SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended June 30, 1995.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File Number
1-9813
GENENTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2347624
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
460 Point San Bruno Boulevard, South San Francisco, California 94080
(Address of principal executive offices and zip code)
(415) 225-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X
No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.02 par value 67,133,409
Class Outstanding at June 30, 1995
Redeemable Common Stock $.02 par value 51,106,509
Class Outstanding at June 30, 1995
<TABLE>
GENENTECH, INC.
INDEX
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Condensed Consolidated Statements of Income -
for the three months and six months ended
June 30, 1995 and 1994 3
Condensed Consolidated Statements of Cash Flows -
for the six months ended June 30, 1995 and 1994 4
Condensed Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994 5
Notes to Condensed Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Independent Accountants' Review Report 15
PART II. OTHER INFORMATION 16-17
SIGNATURES 18
</TABLE>
Page 2
<TABLE>
PART I. FINANCIAL INFORMATION
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 161,236 $ 152,574 $ 323,303 $ 300,372
Royalties 49,424 26,099 96,573 59,778
Contract and other 7,861 6,842 24,083 14,369
Interest 14,532 9,407 28,061 19,273
--------- --------- --------- ---------
Total revenues 233,053 194,922 472,020 393,792
Costs and expenses:
Cost of sales 24,312 24,565 51,062 46,696
Research and development 87,167 73,008 182,126 147,384
Marketing, general and administrative 67,814 60,817 132,137 120,928
Special charge (merger related) 8,000 - 8,000 -
Interest 2,039 1,754 3,910 3,532
--------- --------- --------- ---------
Total costs and expenses 189,332 160,144 377,235 318,540
Income before taxes 43,721 34,778 94,785 75,252
Income tax provision 6,558 1,391 14,218 3,010
--------- --------- --------- ---------
Net income $ 37,163 $ 33,387 $ 80,567 $ 72,242
========= ========= ========= =========
Net income per share $ .31 $ .28 $ .67 $ .61
========= ========= ========= =========
Weighted average number of shares used
in computing per share amounts 120,899 119,041 120,696 118,924
========= ========= ========= =========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 3
<TABLE>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<CAPTION>
Six Months
Ended June 30
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 80,567 $ 72,242
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 28,899 25,114
Gain on sales of securities available-for-sale (5,730) -
Writedown of securities available-for-sale 6,609 -
Gain on sale of a non-marketable equity security (703) -
Writedown of non-marketable equity securities 469 750
Changes in assets and liabilities:
Receivables and other current assets (69,948) 3,587
Inventories 10,312 (10,281)
Accounts payable, accrued liabilities
and other long-term liabilities 5,023 569
---------- ----------
Net cash provided by operating activities 55,498 91,981
Cash flows from investing activities:
Purchases of securities held-to-maturity (286,197) (538,609)
Proceeds from maturities of securities held-to-maturity 484,815 434,487
Purchases of securities available-for-sale (225,942) (5,302)
Proceeds from sales of securities available-for-sale 20,334 -
Proceeds from sale of a non-marketable equity security 703 -
Capital expenditures (23,728) (42,662)
Change in other assets (25,694) 361
---------- ----------
Net cash used in investing activities (55,709) (151,725)
Cash flows from financing activities:
Stock issuances 26,644 28,003
Additions to long-term debt and short-term borrowings 26,109 -
Repayment of long-term debt, including current portion (425) (388)
---------- ----------
Net cash provided by financing activities 52,328 27,615
---------- ----------
Net increase (decrease) in cash and cash equivalents 52,117 (32,129)
Cash and cash equivalents at beginning of period 66,713 117,473
---------- ----------
Cash and cash equivalents at end of period $ 118,830 $ 85,344
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 4
<TABLE>
GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 118,830 $ 66,713
Short-term investments 625,701 652,461
Accounts receivable, net (including amounts from
a related party: 1995-$30,487; 1994-$13,184) 185,416 146,267
Inventories 92,888 103,200
Prepaid expenses and other current assets 54,736 28,475
------------ ------------
Total current assets 1,077,571 997,116
Long-term marketable securities 241,228 201,726
Property, plant and equipment, less
accumulated depreciation
(1995-$245,228; 1994-$215,255) 483,731 485,293
Other assets 88,299 60,989
------------ ------------
Total assets $ 1,890,829 $ 1,745,124
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 29,976 $ 30,963
Other current liabilities (including amounts due
to a related party: 1995-$5,528; 1994-$2,280) 198,459 189,536
------------ ------------
Total current liabilities 228,435 220,499
Long-term debt 175,503 150,358
Other long-term liabilities 22,708 25,483
------------ ------------
Total liabilities 426,646 396,340
Stockholders' equity:
Preferred stock - -
Redeemable common stock 1,022 1,002
Common stock 1,343 1,343
Other stockholders' equity 1,461,818 1,346,439
------------ ------------
Total stockholders' equity 1,464,183 1,348,784
------------ ------------
Total liabilities and stockholders' equity $ 1,890,829 $ 1,745,124
============ ============
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 5
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of Genentech, Inc. (the Company), the accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of adjustments of a normal recurring nature) considered
necessary for a fair presentation have been included. Operating results for
the three-month and six-month periods ended June 30, 1995 and 1994 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1995. The condensed consolidated balance sheet as of December
31, 1994 has been derived from the audited financial statements as of that
date. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report to Stockholders
for the year ended December 31, 1994.
Note 2. Pending Transaction with Roche Holdings, Inc.
On May 1, 1995 the Company announced an agreement with Roche, subject to the
approval of a majority of shares not held by Roche or its affiliates, to
extend for four years Roche's option to cause Genentech to redeem the
outstanding redeemable common stock of the Company at a predetermined price.
The option price was set at $61.25 per share on July 1, 1995, increasing by
$1.25 per share each quarter through June 30, 1997, and thereafter escalating
at $1.50 per share each quarter, to $82.00 per share at the end of the option
period on June 30, 1999. If Roche does not cause the redemption as of June
30, 1999, Genentech's stockholders will have the option to cause the Company
to redeem (put) some or all of their shares at $60.00 per share (and Roche
will concurrently purchase a like number of shares of common stock at $60.00
per share) within thirty business days following July 1, 1999. Under the
agreement Roche may increase its ownership of the Company up to 79.9% by
making purchases on the open market. Roche currently holds approximately 65%
of the outstanding common equity of the Company. As part of the agreement,
Roche will be granted an option at terms discussed below for ten years for
licenses to use and sell certain of Genentech's products in non-U.S. markets.
As a general matter, such option for a Genentech product must be exercised at,
or prior to, the conclusion of phase II clinical trials for each product. In
general, for each product for which Roche exercises its option, the Company
and Roche will share equally all development expenses, including preclinical,
clinical, process development and related expenses, both prospectively and
retroactively incurred by the Company with respect to the development of the
product in the United States. Roche will pay all non-U.S. development
expenses. In general, Roche will pay a royalty of 12.5% until a product
reaches $100 million in aggregate sales outside of the U.S., when the royalty
rate increases to 15%. As part of the agreement, Roche will have exclusive
rights to, and pay the Company 20% royalties on, Canadian sales of the
Company's existing products, as well as European sales of Pulmozyme. The
Company will supply its products to Roche for sales outside of the U.S. at
cost plus 20 percent.
On May 25, 1995 the Company announced that the form of the option agreement
was changed from a "transaction agreement" to a "merger agreement." The terms
of the new agreement remained identical in substance to the previous one,
except that the date by which Genentech stockholders must approve the
Page 6
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
transaction was extended to September 30, 1995. If not approved by that date,
both Genentech and Roche have the right to terminate the agreement. The
change in form of transaction was technically necessary because the issue was
not expected to come to a stockholder vote by June 30, 1995, the date by which
the 1990 agreement with Roche expired. After the close of business on June
30, 1995 Genentech redeemable common stock converted to common stock; see
additional discussion at Note 8 "Subsequent Event - Common Stock and
Redeemable Common Stock. "
On July 10, 1995 the Company announced that the "call" price, or price at
which Roche may cause Genentech to redeem the common stock, would be increased
as part of an agreement in principle to settle stockholder lawsuits, as more
fully discussed in Note 5 "Legal Proceedings." The new redemption price,
subject to court approval, begins at $61.75 in the third quarter of 1995
escalating at the same rate noted above with a final redemption price of
$82.50. The put price remains unchanged at $60.00 per share. Additionally as
part of the proposed settlement, the cut off date for stockholder approval of
the transaction was extended to October 31, 1995.
Note 3. Special Charge
The Company recorded an $8.0 million special charge in the second quarter of
1995 related to the proposed merger agreement with Roche discussed in Note 2
"Pending Transaction with Roche Holdings, Inc." The special charge includes
legal expenses, filing fees and other costs related to the agreement, as well
as charges associated with the proposed settlement of stockholder lawsuits
filed after the transaction was announced (see Note 5 "Legal Proceedings").
The Company expects to incur approximately $13.0 million in additional merger
related special charges in the second half of 1995, a portion of which is
contingent upon the approval of the merger agreement, and record a special
charge of approximately $4.0 million in the third quarter of 1995 related to
the termination of the Company's former chief executive officer.
Note 4. Quasi-Reorganization
On February 18, 1988 the Company's Board of Directors approved the
elimination of the Company's accumulated deficit through an accounting
reorganization of its stockholders' equity accounts (a quasi-
reorganization) effective October 1, 1987 that did not involve any
revaluation of assets or liabilities. The quasi-reorganization did not
involve any revaluation of assets or liabilities because for similar
classes of assets their fair values were no less than their book values and
for similar classes of liabilities their book values were no more than
their fair values. The accumulated deficit of $329.5 million was
eliminated by a transfer from additional paid-in capital in an amount equal
to the accumulated deficit. Simultaneously with the quasi-reorganization,
the Company adopted Financial Accounting Standards Board Statement (FAS)
96. FAS 96 provided for recognition of the tax benefits of operating loss
and tax credit carryforward items that arose prior to a quasi-
reorganization involving only the elimination of a deficit in retained
earnings being reported in the income statement and then being reclassified
from retained earnings to additional paid-in capital. Subsequently, in
September 1989, the staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) 86 which states that a quasi-
reorganization cannot involve only an elimination of a deficit in retained
earnings and, therefore, the tax benefits of prior operating loss and tax
credit carryforwards must be reported as a direct addition to additional
paid-in capital rather than being recorded in the income statement.
Page 7
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 has continued to report in income the recognition of operating
loss and tax credit carryforward items arising prior to the quasi-
reorganization due to the Company's adoption of its quasi-reorganization in
the context of its interpretation of FAS 96 and the quasi-reorganization
literature existing at the date the quasi-reorganization was effected. The
SEC staff has indicated that it would not object to the Company's
accounting for such tax benefits. If the provisions of SAB 86 had been
applied, net income for the three months and six months ended June 30, 1995
would have been reduced by approximately $1.8 million or $.01 per share and
$11.8 million or $.10 per share, respectively (1994 - net income reduced by
$11.2 million or $.09 per share, and $24.8 million or $.21 per share,
respectively). As of June 30, 1995, the operating loss and tax credit
carryforwards arising prior to the quasi-reorganization have been fully
utilized.
Note 5. Legal Proceedings
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone, Activase and antibodies to
IgE (a protein central to allergic reactions), and product liability cases
involving Activase. The Company and its directors are defendants in two suits
filed in California challenging their actions in connection with the Company's
1990 merger with a wholly owned subsidiary of Roche Holdings, Inc. (Roche).
In addition, the Company, its directors, two former directors and Roche are
defendants in a number of suits filed in Delaware, which have been
consolidated in a single action, by certain individual stockholders purporting
to represent stockholders as a class alleging, in general, breach of their
fiduciary duties to the Company in connection with the proposed extension of
Roche's option to cause the Company to redeem its Redeemable Common Stock and
transactions related thereto. The Company, Roche and the attorneys
representing the stockholders have entered into a memorandum of understanding
settling all claims against the defendants in these actions. In connection
with the settlement, if approved by the court, Roche would increase the prices
at which it could cause Genentech to redeem the non-Roche owned common stock
by $0.50 per share per quarter, to a final price of $82.50 in the quarter
ending June 30, 1999, and Genentech would pay the plaintiffs' attorneys up to
$3.5 million in attorneys fees, and in connection with the proposed merger,
Genentech will absorb the termination costs of six Europe-based Genentech
employees.
The Company has received grand jury document subpoenas in the United States
District Court for the Northern District of California for documents relating
to payments to doctors, nurses and institutions associated with Genentech's
National Cooperative Growth Study, and materials related to Genentech's
marketing and sales of human growth hormone.
Page 8
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 the
above actions will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
Note 6. Collaboration with Scios Nova
In December 1994, the Company entered into a collaboration with Scios Nova
Inc. (Scios Nova) for the development of Scios Nova's Auriculin for the
treatment of acute renal failure. In May 1995, the preliminary results of the
drug's Phase III clinical trials were announced, indicating that, except for a
subpopulation of acute renal failure patients, the drug did not either
decrease the need for dialysis or decrease mortality in the population
studied. Scios Nova and the Company are conducting further analysis of the
clinical data to determine the next appropriate steps for the development of
Auriculin. Subsequent to the announcement, the market price of Scios Nova's
common stock lost approximately 46% of its value. The decline in the value
of Scios Nova's stock was considered to be other than temporary and the
Company recorded a $5.7 million loss on its investment in the second quarter
of 1995, included in marketing, general and administrative expenses.
Note 7. Inventories
Inventories at June 30, 1995 and December 31, 1994 are summarized below:
1995 1994
---------- ----------
(thousands)
Raw materials $ 14,132 $ 13,145
Work in process 64,127 76,974
Finished goods 14,629 13,081
---------- ----------
Total $ 92,888 $ 103,200
========== ==========
Note 8. Subsequent Event - Common Stock and Redeemable Common Stock
After the close of business on June 30, 1995 each share of Genentech
redeemable common stock automatically converted to one share of Genentech
common stock. The conversion is in accordance with the terms of the
redeemable common stock put in place at the time of its issuance in 1990 and
as described in Genentech's Certificate of Incorporation. Shares of common
stock will no longer be redeemable by Genentech, but will have the same equity
interest in Genentech that the redeemable common stock had previously. As
discussed in Note 2 "Pending Transaction with Roche Holdings, Inc.," shares of
common stock would become redeemable under the new merger agreement with Roche
Holdings, Inc. if the agreement is approved by non-Roche stockholders.
Note 9. Subsequent Event - Research and Development
On July 10, 1995, the Company announced that an independent Data Safety
Monitoring Board (DSMB) recommended that the Phase III trial of Pulmozyme,
registered trademark (dornase alfa), in patients hospitalized for acute
episodes of chronic obstructive pulmonary disease (COPD) be stopped due to
the lack of demonstrable benefit shown in the interim analysis of the study.
Genentech has accepted the recommendation of the DSMB and is halting
enrollment in the trial. These findings do not change the current treatment
recommendations for patients with cystic fibrosis.
Page 9
GENENTECH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As discussed in Note 2 in the Notes to Condensed Consolidated Financial
Statements, under the proposed agreement with Roche, Roche will be granted
an option at terms discussed below for ten years for licenses to use and
sell certain of Genentech's products in non-U.S. markets. As a general
matter, such option for a Genentech product must be exercised at, or prior
to, the conclusion of phase II clinical trials for each product. In
general, for each product for which Roche exercises its option, the Company
and Roche will share equally all development expenses, including
preclinical, clinical, process development and related expenses, both
prospectively and retroactively incurred by the Company with respect to the
development of the product in the United States. Roche will pay all non-
U.S. development expenses. In general, Roche will pay a royalty of 12.5%
until a product reaches $100 million in aggregate sales outside of the
U.S., when the royalty rate increases to 15%. As part of the agreement,
Roche will have exclusive rights to, and pay the Company 20% royalties on,
Canadian sales of the Company's existing products, as well as European
sales of Pulmozyme. The Company will supply its products to Roche for
sales outside of the U.S. at cost plus 20 percent. Subject to stockholder
approval of the agreement and Roche's exercise of rights to develop or sell
the Company's products, product sales, royalties and contract revenue, as
well as R & D and other expenses, could be significantly affected in future
periods.
<TABLE>
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
<CAPTION>
Quarter ended June 30 Six months ended June 30
---------------------- ------------------------
REVENUES 1995 1994 % Change 1995 1994 % Change
----------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $233.0 $194.9 20% $472.0 $393.8 20%
====== ====== ======== ====== ====== ========
PRODUCT SALES
----------------------
Activase $ 74.1 $ 73.5 1% $152.3 $143.7 6%
Protropin and Nutropin 55.9 59.5 (6) 110.3 113.1 (2)
Pulmozyme 30.3 18.7 62 58.8 41.1 43
Actimmune .9 .9 0 1.9 2.5 (24)
------ ------ -------- ------ ------ --------
Total product sales $161.2 $152.6 6% $323.3 $300.4 8%
====== ====== ======== ====== ====== ========
</TABLE>
Net sales of Activase, registered trademark,(Alteplase, recombinant) tissue-
plasminogen activator increased 1% in the second quarter of 1995 compared to
the second quarter of 1994, and increased 6% for the year-to-date period ended
June 30, 1995 over the comparable prior year period. The increase reflects
growth in market share, an increase in the number of patients receiving
Page 10
thrombolytic therapy, and $3.8 million of sales of bulk product to Japanese
licensees in the first quarter of 1995. In April 1995, the Food and Drug
Administration (FDA) approved for marketing an accelerated infusion of
Activase, allowing revised labeling for the product incorporating data from
the Global Utilization of Activase and Streptokinase in Occluded Coronary
Arteries (GUSTO) study. Also during this quarter, an analysis of the GUSTO
trial published in the New England Journal of Medicine determined that
Activase is cost-effective relative to other medical treatments.
Net sales of the Company's two growth hormone products - Protropin, registered
trademark, (somatrem for injection) and Nutropin, registered trademark,
(somatropin [rDNA origin] for injection) - decreased 6% and 2% for the second
quarter and year-to-date periods ended June 30, 1995, respectively, when
compared to the same periods in 1994. This decrease results primarily from
the impact of pricing programs for distribution channels and for the managed
care sector.
Net sales of Pulmozyme, registered trademark, (dornase alfa), increased 62%
and 43% for the quarter and year-to-date periods ended June 30, 1995,
respectively, compared to the same periods in 1994. The increase reflects
market launches in additional European countries and continued adoption of the
product by physicians to treat cystic fibrosis patients. The Company currently
markets the drug in the United States and, through its Canadian subsidiary, in
Canada. Under the existing collaboration with F. Hoffmann-LaRoche, Ltd.
(HLR), Genentech Europe Limited and its affiliates promote Pulmozyme in the
United Kingdom, Ireland, the Netherlands and Germany, while HLR is responsible
for promoting the product in the remaining Western European countries in the
collaboration.
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
ROYALTIES, CONTRACT AND ---------------------- ------------------------
OTHER, AND INTEREST INCOME 1995 1994 % Change 1995 1994 % Change
----------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Royalties $49.4 $26.1 89% $96.6 $59.8 62%
Contract and other 7.9 6.8 16 24.1 14.4 67
Interest income 14.5 9.4 54 28.1 19.3 46
</TABLE>
Royalty income increased as a result of increases in licensees' net sales
subject to royalties, new royalty arrangements, and the receipt and
recognition of $15.0 million of royalties in 1995 ($7.5 million in the second
quarter) relating to the December 1994 settlement with Eli Lilly and Company.
The impact on total royalties of changes in foreign currency translation
rates, net of gains and losses recognized on foreign exchange hedging
instruments and the amortization of expense related to foreign currency
options outstanding during the period, was not material.
Contract revenues increased between quarters due to variations in the timing
of contract benchmark achievements, varying payment amounts and the initiation
of new arrangements. Other revenues in 1995 included $6.3 million ($2.3
million in the second quarter) of gains recorded from the sales of
biotechnology equity securities owned by the Company.
The increase in interest income occurred due to higher available interest
rates and a larger investment portfolio in 1995. The total investment
portfolio, consisting of cash and cash equivalents, and short- and long-term
marketable securities, increased to $985.8 million as of June 30, 1995 from
$819.6 million as of June 30, 1994, and from $920.9 million as of December 31,
1994.
Page 11
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
---------------------- ------------------------
COSTS AND EXPENSES 1995 1994 % Change 1995 1994 % Change
----------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales $ 24.3 $ 24.6 (1%) $ 51.1 $ 46.7 9%
Research and development 87.2 73.0 19 182.1 147.4 24
Marketing, general and
administrative 67.8 60.8 12 132.1 120.9 9
Special charge (merger related) 8.0 - - 8.0 - -
Interest expense 2.0 1.7 18 3.9 3.5 11
------ ------ -------- ------ ------ --------
Total costs and expenses $189.3 $160.1 18% $377.2 $318.5 18%
====== ====== ======== ====== ====== ========
</TABLE>
Cost of sales decreased in the second quarter of 1995 compared to the same
period in the prior year, although product sales increased 6%, due to reserves
of $9.0 million provided in the second quarter of 1994 for potential excess
levels of inventories, primarily Pulmozyme and Nutropin. Cost of sales for
the year-to-date period ended June 30, 1995 increased over the comparable 1994
period due to higher product sales, which more than offset the effect of the
reserves provided in the prior year.
R&D expenses increased 19% and 24% in the second quarter and year-to-date
periods of 1995, respectively, over the comparable periods in 1994 due to
increased production of products for clinical trials; expenses related to two
worldwide Phase III trials - one investigating Pulmozyme in patients with
chronic obstructive pulmonary disease (COPD), and one investigating
Genentech's anti-HER2 antibody as a potential therapy for breast cancer; and
higher first quarter 1995 in-licensing expenses. In-licensing expenses in the
first quarter of 1995 included $4.0 million paid to IDEC Pharmaceutical
Corporation (IDEC) under the previously disclosed collaboration to develop
IDEC's anti-CD20 monoclonal antibody, IDEC-C2B8. The Company intends to
continue its commitment to aggressive investment in research and development.
Marketing, general and administrative expenses increased in the quarter ended
June 30, 1995 over the comparable prior year period, primarily due to the $5.7
million writedown of an equity investment in Scios Nova Inc. (Scios Nova), the
Company's collaborative partner in the development of Auriculin, following the
announcement of the preliminary results of the drug's Phase III clinical
trials in May 1995. Marketing, general and administrative expenses year-to-
date 1995 increased over the same period in 1994 due to the Scios Nova
writedown and increased marketing and selling expenses in Europe, as Pulmozyme
is now sold in more European countries than in the prior year.
The $8.0 million special charge in the second quarter of 1995 relates to the
proposed merger agreement with Roche discussed in Note 2 in Notes to Condensed
Consolidated Financial Statements "Pending Transaction with Roche Holdings,
Inc." It includes legal expenses, filing fees and other costs related to the
agreement, as well as charges associated with the proposed settlement of
stockholder lawsuits filed after the transaction was announced (see Note 5
"Legal Proceedings" in Notes to Condensed Consolidated Financial Statements).
The Company expects to incur approximately $13.0 million in additional merger
related special charges in the second half of 1995, a portion of which is
contingent upon the approval of the merger agreement, and record a special
charge of approximately $4.0 million in the third quarter of 1995 related to
the termination of the Company's former chief executive officer.
Interest expense primarily relates to the Company's 5% convertible
subordinated debentures and a new $25 million long-term borrowing arrangement
which commenced in February 1995.
Page 12
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
--------------------- ------------------------
INCOME TAXES 1995 1994 1995 1994
----------------------------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Income taxes $ 6.6 $ 1.4 $14.2 $ 3.0
</TABLE>
The increase in income tax expense was due to higher income before taxes and
an increase in the effective income tax rate, from 4% in 1994 to 15% in 1995.
The increase in the effective tax rate was primarily related to a higher
alternative minimum tax (AMT) in 1995, due to the complete utilization of
available AMT loss carryforwards in 1994.
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
---------------------- ------------------------
NET INCOME 1995 1994 % Change 1995 1994 % Change
----------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net income $37.2 $33.4 11% $80.6 $72.2 12%
Earnings per share .31 .28 11 .67 .61 10
</TABLE>
Net income increased in 1995 due to overall higher revenues from all sources,
partially offset by increases in research and development and other expenses,
including the special charge and income taxes.
LIQUIDITY AND CAPITAL
RESOURCES June 30, 1995 December 31, 1994
----------------------------- ---------------- -------------------
Cash, cash equivalents, $ 985.8 $ 920.9
short-term investments
and long-term marketable
securities
Working capital 849.1 776.6
Cash generated from operations, maturities of investments, stock issuances and
borrowings, was used to make investments in marketable securities, other
assets and capital additions. Cash and cash equivalents at June 30, 1995
increased $52.1 million compared to December 31, 1994. Working capital
increased $72.5 million. The Company believes that its cash, cash
equivalents, and short-term and long-term investments, together with funds
provided by operations and leasing arrangements, will be sufficient to meet
its cash requirements.
Capital expenditures totaled $23.7 million in the first six months of 1995
compared to $42.7 million in the same period in 1994. The decrease was due to
the construction in 1994 of a central process utility plant and additional
manufacturing facilities, and the 1994 purchase of land for building
expansion.
Page 13
Accounts receivable increased $39.1 million or 27% from December 1994 to June
1995. The change is due to a $17.3 million increase in receivables due from
Roche for Pulmozyme shipments to the European collaboration, contract payments
and other items; and increases in royalty revenue and product sales of 46% and
8%, respectively, in the first six months of 1995 compared to the last six
months of 1994. Prepaid expenses and other current assets increased to $54.7
million at June 30, 1995 from $28.5 million at December 31, 1994, primarily
due to an increase in deferred tax assets. Other assets increased $27.3
million in the same period primarily because of the 1995 repurchase from a
licensee for $25.0 million of the right to sell Activase in Canada. The asset
is being amortized over ten years. If the pending transaction with Roche is
approved, the asset is expected to be recovered through royalties received on
product sales in Canada.
Page 14
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of June 30, 1995, and the related condensed consolidated
statements of income for the three-month and six-month periods ended June 30,
1995 and 1994, and the condensed consolidated statements of cash flows for the
six-month periods ended June 30, 1995 and 1994. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Genentech, Inc. as of December
31, 1994, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated January 17, 1995, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1994, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
San Jose, California
July 14, 1995
Page 15
GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1995, the Company, its directors, two former directors and Roche were
named as defendants in a number of suits filed in the Court of Chancery,
County of New Castle, Delaware, which have been consolidated in a single
action, by certain individual stockholders purporting to represent
stockholders as a class alleging, in general, breach of their fiduciary duties
to the Company in connection with the proposed extension of Roche's option to
cause the Company to redeem its Redeemable Common Stock (which after the close
of business on June 30, 1995 automatically converted into Common Stock) and
transactions related thereto (the Proposed Transactions). As relief, the
suits seek, among other things, a preliminary and permanent injunction against
the vote to be held at the Special Meeting of the stockholders of the Company
to be held in connection with the Proposed Transactions; a preliminary and
permanent injunction against consummation of the Proposed Transactions; an
order voiding the Proposed Transactions in the event they are approved by the
vote of the stockholders; and damages in an unspecified amount. The Company,
Roche and the attorneys representing the stockholders have entered into a
memorandum of understanding settling all claims against the defendants in
these actions. In connection with the settlement, if approved by the court,
Roche would increase the prices at which it could cause Genentech to redeem
the non-Roche owned Common Stock by $0.50 per share per quarter, to a final
price of $82.50 in the quarter ending June 30, 1999, and Genentech would pay
the plaintiffs attorneys up to $3.5 million in attorney fees. In addition,
Genentech will absorb the termination costs of six Europe-based Genentech
employees.
During the quarter ended June 30, 1995, the Company received grand jury
document subpoenas in the United States District Court for the Northern
District of California for documents relating to payments to doctors, nurses
and institutions associated with Genentech's National Cooperative Growth
Study, and materials related to Genentech's marketing and sales of human
growth hormone.
See also Note 2 "Pending Transaction with Roche Holdings, Inc." and Note 5
"Legal Proceedings", each in Part I, "Notes to Condensed Consolidated
Financial Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on April 13, 1995, three
matters were voted upon. A description of each matter and tabulation of votes
follows:
1. Election of five Directors:
Nominee Votes
------------------- ----------------------------------
For Withheld
--------------- ---------------
Jurgen Drews 110,553,097 487,325
Armin M. Kessler 110,549,686 490,736
Donald L. Murfin 110,554,709 485,713
John T. Potts, Jr. 110,169,857 870,565
G. Kirk Raab 110,548,834 491,588
There were no abstentions or broker nonvotes.
Mr. Raab resigned from the Board of Directors on July 7, 1995 as
discussed in Item 5 "Other Information."
Page 16
The terms of directors Boyer, Levinson, Munro, Smith, Swanson and
Tappan continued after the Annual Meeting of Stockholders.
2. Approve an amendment of the Company's 1991 Employee Stock Plan:
Votes
-------------------------------------------------------------
For Against Abstain Nonvotes
-------------- ------------- ----------- --------------
109,180,014 1,558,287 302,121 0
3. Ratification of Ernst & Young LLP as the Company's Independent
Accountants:
Votes
-------------------------------------------------------------
For Against Abstain Nonvotes
------------- ------------- ----------- --------------
110,827,999 133,636 78,787 0
ITEM 5. OTHER INFORMATION
On July 10, 1995 the Company announced the appointment of Arthur D. Levinson,
Ph.D. as the Company's new president and chief executive officer. He also was
named to the Board of Directors. The Board of Directors made the appointment
on July 7, 1995 after requesting and accepting the resignation of G. Kirk Raab
from the posts and from the Board of Directors the same day. The leadership
change followed an inquiry by the Board of Directors, after a June 22 meeting
of the Board at which it was disclosed that, during the period of negotiations
with Roche Holdings, Inc. concerning the proposed merger agreement, Mr. Raab
discussed with Roche a guarantee by Roche of a $2 million personal bank loan.
Although no guarantee was provided, the Board decided to appoint a special
committee of four independent directors to review Mr. Raab's leadership over
the past few years. After an extensive review, the committee recommended, and
the Board followed the recommendation, that Mr. Raab's resignation be
requested and accepted. The non-Roche members of the Board subsequently
undertook another review of the proposed merger transaction with Roche and
received a fairness opinion from Morgan Stanley, having previously received a
fairness opinion from Lehman Brothers. The Company expects to record a
special charge of approximately $4.0 million in the third quarter of 1995
related to the termination of Mr. Raab.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15.1 Letter re: Unaudited Interim Financial Information
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended June 30, 1995.
Page 17
GENENTECH, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1995 GENENTECH, INC.
/S/ARTHUR D. LEVINSON /S/LOUIS J. LAVIGNE, JR.
----------------------------- -----------------------------
Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr.
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
/S/BRADFORD S. GOODWIN
-----------------------------
Bradford S. Goodwin
Vice President and Controller
Page 18
Exhibit 15.1
August 14, 1995
Securities and Exchange Commission
Washington, DC 20549
We are aware of the incorporation by reference in the Registration
Statements pertaining to the 1994 Stock Option Plan, the 1991 Employee
Stock Plan, the 1990 Stock Option/Stock Incentive Plan, the 1984 Incentive
Stock Option Plan and the 1984 Non-Qualified Stock Option Plan, the shares
issuable to certain warrant holders, the shares issuable to certain
convertible subordinated debenture holders, the Genentech, Inc. Tax
Reduction Investment Plan and in the related prospectuses, as applicable,
contained in such Registration Statements of our report dated July 14, 1995
relating to the unaudited condensed consolidated interim financial
statements of Genentech, Inc. which are included in its Form 10-Q for the
quarter and six months ended June 30, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a
part of the registration statement prepared or certified by accountants
within the meaning of Section 7 or 11 of the Securities Act of 1933.
Very truly yours,
ERNST & YOUNG LLP
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED
STATEMENTS OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD
ENDED JUNE 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 118830
<SECURITIES> 866929
<RECEIVABLES> 192779
<ALLOWANCES> 7363
<INVENTORY> 92888
<CURRENT-ASSETS> 1077571
<PP&E> 728959
<DEPRECIATION> 245228
<TOTAL-ASSETS> 1890829
<CURRENT-LIABILITIES> 228435
<BONDS> 175503
<COMMON> 2365
0
0
<OTHER-SE> 1461818
<TOTAL-LIABILITY-AND-EQUITY> 1890829
<SALES> 323303
<TOTAL-REVENUES> 472020
<CGS> 51062
<TOTAL-COSTS> 51062
<OTHER-EXPENSES> 182126
<LOSS-PROVISION> 6094
<INTEREST-EXPENSE> 3910
<INCOME-PRETAX> 94785
<INCOME-TAX> 14218
<INCOME-CONTINUING> 80567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80567
<EPS-PRIMARY> .67
<EPS-DILUTED> 0
</TABLE>
