock- Interested in biology?
ness on June 30, 1995, each share of our Redeemable Common Stock holders of record of our Common Stock. Visit Access Excellence®, the site for health and bioscience
automatically converted to one share of Common Stock. The conver- Common/Special Common Stock teachers and learners. Originally developed by Genentech, the
sion was in accordance with the terms of the Redeemable Common site was donated in 1999 to the National Health Museum, a non-
Stock Prices 2000 1999
profit organization founded by former U.S. Surgeon General
Stock put in place at the time of its issuance on September 7, 1990,
High Low High Low C. Everett Koop as a national center for health education:
when our merger with a wholly owned subsidiary of Roche was con-
4th Quarter $ 90.75 $ 65.25 $ 71.50 $ 33.44 www.accessexcellence.org.
summated. Our Redeemable Common Stock traded on the New York
3rd Quarter 95.66 73.44 44.88 24.25
Stock Exchange under the symbol GNE from September 10, 1990, to
2nd Quarter 85.95 46.13 22.50 20.48
June 30, 1995. Our Common Stock was traded on the New York Stock
1st Quarter 117.25 61.25 22.23 18.63
Exchange under the symbol GNE from March 2, 1988, until September

72 73
BOA R D O F D I R EC TO R S David Nagler
Vice President, Human Resources
Arthur D. Levinson, Ph.D.
Chairman and Chief Executive Officer, Genentech, Inc. Diane L. Parks
Vice President, Managed Healthcare and Commercial Support
Herbert W. Boyer, Ph.D.
Co-founder of Genentech, Inc. and Professor Emeritus of Biochemistry Andrew Scherer
and Biophysics, University of California, San Francisco Vice President, Engineering, Facilities, Strategic Planning and Support

Franz B. Humer, Ph.D. Daniel S. Sulzbach M I S S I O N

Chairman and Chief Executive Officer, The Roche Group, a research-based Vice President, Corporate Information Technology
healthcare company
John M. Whiting
S T A T E M E N T
Jonathan K.C. Knowles, Ph.D. Vice President, Controller, and Chief Accounting Officer
President of Global Research, The Roche Group, a research-based
healthcare company Our mission is to be the leading
S TA F F S C I E N T I S T S
Sir Mark Richmond, Ph.D. biotechnology company, using human
Senior Research Fellow, School of Public Policy, University College, London Avi J. Ashkenazi, Ph.D.
Research genetic information to develop,
Charles A. Sanders, M.D.
Former Chairman and Chief Executive Officer, Glaxo, Inc., Thomas A. Bewley, Ph.D. manufacture and market pharma-
a research-based healthcare company Process Sciences
ceuticals that address significant
Stuart Bunting, Ph.D.
Research unmet medical needs. We commit
OFFICERS
Napoleone Ferrara, M.D. ourselves to high standards of
Arthur D. Levinson, Ph.D.*
Research
Chairman and Chief Executive Officer
Robert Fick, M.D.
integrity in contributing to the best
Susan D. Desmond-Hellmann, M.D., M.P.H.*
Medical Affairs interests of patients, the medical
Executive Vice President, Development and Product Operations,
and Chief Medical Officer David Giltinan, Ph.D.
Medical Affairs
profession, and our employees, and
Louis J. Lavigne, Jr.*
Executive Vice President and Chief Financial Officer Tim Gregory, Ph.D. to seeking significant returns to our
Process Sciences
Myrtle S. Potter* stockholders based on the continued
Executive Vice President, Commercial Operations, and Chief Operating Officer Andrew J.S. Jones, D. Phil.
Process Sciences pursuit of excellent science.
Stephen G. Juelsgaard, D.V.M., J.D.*
Senior Vice President, General Counsel, and Secretary Laurence A. Lasky, Ph.D.
Research
Richard H. Scheller, Ph.D.*
Genentech Fellow
Senior Vice President, Research
Leonard G. Presta, Ph.D.
Robert L. Garnick, Ph.D.
Research

Creative concept, design and production by Sperling Sampson West. Printed in the United States by George Rice & Sons.
Senior Vice President, Regulatory, Quality and Compliance
Arnon Rosenthal, Ph.D.
Kimberly J. Popovits
Research
Senior Vice President, Marketing and Sales
Timothy A. Stewart, Ph.D.
W. Robert Arathoon, Ph.D.
Research
Vice President, Manufacturing Operations
William I. Wood, Ph.D.
J. Joseph Barta
Research
Vice President, Quality

Stephen G. Dilly, M.D., Ph.D.

Vice President, Medical Affairs DISTINGUISHED ENGINEERS

David A. Ebersman Chung Hsu, Ph.D., P.E.

Vice President, Product Development Process Sciences

Claudia Estrin Robert van Reis

Vice President, Decision Support and Commercial Innovation Process Sciences

Roy C. Hardiman, J.D.

Vice President, Corporate Law, and Assistant Secretary

Paula M. Jardieu, Ph.D.

Vice President, Pharmacological Sciences
*Member of Executive Committee
Sean A. Johnston, Ph.D.
Access Excellence, Activase, Herceptin, Nutropin, Nutropin AQ, Protropin and Pulmozyme
Vice President, Intellectual Property are registered trademarks, and Nutropin Depot, TNKase, Xanelim and Xolair are trademarks
of Genentech, Inc. Cancer Survival Toolbox is a trademark of the National Coalition for
R. Guy Kraines
Cancer Survivorship. Enbrel is a registered trademark of Immunex Corporation. Epogen and
Vice President, Finance Neupogen are registered trademarks of Amgen, Inc. INTEGRILIN is a registered trademark
of COR Therapeutics, Inc. MabThera is a registered trademark of Roche. Recombinate is a
Joseph S. McCracken, D.V.M.
trademark of Baxter Healthcare Corporation. Rituxan is a registered trademark of IDEC
Vice President, Business and Commercial Development Pharmaceuticals Corporation. Tracleer is a trademark of Actelion Ltd.
Walter K. Moore
Vice President, Government Affairs Copyright © 2001, Genentech, Inc.

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