<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 June 30, 1999.
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 94080-4990
(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 127,857,556
Outstanding at July 31, 1999
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GENENTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Condensed Consolidated Statements of Operations -
for the three months and six months ended
June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows -
for the six months ended June 30, 1999 and 1998 4
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6-16
Independent Accountants' Review Report 17
Financial Review 18-40
PART II. OTHER INFORMATION 41-43
SIGNATURES 44
In this report, "Genentech," "we," "us" and "our" refer to Genentech, Inc.
We own or have rights to various copyrights, trademarks and trade names used
in our business including the following: Actimmune, registered trademark,
interferon gamma-1b; Activase, registered trademark, (alteplase, recombinant)
tissue-plasminogen activator; Herceptin, registered trademark, (trastuzumab)
anti-HER2 antibody; Nutropin, registered trademark, (somatropin (rDNA origin)
for injection) growth hormone; Nutropin AQ, registered trademark, (somatropin
(rDNA origin) injection) liquid formulation growth hormone; Nutropin Depot,
trademark, encapsulated sustained-release growth hormone; Protropin,
registered trademark, (somatrem for injection) growth hormone; Pulmozyme,
registered trademark, (dornase alfa, recombinant) inhalation solution; and
Rituxan, registered trademark, (rituximab) antibody. This report also
includes trademarks, service marks and trade names of other companies.
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PART I. FINANCIAL INFORMATION
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales (including amounts
from related parties: three months -
1999-$13,374; 1998-$6,566; six
months - 1999-$26,998; 1998-$13,173) $ 269,355 $ 176,263 $ 503,424 $ 340,982
Royalties (including amounts from
related parties: three months -
1999-$8,870; 1998-$8,752; six
months - 1999-$20,111; 1998-$15,881) 45,986 57,388 92,604 121,881
Contract and other (including
amounts from related parties:
three months - 1999-$15,675;
1998-$7,850; six months -
1999-$19,944; 1998-$15,648) 57,915 14,056 77,181 28,921
Interest 21,986 20,305 44,385 40,928
---------- --------- ---------- ---------
Total revenues 395,242 268,012 717,594 532,712
Costs and expenses:
Cost of sales (including amounts
from related parties: three months -
1999-$11,145; 1998-$5,747; six
months - 1999-$21,931; 1998-$11,772) 52,681 37,150 98,404 70,771
Research and development (including
contract related: three months -
1999-$6,566; 1998-$10,679; six
months - 1999-$14,426; 1998-$19,741) 94,211 92,949 184,951 191,151
Marketing, general and administrative 117,372 80,643 214,573 155,593
Legal settlement - - 50,000 -
Special charge, related to redemption 1,147,304 - 1,147,304 -
Interest 1,356 1,195 2,719 2,154
---------- --------- ---------- ---------
Total costs and expenses 1,412,924 211,937 1,697,951 419,669
Income (loss) before taxes (1,017,682) 56,075 (980,357) 113,043
Income tax (benefit) provision (94,490) 15,701 (71,580) 31,652
---------- --------- ---------- ---------
Net income (loss) $ (923,192) $ 40,374 $ (908,777) $ 81,391
========== ========= ========== =========
Earnings (loss) per share:
Basic $ (7.19) $ 0.32 $ (7.09) $ 0.65
========== ========= ========== =========
Diluted $ (7.19) $ 0.31 $ (7.09) $ 0.63
========== ========= ========== =========
Weighted average shares used to
compute earnings (loss) per share:
Basic 128,480 125,601 128,092 125,179
========== ========= ========== =========
Diluted 128,480 129,775 128,092 129,291
========== ========= ========== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 3
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GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (908,777) $ 81,391
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 44,317 37,246
In-process research and development 752,500 -
Non-cash compensation related to stock options,
net of tax 61,353 -
Write-up of securities available-for-sale (20,337) -
Deferred income taxes (114,672) (8,480)
Gain on sales of securities available-for-sale (12,283) (5,835)
Loss on sales of securities available-for-sale 921 389
Write down of securities available-for-sale 8,467 7,193
Write down of non-marketable equity securities 432 -
Gain on fixed asset dispositions (16) -
Changes in assets and liabilities:
Investments in trading securities (4,944) (16,263)
Receivables and other current assets (38,643) 12,458
Inventories 10,333 (814)
Accounts payable, other current liabilities
and other long-term liabilities 344,920 (7,281)
---------- ----------
Net cash provided by operating activities 123,571 100,004
Cash flows from investing activities:
Purchases of securities held-to-maturity (186,612) (177,416)
Proceeds from maturities of securities held-to-maturity 150,357 152,182
Purchases of securities available-for-sale (300,254) (302,359)
Proceeds from sales of securities available-for-sale 257,752 162,945
Purchases of non-marketable equity securities (39,177) (5,425)
Capital expenditures (41,513) (43,331)
Change in other assets (17,721) (2,568)
---------- ----------
Net cash used in investing activities (177,168) (215,972)
Cash flows from financing activities:
Stock issuances 64,291 61,451
---------- ----------
Net cash provided by financing activities 64,291 61,451
---------- ----------
Net (decrease) increase in cash and cash equivalents 10,694 (54,517)
Cash and cash equivalents at beginning of period 281,162 244,469
---------- ----------
Cash and cash equivalents at end of period $ 291,856 $ 189,952
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 4
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GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 291,856 $ 281,162
Short-term investments 621,122 606,544
Accounts receivable, net (including amounts
from related party: 1999-$34,743;
1998-$22,850) 191,743 149,741
Inventories 324,473 148,626
Prepaid expenses and other current assets 13,115 55,885
------------ ------------
Total current assets 1,442,309 1,241,958
Long-term marketable securities 808,024 716,888
Property, plant and equipment, less accumulated
depreciation (1999-$484,755; 1998-$445,215) 718,743 700,249
Goodwill 1,706,042 -
Other intangible assets 1,563,601 65,033
Other assets 130,660 131,274
------------ ------------
Total assets $ 6,369,379 $ 2,855,402
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,173 $ 40,895
Accrued liabilities - related party 13,975 10,945
Other accrued liabilities 573,087 239,487
------------ ------------
Total current liabilities 619,235 291,327
Long-term debt 149,989 149,990
Other long-term liabilities 471,304 70,240
------------ ------------
Total liabilities 1,240,528 511,557
Commitments and contingencies
Stockholders' equity:
Preferred stock - -
Special Common Stock - 1,010
Common Stock 2,573 1,532
Additional paid-in capital 7,026,381 1,588,990
Retained earnings (accumulated deficit) (1,937,871) 693,050
Net unrealized gain on securities
available-for-sale 37,768 59,263
------------ ------------
Total stockholders' equity 5,128,851 2,343,845
------------ ------------
Total liabilities and stockholders' equity $ 6,369,379 $ 2,855,402
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 5
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GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of management, 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 six-
month periods ended June 30, 1999 and 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. The
condensed consolidated balance sheet as of December 31, 1998 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 our Annual Report to Stockholders for the year ended December 31,
1998.
The unaudited condensed consolidated financial statements give effect to our
June 30, 1999 redemption of all of our outstanding callable putable common
stock, par value $.02 per share (referred to as our "Special Common Stock")
held by stockholders other than Roche Holdings, Inc., commonly known as
Roche, at a price of $82.50 per share in cash with funds deposited by Roche
for such purpose (the "Redemption"), resulting in Roche owning 100% of our
common stock. Roche will account for the Redemption as a purchase of a
business and we are required to push down the effect of the Redemption and
Roche's 1990 through 1997 purchases of our Common Stock and Special Common
Stock into our consolidated financial statements.
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.
Certain reclassifications of prior year amounts have been made to conform
with the current year presentation.
Note 2. Redemption of Genentech's Special Common Stock
Basis of Presentation
Roche will account for the Redemption as a purchase of a business and we are
required to push down the effect of the Redemption and Roche's 1990 through
1997 purchases of our Common and Special Common Stock into our consolidated
financial statements at the date of the Redemption. Under this method of
accounting, Genentech's assets and liabilities, including intangible assets,
were recorded at their fair values not to exceed the aggregate purchase price
plus Roche's transaction costs. In 1990 and 1991 through 1997 Roche
purchased 60% and 5%, respectively, of the outstanding stock of Genentech.
Further, in June 1999, we redeemed all of our Special Common Stock held by
stockholders other than Roche resulting in Roche owning 100% of our common
stock. The push-down effect of Roche's aggregate purchase price and the
Redemption price in the unaudited condensed consolidated balance sheet as of
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June 30, 1999 is allocated based on Roche's ownership percentages as if the
purchases occurred at the original purchase dates for the 1990 and 1991
through 1997 purchases, and at June 30, 1999 for the Redemption. Management
of Genentech determined the values of tangible and intangible assets,
including in-process research and development, used in allocating the
purchase prices. The aggregate purchase prices for the acquisition of all of
Genentech's outstanding shares, including Roche's estimated transaction costs
of $10.0 million, was $6,604.9 million, consisting of approximately $2,843.5
million for the 1990 and 1991 through 1997 purchases and approximately
$3,761.4 million for the Redemption.
The following table shows details of the excess of purchase price over net
book value (in millions):
<TABLE>
<CAPTION>
Purchase Period
--------------------
1990-1997 1999 Total
--------- --------- ---------
<S> <C> <C> <C>
Total purchase price $ 2,843.5 $ 3,761.4 $ 6,604.9
Less portion of net book value purchased 566.6 836.4 1,403.0
--------- --------- ---------
Excess of purchase price over net book value $ 2,276.9 $ 2,925.0 $ 5,201.9
========= ========= =========
</TABLE>
The following table shows the allocation of the excess of the purchase price
over net book value (in millions):
Purchase Period
--------------------
1990-1997 1999 Total
--------- --------- ---------
Inventories $ 102.0 $ 186.2 $ 288.2
Land - 16.6 16.6
In-process research and development 500.5 752.5 1,253.0
Developed product technology 429.0 765.0 1,194.0
Core technology 240.5 203.0 443.5
Developed license technology 292.5 175.0 467.5
Trained and assembled workforce 32.5 49.0 81.5
Tradenames 39.0 105.0 144.0
Key distributor relationships 6.5 73.5 80.0
Goodwill 1,091.2 1,228.4 2,319.6
Deferred tax liability (456.8) (629.2) (1,086.0)
--------- --------- ---------
Total $ 2,276.9 $ 2,925.0 $ 5,201.9
========= ========= =========
PUSH-DOWN ACCOUNTING ADJUSTMENTS
The following is a description of accounting adjustments made to reflect
push-down accounting on our financial statements. These adjustments were
based on management's estimates of the value of the tangible and intangible
assets acquired:
- - As a result of push-down accounting, we recorded in the second quarter of
1999 a charge of $1,147.3 million. This charge includes a non-cash
charge of $752.5 million for in-process research and development, $284.5
million of compensation expense related to Genentech's early cash
settlement of certain employee stock options and an aggregate of
approximately $102.3 million of non-cash compensation expense in
connection with the modification and remeasurement, for accounting
purposes, of continuing employee stock options, which represents the
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difference between each applicable option exercise price and the
redemption price of the Special Common Stock. (You should read "Stock
Option Changes" note for further information on these charges.) In
addition, we recognized $20.3 million of gains related to the write-up of
marketable securities as a result of push-down accounting.
- - We recorded an income tax benefit of $113.8 million related to the above
early cash settlement of certain employee stock options. The income tax
benefit reduced the current tax payable in other accrued liabilities by
$56.9 million and reduced long-term deferred income taxes by $56.9
million.
- - The estimated useful life of the inventory adjustment to fair value is
approximately one year based upon the expected time to sell inventories on
hand at June 30, 1999. The entire inventory adjustment related to Roche's
1990 through 1997 purchases was reflected as a charge to retained
earnings.
- - An adjustment was made to record the fair value of land as a result of the
Redemption. There were no such adjustments for the purchase periods from
1990 through 1997.
- - $1,091.2 million of goodwill, which reflects Roche's 1990 through 1997
purchases less related accumulated amortization of $613.6 million through
June 30, 1999, was recorded as a charge to retained earnings. Included in
goodwill is $456.8 million related to the recording of deferred tax
liabilities. Deferred taxes were recorded for the adjustment to fair
value for other intangible assets and inventories as a result of Roche's
1990 through 1997 purchases. The deferred tax liability was calculated
based on a marginal tax rate of 40%. The goodwill related to the 1990
through 1997 purchases is amortized over 15 years.
- - $1,228.4 million of goodwill was recorded as a result of the Redemption.
Included in goodwill is $629.2 million related to the recording of
deferred tax liabilities. Deferred taxes were recorded for the adjustment
to fair value for other intangible assets, inventories and land. The
deferred tax liability was calculated based on a marginal tax rate of 40%
and has been allocated between short- and long-term classifications to
match the asset classifications. The goodwill related to the Redemption
is amortized over 15 years.
- - The existing deferred tax asset valuation allowance of $62.8 million was
eliminated at June 30, 1999 related to the tax benefits of stock option
deductions which have been realized and credited to paid-in capital as a
result of establishing deferred tax liabilities under push-down
accounting.
- - The redemption of our Special Common Stock and the issuance of new shares
of common stock to Roche resulted in substantially the same number of
total shares outstanding as prior to the Redemption.
- - The excess of purchase price over net book value of $2,276.9 million for
1990 through 1997 and $2,925.0 million in 1999, and $102.3 million for the
remeasurement of continuing employee stock options at the remeasurement
date was recorded in paid-in capital.
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- - The following adjustments were made to retained earnings for the 1990
through 1997 purchase period (in millions):
1990-1997
Purchases
----------
In-process research and development $ (500.5)
Amortization of goodwill, intangibles and fair
value adjustment to inventories, net of tax (1,221.8)
----------
Total adjustment to retained earnings $ (1,722.3)
==========
- - The tax provision benefit of $94.5 million for the second quarter of 1999
consists of tax expense of $51.8 million on pretax income before push-down
accounting of $109.3 million and a benefit of $146.3 million related to
the income and deductions attributable to push-down accounting.
- - $1,040.0 million of other intangible assets, which reflects Roche's 1990
through 1997 purchases less related accumulated amortization of $911.5
million of those assets through June 30, 1999, was recorded as a charge to
retained earnings. The components of other intangible assets related to
these purchases and their estimated lives are as follows (in millions):
Fair Accumulated Estimated
Value Amortization Life
-------- ------------ ----------
Developed product technology $ 429.0 $ 361.8 10
Core technology 240.5 202.9 10
Developed license technology 292.5 286.9 6
Trained and assembled workforce 32.5 31.6 7
Tradenames 39.0 21.9 15
Key distributor relationships 6.5 6.4 5
-------- --------
$1,040.0 $ 911.5
======== ========
- - $1,370.5 million of other intangible assets was recorded as a result of
the Redemption. The components of other intangible assets related to the
Redemption and their estimated lives are as follows (in millions):
Fair Estimated
Value Life
-------- -----------
Developed product technology $ 765.0 10
Core technology 203.0 10
Developed license technology 175.0 6
Trained and assembled workforce 49.0 7
Tradenames 105.0 15
Key distributor relationships 73.5 5
--------
$1,370.5
========
- - $500.5 million and $752.5 million of in-process research and development
was recorded as a result of Roche's 1990 through 1997 purchases and the
Redemption, respectively. At the date of each purchase, Genentech
concluded that technological feasibility of the acquired in-process
technology was not established and that the in-process technology had no
future alternative uses. The amount related to the 1990 through 1997
purchases was charged to retained earnings in the unaudited condensed
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consolidated balance sheet at June 30, 1999. The amount related to the
Redemption was charged to operations at June 30, 1999.
The amounts assigned to in-process research and development were
determined based upon an analysis employing the risk-adjusted cash flows
expected to be generated by the products that result from the in-process
projects. The analyses performed included forecasting future cash flow
that was expected to result from the progress made on each of the in-
process projects prior to the purchase dates. These cash flows were
estimated by first forecasting, on a product-by-product basis, total
revenues expected to result from sales of the first generation of each in-
process product. From this amount, a portion of the gross in-process
product revenues was removed to account for the contribution provided by
any core technology, which was considered to benefit the in-process
products. The net in-process revenue was then multiplied by the project's
estimated percentage of completion as of the purchase dates to arrive at a
forecast of net in-process research and development revenues attributable
to projects completed prior to the purchase dates. From this forecast,
appropriate operating expenses, cash flow adjustments and contributory
asset returns were deducted to arrive at a forecast of net returns on the
completed portion of the in-process technology. Finally, these net
returns were discounted to a present value at discount rates that
incorporate both the weighted average cost of capital (relative to the
biotech industry and Genentech) as well as the product-specific risk
associated with the purchased in-process research and development
products. The product specific risk factors considered include where each
product is in each phase of development, type of molecule under
development, likelihood of regulatory approval, manufacturing process
capability, scientific rationale, pre-clinical safety and efficacy data,
target product profile and development plan. The discount rates employed
ranged from 16% to 19% for the 1999 valuation and 20% to 28% for the 1990
purchase valuation, all of which represent a significant risk premium to
Genentech's weighted average cost of capital.
The forecast data employed in the analyses was based upon internal product
level forecast information maintained by Genentech management in the
ordinary course of managing its business. The inputs used by Genentech in
analyzing in-process research and development were based upon assumptions,
which Genentech believes to be reasonable but which are inherently
uncertain and unpredictable. These assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur.
Note 3. Relationship with Roche Holdings, Inc.
On June 30, 1999, Roche exercised its option to cause us to redeem all of our
Special Common Stock held by stockholders, other than Roche, at a price of
$82.50 per share in cash with funds deposited by Roche for such purpose and
we retired all of the shares of Special Common Stock including those held by
Roche. As a result, Roche owned 100% of our outstanding common stock. On
July 23, 1999, Roche completed a public offering of 22,000,000 shares of our
common stock and received all of the proceeds from the offering. After the
completion of the offering, Roche's percentage ownership of our outstanding
common stock was reduced from 100% to approximately 82.4% at July 31, 1999.
Our common stock began trading on the New York Stock Exchange under the
symbol "DNA" on July 20, 1999.
In connection with this offering, we entered into certain affiliation
arrangements with Roche, amended our licensing and marketing agreement with
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F. Hoffmann-La Roche Ltd, an affliliate of Roche commonly known as Hoffmann-
La Roche, and entered into a tax sharing agreement with Roche.
AFFILIATION ARRANGEMENTS
We have amended our certificate of incorporation and bylaws and entered into
an affiliation agreement with Roche. As a result, the size and composition
of our board of directors changed to consist of two Roche directors, three
independent directors nominated by a nominating committee currently
controlled by Roche, and one Genentech employee. However, under the new
affiliation agreement, Roche will have the right to obtain proportional
representation on our board at any time. Roche intends to continue to allow
our current management to conduct our business and operations as we have done
in the past. However, we cannot ensure that Roche will not implement a new
business plan in the future.
LICENSING AGREEMENT
In 1995, we entered into a licensing and marketing agreement with Hoffmann-La
Roche and its affiliates granting it a ten-year option to license to use and
sell products in non-U.S. markets. In connection with the offering, we
amended that agreement, the major provisions of which include:
- - extended Hoffmann-La Roche's option until at least 2015;
- - Hoffmann-La Roche may exercise its option to license our products upon the
occurrence of any of the following: (1) our decision to file an
Investigational New Drug exemption application, or IND, for a product, (2)
completion of a Phase II trial for a product or (3) if Hoffmann-La Roche
previously paid us a fee of $10 million to extend its option on a product,
completion of a Phase III trial for that product;
- - we have agreed, in general, to manufacture for and supply to Hoffmann-La
Roche its clinical requirements of our products at cost, and its
commercial requirements at cost plus a margin of 20%; however, Hoffmann-La
Roche will have the right to manufacture our products under certain
circumstances;
- - Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-
La Roche exercises its option upon either a decision to file an IND with
the U.S. Food and Drug Administration, or FDA, or completion of the Phase
II trials, a royalty of 12.5% on the first $100 million on its aggregate
sales of that product and thereafter a royalty of 15% on its aggregate
sales of that product in excess of $100 million until the later in each
country of the expiration of our last relevant patent or 25 years from the
first commercial introduction of that product; and
- - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction of that product; however, $5 million of any option extension
fee paid by Hoffmann-La Roche will be credited against royalties payable
to us in the first calendar year of sales by Hoffmann-La Roche in which
aggregate sales of that product exceed $100 million.
TAX SHARING AGREEMENT
Since the redemption of our Special Common Stock, we have been included in
Roche's U.S. federal consolidated income tax group. As a result, our tax
liability will be included in the consolidated federal income tax liability
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of Roche and its subsidiaries. We also will be included with Roche and/or
one or more Roche subsidiaries in consolidated or combined income tax groups
for certain state and local tax jurisdictions. Accordingly, we have entered
into a tax sharing agreement with Roche. Pursuant to the tax sharing
agreement, we and Roche will make payments so that the net amount paid by us
on account of Roche's consolidated or combined taxes will be determined as
though Genentech had filed separate, stand-alone income tax returns as the
common parent of a group of corporations rather than a consolidated
subsidiary of Roche.
ROCHE'S RIGHT TO MAINTAIN ITS PERCENTAGE OWNERSHIP INTEREST IN OUR STOCK
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. In order to preserve our status as a
member of Roche's consolidated federal income tax group, the affiliation
agreement will require us to, among other things, establish a stock
repurchase program designed to maintain Roche's percentage ownership interest
in our common stock. In addition, Roche will have a continuing option to buy
stock from us at prevailing market prices to maintain its percentage
ownership interest.
Note 4. Stock Option Changes
In connection with the redemption of our Special Common Stock, the following
changes have occurred with respect to our stock options that were outstanding
as of June 30, 1999:
- - Options for the purchase of approximately 6.8 million shares of Special
Common Stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $82.50 per share, less the exercise price;
- - Options for the purchase of approximately 4.0 million shares of Special
Common Stock were converted into options to purchase a like number of
shares of common stock at the same exercise price; and
- - Options for the purchase of approximately 4.9 million shares of Special
Common Stock were canceled, in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan (the "1996 Plan"). With certain exceptions,
we granted new options for the purchase of 1.333 times the number of
shares under the previous options with an exercise price of $97 per share,
which was the public offering price of the common stock. The number of
shares that were the subject of these new options, which were issued under
our 1999 Stock Plan (the "1999 Plan"), was approximately 5.0 million.
Alternative arrangements were provided for certain holders of some of the
unvested options under the 1996 Plan.
In connection with these stock option transactions, we recorded or expect to
record:
- - In the quarter ended June 30, 1999, (1) cash compensation expense of
approximately $284.5 million associated with the cash-out of such stock
options and (2) non-cash compensation expense of approximately $102.3
million associated with the remeasurement, for accounting purposes, of the
converted options, which non-cash amount represents the difference between
each applicable option exercise price and the redemption price of the
Special Common Stock;
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- - In the quarter ending September 30, 1999, non-cash compensation expense of
approximately $57.8 million associated with the remeasurement, for
accounting purposes, of the converted options, which non-cash amount
represents the difference between the $82.50 redemption price of the
Special Common Stock and the $97 public offering price of the common
stock; and
- - Over a two-year period, an aggregate of $27.4 million available to be
earned by a limited number of employees who elected the alternative
arrangements described above.
Note 5. Related Party Transactions
Genentech entered into a license agreement with Immunex Corporation that
grants rights under Genentech's immunoadhesin patent portfolio to Immunex for
its product ENBREL, registered trademark. In exchange for a worldwide, co-
exclusive license covering fusion proteins such as ENBREL, Immunex paid
Genentech an initial non-refundable license fee which was recorded in
contract revenues net of a portion to be paid to Roche pursuant to an
agreement between Roche and Genentech.
Note 6. Long-term Debt
Our long-term debt consists of $150.0 million of convertible subordinated
debentures, with interest payable at 5%, due in 2002. Prior to the
redemption of our Special Common Stock, the debentures were convertible, at
the option of the holder, into one-half share of our Special Common Stock and
$18 in cash, for each $74 in principal amount of debenture converted. As a
result of the redemption of our Special Common Stock, upon conversion, the
holder receives, for each $74 in principal amount of debenture converted,
$59.25 in cash, which represents one-half of the $82.50 redemption price and
$18 in cash. The $18 in cash is reimbursed by Roche to us. Generally, we
may redeem the debentures until maturity.
Note 7. New Accounting Standards
In July 1999, the Financial Accounting Standards Board (FASB) announced the
delay of the effective date of Statement of Financial Accounting Standards
(FAS) 133, "Accounting for Derivative Instruments and Hedging Activities,"
for one year, to the first quarter of 2001. 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. We are currently
evaluating the impact of FAS 133 on our financial position and results of
operations.
At the end of March 1999, the FASB issued a proposed Interpretation of
Accounting Principles Board Opinion number 25, "Accounting for Certain
Transactions involving Stock Compensation" (proposal). This proposal would
be effective upon issuance of the final interpretation, which is expected in
the fourth quarter of 1999, but generally would cover events that occur after
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December 15, 1998. To the extent that events covered by this proposal occur
during the period after December 15, 1998, but before issuance of the final
interpretation, the effects of applying this proposal would be recognized on
a prospective basis from the effective date. The potential impact of this
proposal may be significant in relation to non-employee director stock
options and stock option repricings. We are currently evaluating the impact
of this proposal on our financial position and results of operations.
Note 8. Earnings Per Share
The following is a reconciliation of the numerator and denominators of the
basic and diluted earnings per share (EPS) computations for the three- and
six-month periods ended June 30, 1999 and 1998 (in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1999 1998 1999 1998
--------- -------- --------- --------
Numerator:
Net income (loss) - numerator
For basic and diluted EPS: $(923,192) $ 40,374 $(908,777) $ 81,391
--------- -------- --------- --------
Denominator:
Denominator for basic EPS--
weighted-average shares 128,480 125,601 128,092 125,179
Effect of dilutive securities:
Stock options - 4,174 - 4,112
--------- -------- --------- --------
Denominator for diluted EPS
--adjusted weighted-average
shares and assumed conversions 128,480 129,775 128,092 129,291
========= ======== ========= ========
Options to purchase 1,580,150 shares of Special Common Stock between $68.19
per share and $68.38 per share were outstanding in the six-month period
ended June 30, 1998, but were not included in the computations of diluted
EPS because the options were anti-dilutive.
In the three- and six-month periods ended June 30, 1998, we had convertible
subordinated debentures that were convertible to 1,013,514 shares of Special
Common Stock. These were not included in the computations of diluted EPS
because they were anti-dilutive. As a result of the Redemption, the
convertible subordinated debentures are no longer convertible to Special
Common Stock. For further information, you should read "Long-term Debt"
note in the Notes to Condensed Consolidated Financial Statements above.
Note 9. Comprehensive Income
We adopted FAS 130, "Reporting Comprehensive Income," in 1998. Comprehensive
income is comprised of net income and other comprehensive income. Our other
comprehensive income includes unrealized holding gains and losses on its
available-for-sale securities, which were reported separately in
stockholders' equity, and included in accumulated other comprehensive income.
Comprehensive income (loss) was $(934.8) million for the quarter ended June
30, 1999 and $20.2 million for the comparable period in 1998. For the six
months ended June 30, 1999, comprehensive income (loss) was $(930.3) and
$66.3 for the comparable period in 1998.
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<PAGE>
Note 10. Legal Proceedings
We are a party to various legal proceedings, including patent infringement
cases involving human growth hormone products and Activase and other matters.
In July 1997, an action was filed in the U.S. District Court for the Northern
District of California alleging that our manufacture, use and sale of
Nutropin human growth hormone products infringes a patent known as the
"Goodman Patent," owned by the Regents of the University of California, or
UC. This action is substantially the same as a previous action filed in 1990
against us by UC alleging that our manufacture, use and sale of Protropin
recombinant human growth hormone infringes the Goodman Patent. The 1997 case
had been stayed until recently, as described below.
In May 1999, the 1990 case was submitted to the jury and, on June 2, 1999,
the jury announced its findings. While the jury found that the Goodman
Patent was valid, the jurors could not agree among themselves whether our
manufacture, use or sale of Protropin infringed the Goodman Patent, although
the jury publicly reported that it voted 8-1 in favor of UC. Because the
jury could not reach a unanimous decision, no finding of infringement was
made and there is no current legal basis for us to be held liable to UC for
any claim of damages. On June 22, 1999, the judge held a hearing known as a
status conference to discuss further proceedings relating to the 1990 and
1997 cases. At that time, Genentech renewed its request that the judge hold
a non-jury trial and decide whether UC defrauded the U.S. Patent and
Trademark Office when obtaining the Goodman Patent. The judge has previously
denied a request by UC that this defense be thrown out of the case for lack
of merit. A favorable ruling by the judge in any such trial would render the
Goodman Patent unenforceable. On July 1, 1999, the judge issued a written
decision setting the schedule for further proceedings. The judge
consolidated the 1990 and 1997 cases for a jury trial to begin on January 3,
2000. The issues of infringement and willfulness will be tried to the jury
first, and only if the jury finds liability would the issue of damages be
tried. Pursuant to the judge's decision, that jury trial is to be followed
immediately by a court trial of Genentech's fraud (inequitable conduct) claim
against UC. In addition, UC made a motion for entry of a judgment as a
matter of law (a "directed verdict") that Genentech's manufacture, use or
sale of Protropin infringes the Goodman Patent notwithstanding the lack of
unanimous jury verdict on that issue. The judge scheduled a hearing for July
23, 1999 to discuss that motion. On July 15, 1999, the judge issued a
written decision denying UC's motion for a directed verdict, and the judge
canceled the July 23, 1999 hearing.
On May 28, 1999, Glaxo Wellcome Inc. filed a patent infringement lawsuit
against us in the U.S. District Court in Delaware. That suit asserts that we
infringe four U.S. patents owned by Glaxo Wellcome. Two of the patents
relate to the use of specific kinds of monoclonal antibodies for the
treatment of human disease, including cancer. The other two patents asserted
against us relate to preparations of specific kinds of monoclonal antibodies
which are made more stable and the methods by which such preparations are
made. We have been served with the complaint. The complaint fails to
specify which of our products or methods of manufacture are allegedly
infringing the four patents at issue. However, we believe that the suit
relates to the manufacture, use and sale of our Herceptin and Rituxan
antibody products. On July 19, 1999, we filed our answer to Glaxo Wellcome's
complaint, and in our answer we also stated counterclaims against Glaxo
Wellcome.
Based upon the nature of the claims made and the information available to
date to us and our counsel through investigations and otherwise, we believe
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<PAGE>
the outcome of these actions is not likely to have a material adverse effect
on our financial position, result of operations or cash flows. 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.
In addition to the above, in April 1999, we agreed to make a $50 million
payment to settle a federal investigation relating to our past clinical,
sales and marketing activities associated with human growth hormone.
Note 11. Inventories
As a result of push-down accounting, we wrote-up inventory by $186,181,000 of
which $170,320,000 was allocated to work in process and $15,861,000 was
allocated to finished goods. Inventories are summarized below (in
thousands):
June 30, December 31,
1999 1998
------------ ------------
Raw materials and supplies $ 21,678 $ 21,414
Work in process 270,981 106,383
Finished goods 31,814 20,829
--------- ---------
Total $ 324,473 $ 148,626
========= =========
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<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 June 30, 1999, and the related condensed consolidated
statements of operations for the three-month and six-month periods ended June
30, 1999 and 1998 and the condensed consolidated statements of cash flows for
the six-month periods ended June 30, 1999 and 1998. 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, 1998, 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, 1999, 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, 1998, 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 9, 1999
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<PAGE>
GENENTECH, INC.
FINANCIAL REVIEW
OVERVIEW
Genentech is a leading biotechnology company that uses human genetic
information to discover, develop, manufacture and market human
pharmaceuticals for significant unmet medical needs. Twelve of the approved
products of biotechnology stem from our science. Science at Genentech
focuses primarily on two areas of medicine: cardiovascular and oncology. We
also pursue projects where there exists a significant opportunity to fill a
therapeutic void in other important areas of medicine, such as with our
growth hormone products.
We manufacture and market the following seven products directly in the United
States:
- - Herceptin antibody for the treatment of certain patients with metastatic
breast cancer whose tumors overexpress the human epidermal growth factor
receptor2, or HER2, protein;
- - Rituxan (rituximab) antibody for the treatment of patients with relapsed
or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkins
lymphoma;
- - Activase tissue plasminogen activator, or t-PA, for the treatment of heart
attack, acute ischemic stroke within three hours of the onset of symptoms,
and acute massive pulmonary embolism;
- - Protropin growth hormone for the treatment of lack of adequate endogenous
growth hormone secretion, or growth hormone deficiency, in children;
- - Nutropin growth hormone for the treatment of growth hormone deficiency in
children and adults, growth failure associated with chronic renal
insufficiency prior to kidney transplantation and short stature associated
with Turner syndrome;
- - Nutropin AQ liquid formulation growth hormone for the same indications as
Nutropin; and
- - Pulmozyme inhalation solution for the management of cystic fibrosis.
We receive royalties on sales of products in Canada, on sales of Pulmozyme
outside of the United States and on sales of rituximab outside of the United
States (excluding Japan) from F. Hoffmann-La Roche Ltd, an affiliate of Roche
Holdings, Inc., that is commonly known as Hoffmann-La Roche. We receive
royalties on sales of growth hormone products and t-PA outside of the United
States and Canada through other licensees. We also receive worldwide
royalties on five additional licensed products that originated from our
technology and are marketed by other companies.
REDEMPTION OF OUR SPECIAL COMMON STOCK
On June 30, 1999, we redeemed all of our outstanding Special Common Stock
held by stockholders other than Roche Holdings, Inc., commonly known as
Roche, at a price of $82.50 per share in cash with funds deposited by Roche
for that purpose. As a result, Roche's percentage ownership of our
outstanding common stock increased from 65% to 100%. Consequently, push-down
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accounting is required under U.S. generally accepted accounting principles to
reflect in our financial statements the amounts paid for our stock in excess
of our net book value. Push-down accounting required us to record goodwill
and other intangible assets of $1,706.0 million and $1,499.1 million,
respectively, onto our balance sheet in the second quarter of 1999. The
amortization of this goodwill and other intangible assets will have a
significant negative impact on our financial results in future years. In
addition, we will continuously evaluate whether events and circumstances have
occurred that indicate any portion of the remaining balance of these
intangible assets may not be recoverable. When factors indicate that assets
should be evaluated for possible impairment, we may be required to reduce the
carrying value of our intangible assets, which could have a material adverse
effect on our financial condition and results of operations during the
periods in which such a reduction is recognized. Also as a result of push-
down accounting, we recorded in the second quarter of 1999 a charge of
$1,147.3 million. This charge includes a non-cash charge of $752.5 million
for in-process research and development, $284.5 million for the cash-out of
Special Common Stock options and $102.3 million as a non-cash charge for the
remeasurement of the value of continuing employee stock options. For more
information about push-down accounting, you should read "Redemption of
Genentech's Special Common Stock" note in the Notes to Condensed Consolidated
Financial Statements above.
Stock Options Changes
In connection with the redemption of our Special Common Stock, the following
changes have occurred with respect to our stock options that were outstanding
as of June 30, 1999:
- - Options for the purchase of approximately 6.8 million shares of Special
Common Stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $82.50 per share, less the exercise price;
- - Options for the purchase of approximately 4.0 million shares of Special
Common Stock were converted into options to purchase a like number of
shares of common stock at the same exercise price; and
- - Options for the purchase of approximately 4.9 million shares of Special
Common Stock were canceled, in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan (the "1996 Plan"). With certain exceptions,
we granted new options for the purchase of 1.333 times the number of
shares under the previous options with an exercise price of $97 per share,
which was the public offering price of the common stock. The number of
shares that were the subject of these new options, which were issued under
our 1999 Stock Plan (the "1999 Plan"), was approximately 5.0 million.
Alternative arrangements were provided for certain holders of some of the
unvested options under the 1996 Plan.
In connection with these stock option transactions, we recorded or expect to
record:
- - In the quarter ended June 30, 1999, (1) cash compensation expense of
approximately $284.5 million associated with the cash-out of such stock
options and (2) non-cash compensation expense of approximately $102.3
million associated with the remeasurement, for accounting purposes, of the
converted options, which non-cash amount represents the difference between
each applicable option exercise price and the redemption price of the
Special Common Stock;
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- - In the quarter ending September 30, 1999, non-cash compensation expense of
approximately $57.8 million associated with the remeasurement, for
accounting purposes, of the converted options, which non-cash amount
represents the difference between the $82.50 redemption price of the
Special Common Stock and the $97 public offering price of the common
stock; and
- - Over a two-year period, an aggregate of $27.4 million available to be
earned by a limited number of employees who elected the alternative
arrangements described above.
THE PUBLIC OFFERING
On July 23, 1999, Roche completed a public offering (the offering) of our
common stock. After the completion of the offering, Roche's percentage
ownership of our outstanding common stock was reduced to approximately 82.4%
at July 31, 1999. We had 127,857,556 shares of common stock outstanding at
July 31, 1999. We did not receive any of the net proceeds from the offering.
Our common stock began trading on the New York Stock Exchange under the
symbol DNA on July 20, 1999. We currently intend to retain all future income
for use in the operation of our business and to fund future growth and,
therefore, we do not intend to declare or pay any cash dividends on our
common stock in the forseeable future.
In connection with the offering, we amended our certificate of incorporation
and bylaws and entered into certain affiliation arrangements with Roche,
amended our licensing and marketing agreement with Hoffmann-La Roche, and
entered into a tax sharing agreement with Roche.
RELATIONSHIP with Roche Holdings, Inc.
As a result of the redemption of our Special Common Stock, the then-existing
governance agreement between Genentech and Roche terminated, except for
provisions relating to indemnification and stock options, warrants and
convertible securities. In connection with the offering, we entered into
certain affiliation arrangements with Roche, amended our licensing and
marketing agreement with Hoffmann-La Roche, and entered into a tax sharing
agreement with Roche as follows:
Affiliation Arrangements
Prior to the completion of the offering, we amended our certificate of
incorporation and bylaws and entered into an affiliation agreement with
Roche. As a result, the size and composition of our board of directors
changed to consist of two Roche directors, three independent directors
nominated by a nominating committee currently controlled by Roche, and one
Genentech employee. However, under the new affiliation agreement, Roche will
have the right to obtain proportional representation on our board at any
time. Roche intends to continue to allow our current management to conduct
our business and operations as we have done in the past. However, we cannot
ensure that Roche will not implement a new business plan in the future.
Except as follows, the affiliation arrangements will not limit Roche's
ability to buy or sell our common stock. If Roche and its affiliates sell
their majority ownership of shares of our common stock to a successor, Roche
has agreed that it will cause the successor to purchase all shares of our
common stock not held by Roche as follows:
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- - with consideration, if that consideration is composed entirely of either
cash or equity traded on a U.S. national securities exchange, in the same
form and amounts per share as received by Roche and its affiliates; and
- - in all other cases, with consideration that has a value per share not less
than the weighted average value per share received by Roche and its
affiliates as determined by a nationally recognized investment bank.
If Roche owns more than 90% of our common stock for more than two months,
Roche has agreed that it would, as soon as reasonably practicable, effect a
merger of Genentech with Roche or an affiliate of Roche.
Roche has agreed, as a condition to any merger of Genentech with Roche or the
sale of our assets to Roche, that either:
- - the merger or sale must be authorized by the favorable vote of a majority
of non-Roche stockholders, provided no person will be entitled to cast
more than 5% of the votes at the meeting; or
- - in the event such a favorable vote is not obtained, the value of the
consideration to be received by non-Roche stockholders would be equal to
or greater than the average of the means of the ranges of fair values for
the common stock as determined by two nationally recognized investment
banks.
We have agreed not to approve, without the prior approval of the directors
designated by Roche:
- - any acquisition, sale or other disposal of all or a portion of our
business representing 10% or more of our assets, net income or revenues;
- - any issuance of capital stock except under certain circumstances; or
- - any repurchase or redemption of our capital stock other than a redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
Licensing Agreement
In 1995, we entered into a licensing and marketing agreement with Hoffmann-La
Roche and its affiliates granting it a ten-year option to license to use and
sell products in non-U.S. markets. In connection with the offering, we
amended that agreement, the major provisions of which include:
- - extending Hoffmann-La Roche's option until at least 2015;
- - Hoffmann-La Roche may exercise its option to license our products upon the
occurrence of any of the following: (1) our decision to file an
Investigational New Drug exemption application, or IND, for a product, (2)
completion of a Phase II trial for a product or (3) if Hoffmann-La Roche
previously paid us a fee of $10 million to extend its option on a product,
completion of a Phase III trial for that product;
- - we agreed, in general, to manufacture for and supply to Hoffmann-La Roche
its clinical requirements of our products at cost, and its commercial
requirements at cost plus a margin of 20%; however, Hoffmann-La Roche will
have the right to manufacture our products under certain circumstances;
- - Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-
La Roche exercises its option upon either a decision to file an IND with
the U.S. Food and Drug Administration, or FDA, or completion of the Phase
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II trials, a royalty of 12.5% on the first $100 million on its aggregate
sales of that product and thereafter a royalty of 15% on its aggregate
sales of that product in excess of $100 million until the later in each
country of the expiration of our last relevant patent or 25 years from the
first commercial introduction of that product; and
- - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction of that product; however, $5 million of any option extension
fee paid by Hoffmann-La Roche will be credited against royalties payable
to us in the first calendar year of sales by Hoffmann-La Roche in which
aggregate sales of that product exceed $100 million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, we have been included in
Roche's U.S. federal consolidated income tax group. As a result, our tax
liability will be included in the consolidated federal income tax liability
of Roche and its subsidiaries. We also will be included with Roche and/or
one or more Roche subsidiaries in consolidated or combined income tax groups
for certain state and local tax jurisdictions. Accordingly, we entered into
a tax sharing agreement with Roche. Pursuant to the tax sharing agreement,
we and Roche will make payments so that the net amount paid by us on account
of Roche's consolidated or combined taxes will be determined as though
Genentech had filed separate, stand-alone income tax returns as the common
parent of a group of corporations rather than a consolidated subsidiary of
Roche.
Roche's Right to Maintain its Percentage Ownership Interest in Our Stock
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. In order to preserve our status as a
member of Roche's consolidated federal income tax group, the affiliation
agreement will require us to, among other things, establish a stock
repurchase program designed to maintain Roche's percentage ownership interest
in our common stock. In addition, Roche will have a continuing option to buy
stock from us at prevailing market prices to maintain its percentage
ownership interest.
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
1999 1999
------------------ 1998 Pro Forma ------------------ 1998 Pro Forma
NET INCOME (LOSS) Actual Pro Forma Actual % Change Actual Pro Forma Actual % Change
- ------------------- ------- --------- ------ --------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $(923.2) $ 73.2 $ 40.4 81% $(908.8) $ 131.7 $ 81.4 62%
Earnings (loss)
per share:
Basic $ (7.19) $ 0.57 $ 0.32 $ (7.09) $ 1.03 $ 0.65
Diluted $ (7.19) $ 0.55 $ 0.31 $ (7.09) $ 0.99 $ 0.63
</TABLE>
The net loss for the quarter and first six months of 1999 reflects the effect
of push-down accounting. (For further information, read "Redemption of
Genentech's Special Common Stock" note in the Notes to Condensed Consolidated
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Financial Statements.) In addition, the net loss for the first six months of
1999 also reflects the legal settlement recorded in the first quarter of
1999.
Pro forma net income, which excludes the effect of push-down accounting, for
the second quarter of 1999 was $73.2 million, an 81% increase from the
comparable period in 1998. Pro forma net income, which excludes the effect
of push-down accounting and the legal settlement, for the first six months of
1999 was $131.7 million, a 62% increase from the comparable period in 1998.
These increases represent revenue growth primarily driven by sales of our
oncology products, Rituxan and Herceptin, and higher revenues from our
strategic alliances. These revenue increases were offset in part by the
expiration of royalties from Eli Lilly and Company, commonly known as Lilly,
in August 1998 and higher marketing, general and administrative expenses.
See below for further information on the components of operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
1999 1999
------------------ 1998 Pro Forma ------------------ 1998 Pro Forma
REVENUES Actual Pro Forma Actual % Change Actual Pro Forma Actual % Change
- ------------------- ------- --------- ------ --------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 395.2 $ 374.9 $268.0 40% $ 717.6 $ 697.3 $532.7 31%
======= ========= ====== ========= ======= ========= ====== =========
PRODUCT SALES
- -------------------
Herceptin $ 46.2 $ 46.2 - - $ 86.1 $ 86.1 - -
Rituxan 74.4 74.4 $ 34.8 114% 131.5 131.5 $ 72.5 81%
Activase 58.1 58.1 54.1 7 110.1 110.1 109.8 -
Protropin, Nutropin
and Nutropin AQ 59.3 59.3 62.3 (5) 115.5 115.5 113.2 2
Pulmozyme 30.6 30.6 24.1 27 58.8 58.7 43.6 35
Actimmune 0.7 0.7 1.0 (30) 1.4 1.4 1.9 (26)
------- --------- ------ --------- ------- --------- ------- --------
Total product sales $ 269.3 $ 269.3 $176.3 53% $ 503.4 $ 503.4 $341.0 48%
======= ========= ====== ========= ======= ========= ======= ========
</TABLE>
Net sales of Herceptin, indicated for the treatment of certain patients with
metastatic breast cancer who have tumors that overexpress the human epidermal
growth factor receptor (HER2) protein, were $46.2 million in the second
quarter of 1999. We recorded $39.9 million in net sales of Herceptin in the
first quarter of 1999 and $30.5 million of initial net sales in the fourth
quarter of 1998 after Herceptin's introduction in September 1998. An
increase in physician acceptance of Herceptin has contributed to a positive
sales trend and successful penetration into the breast cancer market.
Net sales of Rituxan, indicated 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, increased 114% in the second quarter
of 1999 and 81% in the first six months of 1999 from the comparable periods
in 1998. These increases were primarily due to increased market penetration
for the treatment of B-cell non-Hodgkin's lymphoma. We co-developed with
IDEC Pharmaceuticals Corporation, commonly known as IDEC, from whom we
license Rituxan.
Net sales of Activase tissue plasminogen activator (t-PA) increased 7% in the
second quarter of 1999 from the comparable period in 1998. This increase was
due largely to usage in peripheral indications previously served by another
company's thrombolytic currently in short supply in the marketplace. This
increase was offset in part by a continued decline in the overall size of the
thrombolytic therapy market due to mechanical reperfusion and continued
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competition from Centocor, Inc.'s Retavase, registered trademark. Sales of
Activase in the first six months of 1999 were comparable to the first six
months of last year.
In connection with the acquisition by Roche of Corange Limited in 1998,
Roche entered into a consent decree with the Federal Trade Commission.
Pursuant to the consent decree, if Roche acquires 100% of our stock, Roche
shall cause us to dismiss, with prejudice, all pending litigation we have
against Centocor regarding the rights for the research, development,
manufacture or sale of Centocor's Retavase product, and we shall refrain from
instituting any new litigation against Centocor challenging or seeking to
render invalid any of the patents divested or licensed to Centocor pursuant
to the terms of the decree. Roche has requested that we proceed with
dismissing such litigations as required under the consent decree, and we are
in process of discussing and resolving with Roche and Centocor how to
implement those dismissals.
Net sales of our three growth hormone products - Protropin, Nutropin, and
Nutropin AQ, - decreased 5% in the second quarter of 1999 from the comparable
period in 1998. Sales of these products increased slightly in the first six
months of 1999 from the comparable period in 1998. These sales variances
primarily reflect fluctuations in distributor ordering patterns.
Net sales of Pulmozyme increased 27% and 35% in the second quarter and first
six months of this year, respectively, from the comparable periods in 1998.
These increases were primarily due to increased market penetration in the
early and mild patient populations for the management of cystic fibrosis.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
ROYALTIES, CONTRACT, 1999 1999
AND OTHER, AND ------------------ 1998 Pro Forma ------------------ 1998 Pro Forma
INTEREST INCOME Actual Pro Forma Actual % Change Actual Pro Forma Actual % Change
- ------------------- ------- --------- ------ --------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Royalties $ 46.0 $ 46.0 $ 57.4 (20)% $ 92.6 $ 92.6 $121.9 (24)%
Contract and other 57.9 37.6 14.0 169 77.2 56.9 28.9 97
Interest income 22.0 22.0 20.3 8 44.4 44.4 40.9 9
</TABLE>
Royalty income decreased by 20% in the second quarter and 24% in the first
six months of 1999 from the comparable periods in 1998. These decreases
primarily relate to the expiration of royalties from Lilly in August 1998,
partly offset by higher royalties from various licensees.
Contract and other revenues increased in the second quarter and first six
months of 1999 from the comparable periods in 1998. These increases were due
in part to the recognition of $20.3 million of gains related to the write-up
of marketable securities as a result of push-down accounting as described
above in the "Redemption of Genentech's Special Common Stock" note in the
Notes to Condensed Consolidated Financial Statements. Pro forma contract and
other revenues, which excludes the effect of push-down accounting, increased
169% and 97% in the second quarter and first six-months of 1999,
respectively. These increases reflect higher revenues from Hoffmann-La Roche
related to a milestone payment for Herceptin and higher revenues from our
strategic alliances. In the second quarter of 1999, we received from Immunex
Corporation an initial license fee and retroactive royalties pursuant to a
licensing agreement with Immunex for ENBREL, registered trademark, and a
milestone payment from Schwarz Pharma AG related to a FDA filing for Nutropin
Depot.
Interest income increased 8% in the second quarter and 9% in the first six
months 1999 from the comparable periods in 1998 primarily due to a higher
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<PAGE>
portfolio balance. The total investment portfolio, consisting of cash and
cash equivalents, and short- and long-term marketable securities, increased
to $1,721.0 million as of June 30, 1999 from $1,388.3 million as of June 30,
1998 and from $1,604.6 million as of December 31, 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- --------------------------------------
1999 1999
------------------ 1998 Pro Forma ------------------ 1998 Pro Forma
COST AND EXPENSES Actual Pro Forma Actual % Change Actual Pro Forma Actual % Change
- ------------------------ -------- --------- ------ --------- -------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of sales $ 52.7 $ 52.7 $ 37.2 42% $ 98.4 $ 98.4 $ 70.8 39%
Research and development 94.2 94.2 92.9 1 184.9 184.9 191.1 (3)
Marketing, general and
administrative 117.4 117.4 80.6 46 214.6 214.6 155.5 38
Legal settlement - - - - 50.0 - - -
Special charge, related
to redemption 1,147.3 - - - 1,147.3 - - -
Interest expense 1.3 1.3 1.2 8 2.7 2.7 2.2 23
-------- --------- ------ --------- -------- --------- ------ ---------
Total costs and expenses $1,412.9 $ 265.6 $211.9 25% $1,697.9 $ 500.6 $419.6 19%
======== ========= ====== ========= ======== ========= ====== =========
</TABLE>
Cost of sales increased 42% in the second quarter and 39% in the first six
months of 1999 from the comparable periods in 1998 primarily due to increased
product sales.
Research and development expenses in the second quarter of 1999 were
comparable to the second quarter of 1998. In the first six months of 1999,
research and development expenses decreased from the comparable period in
1999. For the second quarter and first six months of 1999, we invested 25%
and 27%, respectively, of pro forma revenues into research and development
compared to 35% and 36%, respectively, from a year ago. The decrease in the
first six months of 1999 and the lower ratios reflect our long-range plan to
reduce research and development spending as a percent of revenues as products
progress through late-stage clinical trials and revenues increase.
Marketing, general and administrative expenses increased 46% in the second
quarter and 38% in the first six months of 1999 from the comparable period in
1998. These increases were driven mainly by the growth of Rituxan and the
resultant profit sharing expense and the introduction of Herceptin, as well
as the write-down of certain biotechnology investments.
The second quarter of 1999 included a $1,147.3 million special charge,
related to the Redemption and the application of push-down accounting. This
charge includes a non-cash charge of $752.5 million for in-process research
and development, $284.5 million for the cash-out of Special Common Stock
options and $102.3 million as a non-cash charge for the remeasurement of the
value of continuing employee stock options. The first six months of 1999
also included a $50.0 million legal settlement related to a federal
investigation of our past clinical, sales and marketing activities associated
with human growth hormone. (See the Legal Proceedings note in the Notes to
Condensed Consolidated Financial Statements for further information regarding
the legal settlement.)
At the Redemption date, Genentech concluded that technological feasibility of
the acquired in-process technology was not established and that the in-
process technology had no future alternative uses. As a result, $500.5
million of in-process research and development related to Roche's 1990
through 1997 purchases of our common stock was charged to retained earnings;
and $752.5 million of in-process research and development related to the
Redemption was charged to operations at June 30, 1999.
The amounts assigned to in-process research and development were determined
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<PAGE>
based upon an analysis employing the risk-adjusted cash flows expected to be
generated by the products that result from the in-process projects. The
analyses performed included forecasting future cash flow that was expected to
result from the progress made on each of the in-process projects prior to the
purchase dates. These cash flows were estimated by first forecasting, on a
product-by-product basis, total revenues expected to result from sales of the
first generation of each in-process product. From this amount, a portion of
the gross in-process product revenues was removed to account for the
contribution provided by any core technology, which was considered to benefit
the in-process products. The net in-process revenue was then multiplied by
the project's estimated percentage of completion as of the purchase dates to
arrive at a forecast of net in-process research and development revenues
attributable to projects completed prior to the purchase dates. From this
forecast, appropriate operating expenses, cash flow adjustments and
contributory asset returns were deducted to arrive at a forecast of net
returns on the completed portion of the in-process technology. Finally,
these net returns were discounted to a present value at discount rates that
incorporate both the weighted average cost of capital (relative to the
biotech industry and Genentech) as well as the product-specific risk
associated with the purchased in-process research and development products.
The product specific risk factors considered include where each product is in
each phase of development, type of molecule under development, likelihood of
regulatory approval, manufacturing process capability, scientific rationale,
pre-clinical safety and efficacy data, target product profile and development
plan. The discount rates employed ranged from 16% to 19% for the 1999
valuation and 20% to 28% for the 1990 purchase valuation, all of which
represent a significant risk premium to Genentech's weighted average cost of
capital.
The forecast data employed in the analyses was based upon internal product
level forecast information maintained by Genentech management in the ordinary
course of managing its business. The inputs used by Genentech in analyzing
in-process research and development were based upon assumptions, which
Genentech believes to be reasonable but which are inherently uncertain and
unpredictable. These assumptions may be incomplete or inaccurate, and no
assurance can be given that unanticipated events and circumstances will not
occur.
A brief description of in-process research and development projects is set
forth below including an estimated percentage of completion of products
within each project at the Redemption date and an estimate made as of August
10, 1999 of when products within each project will be substantially complete.
Genentech does not track all costs associated with research and development
on a project-by-project basis, therefore we believe a calculation of cost
incurred as a percentage of total incurred project cost as of FDA approval is
not possible. Management estimates, however, that the research and
development expenditures that will be required to complete the in-process
projects will total at least $700 million.
We have estimated percentage complete data for each project based upon an
equal weighting of three indicators, as follows:
PTS: Probability of technical success ("PTS") is a project level statistic
maintained by Genentech on an ongoing basis, which is intended to represent
the current likelihood of project success, i.e., FDA approval. This is a
quantitative calculation based upon the stage of development and the
complexity of the project, and it is highly correlated with the project's
phase of development. PTS is periodically adjusted to reflect actual
experiences over a reasonable period of time.
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<PAGE>
Status compared to Baseline Model: We developed a baseline model which
allocated percentages of a standard development project to each major phase
of the project based upon our experience. We then overlaid the time-based
status of each project to this baseline model, in order to calculate a
percentage complete for each project.
Management's Estimate of Percentage Complete: Genentech's senior product
development management representatives provided an estimate of the percentage
complete, on a technological basis, of each project.
Nutropin Depot sustained-release growth hormone - A sustained release version
of human growth hormone based on Alkermes' ProLease sustained release drug
delivery system, which is designed to deliver human growth hormone by monthly
or semi-monthly injections. This product is being developed in collaboration
with Alkermes. On June 25, 1999, Genentech made U.S. regulatory filings
seeking marketing approval for Nutropin Depot, and we are currently awaiting
regulatory clearance. We estimate the initial indication on this project
will be substantially complete by the year 2000, and that this project was
approximately 85% complete at the Redemption date.
TNK-tPA - A second generation t-PA that is a selectively mutated version of a
wild-type t-PA. This t-PA version may be faster acting and easier to
administer, and may restore blood flow faster. We have completed enrollment
in Phase III clinical trials in patients with acute myocardial infarction and
are currently preparing FDA regulatory filings. This product is being
developed in collaboration with Boehringer Ingelheim International GmbH. We
estimate that this project will be substantially complete by the year 2000,
and that it was approximately 90% complete at the Redemption date.
Anti-IgE antibody - An anti-IgE monoclonal antibody designed to interfere
early in the process that leads to symptoms of allergic asthma and seasonal
allergic rhinitis. This product is being developed in collaboration with
Tanox, Inc. and Novartis Pharmaceuticals Corporation. Phase III trials are
ongoing in patients with allergic asthma. Phase III trials have been
completed in patients with seasonal allergic rhinitis and the results have
been analyzed. We estimate that this project was approximately 75% complete
at the Redemption date.
Pulmozyme inhalation solution - A recombinant human protein that is an
approved treatment for the management of cystic fibrosis. We are conducting
a trial to determine the effect of Pulmozyme on pulmonary function in
patients with early-stage cystic fibrosis. We estimate this project to be
approximately 75% complete at the Redemption date. We are also preparing to
begin clinical testing of Pulmozyme delivery via Aradigm Corporation's AERx,
trademark, delivery system. We estimate that this project was approximately
45% complete at the Redemption date. These projects will be substantially
complete by the year 2003.
Rituxan antibody - A monoclonal antibody approved for the treatment of
relapsed or refractory low-grade or follicular, CD20-positive B-cell non-
Hodgkin's lymphoma, a cancer of the immune system. Genentech is in Phase III
clinical trials for the treatment of intermediate- and high-grade non-
Hodgkin's lymphoma. This product is being developed in collaboration with
IDEC Pharmaceuticals, Inc., or IDEC. We estimate that this project will be
substantially complete by the year 2004 and that it was approximately 60%
complete at the Redemption date.
Xubix, trademark, (sibrafiban) oral IIb/IIIa antagonist - An orally
administered inhibitor of platelet aggregation that may be useful in the
prevention of unwanted clotting in certain cardiovascular conditions,
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<PAGE>
including acute coronary syndrome. F. Hoffmann-La Roche Ltd (Hoffmann-La
Roche) is conducting global development of this molecule, and we retain
certain opt-in rights with respect to the United States. We estimate that
this project was approximately 65% complete at the Redemption date. On
August 6, 1999, Hoffmann-La Roche announced that the preliminary results from
its Phase III trial of Xubix had not shown that Xubix was better than aspirin
in preventing recurrent ischaemic events in patients suffering from acute
coronary syndrome. Hoffmann-La Roche is currently analyzing the data from
the trial.
Activase t-PA - A protein that is an approved treatment for heart attack,
acute ischemic stroke within three hours of symptom onset, and acute massive
pulmonary embolism. We are preparing for Phase III trials of this product
for intravenous catheter clearance. We estimate that this project will be
substantially complete in 2000 and that it was approximately 90% complete at
the Redemption date.
Anti-CD11a antibody - An antibody (also known as hu1124) designed to block
certain immune cells as a potential treatment of psoriasis. We are currently
preparing for Phase III trials of this product, which we are developing in
collaboration with Xoma Corporation. We estimate that this project will be
substantially complete by the year 2003 and that it was approximately 50%
complete at the Redemption date.
Herceptin antibody - An antibody that is an approved treatment for metastatic
breast cancer. In collaboration with Hoffmann-La Roche and U.S. national
cooperative groups, we are preparing for Phase III trials for adjuvant
treatment of early-stage breast cancer in patients who overexpress the HER2
protein. We estimate that this project will be substantially complete by the
year 2007, and that it was approximately 45% complete at the Redemption date.
Thrombopoietin (TPO) - A protein that is being studied for treatment of
thrombocytopenia, a reduction in clot-inducing platelets, in cancer patients
treated with chemotherapy. This molecule has been exclusively licensed to
Pharmacia & Upjohn. We estimate that this project will be substantially
complete by the year 2002, and that it was approximately 55% complete at the
Redemption date.
Anti-CD18 antibody - An antibody designed to block certain immune cells that
may impact blood flow. We are conducting Phase II clinical trials aimed at
increasing blood flow in patients with acute myocardial infarction. We
estimate that this project will be substantially complete by the year 2004,
and that it was approximately 55% complete at the Redemption date.
Anti-VEGF antibody - An antibody developed to inhibit angiogenesis (the
formation of new blood vessels) as a potential treatment for several types of
solid-tumor cancers. In pre-clinical studies the anti-VEGF antibody resulted
in decreased vascularization and a decline in growth and metastasis of a
variety of solid tumors. Phase II studies are ongoing in prostate cancer,
breast cancer, renal cell carcinoma, lung cancer and colorectal cancer. We
estimate these projects will be substantially complete by the year 2003, and
that these different projects were 35% to 40% complete at the Redemption
date.
Herceptin antibody - An antibody that is an approved treatment for metastatic
breast cancer. Herceptin will also be evaluated for broader application in
other tumor types in which the HER2 protein is overexpressed. We are
conducting and are planning to conduct additional Phase II studies alone or
in collaboration with Hoffmann-La Roche, the National Cancer Institute or
other clinical research groups. We estimate that the initial indications on
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<PAGE>
this project will be substantially complete by the year 2004. These broader
applications have projects that are estimated to be 40% to 45% complete at
the Redemption date.
AMD Fab - A customized fragment of an anti-VEGF antibody for the potential
treatment of age-related macular degeneration (AMD). In this condition,
excessive blood vessel growth in the retina of the eye can lead to blindness.
We are currently preparing for Phase I clinical trials. We estimate that
this project will be substantially complete by the year 2004, and that it was
approximately 20% complete at the Redemption date.
LDP-02 - A monoclonal antibody for the treatment of inflammatory bowel
disease. This product is licensed from and being developed in collaboration
with LeukoSite, Inc. This compound is currently in Phase Ib/IIa clinical
trials in Canada and the United Kingdom. We estimate that this project will
be substantially complete by the year 2005, and that it was approximately 30%
complete at the Redemption date.
We also have identified five additional product programs that are at
different stages of in-process research and development. We expect these
projects to be substantially complete in years 1999 through 2004. The
percent completion for these additional programs range from an estimated 35%
to 90%. These projects did not receive material allocations of the purchase
price.
In addition, our in-process research and development includes a process
technology program. The process technology program includes the research and
development of ideas and techniques that should improve the bulk production
of antibodies, including cell culture productivity, and streamlined and
improved recovery processes, and improvements in various areas of
pharmaceutical manufacturing. We estimate the process technology program to
be approximately 50% complete at the Redemption date.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
1999 1999
------------------ 1998 Pro Forma ------------------ 1998 Pro Forma
INCOME TAXES Actual Pro Forma Actual % Change Actual Pro Forma Actual % Change
- --------------------- ------- --------- ------ --------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income taxes (benefit)
provision $ (94.5) $ 36.1 $ 15.7 130% $ (71.6) $ 64.9 $ 31.7 105%
</TABLE>
The tax provision benefit of $94.5 million for the second quarter and $71.6
million for the first six months ended June 30, 1999 consists of tax expense
of $51.8 million and $80.6 million, respectively, on pretax income excluding
special charges and legal settlement and tax benefits of $146.3 million for
the second quarter and $152.2 million for the first six months ended June 30,
1999 related to the income and deductions attributable to push-down
accounting and legal settlement. The effective tax rate on pretax income
excluding special charges and legal settlement is 47% for the second quarter
ended June 30, 1999, which brings the year-to-date effective tax rate to 41%,
which reflects the anticipated impact of non-deductible goodwill amortization
on the full year 1999 effective tax rate.
The expected full year 1999 effective tax rate of 41% is higher than the
33% rate for the first quarter of 1999 because of non-deductible goodwill
amortization to be recorded in the second half of 1999, and is higher than
the 1998 effective tax rate of 28% because of the goodwill amortization and
reduced benefits from research and development tax credits and the
realization of foreign losses.
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<PAGE>
The pro forma tax provision of $36.1 million for the second quarter and
$64.9 million for the first six months ended June 30, 1999 was based on a tax
rate of 33% on pro forma pretax income, which excludes the effects of push-
down accounting in the second quarter of 1999 and the legal settlement in the
first quarter of 1999. The full year 1999 pro forma effective tax rate is
expected to remain at 33%.
LIQUIDITY AND CAPITAL
RESOURCES June 30, 1999 December 31, 1998
- --------------------------- ------------------- -------------------
Cash and cash equivalents, $ 1,721.0 $ 1,604.6
short-term investments
and long-term marketable
securities
Working capital $ 823.1 950.6
We used cash generated from operations, maturities of investments and stock
issuances to make investments in marketable securities and capital additions.
Cash and cash equivalents, short-term investments and long-term marketable
securities at June 30, 1999, were higher by $116.4 million compared to
December 31, 1998. Working capital decreased by $127.5 million in the first
half of 1999 from the comparable period in 1998 primarily due to the effects
of push-down accounting.
Capital expenditures totaled $41.5 million in the first half of 1999 compared
to $43.3 million in the comparable period of 1998. The slight decrease in
1999 compared to 1998 was primarily due to a decrease in construction
activity related to existing manufacturing facilities partly offset by an
increase in equipment purchases.
Our long-term debt consists of $150.0 million of convertible subordinated
debentures, with interest payable at 5%, due in 2002. Prior to the
redemption of our Special Common Stock, the debentures were convertible, at
the option of the holder, into one-half share of our Special Common Stock and
$18 in cash, for each $74 in principal amount of debenture converted. As a
result of the redemption of our Special Common Stock, upon conversion, the
holder receives, for each $74 in principal amount of debenture converted,
$59.25 in cash, which represents one-half of the $82.50 redemption price and
$18 in cash. The $18 in cash is reimbursed by Roche to us. Generally, we
may redeem the debentures until maturity.
Forward-Looking Information and Cautionary Factors that May Affect Future
Results
The following section contains forward-looking information based on our
current expectations. Because our actual results may differ materially from
this and any other forward-looking statements made by or on behalf of
Genentech, this section also includes a discussion of important factors that
could affect our actual future results, including our product sales,
royalties, contract revenues, expenses and net income.
Operating Results May Fluctuate
Our operating results may vary from period to period for several reasons
including, but not limited to:
- - the overall competitive environment for our products;
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<PAGE>
- - the amount and timing of sales to customers in the United States;
- - the amount and timing of our sales to Hoffmann-La Roche and the amount and
timing of its sales to its customers;
- - 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 our products;
- - the rate of adoption and use of our products for approved indications and
additional indications;
- - the potential introduction of new products and additional indications for
existing products in 1999 and beyond; and
- - the ability to manufacture sufficient quantities of any particular
marketed product.
The Results of Our Research and Development Are Unpredictable
Successful pharmaceutical product development is highly uncertain and is
dependent on numerous factors, many of which are beyond our control.
Products that appear promising in the early phases of development may fail to
reach the market for numerous reasons, including, but not limited to:
- - 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.
Factors affecting our research and development expenses include, but are not
limited to:
- - the number of and the outcome of clinical trials currently being conducted
by us and/or our collaborators;
- - the number of products entering into development from late-stage research;
- - Hoffmann-La Roche's decisions whether to exercise its options to develop
and sell our future products in non-U.S. markets and the timing and amount
of any related development cost reimbursement;
- - in-licensing activities, including the timing and amount of related
development funding or milestone payments; and
- - future levels of revenues.
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<PAGE>
Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to
Other Stockholders
At the completion of the offering, Roche owned approximately 82.7% of our
outstanding common stock. Roche may in the future, through open market
purchases or otherwise, acquire additional shares of our common stock. Roche
will control the outcome of actions requiring the approval of our
stockholders. In connection with the offering, we amended our certificate of
incorporation and bylaws and entered into a new affiliation agreement with
Roche. Our bylaws provide, among other things, that the composition of our
board of directors will consist of two Roche directors, three independent
directors nominated by a nominating committee and one Genentech employee who
in the future will be nominated by the nominating committee. As long as
Roche owns in excess of 50% of our common stock, Roche directors will
comprise two of the three members of the nominating committee. However, at
any time until Roche owns less than 5% of our stock, Roche will have the
right to obtain proportional representation on our board. Roche intends to
continue to allow our current management to conduct our business and
operations as we have done in the past. However, we cannot assure you that
Roche will not institute a new business plan in the future. The interests of
Roche may conflict with the interests of other holders of common stock. you
should also read "Relationship with Roche Holdings, Inc." above for further
information.
The affiliation agreement between us and Roche requires the approval of the
directors designated by Roche to make any acquisition or any sale or disposal
of all or a portion of our business representing 10% or more of our assets,
net income or revenues. Moreover, in order to preserve our status as a
member of Roche's consolidated federal income tax group, the affiliation
agreement also contains provisions that are designed to enable Roche to
maintain its percentage ownership interest in our common stock. These
provisions may have the effect of limiting our ability to make acquisitions.
Our certificate of incorporation includes provisions relating to competition
by Roche with us, allocations of corporate opportunities, transactions with
interested parties and intercompany agreements and provisions limiting the
liability of certain people. Our certificate of incorporation provides that
any person purchasing or acquiring an interest in shares of our capital stock
shall be deemed to have consented to the provisions in the certificate of
incorporation relating to competition with Roche, conflicts of interest,
corporate opportunities and intercompany agreements, and such consent may
restrict such person's ability to challenge transactions carried out in
compliance with such provisions. Persons who are directors and/or officers
of ours and who are also directors and/or officers of Roche may choose to
take action in reliance on such provisions rather than act in a manner that
might be favorable to us but adverse to Roche. Two of our directors
currently serve as directors, officers and employees of Roche Holding Ltd and
its affiliates.
We Depend on Skilled Personnel and Key Relationships
The success of our business depends, in large part, on our continued ability
to attract and retain highly qualified management, scientific, manufacturing
and sales and marketing personnel, and on our ability to develop and maintain
important relationships with leading research institutions and key
distributors. Competition for such personnel and relationships is intense.
We cannot assure you that we will be able to attract or retain such personnel
or maintain such relationships.
We Face Growing and New Competition
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<PAGE>
We face growing competition in two of our therapeutic markets and expect new
competition in a third market. First, in the thrombolytic market, Activase
has lost market share and could lose additional market share to Centocor's
Retavase, registered trademark; the resulting adverse effect on sales could
be material. Retavase received approval from the FDA in October 1996 for the
treatment of acute myocardial infarction. In addition, Bristol-Myers Squibb
recently completed a Phase III trial for another competitive product for the
treatment of acute myocardial infarction and it may file for product approval
in the near future. There is also an increasing use of mechanical
reperfusion in lieu of thrombolytic therapy for the treatment of acute
myocardial infarction, which we expect to continue.
Second, in the growth hormone market, we continue to face increased
competition from five other companies with growth hormone products, although
one company has been preliminarily enjoined from selling its product. As a
result of this competition, we have experienced a loss in new patient market
share. Four of these competitors have also received approval to market their
existing human growth hormone products for additional indications. As a
result of this competition, our sales of Protropin, Nutropin and Nutropin AQ
may decline, perhaps significantly.
Third, in the non-Hodgkin's lymphoma market, Coulter Pharmaceuticals Inc., or
Coulter, recently filed a Biologics License Application, or BLA, for a
product that may compete with our product Rituxan. We are also aware of
other potentially competitive biologic therapies for non-Hodgkin's lymphoma
in development.
Other Competitive Factors Could Affect Our Product Sales
Other competitive factors that could affect our product sales include, but
are not limited to:
- - the timing of FDA approval, if any, of competitive products;
- - our pricing decisions and the pricing decisions of our competitors;
- - the degree of patent protection afforded to particular products;
- - the outcome of litigation involving our patents and patents of other
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.
In Connection with the Redemption of Our Special Common Stock We Recorded
Substantial Goodwill and Other Intangibles, the Amortization of Which Will
Adversely Affect Our Earnings
As a result of the redemption of our Special Common Stock, Roche owned all of
our outstanding stock, requiring push-down accounting under generally
accepted accounting principles. Push-down accounting required us to
establish a new accounting basis for our assets and liabilities, based on
Roche's cost in acquiring all of our stock. In other words, Roche's cost of
acquiring Genentech was "pushed down" to us and reflected on our financial
statements. Push-down accounting required us to record goodwill and other
intangible assets of approximately $1,706.0 million and $1,499.1 million,
respectively, during the second quarter of 1999. The amortization of this
goodwill and other intangible assets will have a significant negative impact
on our financial results in future years. In addition, we will continuously
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evaluate whether events and circumstances have occurred that indicate the
remaining balance of this and other intangible assets may not be recoverable.
When factors indicate that assets should be evaluated for possible
impairment, we may be required to reduce the carrying value of our intangible
assets, which could have a material adverse effect on our financial condition
and results of operations during the periods in which such a reduction is
recognized. We may be required to write down intangible assets in future
periods. For more information about push-down accounting, see the
"Redemption of Genentech's Special Common Stock" note in the Notes to
Condensed Consolidated Financial Statements.
Our Royalty and Contract Revenues Could Decline
Royalty and contract revenues in future periods could vary significantly.
Major factors affecting these revenues include, but are not limited to:
- - Hoffmann-La Roche's decisions whether to exercise its options to develop
and sell our future products in non-U.S. markets and the timing and amount
of any related development cost reimbursements;
- - variations in Hoffmann-La Roche's sales and other licensees' sales of
licensed products;
- - the conclusion of existing arrangements with other companies and Hoffmann-
La Roche;
- - the timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees;
- - fluctuations in foreign currency exchange rates;
- - the initiation of new contractual arrangements with other companies;
- - whether and when contract benchmarks are achieved;
- - the failure of or refusal of a licensee to pay royalties; and
- - the expiration or invalidation of patents or other licensed intellectual
property.
Protecting Our Proprietary Rights is Difficult and Costly
The patent positions of pharmaceutical and biotechnology companies can be
highly uncertain and involve complex legal and factual questions.
Accordingly, the breadth of claims allowed in these companies' patents cannot
be predicted. Patent disputes are frequent and can preclude
commercialization of products. We have in the past been, are currently, and
may in the future be involved in material patent litigation. Patent
litigation is costly in its own right and could subject us to significant
liabilities to third-parties and, if decided adversely, we 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 the research and
development of a particular product. We believe that we have strong patent
protection or the potential for strong patent protection for a number of our
products that generate sales and royalty revenue or that we are developing.
However, the courts will determine the ultimate strength of patent protection
of our products and those on which we earn royalties. You should read the
"Legal Proceedings" note in the Notes to Condensed Consolidated Financial
Statements.
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We May Incur Material Litigation Costs
We are subject to legal proceedings, including those matters described in the
"Legal Proceedings" note in the Notes to Condensed Consolidated Financial
Statements. Litigation to which we are currently or have been subjected
relates to, among other things, our patent and intellectual property rights,
licensing arrangements with other persons, product liability and financing
activities. We cannot predict with certainty the eventual outcome of pending
litigation, and we could be required to incur substantial expense in
defending these lawsuits. We have in the past taken substantial special
charges relating to certain litigation, including a special charge of $50
million in the first quarter of 1999.
We May Incur Material Product Liability Costs
The testing and marketing of medical products entail an inherent risk of
product liability. We maintain limited product liability insurance coverage.
Our business may be materially and adversely affected by a successful product
liability claim in excess of our insurance coverage. We cannot assure you
that product liability insurance coverage will continue to be available to us
in the future on reasonable terms or at all.
Our Products Are Subject to Governmental Regulations and Approvals
The pharmaceutical industry is subject to stringent regulation with respect
to product safety and efficacy by various federal, state and local
authorities. Of particular significance are the FDA's requirements covering
research and development, testing, manufacturing, quality control, labeling
and promotion of drugs for human use. A pharmaceutical product cannot be
marketed in the United States until it has been approved by the FDA, and then
can only be marketed for the indications and claims approved by the FDA. As
a result of these requirements, the length of time, the level of expenditures
and the laboratory and clinical information required for approval of a New
Drug Application, or NDA, or a BLA, are substantial and can require a number
of years. We cannot be sure that we can obtain necessary regulatory
approvals on a timely basis, if at all, for any of the products we are
developing, and all of the following could have a material adverse effect on
our business:
- - significant delays in obtaining or failing to obtain required approvals;
- - loss of or changes to previously obtained approvals; and
- - failing to comply with existing or future regulatory requirements.
Moreover, it is possible that the current regulatory framework could change
or additional regulations could arise at any stage during our product
development, which may affect our ability to obtain approval of our products.
A Variety of Factors Could Affect Our Liquidity
We believe that our cash, cash equivalents and short-term investments,
together with funds provided by operations and leasing arrangements, will be
sufficient to meet our foreseeable operating cash requirements. In addition,
we believe we could access additional funds from the capital and debt
markets. Factors that could negatively affect our cash position include, but
are not limited to, future levels of our 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.
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We Are Subject to a Tax Sharing Agreement with Roche, and a Variety of
Factors Could Affect Our Income Tax Rate
We are included in Roche's federal consolidated income tax group. As a
result, our tax liability is included in Roche's U.S. consolidated federal
income tax group and our tax liability thus is included in the consolidated
federal income tax liability of Roche and its subsidiaries. We are also
included with Roche and/or one or more Roche subsidiaries in consolidated or
combined income tax groups for certain state and local tax jurisdictions.
Genentech and Roche have entered into a tax sharing agreement. Pursuant to
this agreement, Genentech and Roche will make payments such that, with
respect to any period, the net amount paid by us on account of consolidated
or combined income taxes (including any amounts determined to be due as a
result of a redetermination of the consolidated or combined income tax
liability of a Roche group by reason of an audit by a taxing authority) will
be determined as though we filed separate, stand-alone federal, state and
local income tax returns as the common parent of an affiliated group of
corporations filing consolidated or combined federal, state and local returns
rather than a consolidated subsidiary of Roche. Such stand-alone tax returns
will be prepared on a basis as if we were an independent taxpayer with no
affiliation with Roche.
We expect our effective tax rate to increase in 1999 as a result of non-
deductible goodwill amortization and a charge for in-process research and
development and beyond 1999 for goodwill amortization.
Our effective tax rate is dependent upon several factors including, but not
limited to, changes in tax laws and rates, interpretation of existing tax
laws, future levels of research and development spending, the outcome of
clinical trials of certain development products, our success in
commercializing such products, and potential competition regarding the
products.
We May Lose Revenue or Incur Significant Costs if Year 2000 Compliance Issues
Are Not Properly Addressed
We use and rely 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 our older computer software programs and equipment are
unable to distinguish between the year 1900 and the year 2000. 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. 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.
We have a Year 2000 Project in place to address the potential exposures
related to the impact on our computer systems and scientific and
manufacturing equipment containing computer-related components for the Year
2000 and beyond. More than half of our Year 2000 scheduled work is complete.
The remaining work is scheduled to be completed in November of 1999. The
Year 2000 Project phases include: (1) inventorying and prioritizing business
critical systems; (2) Year 2000 compliance analysis; (3) remediation
activities including repairing or replacing identified systems; (4) testing;
and (5) developing contingency plans.
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An inventory of business critical financial, informational and operational
systems, including manufacturing control systems, has been essentially
completed. Compliance analysis is approximately 90% complete for these
systems. Remediation activities vary by department, however, on the average,
remediation activities are approximately 65% complete. Testing of our
information technology infrastructure is approximately 85% complete. Testing
of business critical application programs is approximately 55% complete and
is scheduled to be completed by November 1999. Contingency planning for
business critical processes, which will include provisions such as
identifying alternate sources for materials and services and if necessary
reverting to non-computerized systems for processing information, was
initiated in March 1999, is approximately 60% complete and is scheduled for
completion in September 1999. We believe that with the completed
modifications, the Year 2000 issue will not pose significant operational
problems for our computer systems and equipment. However, if such
modifications and conversions are not made, or are not completed in a timely
fashion, Year 2000-related problems could have a material impact on our
operations, the precise degree of which cannot be known at this time.
In addition to risks associated with our own computer systems and equipment,
we have relationships with, and are to varying degrees dependent upon, a
large number of third parties that provide us with information, goods and
services. These include financial institutions, suppliers, vendors, research
and business partners, governmental entities and customers. If significant
numbers of these third parties experience failures in their computer systems
or equipment due to Year 2000 noncompliance, it could affect our ability to
process transactions, manufacture products, or engage in similar normal
business activities. While some of these risks are outside our control, we
have 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 noncompliance issues.
The total cost of the Year 2000 systems assessments and conversions is funded
through operating cash flows and we are expensing these costs as they are
incurred. We have created a mechanism to trace costs directly related to the
Year 2000 issue and have 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.
We Are Exposed to Market Risk
We are exposed to market risk, including changes to interest rates, foreign
currency exchange rates and equity investment prices. To reduce the
volatility relating to these exposures, we enter into various derivative
investment transactions pursuant to our investment and risk management
policies and procedures in areas such as hedging and counterparty exposure
practices. We do not use derivatives for speculative purposes.
We maintain risk management control systems to monitor the risks associated
with interest rates, foreign currency exchange rates and equity investment
price changes, and our derivative and financial instrument positions. The
risk management control systems use analytical techniques, including
sensitivity analysis and market values. Though we intend for our risk
management control systems to be comprehensive, there are inherent risks that
may only be partially offset by our hedging programs should there be
unfavorable movements in interest rates, foreign currency exchange rates or
equity investment prices.
The estimated exposures discussed below are intended to measure the maximum
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amount we could lose from adverse market movements in interest rates, foreign
currency exchange rates and equity investment prices, given a specified
confidence level, over a given period of time. Loss is defined in the value
at risk estimation as fair market value loss. The exposures to interest
rate, foreign currency exchange rate and equity investment price changes are
calculated based on proprietary modeling techniques from a Monte Carlo
simulation value at risk model using a 30-day holding period and a 95%
confidence level. The value at risk model assumes non-linear financial
returns and generates potential paths various market prices could take and
tracks the hypothetical performance of a portfolio under each scenario to
approximate its financial return. The value at risk model takes into account
correlations and diversification across market factors, including interest
rates, foreign currencies and equity prices. Market volatilities and
correlations are based on J.P. Morgan Riskmetrics, trademark, dataset as of
December 31, 1998.
Our Interest Income is Subject to Fluctuations in Interest Rates
Our interest income is sensitive to changes in the general level of interest
rates, primarily U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on our cash equivalents, short-term
investments, convertible preferred stock investments, convertible loans and
long-term investments. To mitigate the impact of fluctuations in U.S.
interest rates, we 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 our 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, we hedge
ourselves from any potential earnings impact due to changes in interest
rates.
Based on our overall interest rate exposure at June 30, 1999 and December 31,
1998, including derivative and other interest rate sensitive instruments, a
near-term change in interest rates, within a 95% confidence level based on
historical interest rate movements, would not materially affect the fair
value of interest rate sensitive instruments.
We Are Exposed to Risks Relating to Foreign Currency Exchange Rates and
Foreign Economic Conditions
We receive royalty revenues from licensees selling products in countries
throughout the world. As a result, our 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
our licensed products are sold. We are exposed to changes in exchange rates
in Europe, Asia (primarily Japan) and Canada. Our exposure to foreign
exchange rates primarily exists with the euro. 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 our royalty revenues as expressed in
U.S. dollars. In addition, as part of our overall investment strategy, a
portion of our portfolio is primarily in non-dollar denominated investments.
As a result, we are exposed to changes in the exchange rates of the countries
in which these non-dollar denominated investments are made.
To mitigate this risk, we hedge certain of our 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-
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dollar denominated revenues will be at least partly offset by an associated
increase in the value of the option. Currently, the duration of these
options is generally one to four years. We may also enter into foreign
currency 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 portfolio, we also enter into forward contracts.
Based on our overall currency rate exposure at June 30, 1999 and December 31,
1998, including derivative and other foreign currency sensitive instruments,
a near-term change in currency rates within a 95% confidence level based on
historical currency rate movements, would not materially affect the fair
value of foreign currency sensitive instruments.
Our Investments in Equity Securities Are Subject to Market Risks
As part of our strategic alliance efforts, we invest in equity instruments 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 us from a decline in the market value of the
security below a certain minimum level (the put "strike" level); while the
call effectively limits our 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 our strategic alliance efforts, we hold
dividend-bearing convertible preferred stock and have made interest-bearing
loans that are convertible into the equity securities of the debtor.
Based on our overall exposure to fluctuations from market value changes in
marketable equity prices at June 30, 1999 and December 31, 1998, a near-term
change in equity prices within a 95% confidence level based on historic
volatilities could result in a potential loss in fair value of the equity
securities portfolio of $10.6 million.
New Accounting Standards Could Impact Our Financial Position and Results of
Operations
In July 1999, the Financial Accounting Standards Board (FASB) announced the
delay of the effective date of Statement of Financial Accounting Standards
(FAS) 133, "Accounting for Derivative Instruments and Hedging Activities,"
for one year, to the first quarter of 2001. 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. We are currently
evaluating the impact of FAS 133 on our financial position and results of
operations.
At the end of March 1999, the FASB issued a proposed Interpretation of
Accounting Principles Board Opinion number 25, "Accounting for Certain
Transactions involving Stock Compensation" (proposal). This proposal would
be effective upon issuance of the final interpretation, which is expected in
the fourth quarter of 1999, but generally would cover events that occur after
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December 15, 1998. To the extent that events covered by this proposal occur
during the period after December 15, 1998, but before issuance of the final
interpretation, the effects of applying this proposal would be recognized on
a prospective basis from the effective date. The potential impact of this
proposal may be significant in relation to non-employee director stock
options and stock option repricings. We are currently evaluating the impact
of this proposal on our financial position and results of operations.
We Are Exposed to Credit Risk of Counterparties
We could be exposed to losses related to the financial instruments described
above under "We are Exposed to Market Risk" should one of our counterparties
default. This risk is mitigated through credit monitoring procedures.
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GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Previously reported.
See Item 3 of the Company's report on Form 10-K for the period ended December
31, 1998.
See also Item 1 of the Company's report on Form 10-Q for the period ended
March 31, 1999.
See also the Legal Proceedings note in the Notes to Condensed Consolidated
Financial Statements of Part I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Genentech's Annual Meeting of Stockholders held on April 13, 1999, three
matters were voted upon. A description of each matter and tabulation of
votes follows:
1. Election of Directors:
Votes
----------------------------
Nominee For Withheld
----------------------- ------------ -----------
J. Richard Munro 119,972,244 1,673,401
C. Thomas Smith, Jr. 120,009,574 1,636,071
David S. Tappen, Jr. 120,025,953 1,619,692
There were no abstentions or broker nonvotes.
The terms of directors Herbert W. Boyer, Franz B. Humer, Jonathan
K.C. Knowles, Arthur D. Levinson, Linda Fayne Levinson, Donald L.
Murfin and John T. Potts, Jr. continued after the Annual Meeting of
Stockholders.
In connection with the redemption of our Special Common Stock, all of
our directors have resigned from our board of directors other than
Franz B. Humer, Jonathan K.C. Knowles and Arthur D. Levinson. Roche
intends to nominate Herbert W. Boyer for one of the three independent
director positions.
2. To Approve the Amendment to Genentech's 1991 Employee Stock Plan
Votes
----------------------------------------
For Against Abstain
----------- ----------- -----------
120,961,040 471,704 212,901
There were no broker nonvotes.
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3. Ratification of Ernst & Young, LLP as Genentech's Independent
Accountants for the Year Ending December 31, 1999:
Votes
----------------------------------------
For Against Abstain
----------- ----------- -----------
121,500,528 58,060 87,057
There were no broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 99.1 of
Amendment No. 3 to Genentech Inc.'s current report on
Form 8-K (File No. 001-09813) filed with the
Securities and Exchange Commission on July 28, 1999)
3.2 By-Laws (incorporated herein by reference to Exhibit
3.2 of Amendment No. 3 to Genentech Inc.'s
registration statement on Form S-3 (Registration No.
333-80601) filed with the Securities and Exchange
Commission on July 16, 1999)
4.1 Form of Common Stock Certificate (incorporated herein
by reference to Exhibit 4.1 of Amendment No. 3 to
Genentech Inc.'s registration statement on Form S-3
(Registration No. 333-80601) filed with the
Securities and Exchange Commission on July 16, 1999)
10.1 Affiliation Agreement between Genentech, Inc. and
Roche Holdings, Inc.
10.2 Amended and Restated Agreement between Genentech,
Inc. and F. Hoffmann-La Roche Ltd regarding
Commercialization of Genentech's Products outside the
United States
10.3 Tax Sharing Agreement between Genentech, Inc. and
Roche Holdings, Inc.
15.1 Letter re: Unaudited Interim Financial Information
27.1 Financial Data Schedule
99.1 1999 Stock Option Plan (incorporated herein by
reference to Exhibit 99.1 of Genentech Inc.'s
registration statement on Form S-8 (Registration No.
333-83989) filed with the Securities and Exchange
Commission on July 29, 1999)
(b) Reports on Form 8-K
Genentech, Inc. filed a current report on Form 8-K on June
28, 1999. There were no other such reports filed by
Genentech, Inc. during the quarter ended June 30, 1999.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 1998 Annual Report to
Stockholders have not changed significantly.
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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 10, 1999 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
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EXHIBIT 10.1
AFFILIATION AGREEMENT
AFFILIATION AGREEMENT dated as of July 22, 1999 between Genentech, Inc.,
a Delaware corporation (the "COMPANY") and Roche Holdings, Inc., a Delaware
corporation ("ROCHE").
WHEREAS, the Amended and Restated Governance Agreement dated as of
October 25, 1995 between Roche and the Company (the "TERMINATED GOVERNANCE
AGREEMENT") was terminated pursuant to its terms on June 16, 1999;
WHEREAS, Roche owns, as of the date hereof, all of the outstanding
common stock, par value $0.02 per share, of the Company (the "COMMON STOCK");
WHEREAS, Roche expects to sell shares of Common Stock representing
approximately 17.28% of the Company's equity in a registered public offering
(the "OFFERING");
WHEREAS, Roche and the Company desire to establish in this Agreement
certain terms and conditions concerning the corporate governance of the
Company after completion of the Offering; and
WHEREAS, Roche and the Company also desire to establish in this
Agreement certain terms and conditions concerning the acquisition and
disposition of securities of the Company by Roche and its Affiliates (as
defined herein) after completion of the Offering;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and agreements contained herein, Roche and the Company hereby agree
as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions.
(a) "AFFILIATE" and "AFFILIATE" have the meaning defined in Rule 12b-2
promulgated under the Securities Exchange Act of 1934, as amended (such Act,
including the rules and regulations promulgated thereunder, the "1934 ACT").
(b) "APPLICABLE STOCK" means, at any time, the (i) shares of Common
Stock owned by Roche and its affiliates at such time that were owned on the
date hereof, plus (ii) shares of Common Stock purchased by Roche and its
affiliates pursuant to Section 4.04 of this Agreement, plus (iii) shares of
Common Stock that were issued to Roche and its affiliates in respect of
shares described in either clause (i) or clause (ii) in any reclassification,
share combination, share subdivision, share dividend, share exchange, merger,
consolidation or similar transaction or event.
(c) "BENEFICIAL OWNERSHIP" has the meaning defined in Rule 13d-3
promulgated under the 1934 Act.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
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(e) "EQUITY SECURITY" means any (A) voting stock of the Company (other
than shares of voting stock not having the right to vote generally in any
election of directors of the Company), (B) securities of the Company
convertible into or exchangeable for such stock, and (C) options, rights and
warrants issued by the Company to acquire such stock.
(f) "INDEPENDENT DIRECTOR" means a director of the Company who is not
(i) an officer of the Company, (ii) an employee, director, principal
stockholder or partner of Roche or any affiliate of Roche, or (iii) an
employee, director, principal stockholder or partner of an entity (other than
the Company or any of its subsidiaries) that was dependent upon Roche or any
affiliate of Roche for more than 10% of its revenues or earnings in its most
recent fiscal year.
(g) "MARKET PRICE" of any shares of Common Stock or Other Stock, as the
case may be, on any date means (i) the average of the last sale price of such
shares on each of the five trading days immediately preceding such date on
the New York Stock Exchange, Inc. or, if such shares are not listed thereon,
on the principal national securities exchange or automated interdealer
quotation system on which such shares are traded or (ii) if such sale prices
are unavailable or such shares are not so traded, the value of such shares on
such date determined in accordance with agreed-upon procedures reasonably
satisfactory to Roche and the Company.
(h) "OTHER STOCK" means any class of the Company's capital stock other
than Common Stock, and any other security of the Company that, in the opinion
of Roche, will or is likely to be treated as stock for purposes of Section
1504 of the Code.
(i) "OWNERSHIP PERCENTAGE" means, at any time, the fraction, expressed
as a percentage and rounded to the next highest thousandth of a percent,
whose numerator is the aggregate Value of the Applicable Stock and whose
denominator is the sum of the aggregate Value of the outstanding shares of
Common Stock of the Company plus Repurchased Shares; provided, however, that
any shares of Common Stock issued by the Company in violation of its
obligations under Section 4.04 of this Agreement shall not be deemed
outstanding for the purpose of determining the Ownership Percentage.
(j) "PARENT'S VOTING INTEREST" means the percentage of the outstanding
Common Stock beneficially owned by Roche and its affiliates.
(k) "REPURCHASED SHARES" means the aggregate Value of shares of the
Company's Common Stock that are, from and after the date hereof, repurchased
by the Company from its shareholders, less the aggregate Value of shares of
Common Stock (up to the aggregate Value so repurchased) that are re-issued
from and after the date hereof upon the exercise of stock options or
otherwise.
(l) "VALUE" means, with respect to any share of stock, the value of
such share determined by Roche under principles applicable for purposes of
Section 1504 of the Code.
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ARTICLE 2
CORPORATE GOVERNANCE
SECTION 2.01. Roche Approval Required for Certain Actions. The
approval of the directors designated by Roche pursuant to the Company's
bylaws shall be required to approve any of the following:
(a) the acquisition by the Company of any business or assets that would
constitute a substantial portion of the business or assets of the Company,
whether such acquisition be by merger or consolidation or the purchase of
stock or assets or otherwise;
(b) the sale, lease, license, transfer or other disposal of all or a
substantial portion of the business or assets of the Company other than in
the ordinary course of business, other than any such sale, lease, license,
transfer or other disposal which is subject to the other provisions hereof;
(c) the issuance of any Equity Securities or other capital stock of the
Company, except for (i) issuances of shares of the Company's Common Stock, or
options, warrants or rights to acquire, or securities convertible into or
exchangeable for, such Common Stock pursuant to any employee compensation
plan that has been approved by Roche not exceeding 5% of the voting stock,
(ii) issuances thereof upon the exercise, conversion or exchange of any
outstanding Equity Securities or other capital stock; and (iii) other
issuances thereof during any 24 month period not exceeding 5% of the voting
stock of the Company outstanding at the beginning of such 24 month period;
and
(d) the repurchase or redemption of any Equity Securities or other
capital stock of the Company, other than redemptions required by the terms
thereof and purchases made at fair market value in connection with any
deferred compensation plan maintained by the Company.
For purposes of clauses (a) and (b), unless a majority of Directors
shall have made a contrary determination in good faith, a "substantial
portion of the business or assets of the Company" shall mean a portion of the
business or assets of the Company accounting for 10% of the consolidated
total assets, contribution to net income or revenues of the Company and its
consolidated subsidiaries.
Following the giving of a Governance Notice (as defined in Section 3.03
of the Company's bylaws), until the additional Roche designees shall have
taken office as directors of the Company, the Directors shall not take any
action, or fail to take any action, except in the ordinary course of
business, without the consent of Roche. Roche agrees to use its best efforts
to cause such designees to take office, and for any necessary filings to be
made with respect thereto to be made, as promptly as practicable following
such Governance Notice.
SECTION 2.02. Licensing and Marketing Arrangements. Except as
otherwise provided in the Amended and Restated Agreement between Genentech,
Inc. and F. Hoffmann - La Roche Ltd Regarding Commercialization of
Genentech's Products Outside of the United States dated as of July 22, 1999
(the "MARKETING AGREEMENT"), the Company will not, and will not permit any of
its subsidiaries to, enter into any material licensing or marketing agreement
with respect to any products, processes, inventions or developments made by
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the Company or any subsidiary of the Company unless it shall have first
negotiated in good faith with Roche for a reasonable period of not less than
three or more than six months with a view towards reaching a mutually
beneficial licensing or marketing agreement with respect to such products,
processes, inventions or developments.
ARTICLE 3
REGISTRATION RIGHTS
SECTION 3.01. Registration.
(a) The Company agrees that upon the request of Roche it will file one
or more registration statements (each a "REGISTRATION STATEMENT") under the
Securities Act of 1933, as amended (the "1933 ACT") as to the number of
shares of Common Stock specified in such request (the "REGISTERED SHARES").
Roche shall have the right to designate the underwriters for any public
offering of Registered Shares.
(b) The Company agrees to (i) use its best efforts to have any
registration of the Registered Shares declared effective as promptly as
practicable after the filing thereof and (ii) to keep such registration
statement effective for a period sufficient to complete the distribution of
the Registered Shares. The Company further agrees to supplement or make
amendments to the Registration Statement, if required by (x) the registration
form utilized by the Company for such registration or by the instructions
applicable to such registration form, (y) the 1933 Act or the rules and
regulations thereunder or (z) Roche (or any underwriter for Roche) with
respect to information concerning Roche or such underwriter or the plan of
distribution to be utilized with respect to the Registered Shares. The
Company agrees to furnish to Roche copies of any such supplement or amendment
prior to its being used or filed with the Securities and Exchange Commission
(the "SEC").
SECTION 3.02. Registration Procedures. Subject to the provisions of
Section 3.01 hereof, in connection with the registration of shares of Common
Stock hereunder, the Company will as expeditiously as possible:
(a) furnish to Roche, prior to the filing of a Registration Statement,
copies of such Registration Statement as is proposed to be filed, and
thereafter such number of copies of such Registration Statement, each
amendment and supplement thereto (in each case including all exhibits
thereto), the prospectus included in such Registration Statement (including
each preliminary prospectus) and such other documents in such quantities as
Roche may reasonably request from time to time in order to facilitate the
disposition of the Registered Shares;
(b) use all reasonable efforts to register or qualify the Registered
Shares under such other securities or blue sky laws of such jurisdiction as
Roche reasonably requests and do any and all other acts and things as may be
reasonably necessary or advisable to enable Roche to consummate the
disposition in such jurisdictions of the shares of Common Stock owned by
Roche; provided that the Company will not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this subsection (b), (ii) subject itself to
taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction;
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(c) use all reasonable efforts to cause the Registered Shares to be
registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of
the Company to enable Roche to consummate the disposition of such shares of
Common Stock;
(d) notify Roche, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of the happening of any event as
a result of which the prospectus included in such Registration Statement or
amendment contains an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Company will prepare a supplement
or amendment to such prospectus so that, as thereafter delivered to the
purchasers of the Registered Shares, such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading;
(e) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of the Registered
Shares;
(f) make available for inspection by Roche, any underwriter
participating in any disposition pursuant to such registration, and any
attorney, accountant or other agent retained by any Roche or any such
underwriter (collectively, the "INSPECTORS"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "RECORDS") as shall be reasonably necessary to enable them
to exercise their due diligence responsibility, and cause the officers,
directors and employees of the Company to supply all information reasonably
requested by any such Inspector in connection with such registration;
provided that (i) records and information obtained hereunder shall be used by
such persons only to exercise their due diligence responsibility and (ii)
records or information which the Company determines, in good faith, to be
confidential shall not be disclosed by the Inspectors unless (x) the
disclosure of such Records or information is necessary to avoid or correct a
misstatement or omission in the Registration Statement or (y) the release of
such Records or information is ordered pursuant to a subpoena or other order
from a court or governmental authority of competent jurisdiction. Roche shall
use reasonable efforts, prior to any such disclosure described in (x) above,
to inform the Company that such disclosure is necessary to avoid or correct a
misstatement or omission in the Registration Statement. Roche further agrees
that it will, upon learning that disclosure of such Records or information is
sought in a court or governmental authority, give notice to the Company and
allow the Company, at the expense of the Company, to undertake appropriate
action to prevent disclosure of the Records or information deemed
confidential;
(g) use all reasonable efforts to obtain a comfort letter from the
independent public accountants for the Company in customary form and covering
such matters of the type customarily covered by comfort letters as Roche
reasonably requests;
(h) otherwise use all reasonable efforts to comply with all applicable
rules and regulations of the SEC, and make generally available to its
security holders, as soon as reasonably practicable, an earnings statement
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covering a period of twelve months, beginning within three months after the
effective date of the registration, which earnings statement shall satisfy
the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder; and
(i) use all reasonable efforts to cause all Registered Shares to be
listed on each securities exchange on which similar securities issued by the
Company are listed.
SECTION 3.03. Conditions to Offerings. The obligations of the Company
to take the actions contemplated by Sections 3.01 and 3.02 with respect to an
offering of shares of Common Stock shall be subject to the condition that
Roche shall conform to all applicable requirements of the 1933 Act and the
1934 Act with respect to the offering and sale of securities and advise each
underwriter, broker or dealer (all of whom may be freely designated by Roche)
through which any of the Registered Shares are offered that the Registered
Shares are part of a distribution that is subject to the prospectus delivery
requirements of the 1933 Act.
The Company may require Roche to furnish to the Company such information
regarding Roche or the distribution of the Registered Shares as the Company
may from time to time reasonably request in writing, in each case only as
required by the 1933 Act or the rules and regulations thereunder or under
state securities or Blue Sky laws.
Roche agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3.02(d) hereof, Roche
will forthwith discontinue disposition of Registered Shares pursuant to the
registration covering such shares of Common Stock until Roche's receipt of
the copies of the supplemented or amended prospectus contemplated by Section
3.02(d) hereof.
SECTION 3.04. Additional Conditions. The Company's obligations
pursuant to Section 3.01 shall be suspended, for an aggregate period of up to
sixty days in any 12-month period, if (i) the fulfillment of such obligations
would require the Company to make a disclosure that would, in the reasonable
good faith judgment of the Company's board of directors, be detrimental to
the Company and premature, or (ii) the Company has filed a registration
statement with respect to Equity Securities to be distributed in an
underwritten public offering and it is advised by its lead or managing
underwriter that an offering by Roche of the Registered Shares would
materially adversely affect the distribution of such Equity Securities. Such
obligations shall be reinstated (x) in the case of clause (i) above, upon the
making of such disclosure by the Company (or, if earlier, when such
disclosure would either no longer be necessary for the fulfillment of such
obligations or no longer be detrimental), and (y) in the case of clause (ii)
above, upon the conclusion of any period (not exceeding 6 months) during
which the Company would not, pursuant to the terms of its underwriting
arrangements, be permitted to sell the Registered Securities for its own
account.
SECTION 3.05. Registration Expenses. All expenses incident to the
performance of or compliance with this Article by the Company, including,
without limitation, all fees and expenses of compliance with securities or
blue sky laws (including reasonable fees and disbursements of counsel in
connection with blue sky qualifications of the Registered Shares), rating
agency fees, printing expenses, messenger and delivery expenses, internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the fees and
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expenses incurred in connection with the listing of the securities to be
registered on each securities exchange on which similar securities issued by
the Company are then listed, fees and disbursements of counsel for the
Company and its independent certified public accountants (including the
expenses of any comfort letters required by or incident to such performance),
securities acts liability insurance (if the Company elects to obtain such
insurance), the reasonable fees and expenses of any special experts retained
by the Company in connection with such registration and the fees and expenses
of other persons retained by the Company (all such expenses being herein
called "REGISTRATION EXPENSES"), will be borne by the Company, provided that
any such expenses (other than internal expenses) of a registration shall be
paid by Roche if such registration is the third (or any greater number) that
the Company undertakes at Roche's request within a twelve month period. The
Company shall pay any registration or filing fees payable under any federal
or state securities or Blue Sky laws, provided that any such fees of a
registration shall be paid by Roche if (i) such registration is the second
(or any greater number) that the Company undertakes at Roche's request within
a twelve month period or (ii) the Company has paid such fees pursuant to this
sentence in connection with four previous registrations. The Company will
not have any responsibility for any of the expenses of the holders of
Registrable Securities incurred in connection with any registration hereunder
including, without limitation, underwriting fees, discounts and commissions
and transfer taxes, if any, attributable to the sale of Registrable
Securities, counsel fees of such holders and travel costs.
SECTION 3.06. Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify,
to the fullest extent permitted by law, Roche, its directors and officers and
each person who controls Roche (within the meaning of either the 1933 Act or
the 1934 Act) against any and all losses, claims, damages, liabilities and
expenses (including attorneys' fees) caused by any untrue or alleged untrue
statement of material fact contained in any Registration Statement,
prospectus or preliminary prospectus (each as amended and or supplemented, if
the Company shall have furnished any amendments or supplements thereto), or
any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein (in the case of
a prospectus, in the light of the circumstances under which they were made)
not misleading, provided that the Company shall not be required to indemnify
any holder or its officers, directors or controlling persons for any losses,
claims, damages, liabilities or expenses resulting from any such untrue
statement or omission if such untrue statement or omission is made in
reliance on and conformity with any information with respect to such holder
furnished to the Company by such holder expressly for use therein. In
connection with an underwritten offering, the Company will indemnify each
underwriter thereof, the officers and directors of such underwriter, and each
person who controls such underwriter (within the meaning of either the 1933
Act or 1934 Act) to the same extent as provided above with respect to the
indemnification of Roche; provided that such underwriter agrees to indemnify
the Company to the same extent as provided below with respect to the
indemnification of the Company by Roche.
(b) Indemnification by Roche. In connection with any registration in
which Roche is participating, Roche will furnish to the Company in writing
such information and affidavits with respect to Roche as the Company
reasonably requests for use in connection with any such registration,
prospectus, or preliminary prospectus and agrees to indemnify the Company,
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its directors, its officers who sign the Registration Statement and each
person, if any, who controls the Company (within the meaning of either the
1933 Act or of the 1934 Act) to the same extent as the foregoing indemnity
from the Company to such holder, but only with respect to information
relating to such holder furnished to the Company in writing by Roche
expressly for use in the Registration Statement, the prospectus, any
amendment or supplement thereto, or any preliminary prospectus.
(c) Conduct of Indemnification Proceedings. In case any proceeding
(including any governmental investigation) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to Section
3.06(a) or Section 3.06(b) such person (hereinafter called the indemnified
party) shall promptly notify the person against whom such indemnity may be
sought (hereinafter called the indemnifying party) in writing and the
indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in such
proceeding and shall pay the fees and disbursements of such counsel related
to such proceeding. In any such proceeding, any indemnified party shall have
the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and the indemnified party shall have been
advised by counsel that representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. It is understood that the indemnifying party shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be
liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties, and that all such
fees and expenses shall be reimbursed as they are incurred. In the case of
any such separate firm for the indemnified parties, such firm shall be
designated in writing by the indemnified parties. The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as
contemplated by the third sentence of this Section 3.06(c), the indemnifying
party agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement in entered into
more than 30 days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request or reasonably objected in
writing, on the basis of the standards set forth herein, to the propriety of
such reimbursement prior to the date of such settlement. No indemnifying
party shall, without the prior written consent of the indemnified party,
effect any settlement of any pending or threatened proceeding in respect of
which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(d) Contribution. If the indemnification provided for in this Section
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3.06 from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to in this Section 3.06, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and indemnified parties
in connection with the actions which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and indemnified
parties shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party
or indemnified parties, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 3.06(c), any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.06(d) were determined by pro rata
allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
If indemnification is available under this Section 3.06, the
indemnifying parties shall indemnify each indemnified party to the full
extent provided in Sections 3.06(a) and 3.06(b) without regard to the
relative fault of said indemnifying party or indemnified party or any other
equitable consideration provided for in this Section 3.06(d).
SECTION 3.07. Rule 144. The Company covenants that it will file the
reports required to be filed by it under the 1933 Act and the 1934 Act and
the rules and regulations adopted by the SEC thereunder, and it will take
such further action as Roche may reasonably request, all to the required from
time to time to enable Roche to sell shares of Common Stock without
registration under the 1933 Act within the limitation of the exemptions
provided by (a) Rule 144 under the 1933 Act, as such Rule may be amended from
time to time, or (b) any similar rule or regulation hereafter adopted by the
SEC. Upon the request of Roche, the Company will deliver to Roche a written
statement as to whether it has complied with such requirements.
SECTION 3.08. No Inconsistent Agreements; etc. The Company will not
hereafter enter into any agreement with respect to its securities which is
inconsistent with the rights granted to Roche in this Agreement.
ARTICLE 4
COVENANTS
SECTION 4.01. Disposition by Roche. In the event that Roche and its
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affiliates shall dispose, in one or a series of integrally related
transactions, of all or substantially all of their beneficial ownership of
Common Stock to one or more Persons (a "SUCCESSOR"), (a) Roche shall (i) in
the event that immediately prior to such transactions Roche and its
affiliates own over 50% of the Company, either make or cause such Successor
to make adequate arrangement for the simultaneous or prompt subsequent
receipt by the holders of Common Stock of consideration for their Common
Stock which (A) in a transaction in which the consideration is composed
entirely of either (1) cash or (2) equity traded on a U.S. national
securities exchange, is in the same form and amount(s) per share of Common
Stock as that received by Roche and its affiliates, and (B) in any other type
of transaction, either (1) is in the same form(s) and amount(s) per share of
Common Stock as that received by Roche and its affiliates, or (2) has a value
per share of Common Stock not less than the weighted average value
(determined as of the time of receipt by Roche and its affiliates) per share
of Common Stock received by Roche and such affiliates, such value to be
determined by an investment bank of nationally recognized standing appointed
by a committee of Independent Directors (an "INVESTMENT BANK") and (ii) cause
such Successor to agree to be bound by the obligations of Roche under
Sections 4.01, 4.02, and 4.03 hereof; and (b) the Company shall agree that
such Successor shall succeed to the rights of Roche under Section 3.03 of the
Company's bylaws.
SECTION 4.02. Business Combinations with Roche. Roche agrees to
require, as a condition to consummation of any merger of the Company with
Roche or an affiliate of Roche or a sale of all or substantially all of the
assets of the Company to Roche or an affiliate of Roche, that (i) such merger
or sale receive the favorable vote of a majority of the shares of Common
Stock voted at any meeting or adjournment thereof not beneficially owned by
Roche and its affiliates, provided that no PERSON (as such term is defined in
Section 16(a) of the 1934 Act) or GROUP (as defined in Section 13(d) of the
1934 Act) shall be entitled to cast more than 5% of the votes cast at such
meeting, or, in the event such a favorable vote is not obtained, (ii) the
value of the consideration to be received by the holders of Common Stock
other than Roche and its affiliates in connection with such merger or sale
shall be equal to or greater than the average of the means of the ranges of
fair values for the Common Stock as determined by two Investment Banks.
Roche also agrees that in the 90 days immediately preceding any proposal by
Roche or an affiliate for a merger with the Company, it will not sell any
shares of Common Stock, and it will cause its affiliates not to sell any
shares of Common Stock. Roche further agrees that in the event of any merger
of the Company with Roche or an affiliate of Roche or a sale of all or
substantially all of the assets of the Company to Roche or an affiliate of
Roche, each unvested option then outstanding under the Company's 1990 Stock
Option/Stock Incentive Plan, as amended, the Company's 1994 Stock Option
Plan, as amended, the Company's 1996 Stock Option/Stock Incentive Plan and
the Company's 1999 Stock Option Plan or any other option plan of the Company
shall (at the election of Roche in its sole discretion) either (x) be
accelerated so that each such option shall become exerciseable immediately
prior to the consummation of such transaction for the full number of shares
of Common Stock covered by such option, (y) become exchangeable upon the
consummation of such transaction for deferred cash compensation (vesting on
the same schedule as the shares of Common Stock covered by such option)
having a value equal to the product of (A) the number of shares of Common
Stock covered by such option and (B) the amount which Roche, in its
reasonable judgment, considers to be equivalent in value to the consideration
per share received by holders of shares of Common Stock other than Roche and
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its affiliates in the transaction, minus the exercise price per share under
such option or (z) be canceled in exchange for a replacement option to
purchase stock of the surviving corporation or any successor thereto in any
such transaction with the terms of such options to provide value equivalent
to that of the canceled option, such equivalent value to be determined in the
reasonable discretion of Roche.
SECTION 4.03. Compulsory Acquisitions. If Roche and its affiliates
shall have owned, for more than two months, beneficial ownership of Common
Stock in excess of 90% of the outstanding Common Stock, then Roche shall as
soon as reasonably practicable effect a merger of the Company with Roche or
an affiliate of Roche (either with the vote provided for in clause (i) of
Section 4.02 or with the valuation provided for in clause (ii) of Section
4.02). In such event, each unvested option then outstanding under the
Company's 1990 StockOption/Stock Incentive Plan, as amended, the Company's
1994 Stock Option Plan, as amended, the Company's 1996 Stock Option / Stock
Incentive Plan and the Company's 1999 Stock Option Plan or any other option
plan of the Company shall (at the election of Roche in its sole discretion)
either be treated in the manner set forth in clause (x), clause (y) or clause
(z) under Section 4.02 above.
SECTION 4.04. Tax Consolidation Provisions.
(a) Common Stock Option. The Company hereby grants to Roche, on the
terms and conditions set forth herein, a continuing right (the "COMMON STOCK
OPTION") to purchase from the Company, at the times set forth herein, such
number of shares of Common Stock as is necessary to allow Roche and its
affiliates to maintain the then-current Ownership Percentage. The Common
Stock Option shall be assignable, in whole or in part and from time to time,
by Roche to any affiliate of Roche. The exercise price for the shares of
Common Stock purchased pursuant to the Common Stock Option shall be the
Market Price of the Common Stock as of the date of first delivery of notice
of each exercise of the Common Stock Option by Roche (or its permitted
assignee hereunder) to the Company.
(b) Other Stock Option. The Company hereby grants to Roche, on the
terms and conditions set forth herein, a continuing right (the "OTHER STOCK
OPTION" and, together with the Common Stock Option, the "OPTIONS") to
purchase from the Company, at the times set forth herein, such number of
shares of Other Stock as is necessary to allow Roche and its affiliates to
own 80 percent of each class of outstanding Other Stock. The Other Stock
Option shall be assignable, in whole or in part and from time to time, by
Roche to any affiliate of Roche. The exercise price for the shares of Other
Stock purchased pursuant to the Other Stock Option shall be the Market Price
of the Other Stock as of the date of first delivery of notice of each
exercise of the Other Stock Option by Roche (or its permitted assignee
hereunder) to the Company.
(c) Notice. At least 20 business days prior to the issuance of any
shares of Common Stock or the first date on which any event could occur that,
in the absence of a full or partial exercise of the Common Stock Option,
would result in a reduction in the Ownership Percentage, the Company will
notify Roche in writing (a "COMMON STOCK OPTION NOTICE") of any plans that
the Company has to issue such shares or the date on which such event could
first occur. At least 20 business days prior to the issuance of any shares
of Other Stock or the first date on which any event could occur that, in the
absence of a full or partial exercise of the Other Stock Option, would result
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in Roche and its affiliates owning less than 80 percent of each class of
outstanding Other Stock, the Company will notify Roche in writing (an "OTHER
STOCK OPTION NOTICE" and, together with or separate from a Common Stock
Option Notice, an "OPTION NOTICE") of any plans that the Company has to issue
such shares or the date on which such event could first occur.
Each Option Notice must specify the date on which the Company intends to
issue such additional shares or on which such event could first occur (such
issuance or event being referred to herein as an "ISSUANCE EVENT" and the
date of such issuance or event as an "ISSUANCE EVENT DATE"), the number of
shares the Company intends to issue or may issue and the other terms and
conditions of such Issuance Event.
(d) Exercise. The Common Stock Option may be exercised by Roche (or
any Roche affiliate to which all or any part of the Common Stock Option has
been assigned) for a number of shares equal to or less than the number of
shares that are necessary for Roche and its affiliates to maintain, in the
aggregate, the Ownership Percentage. The Other Stock Option may be exercised
by Roche (or any Roche affiliate to which all or any part of the Other Stock
Option has been assigned) for a number of shares equal to or less than the
number of shares that are necessary for Roche and its affiliates to own, in
the aggregate, 80 percent of each class of outstanding Other Stock. Each
Option may be exercised at any time after receipt of an applicable Option
Notice and prior to the applicable Issuance Event Date by the delivery to the
Company of a written notice to such effect specifying (i) the number of
shares of Common Stock or Other Stock (as the case may be) to be purchased by
Roche or any of its affiliates, and (ii) a calculation of the exercise price
for such shares. Upon any such exercise of either Option, the Company will,
prior to the applicable Issuance Event Date, deliver to Roche (or any Roche
affiliate designated by Roche), against payment therefor, certificates
(issued in the name of Roche or its permitted assignee hereunder, or as
directed by Roche) representing the shares of Common Stock or Other Stock (as
the case may be) being purchased upon such exercise. Payment for such shares
shall be made by wire transfer or intrabank transfer to such account as shall
be specified by the Company, for the full purchase price for such shares.
(e) Effect of Failure to Exercise. Any failure by Roche to exercise
either Option, or any exercise for less than all shares purchasable under
either Option, in connection with any particular Issuance Event shall not
affect Roche's right to exercise the relevant Option in connection with any
subsequent Issuance Event; provided, however, that, in the case of the Common
Stock Option, the Ownership Percentage following such Issuance Event in
connection with which Roche so failed to exercise such Option in full or in
part shall be recalculated as set forth in the definition thereof.
(f) Notwithstanding anything to the contrary herein, the Company and
Roche acknowledge that the procedures set forth above relating to the
exercise of the Common Stock Option shall not apply where the Company is not
capable of giving advance notice of the relevant Issuance Event. Roche and
the Company agree that, in such case, the Common Stock Option shall be
exercisable at such times and in such manner as Roche and the Company may
from time to time agree, and otherwise by Roche in a reasonable time and
manner.
(g) The Company will adopt, implement as soon as practicable (but not
more than 60 days after the Offering), and maintain a comprehensive, long-
term common stock repurchase program (the "COMMON STOCK REPURCHASE PROGRAM")
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for general corporate purposes. The Company agrees that, pursuant to the
Common Stock Repurchase Program, prior to any issuance of shares of Common
Stock by the Company, it shall have repurchased a number of shares of Common
Stock such that, immediately after such issuance, Roche's Ownership
Percentage is equal to or greater than Roche's lowest Ownership Percentage at
any time after the Offering but prior to such issuance; provided that (i)
nothing in this Section 4.04(g) shall require the Company to take any action
that would, in the Company's reasonable determination, adversely affect the
Company's accounting for its stock option and employee stock purchase plans,
and (ii) the parties shall cooperate to effect repurchases in a manner that
will not have a substantial adverse economic impact on the Company. It is
understood that any reduction in the Company's cash position as a result of
such repurchases is not a "substantial adverse economic impact."
(h) The Company shall:
(i) provide to Roche at the end of each month, and at such other
times as Roche may request, information as to (A) the total number of
shares of Common Stock repurchased by the Company in the last month and
on a year-to-date basis, (B) the total number of shares of Common Stock
previously issued to date, (C) the Company's current forecasts as to
future issuances, and (D) such other information as Roche may request in
connection with Roche's ownership and tax consolidation objectives; and
(ii) notify Roche within one business day after the date in any
month in which the total number of shares of Common Stock issued by the
Company in such month equals or exceeds 500,000.
SECTION 4.5. No Inconsistent Actions. The Company agrees not to take,
and agrees to cause its directors to refrain from taking, any action which
could impede or delay the exercise by Roche of any of its rights under this
Agreement.
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ARTICLE 5
MISCELLANEOUS
SECTION 5.01. Effectiveness. This agreement shall become effective
only upon the closing of the Offering.
SECTION 5.02. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including telecopy or similar
writing) and shall be given:
If to the Company, to:
Genentech, Inc.
One DNA Way
South San Francisco, CA 94080
Attention: Dr. Arthur D. Levinson
Facsimile: 650-225-2929
If to Roche, to:
Roche Holdings, Inc.
1201 North Orange Street
Wilmington, DE 19801
Attention: Corporate Secretary
Facsimile: 302-425-4713
with a copy to:
Roche Holding AG
CH 4070 Basel
Switzerland
Attention: Dr. Franz B. Humer
Facsimile: 011-41-61-688-5030
with a further copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attention: Peter R. Douglas, Esq.
Facsimile: 212-450-4800
or such other address or telecopier number as such party may hereafter
specify for the purpose by notice to the other party hereto. Each such
notice, request or other communication shall be effective (i) if given by
telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and the appropriate answerback is received or (ii)
if given by any other means, when delivered at the address specified in this
Section.
SECTION 5.03. Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and signed, in the case of an
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amendment, by Roche and the Company, or in the case of a waiver, by the party
against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
SECTION 5.04. Specific Performance. The Company acknowledges and
agrees that Roche's and the Company's respective remedies at law for a breach
or threatened breach of any of the provisions of this Agreement would be
inadequate and, in recognition of that fact, agrees that, in the event of a
breach or threatened breach by the Company or Roche of the provisions of this
Agreement, in addition to any remedies at law, Roche and the Company,
respectively, without posting any bond shall be entitled to obtain equitable
relief in the form of specific performance, a temporary restraining order, a
temporary or permanent injunction or any other equitable remedy which may
then be available.
SECTION 5.05. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns; provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other party hereto except as provided
herein.
SECTION 5.06. Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware.
SECTION 5.07. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
SECTION 5.08. Termination. This Agreement (other than Article 3 and
Sections 4.01, 4.02, 4.03, 4.04(a), 4.04(b), 4.04(c), 4.04(d), 4.04(e),
4.04(f), and 4.05) will terminate at such time as Roche and its affiliates
dispose of beneficial ownership of Common Stock of the Company which
disposition has the effect of causing Parent's Voting Interest to be less
than 40% (a "TERMINATION EVENT").
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first
above written.
GENENTECH, INC.
By: /S/STEPHEN G. JUELSGAARD
-----------------------------
Name: Stephen G. Juelsgaard
Title: Senior Vice President,
General Counsel and Secretary
ROCHE HOLDINGS, INC.
By: /S/HENRI MEIER
-----------------------------
Name: Henri Meier
Title: Chief Financial Officer
Page 16
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED
AGREEMENT BETWEEN
GENENTECH, INC. AND
F. HOFFMANN-LA ROCHE LTD
REGARDING COMMERCIALIZATION
OF GENENTECH'S PRODUCTS
OUTSIDE THE UNITED STATES
<PAGE>
TABLE OF CONTENTS
Whereas Clauses
Article I - Definitions
1. Affiliate....................................................2
2. Agreement....................................................3
3. Asia.........................................................3
4. Canada Products..............................................3
5. Clinical Requirements........................................3
6. Collaborative Countries......................................3
7. Commercial Requirements......................................3
8. DNase........................................................3
9. Dossier......................................................4
10. Entry into Man...............................................4
11. Financial Appendix...........................................4
12. First Commercial Introduction................................4
13. Effective Date...............................................4
14. GENENTECH....................................................4
15. Genentech Canada Ltd.........................................4
16. Genentech Europe Limited.....................................4
17. Roche Territory's Fully Burdened Manufacturing Cost..........4
18. Genentech Product............................................4
19. Governance Agreement.........................................4
20. IDEC Agreement...............................................5
21. IDEC Product.................................................5
22. IGF-1........................................................5
23. In-Licensed Product..........................................5
24. Know-How.....................................................5
25. Manufacturing Technology.....................................5
26. Net Sales....................................................5
27. NGF..........................................................5
28 Party........................................................6
29. Patents......................................................6
30. Phase II Completion Date.....................................6
31. Phase III Trial..............................................6
32. Product......................................................6
33. Registration.................................................6
34. Restated Date................................................6
35. ROCHE........................................................7
36. Roche Territory..............................................7
37. Scios Nova Agreement.........................................7
38. Scios Product................................................7
39. Small Molecule Product.......................................7
40. Trademark....................................................7
41. Valid Claim..................................................7
Article II - Licenses, Options, Know-How and Trademarks
1. Licenses for Canada Products and DNase.......................7
2. Option for License for Other Products........................8
3. Exercise of Option for License for Other Products............9
4. License to Know-How and Option for License to Know-How......10
5. License to Trademark and Option for License to Trademark....11
6. Standard of Effort..........................................11
7. Reporting on Commercialization Progress.....................12
8. License to Genentech........................................12
9. Future In-Licenses..........................................13
10. IIbIIIa and Ras Farnesyltransferase Collaborations..........13
11. IIbIIIa Collaboration.......................................13
<PAGE>
Article III - Commercialization Committees
1. Commercialization Committee.................................14
2. Management Committee........................................15
3. Development Committee.......................................15
4. Finance Committee...........................................15
Article IV - Development and Marketing
1. Development.................................................16
2. Development Costs...........................................16
3. Marketing...................................................18
Article V - Production and Supply
1. Production of Product.......................................18
2. Supply of Clinical Requirements.............................18
3. Supply of Commercial Requirements...........................18
4. Supply Agreement............................................19
5. Amendments to DNase Supply Agreement........................19
6. Supply of Scios Product.....................................20
7. Supply of IDEC Product......................................21
8. Supply of In-Licensed Product...............................21
9. Supply of Small Molecule Product............................21
10. Manufacturing Process and Facilities........................21
11. Additional Capital Requirements.............................22
12. Term of Supply Obligation...................................22
Article VI - Payments, Margins and Royalties
1. Payment for Product Requirements............................22
2. Invoices and Method of Payment of Roche Territory's
Fully Burdened Manufacturing Cost and Margin..............23
3. Royalties on Sales of DNase.................................23
4. Royalties and Other Payments on Sale of Canada Products.....23
5. Royalties on Sale of Genentech Products.....................23
6. Royalties and Other Payments on Sale of Scios Product.......24
7. Royalties and Other Payments on Sale of IDEC Product........24
8. Royalties and Other Payments on Sale of In-Licensed
Product...................................................25
9. Calculation of Aggregate Net Sales..........................26
10. Timing of Royalty Payments..................................26
11. Restrictions on Transfer of Funds...........................26
12. Records Regarding Royalties.................................27
13. Royalty for Use of Trademark................................27
14. Generic Competition.........................................27
15. Royalty Term if ROCHE Becomes Minority Shareholder..........27
Article VII - Transaction Provisions
1. General.....................................................28
2. Personnel of Genentech Canada, Inc., Genentech
Europe Limited and Genentech Ltd. (Japan).................28
3. Records and Property Leases.................................28
4. Transfer of Dossier and Registration........................29
Article IX - Patents, Inventions and Trademarks
1. Sole Inventions.............................................29
2. Joint Inventions............................................29
3. Patent Infringement.........................................30
4. Third Party Patents.........................................31
5. Reporting on Patent Status..................................31
6. Trademark...................................................32
<PAGE>
Article X - Confidentiality and Publications
1. Confidential Information...................................32
2. Publications...............................................32
3. Restrictions on Transfer of Proprietary Materials..........32
Article XI - Liability
1. No Liability...............................................33
2. Indemnification by ROCHE...................................33
3. Indemnification By GENENTECH...............................33
Article XII - Term and Termination
1. Term.......................................................33
2. Termination By ROCHE.......................................33
3. Termination By GENENTECH...................................34
4. Termination of Development/Commercialization...............35
5. Termination for Breach.....................................36
6. Certain Proceedings........................................36
7. Termination For Change in Ownership........................36
8. Survival of Terms..........................................36
Article XIII - Miscellaneous
1. Disclaimer of Certain Warranties...........................37
2. Entire Agreement, Amendment................................37
3. Failure to Enforce.........................................37
4. Force Majeure..............................................37
5. Arbitration................................................37
6. Notices....................................................38
7. Use of Names...............................................39
8. Successors and Assigns.....................................39
9. Headings...................................................39
10. Counterparts...............................................39
11. Severability...............................................39
12. Governing Law..............................................39
13. Relationship...............................................39
<PAGE>
Appendix A - Financial Appendix..................................41
Appendix B - Article II Countries................................51
<PAGE>
AMENDED AND RESTATED AGREEMENT
Effective as of the Effective Date
and
Amended and Restated as of the Restatement Date
Among
F. Hoffmann-La Roche Ltd, Grenzacherstrasse 124, CH 4070 Basel, Switzerland
and
Genentech, Inc., 1 DNA Way, South San Francisco, California, USA 94080,
Genentech Europe Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM
FXV and Genentech Biopharmaceuticals Limited, Reid House, 31 Church Street,
Hamilton, Bermuda HM FXV.
WHEREAS, GENENTECH possesses rights outside the United States in and to
certain pharmaceutical products;
WHEREAS, GENENTECH wishes to have certain pharmaceutical products
developed and marketed outside the United States;
WHEREAS, ROCHE has considerable knowledge in developing, registering,
manufacturing, formulating and filling, promoting, detailing, distributing
and marketing pharmaceutical products in all of the significant countries
outside the United States that utilize pharmaceutical products, has in place
in those countries a well-experienced staff for performing these activities,
and can perform these activities in a diligent and aggressive manner for
GENENTECH's pharmaceutical products;
WHEREAS, GENENTECH and ROCHE believe that this Agreement covering the
development, registration, manufacture, supply, formulation and filling,
promotion, detailing, distribution and marketing of certain of GENENTECH's
products outside the United States will be desirable and compatible with both
GENENTECH's and ROCHE's business objectives with respect to such products;
WHEREAS, GENENTECH believes that this Agreement would provide an
economic benefit to GENENTECH and speed up availability of unmarketed
pharmaceutical products of GENENTECH outside the United States and assist
GENENTECH in defraying the substantial costs associated with the development
of such products in the United States;
WHEREAS, GENENTECH and ROCHE intend that this Agreement should cover the
development, marketing and supply of certain GENENTECH pharmaceutical
products outside the United States and that this Agreement supersedes the
following agreements: Agreement Between F. Hoffmann-La Roche Ltd, Genentech,
Inc. and Genentech Europe Limited Regarding Commercialization of DNase in
Collaborative Countries; and Agreement Between F. Hoffmann-La Roche Ltd,
Genentech, Inc., and Genentech Europe Limited Regarding Commercialization of
DNase in Rest Of World; Agreement Among F. Hoffmann-La Roche Ltd, Nippon
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Roche K.K., Genentech, Inc., and Genentech Biopharmaceuticals Limited
Regarding Commercialization of DNase in Japan;
WHEREAS, GENENTECH and ROCHE intend that this Agreement should not cover
the development, marketing and supply of certain GENENTECH or jointly
developed pharmaceutical products and that this Agreement does not supersede
the following Agreements: Supply Agreement Between F. Hoffmann-La Roche Ltd,
Genentech, Inc. and Genentech Europe Limited Regarding DNase in Collaborative
Countries, Rest of World and Japan ("DNASE SUPPLY AGREEMENT") except that the
terms of such Agreement shall be expanded to include the supply of DNase in
Canada; Joint Research and Development Agreement between F. Hoffmann-La Roche
Ltd, Hoffmann-La Roche, Inc. and Genentech, Inc. Regarding LFA/ICAM
Antagonists; the TNF-Receptor Fusion Protein Agreement between Genentech,
Inc., F. Hoffmann-La Roche Ltd, and Hoffmann-La Roche, Inc. and the
Development Agreement Between Genentech, Inc. and Hoffmann-La Roche, Inc.,
dated January 6, 1980 concerning interferon alpha and beta; Joint Research
and Development Agreement between F. Hoffmann-La Roche Ltd. and Hoffmann-La
Roche, Inc. and Genentech, Inc. Regarding IL-8 Molecules (expired); Small
Molecule Screening and Collaboration Agreement between F. Hoffmann-La Roche
Ltd. and Genentech, Inc.; Joint Research and Development Agreement among F.
Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc. and Genentech, Inc. regarding
Anti-Coagulants effective February 10, 1995; and Agreement among F. Hoffmann-
La Roche Ltd and Genentech, Inc. regarding Anti-Her2 effective July 6, 1998;
WHEREAS, Roche Holding Ltd, a corporation organized under the laws of
Switzerland, and Genentech, Inc. concluded, effective September 8, 1990, a
Mutual Confidentiality Agreement (the "MUTUAL CONFIDENTIALITY AGREEMENT")
covering the ongoing disclosure of all confidential scientific, financial,
technical and business information of any nature in any tangible form of
expression among Genentech, Inc. on the one hand and Roche Holding Ltd and
its subsidiaries and affiliates throughout the world, except Genentech, Inc.,
on the other hand.
WHEREAS, Roche Holding Ltd and Genentech, Inc. concluded effective July
17, 1991 a Mutual Agreement for Supply of Research Material covering the
ongoing transfer of proprietary materials, substances, reagents and the like
among Genentech, Inc. on the one hand and Roche Holding Ltd and its
subsidiaries and affiliates throughout the world, except Genentech, Inc., on
the other hand.
WHEREAS, GENENTECH and ROCHE amended this Agreement at a meeting in
London on May 1, 1997 and made additional amendments with respect to the
commercialization of the GP-IIbIIIa antagonist, designated Xubix, pursuant to
a letter agreement dated May 29, 1998.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
ARTICLE I - DEFINITIONS
1. The term "AFFILIATE" shall mean --
(a) an organization fifty (50%) percent or more of the voting stock
of which is owned and/or controlled directly or indirectly by either
Party;
(b) an organization which directly or indirectly owns and/or
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<PAGE>
controls fifty percent (50%) or more of the voting stock of either
Party;
(c) an organization which is directly or indirectly under common
control of either Party through common share holdings.
The foregoing notwithstanding, neither Party shall be considered an
Affiliate of the other Party or of any other Party's Affiliates.
2. The term "AGREEMENT" shall mean this Agreement, including all Appendices
hereto, together with any valid amendments or modifications of the
foregoing, and any agreements or plans entered into in connection with
this Agreement.
3. The term "ASIA" shall mean the countries of Japan, Bangladesh, Myanmar,
Cambodia, Indonesia, People's Republic of China, Hong Kong, Republic of
Korea, Laos, Malaysia, Papua New Guinea, Philippines, Singapore, Sri
Lanka, Republic of China (Taiwan) and Thailand and the territories and
possessions of each.
4. The term "BULK PRODUCT" shall have the definition set forth in the
definition of "Product."
5. The term "CANADA PRODUCTS" shall mean the pharmaceutical products
Activase, registered trademark, tissue plasminogen activator, Protropin,
registered trademark, and Nutropin, registered trademark, human growth
hormone, Actimmune, registered trademark, interferon gamma and
Pulmozyme, registered trademark, dornase alpha each as sold in Canada.
6. The term "CLAIMS" shall have the meaning set forth in Article XI,
Sections 2 and 3 of this Agreement.
7. The term "CLINICAL REQUIREMENTS" shall mean those quantities of a
Product reasonably required by a Party for the conduct of preclinical
and clinical studies of such Product in that Party's Territory. The
term Clinical Requirements as used herein with respect to a Party shall
also include the Clinical Requirements of that Party's licensees, if
any.
8. The term "COLLABORATIVE COUNTRIES" shall mean Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Italy, Ireland, Luxembourg,
Netherlands, Norway, Portugal, Spain, Switzerland, Sweden, United
Kingdom and any additional countries that may subsequently become
members of the EU.
9. The term "COMMERCIAL REQUIREMENTS" shall mean those quantities of a
Product reasonably required by a Party for promotion and sale of such
Product in the its Territory. The term Commercial Requirements as used
herein with respect to a Party shall also include the Commercial
Requirements of that Party's licensees, if any.
10. The term "DEVELOPMENT COSTS" shall have the meaning set forth in the
Financial Appendix.
11. The term "DNASE" shall mean the protein, DNase, as defined in the DNase
Supply Agreement.
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12. The term "DNASE SUPPLY AGREEMENT" shall have the meaning set forth in
the preamble of this Agreement.
13. The term "DOSSIER" shall mean the document or documents filed with and
approved by the government or health authority in a country in the Roche
Territory for purposes of registration of a Product for sale in such
country.
14. The term "EFFECTIVE DATE" shall mean the date that the Amendment and
Restatement of Article Third of the Certificate of Incorporation of
Genentech, Inc. amending the terms of the Redeemable Common Stock, par
value $0.02, of GENENTECH became effective, i.e., October 25, 1995.
15. The term "ENTRY INTO MAN" shall mean the occurrence of Genentech's
official decision to file an Investigational New Drug exemption
application (an "IND") with the U.S. Food and Drug Administration.
16. The term "FINANCIAL APPENDIX" shall mean Appendix A to this Agreement.
17. The term "FINISHED PRODUCT" shall have the meaning set forth in the
definition of "Product."
18. The term "FIRST COMMERCIAL INTRODUCTION" shall mean the first date upon
which a Product is shipped commercially by ROCHE to an independent third
party in a country in the Roche Territory, after formal marketing
approval in that country, including any required price approval, has
been granted from the relevant authority in that country for that
Product.
19. The term "GENENTECH" shall mean Genentech, Inc. and, where appropriate,
its affiliates.
20. The term "GENENTECH CANADA, INC." shall mean that Affiliate of
Genentech, Inc. located at 1100 Burloak Drive, Fifth Floor, Burlington,
Ontario L7L 6B2 and organized as Genentech Canada, Inc. under the laws
of Canada.
21. The term "GENENTECH EUROPE LIMITED" shall mean that Affiliate of
Genentech, Inc. located at 31 Church Street, Hamilton, Bermuda HM FX and
organized as Genentech Europe Limited under the laws of Bermuda.
22. The term "GENENTECH'S FULLY BURDENED MANUFACTURING COST" shall have the
meaning set forth in the Financial Appendix.
23. The term "GENENTECH PRODUCT" shall mean a Product for which GENENTECH
(i) has an ownership interest outside the United States as of April 12,
1995 or (ii) thereafter has or acquires an ownership interest during the
term of this Agreement but does not include Canada Products, DNase, IDEC
Product, Scios Product and In-Licensed Products, human growth hormone
products, tissue plasminogen activator products and interferon gamma
products.
24. The term "GLOBAL DEVELOPMENT COSTS" shall have the meaning set forth in
the Financial Appendix.
25. The term "GOVERNANCE AGREEMENT" shall mean the Governance Agreement
entered into between Roche Holdings, Inc., a Delaware corporation, and
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Genentech, Inc. on September 7, 1990 as amended and restated on October
25, 1995 and as the same may be further amended by the Parties, or any
agreement which supercedes or replaces that agreement.
26. The term "IDEC AGREEMENT" shall mean the Collaboration Agreement between
Genentech, Inc. and IDEC Pharmaceuticals Corporation, effective as of
March 16, 1995.
27. The term "IDEC PRODUCT" shall mean all of those products which are the
subject of the IDEC Agreement.
28. The term "IND" shall have the meaning set forth in the definition of
Entry Into Man.
29. The term "IIbIIIa AGREEMENT" shall mean the Joint Research and
Development Agreement, dated January 7, 1993, between F. Hoffmann-La
Roche Ltd, Hoffmann La-Roche Inc. and Genentech, Inc. regarding IIbIIIa
Antagonists.
30. The term "IN-LICENSED PRODUCT" shall mean any Product to which,
subsequent to April 12, 1995, GENENTECH acquires rights in the Roche
Territory by means of a patent and/or knowhow license from a third
party.
31. The term "KNOW-HOW" shall mean proprietary technical information, know-
how, data, test results, knowledge, techniques, discoveries, inventions,
specifications, designs, regulatory filings, and other information
(whether or not patentable) which are now and, unless specified
otherwise, hereafter during the term of this Agreement are in the
possession or control of a Party and are specifically related to a
Product or to the development, manufacture, use or sale of a Product of
that Party; provided, however, that Know-How shall not include any of
the foregoing (i) which are now or hereafter in the possession or
control of a Party as a result of a license taken from a third party and
which a Party is not free to transfer or license to the other Party or
which a Party may transfer or license but such transfer or license would
necessitate the payment of a fee or royalty to the licensor (unless
provision is made hereunder for the payment of such fee or royalty) or
(ii) which are generally ascertainable from publicly available
information.
32. The term "MUTUAL CONFIDENTIALITY AGREEMENT" shall have the meaning set
forth in the preamble of this Agreement.
33. The term "MANUFACTURING TECHNOLOGY" shall mean all Know-How of a Party
then existing which is necessary to make or have made a Product in the
manner that such Product is then manufactured by the Party to produce
Clinical Requirements or to produce Commercial Requirements, as
applicable.
34. The term "NET SALES" shall have the meaning set forth in the Financial
Appendix.
35. The term "OPTION EXTENSION FEE" shall mean the nonrefundable amount of
$10,000,000 U.S. which is to be paid to GENENTECH by ROCHE within ten
(10) days of ROCHE's determination with respect to a Product not to
exercise its option for a right and license under Article II, Section 2
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(a) after the Phase II Completion Date for that Product.
36. The term "PARTY" shall mean either GENENTECH or ROCHE, and when used in
the plural, shall mean both of them.
37. The term "PATENTS" shall mean any and all patent applications and
patents (including inventor's certificates), including any
substitutions, extensions, reissues, renewals, divisions, continuations
or continuations-in-part thereof or therefor covering a Product, its
administration, formulation or clinical use, which a Party now or
hereafter during the term of this Agreement owns or controls or with
respect to which a Party has the right to grant licenses or sublicenses
without the payment of a fee or royalty (unless provision is made
hereunder for the payment of such fee or royalty) to the licensor, but
only to the extent they specifically cover a Product or the manufacture,
use or sale of a Product.
38. The term "PHASE II COMPLETION DATE" shall mean the date by which
GENENTECH, in its reasonable judgement, has clinical trial data and
other information sufficient to undertake a Phase III Trial in the USA.
39. The term "PHASE III COMPLETION DATE" shall mean the date by which a
Phase III Trial is completed with respect to a Product, and the results
of that Phase III Trial are known, available and have been analyzed and,
in GENENTECH'S reasonable judgement, allow filing for a Biologics
License Application or New Drug Application for that Product in the USA.
40. The term "PHASE III TRIAL" shall mean a controlled study in humans of
the efficacy and safety of a Product which is prospectively designed to
demonstrate statistically whether the Product is effective for use in a
particular indication in a manner sufficient to obtain regulatory
approval to market that Product or which is sufficient to permit a
filing with the competent authorities for a Registration in the USA.
41. The term "PRODUCT" shall mean any human pharmaceutical formulation of a
compound for which a Party has an ownership interest as of April 12,
1995 or thereafter acquires an ownership interest or rights by means of
a patent or knowhow license during the term of this Agreement. In the
case of GENENTECH, the term Product shall include Canada Products,
Genentech Products, IDEC Product, Scios Product, In-Licensed Products
and DNase. The term Product shall also include: (a) all bulk forms of a
Product ("BULK PRODUCT"); (b) Product which has been vialed but is not
finished or packaged ("VIALED PRODUCT"); and (c) finished, packaged
final dosage units of a Product ("FINISHED PRODUCT"). The term Product
shall include not only the specific molecule involved but molecules
derived from that molecule whether by addition or deletion of other
chemical subunits.
42. The term "REGISTRATION" shall mean the official approval by the
government or health authority or similar entity in one or more
countries in the Roche Territory which is required for a Product to be
offered for sale in that country or those countries, including such
authorizations as may be required for the production, importation,
pricing and sale of that Product to the extent they are needed for that
Product to be offered for sale in that country or those countries.
43. The term "RESTATEMENT DATE" shall mean July 1, 1999.
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44. The term "ROCHE" shall mean F. Hoffmann-La Roche Ltd and its Affiliates
unless otherwise specified in this Agreement.
45. The term "ROCHE TERRITORY" shall mean all countries of the world except
the United States and its territories and possessions.
46. The term "SCIOS NOVA AGREEMENT" shall mean the Collaboration Agreement
between Genentech, Inc. and Scios Nova, Inc. effective as of December
30, 1994.
47. The term "SCIOS PRODUCT" shall mean all of those products which are the
subject of the Scios Nova Agreement.
48. The term "SMALL MOLECULE PRODUCT" shall mean a synthetic molecule that
is not a protein or peptide.
49. The term "TRADEMARK" shall mean the trademarks owned, registered,
maintained or used by GENENTECH in connection with a Product.
50. The term "UNITED STATES" shall mean, unless otherwise indicated, the
United States and its territories and possessions.
51. The term "VALID CLAIM" shall mean a subsisting claim of an issued and
unexpired Patent that has not been held invalid, unpatentable or
unenforceable by a decision of a governmental body or court of
competent jurisdiction, that is unappealable or unappealed within the
time allowed for appeal, and that has not been rendered unenforceable
through disclaimer or otherwise.
52. The term "VIALED PRODUCT" shall have the meaning set forth in the
definition of "Product."
53. The term "XUBIX" shall mean the specific IIaIIIb antagonist currently
designated by the trademark Xubix, and any formulations thereof.
ARTICLE II - LICENSES, OPTIONS, KNOW-HOW AND TRADEMARKS
1. License for Canada Products and DNase.
(a) Subject to the terms and conditions of this Agreement,
GENENTECH hereby grants to ROCHE a sole and exclusive right and license
under GENENTECH's Patents, including the right to sublicense others with
GENENTECH's prior consent, which consent shall not be unreasonably
withheld, to register, use, sell and market (including the right to
detail and promote) Canada Products in Canada and DNase in the Roche
Territory.
(b) Subject to the terms and conditions of this Agreement,
GENENTECH hereby grants to ROCHE a sole and exclusive right and license
under GENENTECH's Patents, including the right to sublicense others with
GENENTECH's prior consent, which consent shall not be unreasonably
withheld, for each Canada Product in Canada and DNase in the Roche
Territory, dependent on the Parties' mutual agreement as to whether
GENENTECH will supply Vialed Product or Bulk Product (i) to make and/or
have made Finished Product from Vialed Product or (ii) to make and/or
have made Vialed Product from Bulk Product.
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2. Option for License for Other Products.
(a) Subject to the terms and conditions of this Agreement,
GENENTECH hereby grants to ROCHE an option on a Product-by-Product
basis, exercisable for any Product at (i) such Product's Entry Into Man;
(ii) at the first Phase II Completion Date for such Product, or (iii) if
ROCHE has paid GENENTECH the Option Extension Fee, at the Phase III
Completion Date for such Product for a sole and exclusive (to the extent
available) right and license in the Roche Territory under GENENTECH's
Patents and, to the extent sublicensable by GENENTECH, patents of third
parties licensed to GENENTECH, including where available the right to
sublicense others with GENENTECH's prior consent, which consent shall
not be unreasonably withheld, to register, use, sell and market
(including the right to detail and promote) each Genentech Product and,
subject to the terms and conditions of the relevant license agreement,
In-Licensed Product and IDEC Product or Scios Product and shall include
the right for all indications. Such option shall be exercisable only
once for each Product. If ROCHE does not pay the Option Extension Fee
with respect to a Product, there shall be no additional option with
respect to that Product beyond that associated with the Phase II
Completion Date.
(b) Subject to the terms and conditions of this Agreement and
contingent on ROCHE exercising its option under Section 2(a) of this
Article II, GENENTECH hereby grants to ROCHE, an option, exercisable
only once for any Product either at (i) such Product's Entry Into Man;
(ii) at the first Phase II Completion Date for such Product, or (iii) at
the Phase III Completion Date, for a sole and exclusive (to the extent
available) right and license in the Roche Territory, under GENENTECH's
Patents and, to the extent sublicenseable by GENENTECH, patents of third
parties licensed to GENENTECH, including where available, the right to
sublicense others with GENENTECH's prior consent, which consent shall
not be unreasonably withheld, for Genentech Product and, subject to the
terms and conditions of the relevant license agreement, In-Licensed
Product and IDEC Product to the extent GENENTECH is contractually able
to do so under the IDEC Agreement and to Scios Product to the extent
GENENTECH is contractually able to do so under the Scios Nova Agreement,
to make Vialed Product from Bulk Product. Such option shall be
exercisable only once for each Product.
(c) The options described above may be exercised earlier than the
time periods described if the Parties mutually agree. The options
described above shall terminate on October 25, 2015 except as follows:
(i) if Roche has paid an Option Extension Fee for a Product,
Roche shall retain an option for that Product exercisable at the
Phase III Completion Date for that Product;
(ii) for a Product for which Entry Into Man has occurred but
which has not yet reached the Phase II Completion Date, Roche shall
continue to have an option exercisable at the Phase II Completion
Date; and
(iii) for any Product for which the 60 day period to exercise
an option with respect to Entry Into Man or the Phase II Completion
Date or the Phase III Completion Date has arisen, that option shall
continue for the remaining portion of that 60 day period that is
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then unexpired.
(d) The foregoing notwithstanding, if at any time prior to Entry
Into Man of a Genentech Product or In-Licensed Product, GENENTECH
decides to discontinue sole development of such a Product and to license
a third party the rights to that Product, that Product shall be subject
to the provisions of Section 3.07 of the Governance Agreement and shall
no longer be subject to the provisions of this Agreement. If at any
time upon or after Entry Into Man of a Genentech Product or In-Licensed
Product, the occurrence of the first Phase II Completion Date for such a
Product, or thereafter unless ROCHE has paid the Option Extension Fee,
GENENTECH decides to discontinue sole development of such a Product and
to license a third party the rights in the Roche Territory to that
Product, that Product shall be subject to the provisions of Section 3.07
of the Governance Agreement provided, however, that if the parties do
not enter into an license agreement regarding such Product on the basis
of Section 3.07 of the Governance Agreement, the terms of this Agreement
(including but not limited to ROCHE's option rights) with regard those
rights to such Product in the Roche Territory shall continue to remain
in full force and effect. If ROCHE has paid the Option Extension Fee,
GENENTECH shall have no rights to grant rights to third parties to that
Product in the Roche Territory. Upon receipt of notification with
respect to a Product as specified in the first sentence of Section 3 (a)
of Article II, ROCHE shall make a good faith determination as to its
interest in the Product in the Roche Territory. If ROCHE determines
that it has no interest in maintaining its future option rights it will
so inform GENENTECH so that GENENTECH may pursue other development and
commercial arrangements with others with respect to that Product in the
Roche Territory so that GENENTECH may realize the full commercial
potential of such Product.
3. Exercise of Option for License for Other Products.
(a) Upon each of the occurrences of Entry Into Man, the Phase II
Completion Date and the Phase III Completion Date for a GENENTECH
Product or an In-Licensed Product for which an option hereunder is still
in effect, GENENTECH shall so notify ROCHE's primary contact on the
Commercialization Committee established in Article III. In connection
with such notice, GENENTECH shall provide ROCHE with all relevant
information regarding the Product, including results of preclinical and
clinical studies, third party rights (patent rights and royalty
obligations), and manufacturing process and cost information not yet
communicated to the Development Committee in accordance with this
Section 3, but such information shall not include marketing or other
commercial information other than market research information. At any
time, ROCHE shall have the right to request reasonable additional non-
marketing or noncommercial information. Within thirty (30) days of such
notification and the receipt by ROCHE of all information specified
herein, the Commercialization Committee shall meet to review such
information and the results of such studies and any other relevant non-
marketing or noncommercial information developed by or possessed by
GENENTECH regarding that Product which ROCHE may request. After the
notice to ROCHE's primary contact on the Commercialization Committee as
specified above, GENENTECH and ROCHE shall jointly formulate a
development plan with respect to the United States and Europe for the
Product, the terms of which shall be negotiated in good faith by the
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Parties. Such plan shall address issues regarding initially envisioned
indications and additional indications to be developed and shall be
agreed upon ten (10) days prior to the expiry of the sixty (60) day
period mentioned below. If ROCHE does not exercise its option
hereunder, that development plan will not have any binding effect.
Within sixty (60) days of the notice to ROCHE's primary contact on the
Commercialization Committee as specified above and the receipt by ROCHE
of all information specified herein, ROCHE shall either exercise in
writing its option for a license for such Product under Section 2 of
this Article II or if ROCHE fails to so exercise, ROCHE shall be deemed
to have irrevocably waived the option with respect to that particular
option exercise period.
If ROCHE fails to exercise its option for a license for such Product
within 60 days of the notice to ROCHE of the Phase III Completion Date,
GENENTECH thereafter shall be free to develop, make, have made, use,
sell and market (including the right to promote and detail) such Product
in the Roche Territory in any manner it chooses, including by means of a
license to one or more third parties, and free of any restrictions under
Section 3.07 of the Governance Agreement.
(b) (1) Within forty-five (45) days of the Effective Date of this
Agreement, the Commercialization Committee shall meet to review summary
results of clinical data for any Genentech Product and In-Licensed
Product for which there has been a Phase II Completion Date of the
Effective Date and for IDEC Product and Scios Product. Within ninety
(90) days of the commencement of such meeting, ROCHE shall either
exercise in writing its option for a license for each such Product under
Section 2 of this Article II or if ROCHE fails to so exercise, it shall
be deemed to have irrevocably waived such option. If ROCHE waives its
option for a license for a Product under Section 2 of this Article II,
GENENTECH shall be free to develop, make, have made, use, sell and
market (including the right to detail and promote) such Product in the
Roche Territory in any manner it chooses including by means of a license
to one or more third parties and free of any restrictions of Section
3.07 of the Governance Agreement. If ROCHE waives its option for a
license for either IDEC Product or Scios Product pursuant to the
foregoing, ROCHE shall have no further rights to any IDEC Product or
Scios Product, as the case may be.
(2) The right of ROCHE to any license hereunder to IDEC Product
is subject to ROCHE's agreement to comply with all appropriate
obligations of the IDEC Agreement for IDEC Product and any required
consent of IDEC. The right of ROCHE to any license hereunder to Scios
Product is subject to ROCHE's agreement to comply with all appropriate
obligations of the Scios Nova Agreement for Scios Product and any
required consent of Scios Nova.
(c) Any information provided by GENENTECH to ROCHE for its
evaluation with respect to exercising an option under this Article shall
be returned to GENENTECH promptly if ROCHE decides not to exercise such
option and such information shall be subject to the provisions of
Article X below.
4. License to Know-How and Option for License to Know-How.
(a) Subject to the terms and conditions of this Agreement,
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GENENTECH hereby grants to ROCHE, for the term of this Agreement, a
right and license, including the right to sublicense others with
GENENTECH's prior consent, which consent shall not be unreasonably
withheld, to use in Canada, GENENTECH Know-How specifically related to
Canada Products and to use in the Roche Territory, GENENTECH Know-How
specifically related to DNase (i) to register, use, sell and market
(Including the right to detail and promote) such Products; and dependent
on the Parties' mutual agreement as to whether GENENTECH will supply
Vialed Product or Bulk Product (ii) to make and/or have made Finished
Product from Vialed Product, or (iii) to make and/or have made Vialed
Product from Bulk Product.
(b) Subject to the terms and conditions of this Agreement and the
exercise of the option for such Product under Section 2 of this Article
II, GENENTECH hereby grants to ROCHE, for the term of this Agreement, a
right and license, including the right to sublicense others with
GENENTECH's prior consent, which consent shall not be unreasonably
withheld, to use in the Roche Territory, GENENTECH Know-How specifically
related to GENENTECH Products, In-Licensed Products, Scios Product or
IDEC Product (i) to register, use, sell and market (Including the right
to detail and promote) such Product; and dependent on the Parties mutual
agreement as to whether GENENTECH will supply Vialed Product or Bulk
Product (ii) to make and/or have made such Finished Product from such
Vialed Product or (iii) to make and/or have made such Vialed Product
from such Bulk Product.
5. License to Trademark and Option for License to Trademark.
(a) Subject to the terms and conditions of this Agreement,
GENENTECH grants to ROCHE a sole and exclusive right and license to use
the appropriate Trademarks in Canada for Canada Products and in the
Roche Territory for DNase including the right to sublicense others with
GENENTECH's prior consent, which consent shall not be unreasonably
withheld. ROCHE and its Affiliates shall use the appropriate Trademarks
for such Products in Canada in the case of Canada Products or in each
country in the Roche Territory in the case of DNase unless the Trademark
is not available in such country. If the appropriate Trademark for such
Product is not available in such country, ROCHE shall obtain GENENTECH's
prior consent before using any other trademark for such Product in such
country, which consent shall not be unreasonably withheld.
(b) Subject to the terms and conditions of this Agreement and the
exercise of the option for a Product under Section 2 of this Article II,
GENENTECH grants to ROCHE a sole and exclusive right and license to use
the Trademark for such Product in the Roche Territory including the
right to sublicense others with GENENTECH's prior consent, which consent
shall not be unreasonably withheld. ROCHE and its Affiliates shall use
the Trademark for such Product in each country in the Roche Territory
unless the Trademark is not available in such country. If the Trademark
for such Product is not available in such country, ROCHE shall obtain
GENENTECH's prior consent before using any other trademark for the
Product in such country, which consent shall not be unreasonably
withheld.
6. Standard of Effort. ROCHE acknowledges that for those Products licensed
to ROCHE hereunder, GENENTECH's sole opportunity to receive maximum
potential revenue from sales of those Products in each country in the
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Roche Territory is solely dependent on ROCHE's efforts and that a
failure to provide the level of effort specified herein is likely to
have a significant adverse effect on potential revenues to GENENTECH
which would be inimical to the purposes of this Agreement. Therefore,
the exclusive licenses granted to ROCHE under this Article shall be
conditioned on ROCHE using its "best efforts" in each country in the
Roche Territory to take all steps necessary in an expeditious fashion to
obtain regulatory approval to sell the Product and thereafter to sell
the Product in a manner so as to maximize its revenue potential. "Best
efforts" shall mean efforts, including the commitment of all necessary
personnel and financial resources, in a timeframe equivalent to that
used by ROCHE to develop, promote and sell ROCHE's major pharmaceutical
products.
7. Reporting on Commercialization Progress. ROCHE shall keep GENENTECH
informed of the progress of its efforts to develop, register, and market
the Product licensed by it hereunder in each country in the Roche
Territory. Such progress reports shall be made annually by November
30th of each year. For each country listed on Appendix B hereto, such
progress reports shall specifically include information on --
(a) the status of, and plans for, clinical trials needed for
registration of the Product,
(b) the status of, and plans for, registering the Product for
sale, and
(c) the budgeted sales of the Product or the Net Sales of the
Product if it is registered;
(d) the Net Sales of the Product included in the business plan for
the Product; and
(e) summaries of promotional plans and market research.
In addition, GENENTECH may make reasonable requests for, and ROCHE shall
provide, specific information about efforts to register and sell the
Products in countries in the Roche Territory other than those set forth
in Appendix B and about the aggregate Net Sales budgeted or included in
the business plan for Products for all countries in the Roche Territory.
8. License to GENENTECH. Subject to the terms and conditions of this
Agreement, ROCHE hereby grants, and shall cause Hoffmann-La Roche, Inc.
to grant, to GENENTECH in the United States, a perpetual royalty-free,
nonexclusive right and license under ROCHE's Patents and Know-How, to
register, make, have made, use, sell and market (including the right to
promote) in the United States
(a) the Canada Products and DNase; and
(b) any Genentech Product, In-Licensed Product, IDEC Product
or Scios Product for which ROCHE exercises its option under Section
2 of this Article II.
ROCHE shall not grant to any third party, and ROCHE shall cause
Hoffmann-La Roche, Inc. not to grant to any third party, any license
under ROCHE's Patents and Know-How in the United States to register,
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make, have made, use, sell and market (including the right to promote)
any Product which is described in subsection (a) or (b) of this Section
8 without GENENTECH's prior written consent.
9. Future In-Licenses. With respect to future prospective in-licenses from
third parties where GENENTECH is the prospective licensee and the
license involves Products with rights in the Roche Territory, the
Parties shall discuss in advance the nature of reasonable terms for the
Roche Territory. Any final license agreement with respect to the Roche
Territory shall be on terms mutually acceptable to both Parties, and the
Parties shall discuss and agree to a worldwide development and
commercialization strategy with respect to such a Product.
10. Ras Farnesyltransferase Collaboration. With respect to the Parties'
current collaboration on ras farnesyltransferase inhibitors, GENENTECH
will have the sole right outside of the Roche Territory, and ROCHE shall
have the sole right in the Roche Territory to register, use, sell and
market (including the right to detail and promote) all Products
resulting from such collaboration. All research efforts and Development
Costs for these Products shall be shared in an equal manner. Neither
Party shall pay the other royalties for sales of any of these Products
in its Territory. In the event that any of the existing agreements
relating to such collaboration conflict with this Section 10 of Article
II, the terms of this Section shall govern.
11. IIbIIIa Collaborations Other than Xubix Collaboration. With respect to
the Parties' collaborations on IIbIIIa antagonists under the IIbIIIa
Agreement other than the collaboration on Xubix, GENENTECH will have the
sole right outside of the Roche Territory, and ROCHE shall have the sole
right in the Roche Territory to register, use, sell and market
(including the right to detail and promote) all Products resulting from
such collaborations. All research efforts and Global Development Costs
for these Products shall be shared in an equal manner. Neither Party
shall pay the other royalties for sales of any of these Products in its
Territory. In the event that any of the existing agreements relating to
these collaborations conflict with this Section 11 of Article II, the
terms of this Section shall govern.
12. GP-IIbIIIa (Xubix) Collaboration.
(a) ROCHE hereby grants to GENENTECH the option (the "OPT-IN OPTION")
to participate and share in the development and commercialization
of Xubix, exercisable at any time up to and within thirty (30) days
after NDA approval of the first indication (acute or chronic
therapy) in the United States. Such Opt-in Option shall be
exercisable with respect to Xubix for all indications. Upon its
exercise of the Opt-in Option, GENENTECH shall reimburse ROCHE for
fifty percent (50%) of ROCHE's Development Costs for Xubix
(including Phase III Development Costs) incurred by ROCHE from and
after May 1, 1997 through the exercise date and for Phase III
Development costs incurred prior to May 1, 1997 and shall pay the
additional sum of $25 million U.S. Upon GENENTECH's exercise of the
Opt-in Option, the Parties shall negotiate in good faith and enter
into a more detailed commercialization and development agreement
with respect to Xubix based on the provisions contained herein it
being understood that any Development Costs incurred after such
opt-in date shall be equally shared.
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(b) If GENENTECH exercises the Opt-in Option, GENENTECH and ROCHE will
have semi-exclusive rights in the United States, with GENENTECH and
ROCHE co-promoting Xubix and sharing net profits on a basis of
sixty percent (60%) to GENENTECH and forty percent (40%) to ROCHE
if the first indication for which marketing approval is sought is
for acute therapy or on a basis of fifty percent (50%) to GENENTECH
and fifty percent (50%) to ROCHE if the first indication for which
marketing approval is sought is for chronic therapy. ROCHE shall
have the sole right in the Roche Territory to register, use, sell
and market (including the right to detail and promote) all Products
resulting from such collaboration.
(c) Upon ROCHE's filing of a NDA for the first indication (acute or
chronic therapy) of Xubix in the United States if GENENTECH has not
yet exercised its Opt-in Option, ROCHE shall provide GENENTECH with
all relevant information requested by Genentech regarding Xubix
including results of preclinical and clinical studies.
(d) Neither Party shall pay the other royalties for sales of any Xubix
provided however, that ROCHE shall pay GENENTECH a six percent (6%)
royalty on Net Sales of Xubix in any country in which Net Sales
occur, in accordance with Article VI of this Agreement, if
GENENTECH does not exercise the Opt-in Option. The royalty shall
be paid in that country for the longer of (a) a period of ten (10)
years from First Commercial Introduction of Xubix in that country
or (b) until the last expiration of a valid claim of a Genentech
Patent which the sale of Xubix would infringe in that country
without the license granted in the IIbIIIa Agreement. If there are
one or more products generically equivalent to Xubix which directly
compete with Xubix in a country so that the generically equivalent
products have a market share in that country of at least twenty-
five percent (25%) of the market (in units) for Xubix, GENENTECH
and ROCHE shall negotiate in good faith a modification to the
royalty term or rate so that the royalty payable by ROCHE in that
case is more economically viable.
(e) In the event that any of the existing agreements relating to this
collaboration conflict with this Section 12 of Article II, the
terms of this Section shall govern.
ARTICLE III - COMMERCIALIZATION COMMITTEES
1. Joint Commercialization Committee. Within fifteen (15) days of the
Effective Date, the Parties shall form a Joint Commercialization
Committee. The Joint Commercialization Committee shall be the (a) forum
for communicating to ROCHE information about Products, including the
results for a Product as of that Product's Entry Into Man, Phase II
Completion Date and Phase III Completion Date as well as all other
information about that Product in GENENTECH's possession at the time of
such communication which is specifically relevant to ROCHE's decision
whether to exercise its option for that Product (e.g., cost information,
market research, etc.) and (b) for communicating to GENENTECH
information about Products for which ROCHE has a license. The Joint
Commercialization Committee shall meet initially with respect to a
Product upon its Entry Into Man or earlier if the Parties mutually
agree. The Joint Commercialization Committee shall also be the forum
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for ROCHE's communications, pursuant to Section 7 of Article II, above
about ROCHE's development and sales and marketing efforts for each
Product for which it has a license hereunder. The Joint
Commercialization Committee shall be comprised of an equal number but
not more than five nominees of ROCHE and GENENTECH respectively,
appointed by their respective organizations. The chairman of the Joint
Commercialization Committee will be designated by GENENTECH. The
chairman will call and chair meetings of the Joint Commercialization
Committee which will be held at GENENTECH's facilities unless mutually
agreed otherwise or by video conference where feasible.
2. Management Committee. Within ninety (90) days of the Effective Date,
the Parties shall form a Management Committee comprised of three
representatives from ROCHE, including its Chief Operating Officer or
Head of the Pharma Division and three representatives from GENENTECH,
including its Chief Executive Officer or Chief Operating Officer. The
Management Committee shall meet at least once per year to review the
development and commercialization status of all Products which are then
subject to this Agreement and any other matters brought to the
Committee's attention by the Commercialization Committee, the Finance
Committee or the Development Committee.
3. Development Committee. Within sixty (60) days of the Effective Date,
the Parties shall form a Development Committee comprised of three
representatives from ROCHE and three representatives from GENENTECH. The
Development Committee shall meet regularly but at least three (3) times
a year to discuss the development of Products for which ROCHE has
exercised its option under Article II. GENENTECH shall keep ROCHE
informed through the Development Committee on projects and products for
which an option of ROCHE is still in effect with an emphasis on those
projects which are approaching Entry Into Man (i.e. potential Entry Into
Man foreseen within the next four (4) months).
The Development Committee shall direct and coordinate development
efforts on a global basis for a Product for which ROCHE has exercised
its option, consistent with the development plan required by Section 3
of Article II. The Development Committee shall meet initially with
respect to a Product approaching its Entry Into Man, or earlier if the
Parties mutually agree, and shall be responsible for formulating a joint
development plan as required by Section 3 of Article II. Except as
otherwise specifically provided in such plan with respect to a Product,
GENENTECH will lead the planning of world-wide development strategies
for its Products. All decisions related to GENENTECH's development
efforts for a Product and GENENTECH's filings for approval of a
Registration outside the Roche Territory shall be solely those of
GENENTECH, except as otherwise specifically provided in such plan. All
decisions related to ROCHE's development efforts for a Product for which
ROCHE has exercised its option right and ROCHE's filing for approval of
a Registration in the Roche Territory shall be solely those of ROCHE,
except as otherwise specifically provided in such plan. The activities
of a party in its territory shall not negatively impact the activities
of the other party in its territory.
4. Joint Finance Committee. Within sixty (60) days of the Effective Date,
the Parties shall form a Joint Finance Committee comprised of two
representatives from ROCHE and two representatives from GENENTECH. The
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Joint Finance Committee shall meet on an as needed basis to review and
discuss financial activities and issues relating to this Agreement.
5. Review of Status. Within six (6) months of the Restatement Date, the
Parties shall review the Committee structure and composition described
above with a view to simplifying the Committee system where feasible.
ARTICLE IV - DEVELOPMENT AND MARKETING
1. Development. Subject to the terms and conditions of this Agreement and
the joint development plan with respect to a Product agreed to pursuant
to Section 3 of Article II, GENENTECH shall be solely responsible for,
and have full autonomy with respect to, the development of its Products
outside of the Roche Territory and in the Roche Territory with respect
to Products not licensed to ROCHE hereunder, and ROCHE shall be solely
responsible for the development in the Roche Territory of those Products
for which it has been granted a license under Section 2 of Article II
and has exercised its option for a license under Section 3 of Article
II. The Parties shall each have the Additional Indication Opt-Out
Option referred to in the Financial Appendix with respect to each
Product developed hereunder.
2. Development Costs Incurred prior to Opt-In. Except as set forth below,
GENENTECH shall be reimbursed by ROCHE for fifty percent (50%) of all of
GENENTECH's Development Costs incurred in connection with a Product
prior to the date on which ROCHE has exercised its option for such
license under Sections 2 and 3 of Article II. GENENTECH shall choose
the method for reimbursement from among those set forth in the Financial
Appendix.
If ROCHE exercises its option for a license for a Product after notice
of the Phase III Completion Date for that Product, GENENTECH will be
reimbursed by ROCHE for fifty percent (50%) of all of GENENTECH's
Development Costs incurred in connection with that Product prior to the
date of GENENTECH'S notice to ROCHE of the Phase II Completion Date for
that Product and seventy-five percent (75%) of all of GENENTECH's
Development Costs incurred in connection with that Product after the
date of the notice to ROCHE of the Phase II Completion Date and prior to
the exercise of ROCHE's option for a license to the Product after
receipt of the notice of the Phase III Completion Date. If ROCHE has
paid an Option Extension Fee for a Product, $5,000,000 shall be credited
against the Development Costs reimbursable by ROCHE at the time of the
exercise of the option following receipt of notice of the Phase III
Completion Date.
3. Development Costs after Opt-In. Except as noted below, GENENTECH and
ROCHE shall share the Global Development Costs incurred in connection
with any development of a Product and incurred on or after the date on
which ROCHE has been granted a license to such Product under Section 2
of Article II and has exercised its option for such license under
Sections 2 and 3 of Article II. If ROCHE exercises its option for such
Product during the exercise period after the date of such Product's
Entry Into Man, ROCHE shall bear fifty percent (50%) of the Global
Development Costs and GENENTECH shall bear fifty percent (50%) of the
Global Development Costs for that Product. If ROCHE exercises its
option for such Product during the exercise period after the Phase II
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Completion Date for such Product, ROCHE shall bear seventy-five percent
(75%) of the Global Development Costs and GENENTECH shall bear twenty-
five percent (25%) of the Global Development Costs for that Product. The
exceptions to the foregoing are as follows:
(a) Canada Products. With respect to Canada Products, GENENTECH
shall be reimbursed by ROCHE for ten percent (10%) of all of
GENENTECH's Development Costs incurred in connection with any
development of a Canada Product and incurred on or after the date
on which ROCHE has been granted a license to such Product under
Section 1 of Article II.
(b) IGF-1 Products. With respect to IGF-1 Products, ROCHE shall
bear sixty percent (60%) of all Global Development Costs incurred
in connection with any development of an IGF-1 Product for any
diabetes indication on or after the date on which ROCHE has
exercised its option for a license under Section 3 of Article II
and GENENTECH shall bear forty percent (40%) of such Global
Development Costs.
(c) NGF Products. With respect to NGF Product, ROCHE shall bear
sixty percent (60%) of all of Global Development Costs incurred in
connection with any development of a NGF Product on or after the
date on which ROCHE has exercised its option for a license under
Section 3 of Article II and GENENTECH shall bear forty percent
(40%) of such Global Development Costs, however any costs related
to AIDS related neuropathies shall be fully borne by GENENTECH.
(d) Additional Indications, New Formulations and New Dosing
Schedules. With respect to any additional indications or new
formulations or new dosing schedules for a Product other than the
indication or formulation or dosing schedule for which the Product
is being developed for initial Registration and where the
additional indication or new formulation or new dosing schedule
would require a separate Phase III Trial for Registration,
(i) if ROCHE exercises its option associated with the Phase
II Completion Date, each Party shall bear 50% of the
Global Development Costs incurred with respect to such
additional indications and new formulations and new
dosing schedules; and
(ii) if ROCHE exercise its option associated with the Phase
III Completion Date, ROCHE shall bear seventy-five
percent (75%) and GENENTECH shall bear twenty-five
percent (25%) of the Global Development Costs incurred
with respect to such additional indications and new
formulations and new dosing schedules.
(e) Phase III Completion Date Option. If Roche exercises its
option for a Product after notice of the Phase III Completion Date
for that Product, no Global Development Costs will be shared for
the completion of any clinical development or filing or preparation
necessary for either Party's Registration for the indication which
was the subject of the Phase III Trial related to the Phase III
Completion Date.
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The determination of the amount of the Development Costs and the Global
Development Costs, and the timing and mechanism for payment thereof, is
set forth in the Financial Appendix.
4. Marketing. GENENTECH shall be solely responsible for and have full
autonomy with respect to the marketing of its products in the United
States and in the Roche Territory with respect to Products not licensed
to ROCHE hereunder. Subject to the terms and conditions of this
Agreement, ROCHE shall be solely responsible for the marketing in the
Roche Territory of those Products for which it has been granted a
license under Section 2 of Article II and has exercised its option for a
license under Section 3 of Article II and for Canada Products and DNase.
ARTICLE V - PRODUCTION AND SUPPLY
1. Production of Product. Except as provided in Sections 6, 7 and 8 of
this Article V, GENENTECH, or Genentech Biopharmaceuticals Limited in
the case of DNase as Vialed Product or Finished Product, or Genentech
International Limited in the case of Genentech Products (except DNase)
which are Vialed Product or Finished Product, shall be responsible for
the manufacture of Clinical Requirements and Commercial Requirements of
Bulk Product, Vialed Product or Finished Product, as the case may be,
for which ROCHE has a license, for the Roche Territory.
2. Supply of Clinical Requirements. Except as provided in Sections 5, 6, 7
and 8 of this Article, GENENTECH shall use its best efforts to supply
ROCHE with ROCHE's Clinical Requirements pursuant to a mutually
agreeable and reasonable production schedule. GENENTECH shall not be
obligated to supply Clinical Requirements to ROCHE other than in
accordance with the quantities mutually agreed to and at the approximate
dates of delivery mutually agreed to. All transportation and packing
and similar costs shall be borne by ROCHE. Title and risk of loss shall
pass to ROCHE upon delivery by GENENTECH FOB origin. The Parties shall
agree on specifications for the Clinical Requirements, and the Clinical
Requirements delivered by GENENTECH shall meet those specifications.
GENENTECH shall not favor the supply of its own clinical requirements of
a Product to it or its other licensees over ROCHE's Clinical
Requirements.
3. Supply of Commercial Requirements. Except as provided in Sections 5, 6,
7 and 8 of this Article, GENENTECH, or Genentech Biopharmaceuticals
Limited in the case of DNase as Vialed Product or Finished Product, or
Genentech International Limited in the case of Genentech Products
(except DNase) which are Vialed Product or Finished Product, shall
supply ROCHE with ROCHE's Commercial Requirements pursuant to a mutually
agreeable and reasonable production schedule for ROCHE's Commercial
Requirements, and ROCHE agrees to purchase its Commercial Requirements
from those entities. Those entities shall not be obligated to supply
Commercial Requirements to ROCHE other than in accordance with the
quantities mutually agreed to and at the approximate dates of delivery
mutually agreed to. All transportation and packing and similar costs
shall be borne by ROCHE. Title and risk of loss shall pass to ROCHE
upon delivery by those entities to ROCHE, FOB origin. The Parties shall
agree on specifications and procedures for the Commercial Requirements,
and the Commercial Requirements delivered by those entities shall meet
those specifications and procedures. Those entities shall not favor the
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supply of their own commercial requirements of Product to themselves or
their other licensees over ROCHE's Commercial Requirements.
4. Supply Agreement.
(a) Except as provided in Sections 5, 6, 7 and 8 of this Article,
at the time that ROCHE exercises its option for a license for a Product
under Section 2 of Article II, the Parties agree to negotiate and enter
into a definitive Supply Agreement for such Product on a basis
consistent with this Article and the other terms and conditions of this
Agreement.
(b) For Canada Products other than DNase, the Parties will
negotiate and enter into a Supply Agreement consistent with this Article
V and the other terms and conditions of this Agreement.
5. Amendments to DNase Supply Agreement. (a) GENENTECH's and Genentech
Biopharmaceutical Limited's obligation to supply ROCHE with ROCHE's
Clinical Requirements and Commercial Requirements of DNase in the Roche
Territory, and ROCHE's agreement to purchase such Requirements from
GENENTECH and Genentech Biopharmaceuticals Limited shall be governed by
the DNase Supply Agreement as amended by this Section 5. The DNase
Supply Agreement is amended as follows.
(a) The definition of Collaborative Countries is amended to
include Canada by striking Section 4 of Article I in its entirety and
inserting in lieu thereof:
"4. The term "COLLABORATIVE COUNTRIES" shall include those
countries listed in Appendix D of the Collaborative Agreement and
Canada.".
(b) The definition of Rest of World Countries is amended to
include Japan by striking Section 19 of Article I and inserting in lieu
thereof:
"19. The term "ROW COUNTRIES" shall include all countries except
the Collaborative Countries and the United States.".
(c) The inclusion of Canada and Japan in the DNase Supply Agreement
and its effect on the provisions allocating DNase in the event of a
product shortfall shall be addressed by striking Section 9(c)(i) of
Article II and inserting in lieu thereof:
"(i) the United States,".
(d) In light of the changed marketing arrangement for DNase and to
provide for an arm's length margin on GENENTECH's manufacture of DNase,
Section 1 of Article III is stricken in its entirety and a new Section 1
is inserted in lieu thereof:
"1. Payment for Clinical Requirements and Commercial Requirements.
(a) All Vialed Product for Clinical Requirements shall be
supplied by Genentech Biopharmaceutical Limited to ROCHE at
Genentech Biopharmaceutical Limited's Fully Burdened
Manufacturing Cost.
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(b) All Bulk Product for Commercial Requirements shall be
supplied by Genentech Biopharmaceutical Limited to ROCHE at
Genentech Biopharmaceutical Limited 's Fully Burdened
Manufacturing Cost plus a margin of twenty percent (20%) on
such Cost and all Vialed Product for Commercial Requirements
shall be supplied by Genentech Biopharmaceutical Limited to
ROCHE at Genentech Biopharmaceutical Limited's Fully Burdened
Manufacturing Cost plus a margin of twenty percent (20%) and --
(1) in the case of Commercial Requirements for use
in a Collaborative Country, such other amounts as
specified in Section 3 of Article VI of the Agreement
Between Genentech, Inc. and F. Hoffmann-La Roche Ltd
Regarding the Commercialization of Genentech's Products
in the Roche Territory; or
(2) in the case of Commercial Requirements for use
in a ROW country, such other amounts as specified in
Section 3 of Article VI of the Agreement Between
Genentech, Inc. and F. Hoffmann-La Roche Ltd Regarding
the Commercialization of Genentech's Products in the
Roche Territory."
(e) In light of the changed marketing arrangement for DNase and to
extend Genentech Biopharmaceutical Limited's supply obligation to
reflect such change, Section 1 of Article IV is stricken in its entirety
and a new Section 1 is inserted in lieu thereof:
"1. Term. (a) This Agreement shall enter into force and effect
as of February 11, 1992.
(b) The term of Genentech Biopharmaceutical Limited's
obligation to supply ROCHE with Product and ROCHE's obligation
to purchase Product from Genentech Biopharmaceutical Limited
for use in each of the Collaborative Countries and ROW
Countries shall continue only for so long as ROCHE is
obligated to pay royalties under Section 3 of Article VI of
the Agreement Between Genentech, Inc and F. Hoffmann-La Roche
Ltd Regarding the Commercialization of Genentech's Products in
the Roche Territory; provided, however, that when such term
ends with respect to a Collaborative or ROW Country, ROCHE and
Genentech Biopharmaceutical Limited shall discuss in good
faith terms and conditions for a continuing supply of Product
from Genentech Biopharmaceutical Limited to ROCHE at a world
market price for use and sale in the Roche Territory.".
6. Supply of Scios Product. If ROCHE exercises its option for Scios
Product under Section 2 of Article II of this Agreement, Scios Product
will be supplied by Scios Nova (or a third party contractor of Scios
Nova) to ROCHE, and ROCHE agrees to purchase such Product from Scios
Nova (or a third party contractor of Scios Nova), under the terms and
conditions specified in the Scios Nova Agreement and such other terms
and conditions as may be agreed to by GENENTECH and Scios Nova in a
supply agreement yet to be negotiated. In the event that ROCHE has
exercised its option for a license for the Scios Product prior to the
negotiation and execution of such supply agreement, GENENTECH shall keep
ROCHE fully informed of the negotiations regarding such supply agreement
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and shall invite a representative of ROCHE to participate in such
discussions.
7. Supply of IDEC Product. If ROCHE exercises its option for IDEC Product
under Section 2 of Article II of this Agreement, IDEC Product will be
supplied in a manner consistent with the IDEC Agreement.
8. Supply of In-Licensed Product. If ROCHE exercises its option for a
license for an In-Licensed Product under Section 2 of Article II of this
Agreement and if the terms and conditions of the agreement between
GENENTECH and the licensor covering the manufacture and supply of such
In-Licensed Product provide that such licensor (or a third party
contractor of such licensor) will be responsible for the manufacture and
supply of such In-Licensed Product, then such In-Licensed Product will
be supplied by such licensor (or a third party contractor of such
licensor) to ROCHE, and ROCHE agrees to purchase such In-Licensed
Product from such licensor (or a third party contractor of such
licensor) under the terms and conditions specified in the agreement
between GENENTECH and the licensor. In the event that ROCHE has
exercised its option for such In-Licensed Product and a supply agreement
has yet to be negotiated between GENENTECH and the licensor of such In-
Licensed Product, GENENTECH shall keep ROCHE fully informed of the
negotiations regarding such supply agreement and shall invite a
representative of ROCHE to participate in discussions regarding a supply
agreement.
9. Supply of Small Molecule Product. If ROCHE exercises its option for a
license for a Product under Section 2 of Article II of this Agreement
and if such Product is a Small Molecule Product, ROCHE shall be
responsible for the manufacture and supply of GENENTECH's Clinical
Requirements and Commercial Requirements of such Small Molecule Product.
In such case, the terms and conditions herein applicable to GENENTECH
when it is manufacturing and supplying Product to ROCHE shall be equally
applicable to ROCHE when it is manufacturing and supplying Small
Molecule Product to GENENTECH including, without limitation, those terms
and conditions set forth in Sections 2, 3, 4, 9 and 10 of this Article
and the Section 1 of Article VI.
10. Manufacturing Process and Facilities.
(a) Except as provided in Sections 6, 7, 8 and 9 of this Article,
GENENTECH shall be solely responsible for the development of a
manufacturing process and facilities for Products for which ROCHE has a
license except Small Molecule Products. The fully burdened costs
associated with the development of a manufacturing process specifically
for such Product shall be considered part of the Development Costs and
shall be shared as set forth in Section 3 of the Financial Appendix.
(b) ROCHE shall be solely responsible for the development of a
manufacturing process and facilities for Small Molecule Products for
which ROCHE has a license. The fully burdened costs associated with the
development of a manufacturing process specifically for such Small
Molecule Product shall be shared by the Parties in proportion to their
expected share of the worldwide market, in terms of revenues, for the
Small Molecule Product for their Territory. For example, if GENENTECH's
expected proportionate share in terms of revenues of the worldwide
market is 33%, it shall bear 33% of the expense of developing a
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manufacturing process for that Small Molecule Product.
11. Additional Capital Requirements. Except as provided in Sections 6, 7
and 8 of this Article, if GENENTECH or ROCHE determines that additional
dedicated manufacturing equipment, expansion or adaption of the then
existing manufacturing facilities or manufacturing equipment, or
construction of an additional manufacturing facility is needed to
manufacture a Product to meet Clinical Requirements or Commercial
Requirements for the other Party as provided herein, the manufacturing
Party shall be solely responsible for the capital costs associated with
such project.
12. Term of Supply Obligation. Except as provided in Sections 5, 6, 7 and 8
of this Article, each Party's obligation to provide the other Party with
Product for use and sale in that Party's Territory shall continue only
for so long as that Party is obligated to pay royalties hereunder for
such Product. Thereafter ROCHE and GENENTECH shall discuss in good
faith terms and conditions for a continuing supply of such Product from
the manufacturing Party to other Party at a mutually agreeable market
price for use and sale in that Party's Territory.
13. ROCHE Right to Manufacture. Notwithstanding anything to the contrary in
this Agreement, and subject to the provisions relating to Costs of Idle
Capacity in the Financial Appendix, ROCHE shall have the right to
manufacture Bulk Product or Vialed Product (i) if ROCHE can demonstrate
that it is able to manufacture Bulk Product or Vialed Product at a lower
price than the supply price of GENENTECH, or (ii) if GENENTECH is not
able to, or it is foreseeable that GENENTECH will not be in a position
to, supply Roche's Commercial Requirements in the Roche Territory, or
(iii) if GENENTECH intends to have a third party toll manufacture Bulk
Product or Vialed Product. In such case and if ROCHE so requests,
GENENTECH shall provide ROCHE with all information and, at Roche's
expense, support needed to enable ROCHE to manufacture Bulk Product or
Vialed Product for use and sale in the Roche Territory and GENENTECH
shall grant ROCHE the respective licenses necessary for ROCHE to effect
its rights hereunder.
ARTICLE VI - PAYMENTS, MARGINS AND ROYALTIES
1. Payment for Product Requirements.
(a) Except for IDEC Product and Scios Product, unless the terms and
conditions applicable to an In-Licensed Product provide otherwise, all
Clinical Requirements shall be supplied by one Party to the other at the
manufacturing Party's Fully Burdened Manufacturing Cost.
(b) Except for IDEC Product and Scios Product, unless the terms and
conditions applicable to an In-Licensed Product provide otherwise, all
Commercial Requirements in the form of Vialed Product shall be supplied
by GENENTECH to ROCHE at GENENTECH's Fully Burdened Manufacturing Cost
plus a margin of twenty (20%) on such Cost. Except for IDEC Product and
Scios Product, unless the terms and conditions applicable to an In-
Licensed Product provide otherwise, if ROCHE is producing Vialed Product
pursuant to the licenses granted in Sections 1 and 3 of Article II, then
Bulk Product, necessary for the manufacture of Vialed Product and
Finished Product for Commercial Requirements outside the United States,
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shall be supplied by GENENTECH to ROCHE at GENENTECH's Fully Burdened
Manufacturing Cost plus a margin of twenty (20%) on such Cost.
2. Invoices and Method of Payment of GENENTECH's Fully Burdened
Manufacturing Cost and Margin. GENENTECH shall invoice ROCHE for each
shipment of Bulk Product or Vialed Product, as the case may be, and
ROCHE shall pay such invoice on the terms and conditions set forth in
the Financial Appendix.
3. Royalties on Sale of DNase.
(a) ROCHE shall pay GENENTECH a royalty of twenty percent (20%) on
Net Sales of DNase in each of the Collaborative Countries and Canada.
(b) ROCHE shall pay GENENTECH a royalty of twelve and one-half
percent (12.5%) on the first $100 million in aggregate Net Sales of
DNase in countries other than the Collaborative Countries and Canada
and thereafter a royalty of fifteen percent (15%) on aggregate Net Sales
of DNase in such countries in excess of $100 million.
(c) The payment of royalties on DNase Net Sales in each country of
the Roche Territory in (a) and (b) above shall continue until the latter
to occur of (i) the last expiration of a Valid Claim of a GENENTECH
Patent which the sale of that Product would infringe in that country but
for the license granted herein or (ii) for a period of 25 years from the
date of First Commercial Introduction in that country.
4. Royalties and Other Payments on Sale of Canada Products.
(a) ROCHE shall pay GENENTECH a royalty of twenty percent (20%) on
Net Sales of each Canada Product. The payment of royalties on each
Canada Product's Net Sales shall continue until the latter to occur of
(i) the last expiration of a Valid Claim of a GENENTECH Patent which the
sale of that Product would infringe in that country but for the license
granted herein or (ii) a period of 25 years from the Effective Date.
(b) For each annual increase in Net Sales of Activase in Canada in
excess of 110% of 1994 Net Sales of Activase in Canada, ROCHE agrees to
make an additional payment to GENENTECH of ten percent (10%) of Net
Sales of Activase in Canada for that year in excess of 1994 Net Sales.
In no event shall the total of such annual payments exceed $27 million.
5. Royalties on Sale of Genentech Products. Except for Genentech Products
for which ROCHE exercises its option granted under Section 2(b) of
Article II after the Phase III Completion Date, ROCHE shall pay
GENENTECH a royalty of twelve and one-half percent (12.5%) on the first
$100 million in aggregate Net Sales of each Genentech Product in the
Roche Territory and a royalty of fifteen percent (15%) on aggregate Net
Sales of such Genentech Product in excess of $100 million. For
Genentech Products for which ROCHE exercises its option granted under
Section 2(b) of Article II after the Phase III Completion Date, ROCHE
shall pay GENENTECH a royalty of fifteen percent (15%) on all Net Sales
of such Genentech Product. If ROCHE has paid an Option Extension Fee
for a Product, the amount of $5,000,000 shall be credited against
royalties payable GENENTECH by ROCHE in the first calendar year of sales
by ROCHE in which Net Sales of that product exceed $100 million U.S.
The payment of royalties on each GENENTECH Product's Net Sales in each
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country of the Roche Territory shall continue until the latter to occur
of (i) the last expiration of a Valid Claim of a GENENTECH Patent which
the sale of that Product would infringe in that country but for the
license granted herein or (ii) a period of 25 years from the date of
First Commercial Introduction in that country.
6. Royalties and Other Payments on Sale of Scios Product.
(a) ROCHE shall pay GENENTECH a royalty of twenty percent (20%) on
annual Net Sales of Scios Product in each country of the Roche Territory
for so long as GENENTECH is paying a royalty to Scios Nova under the
Scios Nova Agreement in that country. Thereafter, ROCHE shall pay
GENENTECH a royalty on Net Sales in that country of ten percent (10%) or
aggregate annual Net Sales of up to and including $150 million in all
countries in that year and of eight percent (8%) for aggregate annual
Net Sales of over $150 million in all countries in that year, and such
royalties shall be payable with respect to each country until the latter
to occur of (i) the last expiration of a Valid Claim of a GENENTECH
Patent which the sale of that Product would infringe in that country but
for the license granted herein or (ii) a period of 25 years from the
date of First Commercial Introduction in that country.
(b) If ROCHE exercises its option pursuant to Sections 2 and 3 of
Article II, within thirty (30) days thereafter ROCHE shall pay GENENTECH
a one time fee of $25,000,000 in lieu of paying one-half-of the
Development Costs for Scios Product. Such amount assumes that a second
Phase III Trial will be required for Registration of Scios Product in
the United States; if only one Phase III Trial is necessary, the Parties
will negotiate a higher one time fee. GENENTECH is obligated to make
certain one time milestone payments to Scios Nova, as set forth in the
Scios Nova Agreement, upon Net Sales of $150 million in the Licensed
Territory in any 12 month period (either $15 million or $7.5 million) or
upon Regulatory Approval in Japan (either $5 million or $2.5 million) as
those terms are used in the Scios Nova Agreement. ROCHE shall promptly
reimburse GENENTECH for each such milestone GENENTECH pays to Scios
Nova.
(c) With respect to Canada, the Scios Nova Agreement provides that
GENENTECH and Scios Nova will copromote Scios Product as part of a
copromotion arrangement for the United States and Canada and that
GENENTECH and Scios Nova will share Operating Profits and Losses on the
sale of Scios Product as part of an arrangement to share Operating
Profits and Losses for the United States and Canada. ROCHE's rights
with respect to Scios Product are subject to such obligations regarding
copromotion in Canada and the sharing of Operating Profits and Losses
with respect to Canada.
7. Royalties and Other Payments on Sale of IDEC Product.
(a) ROCHE shall pay GENENTECH a royalty of twenty percent (20%) on
Net Sales of IDEC Product in each country of the Roche Territory for so
long as GENENTECH is paying a royalty to IDEC under the IDEC Agreement
in that country. Thereafter, ROCHE shall pay GENENTECH a royalty on Net
Sales in that country of ten percent (10%) for aggregate annual Net
Sales of up to and including $75 million in all countries in that year
and eight percent (8%) for aggregate annual Net Sales over $75 million
in all countries in that year, and such royalties shall be payable with
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respect to each country until the latter to occur of (i) the last
expiration of a Valid Claim of a GENENTECH Patent which the sale of that
Product would infringe in that country but for the license granted
herein or (ii) a period of 25 years from the date of First Commercial
Introduction in that country.
(b) If ROCHE exercises its option pursuant to Sections 2 and 3 of
Article II, within thirty (30) days thereafter ROCHE shall pay GENENTECH
a one time fee of $10 million in lieu of paying one-half of the
Development Costs for IDEC Product incurred as of the Effective Date.
Development Costs incurred after the Effective Date shall be subject to
Section 2 of Article IV. In addition, GENENTECH is obligated to make
certain one time milestone payments to IDEC, as set forth in the IDEC
Agreement, upon Regulatory Approval in the First Major European Country
($10 million) and upon the Patent Milestone Event ($2.5 million) as
those terms are used in the IDEC Agreement. ROCHE shall promptly
reimburse GENENTECH for each such milestone which GENENTECH pays to
IDEC.
(c) GENENTECH has an option for a co-exclusive license for rights
to IDEC Product in Asia for a payment of $2.5 million if such co-
exclusive license becomes available to GENENTECH. If ROCHE exercises
its option for a license for the IDEC Product under Section 2 of Article
II and if ROCHE wishes GENENTECH to exercise the option for a co-
exclusive license to IDEC Product in Asia should such license become
available to GENENTECH, then ROCHE shall provide written notice of such
to GENENTECH at the time of exercise of its option and pay $2.5 million
to GENENTECH in conjunction therewith.
(d) With respect to Canada, the IDEC Agreement provides that
GENENTECH and IDEC will copromote IDEC Product as part of a copromotion
arrangement for the United States and Canada and that GENENTECH and IDEC
will share Operating Profits and Losses on the sale of IDEC Product as
part of an arrangement to share Operating Profits and Losses for the
United States and Canada. ROCHE's rights with respect to IDEC Product
are subject to such obligations regarding copromotion in Canada and the
sharing of Operating Profits and Losses with respect to Canada.
8. Royalties and Other Payments on Sale of In-Licensed Product.
(a) If ROCHE exercises its option under Article II for an In-
Licensed Product, the Parties will negotiate mutually agreeable
financial terms for payments by ROCHE to GENENTECH.
(b) In general, if ROCHE exercises its option under Article II for
an In-Licensed Product, ROCHE agrees to pay to GENENTECH a license fee
or similar acquisition fee for rights in the Roche Territory and any
milestone or similar payments related to the achievement of progress
either in development, registration or sales of an In-Licensed Product
or for other achievements in the Roche Territory.
(c) The Parties acknowledge that the specific terms and conditions
related to an In-Licensed Product cannot be anticipated and agree to
negotiate in good faith the allocation of responsibility for such terms
and conditions in a fair manner reflecting the benefit to be received by
each from the In-Licensed Product.
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9. Calculation of Aggregate Net Sales. The calculation of the aggregate
Net Sales for determination of the applicable royalty percentage shall
be that set forth in the Financial Appendix.
10. Timing of Royalty Payments. Payment of amounts specified in this
Article shall be made within ninety (90) days of the end of each
calendar quarter in which the sale was made except where payments are
made to GENENTECH in consideration of royalty payments to be made to
Scios Nova or IDEC in which case those payments shall be made within
sixty (60) days of the end of each calendar quarter. For purposes of
determining when a sale of a Product occurs, the sale shall be deemed to
occur when an independent third party is invoiced for the Product. Any
such payment that is not paid on or before the date such payment is due
under this Agreement shall bear interest, to the extent permitted by
applicable law, at the LIBOR rate of interest as reported by Data Stream
from time to time, calculated on the number of days such payment is
delinquent. ROCHE shall make all payments hereunder by bank wire
transfer in immediately available funds to such account as GENENTECH
shall designate before such payment is due, free and clear of any taxes,
duties, levies, fees or charges, except for withholding taxes due on
behalf of GENENTECH (to the extent applicable). ROCHE shall make any
withholding payments due on behalf of GENENTECH and shall promptly
provide GENENTECH with written documentation of any such payment
sufficient to satisfy the reasonable requirements of an appropriate tax
authority with respect to an application by GENENTECH for a foreign tax
credit for such payment or for similar treatment. At the time of
remittance of each payment described in this Article, ROCHE shall
provide GENENTECH with a statement summarizing the Net Sales of the
Product in each of country outside the United States in the reporting
currency of each such country and the rate used to convert from each
such country's currency to Swiss Francs and, in the case of the Scios
Agreement and IDEC Agreement, with such other information as those
Agreements require of GENENTECH.
11. Restrictions on Transfer of Funds.
(a) If ROCHE ships Product into a country outside the United States
for sale in that country and, at the time of shipment, such country has
legal restrictions on the transfer of funds which prevent the prompt
remittance of the part or all of the amount described in this Article,
ROCHE shall be obligated to pay such amounts in immediately available
funds to such account as GENENTECH shall designate.
(b) If ROCHE ships Product into a country outside the United States
for sale in that country and such country subsequently imposes legal
restrictions on the transfer of funds which prevents the prompt
remittance of part or all of the amount described in this Article with
respect to that shipment of the Product in that country, ROCHE shall be
obligated to --
(i) pay such portion of such amount as permitted by the law
of such country in immediately available funds to such account as
GENENTECH shall designate, and
(ii) pay the remainder of such amount to such account as
GENENTECH shall designate in a bank in such country.
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In such event, the Parties shall discuss in good faith the best means of
utilizing the funds on deposit in such country. Shipments of the
Product into such country after the imposition of legal restrictions on
the transfer of funds shall be subject to subsection (a) of this
Section.
12. Records Regarding Royalties. ROCHE agrees to keep for at least three
(3) years, records of all sales of Product on a country-by-country basis
in sufficient detail to permit GENENTECH to confirm the accuracy of the
ROCHE's calculations with respect to payment of the amounts described in
this Article. Once a year, at the request and the expense of GENENTECH
and upon at least five (5) days' prior written notice, ROCHE shall
permit its officially appointed world-wide auditor to examine its
records in a manner sufficient to report to GENENTECH on the accuracy of
ROCHE's calculations. Results of any such examination shall be made
available to both Parties. If such examination reveals an underpayment
of the amounts described in this Article by five percent (5%) or more,
ROCHE shall pay all costs of such examination. In the event such
examination concludes that additional amounts are owed, the additional
amounts shall be paid within thirty (30) days of the date GENENTECH
delivers to ROCHE such accountant's written report so concluding. In
the event such examination concludes that there has been an overpayment
with respect to such amounts, the excess shall be credited to ROCHE
against future payment of the amounts described in this Article. This
Section shall survive any termination of royalty payments for a
particular country for a period of six (6) years.
13. Royalty for Use of Trademark. At the end of the term for the payment of
royalties as defined in this Article, ROCHE shall pay to GENENTECH a
royalty for the use of each Trademark in each country in the Roche
Territory at a rate of two percent (2%) of Net Sales by ROCHE in such
country of the Product represented by the Trademark for so long as the
Trademark is used.
14. Generic Competition. If there is one or more products generically
equivalent to a Product which compete with that Product in a country so
that the generically equivalent products have a market share in that
country of at least twenty-five percent (25%) of the market (in units)
for the Product, GENENTECH and ROCHE shall negotiate in good faith a
modification to the royalty term or rate so that the royalty payable by
ROCHE in that case is significantly more economically viable.
15. Royalty Term if ROCHE Becomes Minority Shareholder. Notwithstanding
anything to the contrary herein, if ROCHE's equity ownership of
GENENTECH securities is less than fifty percent (50%) of all such
securities then outstanding, the term for the payment of royalties for a
Product hereunder in each country shall be reduced to the latter to
occur of (i) the last expiration of a Valid Claim of a GENENTECH Patent
which the sale of that Product would infringe in that country but for
the license granted herein or (ii) a period of ten (10) years from the
date of First Commercial Introduction in that country. If at any time
ROCHE's equity ownership of GENENTECH securities becomes less than fifty
percent (50%) (the "Divestiture Date"), the term for the payment of
royalties specified above shall become immediately applicable. If
because of the immediate applicability of the shortened term for the
payment of royalties for a Product, royalties would no longer be payable
in a country, ROCHE shall continue to pay royalties on that Product in
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that country over the following period in a decreasing manner as
follows:
Period % of applicable royalty
From Divestiture Date until 100
end of that calendar year
First full calendar year following 80
Divestiture Date
Second full calendar year following 60
Divestiture Date
Third full calendar year following 40
Divestiture Date
Fourth full calendar year following 20
Divestiture Date
Fifth full calendar year following 0
Divestiture Date and thereafter
Thereafter, ROCHE shall have a fully paid-up license for such Product.
ARTICLE VII - TRANSITION PROVISIONS
1. General. The Parties intend to effect a transfer of the operations of
Genentech Canada Ltd, Genentech Europe Limited and Genentech Ltd.
(Japan) to ROCHE in the manner described above and in the subsequent
provisions of this Article VII. The Parties acknowledge that a number
of actions must be taken to effect such transfers in an orderly manner
so as to minimize disruption to those operations and attendant costs and
maximize revenue receipt where such operations are generating or
involved in generating revenue. The Parties acknowledge that while they
will act expeditiously to take all such appropriate actions, a
substantial period is likely to be required to complete all of such
actions. Therefore, the Parties agree to effect such a transfer as
quickly as possible but no later than January 1, 1996 and the provisions
relating to such a transfer, including license grants, supply
obligation, like relating to Canada, shall be effective when such
transfer is completed and at a date to be mutually agreed to.
2. Personnel of Genentech Canada, Inc., Genentech Europe Limited and
Genentech Ltd. (Japan). The Parties shall discuss and mutually agree
with respect to the continuing status of the employees of Genentech
Canada, Inc., Genentech Europe Limited and Genentech Ltd. (Japan).
3. Records and Property Leases.
(a) Within ninety (90) days of the Effective Date of this
Agreement, copies of the records of Genentech Canada, Inc., Genentech
Europe Limited and Genentech Ltd. (Japan) relating to their operations
and needed by ROCHE to assume those operations shall be made available
to ROCHE.
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(b) Within ninety (90) days of the Effective Date of this
Agreement, information regarding the real estate property leases of
Genentech Canada, Inc., Genentech Europe Limited and Genentech Ltd.
(Japan) shall be made available to ROCHE and such leases shall promptly
be assumed by ROCHE as well as any other liabilities of these entities
which have arisen in the ordinary course of business except for a line
of credit to Genentech Canada, Inc. used to purchase Activase rights.
(c) Within ninety (90) days of the Effective Date of this
Agreement, information regarding office equipment and the like to ROCHE.
Within thirty (30) days after such information is made available ROCHE,
ROCHE shall advise GENENTECH whether it wishes to purchase any or all of
such equipment or the like.
4. Transfer of Dossier and Registration. The Dossiers for Canada Product,
including all data, information, results, and documents with respect to
pertinent Registrations in Canada, shall be transferred by GENENTECH to
ROCHE, and ROCHE shall be entitled to use the Dossiers and all such
data, information, results, and documents for its own purposes
consistent with the terms of this Agreement. GENENTECH shall cooperate
with ROCHE in a timely manner and in every proper way to effect the
transfer of the pertinent Registration or Registrations exclusively to
ROCHE and GENENTECH shall seek, and use its best efforts to obtain, the
necessary authorization from the pertinent governmental authorities
applicable to such transfer.
ARTICLE IX - PATENTS, INVENTIONS AND TRADEMARKS
1. Sole Inventions. The Parties recognize that either Party may
independently and separately make inventions in the course of this
Agreement relating to a Product, its administration, formulation or
clinical use. In such event, the Party making the invention shall be
the sole owner of that invention and of any patent applications and
patents thereon (including inventor's certificates) and shall be solely
responsible for the filing, prosecution and maintenance of all such
patent applications and patents and shall have sole authority to decide
what actions in that regard it shall take. If the other Party wishes to
have the Party owning the invention undertake actions which the Party
owning the invention does not routinely undertake or which it has
decided not to undertake, the other Party may request such Party to
undertake such actions and if the other Party does undertake such
actions, it shall be reimbursed for all internal and external costs it
incurs relating to such actions.
2. Joint Inventions. Any inventions relating to a Product, its
administration, formulation or clinical use arising from the Parties'
efforts under this Agreement that are jointly made by both Parties
(i.e., an invention in which one or more inventors from each Party,
including individuals normally obliged to assign an invention to a
Party, have made an inventive contribution as determined by United
States Patent Law), and any patent applications and patents thereon,
shall be jointly owned by the Parties. With respect to any such joint
invention, the Parties intend that after consultation with each other,
the filing, prosecution and maintenance of any patent applications
thereon will be under the control of the Party from whom the majority of
the data underlying such patent application arises (the "Controlling
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Party"), and the Controlling Party shall have the right (but not the
obligation) to undertake such filings, prosecutions and maintenance at
its sole expense, provided that: (a) the Controlling Party notifies the
non-Controlling Party within one (1) month after the filing of any
priority patent application by the Controlling Party; (b) the
Controlling Party informs the non-Controlling Party within eight (8)
months from the filing of the priority application whether and in which
countries it intends to file convention applications; (c) the
Controlling Party provides the non-Controlling Party promptly with
copies of all communications received from or filed in patent offices
with respect to such filings; and (d) the Controlling Party provides the
non-Controlling Party a reasonable time prior to taking or failing to
take action that would affect the scope or validity of rights under any
patent applications or patents (including but not limited to
substantially narrowing or canceling any claim, abandoning any patent or
not filing or perfecting the filing of any patent application in any
country), with notice of such proposed action or inaction so that the
non-Controlling Party has a reasonable opportunity to review and make
comments. In the event that the Controlling Party breaches the
foregoing obligations regarding updating and consultation, and such
breach is not cured with thirty (30) days of a written notice from the
non-Controlling Party to the Controlling Party describing such breach,
or in the event that the Controlling Party fails to undertake the filing
of a patent application within ninety (90) days of a written notice by
the non-Controlling Party to the Controlling Party that the non-
Controlling Party believes filing of such an application is appropriate,
the non-Controlling Party may undertake such filing, prosecution and
maintenance at its sole expense, in which case the Controlling Party
shall assign all its rights to such invention to the non-Controlling
Party, and any patent application and subsequently issued patent thereon
shall be owned solely by the non-Controlling Party.
3. Patent Infringement.
(a) In the event that GENENTECH or ROCHE become aware of any
infringement by a third party of any GENENTECH Patents in the Roche
Territory, whether solely or jointly held, each Party shall inform the
other in writing of all available evidence and details available
concerning such infringement. Before taking any action, the Parties
shall consult with each other as to the best manner in which to proceed.
Either Party which is the sole owner of a Patent shall have the sole
right but not the obligation to bring, defend, and maintain any
appropriate suit or action or to control the conduct thereof against the
infringer. However, if the Parties agree to equally share all expenses,
they shall also share the recoveries due to any such action. If the
Parties do not agree to share all expenses, the paying Party will
receive all recoveries due to any such action. If one Party requests
the other Party to join in such suit or action, the other Party shall
cooperate and execute all papers and perform such other acts as may be
reasonably required.
(b) In the event that GENENTECH and/or ROCHE are sued or threatened
with suit in the Roche Territory, by a third party who claims that the
manufacture, use or sale of a Product is an infringement of one or more
claims of a patent owned or controlled by the third party, GENENTECH and
ROCHE shall each pay its own costs in defending such suit or threatened
suit. If the settlement of a lawsuit or threatened lawsuit or other
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action or a judgment arising out of a lawsuit requires any payments to a
third party or license from a third party in order to manufacture, use
or sell Product in a country as a result of a dominating third party
patent right, GENENTECH agrees to reduce the royalty for that Product in
that country specified in this Agreement by one-half of the amount of
any such payments, up to a maximum reduction of two percent (2%) of the
royalty due on Net Sales of that Product in that country. In such case,
there shall be no additional reduction in royalties on Net Sales of that
Product for that country because of dominating third party patent rights.
4. Third Party Patents.
(a) If either Party becomes aware of any patent or other
appropriate intellectual property belonging to a third party which the
Party reasonably believes that without a license thereto GENENTECH would
infringe by virtue of its obligations under Article IV to manufacture
and supply both clinical and commercial needs for Bulk Product or Vialed
Product in the Roche Territory, the Party shall notify the other Party
of such. The Parties shall thereafter discuss a means of resolving such
potential infringement including taking a license to such patent or
other intellectual property. If as a result of an agreement between the
parties, GENENTECH acquires a license to such patent or other
intellectual property, the associated intellectual property acquisition
and licensing costs shall be deemed to be part of the GENENTECH's Fully
Burdened Manufacturing Cost.
(b) If GENENTECH insists that such a license is necessary but ROCHE
does not agree, or if ROCHE is not willing to agree to terms for such a
license that are acceptable to the third party patent or intellectual
property owner, then ROCHE shall defend, indemnify and hold harmless
GENENTECH from and against all third party costs, claims, suits,
expenses (including reasonable attorney's fees) and damages arising out
of or resulting from any infringement by GENENTECH of such patent or
intellectual property which covers the manufacture of the Product.
(c) If ROCHE insists that such a license is necessary but GENENTECH
does not agree, or if GENENTECH is not willing to agree to terms for
such a license that are acceptable to the third party patent or
intellectual property owner, then GENENTECH shall defend, indemnify and
hold harmless ROCHE from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) and damages
arising out of or resulting from any infringement by ROCHE of such
patent or intellectual property which covers the manufacture of the
Product.
5. Reporting on Patent Status. GENENTECH shall keep ROCHE informed of its
efforts to secure one or more Patents its owns in the Roche Territory
with one or more valid claims covering as compositions
(a) Canada Products and DNase, and
(b) Genentech Products, IDEC Product, Scios Product and In-Licensed
Product for which ROCHE has exercised its option under Section 2 of
Article II,
or its use or sale in the Roche Territory. Such reports shall be made
at the end of each year beginning in the year of execution of this
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Agreement and shall include the expiration date of any such patent
which.
6. Trademark. GENENTECH will register in each major country in the Roche
Territory, at its own expense, at least one Trademark for each Product
for which ROCHE has exercised its option under Section 2 of Article II
and will maintain it in force. GENENTECH shall monitor for trademarks
that may infringe such Trademark at its sole expense. ROCHE shall
inform GENENTECH of any infringing trademarks in major countries in the
Roche Territory of which ROCHE becomes aware. GENENTECH shall hold
ROCHE harmless from all loss, expense or damage such as interruption and
loss of sales, destruction and reprinting of packaging and promotional
material, damages to the adverse party and other similar consequences if
a third party succeeds in enjoining ROCHE from distributing and
marketing a Product outside the United States to the extent that such
loss, expense or damage results from the use of GENENTECH's Trademark.
In such event, ROCHE shall make best efforts to mitigate any losses both
prospectively and subsequently.
ARTICLE X - CONFIDENTIALITY AND PUBLICATIONS
1. Confidential Information. The Parties acknowledge that during the
course of this Agreement they may receive from each other information
which is proprietary and confidential and of significant commercial
value to the disclosing Party. Such information shall specifically
include all data provided to ROCHE for its evaluation in connection the
exercise of any option under Section 2 of Article II. Such information
as well as any Know-How, so long as such Know-How is not generally
ascertainable from publicly available information, to the extent
provided by the other Party, shall be deemed "Information" as that term
is used in the Mutual Confidentiality Agreement entered into as of
September 8, 1990 between Roche Holding Ltd and GENENTECH, Inc. (the
"Mutual Confidentiality Agreement"), and the Parties agree that such
Information shall be subject to the terms and provisions of the Mutual
Confidentiality Agreement.
2. Publications. Notwithstanding Section 1 of this Article, ROCHE shall be
free to publish the results of the development activities hereunder to
the extent that such publication will not result in the disclosure of
Information of GENENTECH. ROCHE shall submit to GENENTECH any such
proposed publication at least thirty (30) days in advance to allow
GENENTECH to review such planned publication. GENENTECH will promptly
report any decisions regarding the existence of patentable inventions,
and should any patentable inventions be identified, ROCHE agrees to
delay disclosure for a reasonable time period to allow filing of such
patent applications. In addition, GENENTECH shall have the authority to
require deletion from any such planned publication of any Information of
GENENTECH.
3. Restrictions on Transfer of Proprietary Materials. Each Party agrees,
with respect to any proprietary materials, substances, reagents or the
like (except Product) received from the other Party ("Materials") that
such materials shall be subject to the provisions of Mutual Agreement
for Supply of Research Material entered into between GENENTECH Inc. and
Roche Holding Ltd as of July 17, 1991.
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ARTICLE XI - LIABILITY
1. No Liability. Neither Party shall be liable to the other Party for
indirect, incidental or consequential damages arising out of the terms
and conditions of this Agreement or with respect to that Party's
performance hereunder or lack thereof.
2. Indemnification by ROCHE. ROCHE shall defend, indemnify and hold
harmless GENENTECH from and against all third party costs, claims,
suits, expenses (including reasonable attorneys' fees), assessments,
fines and damages (collectively "CLAIMS") arising out of or resulting
from ROCHE's manufacturing (if any), formulating (if any), filling (if
any), finishing, packaging, labeling, distributing, selling or using
after title to a Product has passed to ROCHE from GENENTECH. The
foregoing indemnification shall not extend to any claims which arise or
result from any defect in GENENTECH's manufacture, formulation or fill
of the Product. The foregoing indemnification shall be conditioned upon
GENENTECH: (a) providing written notice to ROCHE within twenty (20) days
after GENENTECH has been given written notice of such Claim; (b)
permitting ROCHE the opportunity to assume full responsibility (at
ROCHE's expenses) for the investigation and defense of any such Claim;
and (c) not settling or compromising any such Claim without ROCHE's
prior written consent.
3. Indemnification by GENENTECH. GENENTECH shall defend and indemnify and
hold harmless ROCHE from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) assessments,
fines and damages (collectively "Claims") arising out of or resulting
from its manufacture, formulating, filling and testing prior to passage
of title to the Product to ROCHE from GENENTECH and which gives rise to
a defect which could not normally be detected by adequate quality
control testing on the part of ROCHE. The foregoing indemnification
shall not extend to any claims which arise or result from any defect in
ROCHE's manufacture of the Product (if such manufacture occurs). The
foregoing indemnification shall be conditioned upon ROCHE: (a) providing
written notice to GENENTECH within twenty (20) days after ROCHE has been
given written notice of such Claim, (b) permitting GENENTECH the
opportunity to assume full responsibility (at GENENTECH's expenses) for
the investigation and defense of any such Claim; and (c) not settling or
compromising any such Claim without GENENTECH's prior written consent.
ARTICLE XII - TERM AND TERMINATION
1. Term. This Agreement shall enter into force and effect as of the
Effective Date. This Agreement shall expire as to a Product when
royalties are no longer payable by ROCHE to GENENTECH with respect to
such Product unless the Parties mutually agree to extend this Agreement
with respect to such Product. Thereafter, ROCHE shall have a fully
paid-up license for such Product.
2. Termination by ROCHE.
(a) ROCHE shall have the right to terminate its license for a
Product in the Roche Territory hereunder at any time upon thirty (30)
days prior written notice to GENENTECH. If ROCHE terminates its license
for a Product in the Roche Territory for other than safety reasons,
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ROCHE shall continue to remain liable for all of its obligations with
respect to said Product, including its obligations with respect to
payment of its portion of Global Development Costs, for a period of
twelve (12) months from the date of the termination notice or six (6)
months from the date of termination notice in the specific circumstance
where GENENTECH or ROCHE has completed at least one Phase III Trial for
that Product and the results of that Trial, either alone or in
conjunction with any other Phase III Trial involving the Product, are
insufficient to support a Registration of the Product in a country set
forth on Appendix B, or if results of other preclinical or clinical
trials establish that further development would not provide data
sufficient to support Registration of the Product in a country set forth
on Appendix B. If GENENTECH enters in a license agreement with a third
party with respect to such Product in the Roche Territory within twelve
(12) months from the date of termination notice, ROCHE shall be relieved
of its obligations to pay its share of Global Development Costs during
that twelve month period to the extent the third party licensee is
obligated to pay those same costs. GENENTECH shall use diligent efforts
to have such costs borne by the third party licensee where it is
reasonable to do so.
(b) If ROCHE terminates its license for a Product in the Roche
Territory based on a good faith determination, after consultation with
appropriate regulatory authorities in the relevant country, that the
Product cannot be approved for sale in one or more major countries in
the Collaborative Countries because of issues related to the safety of
the Product. ROCHE shall continue to remain liable for all obligations
with respect to that Product to the extent they are incurred primarily
to support Registration of that Product, for a period not to exceed six
(6) months from the date of termination, in the Roche Territory. The
Parties agree to attempt to wind down such obligations and the
activities associated therewith as soon as possible after ROCHE has
terminated its license because of safety issues.
(c) If ROCHE terminates its license,
(i) all rights and licenses granted to ROCHE herein with
respect to such Product and supply obligations of GENENTECH
hereunder shall automatically terminate as of the date of
termination;
(ii) the transfer and assignment to GENENTECH or GENENTECH's
designee of the Dossier and the Registration and all associated
data, information, results and documents for such Product in the
Roche Territory shall be done promptly and GENENTECH shall
thereafter have an nonexclusive license thereto as well as to all
ROCHE Patents and Know-How related to such Product and generated by
ROCHE under this Agreement; and
(iii) the Parties shall discuss and agree on a transfer of
stocks of such Product held by ROCHE.
3. Termination by GENENTECH
(a) If ROCHE fails to exercise its "best efforts" to commercialize
a Product in a country in the Roche Territory, GENENTECH shall have the
right to request ROCHE to take remedial measures. If GENENTECH makes
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such a request and ROCHE thereafter does not exercise such "best
efforts" within a period of six (6) months after GENENTECH has requested
ROCHE to take remedial measures or if ROCHE fails to meet the
requirements of Article III, Section 6, then GENENTECH shall have the
right (x) to terminate ROCHE's license hereunder with respect to such
country if Registration for the Product has not been initiated or (y) to
convert the license to a nonexclusive one if Registration has been
initiated and
(i) all rights and licenses granted to ROCHE herein and
Product supply obligations of GENENTECH with respect to such
Product in such country shall automatically terminate as of the
date of termination;
(ii) the transfer and assignment to GENENTECH or GENENTECH's
designee of the Dossier and the Registration and all associated
data, information, results and documents for such Product in such
country shall be done promptly and GENENTECH shall thereafter have
an nonexclusive license thereto in such country as well as to all
ROCHE Patents and Know-how related to such Product and developed by
ROCHE under this Agreement; and
(iii) the Parties shall discuss and agree on a transfer of
stocks of such Product held by ROCHE with respect to such country.
4. Termination of Development/Commercialization.
(a) GENENTECH may terminate at any time its development and/or
commercialization of Product for which ROCHE has exercised its option
under Article II. If GENENTECH so terminates its development and/or
commercialization of a Product and if GENENTECH decides to enter into an
agreement with a third party with respect to rights to such Product in
the United States, the provisions of Section 3.07 of the Governance
Agreement shall apply. In such event, GENENTECH's obligation to
manufacture and supply Clinical Requirements or Commercial Requirements
of that Product to ROCHE shall terminate in the following manner:
(1) If GENENTECH terminates for reasons related to the safety
of the Product, such obligation shall terminate immediately.
(2) If GENENTECH terminates for reasons other than safety,
e.g., efficacy or cost effectiveness or the like, such obligation
shall continue until the earlier to occur of two (2) years from the
date of GENENTECH's notice to ROCHE of such termination or on the
date ROCHE advises GENENTECH that no such further supply is
required.
ROCHE thereafter shall have the royalty-free right and license to
produce and supply all of ROCHE's Clinical Requirements and Commercial
Requirements for use and sale in the Roche Territory. Upon such
termination by GENENTECH, it shall promptly transfer all of the
Manufacturing Technology for that Product to ROCHE.
(b) ROCHE may terminate at any time its development and/or
commercialization of a Small Molecule Product. In such event, ROCHE's
obligation to manufacture and supply Clinical Requirements or Commercial
Requirements of that Product to GENENTECH shall terminate in the
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following manner:
(1) If ROCHE terminates for reasons related to the safety of
the Product, such obligation shall terminate immediately.
(2) If ROCHE terminates for reasons other than safety, e.g.,
efficacy or cost effectiveness or the like, such obligation shall
continue until the earlier to occur of two (2) years from the date
of ROCHE's notice to GENENTECH of such termination or on the date
GENENTECH advises ROCHE that no such further supply is required.
GENENTECH shall thereafter have the royalty-free right and license to
produce and supply all of its Clinical Requirements and Commercial
Requirements for sale in the United States. Upon such termination by
ROCHE, it shall promptly transfer all of the Manufacturing Technology
for that Product to GENENTECH.
5. Termination for Breach. Except as provided in Section 3 of this
Article, either Party may terminate this Agreement upon the failure of
the other Party to comply with any of its material obligations contained
in this Agreement or in the Governance Agreement. Such termination
shall become effective at any time after providing sixty (60) days'
written notice by the non-breaching Party specifying the breach and its
intent to terminate the Agreement; provided that the breaching Party
shall have an opportunity to cure any defect or omission during such
sixty (60) day period. Should such cure be effected, such notice shall
be null and void. Any other provision of this Agreement notwithstanding,
termination of this Agreement for failure to comply with a material
obligation shall be without prejudice to --
(a) any remedies which either Party may then or thereafter have
hereunder or at law; and
(b) either Party's right to obtain performance of any obligations
provided for in this Agreement which survive termination by their terms
or by a fair interpretation of this Agreement.
6. Certain Proceedings. In the event any action or proceeding before any
court or governmental agency or other regulatory or administrative
agency or commission, by any governmental or other regulatory or
administrative agency or commission or by any other person, successfully
challenging this Agreement or the relations or actions of the Parties
contemplated hereby or otherwise materially and adversely affecting the
business or property (including the goodwill and business reputation and
character) of a Party hereto, the Parties shall discuss an appropriate
termination of this Agreement and the terms and conditions associated
with such termination.
7. Termination For Change in Ownership. If at any time during the term of
this Agreement, ROCHE's equity ownership of GENENTECH securities is less
than fifty percent (50%) of all such securities then outstanding,
ROCHE's right to exercise any unexercised options set forth in Article
II above shall terminate immediately.
8. Survival of Terms. The foregoing notwithstanding, the provisions of
Articles IX, X, XI, XII and XIII as well as any provisions which by
their specific language or context are intended to or can be fairly read
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to survive termination of this Agreement, shall survive any termination
of this Agreement for any reason.
ARTICLE XIII - MISCELLANEOUS
1. Disclaimer of Certain Warranties. Information, reagents and materials
(except Product) transferred from one Party to another in the course of
this Agreement are supplied "as is" without warranties, express or
implied, including any warranty of merchantability, title, freedom from
infringement or fitness for a particular use.
2. Entire Agreement, Amendment.
(a) Except as provided in subsection (b), this Agreement, as
amended, constitutes the entire agreement between the Parties with
respect to the subject matter hereof, supersedes all prior agreements,
understandings and communications, oral or written, relating to the
subject matter hereof (including but not limited to the minutes of the
meeting between ROCHE and GENENTECH in London of May 1, 1997 and the
letter agreement dated May 29, 1998, between ROCHE and GENENTECH with
respect to Xubix), and shall not be modified, altered or amended except
by mutual written agreement of the Parties.
(b) This Agreement shall not supersede the DNase Supply Agreement
except that the terms of such Agreement shall be expanded to include the
supply of DNase in Canada.
(c) This Agreement shall not supersede any terms of the IIbIIIa
Agreement unless specifically mentioned in Section 11 and 12 of Article
II.
3. Failure to Enforce. The failure by either Party at any time or for any
period of time to enforce any term or provision of this Agreement shall
not be construed as a waiver of such term or provision or of the right
of either Party to enforce each and every such term and provision.
4. Force Majeure. If either Party shall be delayed, interrupted in or
prevented from the performance of any obligation hereunder by reason of
Force Majeure including an act of God, fire, flood, war (declared or
undeclared), public disaster, strike or labor differences, governmental
enactment, rule or regulation, or any other cause beyond such Party's
control, such Party shall not be liable to the other therefor and the
time for performance of such obligation shall be extended for a period
equal to the duration of the contingency which occasioned the delay,
interruption or prevention. The Party invoking such Force Majeure
rights must notify the other Party within a period of fifteen (15) days,
from the first and the last day of the Force Majeure unless the Force
Majeure renders such notification impossible in which case notification
will be made as soon as possible. If the delay resulting from the Force
Majeure exceeds six (6) months, both Parties shall consult each other to
find an appropriate solution.
5. Arbitration. In the event of any dispute, controversy or claim arising
out of or relating to this Agreement, the Parties shall try to settle
such disputes, controversies or claims amicably between themselves
including referring such dispute, controversy or claim to the Chief
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Executive Officer of GENENTECH and a member of ROCHE's Executive
Committee. If the Parties are unable to so settle such dispute,
controversy or claim, then any such dispute, controversy or claim
arising out of or relating to any provision of this Agreement or the
interpretation, enforceability, performance, breach, termination or
validity hereof, including, without limitation, this arbitration clause
shall be solely and finally settled by arbitration in the manner
specified in this Section.
All arbitration proceedings shall be conducted in New York City. If
ROCHE requests the commencement of such proceedings, the arbitration
proceedings shall be conducted under the procedural rules of the
American Arbitration Association. If GENENTECH requests the
commencement of proceedings, arbitration proceedings shall be conducted
under the procedural rules of the International Arbitration Rules of the
Zurich Chamber of Commerce. In either case, proceedings in the
arbitration shall conducted in the English language, and all documents
not in English submitted by either party must be accompanied by a
translation into English. The Party requesting arbitration shall serve
upon the other Party a written demand for arbitration stating the
substance of the controversy, dispute or claim, and the contention of
the Party requesting arbitration. Within sixty (60) days after the
demand, the Parties shall select three (3) mutually acceptable
arbitrators. The arbitrators are to act as neutral arbitrators and
shall have no past, present or anticipated future affiliation with the
Parties or any relationship with the Parties which would unduly
influence the independence of an arbitrator. If the Parties are unable
to agree upon three (3) mutually acceptable arbitrators, the arbitration
agent under whose rules the arbitration is proceeding shall appoint
three (3) arbitrators. No more than two arbitrators shall be citizens
and/or residents of the United States or citizens and/or residents of
Switzerland. The decision of the arbitrators shall be in writing
setting forth the basis therefore. The arbitrators shall have the
authority to award such remedies as they believe are appropriate in the
circumstances, including, but not limited to, compensatory damages,
consequential and incidental damages, interest, tort damages (but not
punitive or similar damages) and specific performance and other
equitable relief. The Parties shall abide by the award rendered in such
arbitration proceeding, and such award may be enforced and executed upon
in any court having jurisdiction over the Party against whom enforcement
of such award is sought. The Parties shall divide equally the
administrative charges, arbitrators's fees and related expenses of
arbitration, but each Party shall pay its own attorney's fees incurred
in connection with such arbitration; provided, however, if the
arbitrators determine that one Party prevailed clearly and substantially
over the other Party, then the non-prevailing party shall also pay the
prevailing Party's reasonable attorney's fees and expert witness costs
and arbitration costs.
6. Notices. Requests, notices and reports required or permitted under this
Agreement shall be in writing and shall be sent by telefax or telecopier
(with written confirmation) or express mail to the address set forth
below or such other address as a Party may designate from time to time
in accordance with this Section:
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to ROCHE: F. Hoffmann-La Roche Ltd
Corporate Law
Grenzacherstrasse 124
CH-4070 Basel, Switzerland
to GENENTECH: Genentech, Inc.
Corporate Secretary
1 DNA Way
South San Francisco, California 94080
U.S.A.
7. Use of Names. Neither Party will use or refer to this Agreement in any
promotional activity, or use the marks of the other Party, without
express prior written permission of the other Party. Either Party shall
refrain from making any public announcement or disclosure of this
Agreement and its terms without the prior written consent of the other
Party except as required by law.
8. Successors and Assigns. Neither Party may assign this Agreement or any
rights hereunder in any manner, whether by virtue of law or otherwise,
without the prior written consent of the other Party, except that
GENENTECH may assign part or all of its responsibilities and obligations
under this Agreement to one or more wholly-owned subsidiaries of
GENENTECH.
9. Headings. The section headings of this Agreement are for convenience
only and are not a part of this Agreement.
10. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
11. Severability. The Parties hereby expressly state that it is not their
intention to violate any applicable rule, law or regulation. If any of
the provisions of this Agreement are held to be void or unenforceable
with regard to any particular country by a court of competent
jurisdiction, then, to the extent possible, such void or unenforceable
provision shall be replaced by a valid and enforceable provision which
will achieve as far as possible the economic business intentions of the
Parties. The provisions held to be void or unenforceable shall remain,
however, in full force and effect with regard to all other countries.
12. Governing Law. This Agreement shall be governed by and construed for
all purposes in accordance with the laws of the State of New York.
13. Relationship. Neither ROCHE or GENENTECH is in any way the legal
representative or agent of the other, nor authorized or empowered to
assume any obligation of any kind, implied or expressed, on behalf of
the other, without the express written consent of the other.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their duly authorized representatives as of the Effective Date.
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GENENTECH, INC. F. HOFFMANN-LA ROCHE LTD
By: /S/ARTHUR D. LEVINSON By: /S/STEPHAN ARNOLD
------------------------- ----------------------------
Name: Arthur D. Levinson Name: Stephan Arnold
Title: President and Chief Title: Vice Director Law Department
Executive Officer
By: /S/RUDOLF SCHAFFNER
----------------------------
Name: Rudolf Schaffner
Title: Head of Licensing
GENENTECH EUROPE LIMITED
By: /S/ARTHUR D. LEVINSON
-------------------------
Name: Arthur D. Levinson
Title: President
GENENTECH BIOPHARMACEUTICALS LIMITED
By: /S/ARTHUR D. LEVINSON
-------------------------
Name: Arthur D. Levinson
Title: President
GENENTECH INTERNATIONAL LIMITED
By: /S/ARTHUR D. LEVINSON
-------------------------
Name: Arthur D. Levinson
Title: President
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APPENDIX A
FINANCIAL APPENDIX TO THE AMENDED AND RESTATED AGREEMENT
This document is the Financial Appendix to the Amended and Restated Agreement
(the "License Agreement") effective as of the Effective Date, and amended and
restated as of the Restatement Date, between F. Hoffmann-La Roche Ltd.
(ROCHE) and Genentech, Inc., Genentech Europe Limited, Genentech
Biopharmaceuticals Limited and Genentech International Limited (GENENTECH)
and contains the financial definitions and descriptions applicable to the
License Agreement.
When inconsistent with the License Agreement, terms and conditions of the
License Agreement shall prevail upon those as defined herein. Terms not
defined in this Financial Appendix shall have the meanings set forth in the
License Agreement.
1. DEFINITIONS
ADJUSTED GROSS SALES - Shall mean the gross sales amount invoiced by
either Party, their Affiliates, or sublicensees for a Product to non-
Affiliated third party purchasers in the Territory less, to the extent
such amounts are included in the amount of gross sales invoiced,
deductions of returns (including withdrawals and recalls), rebates
(price reductions including Medicaid and similar types of rebates, e.g.,
chargebacks or retroactive price reductions), volume (quantity)
discounts, discounts granted at the time of invoicing, sales taxes and
other taxes directly linked to the gross sales amount as computed on a
product-by-product basis and reported in the central ROCHE sales
statistics for the countries concerned.
NET SALES - Shall mean the amount calculated by subtracting from the
amount of Adjusted Gross Sales a lump sum deduction of three percent
(3%) for those sales related deductions which are not accounted for on a
product-by-product basis, to the extent not already included in the
determination of the Adjusted Gross Sales (such costs shall include but
are not limited to costs of outward freights, postage charges,
transportation insurance, packaging materials for dispatch of goods,
custom duties, discounts granted later than at the time of invoicing,
cash discounts and other direct sales expenses).
COSTS OF GOODS - For Bulk Product, semi-finished (e.g. Vialed Product),
or Finished Product, as the case may be, shall be the sum of:
i) Fully Burdened Manufacturing Cost (FBMC);
ii) Outbound Costs
In the event Product is supplied for clinical or commercial purposes,
such Cost of Goods shall not include item i) above to the extent it has
already been considered or charged within Genentech's Development Costs
or Global Development Costs.
FULLY BURDENED MANUFACTURING COST - (FBMC) - Shall mean GENENTECH's
fully burdened manufacturing costs of Bulk Product, semi-finished, or
Finished Product, as the case may be, shipped for clinical or commercial
use and determined in accordance with generally accepted accounting
principles as applied by GENENTECH.
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Such FBMC shall include direct labor, materials, product testing costs
(including QC and QA bulk testing and in-process testing e.g.
adventitious virus and mycoplasma testing), and Allocable Overhead for
manufacturing or contracting for each stage of the manufacturing process
of the product shipped. GENENTECH will discuss annually with ROCHE the
main drivers of estimated and actual FBMC such as yields and Failures.
Four years after the launch of the Product the Parties will agree on an
annual standard cost for the bulk material manufactured to be charged.
Such standard cost will consider yields, success factors (Failures) and
other pertinent data. In any case, yield losses and Failures which go
beyond what could be reasonably expected and/or justified in this area
of technology shall remain the sole costs of GENENTECH.
Such FMBC shall not include any costs associated with expired products
to the extent that the actual quantity of material purchased is at least
equal to the amount of the firm orders. (Firm orders shall be ROCHE's
latest production quantity request prior to each manufacturing campaign
of GENENTECH.) GENENTECH agrees to consider the worldwide sales and
production needs when establishing its manufacturing campaign plans. A
supply agreement to be entered between the Parties shall determine which
and when forecasts shall become firm orders.
Such FBMC shall not include any costs associated with all of GENENTECH's
allocable intellectual property acquisition, licensing and royalty costs
payable by GENENTECH to third parties in relation with the manufacturing
formulation, filling, use or sale of a Product.
Such FBMC shall not include any costs associated with process
development, scale up costs, qualification lots and any other costs if
they are included in Genentech's Development Costs or Global Development
Cost.
OUTBOUND COSTS - Shall mean any outbound costs borne by GENENTECH at the
request of ROCHE including but not limited to transport, customs
clearance and storage of Product (i.e., freight, duty, insurance and
warehousing).
ALLOCABLE OVERHEAD - Shall mean costs incurred by a Party or for its
account which are attributable to a Party's supervisory services,
occupancy costs, corporate bonus (to the extent not charged directly),
and its payroll, information systems, human resources or purchasing
functions and which are allocated to company departments based on a
space occupied or headcount or other activity-based method. Allocable
Overhead shall not include any costs attributable to general corporate
activities including, by way of example, executive management, investor
relations, business development, legal affairs and finance.
TRANSFER OF MANUFACTURING - In the case where ROCHE assumes
manufacturing for its supply requirements pursuant to Article V, Section
13 (i) of the License Agreement, ROCHE will reimburse GENENTECH for 100%
of the costs incurred by GENENTECH in making the transfer including
overhead and for the cost of Idle Capacity as describe in the next
section.
COST OF IDLE CAPACITY - The principle of cost of Idle Capacity shall
only apply in the case of Article V, Section 13 (i) of the License
Agreement and for a period of four (4) years from notification by ROCHE
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that it will assume manufacturing. The Cost of Idle Capacity (CIC)
shall be determined and charged to ROCHE as follows:
(i) ROCHE will be charged other operating costs calculated as
follows:
(capacity utilized by ROCHE prior to ROCHE's notification minus
capacity actually used for the supply for the ROCHE Territory)
divided by
(total capacity utilized by the Parties for the Product(s)
prior to ROCHE's notification minus capacity actually used for
the supply of Product(s) for GENENTECH's and ROCHE's Territory)
multiplied by
depreciation, plant maintenance cost and other fixed
manufacturing cost related to the total capacity utilized for
Product(s) prior to ROCHE's notification.
The result of this method of accounting for idle capacity is to ensure
that GENENTECH charges ROCHE the share of depreciation, plant
maintenance cost and other fixed manufacturing cost related to the
capacity for the supply of the Product(s) for the ROCHE Territory
utilized prior to ROCHE's notification but actually not utilized after
ROCHE assumes manufacturing.
(ii) GENENTECH shall notify the Joint Finance Committee (JFC)
prospectively of any such charge hereunder, including the
calculation thereof, in writing. The JFC shall review any such
calculated charge hereunder and shall be entitled to receive
from GENENTECH such financial and other information as the JFC
shall reasonably deem necessary in order to confirm (or
correct) the calculated charge.
(iii) To the extent feasible and reasonable, GENENTECH will make best
efforts to use idle capacity for its own products that are not
Products under the Agreement, with the effect that the idle
plant cost charge to ROCHE set forth herein is reduced dollar
for dollar for the portion of capacity actually used by
GENENTECH in such fashion.
FAILURES - Shall mean Bulk Product, semi-finished, or Finished Product,
as the case may be, that:
1. does not meet the specifications, or
2. was not manufactured or tested in accordance with the
procedures, or
3. was not manufactured in accordance with cGMPs.
Only those tests listed in the specifications may be used to determine
conformity.
THIRD PARTY ROYALTIES - Shall mean all of GENENTECH's allocable
intellectual property acquisition, licensing and royalty costs paid to
third parties upon the sale of Product by ROCHE to third parties (unless
any such cost is specifically identified as the sole cost of GENENTECH
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in the License Agreement) , such royalties being payable to third
parties as a result of licenses from third parties for the manufacture,
formulation, filling, use or sale of a Product.
Each Party shall bear the full cost related to Third Party Royalties for
the units of Product sold in its Territory. Procedures for converting
from foreign currencies and paying such royalty to the other Party shall
be as described below in section 6.
GENENTECH shall provide ROCHE the details of such Third Party Royalties
obligations including but not limited to the name of the third party,
the rate, the duration and the "Net Sales" basis for calculation of such
payment. Such information shall be periodically updated for changes (as
need be) by GENENTECH or at ROCHE's request.
DEVELOPMENT COSTS - With respect to GENENTECH whether as part of
Genentech's Development Costs or as part of Global Development Costs,
shall mean the development costs actually incurred by GENENTECH after
the date of GENENTECH's decision to bring a Product into development
(for illustration purposes Development Costs for Product shall include
IND enabling toxicology costs but shall not include optimization of lead
candidates ) through the date of marketing approval or termination of
development efforts of the final indication for which marketing approval
in any country is sought. Such costs shall comprise those costs, both
direct and indirect (i.e. fully burdened costs), required to obtain the
authorization and/or ability to manufacture, formulate, fill, ship
and/or sell the Product in commercial quantities to the third parties.
Such Development Costs shall include but are not limited to costs of
development including cost of studies on the toxicological,
pharmacokinetical, metabolical or clinical aspects of the Product
conducted internally or by individual investigators, or consultants
necessary for the purpose of obtaining and/or maintaining approval in
any country of the Product, process development and scale up costs,
qualification lots, costs for preparing, submitting, reviewing or
developing data or information for the purpose of submission to the U.S.
Food and Drug Administration or other governmental authority to obtain
and/or maintain approval in any country. These costs shall include
expenses for data management, statistical designs and studies, document
preparation, and other administration expenses associated with the
clinical testing program.
These costs shall not include Patent costs, pre-Registration marketing
costs (e.g. trademark costs, advertising agency selection costs, pre-
marketing studies), post-Registration clinical studies which are not
enabling for Registration of the Product and post-Registration marketing
studies.
GENENTECH'S DEVELOPMENT COSTS - shall include all such Costs incurred
by GENENTECH up to ROCHE's exercise of its option for a Product at Entry
Into Man or Phase II or Phase III Completion Date, as applicable. In
determining Development Costs, GENENTECH will use its Project Cost
System with the purpose of tracking costs as much as possible on a
product indication-by-product indication basis.
GLOBAL DEVELOPMENT COSTS - Shall mean the costs specifically
attributable to the development of a Product and actually incurred after
the date of ROCHE's decision to exercise its option for a GENENTECH or
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an In-Licensed Product through the date of marketing approval or
termination of development efforts of the final indication or
formulation or dosing for which marketing approval is sought in the USA
and/or the Collaborative Countries.
Such costs shall comprise those costs, both direct and indirect
including Allocable Overhead (i.e. fully burdened costs), required to
obtain the authorization to manufacture, formulate, fill, ship and/or
sell a Product in commercial quantities in the USA and/or the
Collaborative Countries to third parties.
Such Global Development Costs shall include but are not limited to costs
of development including cost of studies on the toxicological,
pharmacokinetical, metabolical or clinical aspects of a Product
conducted internally or by individual investigators or consultants,
manufacturing process development and scale up costs, qualification
lots, costs for preparing, submitting, reviewing or developing data or
information necessary for the purpose of submission to the FDA, EMEA or
other governmental authority in order to obtain and/or maintain approval
of a Product in the USA and/or the Collaborative Countries.
These costs shall include expenses for data management, statistical
designs and studies, document preparation, and other administration
expenses associated with the clinical testing program.
These costs shall include costs incurred in geographical areas other
than USA and/or the Collaborative Countries (e.g.: Canada, South Africa
and Brazil) only to the extent that the activities related with such
costs are specifically planned (and specifically included in the
mutually approved global development plan and budget) to be incurred in
such geographical areas for the purpose of generating data or
information required to obtain the above mentioned authorization in the
USA and/or the Collaborative Countries.
These costs shall not include Patent costs, pre-registration marketing
costs (e.g. trademark costs, advertising agency selection costs, pre-
marketing studies), post-registration clinical and marketing studies
which are not conducted as part of the global development plan.
In determining Global Development Costs, each Party will use its
applicable project cost system with the purpose of tracking costs as
much as possible on a product indication-by-product indication basis.
As the case may be, Global Development Costs shall exclude for a Product
development costs attributable to specific indications for which one
Party has opted out as described in the next section for such Product as
updated from time to time.
ADDITIONAL INDICATION OPT OUT I OPT BACK IN - When ROCHE opts in for a
Product, it will opt in for all indications for such Product.
Each Party has the right to opt out of the development of an additional
indication for a Product beyond the initial indication for that Product
at one of the following three decision points:
a) Executive Committee decision of GENENTECH to develop an
indication or the equivalent ROCHE decision as defined above
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b) End of Phase II
c) A formal decision point in phase III defined in the clinical
study protocol and agreed upon by the parties
Prior to such opt out decision, the Parties shall have a good faith
discussion about the reasons and consequences of the opt out.
The Party electing to opt out will provide the other Party with sixty
days notice prior to its election and will be obligated to pay its share
of the cost of all ongoing clinical and preclinical studies and its
share of other development costs already committed to third parties as
of the date of such notice. Thereafter the Party electing to opt out
will not share any costs or benefits of such indication.
In the event that a Party which previously opted out of an indication
wishes to regain its rights to such indication then it may regain such
rights by electing to do so at the latest within thirty days of a formal
decision to file for approval for that indication and by paying within
thirty days, two hundred percent of the Global Development Costs it
would have otherwise incurred if it had not opted out for such
indication during the period of opt out and by thereafter assuming from
the opt back in date its ongoing obligations as if no opt out had
occurred.
2. PLANNING AND BUDGETING OF GLOBAL DEVELOPMENT COSTS
For a Product for which ROCHE has exercised its option, the Parties
shall agree on a global development plan and budget on an indication-by-
indication basis.
Such plan and budget shall i) identify activities and costs to be
incurred, by calendar quarter, ii) provide details of activities in a
manner to be specified by the Joint Development Committee and in a
manner consistent with the cost systems of each Party, iii) be updated
whenever needed, at least on a quarterly basis and when development of
indications additional to the initial indication shall be envisaged.
3. REIMBURSEMENT OF DEVELOPMENT COSTS
SHARING AND REIMBURSEMENT OF GENENTECH'S DEVELOPMENT COSTS - Thirty
days prior to the date by which ROCHE must exercise its option for a
Product, GENENTECH shall choose one of the following methods for
reimbursement of Development Costs incurred prior to exercise of such
option, the choice being subject to ROCHE's consent which shall not be
unreasonably withheld:
A.) Lump sum payment for the appropriate percentage of the cumulative
Genentech's Development Costs incurred prior to ROCHE's exercise of such
option, due thirty days after ROCHE's exercise of such option, or
B.) Quarterly payments, due 30 days after invoicing from GENENTECH,
equal to one hundred and fifty percent (150%) of the Global Development
Costs GENENTECH incurred after ROCHE's exercise of a Product option
until such the cumulative amount paid thereunder equals the appropriate
percentage of the cumulative Genentech's Development Costs incurred
prior to ROCHE's exercise of such option plus interest at LIBOR from the
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date of such option exercise. GENENTECH shall invoice ROCHE for the
amount due hereunder within 30 days of the end of each quarter.
For products which GENENTECH can only license Canadian rights to ROCHE,
the appropriate percentage reimbursement of Genentech's Development
Costs provided in this Section 3 of this Appendix shall be reduced to
ten percent (10%).
SHARING AND REIMBURSEMENT OF GLOBAL DEVELOPMENT COSTS - The global
development plan and budget as agreed by the JCC for such Product shall
be the reference for sharing Global Development Costs. The Parties
shall share development costs provided that they relate to activities
which have been planned for and budgeted either in a global development
plan and budget agreed between the Parties before the Option Exercise or
in one of the subsequently jointly agreed updates of such global
development plan and budget after the Option Exercise.
In the case of i) activities or costs which have not been planned and
budgeted but have actually been incurred by a Party or ii) actual costs
of planned activities which have significantly exceeded (more than 10%)
the amount budgeted, the JCC shall decide whether and/or how such
additional costs shall be shared between the Parties.
On a quarterly calendar basis, within 30 days after the end of each
calendar quarter, each Party shall provide the other with an invoice for
the amount of Global Development Costs it has incurred and which is due
for reimbursement by such other Party for such quarter. The cost
sharing shall be that provided for in the License Agreement or in this
Financial Appendix. Such amount shall be expressed in US Dollars and
payable within 30 days from receipt of such invoice. Such invoice shall
be accompanied by a report specifying such Global Development Costs on a
product indication-by-product indication basis and providing details per
activity as specified by the JCC and show in local currency and US
Dollars in a manner consistent with the amounts budgeted for such
activities.
As the case may be, development costs attributable to specific
indications for which one Party has opted out pursuant to an Additional
Indication Opt Out shall not be included in the global development plan
and budget for such Product.
Whenever for the purpose of calculating conversation of Global
Development Costs from any foreign currency into US Dollars shall be
required, such conversion shall be made using the average quarterly rate
of exchange at the time for such currencies as retrieved from the
Reuters System for the countries concerned.
4. SALES BUSINESS PLAN AND BUDGET
ROCHE shall provide GENENTECH within 30 days of availability in final
form its sales budget (prepared annually and covering a one year period,
month by month) and sales business plan (prepared annually and covering
at least a three year period) for each Product for which it has
exercised its option for commercialization in the Roche Territory under
the License Agreement.
5. SUPPLY PRICE OF PRODUCT
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The total amount due for the supply of Product between the Parties shall
be the amount defined below:
SUPPLY OF CLINICAL REQUIREMENTS - The sales price of Product for
clinical purposes shall be the FBMC for such Clinical Requirements.
Product manufactured as qualification lots and supplied for clinical
purposes shall only be charged to the extent not included in Genentech's
Development Costs or Global Development Costs.
SUPPLY OF COMMERCIAL REQUIREMENTS - The sales price of Product for
commercial purposes shall be GENENTECH's Cost of Goods plus a mark-up of
twenty percent (20%) on FBMC.
For the ROCHE Territory, such sales price will be billed to ROCHE and
paid as follows:
(a) The amount corresponding to FBMC + 20% mark-up will be invoiced
in US Dollars and paid by ROCHE in such currency within 30 days
after shipment.
(b) Unless otherwise agreed upon in writing between the Parties,
the amount corresponding to Outbound Costs will be billed in US
Dollars on a quarterly basis and paid by ROCHE in such currency
within 30 days of receipt of the invoice.
Product manufactured as qualification lots and supplied for commercial
purposes shall only be charged to the extent not included in Genentech's
Development Costs or Global Development Costs.
6. TIMING AND PAYMENT OF ROYALTIES BETWEEN THE PARTIES
TIMING - Payment of Royalties due GENENTECH shall be made within ninety
(90) days of the end of each calendar quarter in which the sale was
made. For purposes of determining when a sale of a Product occurs, the
sale shall be deemed to occur when a non-Affiliated third party is
invoiced for the Product. Payment of Royalties due to third parties
will be made ten days prior to the date the royalties are due to the
third party under their respective licenses. Any royalty payment that
is not paid on or before the date such payment is due under the License
Agreement shall bear interest, to the extent permitted by applicable
law, at the LIBOR rate of interest as reported from time to time by a
qualified source that is mutually acceptable to the Parties, calculated
on the number of days such payment is delinquent.
PAYMENT - WITHOLDING TAXES - Unless otherwise agreed in writing between
the Parties, payments of royalties shall be made in US Dollars, by wire
transfer in immediately available funds to such account GENENTECH shall
designate before such payment is due, free and clear of any taxes,
duties, levies, fees or charges, except for withholding taxes due on
behalf of GENENTECH (to the extent applicable). ROCHE shall make any
withholding payments due on behalf of GENENTECH and shall promptly
provide GENENTECH with written documentation of any such payment
sufficient to satisfy the reasonable requirements of an appropriate tax
authority with respect to an application by GENENTECH for a foreign tax
credit for such payment or for similar treatment.
ROYALTY REPORTING AND ROYALTY CALCULATION - Within thirty days after
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the end of each calendar quarter, ROCHE shall provide GENENTECH with a
statement summarizing the Net Sales of the Product in each country in
the reporting currency of each such country as well as the rate used to
convert from each such country's currency to Swiss Francs.
Whenever for the purpose of calculating royalties conversion from any
foreign currency shall be required, the amount of such Net Sales in
foreign currencies shall be converted into Swiss Francs using the
average monthly rate of exchange at the time for such currencies as
retrieved from the Reuters System, or another qualified source that is
mutually acceptable to the Parties.
The amount of royalties due for payment to GENENTECH and calculated in
Swiss Francs shall be translated into US Dollar at the rate retrieved
from the Reuters System during the morning of the "day two" before the
value date of such payment. The corresponding amount in US Dollars will
then be communicated to the bank for payment on the value date.
7. AUDIT AND INTERIM REVIEWS
Audit work will be performed in the following manner and according to
the specifications of the Article "Records Regarding Royalties" of the
1995 Agreement:
If deemed necessary by either ROCHE or GENENTECH , an audit by
independent certified public accountants may be requested. Such audit
will be at the sole expense of the requesting Party and will be
performed by the officially appointed auditor of the Party audited. If
GENENTECH requests audit work of the ROCHE accounts, the audit will be
performed by ROCHE's appointed worldwide auditor which is currently
Price Waterhouse, LLP. If ROCHE requests audit work of the GENENTECH
accounts, the audit will be performed by the independent auditor
appointed by GENENTECH which is currently Ernst & Young LLP.
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FINANCIAL APPENDIX
PART 2
When inconsistent with Part 1, terms and conditions of Part 2 shall
supersede those as defined in Part 1.
1) Sharing of Global Development Costs after Option
Global Development Costs shall be shared fifty percent by ROCHE and
fifty percent by GENENTECH.
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APPENDIX B
ARTICLE II COUNTRIES
Germany
Italy
France
United Kingdom
Spain
Japan
Canada
Mexico
Brazil
Argentina
People's Republic of China
Turkey
South Korea
Australia
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EXHIBIT 10.3
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (the "Agreement") is dated as of July 22,
1999 and executed effective as of the effective date (defined in Section 1.5
of this Agreement), by and between ROCHE HOLDINGS, INC., a Delaware
Corporation, hereinafter referred to as "RHI", and GENENTECH, INC., a
Delaware Corporation, hereinafter referred to as "GNE".
W I T N E S S E T H :
WHEREAS, RHI has obtained control of at least 80% of the stock value and
80% of the voting power of GNE, permitting RHI and GNE under IRC Section
1504(a) the privilege of filing a U.S. consolidated tax return and certain
state and local combined reports; and
WHEREAS, RHI will, from the above effective date, exercise that
privilege and include the taxable income, losses, credits, etc. of GNE as a
fully consolidated subsidiary in all of its consolidated federal and combined
state and local tax filings, payments, estimates, and other such matters as
are required by law or in which it determines such inclusion is appropriate;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and agreements contained herein, RHI and GNE hereby agree as
follows:
ARTICLE I
DEFINED TERMS; PREPARATION OF TAX RETURNS and TAX ESTIMATES
SECTION 1.1 Defined Terms. As used in this Agreement:
RHI Group or Group means, for U.S. federal tax purposes, the affiliated group
(within the meaning of IRC Section 1504(a)) filing a consolidated return of
which RHI (or any successor corporation) is the common parent, and for state
or local tax purposes, RHI and/or any subsidiaries of RHI (direct or indirect
and past, current or future) includible in a group filing a consolidated or
combined return.
GNE Group means GNE and its subsidiaries (direct or indirect and past,
current or future).
GNE Consolidated Group means, for U.S. federal tax purposes, the member or
members of the GNE Group that are includible in the consolidated return filed
by the RHI Group, and for state or local tax purposes, the member or members
of the GNE Group that are includible in a group that (i) also includes RHI or
at least one subsidiary of RHI (other than a member of the GNE Group) as a
member and (ii) files a consolidated or combined return.
SECTION 1.2 Preparation of Proforma Tax Returns. GNE will be responsible
for the preparation of a proforma Form 1120 for the GNE Consolidated Group
for U.S. federal tax purposes, as well as proforma tax returns for the GNE
Consolidated Group for all applicable state and local combined filings,
reporting on such proforma returns the GNE Consolidated Group's items of
income, gain, expense, deduction, loss, credit, carryforwards, carrybacks and
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other such tax reporting items pursuant to the Stand-Alone Method (as defined
below). GNE agrees that these proforma tax returns will be prepared and
computed in compliance with all applicable federal and state tax laws and
regulations. Once prepared, such proforma returns will be delivered by GNE
to RHI, under the guidelines specified in Article IV of this Agreement. In
the event GNE determines that an amended return is necessary (to amend
previously reported GNE tax data), GNE will provide to RHI such proforma
returns, and RHI will file such returns directly with the appropriate taxing
authorities, both in accordance with all other terms of this Agreement.
SECTION 1.3 State and Local Tax Returns - Separate and Combined Filings.
GNE will continue to prepare and directly file, or cause to be prepared and
filed, state and local tax returns, extensions, and payments of tax liability
in any state or locality in which RHI does not file a combined return, and in
which GNE determines that one or more members of the GNE Group has a nexus.
GNE further acknowledges that the state combined returns which are currently
applicable to this Section (and thus will be filed with RHI on a combined RHI
Group basis) are those in California; Colorado; Illinois; Kansas; Minnesota;
and New Hampshire; however, GNE also acknowledges that RHI reserves the right
to commence additional state or local combined filings in the future based on
RHI's tax planning or tax strategies for the RHI Group, or where such a
combined state or local filing becomes necessary in order to comply with
state or local tax requirements.
SECTION 1.4 Preparation of Federal/State/Local Tax Estimates. GNE will be
responsible for the computation pursuant to the Stand-Alone Method (as
defined below in Article II) and submission to RHI under the guidelines
specified in Article IV of this Agreement of the GNE Consolidated Group's
quarterly estimated tax liability (including the estimate of any final amount
due on the tax return extension due dates), based on the GNE Consolidated
Group's items of income, gain, deduction, loss, credit, etc.
SECTION 1.5 Effective Date. This Agreement shall be effective as of the
first day on which GNE is a member of the affiliated group (within the
meaning of IRC Section 1504(a)) of corporations of which RHI is the common
parent, and shall govern all taxable periods of the members of the RHI Group
(including GNE) that are open as of such day and all subsequent taxable
periods.
ARTICLE II
STAND-ALONE METHOD
SECTION 2.1 Stand-Alone Method. GNE shall prepare all of the proforma tax
returns of the GNE Consolidated Group, and shall make all other computations
and determinations under this Agreement relating to the GNE Consolidated
Group or any of its members, using the "Stand-Alone Method." The Stand-Alone
Method is the method that would apply to the GNE Consolidated Group if it
never were a part of the RHI Group under any section of the tax laws or
regulations, but instead filed its own consolidated or combined return under
the applicable provisions of federal, state or local tax law and regulations
dealing with such returns (provided, however, that transactions between (x) a
member of the GNE Group and (y) a member of the RHI Group that is not a
member of the GNE Group, shall be accounted for pursuant to the provisions of
the regulations under IRC Section 1502 that govern intercompany
transactions). Accordingly, the tax so computed by the GNE Group will be
Page 2
<PAGE>
calculated utilizing none of the tax advantages or disadvantages which might
arise to the overall RHI Group as a result of the actual Group
consolidated/combined tax filings. In addition, the GNE Group will not be
permitted to adopt, nor will the GNE Group be required to adopt, any tax
filing position in the preparation of its own pro forma returns which rely on
its true and existing legal affiliation with the RHI Group. Under the Stand-
Alone Method, (a) the income, gains, expenses, deductions, losses and credits
in any taxable period of any member of the RHI Group that is not a member of
the GNE Consolidated Group shall be disregarded, (b) the income, gains,
expenses, deductions, losses and credits in any taxable period of any member
of the GNE Consolidated Group shall be taken into account, (c) the applicable
marginal tax rate under this "Stand-Alone Method" to which the GNE
Consolidated Group could be subject under applicable federal, state or local
law shall be deemed to be the only tax rate to which such group is subject
under such law, and (d) all computations and other determinations shall be
made in accordance with the federal, state and local tax laws and regulations
applying to consolidated or combined groups (including, in the case of any
company that becomes or ceases to be a member of the GNE Consolidated Group,
the laws and regulations applicable to a company that becomes or ceases to be
a member of a consolidated or combined group), as well as all other relevant
federal, state and local tax laws and regulations. The GNE Group's
interpretation and application of the Stand-Alone Method as it relates to any
and all items and calculations reflected in the computation of the GNE
Consolidated Group's proforma tax liability, an overpayment or refund of such
liability, a recomputation of such liability (together with any related
interest, penalty or additional amount) upon a subsequent adjustment of the
RHI Group's tax liability, or a carryforward or carryback of a loss, credit
or other tax attribute of the GNE Consolidated Group or any member thereof to
a taxable period beginning prior to the Effective Date or to a separate
return year, shall at all times be prepared and computed utilizing reasonable
standards and due professional care in applying (and in compliance with) all
applicable federal and state tax laws and regulations, pursuant to Article IV
of this Agreement.
ARTICLE III
PAYMENT OF TAX LIABILITIES and RECEIPT OF REFUNDS
SECTION 3.1 Payment of Tax Liabilities. After the computation by GNE of a
GNE Consolidated Group tax liability pursuant to the terms of this Agreement,
GNE will remit to RHI by federal bank wire the amount of such tax liability
as so approved or recomputed.
SECTION 3.2 Date of Payment. GNE shall remit to RHI the amounts necessary
under Section 3.1 of this Agreement at least one business day prior to the
applicable federal/state/local due dates as required by the specific
federal/state/local law which necessitated the computation. For example, GNE
shall remit to RHI payments for quarterly estimated Federal tax no later than
April 14, June 14, September 14, and December 14 (as adjusted by non-business
days) of each calendar year.
SECTION 3.3 Tax Overpayments and Refunds. In the event GNE has determined
that it has overpaid its tax liability to RHI, GNE will inform RHI of the
amount of that overpayment which it requests to be refunded, and the amount
of such overpayment which GNE requests to be applied to future tax
liabilities. In the event of a cash refund request, RHI will (upon its
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<PAGE>
approval in accordance with Article IV) refund the overpayment to GNE,
pursuant to the applicable laws, regulations, and timing which govern the
receipt of such refund of overpayments for federal/state purposes, and which
apply to taxpayers who file their tax returns directly with such federal or
state tax agency. Upon approval by RHI in accordance with Article IV of the
amount requested as a refund or offset, RHI will refund or allow as an offset
to future tax liabilities the amount so approved (and, in the case of a
refund, will pay interest thereon which is computed pursuant to the Stand-
Alone Method (which method includes the applicable federal, state or local
tax laws and regulations which govern the computation of such interest)).
SECTION 3.4 Limitation to GNE of RHI Group Tax Liabilities/Benefits. The
liability of the members of the GNE Group to RHI for payments of tax under
this Agreement shall include, and be exclusively limited to, tax liabilities
of the GNE Consolidated Group computed pursuant to the Stand-Alone Method.
In addition, the ability of the members of the GNE Group to claim tax
benefits from RHI is exclusively limited to tax benefits of the GNE
Consolidated Group computed pursuant to the Stand-Alone Method. Under no
circumstances shall any member of the GNE Group be held liable for the tax
liability of the consolidated/combined RHI Group, or of any of its individual
members; provided, that a GNE Group member may be held liable for a tax of
the consolidated/combined RHI Group to the extent that such tax is
attributable (determined using the Stand-Alone Method) to the members of the
GNE Consolidated Group and GNE has not previously made a payment to RHI equal
to such attributable portion of such tax. In addition, under no
circumstances will any member of the GNE Group be the beneficiary of tax
benefits which accrue to any member of the RHI Group that is not a member of
the GNE Group, or to the RHI Group as a whole as a result of the RHI Group's
consolidated/combined tax filings.
ARTICLE IV
SUBMISSION OF TAX DATA TO RHI; RHI APPROVAL RIGHTS
SECTION 4.1 Submission of Data; RHI Approval Rights. GNE will submit to RHI
for its review the proforma GNE Consolidated Group proforma tax returns,
extensions, and quarterly estimates and refund or carryback claims prepared
by GNE under this Agreement. Such proforma GNE returns will include all
official forms, consents, elections, riders, and other such documents that
may be required or appropriate for the proper filing of such return. The
final Group returns/estimated tax filings will be prepared by RHI utilizing
the data and proforma returns submitted by GNE and RHI's other includible
subsidiaries, and will thereafter be submitted directly by RHI to the
appropriate governmental tax agency. All such GNE returns and computations
submitted to RHI shall be subject to the review and approval of RHI; however,
RHI agrees that it will not withhold its approval unless RHI can demonstrate
that the returns and computations submitted were not prepared by GNE in
accordance with all applicable federal and state tax laws and regulations, or
that such returns and/or computations were not prepared using reasonable
standards and due professional care in applying such tax laws and
regulations. The approval of such data by RHI, however, will not negate the
Parties' agreement that GNE will remain fully responsible for assuring that
its returns have been prepared in accordance with all applicable federal and
state tax laws and regulations.
SECTION 4.2 Adjustment of Tax Data. In order to comply with laws and
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<PAGE>
regulations concerning consistent tax return positions (for example, as to
when it is required to utilize a mid-quarter convention versus a half-year
convention in depreciation computations), or for any other reason which RHI,
in its sole discretion, deems to be necessary, RHI reserves the right to
adjust and change the tax data as submitted by GNE on the GNE proforma
returns prior to inclusion of that data in any consolidated/combined Group
tax filing. This right of adjustment of RHI includes, but is not limited to,
any or all income/expense/credit items as shown on the GNE proforma returns,
and may be made by RHI for any reason which it deems necessary. Such reasons
would include numerical adjustments which are necessary to submit the final
Group return utilizing a consistent "one taxpayer" filing approach;
adjustments required to make certain elections which are desired on a Group
basis; or to be assured that the consolidated/combined Group return is being
filed in compliance with all applicable federal and state tax laws and
regulations. RHI will communicate these adjustments to GNE in a timely
manner, and will also promptly submit to GNE for its records a copy of the
data (such as a proforma GNE tax return) which exactly conforms to the GNE
data which RHI submitted to the relevant governmental taxing authority.
Adjustments made pursuant to this Section 4.2 will not affect the
determination of GNE liability to RHI under the Stand-Alone Method.
SECTION 4.3 Timeliness of Submission. In order to permit RHI sufficient
time to prepare the final Group tax returns and estimates, GNE will submit
the data under Section 4.1 of this Agreement to RHI no later than the
following dates:
- - tax returns: 30 days prior to the governmental due date;
- - tax estimates and extensions: 7 days prior to the tax payment due date.
SECTION 4.4 Group Tax Planning and Strategies. GNE agrees to provide to RHI
upon its request any and all financial and tax data relating to any GNE Group
member that is necessary in order to allow RHI to develop tax planning
opportunities and overall tax strategies for the RHI Group. GNE tax
personnel shall continue to perform their own tax planning for the proforma
Stand-Alone returns of the GNE Consolidated Group. Both parties agree to
continously communicate and cooperate reasonably regarding both the RHI
Group's and GNE's tax planning efforts. In addition, it is expected that,
upon request, GNE will participate in tax planning meetings and discussions
with RHI from time to time.
SECTION 4.5 Representation to Outside Governmental Bodies. RHI will develop
and oversee implementation of all positions on behalf of the overall RHI
Group regarding federal, state and local tax legislation, regulations and all
other related governmental actions which could affect the tax liability of
the RHI Group. GNE will develop and oversee implementations of all positions
that benefit GNE regarding federal, state and local tax legislation,
regulations, and all other related governmental actions which could affect
GNE and the GNE Consolidated Group's proforma tax returns on a Stand-Alone
basis. GNE agrees to coordinate its efforts with RHI, communicate any issues
that may affect RHI, and not take a position detrimental to the RHI Group.
SECTION 4.6 Access to Consolidated and Combined Tax Returns, and GNE
Proforma Returns. Under no circumstances will GNE be given copies of, or
access to, the RHI Group's consolidated and combined tax filings in which any
member of the GNE Group is a member. In addition, no other RHI subsidiary
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<PAGE>
(except Roche Consulting Corporation) will be given a copy of, or be given
access to, GNE's proforma tax returns and other financial data submitted to
RHI under Section 4.1 of this Agreement.
ARTICLE V
TAX EXAMINATIONS
SECTION 5.1 Pre-Acquisition Year Tax Examinations. For any GNE federal
and/or state tax examinations for tax periods beginning prior to the
effective date of this Agreement, GNE will handle such examination requests
with the governmental agency solely by itself, unless GNE, at its own
discretion, requests the assistance of RHI personnel. GNE will be solely
and exclusively liable for any tax liabilities arising out of such Pre-
Acquisition year tax examinations, and will likewise be the sole and
exclusive beneficiary under this Agreement of any tax decreases which arise
in those same years. In respect to any examination item which RHI reasonably
determines may affect or involve an issue relating to a computation reflected
on a return of the RHI Group or one of its members, GNE shall, however,
notify RHI of the commencement of any such examination, timely and fully
inform RHI of developments relating to such examination, and not settle, fail
to appeal or otherwise compromise any issue raised in such examination
without first consulting with RHI.
SECTION 5.2 Post-Acquisition Year Tax Examinations. In accordance with any
federal, state and/or local tax examination conducted of the RHI Group in
which a GNE Group member was a member of the consolidated/combined RHI Group
tax filing, GNE and the applicable GNE Group member or members will cooperate
fully with RHI and/or its representatives to provide any additional tax data,
requested documentation, physical access, and/or financial information which,
in the discretion of RHI, is necessary to provide to governmental personnel.
RHI will have the sole authority to settle and close such Post-Acquisition
year tax examinations for all federal, state and/or local RHI Group
consolidated/combined tax filings.
GNE is entitled to assist at its own cost, in coordination with RHI, in the
defense of examination issues arising from GNE's operations whether such
defense is occassioned by formal or informal document requests, notices of
proposed adjustments, settlement proposals, appeals, or IRS Tech Advice. In
the event of unfavorable rulings for GNE, RHI agrees to cooperate closely and
in conjunction with GNE to determine at which point tax examination issues
may be conceded; however GNE will remain liable for any additional tax
liability (including interest and applicable penalties) under the Stand-Alone
Method once concession has been agreed to.
SECTION 5.3 GNE Tax Examination Adjustments. In the event an adjustment is
made to GNE proforma income, gains, expenses, deductions, losses or credits
included in the Group return by federal or state tax agencies as a result of
a tax examination, the additional liability/refund to GNE will be determined
solely and only on the basis that the specific examination adjustment to GNE
income, gains, expenses, deductions, losses or credits would have affected
the GNE proforma return which was prepared utilizing the Stand-Alone
methodology of Article II of this Agreement. Any additional tax liability
resulting therefrom shall be the sole liability and responsibility of GNE to
RHI, and will be repaid by GNE to RHI in addition to any interest and/or
penalty charges associated with such adjustments. In the event any such
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<PAGE>
adjustments leads to a GNE Stand-Alone basis tax decrease, GNE shall be
entitled to a corresponding refund (including any interest income arising
from such an adjustment) from RHI for such amount.
SECTION 5.4 Proforma Interest and Penalties. In the event of any interest
expense, interest income, or penalty charges incurred under Section 5.3 of
this Agreement or any interest expense, interest income or penalty charges
incurred under this Agreement in the case of any amended return described in
Section 1.2, the amount payable from one party to the other shall be exactly
the same amount as would have been charged/credited to GNE by the
governmental agency had GNE filed a return using the Stand-Alone Method and
had an amendment or an adjustment been made to such return.
ARTICLE VI
CARRYFORWARDS and CARRYBACKS OF TAX ATTRIBUTES
SECTION 6.1 Pre-Acquisition Tax Attribute Carryforwards. Any tax attribute
carryforwards which were earned by the GNE Consolidated Group in tax periods
beginning prior to the effective date and are still available to the GNE
Consolidated Group on that date, may be utilized by GNE to reduce GNE's
current tax liability payable to RHI under Article III of this Agreement,
pursuant to the Stand Alone Method as described in Section 2.1.
SECTION 6.2 Post-Acquisition Tax Attribute Carrybacks. In the event the GNE
Consolidated Group incurs an excess tax credit, loss, or other item of tax
attribute during a tax period in which it is a member of the RHI
consolidated/combined Group, GNE may carryback such tax credit, loss, or
other item of tax attribute to a pre-acquisition tax year in accordance with
the applicable laws and timing which govern the utilization of such
carrybacks for federal/state purposes, for taxpayers who file their tax
returns directly with such tax agency. In the event of such a carryback by
the GNE Consolidated Group, GNE will file a proforma carryback claim with
RHI, who will (upon its approval in accordance with Article IV) issue to GNE
a refund, pursuant to the applicable laws, regulations, and timing which
govern the receipt of such refunds for federal/state purposes, and which
apply to taxpayers who file their tax returns directly with such federal or
state tax agency. GNE will in no case file a separate carryback claim with
any federal, state or local taxing authority for any post-acquisition tax
attributes which were included in a consolidated or combined return.
ARTICLE VII
UNUSED TAX LOSSES, LIMITATIONS, and CREDITS
SECTION 7.1 Retention by GNE of all Tax Attributes. In the event a GNE
Consolidated Group proforma return includes excess losses, credits, or any
other tax attributes which were limited to the GNE Consolidated Group on its
proforma return (and hence can only be carried-back or carried-forward), that
tax attribute shall remain the property of GNE for utilization in a future
GNE Consolidated Group proforma return as a carryforward, or for utilization
in a prior GNE Consolidated Group return year as a carryback, in accordance
with the sole discretion of GNE. Section 7.2 of this Agreement shall apply.
SECTION 7.2 Applicable Federal/State Law as to Timing and Utilization of Tax
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<PAGE>
Attributes Continues to Apply. GNE agrees that in all circumstances, it will
only be permitted to utilize a tax loss; limitation; credit; or similar item
of tax attribute on a GNE Consolidated Group proforma return pursuant to the
applicable laws, regulations, and timing which govern the utilization of such
tax attributes for federal/state purposes, and which apply to taxpayers who
file their tax returns directly with such federal or state tax agency. In
all such cases, the same terms and conditions under the applicable federal
and state tax laws regarding timing and utilization of deductions and losses
will apply to the GNE Consolidated Group on its proforma returns submitted to
RHI. In the event of a refund due to GNE under this Section, RHI will remit
to GNE the tax which would be payable pursuant to the Stand Alone Method as
described in Section 2.1. RHI will also remit to GNE interest income on such
refund, but only in the event such interest income would be payable pursuant
to the laws and regulations governing such refunds by the appropriate
federal/state tax authority, applicable to taxpayers who file their tax
returns directly with such federal or state tax agency. In the event
interest income is payable by RHI to GNE under this Section, the rate of
interest shall be the same rate of interest that would have been payable
pursuant to the Stand Alone Method as described in Section 2.1.
SECTION 7.3 Utilization of Tax Attributes by RHI on Current Group Return.
Notwithstanding Sections 7.1 and 7.2 of this Agreement, RHI is entitled to
fully utilize currently any tax attributes arising from a GNE Consolidated
Group proforma return on the corresponding Group consolidated/combined
return, and RHI will separately track whether that tax attribute may be
carried-back or carried-forward on a Group basis. Under no circumstances,
however, will the utilization by RHI of a current GNE Consolidated Group tax
attribute affect GNE's ability to utilize that attribute on GNE Consolidated
Group's own proforma return, as described in Section 6.2 and Section 7.1 of
this Agreement. For example, a current GNE tax loss which RHI is able to
utilize currently on a Group consolidated/combined basis, will be refunded by
RHI to GNE at such time when GNE is able to utilize that loss as either a
carryforward or carryback on a proforma return, under the guidelines
specified in Section 7.2 of this Agreement.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Indemnification. Subject to GNE having satisfied its
obligations under this Agreement RHI will indemnify GNE against and hold it
harmless from (a) any liability of GNE for the payment of any tax, interest
and penalties of the RHI Group for any taxable period of which GNE is a
member of the RHI Group (except to the extent that such amount is
attributable to GNE and GNE has not made a previous payment of such amount to
RHI) and (b) all liabilities, costs, expenses (including, without limitation,
reasonable expenses of investigation and attorney's fees and expenses),
losses, damages, assessments, settlements or judgments arising out of or
incident to the imposition, assessment or assertion of any tax, interest or
penalties described in (a).
Page 8
<PAGE>
ARTICLE IX
NOTICES
SECTION 9.1 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to
the parties at the addresses indicated on the signature page of this
Agreement (or at such other address for a party as shall be specified by like
notice). All such notices and other communications shall be deemed to have
been received (a) in the case of personal delivery, on the date of delivery,
(b) in the case of telecopy, when the party receiving such copy shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally recognized overnight courier, on the business day following
dispatch, and (d) in the case of mailing, on the tenth business day following
such mailing. Failure of a party to provide notice in a prescribed time
period or in a timely manner shall not constitute a waiver of the other
party's obligation hereunder. Where notice is a condition to payment, the
obligation to make the payment shall not be waived, forgiven or eliminated by
virtue of a failure to give notice; however, the time period in which an
amount must be paid shall be measured from the date on which notice is
actually given.
ARTICLE X
SUCCESSORS
SECTION 10.1 Successors. This agreement shall be binding on and inure to
the benefit of any successor, by merger, acquisition of assets or otherwise,
to any current or future member of the RHI Group and/or the GNE Group
(including but not limited to any successor to such a member succeeding to
the tax attributes of such member under Section 381 of the Internal Revenue
Code), to the same extent as if such successor had been an original party
hereto.
ARTICLE XI
AUTHORIZATION, ETC.
SECTION 11.1 Authorization, etc. RHI is entering into this Agreement on
behalf of itself and the other members (current and future) of the RHI Group
(other than those RHI Group members that also are members of the GNE Group),
and GNE is entering into this Agreement on behalf of itself and the other
members (current and future) of the GNE Group. RHI and GNE each hereby
represents and warrants that it has the power and authority, on behalf of
itself and, respectively, the other members (current and future) of the RHI
Group (other than those RHI Group members that also are members of the GNE
Group), and the other members (current and future) of the GNE Group, to
execute, deliver and perform this Agreement, that this Agreement has been
duly authorized by all necessary corporate action on the part of such party,
that this Agreement constitutes a legal, valid and binding obligation of each
such party and that the execution, delivery and performance of this Agreement
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<PAGE>
by such party does not contravene or conflict with any provision of law or of
its charter or bylaws or any agreement, instrument or order binding on such
party.
ARTICLE XII
GOVERNING LAW
SECTION 12.1 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without giving
effect to the laws and principles relating to conflicts of law.
ARTICLE XIII
COUNTERPARTS
SECTION 13.1 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
ARTICLE XIV
WAIVERS and AMENDMENTS
SECTION 14.1 Waivers and Amendments. This Agreement shall not be waived,
amended or otherwise modified except in writing, duly executed by all of the
parties hereto.
ARTICLE XV
DISPUTE RESOLUTION
SECTION 15.1 Dispute Resolution. The parties shall attempt in good faith to
resolve any dispute arising out of or relating to this Agreement and shall
attempt in good faith to negotiate a settlement of any dispute. If such
matter has not been resolved within a reasonable period of time, then the
parties will pursue arbitration via an independent accounting or law firm as
mutually agreed upon by the parties.
ARTICLE XVI
MISCELLANEOUS
SECTION 16.1 Tax Advisors. GNE shall have the right to choose its own tax
advisors for purposes of tax return preparation, planning, and other tax
matters.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
GENENTECH, INC.
By: /S/LOUIS J. LAVIGNE, JR.
----------------------------
Name: Louis J. Lavigne, Jr.
Title: Executive Vice President and
Chief Financial Officer
ROCHE HOLDINGS, INC.
By: /S/MARCEL F. KOHLER
----------------------------
Name: Marcel F. Kohler
Title: Vice President -
Controller/Secretary
Page 11
<PAGE>
EXHIBIT 15.1
August 9, 1999
The Board of Directors and Stockholders
Genentech, Inc.
We are aware of the incorporation by reference in the Registration Statements
pertaining to the 1999 Stock Plan, the 1996 Stock Option/Stock Incentive
Plan, the 1994 Stock Option Plan, and the 1990 Stock Option/Stock Incentive
Plan and in the related prospectuses, as applicable, contained in such
Registration Statements of our report dated July 9, 1999 relating to the
unaudited condensed consolidated interim financial statements of Genentech,
Inc. which are included in its Form 10-Q for the quarter ended June 30, 1999.
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,
/S/ERNST & YOUNG LLP
- --------------------------
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 JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. AMOUNTS IN
THOUSANDS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 291,856
<SECURITIES> 1,429,146
<RECEIVABLES> 191,743<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 324,473
<CURRENT-ASSETS> 1,442,309
<PP&E> 1,203,498
<DEPRECIATION> 484,755
<TOTAL-ASSETS> 6,369,379
<CURRENT-LIABILITIES> 619,235
<BONDS> 149,989
0
0
<COMMON> 2,573
<OTHER-SE> 5,126,278
<TOTAL-LIABILITY-AND-EQUITY> 6,369,379
<SALES> 503,424
<TOTAL-REVENUES> 717,594
<CGS> 98,404
<TOTAL-COSTS> 98,404
<OTHER-EXPENSES> 184,951
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 2,719
<INCOME-PRETAX> (980,357)
<INCOME-TAX> (71,580)
<INCOME-CONTINUING> (908,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (908,777)
<EPS-BASIC> (7.09)
<EPS-DILUTED> (7.09)
<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.
</FN>
</TABLE>
