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:
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Title of Each Class Name of Each Exchange on Which Registered
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Redeemable Common Stock, New York Stock Exchange
$.02 par value Pacific Stock Exchange
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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")
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(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
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.
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
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:
<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
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
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
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
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,
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
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.
GENENTECH, INC.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and positions
with the Company are as follows:
</TABLE>
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <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.
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
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.
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 Xoma 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.
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.
Page(s) in
1994 Annual
Report to Stockholders
----------------------
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
2. Financial Statement Schedule
The following schedule is filed as part of this Form 10-K:
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
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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
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)
</TABLE>
(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.
(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
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
---------------------------
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:
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
GENENTECH, INC.
1991 Employee Stock Plan, as Amended
1. Purpose
The purpose of this 1991 Employee Stock Plan (the "Plan") is to
provide employees of Genentech, Inc. (the "Company"), and its U.S.
subsidiaries designated by the Company's Board of Directors, who wish to
become stockholders of the Company an opportunity to purchase Redeemable
Common Stock of the Company (the "Shares"). The Plan is intended to
qualify as an "employee stock purchase plan" within the meaning of Section
423 of the Internal Revenue Code of 1986, as amended (the "Code").
2. Eligible Employees
Subject to the provisions of Sections 7, 8 and 9 below, any individual
who is in the full-time employment of the Company on the day on which a
Grant Date (as defined in Section 3 below) occurs is eligible to
participate in an offering of Shares made by the Company hereunder. In
addition, the board of Directors may at any time designate one or more of
the Company's U.S. subsidiary corporations (as defined in Section 425(f) of
the Code) to be included in an offering of Shares under the Plan. Full-
time employment shall mean employment by the Company or its designated
U. S. subsidiary for:
(a) 20 hours or more per week; and
(b) more than five months in the calendar year.
3. Grant Dates
From time to time, the Board of Directors may fix a date (a "Grant
Date") or a series of dates (each of which is a "Grant Date") on which the
Company will grant rights to purchase Shares ("Rights") to employees
eligible to participate.
4. Prices
The purchase price per Share for Shares covered by a grant of Rights
hereunder shall be determined by the Board of Directors, but in no event
shall be less than the lesser of:
(a) eighty-five percent (85%) of the fair market value of a
Share on the Grant Date on which such Right was granted; or
(b) eighty-five percent (85%) of the fair market value of a
Share on the date such Right is exercised as to that Share.
5. Exercise of Rights and Method of Payment
(a) Rights granted under the Plan will be exercisable on
specific dates as determined by the Board of Directors.
(b) The method of payment for Shares purchased upon exercise of
Rights granted hereunder shall be through regular payroll
deductions or by lump sum cash payment, or both, as
determined by the Board of Directors. No interest shall be
paid upon payroll deductions or other payments in exercise
of Rights unless specifically provided for by the Board of
Directors.
<PAGE>
6. Terms of Rights
Rights granted hereunder shall be exercisable during a twenty-seven
(27) month period or such shorter period as determined by the Board of
Directors. All Rights granted to an employee shall terminate upon
termination of full-time employment of the employee. Any payments received
by the Company from a participating employee with respect to a Right
granted hereunder and not utilized for the purchase of Shares upon exercise
of such Right shall be promptly returned to such employee by the Company
after termination of such Right, except that amounts that were not so
utilized because such amounts were insufficient to purchase a whole Share
may be applied toward the purchase of Shares pursuant to a Right
subsequently granted hereunder, if any.
7. Shares Subject to the Plan
No more than three million eight hundred thousand (3,800,000) Shares
may be sold pursuant to Rights granted under the Plan. Appropriate
adjustments in the above figure, in the number of Shares covered by
outstanding Rights granted hereunder, in the exercise price of the Rights
and in the maximum number of Shares which an employee may purchase
(pursuant to Section 9 below) shall be made to give effect to any mergers,
consolidations, reorganizations, recapitalizations, stock splits, stock
dividends or other relevant changes in the capitalization of the Company
occurring after the effective date of the Plan, provided that no fractional
Shares shall be subject to a Right and each Right shall be adjusted
downward to the nearest full Share. Any agreement of merger or
consolidation will include provisions for protection of the then existing
Rights of participating employees under the Plan. Either authorized and
unissued Shares or issued Shares heretofore or hereafter reacquired by the
Company may be made subject to Rights under the Plan. If for any reason
any Right under the Plan terminates in whole or in part, Shares subject to
such terminated Right may again be subject to a Right under the Plan.
8. Limitations on Grants
Anything to the contrary notwithstanding, pursuant to Section 423 of
the Code:
(a) No employee shall be granted a Right hereunder if such
employee, immediately after the Right is granted, owns stock
possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of the
Company, its parent corporation (as defined in Section
425(c) of the Code) or any subsidiary corporation, in each
case computed in accordance with Section 423(b)(3) of the
Code.
(b) No employee shall be granted a Right which permits his
Rights to purchase Shares under all employee stock purchase
plans of the Company and its subsidiaries to accrue at a
rate which exceeds twenty-five thousand dollars ($25,000)
(or such other maximum as may be prescribed from time to time
by the Code) of fair market value of such Shares (determined
at the time such Right is granted) for each calendar year in
which such Right is outstanding at any time, all in
accordance with the provisions of Section 423(b)(8) of the
Code.
<PAGE>
9. Limits on Participation
(a) Participation shall be limited to eligible employees who enroll
under the Plan.
(b) No Right granted to any participating employee shall cover more
than twelve thousand (12,000) Shares.
(c) No more than One Hundred Eighty Thousand (180,000) Shares may be
purchased during any calendar quarter upon the exercise of
Rights granted under the Plan; provided, however, that for those
calendar quarters in which the Company pays regular annual
bonuses to eligible employees, the maximum aggregate numbers of
Shares which may be purchased upon the exercise of Rights shall
be Two Hundred Thousand (200,000) Shares. If the aggregate
purchases of Shares upon exercises of Rights granted under the
Plan would exceed the applicable maximum number for a particular
calendar quarter, the maximum permitted number of Shares shall
be allocated to the exercising participants in proportion to the
number of Shares they would otherwise purchase during such
calendar quarter.
10. Employee's Rights as Stockholder
No participating employee shall have any Rights as a stockholder in
the Shares covered by a Right granted hereunder until such Right has been
exercised, full payment has been made for the corresponding Shares and the
purchase has been entered in the records of the Transfer Agent for the
Shares.
11. Rights Not Transferable
Rights under the Plan are not assignable or transferable by a
participating employee.
12. Amendments or Discontinuance of the Plan
The Board of Directors of the Company shall have the right to amend,
modify or terminate the Plan at any time without notice; provided, however,
that the then existing Rights of all participating employees shall not be
adversely affected thereby, except that in the case of a participating
employee of a foreign branch of the Company or a designated U.S. subsidiary
corporation the Plan may be varied to conform with local laws, and
provided further that, subject to the provisions of Section 7 above, no
such amendment to the Plan shall, without the approval of the stockholders
of the Company:
(a) Increase the total number of Shares which may be offered
under the Plan;
(b) Amend the Plan in any manner which would render Rights
granted hereunder unqualified for special tax treatment
under Section 421 of the Code.
<PAGE>
13. Effective Date and Approvals.
The Plan shall become effective as of January 1, 1991. The Company's
obligation to offer, sell or deliver its Shares under the Plan is subject
to the approval of the Company's stockholders and any governmental approval
required in connection with the authorized issuance or sale of such Shares
and is further subject to the determination by the Company that all
applicable securities laws have been complied with.
14. Administration of the Plan
The Board of Directors or any committee or person(s) to whom it
delegates its authority (the "Administrator") shall administer, interpret
and apply all provisions of the Plan. The Administrator may waive such
provisions of the Plan as it deems necessary to meet special circumstances
not anticipated or covered expressly by the Plan. Nothing contained in
this Section shall be deemed to authorize the Administrator to alter or
administer the provisions of the Plan in a manner inconsistent with the
provisions of Section 423 of the Code.
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>
Annual % Change
<CAPTION>
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>
Annual % Change
<CAPTION>
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, registered trademark, 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, registered trademark, and
Nutropin, registered trademark, 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.
Pulmozyme: Pulmozyme, registered trademark, 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, registered trademark, 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>
Royalties, Contract and Other, and Interest Income Annual % Change
<CAPTION>
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. 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>
Annual % Change
<CAPTION>
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, registered trademark, (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.
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>
Annual % Change
<CAPTION>
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>
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.
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.
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.
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
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
<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
====================================
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
Increase (Decrease) in Cash and
Cash Equivalents
YEAR ENDED DECEMBER 31 1994 1993 1992
<CAPTION>
________________________________________________________________________________
<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
Net 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
<FN>
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.
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<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
===============================
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(thousands)
<CAPTION>
Redeemable Retained Net Total
Common Stock Common Stock 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 plan 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 plan 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
=========================================================================
<FN>
See notes to consolidated financial statements.
</TABLE>
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.
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 are earned outside of
the United States. Since the Company has nominal expenses 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 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.
Note 3: Income Taxes
<TABLE>
The income tax provision consists of the following amounts (thousands):
<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.
<TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory
rate follows:
<CAPTION>
1994 Amount Tax Rate
(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>
<TABLE>
The components of deferred taxes consist of the following at December 31
(thousands):
<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>
The NOL and credit carryforwards, which totaled $123 million and $87 million,
respectively, listed above 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
<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.
Inventories at December 31, 1994 and 1993 are summarized below (thousands):
<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.
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
==============================================
<FN>
(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.
</TABLE>
<TABLE>
The carrying value of all investment securities (excluding non-marketable
securities) held at December 31, 1994 is summarized below (thousands):
<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>
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 month 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.
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 to 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.
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 - -
================================================================
<FN>
* 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.
</TABLE>
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 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
<TABLE>
<CAPTION>
Long-term debt consists of the following (thousands):
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.
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 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.
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.
<TABLE>
Transactions for the 1984 plans for the year ended December 31, 1994, were as
follows:
<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.
<TABLE>
<CAPTION>
Transactions for the 1990 Plan for the year ended December 31, 1994 were as
follows:
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.
<TABLE>
<CAPTION>
Transactions for the 1994 Plan for the year ended December 31, 1994, were as
follows:
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>
Shares Price
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>
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.
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).
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.
Ernst & Young LLP
San Jose, California
January 17, 1995
<TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(thousands, except per share amounts)
<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
1993 Quarter Ended
December 31 September 30 June 30 March 31
________________________________________________________________________________
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>
<TABLE>
11-YEAR FINANCIAL SUMMARY (UNAUDITED)
(millions, except per share and employee data)
<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
______________________________________
<FN
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.
</TABLE>
<TABLE>
11-YEAR FINANCIAL SUMMARY (UNAUDITED)
(In millions, except per share and employee data)
<CAPTION>
1990 1989 1988 1987 1986 1985 1984
______________________________________________________________________________
<C> <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>
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>
Stock Prices Redeemable Common Stock
1994 1993
__________________________________________________________________________
<CAPTION>
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>
31
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, consolidated statements of income and consoliated
statements of cash flows included in the company's Form 10-K for the year ended
December 31, 1994, and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 66713
<SECURITIES> 854187
<RECEIVABLES> 150689
<ALLOWANCES> 4422
<INVENTORY> 103200
<CURRENT-ASSETS> 997116
<PP&E> 700548
<DEPRECIATION> 215255
<TOTAL-ASSETS> 1745124
<CURRENT-LIABILITIES> 220499
<BONDS> 150358
<COMMON> 2345
0
0
<OTHER-SE> 1346439
<TOTAL-LIABILITY-AND-EQUITY> 1745124
<SALES> 601064
<TOTAL-REVENUES> 795390
<CGS> 95829
<TOTAL-COSTS> 95829
<OTHER-EXPENSES> 314322
<LOSS-PROVISION> 5583
<INTEREST-EXPENSE> 7058
<INCOME-PRETAX> 129577
<INCOME-TAX> 5183
<INCOME-CONTINUING> 124394
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124394
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 0
</TABLE>
