<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
GENENTECH, INC.
(Name of Issuer)
GENENTECH, INC.
ROCHE HOLDINGS, INC.
(Name of Persons Filing Statement)
<TABLE>
<S> <C>
REDEEMABLE COMMON STOCK, $.02 PAR VALUE 368710208
(Title of Class of Securities) (CUSIP Number of Class of Securities)
</TABLE>
------------------------
<TABLE>
<S> <C>
JOHN P. MCLAUGHLIN, ESQ.
SENIOR VICE PRESIDENT AND SECRETARY
GENENTECH, INC. ROCHE HOLDINGS, INC.
460 POINT SAN BRUNO BOULEVARD 15 EAST NORTH STREET
SOUTH SAN FRANCISCO, CALIFORNIA 94080 DOVER, DELAWARE 19901
(415) 225-1000
</TABLE>
(Name, Address and Telephone Number of Persons Authorized to Receive Notices and
Communications on Behalf of the Persons Filing Statement)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD D. KATCHER, ESQ. PETER R. DOUGLAS, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ DAVIS POLK & WARDWELL
51 WEST 52ND STREET 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10017
(212) 403-1000 (212) 450-4000
</TABLE>
JUNE 2, 1995
(Date Proxy Statement First Published, Sent or Given to Security Holders)
This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under
the Securities Exchange Act of 1934.
b. / / The filing of a registration statement under the Securities Act of
1933.
c. / / A tender offer.
d. / / None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies. /X/
CALCULATION OF FILING FEE
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
TRANSACTION VALUATION AMOUNT OF FILING FEE
- ----------------------------------------------------------------------------------------------------------------
$2,756,253,731* $551,251
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* For purposes of calculation of fee only, this amount is based upon the product
of (i) 57,198,521, the number of outstanding shares of Redeemable Common
Stock, par value $.02 per share ("Redeemable Common Stock") of Genentech,
assuming the exercise of all Genentech warrants and stock options (whether or
not currently exercisable), not including shares of Redeemable Common Stock
held by Roche Holdings, Inc. and its affiliates, and (ii) $48.1875, the
average of the high and low sales price of a share of Redeemable Common Stock
quoted on the New York Stock Exchange on May 26, 1995 as reported in published
financial sources. In accordance with Rule 0-11 under the Securities Exchange
Act of 1934, the filing fee is determined by multiplying the amount calculated
pursuant to the preceding sentence by 1/50th of one percent. On May 31, 1995,
the Registrant transferred by electronic funds transfer to the Commission the
sum of $555,000, of which $55l,251 was used to pay the filing fee set forth
above.
/X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2).
Amount Previously Paid: $555,000
Filing Party: Genentech, Inc.
Form or Registration No.: Schedule 14A
Date Filed: June 2, 1995
<PAGE> 2
This Rule 13e-3 Transaction Statement (the "Statement") relates to a
proposed Agreement and Plan of Merger dated as of May 23, 1995 (the "Merger
Agreement") among Genentech, Inc., a Delaware corporation ("Genentech"), Roche
Holdings, Inc., a Delaware corporation ("Roche"), and HLR (U.S.) II, Inc., a
Delaware corporation and a wholly-owned subsidiary of Roche. The purpose of such
Merger Agreement and resulting conversion of Genentech Common Stock into
Genentech Special Common Stock is to, among other matters, (i) extend by four
years the period during which the publicly traded stock of Genentech is subject
to redemption by Genentech at the option of Roche, with such redemption during
such four-year period being at specified prices per share ranging from $61.25
during the quarter ending September 30, 1995 increasing $1.25 per share for the
next seven quarters and $1.50 per share for the next eight quarters to $82.00
during the quarter ending June 30, 1999 (the "Call Rights"), and (ii) provide
holders thereof the right to require Genentech to redeem all or a portion (at
the election of the holder) of their shares of such stock for a 30-business-day
period beginning in July 1999 (unless such right is accelerated following the
occurrence of certain insolvency events of Genentech) at a price of $60.00 per
share in the event that Roche does not cause the exercise of the Call Rights.
This Statement is intended to satisfy the reporting requirements of Section
13(e) of the Securities Exchange Act of 1934, as amended ("The Act"). A
preliminary proxy statement on Schedule 14A (the "Proxy Statement") was filed by
Genentech with the Securities and Exchange Commission (the "Commission")
immediately prior to the filing of this Statement pursuant to the provisions of
Regulation 14A of the Act.
The cross reference sheet below is being supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Proxy Statement of
the information required to be included in response to the items of this
Statement. The information in the Proxy Statement, including all exhibits
thereto, is hereby expressly incorporated herein by reference and the responses
to each item in this Statement are qualified in their entirety by the
information contained in the Proxy Statement.
<PAGE> 3
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM IN
SCHEDULE 13E-3 WHERE LOCATED IN THE PROXY STATEMENT
- -------------- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Item 1(a) Cover Page; BUSINESS OF GENENTECH
Item 1(b) GENERAL INFORMATION -- Record Date; Voting Rights; Proxies
Item 1(c)-(d) MARKET PRICES OF AND DIVIDENDS ON THE REDEEMABLE COMMON STOCK
Item 1(e) **
Item 1(f) CERTAIN INFORMATION CONCERNING ROCHE AND ROCHE HOLDING; PRINCIPAL STOCKHOLDERS OF GENENTECH; CERTAIN INFORMATION
CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD
Item 2(a)-(g) Cover Page; BUSINESS OF GENENTECH; CERTAIN INFORMATION REGARDING ROCHE AND ROCHE HOLDING; CERTAIN INFORMATION
CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; CERTAIN INFORMATION CONCERNING THE DIRECTORS AND
EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD
Item 3(a)(1) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 3(a)(2) THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions; CERTAIN INFORMATION CONCERNING THE
DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE AND ROCHE HOLDING
Item 3(b) THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions
Item 4(a) Pages i-ii; SUMMARY AND SPECIAL FACTORS -- Terms of the Proposed Transactions; THE PROPOSED TRANSACTIONS --
Purpose and Structure of the Transactions; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE
SPECIAL COMMON STOCK; ARTICLE ELEVENTH OF THE CERTIFICATE OF INCORPORATION; THE AMENDED GOVERNANCE AGREEMENT;
GUARANTY OF ROCHE HOLDING; THE LICENSING AGREEMENT
Item 4(b) Pages i-ii; SUMMARY AND SPECIAL FACTORS -- Terms of the Proposed Transactions; THE PROPOSED TRANSACTIONS --
Purpose and Structure of the Transactions; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE
SPECIAL COMMON STOCK; ARTICLE ELEVENTH OF THE CERTIFICATE OF INCORPORATION; THE AMENDED GOVERNANCE AGREEMENT;
GUARANTY OF ROCHE HOLDING; THE LICENSING AGREEMENT
Item 5(a)-(f) SUMMARY AND SPECIAL FACTORS; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON
STOCK; THE AMENDED GOVERNANCE AGREEMENT; GUARANTY OF ROCHE HOLDING; THE LICENSING AGREEMENT; CONDUCT OF
GENENTECH'S BUSINESS AFTER COMPLETION OF THE PROPOSED TRANSACTIONS; ROCHE'S PLANS WITH RESPECT TO GENENTECH;
INCORPORATION OF DOCUMENTS BY REFERENCE; THE PROPOSED TRANSACTIONS -- Interests of Certain Persons in the
Proposed Transactions
Item 5(g) **
Item 6(a)-(b) THE PROPOSED TRANSACTIONS -- Source of Funds; Expenses; GUARANTY OF ROCHE HOLDING
Item 6(c)-(d) **
Item 7(a)-(c) SUMMARY AND SPECIAL FACTORS; THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions; -- Purpose and
Structure of the Transactions
Item 7(d) SUMMARY AND SPECIAL FACTORS; THE PROPOSED TRANSACTIONS -- Interests of Certain Persons in the Proposed
Transactions; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK; THE AMENDED
GOVERNANCE AGREEMENT; GUARANTY OF ROCHE HOLDING; THE LICENSING AGREEMENT; CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS
Item 8(a)-(c) SUMMARY AND SPECIAL FACTORS; THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of
the Transaction; -- Opinion of Financial Advisor; MARKET PRICES OF AND DIVIDENDS ON THE REDEEMABLE COMMON STOCK;
THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK; GENERAL INFORMATION -- Required Vote
Item 8(d) *
Item 8(e) SUMMARY AND SPECIAL FACTORS; THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of
the Transaction
Item 8(f) **
Item 9(a)-(c) SUMMARY AND SPECIAL FACTORS -- Opinion of Financial Advisor; THE PROPOSED TRANSACTIONS -- Opinion of Financial
Advisor
Item 10(a)-(b) PRINCIPAL STOCKHOLDERS OF GENENTECH; SECURITY OWNERSHIP OF MANAGEMENT; CERTAIN INFORMATION CONCERNING DIRECTORS
AND EXECUTIVE OFFICERS OF THE COMPANY; CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF
ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD
Item 11 SUMMARY AND SPECIAL FACTORS; CONDUCT OF GENENTECH'S BUSINESS AFTER COMPLETION OF THE PROPOSED TRANSACTIONS;
ROCHE'S PLANS WITH RESPECT TO GENENTECH; THE MERGER AGREEMENT; THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL
COMMON STOCK; THE AMENDED GOVERNANCE AGREEMENT; GUARANTY OF ROCHE HOLDING
Item 12(a)-(b) THE PROPOSED TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the Transaction; -- Opinion of
Financial Advisor; THE MERGER AGREEMENT
Item 13(a) GENERAL INFORMATION -- No Appraisal Rights
Item 13(b) **
Item 13(c) **
Item 14 SELECTED HISTORICAL FINANCIAL DATA; INCORPORATION OF DOCUMENTS BY REFERENCE
Item 15(a) GENERAL INFORMATION -- Solicitation of Proxies
Item 15(b) GENERAL INFORMATION -- Solicitation of Proxies; THE PROPOSED TRANSACTIONS -- Source of Funds; Expenses
Item 16 **
Item 17(a) *
Item 17(b) Annex B
Item 17(c) Annex A
Item 17(d) **
Item 17(e) **
Item 17(f) **
</TABLE>
- ---------------
* The information requested by this item is not required to be included in the
Proxy Statement.
** The Item is inapplicable or the answer thereto is in the negative.
2
<PAGE> 4
ITEM 1. ISSUER AND CLASS OF SECURITIES SUBJECT TO THE TRANSACTION.
(a) The information set forth on the cover page of, and "BUSINESS OF
GENENTECH" in, the Proxy Statement/Prospectus is incorporated herein by
reference.
(b) The information set forth under "GENERAL INFORMATION -- Record
Date; Voting Rights; Proxies" in the Proxy Statement/Prospectus is
incorporated herein by reference.
(c)-(d) The information set forth in the Proxy Statement/Prospectus
under "MARKET PRICES OF AND DIVIDENDS ON THE REDEEMABLE COMMON STOCK" is
incorporated herein by reference.
(e) Not applicable.
(f) The information set forth under "CERTAIN INFORMATION CONCERNING
ROCHE AND ROCHE HOLDING", "PRINCIPAL STOCKHOLDERS OF GENENTECH" and "CERTAIN
INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE
HOLDINGS, INC. AND ROCHE HOLDING LTD" is incorporated herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
Genentech, a person filing this statement, is the issuer of the class of
equity securities which is the subject of the Rule 13e-3 transaction.
(a)-(g) Additionally, the information set forth on the cover page of
the Proxy Statement/Prospectus and under "BUSINESS OF GENENTECH," "CERTAIN
INFORMATION REGARDING ROCHE AND ROCHE HOLDING," "CERTAIN INFORMATION
CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" and "CERTAIN
INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE
HOLDINGS, INC. AND ROCHE HOLDING LTD" is incorporated herein by reference.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)(1) The information set forth in the Proxy Statement/Prospectus
under "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated
herein by reference.
(2) The information set forth in the Proxy Statement/Prospectus under
"THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions"
and "CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS
OF ROCHE AND ROCHE HOLDING" is incorporated herein by reference.
(b) The information set forth in the Proxy Statement/Prospectus under
"THE PROPOSED TRANSACTIONS -- Background of the Proposed Transactions" is
incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth in the Proxy Statement/Prospectus on
pages i-ii and under the captions "SUMMARY AND SPECIAL FACTORS -- Terms of
the Proposed Transactions", "THE PROPOSED TRANSACTIONS -- Purpose and
Structure of the Transactions", "THE MERGER AGREEMENT", "THE CHARTER
AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "ARTICLE ELEVENTH OF
THE CERTIFICATE OF INCORPORATION", "THE AMENDED GOVERNANCE AGREEMENT",
"GUARANTY OF ROCHE HOLDING", and "THE LICENSING AGREEMENT" is incorporated
herein by reference.
(b) The information set forth in the Proxy Statement/Prospectus on
pages i-ii and under the captions "SUMMARY AND SPECIAL FACTORS -- Terms of
the Proposed Transactions", "THE PROPOSED TRANSACTIONS -- Purpose and
Structure of the Transactions", "THE MERGER AGREEMENT", "THE CHARTER
AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "ARTICLE ELEVENTH OF
THE CERTIFICATE OF INCORPORATION", "THE AMENDED GOVERNANCE AGREEMENT",
"GUARANTY OF ROCHE HOLDING", and "THE LICENSING AGREEMENT" is incorporated
herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OF AFFILIATE.
(a)-(f) The information set forth in the Proxy Statement/Prospectus
under the captions "SUMMARY AND SPECIAL FACTORS", "THE MERGER AGREEMENT",
"THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "THE
AMENDED GOVERNANCE AGREEMENT", "GUARANTY OF ROCHE HOLDING", "THE LICENSING
AGREEMENT", "CONDUCT OF GENENTECH'S BUSINESS AFTER COMPLETION OF THE
PROPOSED TRANSACTIONS; ROCHE'S PLANS WITH RESPECT TO GENENTECH",
"INCORPORATION OF DOCUMENTS BY REFERENCE" and "THE PROPOSED
TRANSACTIONS -- Interests of Certain Persons in the Proposed Transactions"
is incorporated herein by reference.
(g) Not applicable.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) The information set forth in the Proxy Statement/Prospectus
under "THE PROPOSED TRANSACTIONS -- Source of Funds; Expenses" and "GUARANTY
OF ROCHE HOLDING" is incorporated herein by reference.
(c)-(d) Not applicable.
ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS.
(a)-(c) The information set forth in the Proxy Statement/Prospectus
under "SUMMARY AND SPECIAL FACTORS"; "THE PROPOSED
TRANSACTIONS -- Background of the Proposed Transactions", and "-- Purpose
and Structure of the Transactions" is incorporated herein by reference.
(d) The information set forth in the Proxy Statement/Prospectus under
"SUMMARY AND SPECIAL FACTORS", "THE PROPOSED TRANSACTIONS -- Interests of
Certain Persons in the Proposed Transactions", "THE MERGER AGREEMENT", "THE
CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK", "THE AMENDED
GOVERNANCE AGREEMENT", "GUARANTY OF ROCHE HOLDING", "THE LICENSING
AGREEMENT", and "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" is incorporated
herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a)-(c) The information set forth in the Proxy Statement/Prospectus
under "SUMMARY AND SPECIAL FACTORS", "THE PROPOSED
TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the
Transaction" and "-- Opinion of Financial Advisor", "MARKET PRICES OF AND
DIVIDENDS ON THE REDEEMABLE COMMON STOCK", "THE CHARTER AMENDMENT;
DESCRIPTION OF THE SPECIAL COMMON STOCK" and "GENERAL
INFORMATION -- Required Vote" is incorporated herein by reference.
(d) No representative was hired solely on the behalf of unaffiliated
security holders.
(e) The information set forth in the Proxy Statement/Prospectus under
"SUMMARY AND SPECIAL FACTORS" and "THE PROPOSED
TRANSACTIONS -- Recommendation of the Board of Directors; Fairness of the
Transaction" is incorporated herein by reference.
(f) Not applicable.
3
<PAGE> 5
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a)-(c) The information set forth in the Proxy Statement/Prospectus
under "SUMMARY AND SPECIAL FACTORS -- Opinion of Financial Advisor" and "THE
PROPOSED TRANSACTIONS -- Opinion of Financial Advisor" is incorporated
herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a)-(b) The information set forth in the Proxy Statement/Prospectus
under "PRINCIPAL STOCKHOLDERS OF GENENTECH"; "SECURITY OWNERSHIP OF
MANAGEMENT"; "CERTAIN INFORMATION CONCERNING DIRECTORS AND EXECUTIVE
OFFICERS OF THE COMPANY"; and "CERTAIN INFORMATION CONCERNING THE DIRECTORS
AND EXECUTIVE OFFICERS OF ROCHE HOLDINGS, INC. AND ROCHE HOLDING LTD" is
incorporated by reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth in the Proxy Statement/Prospectus under
"SUMMARY AND SPECIAL FACTORS", "CONDUCT OF GENENTECH'S BUSINESS AFTER
COMPLETION OF THE PROPOSED TRANSACTIONS; ROCHE'S PLANS WITH RESPECT TO
GENENTECH", "THE MERGER AGREEMENT", "THE CHARTER AMENDMENT; DESCRIPTION OF
THE SPECIAL COMMON STOCK", "THE AMENDED GOVERNANCE AGREEMENT" and "GUARANTY
OF ROCHE HOLDING" is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a)-(b) The information set forth in the Proxy Statement/Prospectus
under "THE PROPOSED TRANSACTIONS -- Recommendation of the Board of
Directors; Fairness of the Transaction", "-- Opinion of Financial Advisor",
and "THE MERGER AGREEMENT" is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in the Proxy Statement/Prospectus under
"GENERAL INFORMATION -- No Appraisal Rights" is incorporated herein by
reference.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
The information set forth in the Proxy Statement/Prospectus under "SELECTED
HISTORICAL FINANCIAL DATA" is incorporated herein by reference. In addition, the
information set forth in (i) Item 14(a)(2) of Part IV of Genentech's Annual
Report on Form 10-K for the year ended December 31, 1994, (ii) Part II of
Genentech's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
and (iii) pages 39-61 of Genentech's Annual Report to Stockholders for the year
ended December 31, 1994 is incorporated herein by reference.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in the Proxy Statement/Prospectus under
"GENERAL INFORMATION -- Solicitation of Proxies" is incorporated herein by
reference.
(b) The information set forth in the Proxy Statement/Prospectus under
"GENERAL INFORMATION -- Solicitation of Proxies" and "THE PROPOSED
TRANSACTIONS -- Source of Funds; Expenses" is incorporated herein by
reference.
ITEM 16. ADDITIONAL INFORMATION.
Reference is hereby made to the Proxy Statement/Prospectus and to each
exhibit attached thereto, each of which is incorporated herein by reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a) Not applicable.
(b) Opinion of Lehman Brothers (incorporated by reference to Annex B to
the Proxy Statement/Prospectus).
(c)(1) Agreement and Plan of Merger, dated May 23, 1995, among Roche
Holdings, Inc., HLR (U.S.) II, Inc. and Genentech, Inc. (incorporated by
reference to Annex A to the Proxy Statement/Prospectus).
(c)(2) Amended and Restated Governance Agreement, to be entered into at
the effective time of the merger contemplated by the Merger Agreement
included as Exhibit (c)(1) hereof (incorporated by reference to Exhibit A to
Annex A to the Proxy Statement/Prospectus).
(c)(3) Guaranty of Roche Holding Ltd to be dated as of the effective
date of the merger contemplated by the Merger Agreement included as Exhibit
(c)(1) hereof (incorporated by reference to Exhibit B to Annex A to the
Proxy Statement/Prospectus).
(c)(4) Article THIRD to Amended and Restated Certificate of
Incorporation of Genentech (incorporated by reference to Exhibit C to Annex
A to the Proxy Statement/Prospectus).
(d) Proxy Statement and related Notice of Special Meeting, Letter to
Shareholders and Proxy (incorporated by reference to the Proxy Statement and
related material filed under a Schedule 14A by Genentech on the date
hereof).
(e) Not applicable.
(f) Not applicable.
(g)(1) Annual Report to Stockholders of Genentech for the year ended
December 31, 1994.
(g)(2) Annual Report on Form 10-K of Genentech for the year ended
December 31, 1994.
(g)(3) Quarterly Report on Form 10-Q of Genentech for the quarter ended
March 31, 1995.
4
<PAGE> 6
SIGNATURE
After due inquiry and to the best of its knowledge and belief, the
undersigned certifies that the information set forth in this statement is true,
complete and correct.
Date: June 2, 1995 GENENTECH, INC.
By: /s/ John P. McLaughlin
---------------------------------------------
Name: John P. McLaughlin
Title: Senior Vice President and Secretary
ROCHE HOLDINGS, INC.
By: /s/ Henri B. Meier
---------------------------------------------
Name: Henri B. Meier
Title: Vice President
5
<PAGE> 7
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. PAGE NO.
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(a) Not applicable.
(b) Opinion of Lehman Brothers (incorporated by reference to Annex B to the Proxy Statement/Prospectus).
(c)(1) Agreement and Plan of Merger, dated May 23, 1995, among Roche Holdings, Inc., HLR (U.S.) II, Inc. and
Genentech, Inc. (incorporated by reference to Annex A to the Proxy Statement/Prospectus).
(c)(2) Amended and Restated Governance Agreement between Genentech and Roche Holdings, Inc., to be entered into
at the effective time of the merger contemplated by the Merger Agreement included as Exhibit (c)(1) hereof
(incorporated by reference to Exhibit A to Annex A to the Proxy Statement/Prospectus).
(c)(3) Guaranty of Roche Holding Ltd to be dated as of the effective date of the merger contemplated by the
Merger Agreement included as Exhibit (c)(1) hereof (incorporated by reference to Exhibit B to Annex A to
the Proxy Statement/Prospectus).
(c)(4) Article THIRD to Amended and Restated Certificate of Incorporation of Genentech (incorporated by reference
to Exhibit C to Annex A to the Proxy Statement/Prospectus).
(d) Proxy Statement/Prospectus and related Notice of Special Meeting, Letter to Shareholders and Proxy
(incorporated by reference to the Proxy Statement and related material filed under a Schedule 14A by
Genentech on the date hereof).
(e) Not applicable.
(f) Not applicable.
(g)(1) Annual Report to Stockholders of Genentech for the year ended December 31, 1994.
(g)(2) Annual Report on Form 10-K of Genentech for the year ended December 31, 1994.
(g)(3) Quarterly Report on Form 10-Q of Genentech for the quarter ended March 31, 1995.
</TABLE>
<PAGE> 1
Exhibit (g)(1)
SCIENCE. SCIENCE. SCIENCE.
1994 Annual Report
Genentech, Inc.
<PAGE> 2
Cover As in the past, Genentech's future is science. That future is best
exemplified by the wealth of products in the company's pipeline. From products
in Phase III trials offering near-team prospects, to those in late research
offering opportunities for the 21st century, Genentech's pipeline is filled
with the potential to bring important new clinical benefits to patients with a
variety of medical conditions. --Profile Genentech, Inc. is a leading
international biotechnology company that discovers, develops, manufactures and
markets human pharmaceuticals for significant unmet medical needs. The company's
currently marketed products are available free to needy, uninsured patients in
the United States. Genentech has headquarters in South San Francisco,
California and is listed on the New York and Pacific Stock Exchanges under the
symbol GNE.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Genentech Pipeline (poster insert facing this page)
Genentech's product protfolio will fuel
growth into the next century. (If removed
from this report, call 800-626-3553, r5272,
for a replacement poster.)
Financial Highlights 1
Highlights 2
Letter to Stockholders 4
The Future is Science 9
From laboratory bench to market, excellent
science drives Genentech's success.
Genentech Markets Today and Tomorrow 13
Marketed Products 13
Marketing in a Changing Environment 21
Genentech Leadership 24
Meet six Genentech senior executives, who keep
the company's vision in sharp focus.
Genentech Financials 31
Stock and Stockholder Information 64
Offices and Board of Directors 65
Officers and Staff Scientists 66
</TABLE>
<PAGE> 3
Actimmune*
Second Generation
IGF-1
Anti-HERZ Antibody
Thrombopoletin
Anti-IgE Antibody
<PAGE> 4
PROCESS SCIENCE AND MANUFACTURING
As Genentech moves multiple products through late-stage clinical trials, process
scientists apply their industry-leading expertise to develop cost-effective
methods for manufacturing these pharmaceutical candidates in quantities and on
a time-line sufficient to supply fast-paced clinical trials and, ultimately,
the market.
(ART)
Genentech's new process science center,
scheduled for completion in mid 1995,
will centralize the company's process
scientists in one state-of-the-science
facility, enhancing their ability to
develop cost-effective methods of
manufacturing Genetech's protein
pharmaceuticals.
<PAGE> 5
DISCOVERY RESEARCH
Genentech's science begins with its innovative and prolific discovery research.
Through a clear research focus on well-defined biological areas and selective
use of key emerging technologies, Genentech scientists continuously generate a
wealth of pharmaceutical candidates from which the company moves one or two
into development each year. Promising projects not chosen for development are
outlicensed to capture their value for stockholders.
[ART]
In June 1994, Genentech scientists
reported they discovered the long-
sought blood platelet growth
factor, thrombopoietin. The
company has since acted quickly to
plan to move the protein into
clinical development for the
treatment of a dangerous side
effect of cancer chemotherapy.
Reprinted with permission from
Nature, vol. 369, no. 6481.
Copyright 1994
Macmillian Magazines Limited.
<PAGE> 6
PRECLINICAL AND CLINICAL DEVELOPMENT
Genentech selects a limited number of products for development based on specific
selection criteria. It discontinues efforts on projects that do not continue to
meet these criteria. This focuses the company's resources on projects most
likely to bring value to patients and stockholders. Genentech is using its
proven expertise, enhanced by close collaborations with regulatory authorities,
to guide several promising products through preclinical testing and various
stages of human clinical trials.
Phase I Determine safety
Phases of Human Clinical Trials: Phase II Determine safety, dosage and
initial efficacy
Phase III Prove efficacy and safety
[PHOTO]
11-year-old Robert Coleman has had
allergies since infancy and began
asthma symptoms at age 5. He is
enrolled in a Phase I trial for
Genentech's anti-IgE antibody,
which is testing the drug's safety
in children. Phase II trials in
adults are testing safety and
efficacy for allergic rhinitis
and asthma. With proven
expertise, Genentech's Medical
Affairs groups manage dozens of
clinical trials worldwide.
<PAGE> 7
[GENENTECH, INC. LOGO]
Genentech, Inc.
460 Point San Bruno Boulevard
South San Francisco, CA 94080-4990
(415) 225-1000
<PAGE> 8
PROGRESS IN 1994 AND EARLY 1996
Information accurate through January 1995 and may change as projects progress
through pipeline.
Marketing rights information represents where Genentech or its subsidiaries
retains rights at the end of January 1995 for each product/indication -- not
necessarily exclusively -- within the countries indicated by the icons.
PRECLINICAL PROJECTS
ANTI-VEGF ANTIBODY
RAS FT INHIBITER
2ND GENERATION t-PA
ORAL IIb/IIIa ANTAGONIST
- --
ANTI-VEGF HUMANIZED MONOCLONAL ANTIBODY
For cancer and diabetic retinopathies
The protein vascular endothelial growth factor (VEGF) promotes blood vessel
growth. It can be involved in disease by promoting blood supply that tumors need
to become malignant, or by promoting excess blood vessel growth at the retina
in diabetics, which can lead to blindness. An antibody to VEGF may be useful to
treat cancers and diabetic retinopathy. This clinical development candidate is
in late-stage research.
- --
RAS FARNESYLTRANSFERASE INHIBITOR
For pancreatic and colon concerns
Ras is a growth controlling factor that becomes oncogenic (cancer causing) when
mutated. The mutated protein is found in most pancreatic cancers and many colon
cancers. The enzyme ras farnesyltransferase is involved in processing ras and
is critical to its function. An inhibitor to this enzyme may be useful to treat
these cancers. This clinical development candidate is in late stage research.
- --
THROMBOPOICTIN
For thrombocytopenia related to cancer treatment
Patients undergoing cancer chemotherapy may suffer from thrombocytopenia -- a
shortage of clot-inducing platelets that can lead to uncontrolled bleeding.
Thrombopoictin promotes platelet production. It may be useful to treat cancer
patients so they can avoid this side effect and possibly tolerate higher doses
of anti-cancer treatment. Genentech has identified this project for clinical
development.
- --
ORAL IIb/IIIa ANTAGONIST
For cardiovascular indications
Blood platelets aggregate to initiate clotting. This orally active IIb/IIIa
antagonist, discovered in collaboration with Roche, is designed to bind to the
IIb/IIIa receptor on the surface of platelets to inhibit their ability to
aggregate. It may be useful to help prevent blood clotting in certain
cardiovascular conditions, such as to prevent reclotting after a heart attack.
Genentech has identified this project for clinical development.
<PAGE> 9
PHASE I PHASE II
IGF-I
2ND GENERATION t-PA
gp120
NGF
ANTI-IgE ANTIBODY
NUTROPIN(Bullet)
- --
ORAL IIb/IIIa ANTAGONIST
For cardiovascular indications
Blood platelets aggregate to initiate clotting. This orally active IIb/IIa
antagonist, discovered in collaboration with Roche, is designed to bind to
the IIb/IIIa receptor on the surface of platelets to inhibit their ability to
aggregate. It may be useful to help prevent blood clotting in certain
cardiovascular conditions, such as to prevent reclotting after a heart attack.
Genentech has identified this project for clinical development.
- --
SECOND GENERATION t-PA
For heart attacks and related cardiovascular disorders
Designed to build on the success of Activase, second generation t-PA is a
selectively mutated version of natural t-PA. Preclinical data suggest it may be
easier to administer, work faster, cause less unwanted bleeding and require
smaller doses than Activase.
- --
NERVE GROWTH FACTOR
For peripheral neuropathics
Often associated with diabetes or cancer chemotherapy, peripheral neuropathy is
characterized by progressive nerve fiber damage in the hands and feet. Nerve
growth factor may be able to prevent loss of or restore nerve function in
patients with diabetes or undergoing cancer chemotherapy.
- --
INSULIN-LIKE GROWTH FACTOR (IGF-I)
For diabetes
Some Type II diabetics do not respond well to oral hypoglycemic agents or
insulin. Studies show that patients with Type I diabetes have fewer
complications if they closely control blood sugar levels; this is probably also
true for Type II diabetes. Genentech is investigating whether IGF-I can
increase insulin sensitivity in Type II diabetics and help diabetics of either
type maintain better glucose control.
- --
ANTI-IgE HUMANIZED MONOCLONAL ANTIBODY
For allergic rhinitis and asthma
The anti-IgE humanized monoclonal antibody is designed to interfere early in the
complex, multistep process that leads to the symptoms of allergy, such as
allergic rhinitis and asthma.
- --
gp120
As a prophylactic vaccine against HIV-1 infection
Genentech's gp120 is a genetically engineered copy of a protein on the surface
of HIV-1, the virus that causes AIDS. Genentech is investigating gp120 as a
prophylactic vaccine in U.S. Phase II clinical trials. The World Health
Organization is conducting Phase I trials of gp120 in intravenous drug users in
Bangkok, Thailand.
- --
NUTROPIN
For growth hormone inadequacy in adults
Genentech is investigating the potential of Nutropin to restore proper metabolic
functioning in adults who have been growth hormone inadequate since childhood or
who have become so through disease or accident. These patients may benefit from
growth hormone replacement to restore their physical and psycho-social
well-being.
- --
ACTIVASE
For ischemic stroke
Ischemic stroke is caused by blood clots in the arteries of the brain. Activase
may be able to dissolve the clots and restore blood flow to the brain, reducing
neurologic damage. When completed, ongoing clinical trials may provide data
necessary to apply for regulatory approval to change Activase's label to reflect
its efficiency in stroke patients.
<PAGE> 10
PHASE I PHASE II
IGF-I
2ND GENERATION t-PA
gp-120
NGF
ANTI-IgE ANTIBODY
NUTROPIN(Bullet)
- --
THROMBOPOIETIN
For thrombocytopenia related to cancer treatment
Patients undergoing cancer chemotherapy may suffer from thrombocytopenia --
a shortage of clot-inducing platelets that can lead to uncontrolled bleeding.
Thrombopoietin promotes platelet production. It may be useful to treat cancer
patients so they can avoid this side effect and possibly tolerate higher doses
of anti-cancer treatment. Genentech has identified this project for clinical
development.
- --
ORAL IIb/IIIa ANTAGONIST
For cardiovascular indications
Blood platelets aggregate to initiate clotting. This orally active IIb/IIIa
antagonist, discovered in collaboration with Roche, is designed to bind to the
IIb/IIIa receptor on the surface of platelets to inhibit their ability to
aggregate. It may be useful to help prevent blood clotting in certain
cardiovascular conditions, such as to prevent reclotting after a heart attack.
Genentech has identified this project for clinical development.
- --
SECOND GENERATION t-PA
For heart attacks and related cardiovascular disorders
Designed to build on the success of Activase, second generation t-PA is a
selectively mutated version of natural t-PA. Preclinical data suggest it may be
easier to administer, work faster, cause less unwanted bleeding and require
smaller doses than Activase.
- --
NERVE GROWTH FACTOR
For peripheral neuropathics
Often associated with diabetes or cancer chemotherapy, peripheral neuropathy is
characterized by progressive nerve fiber damage in the hands and feet. Nerve
growth factor may be able to prevent loss of or restore nerve function in
patients with diabetes or undergoing cancer chemotherapy.
- --
INSULIN-LIKE GROWTH FACTOR (IGF-I)
For diabetes
Some Type II diabetics do not respond well to oral hypoglycemic agents or
insulin. Studies show that patients with Type I diabetes have fewer
complications if they closely control blood sugar levels; this is probably also
true for Type II diabetes. Genentech is investigating whether IGF-I can
increase insulin sensitivity in Type II diabetics and help diabetics of either
type maintain better glucose control.
- --
ANTI-IgE HUMANIZED MONOCLONAL ANTIBODY
For allergic rhinitis and asthma
The anti-IgE humanized monoclonal antibody is designed to interfere early in
the complex, multistep process that leads to the symptoms of allergy, such as
allergic rhinitis and asthma.
- --
gp120
As a prophylactic vaccine against HIV-1 infection
Genentech's gp120 is a genetically engineered copy of a protein on the surface
of HIV-1, the virus that causes AIDS. Genentech is investigating gp120 as a
prophylactic vaccine in U.S. Phase II clinical trials. The World Health
Organization is conducting Phase I trials of gp120 in intravenous drug users in
Bangkok, Thailand.
- --
NUTROPIN
For growth hormone inadequacy in adults
Genentech is investigating the potential of Nutropin to restore proper
metabolic functioning in adults who have been growth hormone inadequate since
childhood or who have become so through disease or accident. These patients may
benefit from growth hormone replacement to restore their physical and
psycho-social well-being.
- --
ACTIVASE
For Ischemic stroke
Ischemic stroke is caused by blood clots in the arteries of the brain. Activase
may be able to dissolve the clots and restore blood flow to the brain, reducing
neurologic damage. When completed, ongoing clinical trials may provide data
necessary to apply for regulatory approval to change Activase's label to
reflect its efficacy in stroke patients.
<PAGE> 11
PHASE III AWAITING REGULATORY APPROVAL
ACTIVASE(Bullet)
ACTIMMUNE
AURICULIN(Bullet) ACTIVASE (ACCELERATED)
NUTROPIN
ANTI-HER2 ANTIBODY NUTROPIN (LIQUID)
PULMOZYME
- --
AURICULIN
For acute renal failure
Acute renal failure is a life-threatening condition that results primarily from
a temporary decrease in blood flow to the kidneys after injury or complicated
surgery. Genentech and Scios Nova Inc., which licensed Auriculin to Genentech
and Scios Nova Inc., which licensed Auriculin to Genentech, are collaborating to
investigate whether Auriculin-- a hormone that occurs naturally in the heart--
can reduce the need for kidney dialysis in patients with this acute condition.
- --
ANTI-HER2 HUMANIZED MONICIONAL ANTIBODY
For breast cancer
The anti-HER2 antibody is designed to block a protein receptor called HER2 that
is produced in excess amounts in some women with breast cancer. Based on
favorable Phase II trial results, Genentech is investigating the anti-HER2
antibody as a treatment for breast cancer in international Phase III trials.
- --
PULMOZYME
For chronic obstructive pulmonary disease
Chronic obstructive pulmonary disease (COPD) is a syndrome of airway
inflammation, infection and obstruction that leads to lung destruction. In Phase
II trials, Pulmozyme reduced mortality in patients hospitalized with acute
infectious episodes of chronic bronchitis (a form of COPD). Genentech's
international Phase III trial will determine if Pulmozyme can reduce mortality
in hospitalized COPD patients.
- --
ACTIMMUNE
For renal cell carcinoma
Actimmune has been shown to have some anti-tumor effects, including some tumor
shrinkage in patients with metastatic renal cell carcinoma-kidney cancer that
has spread beyond the kidneys.
NUTROPIN
For short stature associated with Turner syndrome
Turner syndrome is a genetic disorder in females that causes a variety of
medical problems including very short stature. Clinical trials have shown
Nutropin may help these patients become taller than they would otherwise.
- --
NUTROPIN (LIQUID)
For growth hormone inadequacy in children and growth failure due to chronic
renal insufficiency
A liquid formulation of growth hormone would not require reconstitution, making
administration easier for patients.
- --
ACTIVASE (ACCELERATED INFUSION)
For acute myocardial infarction (heart attack)
Based on the results of the GUSTO clinical trial, an FDA advisory committee
unanimously agreed that the rapid infusion of Activase has a clinically
significant mortality benefit in the treatment of heart attacks and recommended
that the new dosing regimen be incorporated into the product's labeling.
- --
DISCONTINUED PIPELINE PROJECTS
Genentech is seeking development partners for these projects:
- - Anti-CD18 Humanized Monoclonal Antibody for inflammatory disorders
- - Transforming Growth Factor-B1 for mucositis
Genentech has discontinued these projects because in each case Phase II clinical
trials showed no significant benefit of the product for the targeted indication:
- - gp120 as an
immunotherapeutic for HIV-1 infected individuals
- - IGF-I for physical wasting syndrome associated with AIDS
<PAGE> 12
FINANCIAL HIGHLIGHTS
DISTRIBUTION OF REVENUE DOLLARS
(millions)
$800 TOTAL REVENUES
$700 COST OF SALES
$600
$500 RESEARCH &
DEVELOPMENT
EXPENSES
$400 [GRAPH]
MARKETING, GENERAL,
$300 & ADMINISTRATIVE
EXPENSES
$200
$100 INTEREST EXPENSES &
INCOME TAXES
NET INCOME
0
1992 1993 1994
AS REVENUES HAVE GROWN, AN INCREASING PORTION HAS BEEN BROUGHT TO THE NET
INCOME LINE.
<TABLE>
<CAPTION>
(MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA) 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT
Total revenues $ 795.4 $ 649.7 $ 544.3
Product sales 601.0 457.4 391.0
Research and development expenses 314.3 299.4 278.6
Total costs and expenses 665.8 590.8 522.3
Net income 124.4 58.9 20.8
Net income per share 1.04 0.50 0.18
Weighted average number of shares 119.5 117.1 114.0
-------- -------- --------
BALANCE SHEET
Cash, short-term investments
and marketable securities $ 920.9 $ 719.8 $ 646.9
Property, plant and equipment, net 485.3 456.7 432.5
Total assets 1,745.1 1,468.8 1,305.1
Long-term debt 150.4 151.2 152.0
Total stockholders' equity 1,348.8 1,116.8 1,007.3
Capital expenditures 82.8 87.5 126.0
Employees 2,738 2,510 2,331
-------- -------- --------
</TABLE>
The company has paid no dividends.
1
<PAGE> 13
HIGHLIGHTS
Genentech highlights in 1994 and early 1995
CORPORATE
- 1994 earnings: $124.4 million, or
$1.04 per share. 1994 revenues:
$795.4 million
- Began European commercial opera-
tions with launch of Pulmozyme.
- Reached an agreement with Eli Lilly
and Company, ending a long-stand-
ing dispute regarding recombinant
human growth hormone, to receive
$145 million over approximately four
years, plus future payments, contin-
gent on sale of certain products.
- Elected Louis J. Lavigne, Jr. and
Barry M. Sherman, M.D., to senior
vice president.
- Elected Robert Garnick to vice
president -- Quality; Dennis J.
Henner, vice president -- Research
Technology: Stephen Juelsgaard,
vice president and general counsel:
Bryan Lawlis, vice president --
Process Science: Polly Moore, vice
president -- Information Resources:
Kim Popovits, vice president --
Sales; and Nicholas J. Simon, vice
president -- Business Development.
- Began construction of a new $62.5
million process science center, bring-
ing Genentech's total facilities space
to nearly 1,700,000 square feet.
- Identified Vacaville, California as
location for new $150 million manu-
facturing facility.
MARKETED PRODUCTS
ACTIVASE* (ALTEPLASE, RECOMBINANT), A
TISSUE-PLASMINOGEN ACTIVATOR
- 1994 Activase sales: $280.9 million.
- An FDA advisory committee
unanimously agreed that the rapid
infusion of Activase has a clinically
significant mortality benefit in the
treatment of heart attacks and
recommended that the new dosing
regimen be incorporated into the
product's labeling.
- Repurchased rights in Canada to tis-
sue-plasminogen activator (Alteplase,
recombinant) from Boehringer
Ingelheim International GmbH.
PROTROPIN* (SOMATREM FOR INJECTION) AND
NUTROPIN* (SOMATROPIN [rDNA ORIGIN] FOR
INJECTION) GROWTH HORMONES
- 1994 growth hormone sales: $225.4
million.
- Began shipping Nutropin January
1994 for treating children with
growth failure due to chronic renal
insufficiency.
- Received regulatory approval in
March 1994 to market Nutropin for
the treatment of children with
growth hormone inadequacy.
- Following the dismissal of an inter-
national Trade Commission (ITC)
petition against Novo-Nordisk and
Bio-Technology General Corporation
due to a technicality -- even though
the ITC Judge ruled that certain
Genentech patents were valid and
infringed -- Genentech filed a patent
infringement suit with the U.S.
District Court in Delaware against
Novo-Nordisk and Bio-Technology
General Corporation.
- Filed a submission with the FDA
for regulatory approval to market a
liquid formulation of Nutropin for
treating growth hormone inadequacy
in children and growth failure due
to chornic renal insufficiency.
PULMOZYME* (DORNASE ALFA) INHALATION
SOLUTION
- Begin shipping Pulmozyme in
January 1994. 1994 sales: $88.3
million.
- Pulmozyme is now sold in 19
countries.
- Launched patient registry studies
in the United States and Europe to
track the long-term safety and effec-
tiveness of Pulmozyme in cystic
fibrosis patients, with more than
14,000 patients from more than 200
medical centers worldwide enrolled.
2
<PAGE> 14
- -- Began international Phase III clinical trials in hospitalized
patients with chronic obstructive pulmonary disease (COPD) after
a Phase II trial showed a 61 percent reduction in mortality in
certain hospitalized patients receiving Pulmozyme.
Actimmune* (Interferon gamms-1b)
- -- 1994 Actimmune sales: $6.4 million.
- -- Completed enrollment in Phase III trials for renal cell carcinoma
(kidney cancer).
PRODUCTS IN DEVELOPMENT
To track progress made in Genentech's rich product pipeline in 1994, see the
poster inside the front cover of this report. If the poster has been removed,
call (800) 626-3553, x5272, to receive a new poster.
RESEARCH
- -- Published 275 papers in scientific journals in 1994.
- -- Obtained 397 patents worldwide in 1994 for a total of 1,922 patents.
- -- Purified and cloned thrombopoletin, a long-sought blood factor that
induces platelet production.
- -- In laboratory models, demonstrated the efficacy of an anti-VEGF anti-
body in shrinking tumors and in preventing retinopathy.
RESEARCH AND DEVELOPMENT COLLABORATIONS
- -- Entered into agreements with:
- - Scios Nova Inc. for it to develop in the United States and Canada
and Genentech to develop in other countries its Auriculin* (anaritide),
currently in Phase III clinical trials, for the treatment of acute
renal failure.
- - Cytotherapeutics to develop central nervous system therapeutics.
- - Exocell regarding its A1717 monoclonal antibody for diabetic-
related disease.
- - Alkermes, Inc. to develop sustained-release formulations of two proteins,
including human growth hormone.
- -- Progressed significantly in collaborations with Roche: Determined to
jointly develop an orally active IIb/IIIa antagonist for cardiovascular
indications. Continued collaborative research of orally active antagonists
to LFA/ICAM for chronic inflammatory disorders and to ras farnesyl-
transferase for cancers.
CORPORATE RESPONSIBILITY
- -- Provide more than $26 million worth of pharmaceuticals free-of-charge
in 1994 through various programs for un- or underinsured patients in
the United States.
- -- Donated more than $3 million for scientific research through medical
and academic research organizations and hospital groups.
- -- Identified, trained and equipped the first 100 Access Excellnce Fellows,
and enabled access to the program by thousands of teachers nationwide.
Access Excellence is a $10 million, multi-year national education
program to assist high school biology teachers in the United States.
- -- Donated more than $510,000 to the Genentech Foundation for Biomedical
Sciences, which provided the money for science education to local schools,
from grade school through post-graduate level.
- -- Made available unique experimental proteins free-of-charge to academic
researchers worldwide.
- -- Extended eligibility for benefits coverage to same-sex domestic partners
of employees.
- -- For the fifth time, Genentech was named one of the top 100 companies
for working mothers by Working Mother magazine.
3
<PAGE> 15
GENENTECH PRESIDENT AND CHIEF EXECUTIVE OFFICER G.
KIRK RAAB MEETS WITH TWO OF THE FOUNDING MEMBERS
OF AFRICAN AMERICANS IN BIOTECHNOLOGY, GLYNIS MCCRAY
AND MAX FOSTER, BOTH GENENTECH EMPLOYEES. FOUNDED
TO PROVIDE ROLE MODELS TO YOUTHS AND EXPOSE THEM
TO CAREERS IN SCIENCE AND BIOTECHNOLOGY, AAIB ALSO
WORKS WITH GENENTECH IN ITS EMPLOYEE OUTREACH EFFORTS.
<PAGE> 16
GENENTECH, INC.
G. Kirk Raas
PRESIDENT & CEO
January 31, 1995
Dear Fellow Stockholders:
Thanks to the tremendous efforts of Genentech employees, I'm able to report a
successful year in which we've more than doubled profits and increased product
sales 31 percent, and total revenues 22 percent, with a greater percentage of
revenues going to the bottom line. We also made significant progress with
important preclinical and clinical programs for our new products.
Our employees continue to be guided by a clear focus and united purpose: to
apply excellent science toward innovative products that substantially help
people with serious medical conditions, while increasing returns for our
stockholders. The fundamentals of the business are sound, with execution based
on a disciplined and caring culture. It's the leaders of Genentech's major
operating functions, each profiled beginning on page 24, who keep us sharply
focused. Regardless of function, each group's priorities converge back to
Genentech's science.
Consider our research discovery and technology groups. By any measure,
these groups continue to be exceptionally creative and productive. An
especially telling indication is how difficult it is to choose development
projects among the many exciting research projects they generate. We decide
which projects to move into development based on important information
gathered early. Our preclinical scientists determine potential uses and safety
issues in laboratory models. Our clinical scientists evaluate the potential
benefits a product brings to patients. Our legal group determines what market
protection we can anticipate. Our marketing group evaluates worldwide
commercial possibilities and our process scientists determine if we can
manufacture a product cost-effectively. As a result, we can make intelligent
decisions about which projects to move toward the marketplace, while our
financial group keeps us directed toward profitable growth.
In making choices, we balance risk and return as an investment portfolio
manager would. Some projects have potential for high return, but at a higher
risk than we might otherwise
5
<PAGE> 17
consider. Others may have lower potential for return, but also lower risk. Of
course we make a priority of those with low relative risk and high potential
for return. The result is a balanced mix offering good opportunity for
significant return with reasonable risk.
Anticipated market protection is a major consideration; without the
assurance of a fair market advantage as a proprietary product, a project is not
worth the investment risk. As Lee Iacocca said, "In any kind of competition,
the first thing you do is protect yourself." Our legal group has protected our
efforts well, as exemplified by a recent major agreement in our favor settling
a long-standing dispute with Eli Lilly and Company regarding a variety of
patent and contract issues. This agreement, which should result in payments of
$145 million, reinforces the value of our patents. We will continue to defend
and enforce them, as we have recently by filing suits against other makers of
recombinant growth hormone products. And we will continue to aggressively
patent new technology.
The efforts of our regulatory affairs team have helped secure an FDA
advisory committee recommendation for approval for new labeling for Activase.
We anticipate such approval in 1995, which would allow our sales force and
marketing group to actively promote this drug's life-saving benefits as
demonstrated by the GUSTO trial. This would translate into even higher market
share than the present more than 70 percent and, most importantly, more lives
saved from heart attack. As we strive to design clinical trials to meet the
demands of regulatory authorities worldwide, this group's efforts become
increasingly important.
As will the efforts of our clinical and process scientists. We currently
have five projects in Phase II and five in Phase III clinical trials, some of
which are multinational. We're seekng key answers quickly to get important
products to market fast. And to terminate projects whose potential has faded so
we can redirect our resources to more promising opportunities. Health Care
realities dictate that through clinical trials we demonstrate not only safety
and effectiveness, but also value. Our clinical scientists are doing more than
ever, and they're doing it very well.
6
<PAGE> 18
To conduct clinical trials, we must develop manufacturing processes to
produce large quantities of many different products simultaneously. Making
increased quantities of a protein is not simple, particularly with
cost-effectiveness as essential as it is today. Our process scientists use the
same level of creativity and ingenuity as our discovery scientists use to
discover new pharmaceuticals. When it opens this year, our new process science
center will provide the same caliber of centralized facility and equipment as
our Founders Research Center did in 1992.
Our outstanding manufacturing team will also have new facilities, in
Vacaville, California, as we expand in preparation for our new products. In
1995, our facilities and engineering group will break ground on this new
manufacturing facility. This group has kept our facilities growth in step with
corporate growth within a disciplined budget.
Another group with key accomplishments in 1994 is business development.
These employees identify areas where Genentech could best proceed in
collaboration with external organizations, and they identify key technologies or
products to which Genentech can gain access via collaboration. An example of
their efforts in 1994 is the agreement with Scios Nova to develop a therapy for
acute renal failure.
In 1994, Genentech Europe Ltd. successfully launched Pulmozyme in four
European countries. This group's efforts in 1995 will not only significantly
increase Pulmozyme sales, but also coordinate clinical trials and develop new
marketing plans for new indications and products for Europe.
Our agreement with Roche to develop Pulmozyme in Europe helped bring
that product to additional European countries. Our R&D agreements with Roche
have already led to one joint development product - our orally active IIb/IIIa
antagonist for treating cardiovascular disorders.
Our U.S. sales and marketing groups have done a terrific job in 1994,
as evidenced by our product sales increases. They achieved this success despite
a critical environment in which our past practices have come under
investigation. In light of the changing regulatory environment, we have
provided these groups clear guidelines and contracts for acceptable practices.
7
<PAGE> 19
We stand behind their efforts. They have done a vital job in bringing the
benefits of our products to patients who need them. This is evident in the
growing acceptance of Pulmozyme among the cystic fibrosis community. I'm
confident their efforts in 1995 will be even more successful.
I can say the same for all of our more than 2,700 employees, including
those who work in human resources, information services, corporate
communications and other important areas I didn't mention here. In 1994, we
continued our efforts to ensure Genentech values the contributions of our
diverse groups of employees and that our work environment brings out the best
in each of them. As our employees' accomplishments in 1994 showed, their
efforts are what ultimately bring value to Genentech stockholders. I'll
continue to ensure Genentech's work environment is one that fully realizes and
enhances that value.
Finally, I'd like to thank Roche and all the other Genentech
stockholders for your continued support. Thanks to your vision, our science is
bringing innovative medicine to patients around the world. I'm confident we can
all look forward to further growth.
Sincerely,
/s/ G. KIRK RAAB
G. Kirk Raab
8
<PAGE> 20
THE FUTURE IS SCIENCE
[ART]
AS IN THE PAST, GENENTECH'S FUTURE IS SCIENCE Since its founding in 1976,
Genentech has rooted its success in excellent science. That strategy continues
today. Excellent science sustains all stages of a product's journey from
stimulating the mind of a scientist to meeting the needs of a patient.
DISCOVERY RESEARCH That journey begins in discovery research. Here Genentech
scientists focus their efforts on specific areas of medicine where the company
has significant expertise and where room remains for important clinical
advances. But Genentech also encourages its scientists to spend about 25
percent of their time on research of their own choosing, a source of some of
Genentech's most important discoveries. This discretionary research time is
part of a work environment designed to foster scientific excellence -- an
environment that includes a liberal publication policy, frequent scientific
seminars and top-quality laboratory facilities.
Besides focusing on specific areas of medicine, Genentech researchers
identify emerging technologies in which to develop an expertise in-house. This
keeps the company at the forefront of biotechnology even as technology moves
ever forward. And it leads to innovative products. Genentech's expertise in
humanized monoclonal antibodies has led to the anti-HER2 and anti-1gE
antibodies. An expertise in gene "knock out" technology lets Genentech
scientists understand the effects of specific genes and how the proteins those
genes produce -- or molecules that mimic them -- might function therapeutically.
A mouse model deficient in nerve growth factor, for example, suggests this
protein could
9
<PAGE> 21
be useful in treating Alzheimer's disease. Genentech is also nurturing
expertise in gene therapy and certain other key technologies.
Genentech relies on research collaborations to access additional
technologies of interest. In collaboration with Roche, for example, the company
combines its expertise in biological molecules with Roche's expertise in orally
active molecules. This collaboration has already led to one clinical
development project targeting cardiovascular indications.
PRECLINICAL AND CLINICAL DEVELOPMENT Genentech's discovery research has led to
more potential products than the company has resources to develop. Genentech
manages this fortunate dilemma with discipline, applying strict selection
criteria to determine which projects to develop. The goal is to identify
projects with the best potential to benefit patients and stockholders.
Genentech will stop development if a project does not continue to meet these
criteria. More projects wait in the wings. To realize the value of all
promising research projects for stockholders, Genentech outlicenses those that
do not meet selection criteria yet remain scientifically promising.
Regulatory authorities require preclinical testing and three phases of
human clinical trials of increasing complexity and cost to ulti-
GENENTECH SELECTION CRITERIA
FOR CLINICAL DEVELOPMENT
Scientific Confidence
Critical Medical Need
Significant Market Opportunity
Adequate Market Protection
Reasonable Manufacturing
Economics
PART OF GENENTECH'S
DISCOVERY RESEARCH STRATEGY
IS TO IDENTIFY KEY EMERGING
TECHNOLOGIES, SUCH
AS GENE "KNOCK OUT"
TECHNIQUES, FOR WHICH TO
DEVELOP AN EXPERTISE IN-HOUSE.
HERE A NEEDLE (RIGHT) INJECTS
[ART] SPECIALIZED "STEM" CELLS
MISSING A SPECIFIC GENE INTO
AN HOURS-OLD MOUSE EMBRYO.
MICE DESCENDED FROM AN EMBRYO
INJECTED WITH STEM CELLS DEFICIENT
IN NERVE GROWTH FACTOR SUGGESTED
THAT NGF MAY BE USEFUL TO TREAT
ALZHEIMER'S DISEASE.
10
<PAGE> 22
<photo caption>
Pat Burch began noticing
tingling in his toes ten
years ago. His symptoms
of peripheral neuropathy
related to diabetes have
since progressed; he has
lost most sensation in
his toes. He is participat-
ing in Genentech's Phase
II trial of nerve growth
factor in the hope it can
return his sensation or
stop or slow progression
of the neuropathy.
Designed to ask whether
NGF is safe and effec-
tive, the trial is ongoing
at several U.S. medical
centers.
<photo caption>
mately prove safety and efficacy. Recognizing that a shortcut can be the
longest route. Genentech relies on information from preclinical experiments and
Phase I trials to design comprehensive Phase II trials that can clearly
demonstrate the efficacy of a drug, minimizing the risk of Phase III surprises.
Done well, Phase II trials can provide "proof of concept" and data needed to
design Phase III trials to answer the questions regulatory authorities ask.
Clinical trials designed carefully and in closer collaboration with the
FDA and other regulatory authorities allow Genentech to proceed from phase to
phase of the process with confidence it will know definitively whether a drug
works. If a drug does work, this approach can ultimately provide compelling
proof of a drug's safety, efficacy and value, essential for both regulatory
approvals and successful marketing.
PROCESS SCIENCE AND MANUFACTURING Genentech scientists and engineers must
determine how to make a drug in large quantities in a way that will provide
pure, high-quality product at the lowest possible cost. Genentech's
manufacturing processes today are far more sophisticated in scale, yield,
efficacy and quality than the processes of 15 years ago. As Genentech strives
for increasing cost-efficiency, this trend will continue.
Toward that end, Genentech is constructing a new $62.5 million process
science center to be completed in mid-1995. The center will gather in one
modern facility scientists and engineers currently scattered on Genentech's
campus. It
11
<PAGE> 23
will provide equipment necessary to test and refine future manufacturing
processes. The pay-off will be faster development of more economical
manufacturing processes.
In 1994, Genentech selected Vacaville, California as the site of a new
manufacturing facility for products currently in its pipeline. A challenge will
be to balance the capacity developed, with progress of clinical trials,
ensuring adequate capacity to support late-stage clinical trials and the
market, yet not investing in excess capacity that will remain idle.
Well-designed clinical trials help give the answers needed to strike the right
balance.
SCIENCE BEYOND PRODUCT APPROVAL Once a product reaches the market, the need
for excellent science continues. Clinical registry studies of Genetech's
marketed products help these drugs meet their potential to help patients.
Genentech continues research in the disease areas its products target through
second-generation products that may offer further clinical advances.
Science is an ongoing process. It is not merely an academic pursuit,
but one that leads to improvements in human health. Science is the basis of
Genentech's successful approach to business.
SCIENCE ADDS VALUE EVEN
AFTER A PRODUCT IS
MARKETED. DR. SANDRA
BLETHEN, ASSOCIATE
PROFESSOR AT THE STATE
UNIVERSITY OF NEW YORK,
HAS BEEN INVOLVED IN
GENENTECH'S NATIONAL
COOPERATIVE GROWTH
[PHOTO] STUDY SINCE IT STARTED
IN 1985. "NCGS GIVES
VALUABLE INFORMATION ON
THE SAFETY AND EFFECTIVE-
NESS OF GROWTH HORMONE
TREATMENT," SHE SAID.
"THE INFORMATION IT PRO-
VIDES HELPS ME EVALUATE
TREATMENT FOR MY GROWTH
HORMONE PATIENTS."
GENENTECH ALSO SUPPORTS
REGISTRY STUDIES FOR
ACTIVASE AND PULMOZYME.
12
<PAGE> 24
GENENTECH MARKETS TODAY
AND TOMORROW
[ART]
Genetech's five marketed products are driving the company's growth today. Even
in a changing health care environment, if products provide true value, the
company can scientifically demonstrate that medical and economic value to
health care decision makers. Genentech's growth tomorrow will be driven on a
global scale by the products in its pipeline today.
HELPING HEALTH CARE PROFESSIONALS IMPROVE PATIENT CARE
Genentech's commitment to improving medical care goes beyond selling a product.
The company provides a variety of programs and services to ensure its medicines
meet their full potential in enhancing patient care. Genentech helps ensure its
products are available to all appropriate patients through programs that
provide its medicines free to un- or underinsured patients in the United States
who need but cannot afford them.
Genentech markets five products to treat six serious medical conditions:
- - Pulmozyme (dornose alfa) inhalation solution -- cystic fibrosis
- - Activase (Alteplase, recombinant), a tissue-plasminogen activator -- acute
myocardial infarction (heart attack), acute massive pulmonary embolism (blood
clots in the lungs)
- - Protropin (somatrem for injection) and Nutropin (somatropin [rDNA origin]
for injection) growth hormones -- growth hormone inadequacy and growth
failure due to chronic renal insufficiency (Nutropin only)
- - Actimmune (interferon gamma-1b) -- chronic granulomatous disease
13
<PAGE> 25
BREATHING EASIER
PULMOZYME Genentech, Genentech Europe Ltd. or Roche have launched Pulmozyme
for cystic fibrosis (CF) in 19 countries, together reaching much of the
eligible worldwide patient population of this life-shortening disease. The
challenge now is to make Pulmozyme available to all who need it so they can
breathe more easily and spend less time in the hospital due to respiratory
infections.
Clinical data presented in 1994 re-affirmed Pulmozyme's benefits and
enhanced its acceptance among CF patients and their doctors. The results of the
Phase III trial in CF patients, on which Pulmozyme's approval was based, were
reported in The New England Journal of Medicine. Data presented at a medical
conference in October continue to suggest Pulmozyme is safe and effective.
To continue to monitor safety and effectiveness, Genentech has created
growing patient registry studies in the United States and Europe with more than
14,000 patients at 200 CF centers. These will help physicians optimize patient
care through an increased understanding of the disease and its treatment.
These studies are only part of Genentech's commitment to CF, distilled
in the Pulmozyme Patient Pledge, which ensures all U.S. patients who need
Pulmozyme wil receive it, and which commits Genentech to work toward a cure.
Genentech's research with a second generation version of the drug may lead to a
therapy with even greater clinical benefits than Pulmozyme. Through a
collaboration with GenVec, Inc., a gene therapy company, Genentech is pursuing
the technology that is the best hope for a cure for the life-shortening
respiratory problems of CF. Because only when CF patients worldwide no longer
have to struggle for breath can we all breathe easier.
ELIZABETH LOBO OF ENGLAND
WAS DIAGNOSED WITH CYSTIC
FIBROSIS IN INFANCY. IT DID
NOT SERIOUSLY LIMIT HER
UNTIL YOUNG ADULTHOOD,
WHEN INFECTIONS REQUIRING
[PHOTO] HOSPITALIZATION CAME WITH
INCREASING FREQUENCY. SHE
BEGAN PULMOZYME THERAPY
TWO YEARS AGO IN A CLINICAL
TRIAL AND CONTINUES TODAY.
"PULMOZYME HAS MADE A
TREMENDOUS DIFFERENCE,"
SHE SAID. "I'D HATE TO BE
WITHOUT IT."
/X/ Launched by Genentech
/X/ Launched by Roche
/X/ Argentina
/X/ Australia
/X/ Austria
/X/ Canada
/X/ Denmark
/X/ France
/X/ Germany
/X/ Greece
/X/ Ireland
/X/ Netherlands
/X/ New Zealand
/X/ Portugal
/X/ South Africa
/X/ Spain
/X/ Sweden
/X/ Switzerland
/X/ UK
/X/ US
/X/ Uruguay
14
<PAGE> 26
[PHOTO ART]
15
<PAGE> 27
TIME MATTERS
ACTIVASE In the treatment of heart attacks, time matters. In June 1994, a U.S.
FDA advisory committee recommended that an accelerated infusion of Activase be
cleared for marketing for the management of acute myocardial infarction (AMI),
or heart attack. If approved, Activase's revised labeling would incorporate data
from the worldwide GUSTO trial, which showed that accelerated Activase saves
more lives than another clot-dissolving (thrombolytic) agent studied.
Once Activase's labeling incorporates GUSTO's findings, Genentech will
be able to promote them, so more physicians might apply this new, life-saving
regimen. Since the GUSTO results were first reported in April 1993, Genentech's
market share has risen from just under 50 percent to more than 70 percent.
Ways to further improve heart attack treatment are to reduce time to
treatment and identify all patients eligible for thrombolytic therapy. In 1994,
the National Institute of Health issued guidelines to encourage hospitals to
administer thrombolytic therapy more quickly and to more patients who could
benefit. Genentech endorses these recommendations through its registry
studies, which provide data on more than 350,000 heart attack patients supplied
by 1,500 participating medical centers. By monitoring patient data, medical
centers can enhance their approach to treatment. Genentech also supports
education that encourages heart attack patients to seek treatment quickly.
Genentech's commitment to improving heart attack treatment extends into
the future. The company's second-generation t-PA, currently in Phase I trials,
may be easier to administer, cause less bleeding, and -- toward an
ever-desirable goal of heart attack treatment -- work faster.
[PHOTO]
NOW 67, BILL ROGERS OF PENNSYLVANIA
HAD BYPASS SURGERY IN 1985 AFTER
HIS FIRST HEART ATTACK. IN 1994,
HE HAD ANOTHER HEART ATTACK.
RECOGNIZING THE SYMPTOMS, HE HAD
HIS WIFE RUSH HIM TO THE HOSPITAL,
WHERE HE WAS QUICKLY TREATED WITH
ACTIVASE. "I HAVE NO DOUBT IT
SAVED MY LIFE," HE SAID. TODAY
BILL IS BACK AT WORK AT HIS VARIETY
STORE AND ENJOYING TIME WITH HIS
FIVE CHILDREN AND EIGHT
GRANDCHILDREN.
16
<PAGE> 28
[PHOTO ART]
17
<PAGE> 29
WAY TO GROW
PROTROPIN/NUTROPIN Though in 1994 Genentech did not face additional
competition in the human growth hormone (hGH) market, the company is prepared
for competition in 1995. Some market loss will be inevitable. Yet Genentech
intends to apply its many strengths to maintain leadership.
These strengths stem from Genentech's commitment to helping physicians
better understand human growth and development. The company's National
Cooperative Growth Study has tracked more than 20,000 patients at more than 400
participating medical centers. It provides physicians data on product safety
and helps them develop the best course of treatment for patients.
Genentech is the only company to market hGH for two indications. It has
also filed for approval to market a liquid hGH, which will provide a
competitive advantage because it does not require reconstitution. Genentech is
continuing clinical trials to treat Turner syndrome in girls with this genetic
disorder affecting growth. It also supports patient education programs and an
independent foundation that provides grants for researchers investigating human
growth and development.
Genentech is working to defend its hGH patent position, which was
reaffirmed through a settlement in Genentech's favor with Eli Lilly and
Company, maker of the only other hGH product on the U.S. market.
Regardless of when additional competition enters the market, Genentech
remains committed to helping improve the care of patients with growth
disorders. That commitment will help ensure the continued success of its hGH
products.
BECAUSE OF CHRONIC RENAL INSUFFICIENCY,
7-YEAR OLD CASSANDRA DUKE OF ALABAMA
DID NOT GROW LIKE OTHER CHILDREN HER AGE,
EVEN THOUGH SHE WAS TALL -- 24 INCHES
-- AS A BABY. SINCE SHE STARTED NUTROPIN
[PHOTO] TREATMENT IN THE FALL OF 1994, SHE HAS
GROWN ALMOST THREE INCHES. "NOW THAT
SHE'S GROWING," SAID HER MOTHER,
"CASSANDRA HAS A MUCH BETTER ATTITUDE
ABOUT HERSELF AND HER ILLNESS."
18
<PAGE> 30
[PHOTO ART]
19
<PAGE> 31
STAYING HEALTHY
ACTIMMUNE Staying healthy can be difficult for patients with chronic
granulomatous disease [CGD]. This very rare inherited deficiency of the immune
system leaves patients vulnerable to frequent and severe bacterial and fungal
infections that often required hospitalization and can be fatal. Most of the
approximately 400 CGD patients in the United States are children.
Actimmune reduces approximately threefold the frequency of serious
infections requiring hospitalization. Because of Actimmune, patients with CGD
can come closer to achieving a goal most of us can take for granted; staying
healthy.
JEAN PAUL BINGHAM OF
GEORGIA INHERITED
CHRONIC GRANULOMATOUS
DISEASE (CGD). IN HIS
FIRST TWO YEARS OF LIFE,
HE CONTRACTED FREQUENT
[PHOTO] SEVERE INFECTIONS, SEV-
ERAL REQUIRING SURGERY.
AFTER FRUSTRATING MONTHS
WITHOUT A DIAGNOSIS, HIS
FAMILY RELOCATED FROM
COSTA RICA TO THE UNITED
STATES SO JEAN PAUL
COULD HAVE ACCESS TO
BETTER MEDICAL CARE. HE
WAS DIAGNOSED AND PUT
ON ACTIMMUNE. IN THE
FIVE YEARS SINCE, JEAN
PAUL, NOW 7, HAS BEEN
HOSPITALIZED ONLY ONCE
WITH INFECTIONS RELATED
TO CGD.
20
<PAGE> 32
MARKETING IN A CHANGING
ENVIRONMENT
[PHOTO]
In a health care environment that focuses increasingly on cost, Genentech is
working to demonstrate the value of its unique pharmaceuticals. In doing so,
the company is targeting the changing customer audience of formulary managers
and health benefits directors who are increasingly important in determining
which drugs are available to patients.
DEMONSTRATING VALUE STARTS WITH DEVELOPING VALUE Take Pulmozyme. By
demonstrating in a Phase III clinical trial that this drug can reduce some other
costs associated with cystic fibrosis treatment and that it improves patients'
quality-of-life, Genentech was able to demonstrate the drug's value -- the
positive ratio of its clinical benefits relative to its cost -- to health care
providers, insurance companies and government reimbursement programs. As a
result, the overwhelming majority of these medical providers make this
important medicine available to patients who need it.
21
<PAGE> 33
12-YEAR-OLD CYSTIC FIBROSIS
PATIENT LINDSEY JENSEN
MEETS WITH HER PHYSICIAN,
DR. GREGORY SHAY,
[PHOTO] AT KAISER PERMANENTE
MEDICAL CARE PROGRAM.
LINDSEY IS A LIFE-LONG
MEMBER OF KAISER'S
MANAGED CARE HEALTH
PLAN, THROUGH WHICH
SHE RECEIVES PULMOZYME
TREATMENT.
Genentech's registry programs for its marketed products continue to
provide data to support the value of these products. As the company moves
forward with clinical development of new products, wherever possible it will
design clinical trials to show not only safety and efficiency, but also the
value of these products. It will do so by providng data on cost-effectiveness --
whether it reduces the costs of other treatments, and how its overall cost
compares to other widely accepted medical interventions. Of course, to
demonstrate value requires a drug that truly brings significant medical value
to patients -- exactly the kind of drug Genentech has always pursued, and
exactly the kind that fills its pipeline today.
- --GLOBAL OPPORTUNITIES Beginning with Pulmozyme, compared to Genentech's
earlier products marketed mainly in the United States, the potential market for
many products in Genentech's pipeline increases with the European and Japanese
markets.
In collaboration with Roche, Genentech Europe Ltd. is conducting an
international Phase III clinical trial of Pulmozyme for chronic obstructive
pulmonary disease (COPD) at 80 centers in Europe, where Genentech and Roche
share marketing rights. The two companies are developing Pulmozyme for COPD in
Japan. Through these collaborations, their combined clinical expertise will
speed the process and enhance the opportunity for success, just as the
collaboration to get Pulmozyme to market in Europe for CF did.
22
<PAGE> 34
[Photo]
ROBERT BITON (LEFT) OF GENENTECH'S
MANAGED CARE GROUP REGULARLY MEETS
WITH MANAGED CARE EXECUTIVES TO
EVALUATE OUTCOMES DATA ON THE VALUE
OF PHARMACEUTICALS. HERE HE MEETS
WITH ANDY STERGACHIS, PH.D.,
(CENTER) DIRECTOR OF THE PROGRAM
IN PHARMACEUTICAL OUTCOMES RESEARCH
AND POLICY. UNIVERSITY OF
WASHINGTON SCHOOL OF PHARMACY, AND
PETE FULLERTON, PH.D., VICE
PRESIDENT OF PHARMACY SERVICES AT
KING COUNTY MEDICAL BLUE SHIELD.
Drawing on recent international experience, Genentech is developing its
anti-IgE and anti-HER2 antibodies in Europe. Genentech Europe Ltd. is currently
planning clinical trials, with trials of the anti-HER2 antibody scheduled to
begin in the first half of 1995. Roche and Genentech are developing the
anti-IgE antibody in Japan.
The poster inside the front cover of this report shows where Genentech
retains international marketing rights for the products in its pipeline. The
expertise Genentech is developing with Pulmozyme and the anti-IgE and anti-HER2
antibodies will serve the company well as it develops products for a global
market, bringing the medical benefits of its unique products to patients around
the world.
[PHOTO]
56-YEAR-OLD BART BRAGGAAR OF
THE NETHERLANDS HAS HAD
ASTHMATIC BRONCHITIS SINCE
EARLY CHILDHOOD. IN
DECEMBER 1994, FOR THE FIRST
TIME HE BECAME SERIOUSLY ILL
WITH AN INFECTIOUS COMPLICATION
OF HIS CONDITION THAT REQUIRED
HOSPITALIZATION. WHILE
HOSPITALIZED, HE PARTICIPATED
IN GENENTECH'S INTERNATIONAL
PHASE III TRIAL TESTING
PULMOZYME TO TREAT PATIENTS
WITH ACUTE INFECTIOUS EPISODES
OF CHRONIC OBSTRUCTIVE PULMONARY
DISEASE.
23
<PAGE> 35
GENENTECH LEADERSHIP
Genentech's six senior executives are all long-time employees of the company
with other traits in common. They all left what were sure to be good careers
with more traditional employers. They were lured by the excitement of
recombinant DNA technology and its potential to help people, and by the
opportunity to build functions and test new management ideas in an
entrepreneurial environment. Without resorting to cumbersome, hierarchical
management structures, they have all grown their functions with Genentech,
growing themselves as well. They are each quick to credit their success to the
skill and dedication of their people. And they all marvel at the talent, energy
and enthusiasm they have found at Genentech. The expertise these six senior
executives have developed in their areas and in managing Genentech's unique
culture, combined with their ongoing entrepreneurial drive, will lead
Genentech's success into the next century.
24
<PAGE> 36
[PHOTO]
RICHARD B. BREWER
Senior Vice President
U.S. Sales and Marketing,
Genentech Europe Ltd.,
Genentech Canada, Inc.
Dick Brewer began his career as
a sales representative with Ives
Laboratories and progressed
steadily through several
marketing and sales management
positions, first at G.D. Searle
and Co. and then, beginning in 1984, at Genentech, where he successfully
led the effort to launch Protropin. Dick was named vice president of
Marketing in 1989, vice president of Sales and Marketing in 1990 and
senior vice president in 1993. He oversees the U.S. sales and marketing
effort and all aspects of Genentech's Canadian and European operations. For
1995, he is focusing on the business success of these operations:
"A priority for me is to ensure that our two businesses outside the United
States -- Genentech Canada, Inc. and Genentech Europe Ltd. -- continue to move
toward further commercial success. In both these businesses we will continue to
build the necessary infrastructures to conduct clinical trials, obtain
regulatory and reimbursement approval of new products, and effectively
commercialize our products so we can expeditiously get new drugs to patients
who need them in these parts of the world. Specific priorities for 1995 are to
ensure continued success in commercializing Pulmozyme for cystic fibrosis in
Europe and to continue progress with international clinical trials of
Pulmozyme for chronic obstructive pulmonary disease, of our anti-HER2 antibody
for breast cancer, and of our anti-1gE antibody for allergies and asthma.
"For our U.S. sales and marketing operations, our number one job is to
deliver the revenues. While that's very clear, an equally important priority is
to ensure we do so while keeping within appropriate regulations and guidelines
and our own strict policies and controls. The world of pharmaceutical sales and
marketing is changing, and I'll continue to ensure we're changing with it,
proactively. Key to doing so successfully while keeping employees motivated is
to provide very clear guidelines to our sales and marketing staff so they are
empowered to bring in sales as they continue to operate within all applicable
regulations. We are making very clear to them not only what they cannot do, but
also what they can do, to effectively market our products."
25
<PAGE> 37
LOUIS J. LAVIGNE, JR. [PHOTO]
Senior Vice President and Chief Financial Officer
Treasury, Controllers, Information Systems,
Investor Relations, Planning and Purchasing
Lou Lavigne's penchant for planning
became apparent after he was named
controller in 1983, a year after he joined
the company from Pennwalt Corporation.
Though Genentech had income of about $1 million, to be ready for growth he
built the company's financial functions by hiring people with expertise at
large companies. Most of them now make up Genentech's financial management team
and draw on that experience daily. Since named vice president in 1986 and chief
financial officer in 1988, and then senior vice president in 1994, this
operations-oriented CFO has focused on strategic corporate planning. For 1995,
he has a clear strategy:
"Our financial strategy consists of four major elements, best described as
principles of disciplined growth leading to increased stockholder value. They
are: 1. Achieve strong top- and bottom-line growth; 2. Increase the percentage
of revenues to the bottom line through tight management of expenses; 3. Enhance
financial strength paced with growth; and 4. Increase returns to our
stockholders.
"An example of our disciplined growth is R&D expenses. These are
signficant ($314.3 million in 1994) and will continue to grow because of
increasing numbers of potential projects in later stages of clinical trials.
But as revenues grow, our percentage of R&D investment relative to revenues
will decline. We will not lose discipline in controlling expenditures, even in
this key area, just because revenues are increasing. At the same time, we will
moderate the percentage of revenues spent in marketing, general and
administrative expenses, further improving the bottom line. But we will invest
adequately for continued growth. It's through investments today that we'll bring
value to stockholders in the future.
"A challenge for Genentech in 1995 is to make our overall strategy for
growth clear to the investment community. Out job is unchanged: It's up to us
to manage the company for profitable growth. That will benefit all
stockholders."
26
<PAGE> 38
[PHOTO]
ARTHUR D. LEVINSON, PH.D.
Senior Vice President and Staff Scientist
Research, Preclinical Development, Medical Affairs,
Product Development
Since joining Genentech in 1980, Art Levinson outgrew several research positions
before becoming vice president of Research Technology in 1989, of Research in
1990, and then senior vice president in 1993. Most pipeline projects today come
from research under his watch. He is driven by a need to know the answers
science can provide and the knowledge that those answers could help people. In
1995, he is focusing on maintaining that drive in all Genentech scientists:
"By all measures, Genentech scientists are extremely productive. Given their
qualifications, dedication and drive, that's not surprising. But we can't get
complacent. I put a lot of effort into keeping motivational levels high,
reflecting my belief that the productivity of a research organization is a
function of the motivation and creativity of individual scientists. Creativity
is a rare commodity to be nourished and prized.
"Because our discovery scientists are so productive, we don't have resources
to develop all their good projects ourselves, which could be demotivating. But
we've been clear in communicating our criteria for development. We're fostering
a culture where the scientists recognize when a project won't meet those
criteria. Those exceptional projects that we can't develop internally, we
outlicense, which the scientists recognize as the success it is. When we drop a
project, they know that it's their responsibility -- not management's -- to
identify new opportunities.
"Keeping a clear focus and working with new technologies also helps
motivational levels. Each year we evaluate emerging technologies and identify
those for which we should develop an expertise in-house. We choose those that
can help us make discoveries in our areas of focus. Or we may collaborate with
companies that have technology of potential future value. Biotechnology today is
different than five years ago, and it will be different still in five years.
Given our scientific staff and expertise in key areas, we'll continue to define
this evolution."
27
<PAGE> 39
JOHN P. MCLAUGHLIN
[PHOTO]
Senior Vice President and Secretary
Legal, Business Development, Corporate Communications,
Government Affairs
Early in his career, while working in Congress, John McLaughlin drafted the
U.S. Orphan Drug law giving pharmaceutical companies incentives to develop drugs
targeting small patient populations -- a law that has benefited many patients
who use Genentech products. Later, John left private law practice to join
Genentech as vice president of Government Affairs in 1987. He opened the
company's Government Affairs office in Washington, D.C., and spent his first
few months on a team working with the FDA to secure approval for Activase. He
moved to California in 1989 when he was named vice president, general counsel
and secretary. In 1993 he became senior vice president. For 1995, John is
focusing on maximizing commercial opportunities for Genentech through productive
relationships and by protecting intellectual property rights:
"Hard realities are forcing a retrenchment in the biotechnology industry. This
creates opportunities for collaborations. We want to make sure Genentech is well
positioned to collaborate on medically important products. A priority for me in
1995 is to identify opportunities where there's a fit for Genentech and where we
can bring to bear some of our resources -- our strength in science, in
development and manufacturing, our financial resources -- to pursue these great
opportunities toward marketed products, to the benefit of both patients and
stockholders.
"Genentech has an enviable product portfolio. And our legal group works
hard and successfully to ensure our innovative science is protected by the
patent system. The recent settlement with Lilly demonstrates the value of these
efforts. In 1995, we will continue to defend and build on our patent portfolio
to maximize the commercial potential of our product pipeline.
"Not all of the projects coming out of research -- our own or our
collaborators -- will make it into or through our development pipeline. Another
priority for 1995 is to ensure we realize the value of projects that don't meet
our development criteria, but that are still promising, through outlicensing
agreements with other companies. Again this will benefit both patients and our
stockholders.
"We've always been proud of all we accomplish at Genentech. But not so
proud to think that we can do it all. Productive relationships add tremendous
value to our efforts."
28
<PAGE> 40
[PHOTO] BARRY M. SHERMAN, M.D.
Senior Vice President and Chief Medical Officer
Clinical Research and Development, Biostatistics,
Drug Safety and Post-marketing Programs
When Barry Sherman joined Genentech in 1985 as director of clinical research
from the University of Iowa College of Medicine, the company had few projects in
the clinic. Today it has about a dozen, with several in overlapping stages.
Named vice president of Medical Affairs in 1989 and senior vice president in
1995, Barry believes the wider impact his efforts at Genentech have on human
health more than make up for the fact that he is no longer involved in direct
patient care. Barry's responsibilities include all aspects of clinical
development and medical issues related to marketed products. His project goals
for 1995 are outlined on the poster inside this report. He also has overarching
goals that relate to asking the right questions:
"With several projects moving simultaneously through the clinic, we have to
design trials to help focus our efforts. You can't always expect positive
results from clinical trials. Our goal isn't to execute a trial to show that a
drug will work, although we hope it will. Our goal is to conduct a trial to show
whether or not a drug is safe and will work. And to do so early, in smaller,
Phase II trials, rather than in large, expensive Phase III trials. This lets us
make intelligent stop-or-go decisions before we've invested heavily. And it
minimizes the chance of unexpected results from Phase III trials.
"To design trials that will give the right answers, we emphasize early
planning. If we understand the disease we're investigating, we can target the
right clinical endpoints --what we're going to measure and what kinds of changes
we're going to look for. In this endeavor, if the first few questions you ask
aren't the right ones, asking more later is costly in terms of both dollars and
health.
"We collaborate with regulatory agencies throughout clinical development to
make sure we'll provide the answers they need. Choosing the right clinical
endpoints in Phase II and Phase III trials is essential to definitively prove
safety and efficacy. Now that our drug development is international, we need to
be certain our trials are consistent with medical and regulatory thinking in
other countries.
"Unless we're incredibly lucky, all the projects in our pipeline won't make
it to market. We're managing product development so we'll always focus on those
most likely to get to market, and so that we'll get them to patients as quickly
as possible."
29
<PAGE> 41
WILLIAM D. YOUNG [PHOTO]
Senior Vice President
Manufacturing, Process Science, Quality, Regulatory
Affairs, Engineering & Facilities
In 1980, after collaborating with Genentech to manufacture human insulin for Eli
Lilly and Company, Bill Young came to Genentech as director of Manufacturing.
His first projects were the manufacture of growth hormone and, a couple years
later, of Activase. The success of these projects provided enough product to
supply fast clinical trial schedules and, upon approval, patients who needed the
drugs. These projects stamped a pattern Genentech's manufacturing group would
follow with product after product. In 1983, Bill became vice president of
manufacturing and process science, and in 1988 was promoted to senior vice
president. For 1995, he's seeking balance:
"With our new location for manufacturing expansion identified, our challenge is
to increase manufacturing capacity in a way that keeps one eye on clinical
progress, yet can make enough of each pipeline product as needed. We'll work
closely with Medical Affairs to strike the right balance. In the shorter term,
during 1995, we'll have several projects in Phase III clinical trials that we'll
need to manufacture on a commercial scale. We're developing that capability in
existing facilities now. For those projects not as far along, we need to develop
processes to make large amounts of product at low cost by continually exploring
and applying new technology. As always, ensuring high quality will be a
priority.
"I have two main goals for regulatory affairs. First: Develop a
relationship with the FDA regarding sales and marketing efforts that's as good
as the one we have regarding product development. We've evolved our efforts with
the FDA's changing approach to monitoring pharmaceutical promotional practices.
We'll continue to do so, in productive dialogue with the FDA. Second: Assure
that Regulatory Affairs becomes globally integrated in its thinking, decisions
and actions with respect to product development. Again there's a balance to
strike: We must ensure we don't let one country's differing requirements slow an
entire project.
"We're managing several projects at once, many globally. In all areas we'll
continue to look for ways to reduce development time. We'll strive to balance
the needs of each project to keep them all on track."
30
<PAGE> 42
GENENTECH FINANCIALS
<TABLE>
<CAPTION>
<S> <C>
Financial Overview 32
Management's Discussion and Analysis 33
Report of Management 39
Consolidated Statements of Income 40
Consolidatd Statements of Cash Flows 41
Consolidated Balance Sheets 42
Consolidated Statements of Stockholders' Equity 43
Notes to Consolidated Financial Statements 44
Report of Ernst & Young LLP, Independent Auditors 61
Quarterly Financial Data 61
11-Year Financial Summary 62
Stock and Stockholder Information 64
</TABLE>
31
<PAGE> 43
FINANCIAL OVERVIEW
REVENUES
(millions)
[INSERT GRAPH]
PRODUCT SALES ARE DRIVING THE
INCREASE IN GENENTECH REVENUES.
RESEARCH &
DEVELOPMENT
EXPENSES (millions)
[INSERT GRAPH]
RESEARCH AND DEVELOPMENT
INVESTMENT IS SHOWING BENEFIT
ON REVENUES LINE.
REVENUES PER
EMPLOYEE (thousands)
[INSERT GRAPH]
REVENUES PER EMPLOYEE ARE
INCREASING DUE TO CAREFUL
MANAGEMENT OF HEADCOUNT GROWTH
AS REVENUES INCREASE.
NET INCOME
(millions)
[INSERT GRAPH]
NET INCOME AS A PERCENT OF
REVENUES (4% IN 1992, 9% IN 1993,
AND 10% IN 1994) IS INCREASING
DUE TO CAREFUL MANAGEMENT OF
EXPENSE GROWTH AS REVENUES
INCREASE.
32
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
OVERVIEW
Genentech, Inc. (the Company) is an international biotechnology company that
discovers, develops, manufactures and markets human pharmaceuticals for
significant medical needs. The science of biotechnological product discovery
and development is at the core of the Company's business and has led to ten of
the approved human pharmaceutical products of biotechnology. The Company
manufactures and markets five of these products directly and receives
royalties from the sales of five products which have originated from the
Company's technology.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Annual % Change
REVENUES 1994 1993 1992 94/93 93/92
______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Revenues $ 795.4 $ 649.7 $ 544.3 22% 19%
</TABLE>
Revenues have increased in each year since the Company's inception. The
increase in 1994 revenues resulted primarily from higher product sales. The
increase in 1993 revenues resulted primarily from higher product sales,
royalty income and contract revenues.
<TABLE>
<CAPTION>
Annual % Change
PRODUCT SALES 1994 1993 1992 94/93 93/92
______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Activase $ 280.9 $ 236.3 $ 182.2 19% 30%
Protropin and
Nutropin 225.4 216.8 205.9 4 5
Pulmozyme 88.3 - - - -
Actimmune 6.4 4.3 2.9 49 48
____________________________________________________________
Total product
sales $ 601.0 $ 457.4 $ 391.0 31% 17%
% of revenues 76% 70% 72%
</TABLE>
Activase The increase in Activase,(R) sales in 1994 and 1993 is attributable
to an increase in the number of patients being treated with Activase as a
result of the completion of the worldwide Global Utilization of Streptokinase
and Activase for occluded coronary arteries (GUSTO) clinical trial and the
reporting of its results in 1993. During 1994, Activase market share increased
to over 70% from approximately 66% and 50% in 1993 and 1992, respectively,
in the United States.
Protropin and Nutropin Net sales of Protropin,(R) and Nutropin,(R) continued
to increase in 1994 due primarily to the introduction of Nutropin for the
treatment of chronic renal insufficiency and to more growth hormone inadequate
patients starting treatment. The Company has not faced new competition in the
growth hormone market, although this possibility exists for 1995. If additional
competitors enter the growth hormone market, the Company expects that such
competition will have an adverse effect on its sales of Protropin and Nutropin
which, depending on the extent and type of competition, could be material to
the Company's total growth hormone sales. Factors that may influence future
Protropin and Nutropin sales include: the number and market entry dates of new
competitive products and their effect on the Company's market share and
pricing; the availability of third party reimbursement for the costs of such
therapies; and the outcome of litigation involving the Company's patents for
growth hormone and related processes.
33
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Pulmozyme Pulmozyme,(R) was launched during 1994 in the United States, Canada
and certain European countries. In 1994, sales totaled $88.3 million. In
1995, as approvals for marketing the product in other European countries are
received, and a full year of sales is achieved in countries in which Pulmozyme
sales began in 1994, the Company expects sales to grow. Other factors that may
influence future sales of Pulmozyme for the management of cystic fibrosis
include: the number and kinds of patients benefiting from such therapy; the
availability of third party reimbursement for the costs of such therapies,
physicians' personal experiences in the use and results of the therapy; the
development of alternate therapies for the treatment and cure of cystic
fibrosis; the development of additional indications for using Pulmozyme; and
the cost of Pulmozyme therapy. To protect the Company from adverse changes in
foreign currency exchange rates, the Company has purchased simple put options
to hedge anticipated non-dollar denominated revenue. All options mature within
one year. See Note 6 in the "Notes to Consolidated Financial Statements" for
further information.
Actimmune Actimmune,(R) sales increased in 1994 and 1993 primarily due to the
sales of interferon gamma to licensee Boehringer Ingelheim International GmbH,
which has approval to market interferon gamma in several countries in its
licensed territory.
<TABLE>
<CAPTION>
Annual % Change
ROYALTIES, CONTRACT AND _________________
OTHER, AND INTEREST INCOME 1994 1993 1992 94/93 93/92
__________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Royalties $ 126.0 $ 112.9 $ 91.7 12% 23%
Contract and other 25.6 37.9 16.7 (32) 127
Interest income 42.7 41.5 44.9 3 (8)
</TABLE>
The Company receives royalty payments from the sales of various human health
care products. These payments have increased in each of the past three years
primarily due to increases in product sales by the Company's licensees. In
1994, the largest dollar increase was attributable to royalties earned from the
sales of recombinant human insulin. In 1993, the largest dollar increase was
attributable to hepatitis B vaccine royalties. Cash flows from royalty income
include non-dollar denominated revenues. The Company currently purchases simple
foreign currency put options to hedge these cash flows, all of which expire
within the next two years. Royalty expense obligations associated with these
revenues are included in marketing, general and administrative expenses. In
December 1994, the Company and Eli Lilly and Company (Lilly) reached an
agreement regarding all patent infringement and contract actions between the
two parties, which included the Company granting to Lilly licenses, options to
license, or immunities from suit for certain of the Company's patents. Future
payments are required from Lilly on sales of these products. See Note 12 in the
"Notes to Consolidated Financial Statements" for further information.
Contract revenues in 1993 included $18.2 million related to fixed license
fees receivable through 1996 from Schering Corporation and its affiliates for a
world-wide license to certain patented technology and processes used to produce
recombinant interferon alpha. Contract and other revenues will continue to
fluctuate due to variations in the timing of contract benchmark achievements,
the initiation of new contractual arrangements, and the conclusion of existing
arrangements.
Interest income was slightly higher in 1994 due to a larger investment
portfolio in 1994 more than offsetting the decline in the average portfolio
yield. Similarly, interest income was lower in 1993 compared to 1992 primarily
due to the lower average portfolio yield in 1993.
34
<PAGE> 46
The Company enters into interest rate swaps as part of its overall strategy of
managing the duration of its investment portfolio. See Note 6 in the "Notes to
Consolidated Financial Statements" for further information. Due to the
approximately two-year effective average duration of the portfolio, which
includes the impact of the swaps, the average yield on the portfolio in any one
year is primarily a function of financial instruments purchased in prior years.
The average portfolio yield decline in 1993 and 1994 reflected the generally
continuous decline in interest rates between 1990 and the first quarter of 1994.
As discussed in Note 6, during 1994, the Company terminated certain swaps which
resulted in an unamortized loss of $6.2 million being recorded at December 31,
1994. The amortization of these losses over the next four years will reduce
yields during those years.
<TABLE>
<CAPTION>
Annual % Change
___________________
COSTS AND EXPENSES 1994 1993 1992 94/93 93/92
__________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Cost of sales $ 95.8 $ 70.5 $ 66.8 36% 6%
Research and
development 314.3 299.4 278.6 5 7
Marketing, general and
administrative 248.6 214.4 172.5 16 24
Interest expense 7.1 6.5 4.4 9 48
____________________________________________________________
Total costs
and expenses $665.8 $ 590.8 $ 522.3 13% 13%
% of revenues 84% 91% 96%
Cost of sales as % of
product sales 16% 15% 17%
R&D as % of revenues 40 46 51
MG&A as % of revenues 31 33 32
</TABLE>
Cost of Sales Cost of sales increased in 1994 and 1993 primarily due to
increased product sales and provisions for inventory obsolescence.
Research and Development The increase in R&D expenses in 1994 and 1993
reflects the Company's continued commitment to developing new products and new
indications for existing products. Overall increases resulted from the higher
level of activity and associated costs of products in the later stages of
clinical trials and the manufacture of products for clinical trials. As a
percentage of revenues, research and development has declined over the last
three years due to increasing revenues combined with the Company's disciplined
approach to its research and development investment. The Company now has 12
products in the clinic and two products in preclinical development. At the end
of 1993 the Company had nine products in the clinic and four products in
preclinical development.
To gain additional access to potential new products and technologies, the
Company has established research collaborations, including equity investments,
with companies developing technologies that fall outside the Company's research
focus and with companies having the potential to generate new products through
technology exchanges and investments. The Company has also entered into
product-specific collaborations to acquire development and marketing rights for
products. In December 1994, the Company entered into a collaboration with Scios
Nova Inc. (Scios Nova) for the U.S. and Canadian development of Scios Nova's
Auriculin,(R) (anaritide) for the treatment of acute renal failure, which is
currently in Phase III clinical trials. See Note 2 in the "Notes to
Consolidated Financial Statements" for a further description of this
collaboration.
35
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Marketing, General and Administrative: Marketing, general and administrative
expenses increased in 1994 primarily due to the launch of Pulmozyme in Europe
and higher corporate expenses, including litigation related expenses, and $12.6
million in charges due to the write-down of marketable equity securities of
several of the biotechnology companies that are strategic alliance partners of
the Company. The declines in the fair value of such securities were considered
other than temporary. The increase in 1993 compared to 1992 was primarily due
to additional Activase marketing expenses, Pulmozyme marketing costs in
preparation for the anticipated U.S. and European product launches in 1994, and
increased growth hormone marketing expenses in anticipation of future
competition.
Interest expense in 1994, 1993 and 1992, net of amounts capitalized,
relates primarily to interest on the Company's 5% convertible subordinated
debentures.
<TABLE>
<CAPTION>
INCOME BEFORE TAXES AND INCOME TAXES 1994 1993 1992
_____________________________________________________________________________
<S> <C> <C> <C>
Income before taxes $ 129.6 $ 58.9 $ 21.9
Income tax provision 5.2 - 1.1
Effective tax rate 4% - 5%
Deferred tax assets less
deferred tax liabilities $ 118.6 $ 123.0 $ 132.8
Valuation allowance 84.4 123.0 132.8
________________________________
Total net deferred taxes $ 34.2 $ - $ -
================================
</TABLE>
Approximately $26 million of the valuation allowance at December 31, 1994,
reflected above relates to the tax benefits of stock option deductions which
will be credited to additional paid-in capital when realized.
Realization of the net deferred taxes, future effective tax rates, and
future reversals of the valuation allowance (that is, recognition of deferred
tax assets) depend on future earnings from existing and new products and new
indications for existing products. The timing and amount of future earnings
will depend on continued success in marketing and sales of the Company's
current products, scientific success, results of clinical trials and regulatory
approval of products under development.
The net increase in the effective tax rate from 1993 to 1994 was primarily
related to limitations on the utilization of existing carryforwards related to
the U.S. alternative minimum tax. Expected increases in future effective tax
rates are also attributable to these limitations. Additionally, possible
changes in tax legislation could affect the Company's effective tax rate. Based
on current projections, the Company estimates its 1995 effective tax rate to be
around 15%.
<TABLE>
<CAPTION>
Annual % Change
NET INCOME 1994 1993 1992 94/93 93/92
_______________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net income $124.4 $ 58.9 $ 20.8 111% 183%
Net income per share 1.04 0.50 0.18
Net income as a
% of revenue 16% 9% 4%
</TABLE>
36
<PAGE> 48
Net income as a percent of revenue has increased each year as careful expense
management, particularly R&D expense management, has allowed an increasing
proportion of revenues to flow to net income. Earnings in 1995 will depend on a
continuation of the positive impact of the GUSTO trial results on Activase
sales, sales of Pulmozyme, Protropin and Nutropin competition, and the level of
costs and expenses.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES 1994 1993 1992
_______________________________________________________________________________
<S> <C> <C> <C>
Cash, cash equivalents, short-term investments
and long-term marketable debt and equity
securities $ 920.9 $ 719.8 $ 646.9
Working capital 776.6 694.6 447.0
Cash provided by (used in):
Operating activities 200.4 114.5 36.0
Investing activities (322.3) (121.3) (126.4)
Financing activities 71.2 49.9 35.6
Capital expenditures
(included in investing activities above) $ (82.8) $ (87.5) $(126.0)
Current ratio 4.5:1 4.6:1 4.3:1
</TABLE>
Cash generated from operating activities was used to purchase short-term
investments, long-term marketable securities, and property, plant and
equipment, increasing the amount of cash used in investing activities. Cash
provided by financing activities increased from the issuance of redeemable
common stock under employee stock plans and the exercise of warrants.
Capital expenditures in 1994 include costs incurred for additional
manufacturing facilities and the addition of a central process utility plant.
Capital expenditures decreased in 1993 as compared to 1992 primarily due to
completing construction in 1992 of the Founders Research Center, a state-of-
the-art facility housing many of the Company's research activities, and
substantially completing in 1992 new manufacturing facilities for Pulmozyme.
PROSPECTIVE INFORMATION
Market Potential/Risk Over the longer term, the Company's (and its partners')
ability to successfully market current products, expand their usage, and bring
new products to the marketplace will depend on many factors, including the
effectiveness and safety of the products, FDA and foreign regulatory agencies'
approvals for new indications, the degree of patent protection afforded to
particular products, Orphan Drug Act legislation, the possible future
enactments of biotechnology product protection in the United States as well as
in Europe and Japan, and the outcome in the United States of potential health
care reform legislation. The Company believes it has strong patent protection
or the potential for strong patent protection for a number of its products that
generate royalty revenue or that the Company is developing; however, the courts
will determine the ultimate strength of patent protection of the Company's
products and those on which the Company earns royalties. A product that has
received an Orphan Drug designation for a specific indication, when approved,
will be protected from FDA approval of similar products for similar indications
during the first seven years of product sales in the United States. Loss of
Orphan Drug Act protection for the Company's products that are currently
marketed or in development, resulting from expiration of Orphan Drug status or
amendment of the Orphan Drug Act, could lead to increased competition for those
products and potentially lower future product revenues.
37
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Roche Holdings, Inc. At December 31, 1994, the Company was 65% owned by Roche
Holdings, Inc. (Roche). See Note 9 in the "Notes to Consolidated Financial
Statements" for further information.
Foreign Exchange The Company receives revenues from countries throughout the
world. As a result, risk exists that revenues may be impacted by changes in the
exchange rates between the U.S. dollar and foreign currencies. To mitigate this
risk, the Company hedges certain of these revenues as discussed in Note 6 in
the "Notes to Consolidated Financial Statements."
Legal Proceedings The Company is a party to various legal proceedings. See
Note 12 in the "Notes to Consolidated Financial Statements" for further
information.
General The Company believes that its cash, cash equivalents, and short-term
and long-term investments, together with funds provided by operations and
leasing arrangements, will be sufficient to meet its operating cash
requirements, including capital expenditures and the development of existing
and new products through internal research and development activities, product
in-licensing, research collaborations, equity investments and geographic
expansion.
38
<PAGE> 50
REPORT OF MANAGEMENT
Genentech, Inc. is responsible for the preparation, integrity and fair
presentation of its published financial statements. The Company has prepared
the financial statements, presented on pages 33 to 60, in accordance with
generally accepted accounting principles. As such, the statements include
amounts based on judgments and estimates made by management. The Company also
prepared the other information included in the annual report and is responsible
for its accuracy and consistency with the financial statements.
The financial statements have been audited by the independent auditing
firm, Ernst & Young LLP, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders,
the Board of Directors and committees of the Board. The Company believes that
all representations made to the independent auditors during their audit were
valid and appropriate. Ernst & Young LLP's audit report appears on page 61.
Systems of internal accounting controls, applied by operating and
financial management, are designed to provide reasonable assurance as to the
integrity and reliability of the financial statements and reasonable, but not
absolute, assurance that assets are safeguarded from unauthorized use or
disposition, and that transactions are recorded according to management's
policies and procedures. The Company continually reviews and modifies these
systems, where appropriate, to maintain such assurance. Through the Company's
audit activities, the adequacy and effectiveness of the systems and controls
are reviewed and the resultant findings to management and the Audit Committee
of the Board of Directors.
The selection of Ernst & Young LLP as the Company's independent auditors
has been approved by the Company's Board of Directors and ratified by the
stockholders. An Audit Committee of the Board of Directors, composed of four
non-management directors, meets regularly with, and reviews the activities of,
corporate financial management, the general audit function and the independent
auditors to ascertain that each is properly discharging its responsibilities.
The independent auditors separately meet with the Audit Committee, with and
without management present, to discuss the results of their work, the adequacy
of internal accounting controls and the quality of financial reporting.
/s/ G. KIRK RAAB /s/ LOUIS J. LAVIGNE, JR. /s/ BRADFORD S. GOODWIN
- ------------------- ------------------------- -----------------------
G. Kirk Raab Louis J. Lavigne, Jr. Bradford S. Goodwin
President and Chief Senior Vice President and Vice President and
Executive Officer Chief Financial Officer Controller
39
<PAGE> 51
CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1993 1992
________________________________________________________________________________
<S> <C> <C> <C>
Revenues
Product sales $ 601,064 $ 457,360 $ 390,975
Royalties (including amounts
from related parties: 1994-$8,454;
1993-$5,488; 1992-$5,378) 126,022 112,872 91,682
Contract and other (including amounts
from related parties: 1994-$17,106;
1993-$8,869; 1992-$7,234) 25,556 37,957 16,727
Interest 42,748 41,560 44,881
___________________________________
Total revenues 795,390 649,749 544,265
Costs and expenses
Cost of sales 95,829 70,514 66,824
Research and development (including
contract related: 1994-$7,584;
1993-$4,235; 1992-$8,468) 314,322 299,396 278,615
Marketing, general and administrative 248,604 214,410 172,486
Interest 7,058 6,527 4,406
___________________________________
Total costs and expenses 665,813 590,847 522,331
Income before taxes 129,577 58,902 21,934
Income tax provision 5,183 -- 1,097
___________________________________
Net income $ 124,394 $ 58,902 $ 20,837
===================================
Net income per share $ 1.04 $ .50 $ .18
===================================
Weighted average number of shares used
in computing per share amounts 119,465 117,106 113,992
===================================
</TABLE>
See notes to consolidated financial statements.
40
<PAGE> 52
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and
Cash Equivalents
YEAR ENDED DECEMBER 31 1994 1993 1992
_______________________________________________________________________________________
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 124,394 $ 58,902 $ 20,837
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 53,452 44,003 52,170
Gain on sale of equity investments - - (3,946)
Reserve for long-term assets 748 600 2,275
Loss on fixed asset dispositions 5,510 1,652 410
Write-down of available-for-sale
securities 12,590 - -
Deferred income taxes (34,193) - -
Changes in assets and liabilities:
Receivables and other current assets (16,571) (20,212) (43,843)
Inventories (18,475) (19,410) (9,141)
Accounts payable, other current
liabilities and other long-term
liabilities 72,901 48,995 17,251
_____________________________________
Net cash provided by operating activities 200,356 114,530 36,013
Cash flows from investing activities:
Purchases of securities held-to-maturity (1,088,737) (564,855) (533,808)
Proceeds from maturities of securities
held-to-maturity 877,139 535,089 547,250
Purchases of securities available-for-sale (22,644) (8,222) -
Purchases of non-marketable equity securities (4,000) - (6,009)
Capital expenditures (82,837) (87,461) (126,049)
Proceeds from sale of fixed assets - 26,316 2,004
Change in other assets (1,198) (22,181) (9,768)
_____________________________________
Net cash used in investing activities (322,277) (121,314) (126,380)
Cash flows from financing activities:
Stock issuances 71,955 50,582 36,782
Reduction in long-term debt,
including current portion (794) (721) (1,171)
_____________________________________
Net cash provided by financing activities 71,161 49,861 35,611
_____________________________________
Increase (decrease) in cash and cash equivalents (50,760) 43,077 (54,756)
Cash and cash equivalents at beginning of year 117,473 74,396 129,152
_____________________________________
Cash and cash equivalents at end of year $ 66,713 $ 117,473 $ 74,396
=====================================
Supplemental cash flow data:
Cash paid during the year for:
Interest, net of portion capitalized $ 7,058 $ 6,527 $ 4,406
Income taxes 4,099 2,194 1,002
</TABLE>
Non-cash activity: In 1994, income tax benefits realized from employee stock
option exercises of $26,038 were recorded as an increase in stockholders'
equity.
See notes to consolidated financial statements.
41
<PAGE> 53
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993
______________________________________________________________________________
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 66,713 $ 117,473
Short-term investments 652,461 539,638
Accounts receivable (including amounts from a
related party: 1994-$13,184;1993-$10,259;
less allowances of: 1994-$4,422;1993-$3,572) 146,267 130,469
Inventories 103,200 84,725
Prepaid expenses and other current assets 28,475 13,032
___________________________
Total current assets 997,116 885,337
Long-term marketable securities 201,726 62,657
Property, plant and equipment, at cost:
Land 55,998 49,939
Buildings 245,871 245,923
Equipment 331,392 300,396
Leasehold improvements 11,988 12,535
Construction in progress 55,299 14,893
____________________________
700,548 623,686
Less: accumulated depreciation 215,255 166,954
____________________________
Net property, plant and equipment 485,293 456,732
Other assets 60,989 64,074
____________________________
Total assets $ 1,745,124 $ 1,468,800
============================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 30,963 $ 30,265
Accrued compensation 36,939 32,639
Accrued interest 5,685 5,708
Accrued royalties 25,864 18,889
Accrued marketing and promotion costs 27,463 19,942
Accrued clinical and other studies 36,277 23,324
Income taxes payable 17,839 1,921
Other accrued liabilities 38,598 57,267
Current portion of long-term debt 871 793
____________________________
Total current liabilities 220,499 190,748
Long-term debt 150,358 151,230
Other long-term liabilities 25,483 10,017
____________________________
Total liabilities 396,340 351,995
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.02 par value; authorized
100,000,000 shares, none issued - -
Redeemable common stock, $.02 par value;
authorized 100,000,000 shares, outstanding:
1994-50,105,925;1993-47,690,108 1,002 954
Common stock, $.02 par value; authorized
200,000,000 shares, outstanding:
1994 and 1993-67,133,409 1,343 1,343
Additional paid-in capital 1,207,720 1,070,121
Retained earnings (since October 1, 1987
quasi-reorganization in which a deficit
of $329,457 was eliminated) 129,127 44,387
Net unrealized gain on securities
available-for-sale 9,592 -
____________________________
Total stockholders' equity 1,348,784 1,116,805
____________________________
Total liabilities and stockholders' equity $ 1,745,124 $ 1,468,800
============================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 54
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(thousands)
<TABLE>
<CAPTION>
Redeemable
Common Stock Common Stock Retained Net Total
_____________ _____________ Additional Earnings Unrealized Stock-
Par Par Paid-In (Accumulated Gain On holders'
Shares Value Shares Value Capital Deficit) Securities Equity
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1992 44,165 $ 883 67,133 $1,343 $ 954,755 $ (7,279) - $ 949,702
Issuance of stock upon
exercise of options
and warrants 989 20 - - 25,094 - - 25,114
Issuance of stock under
employee stock plans 590 12 - - 11,656 - - 11,668
Net income - - - - - 20,837 - 20,837
Tax benefits arising prior
to quasi-reorganization - - - - 7,457 (7,457) - -
______________________________________________________________________________
Balance December 31,1992 45,744 915 67,133 1,343 998,962 6,101 - 1,007,321
Issuance of stock upon
exercise of options
and warrants 1,385 28 - - 37,125 - - 37,153
Issuance of stock under
employee stock plans 561 11 - - 13,418 - - 13,429
Net income - - - - - 58,902 - 58,902
Tax benefits arising prior
to quasi-reorganization - - - - 20,616 (20,616) - -
______________________________________________________________________________
Balance December 31,1993 47,690 954 67,133 1,343 1,070,121 44,387 - 1,116,805
Issuance of stock upon
exercise of options
and warrants 1,905 38 - - 56,133 - - 56,171
Issuance of stock under
employee stock plans 511 10 - - 15,774 - - 15,784
Income tax benefits
realized from employee
stock option exercises - - - - 26,038 - - 26,038
Net unrealized gain
on securities
available-for-sale - - - - - - $9,592 9,592
Net income - - - - - 124,394 - 124,394
Tax benefits arising prior
to quasi-reorganization - - - - 39,654 (39,654) - -
______________________________________________________________________________
Balance December 31, 1994 50,106 $1,002 67,133 $1,343 $1,207,720 $129,127 $9,592 $1,348,784
==============================================================================
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Principles of Consolidation The consolidated financial statements include the
accounts of the Company and its wholly owned and majority owned subsidiaries
and collaborations. All significant intercompany balances and transactions have
been eliminated.
Cash and Cash Equivalents The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Short-term Investments and Long-term Marketable Securities The Company
invests its excess cash balances in short-term and long-term marketable
securities. These investments primarily include corporate notes, certificates
of deposit and treasury notes.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standard (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The effect of adopting this new standard was not material to net
income. FAS 115 requires that all investment securities be classified into one
of three categories: held-to-maturity, available-for-sale, or trading.
Securities are considered held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. These securities are
recorded as either short-term investments or long-term marketable securities on
the balance sheet depending upon their contractual maturity date. Held-to-
maturity securities are stated at amortized cost, adjusted for amortization of
premiums and accretion of discounts. Securities are considered trading when
bought principally for the purpose of selling in the near term. These
securities are recorded as short-term investments and are carried at market
value. Unrealized holding gains and losses on trading securities are included
in interest income. Securities not classified as held-to-maturity or as trading
are considered available-for-sale. These securities are recorded as long-term
marketable securities and are carried at market value with unrealized gains and
losses included in stockholders' equity net of related tax effects. If a
decline in fair value below cost is considered other than temporary, such
securities are written down to estimated fair value with a charge to marketing,
general and administrative expenses. Prior to adopting FAS 115, marketable debt
securities were carried at amortized cost that approximated fair value.
Marketable equity securities were carried at the lower of cost or market. The
cost of all securities sold is based on the specific identification method.
Non-marketable Equity Investments The carrying value, which approximates the
fair value, is included in other assets in the consolidated balance sheets. The
fair value of non-marketable equity investments is estimated based on the lower
of amortized cost or the offering price in the most recent round of financing.
Property, Plant and Equipment The costs of buildings and equipment are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are generally amortized over the length of
the applicable lease. Expenditures for maintenance and repairs are expensed as
incurred. Interest on construction-in-progress of $0.6 million in 1994, $1.3
million in 1993 and $3.4 million in 1992 has been capitalized and is included
in property, plant and equipment.
Patents As a result of its research and development (R&D) programs, the
Company owns or is in the process of applying for patents in the United States
and other countries which relate to products and processes of significant
importance to the Company. Costs of patents and patent applications are
capitalized and amortized for financial reporting purposes on a straight-line
basis over their estimated useful lives of approximately 12 years.
44
<PAGE> 56
Contract Revenue Contract revenue for R&D is recorded as earned based on the
performance requirements of the contract. In return for contract payments,
contract partners may receive certain marketing and manufacturing rights,
products for clinical use and testing or R&D services.
Income Taxes The Company accounts for income taxes in conformance with FAS
109, "Accounting for Income Taxes," which requires the asset and liability
approach for the financial accounting and reporting for income taxes.
Net Income Per Share: Net income per share is computed based on the weighted
average number of shares of the Company's redeemable common stock, common stock
and redeemable common stock equivalents, if dilutive. The Company's convertible
subordinated debentures are redeemable common stock equivalents but have been
antidilutive to date; therefore, they have not been included in net income per
share calculations.
Financial Instruments Certain of the Company's revenues and expenses occur
outside of the United States. Since the Company's expenses denominated in
foreign currencies are less than revenues denominated in foreign currencies,
risk exists that income may be impacted by changes in the exchange rates
between the U.S. dollar and foreign currencies. To mitigate this risk, the
Company purchases simple foreign currency put options (options) with
expiration dates and amounts of currency that match a portion of expected
revenues so that the adverse impact of movements in currency exchange rates on
the non-dollar denominated revenues will be largely offset by an associated
increase in the value of the options. Realized and unrealized gains related to
the options are deferred until the designated hedged revenues are recorded. The
associated costs, which are amortized over the term of the options, are
recorded as a reduction of the hedged revenues. In prior years, the Company
also purchased foreign currency forward contracts as hedging instruments. These
contracts are currently recorded at fair value and the associated losses are
reflected in the income statement.
Interest income is subject to fluctuations as U.S. interest rates change. To
manage this risk, the Company periodically establishes duration targets for its
investment portfolio that reflect its anticipated use of cash and fluctuations
in market rates of interest. Swaps are used to adjust the duration of the
investment portfolio in order to meet these duration targets. By combining a
swap with a pool of short-term securities equal in size to the notional amount
of the swap, an instrument with an effective interest rate and maturity equal
to the term of the swap is created. The characteristics of the instrument
(including interest rate, maturity, and fair value) are similar to the
characteristics of a high grade corporate security which could be purchased at
the same time the instrument is created. Increases (decreases) in swap variable
payments caused by rising (falling) interest rates will be essentially offset
by increased (reduced) interest income on the related short-term investments,
while the fixed rate payments received from the swap counterparty establishes
the Company's interest income. Net payments made or received on swaps are
included in interest income as adjustments to the interest received on invested
cash. Amounts deferred on terminated swaps are amortized to interest income
over the original contractual term of the swaps by a method that approximates
the level yield method.
401(k) Plan The Company's 401(k) Plan covers substantially all its U.S.
employees. Under the 401(k) Plan, eligible employees may contribute up to 15%
of their eligible compensation, subject to certain Internal Revenue Service
restrictions. The Company matches a portion of
45
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
employee contributions, up to a maximum of 4% of each employee's eligible
compensation. The match is effective December 31 of each year and is fully
vested when made. During 1994, 1993 and 1992, the Company provided $5.2 million,
$4.4 million, and $4.1 million, respectively, for the Company match under the
401(k) Plan.
Note 1: Significant Customer and Geographic Information
One major customer in 1994, 1993 and 1992 contributed 10% or more of the
Company's total revenues. The portions of revenues attributable to this
customer were 21% in 1994, 26% in 1993 and 31% in 1992. This customer
distributes Protropin, Nutropin, Pulmozyme and Actimmune through its extensive
branch network, and is then reimbursed through a variety of sources. A second
customer, a wholesale distributor of all of the Company's products, contributed
11% of revenues in 1994.
Approximate foreign sources of revenues were as follows (millions):
<TABLE>
<CAPTION>
1994 1993 1992
_____________________________________________________
<S> <C> <C> <C>
Europe $81.8 $41.0 $46.4
Asia 19.5 22.2 16.3
Canada 9.7 12.2 10.1
</TABLE>
The Company sells primarily to distributors and hospitals throughout the United
States, Canada and Europe, performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral. In 1994,
1993 and 1992 the Company did not record any material additions to, or losses
against, its provision for doubtful accounts.
Note 2: Research and Development Arrangements
To gain access to potential new products and technologies, the Company has
established research collaborations, including both marketable and non-
marketable equity investments, with companies developing technologies that fall
outside the Company's research focus and with companies having the potential to
generate new products through technology exchanges and investments. Potential
future payments maybe due to selective collaborative partners if the partners
achieve certain benchmarks as defined in the collabortive agreements.
In addition to the collaborations with F. Hoffmann-La Roche, Ltd.
discussed in Note 10, in December 1994, the Company entered into a
collaboration with Scios Nova Inc. (Scios Nova) for the U.S. and Canadian
development of Scios Nova's Auriculin or the treatment of acute renal failure,
which is currently in Phase III clinical trials. Under the terms of the
collaboration, both companies will copromote Auriculin in the United States
and Canada, sharing profits from its commercialization. The Company received
exclusive rights to all markets outside the United States and Canada subject
to a royalty obligation to Scios Nova. In connection with the collaboration,
the Company purchased Scios Nova non-voting preferred stock, which is
convertible into shares of Scios Nova common stock, for $20 million and
charged approximately $5 million to research and development expense. The
Company established a line of credit for Scios Nova which is described in Note
8. In addition, the Company agreed to pay up to $50 million in benchmark
payments, conditional on achieving certain predetermined commercialization
goals.
46
<PAGE> 58
Note 3: Income Taxes
The income tax provision consists of the following amounts (thousands):
<TABLE>
<CAPTION>
1994 1993 1992
_________________________________________________________________
<S> <C> <C> <C>
Current:
Federal $ 38,331 $ - $ 200
State 1,016 - 711
Foreign 29 - 186
_____________________________________
Total current 39,376 - 1,097
Deferred:
Federal (34,193) - -
_____________________________________
Total $ 5,183 $ - $ 1,097
=====================================
</TABLE>
Actual 1994 current tax liabilities are lower than reflected above by $26
million due to employee stock option-related tax benefits which were credited
to stockholders' equity.
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate follows:
<TABLE>
<CAPTION>
Tax Rate
1994 Amount ____________________________
(thousands) 1994 1993 1992
______________________________________________________________________________
<S> <C> <C> <C> <C>
Tax at U.S. statutory rate $ 45,352 35.0% 35.0% 34.0%
Operating losses utilized (39,654) (30.6) (35.0) (33.1)
Alternative minimum tax liability 31,900 24.6 - -
Adjustment of deferred tax assets
valuation allowance (34,193) (26.4) - -
Other, including state taxes 1,778 1.4 - 4.1
___________________________________________
Income tax provision $ 5,183 4.0% - 5.0%
===========================================
</TABLE>
The components of deferred taxes consist of the following at December 31
(thousands):
<TABLE>
<CAPTION>
1994 1993
________________________________________________________________________________
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 42,109 $ 34,297
Inventory valuation differences (545) 7,024
Other 20,473 21,443
__________________________
Total deferred tax liabilities 62,037 62,764
Deferred tax assets:
Federal net operating loss (NOL) carryforward 43,027 75,612
Federal credit carryforward 86,804 56,097
Reserves not currently deductible 31,688 21,929
State credit carryforward 11,324 14,895
State NOL carryforward 1,893 5,531
Amortization of purchased technology 1,330 2,660
Other 4,616 8,992
__________________________
Total deferred tax assets 180,682 185,716
Valuation allowance (84,452) (122,952)
__________________________
Total net deferred tax assets 96,230 62,764
__________________________
Total net deferred taxes $ 34,193 $ -
==========================
</TABLE>
47
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The NOL and credit carryforwards, which totaled $123 million and $87 million,
respectively, expire in the years 1995 through 2009, except for $20 million of
alternative minimum tax credits which never expire. Approximately $26 million
of the valuation allowance at December 31, 1994 reflected above relates to the
tax benefits of stock option deductions which will be credited to additional
paid-in capital when realized.
The valuation allowance decreased by $38.5 million in 1994 and $10 million
in 1993. Realization of net deferred taxes, as well as future reversals of the
valuation allowance (that is, recognition of deferred tax assets) depend on
future earnings from existing and new products and new indications for existing
products. The timing and amount of future earnings will depend on continued
success in marketing and sales of the Company's current products, scientific
success, results of clinical trials and regulatory approval of products under
development.
Note 4: Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
a weighted-average approach which approximates the first-in, first-out method.
Inventories at December 31, 1994 and 1993 are summarized below (thousands):
<TABLE>
<CAPTION>
1994 1993
__________________________________________________________________
<S> <C> <C>
Raw materials and supplies $ 13,145 $ 10,995
Work in process 76,974 60,256
Finished goods 13,081 13,474
______________________
Total $103,200 $ 84,725
======================
</TABLE>
The increase in total inventories in 1994 compared to 1993 is primarily
attributable to an increase in the inventories of Activase.
48
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contiued)
Note 5: Investment Securities
Securities classified as trading, available-for-sale and held-to-maturity at
December 31, 1994, are summarized below. Estimated fair value is based on
quoted market prices for these or similar investments.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________________________________________________________________________
(thousands)
<S> <C> <C> <C> <C>
TOTAL TRADING SECURITIES
(carried at estimated
fair value) $ 85,295 $ 1,107 $ 1,105 $ 85,297
==============================================
TOTAL AVAILABLE-FOR-SALE(a)
(carried at estimated
fair value) $ 25,669 $ 10,058 $ 67 $ 35,660
==============================================
SECURITIES HELD-TO-MATURITY:
(carried at amortized cost)
U.S. Treasury securities
and obligations of other
U.S. government agencies
maturing within:
1 year $ 77,453 $ 15 $ 37 $ 77,431
1-3 years 119,714 - 218 119,496
Other debt securities
maturing within:
1 year 482,463 1,770 452 483,781
1-3 years 44,715 285 490 44,510
______________________________________________
TOTAL HELD-TO-MATURITY $ 724,345 $ 2,070 $ 1,197 $ 725,218
==============================================
</TABLE>
(a) Securities available-for-sale include only equity securities. Net
unrealized gains, reduced by related tax effects, of $9.6 million are
included in stockholders' equity. At January 1, 1994, the excess of
market value over the cost of these securities was $3.9 million.
The carrying value of all investment securities (excluding non-marketable
securities) held at December 31, 1994, is summarized below (thousands):
<TABLE>
<CAPTION>
Security Carrying Value
__________________________________________________________________________
<S> <C>
Held-to-maturity securities maturing within one year
(at amortized cost) $ 559,916
Accrued interest 7,248
Trading securities (at fair value) 85,297
----------
Total short-term investments $ 652,461
==========
Held-to-maturity securities maturing within 1-3 years
(at amortized cost) $ 164,429
Accrued interest 1,637
Securities available-for-sale (at fair value) 35,660
----------
Total long-term marketable securities $ 201,726
==========
</TABLE>
49
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1994, no available-for-sale securities were sold and the Company
recorded a $12.6 million charge to write down certain available-for-sale
biotechnology securities for which the decline in fair value below cost was
other than temporary.
At December 31, 1993, the fair value of the short-term investments
approximated carrying value. The fair value of the long-term marketable debt
securities totaled $63.4 million. The carrying value of marketable equity
securities at December 31, 1993, totaled $12.1 million and was included in
other assets.
The carrying value, which approximated the fair value, of non-marketable
equity securities totaled $6.8 million and $10.5 million at December 31, 1994
and 1993, respectively.
The Company invests its excess cash principally in marketable debt
securities with terms ranging from overnight to three years. Marketable debt
securities held by the Company are issued by a diversified selection of
institutions with strong credit ratings. The Company's investment policy limits
the amount of credit exposure with any one institution. These debt securities
are generally not collateralized. The Company has not experienced any material
losses due to credit impairment on its investments in marketable debt
securities in the years 1994, 1993 and 1992.
Note 6: Financial Instruments
Foreign Currency Instruments As discussed above, the Company currently
purchases simple foreign currency put options (options) solely to hedge
anticipated non-dollar denominated net revenues. At December 31, 1994, the
Company had hedged approximately 85% of net foreign revenues anticipated within
12 months and 35% of net foreign revenues anticipated in the following 12
months. At December 31, 1994, the notional amount of the options totaled $78.3
million and consisted of the following currencies: Australian dollars, Canadian
dollars, German marks, Spanish pesetas, French francs, British pounds, Italian
lira, Japanese yen, and Swedish krona. All contracts mature within the next
two years. The fair value of the options, which is based on exchange rates and
market conditions at December 31, 1994, totaled $1.6 million.
Previously, the Company had entered into foreign currency forward exchange
contracts (forward contracts) as hedging instruments. Unrealized gains and
losses were deferred until the revenue was recognized. In 1994, the Company
closed out its positions by entering into offsetting contracts so that the net
notional amount denominated in foreign currencies was zero. At December 31,
1994, the U.S. dollar equivalent of the notional amount of the forward sell
contracts totaled $28.3 million; the forward buy contracts totaled $29.8
million. The difference, an unrealized loss of $1.5 million, was recorded as a
reduction of net income in 1994 as a charge to marketing, general and
administrative expenses and at December 31, 1994, is included in other accrued
liabilities. All contracts mature within two years.
50
<PAGE> 62
At December 31, 1993, the Company had simple put option contracts with a
notional amount of $6.8 million and forward contracts with a notional amount
of $47.0 million to sell various foreign currencies within the next two years.
At December 31, 1993, the fair value of the option contracts was $0.4 million
and the fair value of the forward contracts was ($1.2) million.
Credit exposure is limited to the unrealized gains on these contracts. All
agreements are with a diversified selection of institutions with strong credit
ratings which minimizes risk of loss due to nonpayment from the counterparty.
The Company has not experienced any material losses due to credit impairment of
its foreign currency instruments.
Interest Rate Swaps The Company enters into interest rate swaps (swaps) as
part of its overall strategy of managing the duration of its cash portfolio.
For each swap, the Company receives interest based on fixed rates and pays
interest to counterparties based on floating rates (three or six month LIBOR)
on a notional principal amount. By combining a swap with a pool of short-term
securities equal in size to the notional amount of the swap, an instrument with
an effective interest rate and maturity equal to the term of the swap is
created. The use of swaps in this manner generates net interest income on the
swap and associated pool of short-term securities equivalent to interest income
that would be earned from a high grade corporate security of the same maturity
as the swap, while reducing credit risk (there is no principal invested in a
swap). The Company's credit exposure on swaps is limited to the value of the
interest rate swaps that have become favorable to the Company and any net
interest earned but not yet received. Swap counterparties typically have strong
credit ratings which minimize the risk of non-performance on the swaps. The
Company has not experienced any material losses due to credit impairment.
The Company targets the average maturity of its investment portfolio
(including swaps) based on its anticipated use of cash and fluctuations in
the market rates of interest. The maturity of the investment portfolio
(including swaps) ranges from overnight funds used for near-term working
capital purposes, investments maturing within the next one to five years for
future working capital, capital expenditures and strategic investments, to
maturities of up to seven years which is comparable to the remaining term of
the Company's outstanding convertible debt. Due to the increase in market
interest rates during 1994 and concern about a continuing rise in rates, the
Company gradually reduced the average effective maturity of its investment
portfolio (including swaps) from 2.8 years at December 31, 1993 to 1.9 years
at December 31, 1994, which approximates the lower end of the range of the
Company's average anticipated cash needs.
The notional amount of each swap is equal to the amount of designated high
quality short-term investments which either mature or reprice within the next
six months. The investments include U.S. Treasury securities, U.S. government
agency securities, commercial paper and corporate debt obligations. Swaps are
used to extend the maturity of the investment portfolio; no speculative
activity occurs.
51
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below outlines specific information for the swaps outstanding at
December 31, 1994. The fair value is based on market prices of similar
agreements. Dollars are in millions.
<TABLE>
<CAPTION>
Interest Rate Swaps Short-term Investments
___________________________ ________________________________
Fixed Average
Rates Variable Effective
Notional To Be Rates To Carrying Average Interest
Amounts Received Be Paid* Value Maturity** Rate
______________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Swaps matched
to investments
to meet maturity
target comparable
to outstanding debt 3 or 6
[Maturing on: 7.68%- month
1/2/02] $150 7.92% LIBOR $150 84 days 5.45%
Swaps matched to
other investments
to meet specific
maturity targets 3 or 6
[Ending dates: 4.08%- month
12/29/95 - 9/20/99] 180 7.20% LIBOR 180 35 days 5.34%
Other short-term
investments - - - 322 - -
__________________________________________________________________
Total $330 - - $652 - -
==================================================================
</TABLE>
* 3 and 6-month LIBOR rates are reset every 3 or 6 months. At December 31,
1994, the 3-month LIBOR rate was 6.5% and the 6-month LIBOR rate was 7.0%.
** Average maturity reflects either the maturity date or, for a floating
investment, the next reset date.
For the year ended December 31, 1994, the weighted average rate received
on swaps was 6.30% and the weighted average rate paid on swaps was 5.12%. Net
interest income received from swaps totaled $4.3 million in 1994.
The carrying amount of the swaps, which reflects the net interest
accrued for such swaps, totaled $6.2 million and $7.5 million at December 31,
1994 and 1993, respectively, and is included in accounts receivable. At
December 31, 1993, the notional amount totaled $350 million and the fair
value totaled $13.0 million.
During 1994, to reduce the average effective maturity of its portfolio,
the Company terminated certain swap agreements prior to maturity and is
amortizing the realized gains and losses over the original contractual term
of the swaps as a reduction of interest income. At December 31, 1994, net
losses of $6.2 million remained unamortized; $3.1 million will be recognized
in 1995 and $3.1 million will be recognized during the following three years.
Financial Instruments Held for Trading Purposes As part of its overall
investment strategy, in 1994 the Company contracted with two external money
managers to manage part of its investment portfolio. One portfolio, which had a
carrying value of $31 million at December 31, 1994, consisted of both U.S.
dollar and non-dollar denominated investments. To hedge the non-dollar
denominated investments, the money manager purchases forward contracts. The
fair value at December 31, 1994, of the forward contracts totaled $2.7
million; the average fair
52
<PAGE> 64
value during the year totaled $15.3 million. Net realized and unrealized trading
gains totaled approximately $389,000 in 1994 and are included in interest
income. Counterparties have strong credit ratings which minimizes the risk of
non-performance from the counterparties.
Summary of Fair Values The table below summarizes the carrying value and fair
value at December 31, 1994, of the Company's financial instruments. The fair
value of the long-term debt was estimated based on the quoted market price at
year end.
<TABLE>
<CAPTION>
Financial Instrument Carrying Value Fair Value
_______________________________________________________________________
(thousands)
<S> <C> <C>
ASSETS
Investment securities
(including accrued interest
and traded forward contracts)
(Note 5) $ 854,187 $ 855,060
Non-marketable equity
investments (Note 5) 6,820 6,820
Options 1,646 1,600
Outstanding swaps 6,165 (2,044)
LIABILITIES
Short-term and long-term
debt (Note 7) 151,229 125,250
Forward contracts 1,500 1,500
</TABLE>
Note 7: Long-term Debt
Long-term debt consists of the following (thousands):
<TABLE>
<CAPTION>
1994 1993
_______________________________________________________________________________
<S> <C> <C>
Convertible subordinated debentures, interest at 5%,
due in 2002 $ 150,000 $ 150,000
Mortgage note payable on buildings and land,
interest at 9.5%, due through 1996 1,229 2,023
______________________
151,229 152,023
Less current maturities 871 793
______________________
Total long-term debt $ 150,358 $ 151,230
======================
</TABLE>
Maturities of long-term debt in 1995 and 1996 are $0.9 million and $0.3
million, respectively. Exclusive of the convertible subordinated debentures, no
long-term debt maturities are due in 1997 and thereafter. The fair value of the
Company debt was $146 million at December 31, 1993.
Convertible subordinated debentures are convertible at the option of the
holder into shares of the Company's redeemable common stock at a conversion
price of $74 in principal amount of the debenture. Upon conversion, the holder
receives, for each $74 in principal amount of the debenture converted, one-half
share of redeemable common stock and $18 in cash. Under the terms of the
Merger (see Note 9), the $18 in cash is reimbursed by Roche Holdings, Inc.
(Roche) to the Company. Generally, the Company may redeem the debentures until
maturity.
53
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8: Leases, Commitments and Contingencies
<TABLE>
<CAPTION>
Future minimum lease payments under noncancelable operating leases at December
31, 1994, are as follows (thousands):
_______________________________________________________________________
<S> <C>
1995 $ 6,501
1996 2,375
1997 2,041
1998 704
__________
Total minimum lease payments $ 11,621
==========
</TABLE>
The Company has leased certain real property. Under many of its lease
arrangements, the Company is responsible for taxes, insurance and maintenance
related to the leased properties. Rent expense under operating leases was
approximately $6.5 million, $5.1 million and $9.4 million for 1994, 1993 and
1992, respectively. Income from subleases was immaterial.
Under two of its lease agreements, the Company is contingently liable to
purchase three buildings at the end of their lease terms. These leases expire
in 1995, but the Company has the option to extend one lease until 1997 and the
other until 1998. If at the end of the final lease renewal term the Company
does not purchase the property or arrange a third party purchase, then the
Company would be obligated to the lessor for a guaranteed payment equal to a
specified percentage of the lessor's purchase price for the properties. The
Company would also be obligated to the lessor for all or some portion of this
amount if the price paid by a third party for the property is below a specified
percentage of the lessor's purchase price. Under these leases, the Company is
also required to maintain certain financial ratios and is subject to limits on
certain types and amounts of debt. The properties under these leases include a
process science laboratory, which is scheduled for completion in 1995, and two
office buildings. As of December 31, 1994, the total amount related to these
leased facilities, for which the Company would be contingently liable, is $65.0
million. In connection with one of the leases, the Company has pledged
securities worth $42.4 million as of December 31, 1994.
The Company expects to develop a new manufacturing facility over the next
three years with a total expected cost of $150 million. In connection
therewith, the Company expects to enter into an operating lease arrangement
similar to the arrangements described above.
Pursuant to its collaboration agreement with Scios Nova (see Note 2), the
Company established a line of credit for $30 million that Scios Nova may draw
down at Scios Nova's discretion through 2002. This commitment is supported
through December 31, 1997, by a bank letter of credit under which Scios Nova
may draw up to $30 million directly from the bank, with immediate repayment of
the funds due to the bank by the Company. Amounts drawn by Scios Nova under the
bank letter of credit or directly from the Company are repayable in the form of
cash or Scios Nova common stock (at the market price prevailing on the date of
repayment) at Scios Nova's option any time through December 30, 2002. Interest
on amounts borrowed by Scios Nova accrue to the Company at the prime rate of
interest. At December 31, 1994, no amounts were drawn.
Note 9: Merger With Roche Holdings, Inc.
The Company's merger (Merger) with a wholly owned subsidiary of Roche Holdings,
Inc. (Roche) was consummated on September 7, 1990 (Effective Date). Pursuant to
the merger agreement with Roche, the Company's stockholders of record on the
Effective Date received, for each
54
<PAGE> 66
share of common stock that they owned, $18 in cash from Roche and one-half share
of newly issued redeemable common stock from the Company. In the Merger, Roche
acquired one-half of the Company's outstanding common stock for $1,537.2
million. The redeemable common stock is substantially identical to the common
stock previously held by stockholders, except that it is redeemable by the
Company at the election of Roche, provided that Roche first deposits in trust
sufficient funds to pay the aggregate redemption price of all outstanding shares
of redeemable common stock. Roche has the right to require the Company to
exercise its redemption right, providing it does so for all shares of
outstanding redeemable common stock at $58.75 per share in the first calendar
quarter of 1995 and increasing to $60.00 per share on April 1, 1995. The
redemption right expires on June 30, 1995. For the period of July 1, 1995, until
June 30, 1996, Roche may submit a bid to purchase the remaining shares of the
Company. The bid must not be for less than $60.00 per share and is subject to
the approval of the Board of Directors and, subsequently, of non-Roche
stockholders.
Independent of its right to have the Company redeem the redeemable common
stock, Roche is permitted to acquire additional shares of the Company's stock
through open market or privately negotiated purchases, provided that Roche's
aggregate holdings do not exceed 75% of the Company's stock outstanding
on a fully diluted basis.
In connection with the Merger, the Company issued 24,433,951 shares of
common stock to Roche for $487.3 million in cash. The common stock Roche
acquired in the Merger and redeemable common stock purchased in the open
market represents approximately 65% of the outstanding equity of the Company
as of December 31, 1994.
Note 10: Related Party Transactions
The Company has transactions with related parties in the ordinary course of
business. Pursuant to contracts, principally regarding R&D projects
and product licensing agreements as described below, the Company recorded
revenue of approximately $25.6 million in 1994, $14.4 million in 1993 and $12.6
million in 1992 from the following related parties: F. Hoffmann-LaRoche, Ltd.
(HLR) (a wholly owned subsidiary of Roche; two officers of HLR serve on the
Company's Board of Directors - Note 9) and Genencor, Inc. (in which the Company
formerly owned a 25% equity interest). The Company is also developing a
mammalian cell line for HLR. In 1994, the Company and HLR began developing an
anti-IgE antibody and Pulmozyme in Japan. During 1994 and 1993, the Company
collaborated with HLR on four projects, including oral antagonists to platelet
gpIIb/IIIa, IL-8, LFA/ICAM and ras farnesyltransferase. In 1992, the Company
entered into a collaboration with HLR to codevelop and copromote Pulmozyme in
Europe. In connection with this collaboration and the Company's efforts to
expand its markets, Genentech Europe Limited (GEL) was established. GEL and
affiliates are currently promoting Pulmozyme in the United Kingdom, Ireland,
Germany and the Netherlands. HLR is responsible for promoting the drug for
cystic fibrosis in the remaining thirteen European countries in the
collaboration. In addition to sharing profits related to Pulmozyme sales from
all collaborative countries with HLR, the Company has received and will
continue to receive milestone payments and technical support from HLR. Also, as
part of the agreement with HLR, and in return for royalties on product sales,
the Company has granted HLR an exclusive license to sell Pulmozyme in countries
outside of Western Europe, the United States and Canada. The Company has three
other R&D collaborations with HLR which were entered into in 1992.
55
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11: Capital Stock
Stock Option Plans
1984 PLANS The 1984 Plans are the 1984 Incentive Stock Option Plan and the
1984 Non-Qualified Stock Option Plan. The Company may grant options under the
1984 Incentive Stock Option Plan only to employees (including officers) of the
Company. The Company may grant options under the 1984 Non-Qualified Stock
Option Plan to employees (including officers) and consultants of the Company.
Options granted under the 1984 Incentive Stock Option Plan and the 1984 Non-
Qualified Stock Option Plan have a maximum term of ten and 20 years,
respectively, from the date of grant. The options generally become exercisable
in increments over a period of four years from the date of grant, with the
first increment vesting after one year. The Company may grant options with
different vesting terms from time to time.
Transactions for the 1984 plans for the year ended December 31, 1994,
were as follows:
<TABLE>
<CAPTION>
Price
Shares Per Share
________________________________________________________________________________
<S> <C> <C>
Options outstanding - beginning of year 4,033,276 $ 14.08-49.75
Grants - -
Exercises (695,348) 14.08-41.75
Cancellations (28,273) 19.38-49.75
_______________________________
Options outstanding - end of year 3,309,655 14.08-49.75
Options available for future grant -
at December 31 ___________
Total shares reserved under the 1984 Plans
at December 31 3,309,655
===========
Shares reserved under options exercisable
at December 31 2,956,972 $ 14.08-49.75
===============================
</TABLE>
1990 PLAN The 1990 Stock Option/Stock Incentive Plan (1990 Plan) permits the
granting of options intended to qualify as incentive stock options and the
granting of options that do not so qualify. The Company may only grant incentive
options to employees (including officers and employee-directors). The Company
may only grant the non-qualified options and other non-option stock incentives
under the 1990 Plan to employees (including officers and employee-directors)
and consultants of the Company. All non-qualified options have a maximum term of
20 years and all incentive options have a maximum term of ten years. The options
generally become exercisable in increments over a period of four years from the
date of grant, with the first increment vesting after one year. The Company may
grant options with different vesting terms from time to time. The 1990 Plan
includes an Automatic Grant Program whereby each individual who was a
non-employee member of the Board on July 18, 1990, and/or on April 30, 1992, was
automatically granted, on each of those dates, a non-statutory option to
purchase 15,000 shares of redeemable common stock. These options have a term of
ten years from the date of grant and vest in equal increments over a three-year
period from the date of grant. Each non-employee member of the Board who is
elected to that position after April 30, 1992, will be automatically granted
such an option as will any employee member of the Board who becomes a
non-employee member of the Board immediately upon the change in status from
employee to non-employee. The 1990 Plan contains a special provision whereby the
Company's former Chairman of the Board was granted in 1990 a special non-
statutory option for 170,000 shares of redeemable common stock with a per share
exercise price of $25.70 in cancellation of outstanding options for the same
number of shares with an exercise price of $44.25.
56
<PAGE> 68
Transactions for the 1990 Plan for the year ended December 31, 1994, were
as follows:
<TABLE>
<CAPTION>
Price
Shares Per Share
_______________________________________________________________________________
<S> <C> <C>
Options outstanding - beginning of year 8,406,451 $ 25.50-46.50
Grants 957,055 48.00-50.75
Exercises (704,875) 25.50-46.50
Cancellations (152,479) 25.50-50.75
______________________________
Options outstanding - end of year 8,506,152 25.50-50.75
Options available for future grants
at December 31 1,893,133
____________
Total shares reserved under the 1990 Plan
at December 31 10,399,285
============
Shares reserved under options exercisable
at December 31 3,770,903 $ 25.50-50.75
==============================
</TABLE>
In addition, the 1990 Plan permits the Company to grant stock appreciation
rights in connection with non-qualified options or incentive options and issue
shares of redeemable common stock, either fully vested at the time of issuance
or vesting according to a pre-determined schedule. The Company may grant three
types of stock appreciation rights under the 1990 Plan: tandem stock
appreciation rights, concurrent stock appreciation rights and limited stock
appreciation rights. At December 31, 1994, no stock appreciation rights for
redeemable common stock have been granted under the 1990 Plan.
1994 PLAN The 1994 Stock Option Plan (1994 Plan) permits the granting of
options intended to qualify as incentive stock options and the granting of
options that do not so qualify. Incentive options may only be granted to
employees (including officers and employee-directors). The non-qualified
options may only be granted under the 1994 Plan to employees (including
officers and employee-directors) and consultants of the Company. All non-
qualified options have a maximum term of 20 years and all incentive options
have a maximum term of ten years. The options generally become exercisable in
increments over a period of five years from the date of grant, with the first
increment vesting after two years. Options may be granted with different
vesting terms from time to time. The 1994 Plan includes an Automatic Grant
Program whereby each individual who is a non-employee member of the Board on
April 30, 1995 will be automatically granted a non-statutory option to
purchase 15,000 shares of redeemable common stock. These options have a term of
ten years from the date of grant and vest in equal increments over a three-year
period from the date of grant. Each non-employee member of the Board who is
elected to that position after April 30, 1995, will be automatically granted
such an option as will any employee member of the Board who becomes a non-
employee member of the Board immediately upon the change in status from
employee to non-employee. Beginning on April 30, 1995, non-employee members of
the Board will no longer receive automatic option grants under the 1990 Plan.
57
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Transactions for the 1994 Plan for the year ended December 31, 1994, were
as follows:
<TABLE>
<CAPTION>
Price
Shares Per Share
________________________________________________________________________________
<S> <C> <C>
Grants 4,180,000 $ 50.13-50.75
Cancellations (15,000) 50.13
______________________________
Options outstanding - end of year 4,165,000 $ 50.13-50.75
Options available for future grants
at December 31 335,000
____________
Total shares reserved under the 1994 Plan
at December 31 4,500,000
============
Shares reserved under options exercisable 0
at December 31 ============
</TABLE>
Employee Stock Plans The Company adopted the 1991 Employee Stock Plan (1991
Plan) on December 4, 1990, and amended it during 1993. All full-time employees
of the Company are eligible to participate in the 1991 Plan. Of the 2,900,000
shares of redeemable common stock reserved for issuance under the 1991 Plan,
1,905,018 shares have been issued as of December 31, 1994. During 1994,
2,364 of the eligible employees participated in the 1991 Plan.
Warrants In consideration of the grant to the Company by certain limited
partners of Genentech Clinical Partners IV (GCP IV) of an option to purchase
all of such limited partners' interests in GCP IV, the Company issued warrants
with each partnership interest to purchase an aggregate of 2,639,250 shares of
common stock (subsequently converted to 1,319,625 shares of redeemable common
stock under the terms of the Merger). All previously unexercisable warrants
held by nondefaulted limited partners became exercisable upon termination of
GCP IV's research program in September 1992. The warrants are exercisable
through July 31, 1996. Redeemable common stock activity during 1994 related to
the warrants is reflected in the following table:
<TABLE>
<CAPTION>
Price
Shares Per Share
_______________________________________________________________________________
<S> <C> <C>
Shares subject to exercisable
warrants - beginning of year 648,357 $ 22.57-28.26
Shares issued upon exercise
of warrants (509,442) 22.57-28.26
________________________________________
Shares subject to exercisable
warrants - end of year 138,915 $ 27.57-28.26
==========
Shares reserved for issuance
under warrant agreements 138,915
==========
</TABLE>
58
<PAGE> 70
Note 12: Legal Proceedings
The Company is a party to various legal proceedings including patent
infringement cases involving growth hormone; Activase; and antibodies to IgE, a
protein central to allergic reactions; and product liability cases involving
Activase. In addition, the FDA is investigating the Company's promotional
practices in connection with Activase, Protropin and Pulmozyme. The Company and
its directors are defendants in two suits filed in California challenging their
actions in connection with the Merger.
In December 1994, the Company and Eli Lilly and Company (Lilly) reached a
settlement regarding all patent infringement and contract actions between the
two parties. Under the terms of the settlement Lilly agreed to pay the Company
up to $145 million ($25 million initially and 16 quarterly payments of $7.5
million), subject to certain restrictions, and the Company granted Lilly
licenses, options to license, or immunities from suit for certain of the
Company's patents. Future payments are required from Lilly on sales of these
products. The Company will continue to pursue patent invalidity and
noninfringement claims against the Regents of the University of California
(UC), which has sued Genentech for infringing a patent owned by UC relating to
recombinant human growth hormone (hGH). In a related matter, the Company also
settled a patent infringement action against Centocor, Inc. whereby the Company
granted Centocor a royalty bearing license to its Cabilly patent for Centocor's
monoclonal anti-IIb/IIIa antibody.
On November 29, 1994, an administrative law judge of the International
Trade Commission (ITC) found, on an incomplete record, that Bio-Technology
General Corp. and its affiliate (BTG) infringed two of the Company's process
patents, and Novo Nordisk A/S and certain of its affiliates (Novo) (BTG and
Novo are collectively referred to as the Competitors) infringed one process
patent covering hGH; however, the judge refused to recommend a ban on
importation of hGH products for treatment of growth hormone inadequacy by the
Competitors in the United States because the Company delayed in providing
documents to the Competitors. The judge's recommendation was subject to review
by the commissioners of the ITC. The Company filed a petition for review by the
full Commission of the judge's recommendations dismissing the complaint, but
the Commission declined such review. On December 1, 1994, the Company filed suit
against the Competitors in the U.S. District Court in Delaware seeking damages
from the Competitors, and asking for an injunction blocking the Competitors
from marketing hGH in the United States Novo has brought suit against the
Company in the U.S. District Court from Southern District New York, alleging
that the patents in the ITC action are invalid and not infringed by Novo. BTG
has brought suit against the Company in the U.S. District Court from the
Southern District of New York seeking to prevent the Company from further
patent infringement action against BTG and alleging unfair competition,
antitrust and malicious prosecution claims.
Based upon the nature of the claims made and the investigation completed
to date by the Company and its counsel, the Company believes the outcome of the
above actions will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
59
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13: Quasi-reorganization
On February 18, 1988, the Company's Board of Directors approved the elimination
of the Company's accumulated deficit through an accounting reorganization of
its stockholders' equity accounts (a quasi-reorganization) effective October 1,
1987, that did not involve any revaluation of assets or liabilities. The
Company eliminated the accumulated deficit of $329.5 million by a transfer from
additional paid-in capital in an amount equal to the accumulated deficit.
Simultaneous with the quasi-reorganization, the Company FAS 96, providing for
recognition of the tax benefits of operating loss and tax credit carryforward
items that arose prior to a quasi-reorganization involving only the elimination
of a deficit in retained earnings being reported in the income statement and
then reclassified from retained earnings to additional paid-in capital.
Subsequently, in September 1989, the staff of the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin No. 86 (SAB 86) which states
that a quasi-reorganization cannot involve only an elimination of a deficit in
retained earnings and, therefore, the tax benefits of prior operating loss and
tax credit carryforwards must be reported as a direct addition to additional
paid-in capital rather than being recorded in the income statement.
In February 1992, the Financial Accounting Standards Board issued FAS 109
which supersedes FAS 96. FAS 109 requires companies that have previously both
adopted FAS 96 and effected a quasi-reorganization that involves only a deficit
elimination, as did the Company, to continue to report the tax benefits of
prior operating losses and tax credit carryforwards in a manner consistent with
FAS 96. FAS 109 also provides that companies effecting a quasi-reorganization
after February 1992 that involves only a deficit elimination shall report the
tax benefits of prior operating losses and tax credit carryforwards in a manner
consistent with SAB 86.
The Company will continue to report in income the recognition of operating
loss and tax credit carryforward items arising prior to the quasi-
reorganization due to the Company's adoption of its quasi-reorganization in
the context of its interpretation of FAS 96 and the quasi-reorganization
literature existing at the date the quasi-reorganization was effected. The SEC
staff has indicated that it would not object to the Company's accounting for
such tax benefits. If the provisions of SAB 86 had been applied, net income
for the year ended December 31, 1994, would have been reduced by $39.7 million
or $.33 per share (1993-net income reduced by $20.6 million or $.18 per share;
1992-net income reduced by $7.5 million or $.07 per share).
60
<PAGE> 72
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF GENENTECH, INC.
We have audited the accompanying consolidated balance sheets of Genentech, Inc.
as of December 31, 1994 and 1993, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Genentech, Inc.
At December 31, 1994 and 1993, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
January 17, 1995
QUARTERLY FINANCIAL DATA (UNAUDITED)
(thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 Quarter Ended
_________________________________________________
December 31 September 30 June 30 March 31
__________________________________________________________________________________
<S> <C> <C> <C> <C>
Total revenues $ 207,760 $ 193,838 $ 194,922 $ 198,870
Product sales 158,137 142,555 152,574 147,798
Gross margin from product sales 133,464 118,095 128,009 125,667
Net income 18,566 33,586 33,387 38,855
Net income per share .15 .28 .28 .33
</TABLE>
<TABLE>
<CAPTION>
1993 Quarter Ended
_________________________________________________
December 31 September 30 June 30 March 31
__________________________________________________________________________________
<S> <C> <C> <C> <C>
Total revenues $ 161,529 $ 165,386 $ 169,837 $ 152,997
Product sales 124,201 119,733 110,768 102,658
Gross margin from product sales 106,517 101,182 93,088 86,059
Net income 18,651 15,516 10,401 14,334
Net income per share .16 .13 .09 .12
</TABLE>
61
<PAGE> 73
11-YEAR FINANCIAL SUMMARY (UNAUDITED)
(millions, except per share and employee data)
<TABLE>
<CAPTION>
1994 1993 1992 1991
________________________________________________________________________________
<S> <C> <C> <C> <C>
Total revenues $ 795.4 $ 649.7 $ 544.3 $ 515.9
Product sales 601.1 457.4 391.0 383.3
Royalties 126.0 112.9 91.7 63.4
Contract & other 25.6 37.9 16.7 20.4
Interest 42.7 41.5 44.9 48.8
_______________________________________
Total costs and expenses $ 665.8 $ 590.8 $ 522.3 $ 469.8
Cost of sales 95.8 70.5 66.8 68.4
Research & development 314.3 299.4 278.6 221.3
Marketing, general & administrative 248.6 214.4 172.5 175.3
Special charge - - - -
Interest 7.1 6.5 4.4 4.8
_______________________________________
Income data
Income (loss) before taxes $ 129.6 $ 58.9 $ 21.9 $ 46.2
Income tax provision 5.2 - 1.1 1.8
Net income (loss) 124.4 58.9 20.8 44.3
Net income (loss) per share 1.04 0.50 0.18 0.39
_______________________________________
Selected balance sheet data
Cash & marketable securities $ 920.9 $ 719.8 $ 646.9 $ 711.4
Accounts receivable 146.3 130.5 93.9 69.0
Inventories 103.2 84.7 65.3 56.2
Property, plant & equipment, net 485.3 456.7 432.5 342.5
Other long-term assets 61.0 64.1 37.1 42.7
Total assets 1,745.1 1,468.8 1,305.1 1,231.4
Total current liabilities 220.5 190.7 133.5 118.6
Long-term debt 150.4 151.2 152.0 152.9
Total liabilities 396.3 352.0 297.8 281.7
Total stockholders' equity 1,348.8 1,116.8 1,007.3 949.7
_______________________________________
Other data
Depreciation and amortization expense $ 53.5 $ 44.0 $ 52.2 $ 46.9
Capital expenditures 82.8 87.5 126.0 71.3
_______________________________________
Share information
Shares used to compute EPS 119.5 117.1 114.0 112.5
Actual year-end 117.2 114.8 112.9 111.3
_______________________________________
Per share data
Market price: High $ 53.50 $ 50.50 $ 39.50 $ 36.25
Low $ 41.75 $ 31.25 $ 25.88 $ 20.75
Book value $ 11.50 $ 9.73 $ 8.92 $ 8.53
_______________________________________
Number of employees 2,738 2,510 2,331 2,202
_______________________________________
</TABLE>
The Company has paid no dividends.
The Financial Summary above reflects adoption of FAS 115 in 1994, FAS 109 in
1992 and FAS 96 in 1988.
All share and per share amounts reflect two-for-one split in 1986, two-for-one
split in 1987.
*Redeemable common stock began trading September 10, 1990; prior to that date
all shares were common stock. Pursuant to the merger agreement with Roche, all
shareholders as of effective date September 7, 1990, received for each common
share owned, $18 in cash from Roche and one-half share of newly issued
redeemable common stock from the Company.
(1) Charges primarily related to Roche merger.
(2) Primarily inventory-related charge.
(3) Charge for purchase of in-process R&D.
62
<PAGE> 74
<TABLE>
<CAPTION>
1990 1989 1988 1987 1986 1985 1984
____________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
$ 476.1 $ 400.5 $ 334.8 $ 230.5 $ 134.0 $ 89.6 $ 69.8
367.2 319.1 262.5 141.4 43.6 5.2 -
47.6 36.7 26.7 20.1 12.9 5.3 2.1
31.9 27.5 33.5 57.1 70.9 71.1 63.5
29.4 17.2 12.1 11.9 6.6 8.0 4.2
____________________________________________________________________________________
$ 572.7 $ 352.9 $ 311.7 $ 186.6 $ 484.6 $ 83.0 $ 66.8
68.3 60.6 46.9 23.8 10.8 1.7 -
173.1 156.9 132.7 96.5 79.8 64.9 55.0
158.1 127.9 101.9 59.5 27.3 16.4 11.8
167.7(1) - 23.3(2) - 366.7(3) - -
5.5 7.5 6.9 6.8 - - -
____________________________________________________________________________________
$ (96.6) $ 47.5 $ 23.1 $ 43.9 $ (350.6) $ 6.6 $ 3.0
1.5 3.6 2.5 1.7 2.4 0.5 0.6
(98.0) 44.0 20.6 42.2 (353.0) 6.1 2.4
(1.05) 0.51 0.24 0.50 (5.10) 0.10 0.04
____________________________________________________________________________________
$ 691.3 $ 205.0 $ 152.5 $ 158.3 $ 84.3 $ 99.8 $ 32.5
58.8 66.8 63.9 92.2 24.5 26.2 12.7
39.6 49.3 63.4 58.0 14.7 4.6 -
300.2 299.1 289.4 195.7 133.1 87.9 72.9
61.7 85.0 89.7 108.7 114.9 16.6 12.6
1,157.7 711.2 662.9 619.0 376.0 238.6 133.6
101.4 75.9 95.4 82.8 37.8 27.2 18.5
153.5 154.4 155.3 168.1 31.6 6.0 11.5
264.5 242.2 263.6 263.6 83.3 35.7 32.2
893.2 469.0 399.3 355.4 292.6 202.9 101.4
____________________________________________________________________________________
$ 47.6 $ 44.6 $ 38.3 $ 23.5 $ 8.1 $ 5.7 $ 4.3
36.0 37.2 110.9 65.3 46.3 20.2 16.1
____________________________________________________________________________________
93.0 86.0 84.5 84.4 69.3 64.0 57.5
110.6 84.3 82.9 78.7 67.0 65.6 57.6
____________________________________________________________________________________
$ 30.88 $ 23.38 $ 47.50 $ 64.75 $ 49.38 $18.81 $10.56
$ 27.50*
$ 20.13 $ 16.00 $ 14.38 $ 28.00 $ 16.44 $ 8.56 $ 7.19
$ 21.75*
$ 8.08 $ 5.56 $ 4.82 $ 4.52 $ 4.37 $ 3.09 $ 1.76
____________________________________________________________________________________
1,923 1,790 1,744 1,465 1,168 893 674
____________________________________________________________________________________
</TABLE>
63
<PAGE> 75
COMMON STOCK AND REDEEMABLE COMMON STOCK INFORMATION
Stock Trading Symbol GNE
Stock Exchange Listings
The redeemable common stock of the Company has been traded on the New York
Stock Exchange and the Pacific Stock Exchange since September 10, 1990. The
Company's common stock was traded on the New York Stock Exchange under the
symbol GNE from March 2, 1988, until September 7, 1990, and on the Pacific
Stock Exchange under the symbol GNE from April 12, 1988, until September 7,
1990. The Company's common stock was previously traded in the NASDAQ National
Market System under the symbol GENE. No dividends have been paid on the common
stock or redeemable common stock. The Company's merger with a wholly owned
subsidiary of Roche Holdings, Inc. (Roche) was consummated on September 7,
1990. The Company's stockholders of record on September 7, 1990, received, for
each share of common stock owned, $18 in cash from Roche and one-half share of
newly issued redeemable common stock from the Company. See Note 9 to the
consolidated financial statements for a further description of the merger
transaction.
Redeemable Common Stockholders
As of December 31, 1994, there were approximately 20,512 stockholders of
record of the Company's redeemable common stock.
<TABLE>
<CAPTION>
Stock Prices Redeemable Common Stock
1994 1993
__________________________________________________________________________
High Low High Low
_________________________________________________
<S> <C> <C> <C> <C>
4th Quarter $ 53 1/2 $ 42 1/8 $ 50 1/2 $ 42 5/8
3rd Quarter 52 1/2 48 1/8 44 7/8 40 1/2
2nd Quarter 51 5/8 43 1/4 44 31 1/4
1st Quarter 51 3/8 41 3/4 39 3/4 31 7/8
</TABLE>
64
<PAGE> 76
STOCKHOLDER INFORMATION
Stockholder Inquiries
Communication concerning transfer requirements, lost certificates and change of
address should be directed to Genentech's transfer agent:
The First National Bank of Boston
Stockholder Services Division
Post Office Box 644
M/S 45-02-09
Boston, Massachusetts 02102-0644
Telephone: (617) 575-3400
If you need additional assistance or information regarding the company, or
would like to receive a free copy of Genentech's Form 10-K and 10-Q reports
filed with the Securities and Exchange Commission, contact the Investor
Relations Department at Genentech's corporate offices at (415) 225-1599.
Financial Information
Genentech invites security analysts and representatives of portfolio management
firms to contact:
Lisa Brock
Director, Investor Relations
Telephone: (415) 225-1034
Independent Auditors
Ernst & Young LLP
San Jose, California
65
<PAGE> 77
OFFICES AND BOARD OF DIRECTORS
Offices
HEADQUARTERS
Genentech, Inc.
460 Point San Bruno Boulevard
South San Francisco,
California
94080-4990
(415) 225-1000
GENENTECH EUROPE LTD.
P.O. Box 3255
Klingental 17
CH-4002 Basel
Switzerland
41-61-688-9050
GENENTECH GMSH
Jechtinger Strasse 11
D-79111 Freiburg l. Br.
Germany
49-761-452-7811
GENENTECH (UK) LTD.
Verulam Point
Station Way
St. Albans
Herts Al1 SHE
United Kingdom
44-707-366-777
GENENTECH B.V.
Planetenweg 67
2132 HM Hoofddorp
The Netherlands
31-250-34-3355
GENENTECH CANADA, INC.
1100 Burloak Drive
Fifth Floor
Burlington, Ontario
L7L 682
(905) 336-6600
GENENTECH, LTD.-JAPAN
Kakimi Kojimachi Bldg.
Annex 4F
3-2-5, Kojimachi
Chiyoda-Ku
Tokyo, 102 Japan
81-33-288-2351
BOARD OF DIRECTORS
HERBERT W. BOYER, PH.D.
Retired Professor of
Biochemistry and Biophysics
University of California,
San Francisco
JURGEN DREWS, M.D.
President of International
Research and Development
and a member of the
Executive Committee,
the Roche Group, a research-
based health care company
ARMIN M. KESSLER, PH.D.
Member of the Board
Roche Holding Ltd.,
Chief Operating Officer,
F. Hoffman La-Roche Ltd.
and Head of the Pharmaceutical
Division, F. Hoffmann-
La Roche and Co. Ltd., a
research-based health care
company
LINDA FAYNE LEVINSON
President
Fayne Levinson Associates,
Inc., a general management
consulting firm
J. RICHARD MUNRO
Chairman of the Executive
Committee of the Board,
Time-Warner, Inc., a media
and entertainment company
DONALD L. MURFIN
General Partner,
Chemicals & Materials
Enterprise Associates, L.P.,
a venture capital firm
THOMAS J. PERKINS
General Partner
Kleiner Perkins Caufield &
Byers, a venture capital firm
JOHN T. POTTS, JR., M.D.
Jackson Professor of Clinical
Medicine, Harvard Medical
School, Physician-in-Chief,
Massachusetts General
Hospital
G. KIRK RAAB
President and
Chief Executive Officer,
Genentech, Inc.
C. THOMAS SMITH, JR.
President and Chief Executive
Officer, VHA, Inc.
an alliance of 1,150 health
care organizations in 47 states
ROBERT A. SWANSON
Chairman of the Board
Genentech, Inc.
DAVID S. TAPPAN, JR.
Retired Director and Chief
Executive Officer, Fluor
Corporation, an international
engineering and construction
company
66
<PAGE> 78
OFFICERS AND STAFF SCIENTISTS
OFFICERS
G. KIRK RAAB*
President and
Chief Executive Officer
RICHARD A. BREWER*
Senior Vice President
LOUIS J. LAVIGNE, JR.*
Senior Vice President
and Chief Financial Officer
ARTHUR D. LEVINSON, PH.D.*
Senior Vice President
JOHN P. MCLAUGHLIN*
Senior Vice President
and Secretary
BARRY M. SHERMAN, M.D.*
Senior Vice President and
Chief Medical Officer
WILLIAM D. YOUNG*
Senior Vice President
GREGORY BAIRD*
Vice President --
Corporate Communications
DAVID W. BEIER
Vice President --
Government Affairs
ROBERT GARNICK, PH.D.
Vice President -- Quality
MARTY GLICK
Vice President and Treasurer
BRADFORD S. GOODWIN
Vice President and Controller
DENNIS J. HENNER, PH.D.
Vice President --
Research Technology
PAUL F. HOHENSCHUH
Vice President --
Manufacturing
EDMON R. JENNINGS
Vice President --
Sales and Marketing
STEPHEN JUELSGAARD
Vice President and
General Counsel
KURT KOPP
Vice President
and General Manager,
Genentech Europe Ltd.
BRYAN LAWLIS, PH.D.
Vice President --
Process Science
M. DAVID MACFARLANE, PH.D.
Vice President --
Regulatory Affairs
POLLY MOORE, PH.D.
Vice President --
Information Resources
HUGH NIALL, M.D.
Vice President --
Research Discovery
JAMES P. PANEK
Vice President --
Engineering and Facilities
ERIC J. PATZER, PH.D.
Vice President --
Product Development
KIM POPOVITS
Vice President -- Sales
STEPHEN RAINES, PH.D.
Vice President --
Intellectual Property and
Assistant Secretary
LARRY SETREN*
Vice President --
Human Resources
NICHOLAS J. SIMON
Vice President --
Business Development
*Member, Operations Committee
STAFF SCIENTISTS
WILLIAM F. BENNETT, PH.D.
Process Science
PHILLIP W. BERMAN, PH.D.
Immunology
STUART E. BUILDER, PH.D.
Process Science
TIM GREGORY, PH.D.
Process Science
DENNIS J. HENNER, PH.D.
Cell Genetics
ROBERT D. HERSHBERG, PH.D.
Process Science
PAUL JARDIEU, PH.D.
Immunology
ANDREW J.S. JONES, D. PHIL.
Process Science
ANTHONY A. KOSSIAKOFF, PH.D.
Protein Engineering
LAURENCE A. LASKY, PH.D.
Immunology
ARTHUR D. LEVINSON, PH.D.
Gene Expression and
Oncogenes
JENNIE P. MATHER, PH.D.
Cell Biology
TIMOTHY A. STEWART, PH.D.
Endocrinology
GORDON A. VENAR, PH.D.
Vascular Biology
JAMES A. WELLS, PH.D.
Protein Engineering
WILLIAM I. WOOD, PH.D.
Molecular Biology
67
<PAGE> 79
GENENTECH, INC.
[PHOTO]
Genentech, Inc.
460 Point San Bruno Boulevard
South San Francisco, CA 94080-4990
(414) 225-1000
<PAGE> 80
[PHOTO]
Actimmune, Activase, Nutropin,
Protropin and Pulmozyme
are registered trademarks of
Genentech, Inc. Auriculln is a
registered trademark of Scios
Nova Inc.
Copyright 1995, Genentech, Inc.
[logo] This entire report is printed on
partially recycled paper.
<PAGE> 1
Exhibit (g)(2)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended: December 31, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 1-9813
GENENTECH, INC.
A Delaware Corporation 94-2347624
(I.R.S. employer identification number)
460 Point San Bruno Boulevard (415) 225-1000
South San Francisco, California 94080-4990 (telephone number)
Securities registered pursuant to Section 12(b) of the Act:
==============================================================================
Title of Each Class Name of Each Exchange on Which Registered
- ------------------------------------------------------------------------------
Redeemable Common Stock, New York Stock Exchange
$.02 par value Pacific Stock Exchange
==============================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The approximate aggregate market value of voting stock held by nonaffiliates
of the registrant is $1,938,520,599 as of March 13, 1995. (A)
Number of shares of Common Stock outstanding as of March 13, 1995: 67,133,409
Number of shares of Redeemable Common Stock outstanding as of March 13, 1995:
50,427,615
Documents incorporated by reference:
PARTS INCORPORATED
DOCUMENT BY REFERENCE
-------- -------------------
(1) Annual Report to stockholders for the year ended II
December 31, 1994 (specified portions)
(2) Definitive Proxy Statement with respect to the 1995 III
Annual Meeting of Stockholders filed by Genentech, Inc.
(SEC file No. 1-9813) with the Securities and Exchange
Commission (hereinafter referred to as "Proxy Statement")
- -----------------------------------------------------------------------------
(A) Excludes 79,457,425 shares of Common Stock and Redeemable Common Stock
held by Directors, Officers and stockholders whose ownership exceeds five
percent of either the Common Stock or Redeemable Common Stock outstanding at
March 13, 1995. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the registrant, or that such person is controlled by or under common control
with the registrant.
<PAGE> 2
PART I
ITEM 1. BUSINESS
Genentech, Inc. (the "Company") is an international biotechnology company that
discovers, develops, manufactures and markets human pharmaceuticals for
significant unmet medical needs. Genentech was organized in April 1976 as a
California corporation and was reincorporated in Delaware in January 1987.
The science of biotechnology product discovery and development is at the core
of the Company's business and has led to ten of the approved pharmaceutical
products of biotechnology. In September 1990, Roche Holdings, Inc. (Roche)
acquired approximately 60% of the Company's voting stock in a merger
transaction (Merger). The common stock Roche acquired in the Merger and
redeemable common stock subsequently purchased on the open market represented
approximately 65% of the outstanding equity of the Company as of March 13,
1995. Roche has the option to purchase all shares of outstanding redeemable
common stock at $58.75 per share in the first calendar quarter of 1995,
increasing to $60.00 per share on April 1, 1995. The redemption right expires
on June 30, 1995. For the period of July 1, 1995 until June 30, 1996, Roche
may submit a bid to purchase the remaining shares of the Company. The bid
must not be for less than $60.00 per share and is subject to the approval of
the Board of Directors and, subsequently, the non-Roche shareholders.
Independent of its right to have the Company redeem the redeemable common
stock, Roche is permitted to acquire additional shares of the Company's stock
through open market or privately negotiated purchases, provided that Roche's
aggregate holdings do not exceed 75% of the Company's stock outstanding on a
fully diluted basis. As used in this report, except where the context
otherwise indicates, the "Company" means Genentech, Inc. and its subsidiaries,
including subsidiary operations in Europe, Canada and Japan.
Products
Genentech has five products that it has developed and currently manufactures
and markets in the United States: Activase, registered trademark, (Alteplase,
recombinant) recombinant tissue plasminogen activator; Protropin, registered
trademark, (somatrem for injection) recombinant growth hormone; Nutropin,
registered trademark, [somatropin (rDNA origin) for injection] human growth
hormone; Pulmozyme, registered trademark, (dornase alfa) inhalation solution;
and Actimmune, registered trademark, (Interferon gamma-1b) recombinant
interferon gamma. Genentech also markets Activase, Protropin and Pulmozyme in
Canada.
Activase: Tissue plasminogen activator (t-PA) is an enzyme that is produced
naturally by the body to dissolve blood clots. However, when a blood clot
obstructs blood flow in the coronary artery and causes a heart attack, the
body is unable to produce enough t-PA to dissolve the clot rapidly enough to
prevent damage to the heart. Through recombinant DNA technology, Genentech
produces Activase, a recombinant form of t-PA, in sufficient quantity for
therapeutic use. The United States Food and Drug Administration (FDA)
approved Activase for marketing in the United States in 1987 for the treatment
of acute myocardial infarction (AMI or heart attack) and in 1990 for use in
the treatment of acute pulmonary embolism (blood clots in the lungs). Phase
III clinical trials are currently underway to evaluate Activase for ischemic
stroke (stroke caused by blood clots in the arteries to the brain). Phase I
studies are being performed to evaluate a second generation of t-PA which is
anticipated to be easier to administer, work faster, cause less unwanted
bleeding and require smaller doses than Activase.
<PAGE> 3
In exchange for royalty payments, Genentech has licensed marketing rights to
recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd. (Kyowa) and Mitsubishi
Kasei Corporation (Mitsubishi). Kyowa and Mitsubishi are marketing forms of
recombinant t-PA under the trademarks Activacin, registered trademark, and
GRTPA, registered trademark, respectively. In a number of countries outside
of the United States, Canada and Japan, Genentech has licensed t-PA marketing
rights to Boehringer Ingelheim International GmbH (Boehringer). Boehringer
markets recombinant t-PA under the trademark Actilyse, registered trademark.
Prior to February 1995 t-PA was marketed in Canada by Genentech under the
Activase trademark and by Boehringer under the trademark Lysatec. In February
1995, Genentech purchased all t-PA Canadian marketing rights from Boehringer.
Protropin: Human growth hormone is a naturally occurring human protein
produced in the pituitary gland. It regulates metabolism and is responsible
for growth in children. A recombinant growth hormone product developed by
Genentech, Protropin was approved by the FDA in 1985 for marketing in the
United States for the treatment of growth hormone inadequacy in children.
In exchange for royalty payments, Genentech has licensed rights to recombinant
growth hormone outside the United States and Canada to Pharmacia AB (formerly
Kabivitrum AB), which manufactures and markets recombinant growth hormone
under the trademarks Somatonorm, registered trademark, and Genotropin,
registered trademark. Under the terms of the agreement with Pharmacia,
Genentech will have the right to begin selling growth hormone in certain
European countries in late 1995, and Pharmacia will have the right in late
1995 to begin selling their own growth hormone in the United States and Canada
provided they have received regulatory approval.
Nutropin: Nutropin is a human growth hormone similar to Protropin; however,
it does not have the additional amino acid, methionine, found in the Protropin
chemical structure. It was approved by the FDA in March 1994 for marketing
for the treatment of growth hormone inadequacy in children. Nutropin was
approved in November 1993 and launched in January 1994 for marketing in the
United States for the treatment of growth hormone inadequacy in children due
to chronic renal insufficiency (CRI); CRI causes irreversible damage to the
kidneys and a variety of medical problems, including growth hormone
inadequacy. The condition affects an estimated 3,000 children in the United
States. Nutropin has been designated an Orphan Drug for treatment of growth
hormone inadequacy in children with CRI in the United States. The Company is
awaiting regulatory approvals to market a liquid formulation of Nutropin,
aimed at providing improved convenience in administration. Phase III clinical
trials are underway to evaluate Nutropin as a treatment for children with
short stature associated with Turner Syndrome (a genetic disorder). Phase II
clinical trials are currently underway with Nutropin to treat growth hormone
inadequacy in adults.
Pulmozyme: Pulmozyme is marketed in the United States, Canada and Europe for
the management of cystic fibrosis, for which it has Orphan Drug designation in
the United States. There are an estimated 53,000 patients with cystic
fibrosis worldwide, a significant portion of whom are expected to be
candidates for treatment.
In 1992, the Company entered into a collaboration with F. Hoffmann-LaRoche,
Ltd. (HLR) to codevelop and copromote Pulmozyme in Europe. In connection with
this collaboration and the Company's efforts to expand its markets, Genentech
Europe Limited (GEL), a Bermuda company, was established. GEL and affiliates
are currently copromoting Pulmozyme in the United Kingdom, Ireland, Germany
and the Netherlands. Presently, HLR is responsible for promoting the drug for
cystic fibrosis in the remaining western European countries in the
collaboration. In addition to sharing profits related to Pulmozyme sales from
all Western European collaborative countries with HLR, the Company has
received and will continue to receive milestone payments and technical support
from HLR. Also, as part of the agreement with HLR, and in return for
<PAGE> 4
royalties on product sales, the Company has granted HLR an exclusive license
to distribute Pulmozyme in countries outside of Western Europe, the United
States and Canada.
Phase III international trials are ongoing to study the use of Pulmozyme to
treat Chronic Obstructive Pulmonary Disease (COPD), a clinical syndrome of
airway inflammation, infection and obstruction that leads to lung destruction.
Actimmune: Actimmune is approved in the United States for the treatment of
chronic granulomatous disease (CGD), a rare, inherited disorder of the immune
system which affects an estimated 250 to 400 Americans. Actimmune received
designation by the FDA in 1990 as an Orphan Drug for the treatment of CGD in
the United States. Phase III clinical trials are ongoing to investigate the
use of Actimmune to treat renal cell carcinoma, a cancer of the kidneys.
Depending on clinical trial results, the Company hopes to expand the market
potential of Actimmune over time by obtaining new approvals for indications
with larger populations, but such expansion is not assured. Additionally, the
Company receives royalty payments from Boehringer from the sale of interferon
gamma in certain countries outside of the United States, Canada and Japan.
Licensed Products:
In addition to the royalties mentioned above, the Company also receives
royalties on the following human health care products:
<TABLE>
<CAPTION>
Product Trademark Company
____________________________ ____________ ______________________________
<S> <C> <C>
Recombinant human insulin Humulin Eli Lilly and Company (Lilly)
Recombinant interferon alpha Roferon-A Hoffmann-La Roche, Inc.
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B Smith-Kline Beecham
Pharmaceuticals (SKB)
Factor VIII Kogenate Miles, Inc.
Bovine growth hormone Posilac Monsanto Corporation
</TABLE>
In December 1994, the Company and Lilly reached an agreement regarding all
patent infringement and breach of contract actions then pending between the
two parties. Under the terms of the settlement, Lilly agreed to pay the
Company up to $145 million ($25 million initially and 16 quarterly payments of
$7.5 million), subject to certain restrictions, and the Company granted Lilly
licenses, options to licenses, or immunities from suit for certain of the
Company's patents. Future payments are required from Lilly on sales of these
products. See "Item 3 Legal Proceedings" for further information.
Products in Development: As part of Genentech's program of research and
development, a number of other products are in various stages of development.
Product development efforts cover a wide range of disorders or medical
conditions, including cancer, respiratory disorders, cardiovascular diseases,
endocrine disorders, inflammatory and immune problems, AIDS and neurological
disorders.
In addition to the new indications for existing products discussed above,
below is a summary of products in clinical development:
<PAGE> 5
<TABLE>
<CAPTION>
Product Description
- -------------------------------- ------------------------------------------------
<S> <C>
Phase III
Anti-HER2 Humanized Monoclonal A humanized monoclonal antibody targeted against
Antibody a protein receptor, which may be useful in the
treatment of severe breast cancer.
Auriculin (registered trademark) A hormone that occurs naturally in the heart
Anaritide which may be useful in treating acute renal
failure (a collaboration between the Company
and Scios Nova Inc.)
Phase II
Anti-IgE Humanized Monoclonal A humanized IgE monoclonal antibody designed to
Antibody interfere early in the process that leads to
symptoms of allergy such as allergic rhinitis
and asthma.
Nerve Growth Factor Nerve growth factor may aid the treatment of
peripheral neuropathy.
IGF-I IGF-I is being studied to determine if it can
improve blood glucose control in type II
diabetics.
gp120 A protein on the surface of HIV-1, it is being
studied as a prophylactic vaccine.
IDEC-C2B8 A monoclonal antibody which may be useful
in the treatment of non-Hodgkin's B-cell
lymphomas (a collaboration between the
Company and IDEC Pharmaceuticals Corporation).
</TABLE>
Preclinical development products include an anti-VEGF humanized monoclonal
antibody to treat cancer and diabetic retinopathies, a ras farnesyltransferase
inhibitor for pancreatic and colon cancers, thrombopoietin for
thrombocytopenia related to cancer treatment, and an oral IIb/IIIa antagonist
for cardiovascular indications.
In cases where a product does not fit with Genentech's marketing strategy, the
Company may license the product to another company. These contract partners
are chosen for their ability to both fund and perform advanced product
development and to facilitate effective entry into major markets. Genentech
has agreed to negotiate in good faith with Roche for a period of at least
three months, but no more than six months, with a view towards reaching a
mutually beneficial licensing or marketing arrangement, prior to entering into
any material licensing or marketing agreement with a third party for any
products, processes, inventions or developments made by Genentech or its
subsidiaries. In the past Genentech has licensed the foreign rights to some of
its products to major foreign pharmaceutical companies and actively
coordinated development and clinical programs with these partners. In some
cases Genentech has retained manufacturing rights to the licensed products.
The Company has retained United States and European marketing rights for most
of its products currently under development. These European marketing rights
represent a significant expansion opportunity for the Company.
In December 1994, the Company entered into a collaboration with Scios Nova
Inc. (Scios Nova) for the United States and Canadian development of Scios
Nova's Auriculin for the treatment of acute renal failure, which is currently
in Phase III clinical trials. Under the terms of the collaboration, both
companies will copromote Auriculin in the United States and Canada, sharing
profits from its commercialization. The Company received exclusive rights to
all markets outside the United States and Canada subject to a royalty
obligation to Scios Nova. In connection with the collaboration, Genentech
purchased Scios Nova non-voting preferred stock, which is convertible into
shares of Scios Nova common stock, for $20 million. The Company established a
line of credit for $30 million that Scios Nova may draw down at Scios Nova's
discretion through 2002. This commitment is supported through December 31,
1997, by a bank letter of credit under which Scios Nova may draw up to $30
<PAGE> 6
million directly from the bank, with immediate repayment of the funds due to
the bank by the Company. Amounts drawn by Scios Nova under the bank letter of
credit or directly from the Company are repayable in the form of cash or Scios
Nova common stock (at the market price prevailing on the date of repayment) at
Scios Nova's option any time through December 30, 2002. Interest on amounts
borrowed by Scios Nova accrue to the Company at the prime rate of interest. At
December 31, 1994, no amounts were drawn. In addition, the Company agreed to
pay up to $50 million in benchmark payments, conditional on achieving certain
predetermined commercialization goals.
In March 1995, Genentech entered into a collaboration with IDEC
Pharmaceuticals Corporation (IDEC) to develop IDEC's anti-CD20 monoclonal
antibody, IDEC-C2B8, for the treatment of non-Hodgkin's B-cell lymphomas, for
which Phase III clinical trials have begun. Under the terms of the agreement,
Genentech and IDEC will copromote IDEC-C2B8 in the United Sates and Canada,
with IDEC receiving a share of the profits. Genentech will retain
commercialization rights throughout the rest of the world except certain
countries in Asia, where Genentech has certain option rights. IDEC will
receive royalties on sales outside the U.S. and Canada. In connection with
the collaboration, Genentech will provide $9 million in preferred equity
investments and licensing fees, up to $17.5 million in additional equity
funding prior to U.S. approval, and up to $30.5 million in milestone and
option payments.
Distribution
Genentech has a marketing department and a United States-based and Canada-
based pharmaceutical sales and distribution organization for its human
pharmaceuticals. Genentech's sales efforts are focused on specialist
physicians based at major medical centers in the United States and Canada.
Products are sold to distributors or directly to hospital pharmacies or
medical centers. The distribution network for Pulmozyme in Western Europe is
discussed in the "Products" section above. Genentech utilizes common
pharmaceutical company marketing techniques, including advertisements, direct
mail, and other methods.
Genentech's products are available at no charge to qualified patients under
Genentech's Uninsured Patient Programs in the United States. Genentech has
established the Genentech Endowment for Cystic Fibrosis so qualified cystic
fibrosis patients in the United States who need Pulmozyme can gain assistance
in obtaining it.
During 1994, Genentech provided certain marketing programs relating to
Activase. The Activase Stocking Assistance Program provided extended payment
terms, up to 195 days, to wholesalers on certain orders, subject to certain
restrictions on the timing and quantities of the orders. Additionally, a
comprehensive wastage replacement program exists for Activase which, subject
to specific conditions, provides customers the right to return Activase to
Genentech for replacement related to both patient related product wastage and
product expiry. Genentech maintains the right to renew, modify or discontinue
the above programs.
As discussed in Note 1 in the "Notes to Consolidated Financial Statements" in
the Company's 1994 Annual Report to Stockholders, the Company has certain
customers who provided over 10% of total revenues. Also discussed in Note 1
are revenues from foreign customers in 1994, 1993 and 1992.
Raw Materials
Raw materials and supplies required for the production of Genentech's
principal products are generally available in quantities adequate to meet the
Company's needs.
Proprietary Technology - Patents and Trade Secrets
Genentech has a policy of seeking patents on inventions arising from its
<PAGE> 7
ongoing research and development activities. Patents issued or applied for
cover inventions ranging from basic recombinant DNA techniques to processes
relating to specific products and to the products themselves. The Company has
either been granted patents or has patent applications pending which relate to
a number of current and potential products, including products licensed to
others. Genentech considers that in the aggregate its patent applications,
patents and licenses under patents owned by third parties are of material
importance to its operations. Important legal issues remain to be resolved as
to the extent and scope of available patent protection for biotechnology
products and processes in the United States and other important markets
outside of the United States. Genentech expects that litigation will likely
be necessary to determine the validity and scope of certain of its proprietary
rights. Genentech is currently involved in a number of patent lawsuits, as
either a plaintiff or defendant, and administrative proceedings relating to
the scope of protection of its patents and those of others. These lawsuits
and proceedings may result in a significant commitment of Company resources in
the future. There can be no assurance that the patents Genentech obtains or
the unpatented proprietary technology it holds will afford Genentech
significant commercial protection.
Genentech has obtained licenses from various parties which it deems to be
necessary or desirable for the manufacture, use or sale of its products. These
licenses (both exclusive and non-exclusive) generally require Genentech to pay
royalties to the parties on product sales.
The Company's trademarks, ACTIVASE, PROTROPIN, NUTROPIN, PULMOZYME and
ACTIMMUNE in the aggregate are considered to be of material importance and are
registered in the United States Patent and Trademark Office and in other
countries throughout the world.
Royalty income recognized by the Company during 1994, 1993 and 1992 for patent
licenses, know-how and other related rights amounted to $126.0 million, $112.9
million and $91.7 million, respectively. In 1994, 1993 and 1992 the Company
incurred royalty expenses amounting to $50.5 million, $41.9 million and $35.9
million, respectively, under licenses from others.
Competition
Genentech faces competition, and believes significant long-term competition
can be expected, from large pharmaceutical and chemical companies as well as
biotechnology companies. This competition can be expected to become more
intense as commercial applications for biotechnology products increase. Some
competitors, primarily large pharmaceutical companies, have greater clinical,
regulatory and marketing resources and experience than Genentech. Many of
these companies have commercial arrangements with other companies in the
biotechnology industry to supplement their own basic research capabilities.
The introduction of new products or the development of new processes by
competitors or new information about existing products may result in price
reductions or product replacements, even for products protected by patents.
However, the Company believes its competitive position is enhanced by its
commitment to research leading to the discovery and development of new
products and manufacturing methods. Additionally, other factors which should
help the Company meet competition include ancillary services provided to
support its products, customer service and dissemination of technical
information to prescribers of its products and the health care community.
Over the longer term, the Company's (and its partners') ability to successfully
market current products, expand their usage and bring new products to the
marketplace will depend on many factors, including the effectiveness and safety
of the products, FDA and foreign regulatory agencies' approvals for new
indications, the degree of patent protection afforded to particular products,
Orphan Drug Act legislation, the possible future enactments of biotechnology
product protection in the United States as well as in Europe and Japan and the
<PAGE> 8
possible enactment in the United States of health care reform legislation which
may include expanded coverage for prescription drugs and cost containment
measures. The Company believes it has strong patent protection or the
potential for strong patent protection for a number of its products that
generate royalty revenue or that it is developing; however, the courts will
determine the ultimate strength of the patent protection of the Company's
products and those on which the Company earns royalties. Loss of Orphan Drug
Act protection for the Company's products that are currently marketed or in
development, resulting from expiration of Orphan Drug status or amendment of
the Orphan Drug Act, could lead to increased competition for those products and
potentially lower future product revenues.
Activase: In 1990, the Company began co-sponsorship of a major comparative
mortality trial in AMI known as GUSTO (Global Utilization of Streptokinase and
Activase for occluded coronary arteries). The GUSTO trial results, as
reported in the "New England Journal of Medicine" in 1993, demonstrated that
the use of an accelerated administration of Activase with intravenous heparin
is a key to saving more lives following a heart attack than the use of
streptokinase. The GUSTO trial showed that among patients receiving treatment
using an accelerated dose of Activase, combined with the blood thinning agent
heparin, administered intravenously, heart attack patient mortality was
reduced by as much as 14% over other thrombolytic regimens studied in the
trial. The positive results from the GUSTO trial have helped increase
Activase's market share in 1994 to more than 70% in the United States for the
treatment of AMI. In June 1994, an FDA advisory committee unanimously agreed
that the accelerated infusion of Activase used in the GUSTO trial has a
clinically significant mortality benefit in the treatment of heart attacks and
recommended that the new dosing regimen be incorporated into the product's
labeling. Factors which may influence future Activase sales include: the
increase in market demand for thrombolytic therapies; the continued impact of
the GUSTO trial results; and physicians' personal experiences in the
administration of thrombolytic therapy.
Genentech is aware of other companies or combinations of companies actively
pursuing the development for the United States market of nonrecombinant or
recombinant t-PA or derivatives of that substance, and additional companies or
combinations of companies pursuing the development of other types of
potentially competitive thrombolytic agents. Genentech is conducting Phase I
clinical trials on a second generation of t-PA which, subject to the ultimate
outcome of the studies, could have a favorable impact on the Company's
competitive position. Although Genentech believes it will have a strong
patent position with respect to t-PA, its patents may not cover products with
similar functions which are not based on t-PA, and competitors have been and
may continue to be successful in developing effective thrombolytic agents
which are not covered by Genentech's patents.
Protropin and Nutropin: Protropin was approved in late 1985 and was
designated an Orphan Drug which provided seven years of market exclusivity for
its use in the treatment of growth hormone inadequacy in children. In 1987, a
product similar to Nutropin, produced by Lilly (and marketed under the
trademark Humatrope, registered trademark, human growth hormone), was approved
for treatment of growth hormone inadequacy in children and was designated an
Orphan Drug. Protropin was protected from some possible additional
competition until March 1994, by virtue of the designation of Lilly's
Humatrope as an Orphan Drug. While several potential competitors are
preparing to independently market a version of human growth hormone similar to
that currently sold by Lilly since Lilly's Orphan Drug exclusivity expired,
the Company is not aware of any third party efforts to market a version of
human growth hormone similar to Protropin.
Based on information currently available, Protropin and Nutropin have
approximately a 66% share of the United States market for treatment of
children with growth hormone inadequacy. Factors that may influence future
Protropin and Nutropin sales include: the number and market entry dates of new
competitive products and their effect on the Company's market share and
pricing; the availability of third party reimbursement for the costs of such
<PAGE> 9
therapies; and the outcome of litigation involving the Company's patents for
growth hormone and related processes, including actions described below.
Pulmozyme: Sales of Pulmozyme for the management of cystic fibrosis in the
United States, Canada and some countries in Europe began in early 1994. As
approvals for marketing the product in other European countries are received,
the Company expects sales to grow. Other factors which may influence future
sales of Pulmozyme for the management of cystic fibrosis include: the number
and kinds of patients benefiting from such therapy; physicians' personal
experiences in the use and administration of the therapy; the availability of
third party reimbursement for the cost of such therapy; the development of
alternative therapies for the treatment and cure of cystic fibrosis; the
development of additional indications for using Pulmozyme; and the cost of
Pulmozyme therapy.
Actimmune: Actimmune received designation as an Orphan Drug by the FDA in
1990 for the treatment of CGD.
Government Regulation
The pharmaceutical industry is subject to stringent regulation with respect to
product safety and efficacy by various federal, state and local authorities.
Of particular significance are the FDA's requirements covering research and
development, testing, manufacturing, quality control, labeling and marketing
of drugs for human use. Regulations similar to the requirements of the FDA
with respect to the approval of new drugs are encountered in most foreign
countries where the Company's principal products are sold. A pharmaceutical
product cannot be marketed in the United States until it has been approved by
the FDA, and then can only be marketed for the indications and claims approved
by the FDA. As a result of these requirements, the length of time, the level
of expenditures and the laboratory and clinical information required for
approval of an NDA (New Drug Application), a PLA (Product License Application)
or an ELA (Establishment License Application) are substantial and can require
a number of years, although recently revised regulations are designed to
reduce somewhat the time for approval of new products.
Although it is difficult to predict the ultimate effect, if any, these matters
or any other pending or future legislation, regulations or government actions
may have on its business, the Company believes that the development of new and
improved products which address critical unmet medical needs through its
research should enable it to compete effectively within this environment.
Research and Development
A major portion of the Company's operating expenses to date have been related
to the research and development of products either on its own behalf or under
contracts. During 1994, 1993 and 1992 the Company's research and development
expenses were $314.3 million, $299.4 million and $278.6 million, respectively.
The Company has sponsored approximately 98%, 99% and 97% of its research and
development for the years 1994, 1993 and 1992, respectively. Prior to 1987,
licensees of the Company's products had provided significant funding of
research and development expenses. However, with the increase in product
sales, and as a result of the Merger, the Company has been able to fund most
of its own research and development.
The Company's research efforts have been the primary source of the Company's
products. The Company intends to maintain its strong commitment to research
as an essential component of its product development effort. In the future,
licensed technology developed by outside parties could become an additional
source of potential products.
Human Resources
As of December 31, 1994 Genentech had 2,738 employees in the United States,
<PAGE> 10
Europe, Canada and Japan.
Environment
Genentech seeks to comply with all applicable statutory and administrative
requirements concerning environmental quality. The Company has made, and will
continue to make, the necessary expenditures for environmental compliance and
protection. Expenditures for compliance with environmental laws have not had
and are not expected to have a material effect on the Company's capital
expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
Genentech's major facilities are located in a research and industrial park in
South San Francisco, California in both leased and owned properties. The
Company currently utilizes approximately 1.6 million square feet of its
facilities for research and development, manufacturing, marketing and
administrative activities. Approximately two-thirds of the square footage is
in owned property, a portion of which is subject to a $1.2 million mortgage,
and the remainder is leased. The Company has made and continues to make
improvements to these properties to accommodate its growth. In addition, the
Company owns approximately 16 acres adjacent to its current facilities that
may be used for future expansion. The Company expects to develop a new
manufacturing facility of approximately 0.4 million square feet in Vacaville,
California over the next three years under a leasing arrangement. The Company
also has leases for certain additional facilities in several locations in the
United States, Europe, Canada and Japan.
Genentech believes its facilities are in good operating condition and that the
real property owned or leased, combined with the new Vacaville site, are
adequate for all present and foreseeable future uses. Genentech believes any
additional facilities could be obtained or constructed with the Company's
capital resources.
ITEM 3. LEGAL PROCEEDINGS
The Company and its directors are defendants in two suits filed in California
in 1990 challenging their actions in connection with the Merger.
In December 1994, the Company and Eli Lilly and Company (Lilly) reached a
settlement regarding all patent infringement and breach of contract actions
then pending between the two parties regarding recombinant human growth
hormone (hGH) and recombinant human insulin. All of these actions had been
previously consolidated in the Federal District Court for the Southern
District of Indiana. Under the terms of the settlement Lilly agreed to pay the
Company up to $145 million ($25 million initially and 16 quarterly payments of
$7.5 million), subject to certain restrictions, and the Company granted Lilly
licenses, options to licenses, or immunities from suit for certain of the
Company's patents. Future payments are required from Lilly on sales of these
products. The Company will continue to pursue patent invalidity and non-
infringement claims against the Regents of the University of California (UC),
which has sued Genentech for infringing a patent owned by UC relating to hGH.
In a related matter, in December 1994, the Company also settled its patent
infringement action against Centocor, Inc. whereby the Company granted
Centocor a royalty bearing license to its Cabilly patent for Centocor's
monoclonal anti-IIb/IIIa antibody. The suit was orginally filed in the Federal
District Court for Northern California.
On September 21, 1993, the United States International Trade Commission (the
"ITC") voted in favor of instituting an investigation based on a recombinant
human growth hormone patent infringement complaint filed by Genentech against
Bio-Technology General Corporation and its affiliate ("BTG") and Novo Nordisk
A/S and certain of its affiliates ("Novo") (BTG and Novo are collectively
referred to as the "Competitors"). The complaint asked the ITC to impose a ban
on importation of hGH products for treatment of growth hormone inadequacy by
<PAGE> 11
the Competitors in the United States. On November 29, 1994, the administrative
law judge of the ITC found, on an incomplete record, that BTG infringed two
Genentech process patents and Novo infringed one process patent covering hGH;
however, the judge recommended that the case be dismissed because Genentech
delayed in providing documents to the Competitors. Genentech did not initially
produce the documents because it believed that they were protected by the
attorney-client privilege. Genentech filed a petition for a review by the full
Commission of the judge's recommendation dismissing the complaint, but on
January 17, 1995 the Commission declined such review and agreed that the case
be dismissed. On March 16, 1995 the Company filed an appeal of the
Commission's decision in the United States Court of Appeals for the Federal
Circuit.
On December 1, 1994 the Company filed suit against the Competitors in the U.S.
District Court in Delaware seeking damages from the Competitors, and asking
for an injunction blocking the Competitors from marketing hGH in the United
States. On November 30, 1994, Novo brought suit against the Company in the
U.S. District Court for the Southern District New York, alleging that the
patents in the ITC action are invalid and not infringed by Novo. On January 6,
1995, BTG brought suit against the Company in the U.S. District Court from the
Southern District of New York seeking to prevent the Company from further
patent infringement action against BTG and alleging unfair competition,
antitrust and malicious prosecution claims.
On December 22, 1993, Tanox Biosystems, Inc. (Tanox) sued the Company, Roche
Holdings, Inc., Roche Holdings Ltd., and Hoffmann-LaRoche Inc. in the State
District Court of Harris County, Texas alleging, among other things, trade
secret misappropriation, breach of contract, breach of the duty of good faith
and fair dealing, and breach of confidential relationship relating to a 1989
confidentiality agreement and a materials transfer agreement between the
Company and Tanox. The suit seeks injuctive relief, unspecified punitive
damages, a royalty free sublicense to certain third party patents and legal
fees. On January 21, 1994, the Company filed suit against Tanox in the
Federal District Court for the Southern District of Texas, for infringing a
Genentech patent that covers antibody technology related to chimeric and
humanized immunoglobulin compositions, expression vectors and methods.
Genentech's suit encompasses all of Tanox's infringing activities, including
development efforts for antibodies to IgE, a protein central to allergic
reactions, and seeks injunctive relief, an accounting for damages, including
interest and costs, trebling of the damages due to the willful nature of
Tanox's infringement and legal fees. Genentech's suit also seeks a declaratory
judgement that it has not breached any agreement with Tanox. In April, 1994,
Tanox's suit and Genentech's suit were consolidated in the Federal District
Court for the Southern District of Texas. On February 1, 1995, Tanox filed
its First Amended Complaint that added additional defendants, additional
causes of action and specified an alleged monetary damage amount. On February
1, 1995, Genentech filed an Amended Complaint and added claims against Ciba-
Geigy, Ltd. (Tanox's exclusive licensee of its technology) for patent
infringement of the Genentech patent described above.
The Company is also a defendant or plaintiff in other patent infringement and
product liability cases. In addition, the FDA is investigating the Company's
promotional practices in connection with Activase, Protropin and Pulmozyme.
Based upon the nature of the claims made and the investigations completed to
date by the Company and its counsel, the Company believes the outcome of all
of the actions described above will not have a material effect on the
financial position, results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> 12
GENENTECH, INC.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and positions
with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C>
G. Kirk Raab 59 President and Chief Executive Officer
Richard B. Brewer 43 Senior Vice President
Louis J. Lavigne, Jr. 46 Senior Vice President and Chief Financial Officer
Arthur D. Levinson, Ph.D. 44 Senior Vice President
John P. McLaughlin 43 Senior Vice President and Secretary
Barry M. Sherman, M.D. 53 Senior Vice President and Chief Medical Officer
William D. Young 50 Senior Vice President
Gregory Baird 44 Vice President - Corporate Communications
David W. Beier 46 Vice President - Government Affairs
Robert Garnick, Ph.D. 45 Vice President - Quality
Marty Glick 45 Vice President and Treasurer
Bradford S. Goodwin 40 Vice President and Controller
Dennis J. Henner, Ph.D. 43 Vice President - Research Technology
Paul F. Hohenschuh 52 Vice President - Manufacturing
Edmon R. Jennings 47 Vice President - Sales and Marketing
Stephen G. Juelsgaard 46 Vice President, General Counsel and
Assistant Secretary
Kurt Kopp 46 Vice President and General Manager, Europe
Bryan Lawlis, Ph.D. 43 Vice President - Process Science
M. David MacFarlane, Ph.D. 54 Vice President - Regulatory Affairs
Polly Moore, Ph.D. 47 Vice President - Information Resources
Hugh D. Niall, M.D. 57 Vice President - Research Discovery
James P. Panek 41 Vice President - Engineering and Facilities
Eric J. Patzer, Ph.D. 45 Vice President - Development
Kim Popovits 36 Vice President - Sales
Stephen Raines, Ph.D. 57 Vice President - Intellectual Property and
Assistant Secretary
Larry Setren 43 Vice President - Human Resources
Nicholas J. Simon 40 Vice President - Business Development
<FN>
All officers are elected annually by the Board of Directors. There is no
family relationship among any of the officers or directors.
</TABLE>
Business Experience
Mr. Raab was elected Chief Executive Officer in February 1990. He joined the
Company in February 1985 as President, Chief Operating Officer and Director.
Mr. Raab was President, Chief Operating Officer and Director of Abbott
Laboratories, a health care company, from July 1981 to January 1985.
Mr. Brewer was elected Senior Vice President in December 1992. Mr. Brewer has
held a number of other positions in the Marketing Department including Vice
President of Sales and Marketing. He joined the Company in April 1984 as
Product Manager for endocrine products.
Mr. Lavigne was elected Senior Vice President in July 1994. He was elected
Chief Financial Officer in August 1988 and elected Vice President in July
1986. Prior to that, he had been Controller since May 1983 and an officer of
the Company since February 1984. Mr. Lavigne joined the Company in July 1982
as Assistant Controller.
<PAGE> 13
Dr. Levinson was elected Senior Vice President in December 1992. Dr. Levinson
has held a number of other positions, including Vice President of Research,
subsequent to joining the Company in May 1980 as a Senior Scientist.
Mr. McLaughlin has served as Senior Vice President and Secretary since July
1994. He was elected Senior Vice President, General Counsel and Secretary in
1993, and elected Vice President, General Counsel and Secretary in 1989. He
joined the Company as Vice President of Government Affairs in September 1987
from Royer, Shacknai & Mehle, a Washington, D.C. law firm, where he was a
partner. Mr. McLaughlin was Counsel to the House Energy and Commerce
Subcommittee on Health and the Environment and earlier served as counsel to
the House Subcommittee on Consumer Protection and Finance.
Dr. Sherman was elected Senior Vice President and Chief Medical Officer in
February 1995 and had served as Vice President of Medical Affairs since
February 1989. He joined the Company in 1985 as Director of Clinical
Research. Prior to joining the Company, he was Professor of Medicine,
Associate Chairman of the Department of Internal Medicine and Director of the
Clinical Research Center at the University of Iowa.
Mr. Young was elected Senior Vice President in August 1988. He was Vice
President of Manufacturing and Process Science from April 1983 until 1988.
Mr. Young joined the Company in September 1980 as Director of Manufacturing
from Eli Lilly and Company.
Mr. Baird joined the Company in February 1992 as Vice President of Corporate
Communications. Prior to joining Genentech, Mr. Baird was employed by G.D.
Searle & Co. for five years as Vice President of Corporate Communications.
Mr. Beier joined the Company in March 1989 as Vice President of Government
Affairs. Prior to joining Genentech, Mr. Beier spent 10 years as counsel to
the Committee on the Judiciary of the United States House of Representatives
where he was responsible for intellectual property and international trade
issues.
Dr. Garnick was elected Vice President of Quality in April 1994. He was
Senior Director of Quality Control from 1990 to 1994 and Director of Quality
Control from 1988 to 1990. Dr. Garnick joined the Company in August 1984 from
Armour Pharmaceutical.
Mr. Glick was elected Vice President in July 1991. He joined the Company in
June 1987 as Director of Tax and was elected Treasurer in July 1990. Before
joining Genentech, Mr. Glick was employed by Levi Strauss & Co. for seven
years, most recently as Director of Tax Planning.
Mr. Goodwin was promoted to Controller in June 1989 and elected Vice President
in July 1993. Prior to Mr. Goodwin's current position, he was the Director of
Financial Planning and Analysis, the Assistant Controller and the General
Auditor. Before joining Genentech in April 1987, Mr. Goodwin worked for Price
Waterhouse, an international public accounting firm, for 10 years, most
recently as Senior Audit Manager.
Dr. Henner was elected Vice President of Research Technology in July 1994.
From 1990 to 1994 he was Senior Director of Research Technology. Dr. Henner
joined the Company in 1981 as a Scientist in Research. Prior to joining
Genentech, Dr. Henner was at Scripps Clinic and Research Foundation.
Mr. Hohenschuh was elected Vice President of Manufacturing in September 1989
He was Vice President of Biochemical Manufacturing from July 1986 until 1989
and Senior Director of Biochemical Manufacturing from June 1985 to June 1986
Mr. Hohenschuh joined the Company in October 1982 as Director of Biochemical
Manufacturing.
Mr. Jennings was elected to Vice President of Sales and Marketing in January
1994 and had served as Vice President of Sales since December 1990. He joined
<PAGE> 14
the Company in September 1985 as Western Area Sales Manager. Prior to joining
Genentech, Mr. Jennings was Western Region Sales Manager of Bristol-Myers'
Oncology Division. Mr. Jennings held various sales and management positions
during his twelve-year career with Bristol-Myers.
Mr. Juelsgaard was elected Vice President, General Counsel and Assistant
Secretary in July 1994, and was elected Vice President of Corporate Law in
February 1993. He joined the Company in 1985 as Corporate Counsel and
subsequently held the positions of Senior Corporate Counsel and Chief
Corporate Counsel.
Mr. Kopp joined the Company in January 1993 as Vice President and General
Manager, Europe. Mr. Kopp was employed by F. Hoffmann-La Roche, Ltd from 1980
until December 1992, most recently as Regional Director for Latin America.
Dr. Lawlis was elected Vice President of Process Science in July 1994. Dr.
Lawlis joined the Company in February 1981 as a Scientist in Biocatalysis;
most recently he was Senior Director of Process Science. Prior to joining
Genentech, Dr. Lawlis was a National Institutes of Health Post Doctoral Fellow
at Kansas State University.
Dr. MacFarlane joined the Company in August 1989 as Vice President of
Regulatory Affairs. Dr. MacFarlane was employed by Glaxo, Inc. from 1978
until he joined Genentech. At Glaxo, Dr. MacFarlane had served as Vice
President of Regulatory Affairs, Director of Regulatory Affairs, and Director
of Research and Professional Services.
Dr. Moore was elected Vice President of Information Resources in April 1994.
She was Senior Director of Information Resources from July 1992 to 1994 and
Director of Computer Resources from November 1987 to June 1992. Dr. Moore
joined Genentech in August 1982 as a Senior Systems Analyst in Scientific
Computing.
Dr. Niall was elected Vice President of Research Discovery in July 1991. He
joined the Company in 1985 as Director of Protein Chemistry and subsequently
held the positions of Director of Developmental Biology and Senior Director of
Research Discovery.
Mr. Panek was elected Vice President of Engineering and Facilities in July
1993. He joined the Company in 1982 and held a number of positions in the
manufacturing division before becoming Director of Engineering and Facilities
in 1988. Prior to joining Genentech, Mr. Panek was employed by Eli Lilly and
Company for six years.
Dr. Patzer was elected Vice President of Development in February 1993. He
joined the Company in 1981 as a Scientist and subsequently held the positions
of Senior Scientist, Director and Senior Director.
Ms. Popovits was elected Vice President of Sales in October 1994. She was
Director of Field Sales from January 1993 to 1994 and Regional Manager of the
Sales Department from October 1989 to December 1992. Ms. Popovits was at
Dupont Critical Care for six years prior to joining the Company in November
1987 as Division Manager in the Southeast region.
Dr. Raines was elected Vice President of Intellectual Property in March 1989
and Assistant Secretary in April 1989. He joined the Company as Vice
President of Patents in May 1988. Dr. Raines was employed by Warner-Lambert
Company from 1973 to 1988 holding numerous positions in the Legal Division and
ultimately acted as Counsel for the Intellectual Property Department.
Mr. Setren was elected Vice President of Human Resources in April 1989. He
joined the Company in February 1986 as Director of Human Resources. Before
joining Genentech, Mr. Setren was Vice President of Human Resources at the
Getz Corporation.
Mr. Simon was elected Vice President of Business Development in December 1994.
<PAGE> 15
He was Senior Director of Business Development from December 1993 to 1994.
Mr. Simon joined Genentech as a Director in Business Development in December
1989 from Koma Corporation.
Mr. Jennings is named as a defendant in a criminal proceeding pending in the
U.S. District Court for the District of Minnesota alleging conspiracy, mail
fraud and wire fraud in connection with prescribing Protropin.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The sections labeled "Common Stock and Redeemable Common Stock Information"
and Notes 9 and 11 of the Notes to Consolidated Financial Statements appearing
on pages 64, 54 through 55, and 56 through 58, respectively, of the Company's
1994 Annual Report to Stockholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "11-Year Financial Summary" appearing on pages 62 and 63
of the Company's 1994 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 33 through 38 of the
Company's 1994 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements appearing on pages 40 through 60, the Report of Ernst & Young LLP,
Independent Auditors, appearing on page 61 and the section entitled "Quarterly
Financial Data (unaudited)" appearing on page 61 of the Company's 1994 Annual
Report to Stockholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The sections labeled "Nominees" and "Section 16 Reporting" appearing in
the Company's Proxy Statement in connection with the 1995 Annual Meeting of
Stockholders on pages 3 through 5 and 11 are incorporated herein by reference.
(b) Information concerning the Company's Executive Officers is set forth in
Part I of the Form 10-K.
<PAGE> 16
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation", "Compensation of Directors",
"Compensation of Executive Officers", "Summary of Compensation", "Stock Option
Grants and Exercises", "Employment Agreements", "Loans and Other Compensation"
and "Compensation Committee Interlocks and Insider Participation" appearing in
the Company's Proxy Statement in connection with the 1995 Annual Meeting of
Stockholders on pages 11 through 18 and 20 are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Merger with Roche Holdings, Inc.", "Principal
Stockholders of Genentech" and "Security Ownership of Management" appearing in
the Company's Proxy Statement in connection with the 1995 Annual Meeting of
Stockholders on pages 1 through 2 and 10 through 11 are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Relationships and Related Transactions" appearing
in the Company's Proxy Statement in connection with the 1995 Annual Meeting of
Stockholders on pages 21 through 23 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
The following Financial Statements and supplementary data are included in
the Company's 1994 Annual Report to Stockholders and are incorporated herein
by reference pursuant to Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
Page(s) in
1994 Annual
Report to Stockholders
----------------------
<S> <C>
Consolidated Statements of Income for each
of the three years in the period ended
December 31, 1994 40
Consolidated Statements of Cash Flows for each
of the three years in the period ended
December 31, 1994 41
Consolidated Balance Sheets at December 31,
1994 and 1993 42
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1994 43
Notes to Consolidated Financial Statements 44-60
Report of Ernst & Young LLP, Independent Auditors 61
Quarterly Financial Data (unaudited) 61
</TABLE>
2. Financial Statement Schedule
The following schedule is filed as part of this Form 10-K:
<PAGE> 17
Schedule II- Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 1994.
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation.(2)
3.2 By-laws.(2)
3.3 Amended Certificate of Incorporation.(8)
3.4 Restated By-Laws.(9)
4.1 Indenture, dated March 27, 1988 ("Indenture") for U.S. $150,000,000
5% Convertible Subordinated Debentures due 2002.(3)
4.2 First Supplemental to Indenture, dated August 17, 1990.(9)
4.3 Rights Agreement, dated April 21, 1988, between the Company and The
First National Bank of Boston, as Rights Agent.(4)
10.1* 1984 Incentive Stock Option Plan.(2)
10.2* Restated 1984 Non-Qualified Stock Option Plan.(11)
10.3* Agreements dated February 12, 1985 and May 14, 1985 between the
Company and G. Kirk Raab.(1)
10.4 Patent License Agreement with Columbia University dated October 12,
1988.(3)
10.5 Amended and Restated Contract for the Sale and Distribution of
Protropin dated as of March 1, 1991.(10)
10.6* Agreement dated April 15, 1988 between the Company and G. Kirk
Raab.(5)
10.7* Restated Relocation Loan Program.(10)
10.8* Employment Agreement, dated October 25, 1989, between the Company
and G. Kirk Raab.(7)
10.9* Employment Agreement, dated October 25, 1989, between the Company
and William D. Young.(7)
10.10* Employment Agreement, dated October 25, 1989, between the Company
and Louis J. Lavigne, Jr.(7)
10.11* Employment Agreement, dated October 25, 1989, between the Company
and John P. McLaughlin.(7)
10.12 Agreement and Plan of Merger, dated as of February 2, 1990, among
<PAGE> 18
the Company, Roche Holdings, Inc. and HLR (U.S.), Inc. with
exhibits.(6)
10.13* Restated 401(k) Plan.(11)
10.14* Agreements dated June 27, 1989 between the Company and G. Kirk
Raab.(7)
10.15* 1991 Employee Stock Plan, as amended.(12)
10.16* Amended 1990 Stock Option/Stock Incentive Plan.(11)
10.17* Amended Employment Agreement, dated July 31, 1990, between the
Company and G. Kirk Raab.(9)
10.18* Amended Employment Agreement, dated July 31, 1990, between the
Company and William D. Young.(9)
10.19* Amended Employment Agreement, dated July 31, 1990, between the
Company and Louis J. Lavigne, Jr.(9)
10.20* Amended Employment Agreement, dated July 31, 1990, between the
Company and John P. McLaughlin.(9)
10.21 Governance Agreement, dated September 7, 1990, between the Company
and Roche Holdings, Inc.(9)
10.22 Heads of Agreement, dated as of February 11, 1992, between the
Company and F. Hoffmann-LaRoche Ltd.(10)
10.23 Agreement dated June 6, 1991 between the Company and Grandview
Drive Joint Venture.(10)
10.24* Supplemental Plan.(10)
10.25* Agreements dated October 17, 1990 between the Company and G. Kirk
Raab.(10)
10.26* Agreement dated March 17, 1992 between the Company and Robert A.
Swanson.(10)
10.27* 1994 Stock Option Plan.(11)
13.1 1994 Annual Report to Stockholders.(12)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(12)
27.1 Financial Data Schedule.(12)
28.1 Description of the Company's capital stock.(2)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended December 31,
1994.
- --------------------
(1) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1985 and incorporated herein by reference.
(2) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference.
<PAGE> 19
(3) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1988 and incorporated herein by reference.
(4) Filed as an exhibit to Form 8-K dated May 3, 1988 and incorporated
herein by reference.
(5) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1988 and incorporated herein by reference.
(6) Filed as an exhibit to Form 8-K dated February 15, 1990 and incorporated
herein by reference.
(7) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
(8) Filed as an exhibit to Form S-4 dated May 2, 1990 and incorporated
herein by reference.
(9) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1990 and incorporated herein by reference.
(10) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference.
(11) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
(12) Filed with this document.
* As required by Item 14(a)(3) of Form 10-K, the Company identifies this
Exhibit as a management contract or compensatory plan or arrangement of the
Company. For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking
shall be incorporated by reference into registrant's Registration Statements
on Form S-8 Nos. 2-95744, 33-9292, 33-16671, 33-39631 and 33-60816:
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and shall be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GENENTECH, INC.
Registrant
Date: March 30, 1995
By: /s/ BRADFORD S. GOODWIN
----------------------------------
Bradford S. Goodwin
Vice President and Controller
(Principal Accounting Officer)
POWER OF ATTORNEY
<PAGE> 20
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Louis J. Lavigne, Jr., Senior Vice President
and Chief Financial Officer, and Bradford S. Goodwin, Vice President and
Controller, his attorney-in-fact, with the full power of substitution, for him
in any and all capacities, to sign any amendments to this report, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that said attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
Chief Executive Officer:
/s/ G. KIRK RAAB President, Chief Executive March 30, 1995
- --------------------------- Officer and Director
G. Kirk Raab
Principal Financial Officer:
/s/ LOUIS J. LAVIGNE, JR. Senior Vice President and March 30, 1995
- --------------------------- Chief Financial Officer
Louis J. Lavigne, Jr.
Director:
/s/ HERBERT W. BOYER Director March 30, 1995
- ---------------------------
Herbert W. Boyer
/s/ JURGEN DREWS Director March 30, 1995
- ---------------------------
Jurgen Drews
/s/ ARMIN M. KESSLER Director March 30, 1995
- ---------------------------
Armin M. Kessler
/s/ LINDA F. LEVINSON Director March 30, 1995
- ---------------------------
Linda F. Levinson
/s/ J. RICHARD MUNRO Director March 30, 1995
- ---------------------------
J. Richard Munro
/s/ DONALD L. MURFIN Director March 30, 1995
- ---------------------------
Donald L. Murfin
/s/ JOHN T. POTTS, JR. Director March 30, 1995
<PAGE> 21
- ---------------------------
John T. Potts, Jr.
/s/ C. THOMAS SMITH, JR. Director March 30, 1995
- ---------------------------
C. Thomas Smith, Jr.
/s/ ROBERT A. SWANSON Director March 30, 1995
- ---------------------------
Robert A. Swanson
/s/ DAVID S. TAPPAN, JR. Director March 30, 1995
- ---------------------------
David S. Tappan, Jr.
<TABLE>
SCHEDULE II
GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1994, 1993 and 1992
(in thousands)
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions(1) Period
------------ ---------- ---------- ----------
Allowance for doubtful accounts
and returns:
<S> <C> <C> <C> <C>
Year Ended December 31, 1994: $ 3,572 $ 5,583 $ (4,733) $ 4,422
========= ========= ========= =========
Year Ended December 31, 1993: $ 2,220 $ 4,003 $ (2,651) $ 3,572
========= ========= ========= =========
Year Ended December 31, 1992: $ 3,780 $ 2,460 $ (4,020) $ 2,220
========= ========= ========= =========
Inventory reserves:
Year Ended December 31, 1994: $ 2,606 $ 11,940 $ (1,538) $ 13,008
========= ========= ========= =========
Year Ended December 31, 1993: $ 3,094 $ 1,194 $ (1,682) $ 2,606
========= ========= ========= =========
Year Ended December 31, 1992: $ 3,395 $ 289 $ (590) $ 3,094
========= ========= ========= =========
Reserve for non-marketable
equity securities:
</TABLE>
<PAGE> 22
<TABLE>
<S> <C> <C> <C> <C>
Year Ended December 31, 1994: $ 3,875 $ 748 $ - $ 4,623
========= ========= ========= =========
Year Ended December 31, 1993: $ 3,275 $ 600 $ - $ 3,875
========= ========= ========= =========
Year Ended December 31, 1992: $ 1,000 $ 2,275 $ - $ 3,275
========= ========= ========= =========
<FN>
(1) Represents amounts written off or returned against the allowance or reserves.
</TABLE>
INDEX OF EXHIBITS FILED WITH FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994
Exhibit No. Description
- ----------- -----------
10.15 1991 Employee Stock Plan, as amended.
13.1 1994 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
<PAGE> 23
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Genentech, Inc. of our report dated January 17, 1995, included
in the 1994 Annual Report to Stockholders of Genentech, Inc.
Our audits also included the financial statement schedule of Genentech,
Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the 1991 Employee Stock Plan, the 1990 Stock
Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan and
the 1984 Non-Qualified Stock Option Plan, the shares issuable to certain
warrant holders, the shares issuable to certain convertible subordinated
debenture holders and the Genentech, Inc. Tax Reduction Investment Plan
and in the related Prospectuses of our report dated January 17, 1995,
with respect to the consolidated financial statements incorporated
herein by reference, and our report included in the preceding paragraph
with respect to the financial statement schedules included in this
Annual Report (Form 10-K) of Genentech, Inc.
Ernst & Young LLP
San Jose, California
March 28, 1995
<PAGE> 1
Exhibit (g)(3)
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended MARCH 31, 1995.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File Number
1-9813
GENENTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2347624
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
460 Point San Bruno Boulevard, South San Francisco, California 94080
(Address of principal executive offices and zip code)
(415) 225-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.02 par value 67,133,409
Class Outstanding at March 31, 1995
Redeemable Common Stock $.02 par value 50,447,727
Class Outstanding at March 31, 1995
<PAGE> 2
GENENTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Condensed Consolidated Statements of Income -
for the three months ended March 31, 1995 and 1994 3
Condensed Consolidated Statements of Cash Flows -
for the three months ended March 31, 1995 and 1994 4
Condensed Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994 5
Notes to Condensed Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-12
Independent Accountants' Review Report 13
PART II. OTHER INFORMATION 14
SIGNATURES 15
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenues:
Product sales $ 162,067 $ 147,798
Royalties 47,149 33,679
Contract and other 16,222 7,527
Interest 13,529 9,866
---------- ----------
Total revenues 238,967 198,870
Costs and expenses:
Cost of sales 26,750 22,131
Research and development 94,959 74,376
Marketing, general and administrative 64,323 60,111
Interest 1,871 1,778
---------- ----------
Total costs and expenses 187,903 158,396
Income before taxes 51,064 40,474
Income tax provision 7,660 1,619
---------- ----------
Net income $ 43,404 $ 38,855
========== ==========
Net income per share $ .36 $ .33
========== ==========
Weighted average number of shares used
in computing per share amounts 120,493 118,806
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE> 4
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 43,404 $ 38,855
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 14,345 12,394
Gain on sales of securities available-for-sale (4,034) -
Writedown of a security available-for-sale 427 -
Net loss on fixed asset dispositions 2 99
Changes in assets and liabilities:
Receivables and other current assets (27,272) 5,250
Inventories 8,900 (6,998)
Accounts payable, other current liabilities
and other long-term liabilities (16,754) (3,010)
---------- ----------
Net cash provided by operating activities 19,018 46,590
Cash flows from investing activities:
Purchases of securities held-to-maturity (154,860) (316,849)
Proceeds from maturities of securities held-to-maturity 316,319 220,917
Purchases of securities available-for-sale (139,276) -
Proceeds from sales of securities available-for-sale 5,053 -
Capital expenditures (9,558) (21,600)
Increase in other assets (27,771) (186)
---------- ----------
Net cash used in investing activities (10,093) (117,718)
Cash flows from financing activities:
Stock issuances 9,062 13,003
Additions to long-term debt and
short-term borrowings 25,624 -
Repayment of long-term debt, including
current portion (211) (191)
---------- ----------
Net cash provided by financing activities 34,475 12,812
---------- ----------
Net increase (decrease) in cash and cash equivalents 43,400 (58,316)
Cash and cash equivalents at beginning of period 66,713 117,473
---------- ----------
Cash and cash equivalents at end of period $ 110,113 $ 59,157
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE> 5
GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 110,113 $ 66,713
Short-term investments 612,261 652,461
Accounts receivable, net 166,143 146,267
Inventories 94,300 103,200
Prepaid expenses and other current assets 33,386 28,475
------------ ------------
Total current assets 1,016,203 997,116
Long-term marketable securities 219,975 201,726
Property, plant and equipment, less
accumulated depreciation
(1995-$232,844; 1994-$215,255) 482,117 485,293
Other assets 88,551 60,989
------------ ------------
Total assets $ 1,806,846 $ 1,745,124
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 24,593 $ 30,963
Other current liabilities 181,209 189,536
------------ ------------
Total current liabilities 205,802 220,499
Long-term debt 175,140 150,358
Other long-term liabilities 23,658 25,483
------------ ------------
Total liabilities 404,600 396,340
Stockholders' equity:
Preferred stock - -
Redeemable common stock 1,009 1,002
Common stock 1,343 1,343
Other stockholders' equity 1,399,894 1,346,439
------------ ------------
Total stockholders' equity 1,402,246 1,348,784
------------ ------------
Total liabilities and stockholders' equity $ 1,806,846 $ 1,745,124
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE> 6
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. STATEMENT OF ACCOUNTING PRESENTATION
In the opinion of Genentech, Inc. (the Company), the accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of adjustments of a normal recurring nature) considered
necessary for a fair presentation have been included. Operating results for
the three-month periods ended March 31, 1995 and 1994 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1995. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report to
Stockholders for the year ended December 31, 1994.
NOTE 2. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. These debt
instruments are recorded at amortized cost which approximates fair value.
NOTE 3. INVENTORIES
Inventories at March 31, 1995 and December 31, 1994 are summarized below:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(thousands)
<S> <C> <C>
Raw materials $ 13,697 $ 13,145
Work in process 66,275 76,974
Finished goods 14,328 13,081
---------- ----------
Total $ 94,300 $ 103,200
========== ==========
</TABLE>
Inventories are stated at the lower of cost or market. Cost is determined
using a weighted-average approach which approximates the first-in, first-out
method.
NOTE 4. QUASI-REORGANIZATION
On February 18, 1988 the Company's Board of Directors approved the elimination
of the Company's accumulated deficit through an accounting reorganization of
its stockholders' equity accounts (a quasi-reorganization) effective October
1, 1987 that did not involve any revaluation of assets or liabilities. The
quasi-reorganization did not involve any revaluation of assets or liabilities
because for similar classes of assets their fair values were no less than
their book values and for similar classes of liabilities their book values
were no less than their fair values. The accumulated deficit of $329.5
million was eliminated by a transfer from additional paid-in capital in an
amount equal to the accumulated deficit. Simultaneously with the quasi-
reorganization, the Company adopted Financial Accounting Standards Board
Page 6
<PAGE> 7
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Statement (FAS) 96. FAS 96 provided for recognition of the tax benefits of
operating loss and tax credit carryforward items that arose prior to a quasi-
reorganization involving only the elimination of a deficit in retained
earnings being reported in the income statement and then being reclassified
from retained earnings to additional paid-in capital. Subsequently, in
September 1989, the staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) 86 which states that a quasi-
reorganization cannot involve only an elimination of a deficit in retained
earnings and, therefore, the tax benefits of prior operating loss and tax
credit carry-forwards must be reported as a direct addition to additional
paid-in capital rather than being recorded in the income statement.
In February 1992, the Financial Accounting Standards Board issued FAS 109,
which supersedes FAS 96. FAS 109 requires companies that have previously both
adopted FAS 96 and effected a quasi-reorganization that involves only a
deficit elimination, as did the Company, to continue to report the tax
benefits of prior operating losses and tax credit carryforwards in a manner
consistent with FAS 96. FAS 109 also provides that companies effecting a
quasi-reorganization after February 1992 that involves only a deficit
elimination shall report the tax benefits of prior operating losses and tax
credit carryforwards in a manner consistent with SAB 86.
The Company will continue to report in income the recognition of operating
loss and tax credit carryforward items arising prior to the quasi-
reorganization due to the Company's adoption of its quasi-reorganization in
the context of its interpretation of FAS 96 and the quasi-reorganization
literature existing at the date the quasi-reorganization was effected. The
SEC staff has indicated that it would not object to the Company's accounting
for such tax benefits. If the provisions of SAB 86 had been applied, net
income for the three months ended March 31, 1995 would have been reduced by
approximately $10.0 million or $.08 per share (1994 - net income reduced by
$13.6 million or $.11 per share).
NOTE 5. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone, Activase and antibodies to
IgE (a protein central to allergic reactions), and product liability cases
involving Activase. The Company and its directors are defendants in two suits
filed in California challenging their actions in connection with the Company's
1990 merger with a wholly owned subsidiary of Roche Holdings, Inc. (Roche).
In addition, the Company, its directors, a former director and Roche are
defendants in a number of suits filed in Delaware by certain individual
shareholders purporting to represent shareholders as a class alleging, in
general, breach of their fiduciary duties to the Company in connection with
the proposed extension of Roche's option to cause the Company to redeem its
Redeemable Common Stock and transactions related thereto. See also Note 6 -
Subsequent Event - Roche Holdings, Inc.
Based upon the nature of the claims made and the investigation completed to
date by the Company and its counsel, the Company believes the outcome of the
above actions will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
Page 7
<PAGE> 8
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6. SUBSEQUENT EVENT - ROCHE HOLDINGS, INC.
On May 1, 1995 the Company announced a proposed agreement with Roche, subject
to the approval of a majority of shares not held by Roche or its affiliates,
to extend for four years Roche's option to cause Genentech to redeem the
outstanding redeemable common stock of the Company at a predetermined price.
The option price is set at $61.25 per share on July 1, 1995, increasing by
$1.25 per share each quarter through June 30, 1997, and thereafter escalating
at $1.50 per share each quarter, to $82.00 per share at the end of the option
period on June 30, 1999. If Roche does not cause the redemption as of June
30, 1999, or the Company is insolvent, Genentech's stockholders will have the
option to cause the Company to redeem some or all of their shares (and Roche
will concurrently purchase a like number of shares of common stock at $60.00
per share) at $60.00 per share within thirty business days following July 1,
1999 and sixty business days in an insolvency situation. Under the agreement
Roche may increase its ownership of the Company up to 79.9% by making
purchases on the open market. Roche currently holds approximately 65% of the
outstanding common equity of the Company. As part of the agreement, Roche
will be granted an option at terms discussed below for ten years for licenses
to use and sell certain of Genentech's products in non-U.S. markets. As a
general matter, such option for a Genentech product must be exercised at, or
prior to, the conclusion of Phase II clinical trials. If Roche exercises such
an option, the Company and Roche will split equally all development expenses,
including preclinical, clinical, process development and related expenses, both
prospectively, and retroactively, incurred by the Company with respect to the
development of the product in the United States. Roche will pay all non-U.S.
development expenses. In general, Roche will pay a royalty of 12.5% until a
product reaches $100 million in aggregate sales outside of the U.S., when the
royalty rate increases to 15%. As part of the agreement, Roche will have
exclusive rights to, and pay the Company 20% royalties on, Canadian sales of
the Company's existing products, as well as European sales of Pulmozyme. The
Company will supply its products to Roche for sales outside of the U.S. at
cost plus 20 percent. Roche retains its right to cause the Company to redeem
all of its redemmable common stock on or prior to June 30, 1995 at $60.00 per
share.
NOTE 7. SUBSEQUENT EVENT - RESEARCH AND DEVELOPMENT ARRANGEMENTS
In December 1994, the Company entered into a collaboration with Scios Nova
Inc. (Scios Nova) for the development of Scios Nova's Auriculin for the
treatment of acute renal failure, as previously disclosed. In May 1995, the
preliminary results of the drug's Phase III clinical trials were announced,
indicating that, except for a subpopulation of acute renal failure patients,
the drug did not either decrease the need for dialysis or decrease mortality
in the population studied. Subsequent to the announcement, the market price
of Scios Nova's common stock lost approximately 46% of its value. Upon
further analysis of the clinical data, Scios Nova and the Company will
determine the next appropriate steps for the development of Auriculin.
Subject to the outcome of this analysis, and the stock market's reaction to
it, the decline in the market value of Scios Nova's common stock may be deemed
to be other than temporary. If so, and based upon the current value of the
shares of Scios Nova, the Company could record a loss on its investment in
Scios Nova's stock of approximately $6 million in future periods.
Page 8
<PAGE> 9
GENENTECH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As discussed in Note 6 in the Notes to Condensed Consolidated Financial
Statements, under the proposed agreement with Roche, Roche will have exclusive
rights to Canadian sales of the Company's existing products, and European
sales of Pulmozyme. In return the Company will receive royalties at the rate
of 20% of sales. Roche will receive at commercial terms an option to
collaborate on the development and sales of future drugs. Subject to
stockholder approval of the agreement and Roche's exercise of rights to
develop or sell the Company's products, product sales, royalties and contract
revenue, as well as R & D and other expenses, could be significantly affected
in future periods.
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------
REVENUES 1995 1994 % Change
- --------- -------- -------- ---------
<S> <C> <C> <C>
Revenues $239.0 $198.9 20%
======== ======== =========
PRODUCT SALES
- ----------------------
Activase $ 78.2 $ 70.2 11%
Protropin and Nutropin 54.4 53.6 1
Pulmozyme 28.5 22.4 27
Actimmune 1.0 1.6 (38)
-------- -------- ---------
Total product sales $162.1 $147.8 10%
======== ======== =========
</TABLE>
Sales of Activase, registered trademark, (Alteplase, recombinant) tissue-
plasminogen activator increased 11% in the quarter ended March 31, 1995
compared to the quarter ended March 31, 1994. Total Activase sales in 1995
included $3.8 million of sales to Japanese licensees. Sales in the U.S. and
Canada were higher due to an increase in the number of patients receiving
thrombolytic therapy and the continued positive impact of the results of the
worldwide Global Utilization of Activase and Streptokinase in Occluded
Coronary Arteries (GUSTO) clinical trial. This international trial showed
that a new accelerated infusion regimen for Activase was superior compared to
another clot-dissolving agent for the management of acute myocardial
infarction (heart attack). In April 1995, the Food and Drug Administration
(FDA) approved for marketing the accelerated infusion of Activase, allowing
revised labeling for the product incorporating data from the GUSTO study.
Page 9
<PAGE> 10
Sales of the Company's two growth hormone products - Protropin, registered
trademark, (somatrem for injection) and Nutropin, registered trademark,
(somatropin [rDNA origin] for injection)- increased to $54.4 million in the
first quarter of 1995 from $53.6 million in the first quarter of 1994. In May
1995, a competitor received Food and Drug Administration approval to market
its growth hormone product in the United States. Decreases in sales may occur
as competitors enter the market.
Sales of Pulmozyme, registered trademark, (dornase alfa), increased 27% in the
first three months of 1995 over the comparable period in the prior year. The
product was launched in the United States and Canada during the first quarter
of 1994, and launched in Europe at the end of that quarter. The increase
between quarters reflects market launches in additional European countries and
continued adoption of this new therapy by physicians to treat cystic fibrosis
patients. The Company currently markets the drug in the United States and,
through its Canadian subsidiary, in Canada. Under the existing collaboration
with F. Hoffmann-LaRoche, Ltd. (HLR), Genentech Europe Limited and its
affiliates promote Pulmozyme in the United Kingdom, Ireland, the Netherlands
and Germany, while HLR is responsible for promoting the product in the
remaining Western European countries in the collaboration.
<TABLE>
<CAPTION>
Three Months Ended March 31
ROYALTIES, CONTRACT AND ------------------------------
OTHER, AND INTEREST INCOME 1995 1994 % Change
- ----------------------------- -------- -------- --------
<S> <C> <C> <C>
Royalties $47.1 $33.7 40%
Contract and other 16.2 7.5 116
Interest income 13.6 9.9 37
</TABLE>
Royalty income increased primarily as a result of increases in licensees' net
sales subject to royalties and the recognition of $7.5 million of royalties in
the first quarter of 1995 relating to the December 1994 settlement with Eli
Lilly and Company. The impact on total royalties of changes in foreign
currency translation rates, net of gains and losses recognized on foreign
exchange hedging instruments and the amortization of expense related to
foreign currency options outstanding during the period, was not material.
Contract revenues increased between quarters due to variations in the timing
of contract benchmark achievements, varying payment amounts and the initiation
of new arrangements. Other revenues in 1995 included $4.0 million of gains
recorded from the sales of biotechnology equity securities owned by the
Company.
The increase in interest income occurred due to higher available interest
rates and a larger investment portfolio in 1995. The total investment
portfolio, consisting of cash, cash equivalents, short-term marketable
securities and long-term marketable securities increased from $780.7 million
as of March 31, 1994 to $942.3 million as of March 31, 1995.
Page 10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended March 31
------------------------------
COSTS AND EXPENSES 1995 1994 % Change
- -------------------------- -------- -------- --------
<S> <C> <C> <C>
Cost of sales $ 26.8 $ 22.1 21%
Research and development 94.9 74.4 28
Marketing, general and
administrative 64.3 60.1 7
Interest expense 1.9 1.8 6
-------- -------- --------
Total costs and expenses $187.9 $158.4 19%
======== ======== ========
</TABLE>
Cost of sales increased in the first quarter of 1995 due to a change in
product mix, a 10% increase in product sales and inventory write offs in 1995.
R&D expenses for the first three months of 1995 increased over the comparable
period in 1994 due to increased production of products for clinical trials and
higher in-licensing expenses. In-licensing expenses in the first quarter of
1995 included $4.0 million paid to IDEC Pharmaceutical Corporation (IDEC)
under the previously disclosed collaboration to develop IDEC's anti-CD20
monoclonal antibody, IDEC-C2B8.
Marketing, general and administrative expenses increased in the first quarter
of 1995 due to higher marketing and selling expenses in Europe, as Pulmozyme
is now sold in more European countries than in the first quarter of 1994, and
due to an overall increase in other corporate expenses.
Interest expense relates primarily to interest on the Company's 5% convertible
subordinated debentures, net of capitalized interest, and interest on a new
$25.0 million long-term borrowing arrangement of the Company's Canadian
subsidary.
<TABLE>
<CAPTION>
Three Months Ended March 31
------------------------------
INCOME TAXES 1995 1994 % Change
- ------------- -------- -------- ---------
<S> <C> <C> <C>
Income taxes $ 7.7 $ 1.6 381%
</TABLE>
The increase in income tax expense was due to higher income before taxes and
an increase in the effective income tax rate, from 4% in the first quarter of
1994 to 15% in the first quarter of 1995. The increase in the effective tax
rate was primarily related to a higher alternative minimum tax (AMT) in 1995,
due to the complete utilization of available AMT loss carryforwards in 1994.
Page 11
<PAGE> 12
<TABLE>
<CAPTION>
Three Months Ended March 31
------------------------------
NET INCOME 1995 1994 % Change
- ------------------- -------- -------- --------
<S> <C> <C> <C>
Net income $43.4 $38.9 12%
Earnings per share .36 .33 9
</TABLE>
Net income increased in 1995 due to overall higher revenues from all sources,
partially offset by increases in research and development and other expenses,
including income taxes.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL
RESOURCES March 31, 1995 December 31, 1994
- -------------------------- ---------------- -------------------
<S> <C> <C>
Cash, cash equivalents,
short-term investments
and long-term marketable
securities $942.3 $920.9
Working capital 810.4 776.6
</TABLE>
Cash generated from operations, maturities of short-term investments, stock
issuances and proceeds from borrowings, was used to make investments in long-
term marketable securities, other assets and capital expenditures. Cash and
cash equivalents at March 31, 1995 increased $43.4 million compared to
December 31, 1994. Working capital increased $33.8 million. The Company
believes that its cash, cash equivalents, and short-term and long-term
investments, together with funds provided by operations and leasing
arrangements, will be sufficient to meet its operating cash requirements.
Page 12
<PAGE> 13
GENENTECH, INC.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of March 31, 1995, and the related condensed consolidated
statements of income and cash flows for the three-month periods ended March
31, 1995 and 1994. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Genentech, Inc. as of December
31, 1994, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated January 17, 1995, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1994, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
San Jose, California
April 10, 1995
Page 13
<PAGE> 14
GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1995, a number of purported shareholder class action lawsuits were
filed in Delaware's Chancery Court against the Company, its directors, a
former director, and Roche alleging, in general, breach of their fiduciary
duties to the Company in connection with the proposed extension of Roche's
option to cause the Company to redeem its redeemable common stock and
transactions related thereto.
See also Note 5, "Legal Proceedings" in Part I, "Notes to Consolidated
Financial Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15.1 Letter re: Unaudited Interim Financial Information
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
March 31, 1995.
Page 14
<PAGE> 15
GENENTECH, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1995 GENENTECH, INC.
/S/G. KIRK RAAB /S/LOUIS J. LAVIGNE, JR.
----------------------------- -----------------------------
G. Kirk Raab Louis J. Lavigne, Jr.
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
/S/BRADFORD S. GOODWIN
-----------------------------
Bradford S. Goodwin
Vice President and Controller
Page 15
<PAGE> 16
Exhibit 15.1
May 15, 1995
Securities and Exchange Commission
Washington, DC 20549
We are aware of the incorporation by reference in the Registration Statements
pertaining to the 1994 Stock Option Plan, the 1991 Employee Stock Plan, the
1990 Stock Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan
and the 1984 Non-Qualified Stock Option Plan, the shares issuable to certain
warrant holders, the shares issuable to certain convertible subordinated
debenture holders, the Genentech, Inc. Tax Reduction Investment Plan and in
the related prospectuses, as applicable, contained in such Registration
Statements of our report dated April 10, 1995 relating to the unaudited
condensed consolidated interim financial statements of Genentech, Inc. which
are included in its Form 10-Q for the quarter ended March 31, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Very truly yours,
ERNST & YOUNG LLP
