1 DNA Way
South San Francisco, California 94080-4990

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

 

By Order of the Board of Directors,

 

STEPHEN G. JUELSGAARD

  Executive Vice President, Chief

  Compliance Officer and Secretary

 

This Notice of Annual Meeting of Stockholders, Proxy Statement and accompanying proxy card

are being distributed on or about March 16, 2007

ELECTRONIC DELIVERY OF STOCKHOLDER COMMUNICATIONS

 

Genentech, Inc. offers electronic delivery of materials for its 2007 Annual Meeting of Stockholders. As an alternative to receiving printed copies of these materials in future years, you can elect to receive an e-mail which will provide an electronic link to these documents as well as allow you the opportunity to conduct your voting online. By registering for electronic delivery, you can conveniently receive stockholder communications as soon as they are available without waiting for them to arrive via postal mail. You can also reduce the number of documents in your personal files, eliminate duplicate mailings, help us reduce our printing and mailing expenses and conserve natural resources.

 

HOW TO ENROLL

 

Stockholders of Record

 

You are a stockholder of record if you hold your shares in certificate form. If you vote on the Internet at www.computershare.com/expressvote, simply follow the directions for enrolling in the electronic delivery service. You also may enroll in the electronic delivery service at any time in the future by going directly to www.econsent.com/dna and following the instructions.

 

Beneficial Stockholders

 

You are a beneficial stockholder if your shares are held by a brokerage firm, bank or other nominee. Please check with your bank, broker or relevant nominee regarding the availability of this service.

 

If you have any questions about electronic delivery, please contact our Investor Relations Department by phone at (650) 225-4150 or by e-mail at investor.relations@gene.com.

PROXY STATEMENT

 

QUESTIONS AND ANSWERS ABOUT
THE PROXY MATERIALS AND THE ANNUAL MEETING

 

 

 

RELATIONSHIP WITH ROCHE

 

Arrangements between Genentech and Roche

 

In June 1999, we redeemed all of our callable putable common stock (“Special Common Stock”) held by stockholders other than Roche Holdings, Inc. (“Roche”) for cash pursuant to a contractual obligation with Roche that gave Roche the right to require such a redemption. Upon completion of the redemption, Roche’s ownership percentage of our Special Common Stock was 100%. In July and October of 1999 and March 2000, Roche completed public offerings of our Common Stock and in January 2000, Roche completed an offering of its zero-coupon notes exchangeable for our Common Stock held by Roche. At the conclusion of these public offerings in March 2000, Roche’s ownership of our Common Stock was 58.9%. On December 31, 2006, Roche’s ownership of our Common Stock was 55.8%.

 

During the period that Roche owned all of our outstanding equity, we amended our Certificate of Incorporation and entered into an affiliation agreement with Roche that enabled our current management to conduct our business and operations as we had done in the past while at the same time reflecting Roche’s ownership in us. The affiliation agreement is for the exclusive benefit of Roche and can be amended at any time by Roche and us. We also amended our bylaws to provide Roche with certain proportional representation rights with respect to membership on our Board of Directors and committees.

 

Our Amended and Restated Certificate of Incorporation provides that the provisions of our bylaws described under “Composition of Board of Directors,” “Roche’s Right to Proportional Representation,” “Membership of Committees” and “Nomination of Directors,” may be repealed or amended only by a 60% vote of our stockholders. However, Roche’s right to nominate a number of directors proportional to Roche’s ownership interest until Roche’s ownership interest is less than 5%, may be repealed or amended only by a 90% vote of our stockholders.

 

The provisions of the affiliation agreements described below under “Roche Approval Required for Certain Actions” and “Licensing and Marketing Agreements” will terminate if Roche owns less than 40% of our stock.

 

Under our bylaws and for the purposes of the discussion below in this section, unless otherwise noted, an independent director is a director who is not:

 

 

Composition of Board of Directors

 

As prescribed by our bylaws, our Board currently consists of seven members: three nominees of Roche, one of our executive officers and three independent directors. All of our directors other than those designated by Roche are nominated by the Nominations Committee of the Board. See “Board Committees and Meetings – Director Nomination.” The Board has the authority to further increase the size of the board from time to time. Directors are elected to serve until the next annual meeting of stockholders or until their successors are elected and qualified.

 

Roche’s Right to Proportional Representation

 

Under our bylaws, Roche is entitled to representation on our Board proportional to its ownership interest in our Common Stock. Roche is entitled to have a number of directors equal to its percentage ownership of our Common Stock times the total number of directors, rounded up to the next whole

number if Roche’s ownership interest is greater than 50% and rounded down if it is less than or equal to 50%. Upon Roche’s request, we will immediately take action to increase the size of our Board or to fill the vacancies by electing Roche nominees in order to achieve Roche’s proportional representation.

 

If Roche’s ownership interest of our Common Stock falls below 40%, the Roche directors will resign to the extent Roche’s representation exceeds its proportional ownership interest. The number of directors required to resign shall be rounded up to the next whole number. Roche shall thereafter be entitled to nominate a number of directors proportional to Roche’s ownership interest rounded down to the next whole number, until Roche’s ownership interest is less than 5%.

 

Membership of Committees

 

We have five committees of the Board:

 

 

Roche is entitled to designate at least one member of each committee and, upon providing notice to the Company, is entitled to proportional representation on each committee. However, under the Sarbanes–Oxley Act of 2002 (the “Sarbanes–Oxley Act”) and rules of the Securities and Exchange Commission (the “SEC”) promulgated thereunder as well as New York Stock Exchange (“NYSE”) rules relating to corporate governance, no Roche director may be a member of the Audit Committee. Roche’s committee members may designate another Roche director to serve as their alternates on any committee.

 

Under our bylaws, the Nominations Committee is required to have three members. Any time that Roche’s ownership percentage of our stock is equal to or greater than 80%, the Nominations Committee is to be comprised of two Roche nominees and one independent director. Any time that Roche’s ownership percentage of our stock is less than 80%, the Nominations Committee is to be comprised of a number of Roche nominees equal to Roche’s ownership percentage times three, rounded up to the next whole number if Roche’s total voting power is greater than 50% and rounded down if Roche’s total voting power is less than or equal to 50%. However, Roche may not have more than two nominees at any time. Roche currently has two nominees on the Nominations Committee.

 

Nomination of Directors

 

A majority of the members of the Nominations Committee must approve the nomination of any person for director not designated by Roche.

 

Roche Approval Required for Certain Actions

 

Without the prior approval of the Roche directors, we may not approve:

 

 

 

For purposes of the first and second bullet points of the previous paragraph, unless a majority of the Board of Directors has made a contrary determination in good faith, a “substantial portion of our business or assets” shall mean a portion of our business or assets accounting for 10% or more of our consolidated total assets, contribution to net income or revenues. If Roche makes a request for proportional representation on the Board, until the Roche designees take office as directors, we may not take any action not in the ordinary course of business without Roche’s consent.

 

Registration Rights

 

We have agreed to use our best efforts to file one or more registration statements under the Securities Act of 1933, as amended (the “Securities Act”) in order to permit Roche to offer and sell shares of our Common Stock.

 

Generally, we will pay all expenses incident to the performance of our obligations with respect to the registration of Roche’s shares of our Common Stock except that Roche has agreed to pay certain expenses to be directly incurred by Roche, including underwriting fees, discounts and commissions and counsel fees. In addition, we are only required to pay for two registrations within a 12-month period. Roche and we have each agreed to customary indemnification and contribution provisions with respect to liability incurred in connection with these registrations.

 

Dispositions by Roche

 

If Roche and its affiliates sell their majority ownership in our Common Stock to a successor, Roche will cause the successor to purchase all shares of our Common Stock not held by Roche:

 

 

Roche has agreed to cause the buyer of our Common Stock to agree to be bound by the obligations described in the preceding paragraph as well as the obligations described under “Business Combinations with Roche” and “Compulsory Acquisitions” below. We have agreed that the buyer shall be entitled to succeed to Roche’s rights described under “Roche’s Ability to Maintain its Percentage Ownership Interest in Our Stock” below.

 

Business Combinations with Roche

 

Roche has agreed that, as a condition to any merger of the Company with Roche or its affiliates or the sale of substantially all of our assets to Roche or its affiliates, either:

 

 

Roche has agreed that it will not sell any shares of our Common Stock in the 90 days immediately preceding any proposal by Roche for a merger with us. Roche also agreed that in the event of any merger of the Company with Roche or its affiliates or sale of substantially all of our assets to Roche or its affiliates, each unvested option outstanding under our stock option plans will:

 

 

Compulsory Acquisitions

 

If Roche owns more than 90% of our Common Stock for more than two months, Roche has agreed to, as soon as reasonably practicable, effect a merger of the Company with Roche or an affiliate of Roche.

 

The merger shall be conditioned on the vote or the valuation described under the first two bullets of “Business Combinations with Roche” above.

 

Roche’s Ability to Maintain its Percentage Ownership Interest in Our Stock

 

Our affiliation agreement with Roche provides, among other things, that with respect to any issuance of Common Stock by us in the future, we will repurchase a sufficient number of shares so that immediately after such issuance the percentage of our Common Stock owned by Roche will be no lower than 2% below the “Minimum Percentage” (as defined below); provided however, as long as Roche’s percentage ownership is greater than 50%, prior to issuing any shares, we will repurchase a sufficient number of shares of our Common Stock such that, immediately after our issuance of shares, Roche’s percentage ownership will be greater than 50%. The Minimum Percentage equals the lowest number of shares of our Common Stock owned by Roche since the July 1999 offering (to be adjusted for dispositions of shares of our Common Stock by Roche as well as for stock splits or stock combinations) divided by 1,018,388,704, the number of shares of our Common Stock outstanding at the time of the July 1999 offering, as adjusted for stock splits. The affiliation agreement also provides that, upon Roche’s request, we will repurchase shares of our Common Stock to increase Roche’s ownership to the Minimum Percentage. In addition, Roche will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest.

 

Licensing and Marketing Agreements

 

We have a July 1999 Amended and Restated Licensing and Marketing Agreement with F. Hoffmann-La Roche Ltd (“Hoffmann-La Roche”) and its affiliates granting Hoffmann-La Roche an option to license, use and sell our products in non-U.S. markets. The major provisions of that agreement include the following:

 

 

 

We have further amended this licensing and marketing agreement with Hoffmann-La Roche to delete or add certain Genentech products under Hoffman-La Roche’s commercialization and marketing rights for Canada.

 

We also have a July 1998 licensing and marketing agreement relating to anti-HER2 antibodies (Herceptin and Omnitarg) with Hoffmann-La Roche, providing them with exclusive marketing rights outside of the U.S. Under the agreement, Hoffmann-La Roche funds one-half the global development costs incurred in connection with developing anti-HER2 antibody products under the agreement. Either Genentech or Hoffmann-La Roche has the right to “opt-out” of developing an additional indication for a product and would not share the costs or benefits of the additional indication, but could “opt-back-in” before approval of the indication by paying twice what would have been owed for development of the indication if no opt-out had occurred. Hoffmann-La Roche has also agreed to make royalty payments

of 20% on aggregate net product sales outside the U.S. up to $500 million in each calendar year and 22.5% on such sales in excess of $500 million in each calendar year.

 

Research Collaboration Agreement

 

In April 2004, we entered into a research collaboration agreement with Hoffmann-La Roche that outlines the process by which Hoffmann-La Roche and Genentech will conduct and share in the costs of joint research on certain molecules in areas of mutual interest. The agreement further outlines how development and commercialization efforts will be coordinated with respect to select molecules, including the financial provisions for a number of different development and commercialization scenarios undertaken by either or both parties.

 

See “Certain Relationships and Related Person Transactions” on page 33 for a discussion of transactions under other agreements between Hoffmann-La Roche and us.

 

Tax Sharing Agreement

 

We have a tax sharing agreement with Roche. If we and Roche elect to file a combined state and local tax return in certain states where we may be eligible, our tax liability or refund with Roche for such jurisdictions will be calculated on a stand alone basis.

PROPOSAL 1 — ELECTION OF DIRECTORS

 

NOMINEES FOR DIRECTOR

 

Our Board of Directors is elected each year at the Annual Meeting. Our Board is currently comprised of the following seven directors as provided for in our bylaws:

 

 

 

Each of the incumbent directors is a current nominee for director on our Board. All of these nominees for director, if elected, will serve until the 2008 Annual Meeting of Stockholders or until a successor is elected or appointed, and we expect each of these nominees to be able to serve if elected. If a director nominee is not able to serve, proxies will be voted in favor of the remainder of those nominated and may be voted for any other person the Board of Directors may select or who may be properly nominated by a Genentech stockholder.

 

The persons named in the enclosed proxy card will vote your proxy for the election of each of these nominees unless you indicate otherwise. Proxies may not be voted for a greater number of persons than the nominees named below.

 

The following information outlines the name and age of each nominee for director (as of December 31, 2006), his or her current principal occupation, any other position held with the Company, and the period during which he or she has served as a director of the Company:

 

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR EACH NOMINEE

Dr. Boyer, a founder of Genentech who is currently retired, had been a director of Genentech since 1976 when he resigned from the Board in June 1999 in connection with the redemption of our Special Common Stock. He was reelected to the Board in September 1999. He served as a Vice President of Genentech from 1976 to 1991. Dr. Boyer, a Professor of Biochemistry at the University of California at San Francisco from 1976 to 1991, demonstrated the usefulness of recombinant DNA technology to produce medicines economically, which laid the groundwork for Genentech’s development. Dr. Boyer has received numerous awards for his research, including the BayBio Pantheon Lifetime Achievement Award in 2005, National Medal of Science from President George Bush in 1990, the National Medal of Technology in 1989 and the Albert Lasker Basic Medical Research Award in 1980. He is an elected member of the National Academy of Sciences and a Fellow in the American Academy of Arts and Sciences. In 2001, Dr. Boyer was elected to the National Inventors Hall of Fame. In addition, Dr. Boyer serves as Vice-Chairman of the Board of Directors of Allergan, Inc.

 

Mr. Burns was elected a director of Genentech in April 2004. He was appointed Chief Executive Officer of the Pharmaceuticals Division of The Roche Group, an international healthcare company, in January 2005 and was elected to the Corporate Executive Committee of The Roche Group in 2000. From 2001 to December 2004, Mr. Burns served as Head of the Pharmaceuticals Division of The Roche Group. From 1998 to 2001, Mr. Burns served as Head of Europe and International Business of Roche Pharmaceuticals. From 1991 to 1998, Mr. Burns served as Global Head of Strategic Marketing and Business Development for Roche Pharmaceuticals. Mr. Burns is a member of the Board of Directors of Chugai Pharmaceutical Co., Ltd., a subsidiary of Roche. Pursuant to the affiliation agreement, Mr. Burns is a designee of Roche.

 

Dr. Hunziker was elected a Director of Genentech in April 2004. He joined the Roche Group as Chief Financial Officer in 2001 and was elected to the Executive Committee of The Roche Group at that time. In January 2005 he was appointed Deputy Head of the Executive Committee. Prior to joining The Roche Group, from 1998 until 2001, Dr. Hunziker was Chief Executive Officer of the Diethelm Group and Diethelm Keller Holding Ltd. Dr. Hunziker joined Corange Ltd (holding company of Boehringer Mannheim Group) where he was appointed Chief Financial Officer in 1997. Dr. Hunziker is a member of the Boards of Directors of Holcim Ltd. and Chugai Pharmaceutical Co., Ltd., a subsidiary of Roche. Pursuant to the affiliation agreement, Dr. Hunziker is a designee of Roche.

 

Dr. Knowles was elected a director of Genentech in February 1998. He joined The Roche Group as Head of Global Research in September 1997. In January 1998, he became a member of the Corporate Executive Committee of The Roche Group. Dr. Knowles also serves as a member of the Board of Directors of Chugai Pharmaceutical Co., Ltd., a subsidiary of Roche. Pursuant to the affiliation agreement, Dr. Knowles is a designee of Roche.

 

Dr. Levinson was appointed Chairman of the Board of Directors of Genentech in September 1999 and was elected its Chief Executive Officer and a director of the Company in July 1995. Since joining the Company in 1980, Dr. Levinson has been a Senior Scientist, Staff Scientist and the Director of the Company’s Cell Genetics Department. He was appointed Vice President of Research Technology in April 1989, Vice President of Research in May 1990, Senior Vice President of Research in December 1992, Senior Vice President of Research and Development in March 1993 and President in July 1995. Dr. Levinson also serves as a member of the Boards of Directors of Apple Computer, Inc. and Google, Inc.

 

Ms. Reed was elected a director of Genentech in August 2005. She is President and Chief Executive Officer of San Diego Gas & Electric (SDG&E) and Southern California Gas Co. (SoCalGas), Sempra Energy’s California regulated utilities. Previously Ms. Reed served as President and Chief Operating Officer of SDG&E and SoCalGas from 2004 until 2006; President and Chief Financial Officer of SDG&E and SoCalGas from 2002 until 2004; and President of SDG&E from 2000 to 2002. Ms. Reed has also served as President of Energy Distribution Services at SoCalGas, and has held other leadership positions at SoCalGas. Ms. Reed serves on the Boards of Directors of Halliburton Company, SDG&E and SoCalGas.

 

Dr. Sanders, who is currently retired, was elected a director of Genentech in August 1999 and the lead director of the Board in February 2003. He served as Chief Executive Officer of Glaxo Inc., a pharmaceutical company, from 1989 to 1994, and was the Chairman of the Board of Glaxo Inc. from 1992 to 1995. He also has served on the Board of Directors of Glaxo plc. Dr. Sanders is a member of the Boards of Directors of Vertex Pharmaceuticals, Biopure Corporation (retiring from the Biopure Board as of April 4, 2007), Cephalon, Inc., and Icagen, Inc.

BOARD COMMITTEES AND MEETINGS

 

During 2006, the Board of Directors held five (5) meetings. Each of our incumbent directors attended at least 75% of the aggregate number of meetings of the Board and the committees on which the directors served. None of the members of the Audit, Compensation, Corporate Governance or Nominations Committee was an officer or employee of the Company. We show below information on our standing committees of the Board of Directors including the membership, functions and number of meetings of each Board committee held in 2006.

 

Director Independence

 

Drs. Sanders and Boyer and Ms. Reed are independent directors in accordance with NYSE corporate governance listing standards. As Roche holds more than 50% of the voting power of Genentech, we have elected to rely on the NYSE “controlled company” exemption from compliance with NYSE corporate governance listing standards requiring that a majority of the directors on our Board and on the Compensation, Corporate Governance and Nominations Committees of our Board be independent. As a result, the majority of the directors on our Board and these committees are not independent under the criteria for independence established under the NYSE corporate governance listing standards. However, each member of the Audit Committee is an independent director in accordance with SEC rules and NYSE corporate governance listing standards.

 

Director Attendance at Annual Meeting

 

We have no policy requiring directors to attend the Annual Meeting; however, directors are encouraged to attend the annual meetings at which they will stand for election or re-election. All directors serving on the Board as of our 2006 Annual Meeting attended that meeting.

 

Communication with the Board of Directors

 

Dr. Sanders has been appointed the lead director of the Board and in that role, chairs non-management executive sessions of the Board. Ms. Reed has been appointed the chair of the Audit Committee. As discussed in the Company’s Principles of Corporate Governance, our employees, stockholders or other third parties who wish to communicate with the Board of Directors other than through the Chairman may communicate directly to the lead director or to the chair of the Audit Committee of the Board. Communications to Dr. Sanders and Ms. Reed, respectively, may be addressed to Dr. Sanders at c/o Genentech, Inc., 1 DNA Way, South San Francisco, CA 94080-4990 or via e-mail at csanders@gene.com, and to Ms. Reed at c/o Genentech, Inc., 1 DNA Way, South San Francisco, CA 94080-4990 or via e-mail at reed.debra@gene.com.

 

Director Nomination

 

Under our bylaws, our Nominations Committee is composed of three members of which two are Roche directors (Mr. Burns and Dr. Hunziker) and one is an independent director (Dr. Boyer). Roche’s representation on this committee is subject to its ownership percentage of our stock as described in greater detail in “Membership of Committees” under “Relationship with Roche.” The Nominations Committee does not have a formal written charter.

 

The Nominations Committee will consider director candidates for the Board of Directors recommended by our stockholders. Under our bylaws, to be considered, stockholders who wish to recommend a candidate for the Board should send a letter to our Corporate Secretary, c/o Genentech, Inc., 1 DNA Way, South San Francisco, CA 94080-4990, with the following information: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of our stock that are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any additional information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant to SEC rules. Our bylaws require that any director nominee not designated by Roche be approved by a majority of the members of the Nominations Committee.

 

Pursuant to our Bylaws, the Board’s process for identifying and evaluating potential directors depends on whether such an individual is (i) a nominee of Roche, (ii) a management director or (iii) an independent director as defined in our bylaws. Roche identifies all of its director nominees to our Board without input from the Company or the other non-Roche Board members. If the Board wishes to identify a management director, such individual may be identified as a director nominee by existing

Board member(s) or executive management at the Company. If the Board of Directors wishes to identify new independent director candidates for Board membership, it may retain a third party executive search firm to help identify prospective director nominees. At the request of the Company, the search firm may also screen candidates, conduct reference checks, prepare a biography of each candidate for Board or Nominations Committee review, and if appropriate, schedule interviews with the Board or Nominations Committee. The evaluation of management and independent director candidates will take place on the same basis regardless of whether the candidate was recommended by a search firm, a stockholder or identified through any other source.

 

The Board’s desired minimum qualifications for a director nominee depend on whether such individual is a Roche or non-Roche designee. The Board has not established any minimum criteria for Roche designees as such individuals are identified for nomination by Roche. For any independent director nominees, the nominee must meet the Company’s bylaw requirements for being considered an independent director, and if such nominee will serve on the Audit Committee, also the SEC and NYSE criteria for independence. In addition, with respect to management or independent director nominees, the Board assesses character, judgment, business acumen and experience.

 

Any other minimum qualifications will be determined by the Board on a case-by-case basis as any such qualifications may vary, depending on whether the Board desires to fill a vacant seat or increase the size of the Board to add new directors. In addition, the Nominations Committee may also evaluate whether a potential director nominee’s skills are complementary to existing Board members’ skills or meet the Board’s need for operations, management, commercial, financial, international or other expertise. We believe that all director nominees should possess the highest personal and professional ethics and be committed to representing both the short-term and long-term interests of our stockholders.

 

CORPORATE GOVERNANCE

 

Our Board of Directors has formally adopted Principles of Corporate Governance that guide its actions with respect to the composition of the Board, Board functions and responsibilities, the Board’s standing committees, and Board involvement in compliance and ethics matters affecting the Company.

 

The Board expects all directors, as well as officers and employees, to act ethically at all times and to adhere to the policies comprising our code of ethics known as the Genentech Good Operating Principles. The Board also expects the Chief Executive Officer (“CEO”), the Chief Financial Officer, Chief Accounting Officer, Controller and all other senior financial officials to adhere to the Company’s Code of Ethics for the CEO and Senior Financial Officials.

 

The Principles of Corporate Governance, the Genentech Good Operating Principles and the Code of Ethics for the CEO and Senior Financial Officials can be accessed on our website at www.gene.com. These documents are also available in print to any stockholder who requests them by contacting our Investor Relations department at (650) 225-4150 or by sending an e-mail to investor.relations@gene.com.

2006 DIRECTOR COMPENSATION

 

The following information outlines the compensation paid to our Non-Employee Directors, including annual board and committee retainer fees, and meeting attendance fees for the fiscal year ended December 31, 2006:

 

 

 

Compensation information for our employee director, Dr. Levinson, is included in the Section entitled “Compensation of Named Executive Officers” beginning on Page 26.

PROPOSAL 2 — RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

 

The Audit Committee of the Board of Directors has selected Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2007 and has directed management to submit the selection of Ernst & Young LLP for ratification by the stockholders at the Annual Meeting.

 

Ernst & Young LLP has audited our financial statements since our inception in 1976. Representatives of Ernst & Young LLP will be present at the Annual Meeting, will have the opportunity to make a statement if they desire to do so and will be available to respond to questions from stockholders.

 

Stockholder ratification of Ernst & Young LLP as our independent registered public accounting firm is not required by our bylaws or otherwise. The Board of Directors is seeking such ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm, the Audit Committee of the Board of Directors will consider whether to retain that firm for the year ending December 31, 2007.

 

A majority of the shares present in person or by proxy and entitled to vote at the Annual Meeting is required for approval of this proposal.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR APPROVAL OF PROPOSAL 2.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The aggregate fees billed by Ernst & Young LLP to the Company for fiscal years 2006 and 2005 for the professional services described below are as follows:

 

 

 

AUDIT COMMITTEE MATTERS

 

The Audit Committee of the Board of Directors consists of Drs. Boyer and Sanders and Ms. Reed, with Ms. Reed acting as the Chair of the Audit Committee. Ms. Reed was appointed the Chair of the Audit Committee on April 19, 2006, prior to which Dr. Sanders served as Chair. The Audit Committee meets regularly with management, the independent registered public accounting firm, and the general auditor, both jointly and separately, has sole authority to hire and fire the Company’s independent registered public accounting firm, and reviews our financial reporting process on behalf of the Board. The Audit Committee operates under a formal written charter available on the Company’s website at www.gene.com. The charter is available in print to any stockholder who requests it by contacting our Investor Relations department at Genentech, Inc., 1 DNA Way, South San Francisco, California 94080-4990 or by telephone at (650) 225-4150.

 

Each member of the Audit Committee is an independent director in accordance with NYSE corporate governance listing standards. In addition, the Board has determined that each member of the Audit Committee does not have a material relationship with the Company or Roche either directly or as a partner, stockholder or officer of any organization that has a relationship with the Company or Roche. Furthermore, the Board has determined that each Audit Committee member is “financially literate” and that Ms. Reed and Dr. Sanders have “accounting or related financial management expertise” in accordance with NYSE corporate governance listing standards. The Board determined that Ms. Reed also qualifies as an “audit committee financial expert” as defined under SEC rules.

 

The Audit Committee pre-approves all audit and other permitted non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is subject to a budget. Our independent registered public accounting firm and senior management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with a pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. The Audit Committee has delegated the authority to grant pre-approvals to Ms. Reed, the committee chair, when the full Audit Committee is unable to do so. These pre-approvals are reviewed by the full Audit Committee at its next regular meeting. In 2006, all audit and non-audit services were pre-approved in accordance with the Company’s policy.

AUDIT COMMITTEE REPORT⁽¹⁾

 

The Audit Committee has prepared the following report on its activities with respect to our audited financial statements for the year ended December 31, 2006.

 

Our management is responsible for the preparation, presentation and integrity of our financial statements. Management is also responsible for maintaining appropriate accounting and financial reporting practices and policies as well as internal controls and procedures designed to provide reasonable assurance that the Company is in compliance with accounting standards and applicable laws and regulations.

 

The independent registered public accounting firm is responsible for planning and performing an independent audit of our financial statements in accordance with auditing standards generally accepted in the United States and for auditing management’s assessment of the effectiveness of internal control over financial reporting. The independent registered public accounting firm is responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States.

 

In this context, the Audit Committee has reviewed and discussed the audited financial statements for the year ended December 31, 2006 with management and the independent registered public accounting firm, Ernst & Young LLP. The Audit Committee has also discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. Ernst & Young LLP has provided the Audit Committee with the written disclosures and letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with the independent registered public accounting firm that firm’s independence.

 

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements referred to above be included in Genentech’s Annual Report on Form 10-K for the year ended December 31, 2006.

 

From the members of the Audit Committee of Genentech:

 

            Herbert W. Boyer

            Debra L. Reed

            Charles A. Sanders

 

 

⁽¹⁾ The material in this report is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language in those filings.

BENEFICIAL OWNERSHIP
OF PRINCIPAL STOCKHOLDERS, DIRECTORS AND MANAGEMENT

 

The following information outlines the number of shares of our Common Stock beneficially owned as of January 31, 2007 by (a) each stockholder known to us to beneficially own more than 5% of our Common Stock, (b) each of our directors, (c) our Chief Executive Officer, Chief Financial Officer, and our three additional most highly compensated executive officers (the “Named Executive Officers” or “NEOs”), and (d) our directors, director nominees and executive officers as a group. In general, “Beneficial Ownership” refers to shares that an individual or entity has the power to vote or dispose of, and any rights to acquire Common Stock that are currently exercisable or will become exercisable within 60 days of January 31, 2007. Unless otherwise indicated, each person named below holds sole investment and voting power, other than the powers that may be shared with the person’s spouse under applicable law.

 

 

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Our compensation programs are designed to attract and retain employees and reward them for their efforts toward helping us achieve our short-term and long-term goals. Compensation programs in which our NEOs participate are additionally designed to be equitable and competitive with the compensation programs of companies with whom we compete for new employees, and link pay to performance and stockholder returns over the long-term.

 

Objectives of Compensation

 

As discussed in greater detail below, compensation for our NEOs consists of four elements: base salary, bonus, stock options, and benefit programs. With respect to each element of compensation, the Compensation Committee is guided by the following objectives:

 

Competitiveness: to pay our NEOs compensation that taken as a whole is competitive with that of NEOs in similar positions at a group of 14 comparator companies in the pharmaceutical and biotechnology industries;

 

Corporate Performance: to base a portion of compensation on achievement of our financial and strategic goals for the fiscal year as well as on our performance relative to the performance of the comparator companies;

 

Individual Performance: to base a portion of compensation on individual responsibilities, contributions and performance during the past year;

 

Cost-effectiveness: to make fiscally responsible decisions and allocate resources in a manner that supports our business objectives; and

 

Equitable Compensation: to provide compensation programs that are broad-based for all employees and provide reward levels commensurate with relative position in the Company.

 

Across all compensation and benefits elements we review information from a group of comparator companies to set our NEOs’ compensation and benefits to be competitive with that of NEOs in similar positions at these comparator companies and to achieve a balance of incentives to help achieve our performance objectives. The group of fourteen comparator companies is selected based on industry and scope (market capitalization and revenue) and consists of the following companies: Abbott Laboratories, Allergan, Inc., Amgen Inc., Biogen IDEC Inc., Bristol Myers-Squibb Company, Eli Lilly and Company, Genzyme Corporation, Gilead Sciences, Inc., Johnson & Johnson, MedImmune, Inc., Merck & Co., Inc., Pfizer Inc., Schering-Plough Corporation, & Wyeth (the “comparator group”). Data from the comparator group is adjusted using regression analysis to reflect our size and scope (revenue and market capitalization). Specific benchmarking elements include base salaries, target bonuses and actual bonuses paid, actual annual equity awards, total cash compensation, benefits and total compensation. The Compensation Committee has reviewed the compensation paid by our comparator companies for the past fiscal year and in doing so considered industry segment, revenue level, and market capitalization.

 

Elements of Compensation

 

Base Salary

 

We pay base salaries to compensate our NEOs for performing specific job responsibilities. Base salaries represent a fixed portion of compensation and vary by position.

 

Our base salary program for NEOs follows the same methodology used for all employees in terms of our benchmarking and positioning relative to the comparator group. We consider a broad set of factors in setting base salary for our NEOs including an individual’s current base salary, individual performance, total cash and total direct compensation as it compares to the market, and the relationship of pay to other senior officers in the Company.

 

The benchmarking process for our NEOs is conducted annually and includes a review of aggregate compensation of each executive officer position. We use available proxy statement data and published compensation survey sources for this review and assessment. Survey data sources are weighted to

approximate our anticipated revenue level in the next fiscal year. Finally, we consider total cash and total compensation levels in our annual assignment of base salaries. Corporate performance is not a direct factor in the design and administration of our base salary programs except insofar as we use the comparator group to determine base salary levels. The base salaries for each of our NEOs were at or below the 50th percentile of base salaries for their respective positions in companies in the comparator group or in the compensation surveys utilized. Dr. Levinson declined a salary increase in 2006.

 

Bonus

 

We choose to award bonuses in order to reward annual performance and bonuses are expressly linked to successful achievement of pre-specified annual corporate performance goals. Among all compensation to NEOs, bonuses provide the most direct link between compensation levels and annual corporate performance. Our bonus program for our NEOs is the same program as that utilized with our other employees. Bonuses are paid in cash.

 

Overall Bonus Pool Funding: Our bonus pool funding is based on an analysis of bonus funding levels as a percent of net income at our comparator group, as well as broader biotechnology and pharmaceutical companies (the “bonus pool comparator group”). Our bonus pool funding is composed of two parts — a base bonus pool and an incremental bonus pool. The base bonus pool, which is linked to performance of specific annual corporate objectives, targets the 50^th percentile of net income percentage bonus pool contribution used by the bonus pool comparator group. The incremental bonus pool, which is linked to earnings per share (“EPS”) and operating revenue growth relative to the comparator group, targets up to the 75^th percentile of net income percentage bonus pool contribution used by the bonus pool comparator group.

 

Corporate performance goals: The Compensation Committee approves performance goals annually at its December meeting for the subsequent fiscal year. Our performance on these goals determines the amount of funds available in the bonus pool and if a bonus will be paid to all eligible employees, including NEOs. For fiscal year 2006, the corporate performance goals linked to the base bonus pool were as follows: (i) corporate and financial performance, including increasing earnings per share, meeting specific productivity goals and managing operational budgets within specified targets; (ii) commercial performance, including increasing U.S. product sales, both generally and with respect to specific products, increasing margins resulting from the sale of our products and meeting certain compliance objectives; (iii) research and development performance, including timing of regulatory filings, initiating or completing specified clinical trials, investigating the use of new products, selecting new products for development and entering into in-licensing arrangements; (iv) product operations and regulatory, quality and compliance performance, including maintaining target levels of inventory, operating at budgeted cost of production and achieving certain regulatory objectives; and (v) employee development performance, focused on enhancing leadership and management development. In addition, there were two corporate performance goals, linked to the incremental bonus pool, including earnings per share growth relative to the comparator group and operating revenue growth relative to the comparator group.

 

The corporate performance goals for bonuses seek to balance the desire for immediate increase in earnings and improvement in other financial performance measures and the longer term goal of enhancing stockholder value by bringing to market many of the potential therapies in our research and development pipeline. Each performance goal associated with the base bonus pool has an associated dollar value which contributes to the overall bonus pool only if the goal is achieved. In 2006, based on performance against the corporate performance goals, 96% of the total potential base bonus pool funding was achieved and 100% of the total potential incremental bonus pool funding was achieved.

 

Individual performance targets: Bonus targets, expressed as a percent of salary for the CEO and other NEOs, are set annually based on an evaluation of proxy statement data of the comparator group over the preceding five years to determine bonus percentages within competitive practice and are intended to correspond to 50th percentile bonus awards for the comparator group. The targets for the 2006 bonus were 107% of base salary for the CEO, 78% of base salary for the President, Product Development, and 71% of base salary for other NEOs. The bonus award percentage is applied to the

greater of 2006 base salary or 2006 market median base salary (based on a composite of comparator group and survey data) to arrive at the recommended bonus. For the CEO and each other NEO, the Compensation Committee has set the upward bound of bonus allocation as 2.25 times each person’s respective target. The Compensation Committee benchmarked competitive practice on bonus ranges for NEOs and found that the maximum bonus was generally set between 2 times and 2.5 times the target bonus for each NEO. The CEO’s and other NEOs’ actual bonus award can range from 0 to a maximum of 2.25 times target, depending on corporate and individual performance.

 

Bonuses awarded: The bonus awarded to our CEO and other NEOs was based on the Company exceeding the corporate performance goals as described above and the Compensation Committee’s recognition that our CEO’s and NEOs’ performance in our achievement of those goals played a significant role in the Company’s ability to exceed the 90th percentile of our comparator group with respect to EPS and operating revenue growth.

 

Stock Options

 

Stock option awards are intended to align the interests of our NEOs with those of our stockholders and to motivate our NEOs with respect to the Company’s long term performance.

 

Eligible Persons: All regular, full-time employees are eligible to receive stock options under the Genentech, Inc. 2004 Equity Incentive Plan (the “2004 Equity Incentive Plan”), including our NEOs. We currently grant only non-qualified stock options to our NEOs and other employees. We do not have equity ownership guidelines for our NEOs.

 

Timing of Grants and Exercise Price: Annual grants are awarded each September to NEOs and other designated employees at the regularly scheduled meeting of the Compensation Committee. The exercise price for these grants is equal to the closing fair market value of our Common Stock on the date the Compensation Committee approves the grant. For new-hire grants, options are typically provided as part of a NEO’s offer package. The Compensation Committee approves new-hire stock option awards for NEOs as well as other executive officers, and has delegated the authority to the Chairman to approve all other new-hire stock option awards. For non-executive officers, new-hire stock options are granted by the Chairman either on the date of approval or if the non-executive officer is not yet an employee, then effective as of the first day of employment with the Company. For those other employees who receive grants as new hires, it is our process to grant stock options on or shortly after the first day of their employment, with the grant date based on the date of approval by the Chairman. Given that both annual and new-hire grants to NEOs are made using a fixed-date approach, the Compensation Committee does not consider the release or possession of material non-public information in determining grant dates.

 

Option Pool: Annually, an independent compensation specialist benchmarks data using publicly available information from Forms 10-K and proxy statements of the comparator group to determine competitive award pool sizes as a percent of shares outstanding. A regression analysis is performed using the comparator group’s 3-year average market capitalization and 3-year average equity award usage. The appropriate annual pool size for Genentech is determined by plotting on the regression curve created by the regression analysis our average market capitalization in mid-July. As stock options are now considered an expense under FAS 123R, we consider the impact of the expense on earnings as one factor in determining the size of the stock option pool.

 

Individual Grants: A multi-step process is used by the Committee to determine grants to NEOs. For annual grants, option target amounts are established by first identifying the median size of option grants made by the comparator group to their respective NEOs in terms of the percentage of all options granted during the years included in the analysis. In addition, in connection with the 2006 grant, the Compensation Committee considered the fair value of those awards, using a Black-Scholes analysis, of equity awards made to NEOs of the comparator group over the past three years. The 2006 final award size is based on the Committee’s subjective evaluation of a variety of factors such as the retention value of the options to be granted, the individual’s performance as measured by the success of the Company, the individual’s expected future contributions, and total cash and total direct

compensation levels for our NEOs. New hire stock option awards are based on a fixed number of shares that are set annually based on internal practice and competitive market information. Annual and new-hire option grants typically vest over four years, with the first 25 percent vesting one year from the date of the grant, and the remaining shares vesting monthly over the following 36 months.

 

Benefit Programs

 

We choose to offer our health, welfare, stock purchase and retirement programs in order to provide all employees with a level of health and financial security. In addition, they are intended to differentiate Genentech as an employer of choice in attracting and retaining employees. Our benefit programs for NEOs include the following components: medical, dental, vision, the executive medical plan, the employee stock purchase plan, life and accidental death and dismemberment insurance, short-term disability, long-term disability, employee assistance program, counseling and resource services, flexible spending accounts, paid time off, pre-tax commuter benefits, discounted services (home, auto, legal and long-term care insurance), certain security services for our CEO, the Genentech, Inc. Tax Reduction Plan (the “401(k)”) plan and the Genentech, Inc. Supplemental Plan (the “Supplemental Plan”). Genentech sets its benefits at competitive levels after benchmarking our programs against comparator companies on an annual basis. Additionally, we use standard business practices to assure that benefits are provided in the most cost-effective manner.

 

In general, Genentech provides the same benefit programs to all regular, full-time employees within the Company. The only benefit programs available to NEOs but not available to all regular, full-time employees are (i) the Supplemental Plan, a non-qualified supplemental employee retirement plan that operates in parallel with the 401(k) Plan, and in which we credit each eligible participant with an amount equal to the additional contributions that he or she would have received under the 401(k) Plan, assuming that he or she had been allowed to participate in the 401(k) Plan without regard to certain Internal Revenue Code limits on eligible compensation and contribution amounts (ii) the Executive Medical Program, an annual comprehensive medical examination for our officers, staff scientists and certain other senior scientists, and (iii) home security services, as certain of our executive officers have in the past received, and our CEO currently receives, such security services. We do not currently provide change of control or employment agreements for our NEOs.

 

We work with consultants to limit our program costs, and use competitive bidding for certain programs such as our employee medical plan. In some cases, we conduct focus groups and use employee surveys to determine whether we are allocating our benefit dollars in an economical manner.

 

Decision-Making

 

The Compensation Committee (i) reviews and approves our annual bonus pool and associated corporate goals, annual stock option grants and cash compensation for our NEOs; (ii) administers our equity incentive plans, bonus program and certain other corporate benefits programs; and (iii) elects executive officers of the Company.

 

Since our compensation programs apply to all employees, including executive officers, our CEO and the other NEOs are responsible for establishing the general parameters of each program, but the Compensation Committee approves those aspects of each program that apply to our NEOs. Within each program our NEOs do not participate in setting the specific reward levels that apply to their own positions.

 

The salary increase, bonus, and stock option award for each NEO is determined solely by the Compensation Committee after a review of the factors described above. The CEO recommends salary increases, bonus amounts and stock option grant amounts for other NEOs, and the Compensation Committee approves any increases, bonuses or option grants after reviewing the supporting market data and other Company and individual performance information. Senior human resources management, after consultation with an independent consultation specialist, recommends the CEO’s salary increase, bonus amount and stock option amount, and the Compensation Committee approves any increases, bonus or option grant after reviewing the supporting market data and other company and CEO performance information.

 

COMPENSATION OF NAMED EXECUTIVE OFFICERS

 

The following information outlines the compensation paid to our Named Executive Officers, including salary, bonuses, stock options and other compensation for the fiscal year ended December 31, 2006:

 

SUMMARY COMPENSATION TABLE FOR 2006

 

 

GRANTS OF PLAN-BASED AWARDS IN 2006

 

The following information sets forth grants of plan-based awards made to the Named Executive Officers during the fiscal year ended December 31, 2006.

 

 

With respect to Non-Equity Incentive Plan Awards, for fiscal year 2006, the Compensation Committee set specific corporate targets and goals in the following five categories (weighting of such indicated): (i) corporate/financial goals relating to achievement of certain financial measures, including growth in earnings per share (on a non-GAAP basis, subject to certain adjustments), pre-tax operating margin and risk management measures (weighted 31%), (ii) commercial goals relating to product sales, expenses and processes (weighted 24.5%), (iii) research and development goals relating to projects in our pipeline (weighted 24.5%), (iv) product manufacturing and regulatory, quality and compliance goals relating to product inventory levels, regulatory approvals and other manufacturing matters (weighted 15%) and (v) employee development goals relating to leadership succession (weighted 5%). The total size of the potential bonus pool is a specific percentage of net income (on a non-GAAP basis, subject to certain adjustments). This percentage is set based on benchmark data from pharmaceutical and biotechnology companies obtained from an independent survey source. An additional amount may be added to the bonus pool if we achieve earnings per share growth (on a non-GAAP basis, subject to certain adjustments) and operating revenue growth that is above the median of those same financial measures from a group of comparator companies in the pharmaceutical and biotechnology industries, some of which also act as the source of the benchmark data described above. The actual bonuses paid to the Named Executive Officers for fiscal year 2006 were based on the extent to which actual performance met, exceeded, or fell short of the corporate goals approved by the Compensation Committee. Generally, if we achieve performance metrics equal to 50% of our comparator group, Dr. Levinson, Dr. Hellmann, Mr. Ebersman, Dr. Scheller and Mr. Juelsgaard would receive bonuses equal to 107%, 78%, 71%, 71% and 71% of the greater of their respective base salaries or market median base salaries, and higher amounts may be paid if we exceed this performance target. However, the Compensation Committee retains the discretion to increase, reduce or eliminate the bonus that otherwise might be payable to any individual based on actual performance as compared to pre-established goals.

 

The options granted in 2006 to our Named Executive Officers were pursuant to the 2004 Equity Incentive Plan. Generally, stock options granted to employees have a maximum term of 10 years, and

vest over a four year period from the date of grant: 25% vest at the end of one year, and 75% vest monthly in equal increments over the remaining three years. We may grant options with different vesting terms from time to time. When an employee over the age of 65 retires, the portion of the option that would have vested in the 12 month period following the retirement date, if the retiree had remained an employee, automatically becomes fully vested. The expiration date of the exercisable portion of the option remains the original expiration date at the time the option was granted. Unless an employee’s termination of service is due to retirement, disability or death, upon termination of service, any unexercised vested options will be forfeited at the end of three months or the expiration of the option, whichever is earlier.

 

NON-QUALIFIED DEFERRED COMPENSATION FOR 2006

 

The following information outlines the non-qualified deferred compensation given to the Named Executive Officers as of December 31, 2006.

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL 2006 YEAR-END

 

The following information outlines outstanding equity awards held by the Named Executive Officers as of December 31, 2006. All information in this Proxy Statement relating to the number of shares and price per share of our Common Stock give effect to the November 1999, October 2000 and May 2004 two-for-one splits of our Common Stock.

 

 

OPTION EXERCISES AND STOCK VESTED IN 2006

 

The following information sets forth stock options exercised by the Named Executive Officers as of December 31, 2006.

 

 

 

 

EQUITY COMPENSATION PLANS

 

We show below information as of December 31, 2006 regarding our equity compensation plans under which our Common Stock is authorized for issuance.

 

 

 

COMPENSATION COMMITTEE MATTERS

 

The Compensation Committee is responsible for reviewing and approving the Company’s compensation and benefits plans, programs and policies and determining the compensation of our executive officers, including that of Dr. Levinson, our Chairman and CEO. The Compensation Committee is comprised of all the directors except Dr. Levinson. The Compensation Committee has the authority to retain a compensation consultant to assist the Compensation Committee in the evaluation of the compensation of the Company’s CEO or other executive officers. The Compensation Committee has the sole authority to retain or terminate any arrangements, and to approve the fees and other terms with respect to such a compensation consultant. The Compensation Committee also has the authority as necessary and appropriate, to consult with other outside advisors to assist in its duties to the Company. The Compensation Committee uses two different consultants to help determine executive compensation. Mercer Human Resources Consulting provides benchmarking data which is used in assessing certain information of our comparator companies. This benchmarking data is used in determining the amount of base salaries only and does not apply to bonuses or stock option awards. Frederick W. Cook & Co., Inc. provides data relating to our overall pool of stock options which allows us to assess whether the percentage of our overall pool awarded to executive officers is set at a competitive level, and in turn helps us determine the appropriate grant size for our executive officers. We do not use compensation consultants to assist us with director compensation. Please see “Compensation Discussion and Analysis” beginning on page 22 for further information concerning our compensation programs. The Compensation Committee operates under a formal written charter available on the Company’s website at www.gene.com. The charter is available in print to any stockholder who requests it by contacting our Investor Relations department at Genentech, Inc., 1 DNA Way, South San Francisco, California 94080-4990 or by telephone at (650) 225-4150.

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

For fiscal year 2006, our Compensation Committee consisted of Mr. Burns, Ms. Reed and Drs. Boyer, Hunziker, Knowles and Sanders.

 

Dr. Boyer, a co-founder of the Company, was a Vice President of Genentech from 1976 to 1991.

 

Mr. Burns was appointed Chief Executive Officer of the Pharmaceuticals Division of The Roche Group in 2005 and from 2001 to 2004 was Head of such division. He is a member of the Corporate Executive Committee of The Roche Group.

 

Dr. Hunziker joined The Roche Group as Chief Financial Officer in 2001. He is a member of the Corporate Executive Committee of The Roche Group.

 

Dr. Knowles joined The Roche Group in 1997 as Head of Global Research. He is a member of the Corporate Executive Committee of The Roche Group.

 

Pursuant to the terms of the affiliation agreement, Mr. Burns and Drs. Hunziker and Knowles are serving on our Compensation Committee as designees of Roche. See “Relationship with Roche” above and “Certain Relationships and Related Person Transactions” below for a description of our relationship with Roche.

COMPENSATION COMMITTEE REPORT⁽¹⁾

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the registrant’s proxy statement on Schedule 14A.

 

From the members of the Compensation Committee of Genentech:

 

Herbert W. Boyer
William M. Burns
Erich Hunziker
Jonathan K. C. Knowles
Debra L. Reed
Charles A. Sanders

 

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

 

See “Relationship with Roche” beginning on Page 4 for a discussion of certain of our agreements with Roche and Hoffman-La Roche.

 

Related Person Transactions in 2006

 

In 2006, under all our agreements and arrangements with Roche, contract revenue from Hoffmann-La Roche and its affiliates, including amounts earned related to ongoing development activities after option exercise dates, totaled $125 million. All other revenues from Roche, Hoffmann-La Roche and their affiliates, principally royalties and product sales, totaled $1,205 million in 2006. Cost of sales included amounts related to Hoffmann-La Roche of $268 million in 2006. R&D expenses in 2006 include amounts of $213 million related to our R&D collaboration with Roche.

 

In July 2006, we signed two new product supply agreements with Hoffmann-La Roche (and certain of its affiliates), which supplement and supersede existing product supply agreements with Hoffmann-La Roche (and certain of its affiliates). Under a short-term supply agreement, Hoffmann-La Roche has agreed to purchase specified minimum amounts of Herceptin, and specified maximum amounts of Avastin and Rituxan through 2008. Under a longer-term umbrella supply agreement, Hoffmann-La Roche has agreed to purchase specified minimum amounts of Herceptin and Avastin from 2009 through 2012 and, on a perpetual basis, either party may order other collaboration products from the other party, including Herceptin and Avastin after 2012, pursuant to certain forecast terms. The longer-term umbrella supply agreement also provides that either party may terminate its obligation to purchase and/or supply Avastin and/or Herceptin with six years notice on or after December 31, 2007.

 

In 2001, we made a loan of $150,000 to Dr. Richard Scheller as mortgage assistance. This loan was due and payable on the earliest of the fifth anniversary of the date of the loan, the date of termination of Dr. Scheller’s employment with Genentech or sale of his residence; provided, however, that the principal amount of the loan would be forgiven in five equal installments of $30,000 on each anniversary date of the loan if Dr. Scheller is employed by Genentech on such dates. The largest principal amount outstanding under this loan during 2006 was $30,000. The loan had no outstanding balance as of December 31, 2006. The loan was interest-free to Dr. Scheller, but interest was required to be imputed under the Internal Revenue Code. Imputed interest in the amount of $881 was calculated based on the applicable federal rate of 4.93% and, together with the forgiven principal amount of $30,000 on the fifth anniversary of the loan, reported as taxable compensation to Dr. Scheller. Additional taxable compensation attributable to the imputed interest and the forgiven principal amount was grossed up for related taxes resulting in a tax payment by Genentech of $743 and $16,693, respectively, on behalf of Dr. Scheller. For purposes of the discussion above, applicable federal rate refers to the minimum interest rate required to be charged on a loan to avoid the imputation of interest income under the Internal Revenue Code, unless an exception applies.

 

In early 2004, we made a loan of $1,000,000 to Dr. Patrick Yang (at such time Dr. Yang was not an executive officer) for the purchase of a home in connection with Dr. Yang’s relocation to the San Francisco Bay Area. The loan was due and payable on the earlier of five years from the date of the loan, the date of termination of Dr. Yang’s employment with Genentech, the sale of his home or the occurrence of any other event specified in the promissory note representing the loan. The loan accrued interest at the applicable federal rate of 3.31%, compounded semi-annually, subject to adjustment as specified in the promissory note. The largest amount outstanding under the loan during 2006 was $1,000,000. In 2006, $67,862 in accrued and unpaid interest was forgiven by Genentech. This loan was repaid in early 2006 and had no outstanding balance as of December 31, 2006.

 

The spouse of Dr. Patrick Yang is employed at Genentech in a non-officer position and in a group outside of Product Operations, the group headed by Dr. Yang. Her salary and bonus in 2006 totaled approximately $134,000, and are commensurate with the compensation of other Genentech employees in similar positions.

 

Policies and Procedures for Approval of Related Person Transactions

 

Our policy and procedures with respect to any related person transaction between the Company and any related person requiring disclosure under Item 404(a) of Regulation S-K under the Securities Exchange Act of 1934, is that such transaction is consummated only if the Audit Committee approves or ratifies such transaction; the disinterested members of the Board of Directors approves or ratifies such transaction; or the transaction involves compensation approved or ratified by the Compensation Committee. The Board of Directors has adopted a written policy reflecting the policy and procedures identified above.

 

STOCKHOLDER PROPOSALS

 

Requirements for Stockholder Proposals to be Brought Before the Annual Meeting. Our bylaws provide that, for recommendations of candidates for election to the Board of Directors or other proposals to be considered at an annual meeting of stockholders, the stockholder must have given written notice to our Corporate Secretary, c/o Genentech, Inc., 1 DNA Way, MS 49, South San Francisco, California 94080-4990, not less than 90 days before the one-year anniversary of the date on which we first mailed our Proxy Statement to stockholders in connection with the previous year’s annual meeting of stockholders. To be timely for the 2008 Annual Meeting of Stockholders, a stockholder’s notice must be delivered or mailed and received at our principal executive offices by December 16, 2007. However, in the event that the annual meeting has been changed by more than 30 days from the date of the prior year’s meeting, notice by the stockholder must be received not later than the later of 90 days in advance of such annual meeting and ten days following the date on which public announcement of the date of the meeting is first made. In addition to the timing requirements stated above, any stockholder proposal to be brought before the annual meeting must set forth (A) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on our books, of the stockholder proposing such business, (C) the class and number of shares of our Common Stock that are beneficially owned by the stockholder, (D) any material interest of the stockholder in such business, and (E) any additional information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “1934 Act”).

 

Requirements for Stockholder Proposals to be Considered for Inclusion in the Company’s Proxy Materials.  In addition to the requirements stated above, our stockholders who want to submit proposals for inclusion in our proxy materials must comply with Rule 14a-8 promulgated under the 1934 Act. For such proposals to be included in our proxy materials next year relating to our 2008 Annual Meeting of stockholders, all applicable requirements of Rule 14a-8 must be satisfied and we must receive such proposals no later than November 16, 2007. Such proposals must be delivered to our Corporate Secretary, c/o Genentech, Inc., 1 DNA Way, MS 49, South San Francisco, California 94080-4990.

 

The Company was not notified by any stockholder of his or her intent to present a stockholder proposal from the floor at this year’s annual meeting. The enclosed proxy card grants the proxy holders discretionary authority to vote the proxies held by them on any matter properly brought before the Annual Meeting.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the 1934 Act requires our directors, executive officers and those persons owning more than 10% of our equity securities to file reports of holdings and transactions in our equity securities with the SEC. Copies of these reports are required to be furnished to us. We believe that all Forms 3, 4 and 5 required to be filed were filed on time during 2006.

 

HOUSEHOLDING

 

“Householding” means that we may deliver a single set of proxy materials to households with multiple stockholders, provided certain conditions are met. We will continue to provide only one set of proxy materials to each such household, unless we receive contrary instructions.

 

We will promptly deliver separate copies of our Proxy Statement and annual report at the request of any stockholder who is in a household that participates in the householding of our proxy materials. In addition, you may request that we deliver separate copies in the future. In either case, you may send your request by mail to our Investor Relations department at Genentech, Inc., 1 DNA Way, South San Francisco, California 94080-4990 or by telephone at (650) 225-4150.

 

If you currently receive multiple copies of the company’s proxy materials and would like to participate in householding, please contact our Investor Relations department at the address or phone number described above.

 

OTHER MATTERS

 

The Board of Directors knows of no other business to be presented at the Annual Meeting, but if other matters do properly come before the Annual Meeting, it is intended that the persons named on the proxy card will vote on those matters in accordance with their best judgment.

Annual Meeting Proxy Card		123456		C0123456789		12345

6 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 6

A		Proposals — The Board of Directors recommends a vote FOR the nominees for director listed below and FOR Proposal 2.

1. Election of Directors:

For

Withhold

For

Withhold

For

Withhold

01 — Herbert W. Boyer

o

o

02 — William M. Burns

o

o

03 — Erich Hunziker

o

o

04 — Jonathan K.C. Knowles

o

o

05 — Arthur D. Levinson

o

o

06 — Debra L. Reed

o

o

07 — Charles A. Sanders

o

o

B		Non-Voting Items

C		Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below

Please sign exactly as name appears on this card. When signing as attorney, executor, administrator, trustee or guardian, please give full title. If more that one trustee, all should sign. All joint owners must sign.

6 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.6

PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 20, 2007

The undersigned appoints Stephen G. Juelsgaard and Arthur D. Levinson, and each of them, as proxies of the undersigned, each with full power of substitution, to vote all of the shares of common stock of Genentech, Inc. (“Genentech”) held of record by the undersigned as of February 20, 2007 at the Annual Meeting of Stockholders of Genentech to be held at the Clarion Hotel, 401 East Millbrae Avenue, Millbrae, California on Friday, April 20, 2007, commencing at 10:00 a.m., local time, and at any adjournment or postponement of the Annual Meeting, with all powers that the undersigned would possess if personally present, upon and in respect of the following matters and in accordance with the following instructions.

YOU MAY REVOKE THIS PROXY AT ANY TIME PRIOR TO THE VOTE AT THE ANNUAL MEETING.