<PAGE>
UNITED STATES
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 September 30, 1998.
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)
1 DNA Way, South San Francisco, California 94080
(Address of principal executive offices and zip code)
(650) 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.
Class Number of Shares Outstanding
- ----- ----------------------------
Common Stock $.02 par value 76,621,009
(Common Stock) Outstanding at September 30, 1998
Callable Putable Common Stock $.02 par value 49,791,860
(Special Common Stock) Outstanding at September 30, 1998
<PAGE>
GENENTECH, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Condensed Consolidated Statements of Income -
for the three months and nine months ended
September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Independent Accountants' Review Report 10
Financial Review 11-20
PART II. OTHER INFORMATION 21
SIGNATURES 22
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales (including amounts
from related parties: three months -
1998-$8,122; 1997-$5,720; nine
months - 1998-$21,295; 1997-$14,718) $ 163,100 $ 142,306 $ 504,082 $ 441,537
Royalties (including amounts from
related parties: three months -
1998-$9,167; 1997-$5,385; nine
months - 1998-$25,048; 1997-$18,408) 60,725 59,632 182,606 180,323
Contract and other (including
amounts from related parties:
three months - 1998-$43,010;
1997-$29,910; nine months -
1998-$58,658; 1997-$56,311) 66,113 29,385 95,034 67,453
Interest 23,992 17,594 64,920 50,382
--------- --------- --------- ---------
Total revenues 313,930 248,917 846,642 739,695
Costs and expenses:
Cost of sales (including amounts
from related parties: three months -
1998-$5,596; 1997-$4,750; nine
months - 1998-$17,368; 1997-$12,313) 35,351 26,565 106,122 79,817
Research and development (including
contract related: three months -
1998-$6,825; 1997-$29,910; nine
months - 1998-$26,566; 1997-$56,311) 99,862 118,146 291,013 351,779
Marketing, general and administrative 89,544 65,450 245,137 190,504
Interest 1,148 542 3,302 2,446
--------- --------- --------- ---------
Total costs and expenses 225,905 210,703 645,574 624,546
Income before taxes 88,025 38,214 201,068 115,149
Income tax provision 24,647 6,092 56,299 27,634
--------- --------- --------- ---------
Net income $ 63,378 $ 32,122 $ 144,769 $ 87,515
========= ========= ========= =========
Earnings per share
Basic $ 0.50 $ 0.26 $ 1.15 $ 0.71
========= ========= ========= =========
Diluted $ 0.49 $ 0.25 $ 1.12 $ 0.69
========= ========= ========= =========
Weighted average shares used to
compute diluted earnings per share 129,948 126,677 129,510 126,120
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 144,769 $ 87,515
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 57,417 49,887
Deferred income taxes (4,677) (4,445)
Gain on sales of securities available-for-sale (5,839) (6,641)
Loss on sales of securities available-for-sale 669 1,821
Write down of securities available-for-sale 14,550 -
Loss on fixed asset dispositions 730 318
Changes in assets and liabilities:
Investments in trading securities (23,028) (107,150)
Receivables and other current assets 59,116 (10,301)
Inventories (7,860) (6,950)
Accounts payable, other current liabilities
and other long-term liabilities 43,334 32,067
---------- ----------
Net cash provided by operating activities 279,181 36,121
Cash flows from investing activities:
Purchases of securities held-to-maturity (327,690) (360,698)
Proceeds from maturities of securities held-to-maturity 353,029 396,543
Purchases of securities available-for-sale (586,328) (297,730)
Proceeds from sales of securities available-for-sale 321,573 301,507
Purchases of non-marketable equity securities (13,575) -
Capital expenditures (61,740) (121,350)
Change in other assets (11,291) (33,822)
---------- ----------
Net cash used in investing activities (326,022) (115,550)
Cash flows from financing activities:
Stock issuances 81,638 67,116
---------- ----------
Net cash provided by financing activities 81,638 67,116
---------- ----------
Net increase (decrease) in cash and cash equivalents 34,797 (12,313)
Cash and cash equivalents at beginning of period 244,469 207,264
---------- ----------
Cash and cash equivalents at end of period $ 279,266 $ 194,951
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 4
<PAGE>
GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 279,266 $ 244,469
Short-term investments 708,519 588,853
Accounts receivable, net (including amounts
from related party: 1998-$23,360
1997-$44,386) 135,127 189,245
Inventories 123,886 116,026
Prepaid expenses and other current assets 55,135 55,325
------------ ------------
Total current assets 1,301,933 1,193,918
Long-term marketable securities 566,052 453,188
Property, plant and equipment, less accumulated
depreciation (1998-$426,702; 1997-$376,091) 692,876 683,304
Other assets 187,391 177,202
------------ ------------
Total assets $ 2,748,252 $ 2,507,612
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,125 $ 48,992
Income taxes payable 79,982 40,293
Accrued liabilities - related party 13,996 15,427
Other accrued liabilities 193,067 184,845
------------ ------------
Total current liabilities 317,170 289,557
Long-term debt 150,000 150,000
Other long-term liabilities 33,001 36,830
------------ ------------
Total liabilities 500,171 476,387
Commitments and contingencies
Stockholders' equity:
Preferred stock - -
Special Common Stock 996 952
Common Stock 1,532 1,532
Additional paid-in capital 1,545,362 1,463,768
Retained earnings 655,910 511,141
Net unrealized gain on securities
available-for-sale 44,281 53,832
------------ ------------
Total stockholders' equity 2,248,081 2,031,225
------------ ------------
Total liabilities and stockholders' equity $ 2,748,252 $ 2,507,612
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 5
<PAGE>
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- and nine-month periods ended September 30, 1998 and 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The condensed consolidated balance sheet as of December
31, 1997 has been derived from the audited financial statements as of that
date. For further information, refer to the consolidated financial statements
and notes thereto included in the Company's Annual Report to Stockholders for
the year ended December 31, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Note 2. New Accounting Standards
The Company adopted Statement of Financial Accounting Standards (FAS) No. 128,
"Earnings Per Share," for the year ended December 31, 1997. All earnings per
share (EPS) and share amounts for all periods presented have been restated to
comply with FAS 128. The following is a reconciliation of the numerator and
denominators of the basic and diluted EPS computations for the three- and
nine-month periods ended September 30, 1998 and 1997 (in thousands).
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income - numerator for
basic and diluted EPS: $ 63,378 $ 32,122 $144,769 $ 87,515
-------- -------- -------- --------
Denominator:
Denominator for basic EPS--
weighted-average shares 126,080 123,415 125,480 122,731
Effect of dilutive securities:
Stock options 3,868 3,262 4,030 3,389
-------- -------- -------- --------
Denominator for diluted EPS
--adjusted weighted-average
shares and assumed conversions 129,948 126,677 129,510 126,120
======== ======== ======== ========
</TABLE>
Page 6
<PAGE>
Options to purchase 1,563,950 shares of Special Common Stock between $68.19
per share and $68.38 per share were outstanding in the nine-month period ended
September 30, 1998, and options to purchase 147,900 shares of Special Common
Stock at $58.38 per share and 182,905 shares of Special Common Stock between
$57.38 per share and $58.38 per share were outstanding in the three- and nine-
month periods ended September 30, 1997, respectively, but were not included in
the computations of diluted EPS because the options were anti-dilutive.
In the three- and nine-month periods ended September 30, 1998 and 1997, the
Company had convertible subordinated debentures that were convertible to
1,013,514 shares of Special Common Stock, but were not included in the
computations of diluted EPS because they were anti-dilutive.
The Financial Accounting Standards Board (the FASB) issued FAS 130, "Reporting
Comprehensive Income," and FAS 131, "Disclosures about Segments of an
Enterprise and Related Information," in June 1997, which require additional
disclosures to be adopted by December 31, 1998. Under FAS 130, the Company is
required to display comprehensive income and its components as part of the
Company's full set of financial statements. Comprehensive income is comprised
of net income and other comprehensive income. The measurement and
presentation of net income will not change. Other comprehensive income
includes certain changes in equity of the Company that are excluded from net
income. Specifically, FAS 130 requires unrealized holding gains and losses on
the Company's available-for-sale securities, which are currently reported
separately in stockholders' equity, to be included in other comprehensive
income. For the three-month periods ended September 30, 1998 and 1997, total
comprehensive income was $68.9 million and $57.1 million, respectively. For
the nine-month periods ended September 30, 1998 and 1997, total comprehensive
income was $135.2 million and $102.8 million, respectively.
FAS 131 establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. The impact of FAS 131 will be limited
to the form and content of the Company's disclosures.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective beginning in the first quarter of 2000.
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting under FAS 133.
The Company is currently evaluating the impact of FAS 133 on its financial
position and results of operations.
Note 3. Relationship with Roche Holdings, Inc.
On October 25, 1995, the Company and Roche Holdings, Inc. (Roche) entered into
a new agreement (the Agreement) to extend until June 30, 1999, Roche's option
to cause the Company to redeem (call) the outstanding Special Common Stock of
the Company at predetermined prices. Should the call be exercised, Roche will
concurrently purchase from the Company a like number of shares of Common Stock
for a price equal to the Company's cost to redeem the Special Common Stock.
During the quarter beginning October 1, 1998, the call price is $79.50 per
share and increases by $1.50 per share each quarter through the end of the
option period on June 30, 1999, on which date the price will be $82.50 per
share. If Roche does not cause the redemption as of June 30,
Page 7
<PAGE>
1999, the Company's stockholders will have the option (the put) to cause the
Company to redeem none, some or all of their shares of Special Common Stock at
$60.00 per share (and Roche will concurrently provide the necessary redemption
funds to the Company by purchasing a like number of shares of Common Stock at
$60.00 per share) within thirty business days commencing July 1, 1999. Roche
Holding Ltd, a Swiss corporation, has guaranteed Roche's obligation under the
put.
In the event that sufficient shares of the Company's Special Common Stock are
tendered pursuant to the put to result in Roche owning at least 85% of the
total outstanding shares of the Company's outstanding equity, the Company has
in place an Incentive Units Program (the Program) that would result in
amounts becoming payable to eligible employees if specified performance
benchmarks are achieved by the Company during the term of the Program. These
amounts would vary depending on which benchmarks are achieved. At September
30, 1998, no such amounts were payable under the Program.
In conjunction with the Agreement and revisions agreed upon in principle in
the second quarter of 1997, F. Hoffmann-La Roche Ltd (HLR) was granted an
option for ten years for licenses to use and sell certain of the Company's
products in non-U.S. markets (the License Agreement). Under the License
Agreement, HLR may exercise its option to license any such future product of
the Company either when the Company determines to move such product into
development or at the end of Phase II clinical trials. The License Agreement
provides that the Company and HLR will share the U.S. and European development
costs regardless of the location or purpose of studies.
Under the Agreement, independent of its right to cause the Company to redeem
the Special Common Stock, Roche may increase its ownership of the Company up
to 79.9% by making purchases on the open market. Roche held approximately
65.7% of the outstanding common equity of the Company as of September 30,
1998.
Contract revenue for the reimbursement of ongoing development expenses for
nerve growth factor (NGF), for which HLR exercised its development option
under the License Agreement in 1996, was $2.9 million and $11.7 million for
the three- and nine-month periods ended September 30, 1998, respectively.
On July 6, 1998, the Company entered into an agreement with HLR to provide HLR
exclusive marketing rights outside of the U.S. for Herceptin, registered
trademark, (Trastuzumab). Under the agreement, HLR paid a $40.0 million up-
front fee and has agreed to pay cash milestones tied to product development
activities, to contribute equally with the Company up to a maximum of $40.0
million on global development costs and to make royalty payments on product
sales.
Note 4. Legal Proceedings
The Company is a party to various legal proceedings, including patent
infringement cases involving human growth hormone products and Activase,
registered trademark, and other matters.
In July 1997, an action was filed in the U.S. District Court for the Northern
District of California alleging that the Company's manufacture, use and sale
of its Nutropin, registered trademark, human growth hormone products infringed
a patent (the Goodman Patent) owned by the Regents of the University of
California (UC). This action is substantially the same as a previous action
filed in 1990 against the Company by UC alleging that the
Page 8
<PAGE>
Company's manufacture, use and sale of its Protropin, registered trademark,
human growth hormone products infringed the Goodman Patent. The 1997 case has
been stayed pending the conclusion of the 1990 case, which is expected to
commence trial in April 1999.
In 1995, the Company received and responded to grand jury document subpoenas
from the U.S. District Court for the Northern District of California for
documents relating to the Company's past clinical, sales and marketing
activities associated with human growth hormone. In February 1997 and
February 1998, the Company received grand jury document subpoenas from the
same court related to the same subject matter. The government is actively
investigating this matter, and the Company believes that it is a subject of
that investigation. Certain employees and an ex-employee received letters
from the government informing them that they are targets of the investigation.
Based upon the nature of the claims made and the information available to date
to the Company and its counsel through investigations and otherwise, the
Company believes the outcome of these actions is not likely to have a material
adverse effect on the financial position, results of operations or cash flows
of the Company. However, were an unfavorable ruling to occur in any quarterly
period, there exists the possibility of a material impact on the net income of
that period.
Note 5. Inventories
Inventories are summarized below:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(thousands)
<S> <C> <C>
Raw materials and supplies $ 17,121 $ 17,544
Work in process 90,834 84,831
Finished goods 15,931 13,651
--------- ---------
Total $ 123,886 $ 116,026
========= =========
</TABLE>
Page 9
<PAGE>
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 September 30, 1998, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1998 and 1997, and the condensed consolidated statements
of cash flows for the nine-month periods ended September 30, 1998 and 1997.
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, 1997, 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 20, 1998, 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, 1997, 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
October 9, 1998
Page 10
<PAGE>
Item 2. FINANCIAL REVIEW
RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On October 25, 1995, Genentech, Inc. (the Company) and Roche Holdings, Inc.
(Roche) entered into a new agreement (the Agreement) to extend until June 30,
1999, Roche's option to cause the Company to redeem (call) the outstanding
callable putable common stock (Special Common Stock) of the Company at
predetermined prices. Should the call be exercised, Roche will concurrently
purchase from the Company a like number of shares of the Company's common
stock (the Common Stock) for a price equal to the Company's cost to redeem the
Special Common Stock. If Roche does not cause the redemption as of June 30,
1999, the Company's stockholders will have the option to cause the Company to
redeem none, some or all of their shares of Special Common Stock at $60.00 per
share (and Roche will concurrently provide the necessary redemption funds to
the Company by purchasing a like number of shares of Common Stock at $60.00
per share) within thirty business days commencing July 1, 1999.
In conjunction with the Agreement and revisions agreed upon in principle in
the second quarter of 1997, F. Hoffmann-La Roche Ltd (HLR) was granted an
option for ten years for licenses to use and sell certain of the Company's
products in non-U.S. markets (the License Agreement). The License Agreement
provides that the Company and HLR will share the U.S. and European development
costs regardless of the location or purpose of studies. Under the License
Agreement, HLR may exercise its option to license any such future products of
the Company either when the Company determines to move such product into
development or at the end of Phase II clinical trials. See the Relationship
with Roche Holdings, Inc. note in the Notes to Condensed Consolidated
Financial Statements for further information.
As a result of the License Agreement, contract revenue for the three- and
nine-month periods ended September 30, 1998, totaled $2.9 million and $11.7
million, respectively, for the reimbursement of ongoing development expenses
related to nerve growth factor (NGF), for which HLR exercised its development
option under the License Agreement in 1996.
On July 6, 1998, the Company entered into an agreement with HLR to provide HLR
exclusive marketing rights outside of the U.S. for Herceptin, registered
trademark, (Trastuzumab). Under the agreement, HLR paid a $40.0 million up-
front fee and has agreed to pay cash milestones tied to product development
activities, to contribute equally with the Company up to a maximum of $40.0
million on global development costs and to make royalty payments on product
sales.
Page 11
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
REVENUES 1998 1997 % Change 1998 1997 % Change
- ---------------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 313.9 $ 248.9 26% $ 846.6 $ 739.7 14%
======= ======= ======== ======= ======= ========
PRODUCT SALES
- ----------------------------
Activase $ 45.1 $ 60.7 (26)% $ 154.9 $ 204.0 (24)%
Protropin, Nutropin
and Nutropin AQ 52.9 57.0 (7) 166.1 168.5 (1)
Pulmozyme 24.7 23.8 4 68.3 66.3 3
Rituxan 39.4 - - 111.9 - -
Actimmune 1.0 0.8 25 2.9 2.7 7
------- ------- -------- ------- ------- --------
Total product sales $ 163.1 $ 142.3 15% $ 504.1 $ 441.5 14%
======= ======= ======== ======= ======= ========
</TABLE>
Rituxan, trademark, (Rituximab) was approved by the FDA in November 1997 for
the treatment of patients with relapsed or refractory low-grade or follicular,
CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the immune system.
Net sales of Rituxan were $37.7 million, $34.8 million and $39.4 million in
the first, second and third quarters of 1998, respectively. During the third
quarter of 1998, the Company began shipping Rituxan to drug wholesalers rather
than directly to customers. The sales increase over the previous quarter
resulted primarily from initial stocking by wholesalers. Rituxan was co-
developed by the Company and IDEC Pharmaceuticals Corporation (IDEC), from
whom the Company licenses Rituxan.
During the first quarter of 1998, the Company received FDA approval for the
large-scale (12,000-liter) manufacture of Rituxan. The Rituxan that the
Company manufactures will supplement the Rituxan manufactured by IDEC for the
Company. During the second quarter, the Company's and IDEC's partner HLR
received approval from the European Commission to market Rituxan under the
tradename MabThera, trademark, for marketing in the European Union. MabThera
was approved for treating non-Hodgkin's lymphoma patients who have had two or
more relapses or are resistant to chemotherapy. HLR holds marketing rights
for MabThera outside of the U.S. and Japan. HLR has agreed to pay to the
Company royalties and a mark-up on MabThera supplied to HLR.
Net sales of Activase, registered trademark, (alteplase, recombinant), a
tissue plasminogen activator (t-PA), decreased in the three- and nine-month
periods ended September 30, 1998 from the comparable periods in 1997. These
decreases were primarily due to a decline in market share as a result of
competition from Centocor, Inc.'s (Centocor) Retavase, registered trademark.
These decreases also resulted, to a lesser extent, from a decline in the size
of the thrombolytic market due to increasing use of angioplasty and from a
temporary decrease in the available commercial market due to patients
receiving therapy through two large ongoing Phase III clinical trials.
In March 1998, the Company received two new patents related to variant forms
of t-PA. Based on these patents, the Company filed an infringement action
against Centocor in the Northern District of California which alleges that
Centocor's sale, offer for sale, use in, and importation into, the U.S. of
Retavase (Reteplase, recombinant), a t-PA, infringes these two new patents of
the Company. The Company is seeking a permanent injunction and damages.
Page 12
<PAGE>
In early July 1998, the Company and partner Boehringer Ingelheim GmbH
announced preliminary findings from the European Cooperative Acute Stroke
Study II (ECASS II) in stroke patients presenting within 0 to 6 hours of
symptom onset. This study failed to show a statistically significant clinical
benefit in stroke patients treated with Actilyse, registered trademark, (the
European tradename for alteplase, recombinant) compared to placebo. The
Company's Activase (the U.S. tradename for alteplase, recombinant) is approved
for the treatment of acute ischemic stroke within three hours of symptom
onset.
Also in July 1998, the Company announced that the Data Safety Monitoring Board
(DSMB) of its U.S. clinical trial ATLANTIS (Alteplase ThromboLysis for Acute
Noninterventional Therapy in Ischemic Stroke), recommended termination of the
study. ATLANTIS is a placebo-controlled, double-blinded pivotal study
observing Activase in acute ischemic stroke patients three to five hours from
symptom onset. As a result of the DSMB's recommendation, the Company has
decided not to file for a label extension for Activase in acute ischemic
stroke beyond the currently approved three-hour window.
Net sales of the Company's three growth hormone products - Protropin,
registered trademark, (somatrem for injection), Nutropin, registered
trademark, [somatropin (rDNA origin) for injection] and Nutropin AQ,
registered trademark, [somatropin (rDNA origin) injection] - decreased in the
three- and nine-month periods ended September 30, 1998 from the comparable
periods in 1997. These decreases primarily reflect fluctuations in
distributors' ordering patterns.
Net sales of Pulmozyme, registered trademark, (dornase alfa) increased
slightly in the three- and nine-month periods ended September 30, 1998 from
the comparable periods in 1997 primarily due to new patients in all age
groups, including very young patients following regulatory approval for this
age group. These increases were partly offset by lower ex-U.S. sales by HLR.
In February 1998, the Company received approval from the U.S. Food and Drug
Administration (FDA) for a label extension for Pulmozyme. With this revised
labeling, Pulmozyme may now also be used to treat very young children with
cystic fibrosis, ages three months to four years, adding to the product's
previous approvals for patients five years of age and older.
In September 1998, the Company received FDA approval to market Herceptin for
use in patients with metastatic breast cancer who have tumors that overexpress
the HER2 (human epidermal growth factor receptor2) protein. Studies have
shown that 25 to 30 percent of all women with metastatic breast cancer have
HER2 overexpression, which is associated with more aggressive disease.
Herceptin is the first humanized monoclonal antibody for the treatment of HER2
overexpressing metastatic breast cancer and the second U.S. approval in this
new class of biotherapeutic cancer drugs. The first was Rituxan, which was
approved in November of 1997. Pursuant to an agreement entered into with the
Company, HLR received exclusive marketing rights to Herceptin outside of the
U.S.
During the quarter ended June 30, 1998, the Company licensed U.S. marketing
and development rights to interferon gamma, including Actimmune, registered
trademark, (Interferon gamma-1b), to Connetics Corporation. Following a
transition period, the Company will no longer sell Actimmune, but has agreed
to supply bulk materials to Connetics Corporation at cost plus a mark-up.
Page 13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
ROYALTIES, CONTRACT AND ------------------ ------------------
OTHER, AND INTEREST INCOME 1998 1997 % Change 1998 1997 % Change
- ---------------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Royalties $ 60.7 $ 59.6 2% $ 182.6 $ 180.3 1%
Contract and other 66.1 29.4 125 95.0 67.5 41
Interest income 24.0 17.6 36 64.9 50.4 29
</TABLE>
Royalty revenues in the three- and nine-month periods ended September 30, 1998
increased slightly from the comparable periods of 1997. See also above
discussion of Rituxan royalties from HLR.
Contract and other revenues increased in the three- and nine-month periods
ended September 30, 1998 from the comparable periods of 1997. These increases
were primarily due to the contract payment from HLR for exclusive marketing
rights for Herceptin, as discussed above, and the patent infringement
settlement with Novo Nordisk A/S (Novo), as discussed below, partly offset by
lower revenues from HLR primarily due to the discontinuation of two clinical
trials.
In July 1998, the Company and Novo agreed to settle a lawsuit brought in
October 1997 by Novo in the U.S. District Court for the District of New Jersey
alleging infringement of a patent held by Novo relating to the Company's
manufacture, use and sale of its Nutropin human growth hormone products, and a
lawsuit brought by the Company in the U.S. District Court for the Southern
District of New York relating to the Company's patents for human growth
hormone and insulin. Under the settlement agreement, Novo and the Company
agreed to cross-license worldwide certain patents relating to human growth
hormone. In August 1998, Novo received a worldwide license under the Company
patents relating to insulin and the Company received certain payments which
were recorded in contract revenues.
Interest income increased in the three- and nine-month periods ended September
30, 1998 from the comparable periods in 1997 primarily due to a higher
portfolio balance. The total investment portfolio, consisting of cash and
cash equivalents, and short- and long-term marketable securities, increased to
$1,553.8 million as of September 30, 1998 from $1,257.8 million as of
September 30, 1997 and from $1,286.5 million as of December 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
COSTS AND EXPENSES 1998 1997 % Change 1998 1997 % Change
- ---------------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales $ 35.3 $ 26.6 33% $ 106.1 $ 79.8 33%
Research and development 99.9 118.1 (15) 291.0 351.8 (17)
Marketing, general and
administrative 89.6 65.5 37 245.1 190.5 29
Interest expense 1.1 0.5 120 3.3 2.4 38
------- ------- -------- ------- ------- --------
Total costs and expenses $ 225.9 $ 210.7 7% $ 645.5 $ 624.5 3%
======= ======= ======== ======= ======= ========
</TABLE>
Cost of sales increased in the three- and nine-month periods ended September
30, 1998 from the comparable periods in 1997 primarily as a result of a shift
in the product mix, including the introduction of Rituxan.
Page 14
<PAGE>
Research and development (R&D) expenses decreased in the three- and nine-month
periods ended September 30, 1998 from the comparable periods in 1997 primarily
due to the wind-down of large late-stage clinical trials and higher costs to
license technology from collaborators in 1997. For the nine-month period
ended September 30, 1998, the Company invested approximately 34% of revenues
in R&D compared to approximately 48% in the comparable period in 1997. This
percentage decrease reflects the Company's goal to decrease R&D spending as a
percent of revenues as products progress through late-stage clinical trials
and revenues increase.
Marketing, general and administrative (MG&A) expenses increased in the three-
and nine-month periods ended September 30, 1998 from the comparable periods in
1997. The marketing and sales (M&S) increases were driven by the introduction
of Rituxan and the resultant profit sharing with IDEC, launch preparations for
Herceptin, and competitive conditions with other marketed products. G&A
expenses were higher as a result of the write-down of certain biotechnology
equity securities and higher corporate expenses.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
INCOME TAXES 1998 1997 % Change 1998 1997 % Change
- --------------------------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Taxes $ 24.6 $ 6.1 303% $ 56.3 $ 27.6 104%
</TABLE>
The Company's effective tax rate was 28% for the three- and nine-month periods
ended September 30, 1998, which was higher than the effective tax rates of 16%
and 24%, respectively, for the comparable periods in 1997. The tax rates for
the 1997 periods reflect the legislative extension of research and development
tax credits effective beginning in the third quarter of 1997. The effective
tax rate in the nine-month period ended September 30, 1998, was less than the
U.S. statutory rate of 35% due in part to the research and development tax
credits.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
NET INCOME 1998 1997 % Change 1998 1997 % Change
- -------------------------- -------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 63.4 $ 32.1 98% $ 144.8 $ 87.5 65%
Earnings per share:
Basic $ 0.50 $ 0.26 92% $ 1.15 $ 0.71 62%
Diluted $ 0.49 $ 0.25 96% $ 1.12 $ 0.69 62%
</TABLE>
The increase in net income in the three- and nine-month periods ended
September 30, 1998 from the comparable periods in 1997 was driven primarily by
sales of Rituxan, higher contract and other revenues, higher interest income
and lower R&D expenses; partially offset by higher MG&A expenses, higher
income taxes, a decrease in Activase sales and higher cost of sales.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL
RESOURCES September 30, 1998 December 31, 1997
- --------------------------- ------------------ -----------------
<S> <C> <C>
Cash and cash equivalents, $ 1,553.8 $ 1,286.5
short-term investments
and long-term marketable
securities
Working capital $ 984.8 904.4
</TABLE>
Page 15
<PAGE>
Cash generated from operations, maturities of investments and stock issuances
were used to make investments in marketable securities and capital additions.
Cash and cash equivalents at September 30, 1998, were higher by $267.3 million
compared to December 31, 1997, and working capital increased by $80.4 million.
Capital expenditures totaled $61.7 million in the nine-month period ended
September 30, 1998 compared to $121.4 million in the comparable period of
1997. The decrease in 1998 compared to 1997 was due to the completion in 1997
of certain construction projects to improve existing manufacturing and
laboratory facilities, and a decreased level of construction activity related
to office facilities in 1998.
FORWARD-LOOKING STATEMENTS
The following section contains forward-looking statements that are based on
the Company's current expectations. Because the Company's actual results may
differ materially from these and any other forward-looking statements made by
or on behalf of the Company, this section also includes a discussion of
important factors that could affect the Company's actual future results,
including its product sales, royalties, contract revenues, expenses and net
income.
Product Sales: The Company's product sales may vary from period to period for
several reasons including, but not limited to: the overall competitive
environment for the Company's products; the amount of sales to customers in
the U.S.; the amount and timing of the Company's sales to HLR; the timing and
volume of bulk shipments to licensees; the availability of third-party
reimbursements for the cost of therapy; the effectiveness and safety of the
products; the rate of adoption and use of the Company's products for approved
indications and additional indications; and the potential introduction of new
products and additional indications for existing products in 1998 and beyond.
Competition: The Company faces growing competition in two of its therapeutic
markets. Activase lost market share and could lose additional market share in
the thrombolytic market to Centocor's Retavase and the resulting adverse
effect on sales could be material. Retavase received FDA approval in October
1996 for the treatment of acute myocardial infarction (AMI). In addition,
there is an increasing use of angioplasty in lieu of thrombolytic therapy for
the treatment of AMI, which is expected to continue. In the growth hormone
market, the Company continues to face increased competition from five other
companies with growth hormone products. Three of these competitors have also
received approval to market their existing human growth hormone products for
additional indications. The Company expects that such competition could have
an adverse effect on its sales of Protropin, Nutropin and Nutropin AQ and such
effect could be material.
Other competitive factors affecting the Company's product sales include, but
are not limited to: the timing of FDA approval, if any, of additional
competitive products, pricing decisions made by the Company, the degree of
patent protection afforded to particular products, the outcome of litigation
involving the Company's patents and patents of competing companies for
products and processes related to production and formulation of those
products, the increasing use and development of alternate therapies, and the
rate of market penetration by competing products.
Royalty and Contract Revenues: Royalty and contract revenues in future
Page 16
<PAGE>
periods could vary significantly from 1997 levels. Major factors affecting
these revenues include, but are not limited to: HLR's decisions to exercise
or not to exercise its option to develop and sell the Company's future
products in non-U.S. markets and the timing and amount of related development
cost reimbursements, if any; variations in HLR's sales and other licensees'
sales of licensed products; the expiration of royalties from Eli Lilly and
Company on insulin sales which occurred in August 1998 and which have
contributed substantially to past royalty revenues; fluctuations in foreign
currency exchange rates; the initiation of other new contractual arrangements
with other companies; the timing of non-U.S. approvals, if any, for products
licensed to HLR; whether and when contract benchmarks are achieved; and the
conclusion of existing arrangements with other companies and HLR.
R&D: The Company intends to continue to develop new products and is committed
to aggressive R&D investment. Successful pharmaceutical product development
is highly uncertain and is dependent on numerous factors, many of which are
beyond the Company's control. Products that appear promising in the early
phases of development may fail to reach the market for numerous reasons: they
may be found to be ineffective or to have harmful side effects in preclinical
or clinical testing; they may fail to receive necessary regulatory approvals;
they may turn out to be uneconomical because of manufacturing costs or other
factors; or they may be precluded from commercialization by the proprietary
rights of others or by competing products or technologies for the same
indication. Success in preclinical and early clinical trials does not ensure
that large scale clinical trials will be successful. Clinical results are
frequently susceptible to varying interpretations that may delay, limit or
prevent regulatory approvals. The length of time necessary to complete
clinical trials and to submit an application for marketing approval for a
final decision by a regulatory authority varies significantly and may be
difficult to predict.
The Company currently has several products in late-stage clinical testing and
anticipates that its R&D expenses will continue at a high percentage of
revenues over the short-term though they are expected to decline in 1998 from
1997 levels. Over the long-term, as revenues increase, R&D as a percent of
revenues should decrease to the 20% to 25% range. Factors affecting the
Company's R&D expenses include, but are not limited to: the outcome of
clinical trials currently being conducted, the number of products entering
into development from late-stage research, in-licensing activities, including
the timing and amount of related development funding or milestone payments,
and future levels of revenues.
In December 1997, the Company and Alteon Inc. (Alteon) entered into a
collaborative agreement to develop and market pimagedine, an advanced
glycosylation end-product formation inhibitor. Based on the recommendations
of an External Safety Monitoring Committee, with which the FDA and the Company
concurred, in the first quarter of 1998, Alteon discontinued a Phase III
clinical trial of pimagedine in Type II diabetics with progressive kidney
disease and is continuing a Phase III trial of pimagedine in Type I diabetics
with progressive kidney disease. A third Phase III trial in diabetic patients
with end-stage renal disease is ongoing.
Income Tax Provision: The Company expects its effective tax rate to be
approximately 28% in 1998 and continue at or near 35% for the next several
years dependent upon several factors. These factors include, but are not
limited to, changes in tax laws and rates, future levels of R&D spending, the
outcome of clinical trials of certain development products, the Company's
success in commercializing such products, and potential competition regarding
the products.
Uncertainties Surrounding Proprietary Rights: The patent positions of
pharmaceutical and biotechnology companies can be highly uncertain and
Page 17
<PAGE>
involve complex legal and factual questions. Accordingly, the breadth of
claims allowed in such companies' patents cannot be predicted. Patent disputes
are frequent and can preclude commercialization of products. The Company has
in the past been, is currently, and may in the future be involved in material
patent litigation. Such litigation is costly in its own right and could
subject the Company to significant liabilities to third-parties and, if
decided adversely, the Company may need to obtain third-party licenses at a
material cost or cease using the technology or product in dispute. The
presence of patents or other proprietary rights belonging to other parties may
lead to the termination of R&D of a particular product. The Company believes
it has strong patent protection or the potential for strong patent protection
for a number of its products that generate sales and 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.
Year 2000: The Company uses and relies on a wide variety of information
technologies, computer systems and scientific and manufacturing equipment
containing computer related components (such as programmable logic controllers
and other embedded systems). Some of the Company's older computer software
programs and equipment use two digit fields rather than four digit fields to
define the applicable year (i.e., "98" in the computer code refers to the year
"1998"). As a result, time-sensitive functions of those software programs and
equipment may misinterpret dates after January 1, 2000, to refer to the
twentieth century rather than the twenty-first century (i.e., "02" could be
interpreted as "1902" rather than "2002"). This could cause system or
equipment shutdowns, failures or miscalculations resulting in inaccuracies in
computer output or disruptions of operations, including, among other things,
inaccurate processing of financial information and/or temporary inabilities to
process transactions, manufacture products, or engage in similar normal
business activities.
The Company has developed a strategy to address the potential exposures
related to the impact on its computer systems for the Year 2000 and beyond.
An inventory of key financial, informational and operational systems,
including manufacturing control systems, has been completed. Detailed plans
for implementation and testing of any necessary modifications to these key
computer systems and equipment to ensure they are Year 2000 compliant have
been or are in the final stages of being developed on a department by
department basis to address computer system and equipment problems as required
by December 31, 1999. The Company believes that with these detailed plans and
completed modifications, the Year 2000 issue will not pose significant
operational problems for its computer systems and equipment. However, if such
modifications and conversions are not made, or are not completed in a timely
fashion, the Year 2000 issue could have a material impact on the operations of
the Company, the precise degree of which cannot be known at this time. The
Company currently has no contingency plans to deal with major Year 2000
failures, though such plans will be developed over the coming quarters.
In addition to risks associated with the Company's own computer systems and
equipment, the Company has relationships with, and is to varying degrees
dependent upon, a large number of third parties that provide information,
goods and services to the Company. These include financial institutions,
suppliers, vendors, research partners and governmental entities. If
significant numbers of these third parties experience failures in their
computer systems or equipment due to Year 2000 non-compliance, it could affect
the Company's ability to process transactions, manufacture products, or engage
in similar normal business activities. While some of these risks
Page 18
<PAGE>
are outside the control of the Company, the Company has instituted programs,
including internal records review and use of external questionnaires, to
identify key third parties, assess their level of Year 2000 compliance, update
contracts and address any non-compliance issues.
The total cost of the Year 2000 systems assessments and conversions is funded
through operating cash flows and the Company is expensing these costs. The
Company has created a mechanism to trace certain of the costs related to the
Year 2000 issue and budgeted funds to address the issues of assessment and
conversion. The financial impact of making the required systems changes
cannot be known precisely at this time, but it is currently expected to be
less than $10.0 million. The actual financial impact could, however, exceed
this estimate. These costs are not expected to be material to the Company's
financial position, results of operations or cash flows.
Liquidity: The Company believes that its cash, cash equivalents and short-
term investments, together with funds provided by operations and leasing
arrangements, will be sufficient to meet its foreseeable operating cash
requirements. In addition, the Company believes it could access additional
funds from the capital and debt markets. Factors affecting the Company's cash
position include, but are not limited to, future levels of the Company's
product sales, royalty and contract revenues, expenses, in-licensing
activities, including the timing and amount of related development funding or
milestone payments, and capital expenditures.
Roche Holdings, Inc.: At September 30, 1998, Roche held approximately 65.7%
of the Company's outstanding common equity. The Company expects to continue
to have material transactions with Roche, including royalty and contract
revenues, product sales and joint product development costs.
Market Risk: The Company is exposed to market risk, including changes to
interest rates, foreign currency exchange rates and equity investment prices.
To reduce the volatility related to these exposures, the Company enters into
various derivative transactions pursuant to the Company's investment and risk
management policies and procedures in areas such as hedging and counterparty
exposure practices. The Company does not use derivatives for speculative
purposes.
The Company maintains risk management control systems to monitor the risks
associated with interest rates, foreign currency exchange rates and equity
investment price changes, and its derivative and financial instrument
positions. The risk management control systems use analytical techniques,
including sensitivity analysis, and market values. Though the Company intends
for its risk management control systems to be comprehensive, there are
inherent risks that may only be partially offset by the Company's hedging
programs should there be unfavorable movements in interest rates, foreign
currency exchange rates or equity investment prices.
Interest Rates - The Company's interest income is sensitive to changes
in the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents,
short-term investments, convertible equity loans, preferred stock investments
and long-term investments. To mitigate the impact of fluctuations in U.S.
interest rates, the Company may enter into swap transactions, which involve
the receipt of fixed rate interest and the payment of floating rate interest
without the exchange of the underlying principal. By investing the Company's
cash in an amount equal to the notional amount of the swap contract, with a
maturity date equal to the maturity date of the floating rate obligation, the
Company may hedge itself from any potential earnings impact due to changes in
interest rates.
Page 19
<PAGE>
Foreign Currency Exchange Rates - The Company receives royalty revenues
from licensees selling products in countries throughout the world. As a
result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company's licensed products are
sold. The Company is exposed to changes in exchange rates in Europe, Asia
(primarily Japan) and Canada. The Company's exposure to foreign exchange
rates primarily exists with the German Mark. When the U.S. dollar strengthens
against the currencies in these countries, the U.S. dollar value of non-U.S.
dollar-based revenue decreases; when the U.S. dollar weakens, the U.S. dollar
value of the non-U.S. dollar-based revenues increases. Accordingly, changes
in exchange rates, and in particular a strengthening of the U.S. dollar, may
adversely affect the Company's royalty revenues as expressed in U.S. dollars.
In addition, as part of its overall investment strategy, the Company has three
portfolios that are managed by external money managers. These portfolios
consist primarily of non-dollar denominated investments. As a result, the
Company is exposed to changes in the exchange rates of the countries in which
these non-dollar denominated investments are made.
To mitigate this risk, the Company hedges certain of its anticipated revenues
by purchasing option contracts with expiration dates and amounts of currency
that are based on 25% to 90% of probable future revenues so that the potential
adverse impact of movements in currency exchange rates on the non-dollar
denominated revenues will be at least partly offset by an associated increase
in the value of the option. The duration of these options is generally one to
four years. The Company may also enter into foreign currency forward
contracts (forward contracts) to lock in the dollar value of a portion of
these anticipated revenues. The duration of these forward contracts is
generally less than one year. Also, to hedge the non-dollar denominated
investments in the externally managed portfolios, the external money managers
also enter into forward contracts.
Equity Investment Securities - As part of its strategic alliance
efforts, the Company invests in equity securities of biotechnology companies
that are subject to fluctuations from market value changes in stock prices.
To mitigate this risk, certain equity securities are hedged with costless
collars. A costless collar is a purchased put option and a written call
option in which the cost of the purchased put and the proceeds of the written
call offset each other; therefore, there is no initial cost or cash outflow
for these instruments at the time of purchase. The purchased put protects the
Company from a decline in the market value of the security below a certain
minimum level (the put "strike" level); while the call effectively limits the
Company's potential to benefit from an increase in the market value of the
security above a certain maximum level (the call "strike" level). In
addition, as part of its strategic alliance efforts, the Company has made
interest bearing loans that are convertible into the equity securities of the
debtor.
Credit Risk of Counterparties: The Company could be exposed to losses related
to the above financial instruments should one of its counterparties default.
This risk is mitigated through credit monitoring procedures.
Legal Proceedings: The Company is a party to various legal proceedings,
including patent infringement cases and various cases involving other matters.
See the Legal Proceedings note in the Notes to Condensed Consolidated
Financial Statements for further information.
Page 20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 1998, the Company and Novo agreed to settle a lawsuit brought in
October 1997 by Novo in the U.S. District Court for the District of New Jersey
alleging infringement of a patent held by Novo relating to the Company's
manufacture, use and sale of its Nutropin human growth hormone products, and a
lawsuit brought by the Company in the U.S. District Court for the Southern
District of New York relating to the Company's patents for human growth
hormone and insulin. Under the settlement agreement, Novo and the Company
agreed to cross-license worldwide certain patents relating to human growth
hormone. In August 1998, Novo received a worldwide license under the Company
patents relating to insulin.
See also Item 3 of the Company's report on Form 10-K for the period ended
December 31, 1997.
See also Item 1 of the Company's reports on Form 10-Q for the periods ended
June 30, 1998 and March 31, 1998.
See also the Legal Proceedings note in the Notes to Condensed Consolidated
Financial Statements of Part I.
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 September 30, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 1997 Annual Report to
Stockholders have not changed significantly.
Page 21
<PAGE>
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: October 15, 1998 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 Executive Vice President and
Chief Financial Officer
/S/JOHN M. WHITING
----------------------------
John M. Whiting
Controller and
Chief Accounting Officer
Page 22
Exhibit 15.1
October 15, 1998
The Board of Directors and Stockholders
Genentech, Inc.
We are aware of the incorporation by reference in the Registration Statements
pertaining to the 1991 Employee Stock Plan, the 1996 Stock Option/Stock
Incentive Plan, the 1994 Stock Option 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 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 October 9, 1998 relating to the
unaudited condensed consolidated interim financial statements of Genentech,
Inc. which are included in its Form 10-Q for the quarter and nine-months
ended September 30, 1998.
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM
10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 279,266
<SECURITIES> 1,274,571
<RECEIVABLES> 135,127<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 123,886
<CURRENT-ASSETS> 1,301,933
<PP&E> 1,119,578
<DEPRECIATION> 426,702
<TOTAL-ASSETS> 2,748,252
<CURRENT-LIABILITIES> 317,170
<BONDS> 150,000
0
0
<COMMON> 2,528
<OTHER-SE> 2,245,553
<TOTAL-LIABILITY-AND-EQUITY> 2,748,252
<SALES> 504,082
<TOTAL-REVENUES> 846,642
<CGS> 106,122
<TOTAL-COSTS> 106,122
<OTHER-EXPENSES> 291,013
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 3,302
<INCOME-PRETAX> 201,068
<INCOME-TAX> 56,299
<INCOME-CONTINUING> 144,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144,769
<EPS-PRIMARY> 1.15<F2>
<EPS-DILUTED> 1.12
<FN>
<F1>ACCOUNTS RECEIVABLE ARE PRESENTED NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS IN
THE CONDENSED CONSOLIDATED BALANCE SHEET. THE PROVISION FOR LOSSES ON DOUBTFUL
ACCOUNTS IS NOT REPORTED AS A SEPARATE LINE IN THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME OR STATEMENT OF CASH FLOWS.
<F2>REPRESENTS BASIC EARNINGS PER SHARE.
</FN>
</TABLE>
