<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GENENTECH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2347624
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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1 DNA WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080-4990
(650) 225-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEPHEN G. JUELSGAARD, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
GENENTECH, INC.
1 DNA WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080-4990
(650) 225-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
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RICHARD A. DRUCKER, ESQ. GERALD S. TANENBAUM, ESQ.
DAVIS POLK & WARDWELL CAHILL GORDON & REINDEL
450 LEXINGTON AVENUE 80 PINE STREET
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10005
(212) 450-4000 (212) 701-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with dividend of reinvestment
plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
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Common Stock, par value $.02 per share............ $50,000,000 $13,900
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457 under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
Subject to Completion
Dated June 14, 1999
Shares
[GENENTECH LOGO]
Common Stock
Roche Holdings, Inc. is offering all of these shares of our common stock and
will receive all of the proceeds of this offering. We intend to list the common
stock on the under the symbol " ". It is estimated
that the initial public offering price of our common stock will be between
$ per share and $ per share.
Prior to this offering, we had two classes of common stock outstanding: our
common stock, offered hereby, and our special common stock. On June 30, 1999, we
will redeem all of our special common stock held by stockholders other than
Roche Holdings, Inc. at $82.50 per share in cash and retire all of the shares of
special common stock including those held by Roche Holdings, Inc. After the
redemption of our special common stock, Roche Holdings, Inc. will own 100% of
our common stock and, after the completion of this offering, Roche Holdings,
Inc. will own approximately % of our common stock.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT ROCHE HOLDINGS, INC.
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Per Share $ $ $
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Total $ $ $
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Roche Holdings, Inc. has granted the underwriters the right to purchase up to an
additional shares of common stock to cover over-allotments.
J.P. MORGAN & CO.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
WARBURG DILLON READ LLC
BANCBOSTON ROBERTSON STEPHENS
, 1999
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................... 1
Risk Factors................................ 7
Special Note Regarding Forward-Looking
Statements................................ 12
Dividend Policy............................. 12
Price Range of Special Common Stock......... 13
Unaudited Pro Forma Condensed Consolidated
Financial Statements...................... 14
Selected Consolidated Financial Data........ 25
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................. 26
Business.................................... 38
Management.................................. 54
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PAGE
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Relationship with Roche..................... 62
Selling Stockholder and Principal
Stockholders.............................. 67
Description of Capital Stock................ 68
Material U.S. Federal Tax Considerations for
Non-U.S. Holders of Common Stock.......... 70
Shares Eligible for Future Sale............. 72
Underwriting................................ 73
Legal Matters............................... 75
Experts..................................... 75
Where You Can Find More Information......... 75
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
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Until , 1999, all dealers that effect transactions in the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
In this prospectus, "Genentech," "we," "us" and "our" refer to Genentech, Inc.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. Roche Holdings, Inc. is offering to sell, and
seeking offers to buy, shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
We have not taken any action to permit a public offering of the shares of common
stock outside the United States or to permit the possession or distribution of
this prospectus outside the United States. Persons outside the United States who
come into possession of this prospectus must inform themselves about and observe
any restrictions relating to the offering of the shares of common stock and the
distribution of this prospectus outside the United States.
-------------------------
We own or have rights to various copyrights, trademarks and trade names used in
our business including the following: Actimmune(R) (interferon gamma-1b);
Activase(R) (alteplase, recombinant) tissue-plasminogen activator;
Herceptin(R)(trastuzumab) anti-HER2 antibody; Neuleze(TM) nerve growth factor;
Nutropin(R) (somatropin (rDNA origin) for injection) growth hormone; Nutropin
AQ(R) (somatropin (rDNA origin) injection) liquid formulation growth hormone;
Nutropin Depot(TM) encapsulated sustained-release growth hormone; Protropin(R)
(somatrem for injection) growth hormone; Pulmozyme(R) (dornase alfa,
recombinant) inhalation solution; Rituxan(R) (rituximab) antibody; and
Xubix(TM)(sibrafiban) oral IIb/IIIa antagonist. This prospectus also includes
trademarks, service marks and trade names of other companies.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information that you should consider before
deciding to invest in our common stock. We urge you to read this entire
prospectus carefully, including the "Risk Factors" section, the consolidated
financial statements and the notes to those statements and the unaudited pro
forma condensed consolidated financial statements and the notes to those
statements.
GENENTECH, INC.
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. In 1998,
we had total revenues of $1,150.9 million and net income of $181.9 million.
We manufacture and market the following seven products directly in the United
States:
- Herceptin(R) antibody for the treatment of patients with metastatic
breast cancer whose tumors overexpress the human epidermal growth factor
receptor2, or HER2, protein;
- Rituxan(R) (rituximab) antibody for the treatment of patients with
relapsed or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkins lymphoma;
- Activase(R) 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(R) growth hormone for the treatment of lack of adequate
endogenous growth hormone secretion, or growth hormone deficiency, in
children;
- Nutropin(R) 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(R) liquid formulation growth hormone for the same indications
as Nutropin; and
- Pulmozyme(R) inhalation solution for the management of cystic fibrosis.
We receive royalties on sales of our 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., 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.
We currently have 16 projects in our development pipeline, including two
products or indications in preparation for Phase III clinical trials, four
products or indications in Phase III clinical trials and two products for which
Phase III clinical trials have been completed and for which we are preparing
regulatory filings to seek marketing approval in the United States.
Our principal executive offices are located at 1 DNA Way, South San Francisco,
California 94080-4990 and our telephone number is (650) 225-1000.
1
<PAGE> 5
RELATIONSHIP WITH ROCHE HOLDINGS, INC.
Since 1990, Roche Holdings, Inc., a Delaware corporation, commonly known as
Roche, has been our majority stockholder. Roche is an indirect, wholly owned
subsidiary of Roche Holding Ltd, a Swiss company, and is the holding company for
the principal operating subsidiaries of Roche Holding Ltd in the United States.
Roche Holding Ltd, through its various direct and indirect subsidiaries, engages
primarily in the development and manufacture of pharmaceuticals, vitamins and
fine chemicals, diagnostics, flavors and fragrances, and in the business of
analytical laboratory services.
On June 30, 1999, we will redeem all of our special common stock held by
stockholders other than Roche at $82.50 per share in cash and retire all of the
shares of special common stock including those held by Roche. After the
redemption, Roche will own 100% of our outstanding common stock. After the
completion of this offering, Roche will own approximately % of our common
stock.
In connection with this offering, we have 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.
Affiliation Arrangements
Prior to the completion of this offering, we will amend our certificate of
incorporation and bylaws and enter into an affiliation agreement with Roche. In
order to provide continuity while at the same time reflecting Roche's
controlling interest in our company, the size and composition of our board of
directors will change. Upon completion of this offering, our board will consist
of two Roche directors, three independent directors nominated by a nominating
committee currently controlled by Roche and one Genentech employee. Arthur D.
Levinson, Ph.D., the President and Chief Executive Officer of Genentech, will
serve as the Genentech employee director and chairman of the board. 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 assure you that Roche will not
implement a new business plan in the future.
Except as follows, the affiliation agreement does 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:
- 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 redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
For more information about our relationship with Roche and its impact on
investors, please read "Relationship with Roche" and "Risk Factors--Roche, Our
Controlling Stockholder, May Have Interests That Are Adverse to Yours" below.
2
<PAGE> 6
Licensing Agreement
We have, in the past, cooperated in various business collaborations with Roche.
We expect such cooperation to continue. 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 this offering, we have amended that agreement, the major
provisions of which include:
- we have 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 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 shall 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.
For more information about this agreement, see "Business--Licensing Agreements
with F. Hoffmann-La Roche Ltd--Amended and Restated Licensing Agreement."
Tax Sharing Agreement
After the redemption of our special common stock, we will be 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 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. For more
information about the tax sharing agreement, you should read "Relationship with
Roche--Tax Sharing Agreement."
3
<PAGE> 7
THE OFFERING
COMMON STOCK OFFERED BY ROCHE........ shares
OVER-ALLOTMENT OPTION FROM ROCHE..... shares
COMMON STOCK OUTSTANDING............. shares
USE OF PROCEEDS......................We will not receive any of the net proceeds
from this offering.
DIVIDEND POLICY......................We do not intend to declare or pay any cash
dividends on our common stock in the
foreseeable future. We plan to retain any
earnings for use in the operation of our
business and to fund future growth.
PROPOSED SYMBOL............" "
Unless we specifically state otherwise, the information in this prospectus does
not take into account the sale of up to shares of common stock by Roche that
the underwriters have the option to purchase solely to cover over-allotments.
The number of shares of our common stock outstanding listed above does not take
into account shares of common stock that may be issued upon exercise of
either outstanding stock options or stock options which will be issued prior to
this offering.
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data for our
company. The historical and pro forma data presented in this table are derived
from our reported consolidated financial statements and notes thereto and
unaudited pro forma condensed consolidated financial statements and notes
thereto, respectively, which are included elsewhere in this prospectus. The pro
forma information gives effect to the June 1999 redemption of our special common
stock as if it occurred at January 1, 1998 in the case of the statement of
operations data and March 31, 1999 in the case of the balance sheet data. The
pro forma information also gives effect to the 1990 through 1997 purchases of
our common stock and special common stock by Roche.
The pro forma statement of operations data for the year ended December 31, 1998
includes amortization of goodwill ($150.2 million) and other intangibles ($224.3
million) and reflects the sale of inventories adjusted to fair value (such
adjustment totalling $191.8 million) related to the allocation to our financial
statements of Roche's purchase prices and our redemption of the special common
stock. The pro forma statement of operations data for the three months ended
March 31, 1999 includes amortization of goodwill ($37.6 million) and other
intangibles ($56.1 million) related to the allocation of Roche's purchase prices
and our redemption of the special common stock to our financial statements. The
unaudited pro forma statement of operations data for the three months ended
March 31, 1999 excludes an adjustment for the sale of inventories adjusted to
fair value as it is assumed that these inventories were sold in 1998 as there is
approximately twelve months of inventory on hand. The pro forma statements of
operations data also reflect the book tax benefits related to each of these pre-
tax pro forma adjustments other than goodwill (which has and will have no book
tax benefit) at a 40% marginal rate. For more information regarding this pro
forma data, you should read the "Unaudited Pro Forma Condensed Consolidated
Financial Statements" elsewhere in this prospectus.
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THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
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PRO FORMA PRO FORMA
1999 1999 1998 1998 1998 1997 1996
----------- ----------- ----------- ----------- -------- -------- ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
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In millions, except per share
data
STATEMENT OF OPERATIONS DATA
Total revenues................. $317.8 $322.3 $264.7 $1,132.8 $1,150.9 $1,016.7 $968.7
Product sales................ 234.1 234.1 164.7 717.8 717.8 584.9 582.8
Royalties.................... 46.6 46.6 64.5 229.6 229.6 241.1 214.7
Contract and other........... 19.2 19.2 14.9 114.8 114.8 121.6 107.0
Interest..................... 17.9 22.4 20.6 70.6 88.7 69.1 64.2
Total costs and expenses....... $378.7 $285.0 $207.7 $1,464.6 $ 898.3 $ 846.9 $820.8
Cost of sales................ 45.7 45.7 33.6 330.4 138.6 102.5 104.5
Research and development..... 90.7 90.7 98.2 396.2 396.2 470.9 471.1
Marketing, general and
administrative............ 97.2 97.2 74.9 358.9 358.9 269.9 240.1
Special charge -- legal
settlement................ 50.0 50.0 -- -- -- -- --
Goodwill amortization........ 37.6 -- -- 150.2 -- -- --
Amortization of other
intangibles............... 56.1 -- -- 224.3 -- -- --
Interest..................... 1.4 1.4 1.0 4.6 4.6 3.6 5.1
Income (loss) before taxes..... $(60.9) $ 37.3 $ 57.0 $ (331.8) $ 252.6 $ 169.8 $147.9
Income tax provision
(benefit).................... (4.7) 22.9 16.0 (114.5) 70.7 40.8 29.6
Net income (loss).............. $(56.2) $ 14.4 $ 41.0 $ (217.3) $ 181.9 $ 129.0 $118.3
Effective tax rate............. 8% 61% 28% 35% 28% 24% 20%
Earnings (loss) per share
Basic........................ $(0.44) $ 0.11 $ 0.33 $ (1.73) $ 1.45 $ 1.05 $ 0.98
Diluted...................... (0.44) 0.11 0.32 (1.73) 1.40 1.02 0.95
Weighted average shares
outstanding
Basic........................ 127.7 127.7 124.8 125.8 125.8 123.0 120.6
Diluted...................... 127.7 132.5 128.8 125.8 129.9 126.4 124.0
Actual shares outstanding at
period-end................... 128.0 128.0 125.2 127.1 127.1 124.2 121.4
OTHER DATA
Cash flow from operations...... $ 54.3 $ 53.6 $ 68.9 $ 350.5 $ 349.9 $ 118.3 $139.7
Depreciation expense........... 20.2 20.2 16.5 72.7 72.7 58.9 57.6
Amortization expense........... 95.4 1.7 1.4 379.9 5.4 6.6 4.5
Capital expenditures........... 18.2 18.2 21.0 88.1 88.1 154.9 141.8
</TABLE>
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SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
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AS OF MARCH 31, 1999
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PRO FORMA ACTUAL
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(UNAUDITED)
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In millions
BALANCE SHEET DATA
Cash and cash equivalents, short-term investments and
long-term marketable securities........................... $1,362.5 $1,662.5
Working capital............................................. 891.0 942.6
Goodwill and other intangible assets........................ 3,187.1 64.1
Total assets................................................ 6,033.9 2,926.1
Long-term debt.............................................. 150.0 150.0
Total liabilities........................................... 1,056.4 536.4
Total stockholders' equity.................................. 4,977.5 2,389.7
Total liabilities and stockholders' equity.................. 6,033.9 2,926.1
</TABLE>
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<PAGE> 10
RISK FACTORS
You should carefully consider each of the risks and uncertainties described
below and all of the other information in this prospectus or incorporated by
reference before deciding to invest in shares of our common stock. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual events, our
business, financial condition or results of operations could be materially and
adversely affected. In such case, the trading price of our common stock could
decline.
FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON STOCK
Our operating results may vary from period to period for several reasons
including, but not limited to:
- the overall competitive environment for our products;
- 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 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.
These fluctuations may not match the expectations of securities analysts and
investors. This could cause the trading price of our common stock to decline.
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;
7
<PAGE> 11
- in-licensing activities, including the timing and amount of related
development funding or milestone payments; and
- future levels of revenues.
ROCHE, OUR CONTROLLING STOCKHOLDER, MAY HAVE INTERESTS THAT ARE ADVERSE TO YOURS
Upon the completion of this offering, Roche will own approximately % 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. Prior to the
completion of this offering, we will amend our certificate of incorporation and
bylaws and enter into a new affiliation agreement with Roche, which provides,
among other things, that the composition of our board of directors will change
to consist of two Roche directors, three independent directors nominated by the
nominating committee and one Genentech employee who in the future will be
nominated by a 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, 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. See "Relationship with Roche."
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. In connection with
the redemption of our special common stock, some of our existing employee stock
option plans will terminate and a number of employee options will be canceled in
exchange for cash. We intend to issue new employee stock options to attract and
retain employees. 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
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, Inc.'s
Retavase(R); 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 Pharmaceutical Inc., or
Coulter, is expected to file a product for approval with the FDA that would
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;
8
<PAGE> 12
- 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 WILL RECORD
SUBSTANTIAL GOODWILL AND OTHER INTANGIBLES, THE AMORTIZATION OF WHICH WILL
ADVERSELY AFFECT OUR EARNINGS
After the redemption of our special common stock, Roche will own all of our
outstanding stock. Because we will be wholly owned by Roche, push-down
accounting is required under generally accepted accounting principles. Push-down
accounting requires that we 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 is "pushed down" to us and reflected
on our financial statements. Push-down accounting will require us to record
goodwill and other intangible assets of approximately $1,635.2 million and
$1,487.8 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 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 "Unaudited Pro
Forma 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
9
<PAGE> 13
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
"Business--Legal Proceedings."
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 transactions
pursuant to our investment and risk management policies and procedures in areas
such as hedging and counterparty exposure practices. We could be exposed to
losses related to these financial instruments should one of our counterparties
default. Variations in interest rates, foreign currency exchange rates and
equity investment prices may also affect our financial results. You should read
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Market Risk."
WE MAY INCUR MATERIAL LITIGATION COSTS
We are subject to legal proceedings, including those matters described in
"Business--Legal Proceedings." 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 Biologics License Application, or 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.
quarter of 1999 to settle a federal investigation relating to our clinical,
sales and marketing activities from 1985 to 1994 associated with human growth
hormone. We cannot assure you that pending, or future, legal proceedings will
not result in additional special charges or have a material adverse effect on
our financial condition and results of operations.
OUR STOCK PRICE, LIKE THAT OF MANY BIOTECHNOLOGY COMPANIES, IS LIKELY TO BE
HIGHLY VOLATILE
The market prices for securities of biotechnology companies in general have been
highly volatile and may continue to be highly volatile in the future. In
addition, due to the absence of the put and call associated with our special
common stock and the reduction in the number of shares of our publicly traded
stock, the market price of our common stock may be more volatile
10
<PAGE> 14
in the future than our special common stock was in the past. The following
factors, in addition to other risk factors described in this section, may have a
significant impact on the market price of our common stock:
- announcements of technological innovations or new commercial products by
us or our competitors;
- developments concerning proprietary rights, including patents;
- publicity regarding actual or potential medical results relating to
products under development by us or our competitors;
- regulatory developments in the United States and foreign countries;
- public concern as to the safety of biotechnology products;
- economic and other external factors or other disaster or crisis; and
- period-to-period fluctuations in financial results.
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. 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 information, goods and services to us. These include financial
institutions, suppliers, vendors, research partners, governmental entities and
customers. If significant numbers of these third parties experience failures in
their computer systems or equipment due to Year 2000 non-compliance, it could
affect our ability to process transactions, manufacture products, or engage in
similar normal business activities.
FUTURE SALES BY ROCHE COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE
Sales of a substantial number of shares of our common stock in the public market
following this offering could adversely affect the market price of our common
stock. You should read "Shares Eligible for Future Sale."
11
<PAGE> 15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this prospectus are
forward-looking statements concerning our operations, economic performance and
financial condition. Forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, are included, for
example, in the discussions about:
- our strategy;
- our future relationship with Roche;
- our liquidity;
- product sales, royalties and contract revenues;
- new product development or product introduction;
- expenses and net income;
- our credit risk management;
- our asset/liability risk management;
- our operational and legal risks;
- the assumptions used in our unaudited pro forma condensed consolidated
financial statements;
- our consumer business;
- Year 2000 issues; and
- how we may be affected by certain legal proceedings.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
DIVIDEND POLICY
We have never declared or paid cash dividends. We do not intend to declare or
pay any cash dividends on our common stock in the foreseeable future. We plan to
retain any earnings for use in the operation of our business and to fund future
growth.
12
<PAGE> 16
PRICE RANGE OF SPECIAL COMMON STOCK
From October 26, 1995 until June , 1999, our special common stock traded on
the New York Stock Exchange and the Pacific Exchange under the symbol "GNE".
The following table sets forth the high and low reported sale prices for our
special common stock on the NYSE for the periods indicated. Since its issuance,
our special common stock was subject to a redemption right, exercisable at the
option of Roche, at predetermined prices per share. On June 30, 1999, we will
redeem all of our special common stock held by stockholders, other than Roche,
at $82.50 per share in cash and retire all of the shares of special common stock
including those held by Roche.
<TABLE>
<CAPTION>
----------------
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter............................................. $58 $53 1/4
Second Quarter............................................ 59 1/4 56 1/2
Third Quarter............................................. 58 15/16 56 1/2
Fourth Quarter............................................ 60 5/8 57 1/2
1998
First Quarter............................................. $72 1/2 $59 1/4
Second Quarter............................................ 73 3/4 65 3/4
Third Quarter............................................. 72 11/16 63 9/16
Fourth Quarter............................................ 79 3/4 68 1/8
1999
First Quarter............................................. $88 15/16 $74 1/2
Second Quarter (through June 11).......................... 90 81 15/16
</TABLE>
We intend to list our common stock on the under the symbol " ".
13
<PAGE> 17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements
are presented for illustrative purposes only. These statements are not
necessarily indicative of our financial position or results of operations for
future periods or the results that actually would have been realized had the
redemption of all of our special common stock occurred and had push-down
accounting for Roche's purchases of our common and special common stock and the
Redemption (as defined below) been applied during the specified periods. The
unaudited pro forma condensed consolidated financial statements, including the
notes thereto, are based on and qualified in their entirety by reference to, and
should be read in conjunction with our reported audited consolidated financial
statements and unaudited condensed consolidated financial statements and the
notes thereto, which are included elsewhere herein.
The unaudited pro forma condensed consolidated financial statements give effect
to our June 30, 1999 redemption of all of our outstanding 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 (the "Redemption"). 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. Under this method of accounting, our assets and liabilities,
including intangible assets, will be recorded at their fair values not to exceed
the aggregate Roche purchase price, including Roche's transaction costs. In
1990, 1991 through 1997, and 1999, Roche purchased 60%, 5%, and 35%,
respectively, of our outstanding stock. The push-down effect of Roche's purchase
price in the following unaudited pro forma condensed consolidated balance sheet
is allocated based on Roche's ownership percentages as if the purchases had
occurred at the original purchase dates for the 1990 and 1991 through 1997
purchases and at March 31, 1999 for the June 1999 purchase. The unaudited pro
forma condensed consolidated statements of operations assume that the purchases
had occurred at the original purchase dates for the 1990 and 1991 through 1997
purchases and at January 1, 1998 for the June 1999 purchase. The unaudited pro
forma condensed consolidated statements of operations exclude the effect of
charges for in-process research and development and employee compensation for
stock option related transactions to be recorded at the redemption date and
thereafter.
The projected or assumed completion dates, revenues, expenses, cash flows and
other financial information described below are forward-looking statements that
involve substantial risks and uncertainties. Actual results or performance may
differ materially for a variety of reasons. There are a number of risks with
respect to the timely completion and commercialization of the in-process
research and development projects, including the risk that the product
candidates may be found to be ineffective or to have harmful side effects in
clinical testing and that a competitor may develop products which compete with
or replace the in-process research and development projects or that we may lose
key personnel. Other risks that may affect future results or performance are
described under "Risk Factors."
14
<PAGE> 18
GENENTECH, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
---------------------------------------
AS OF MARCH 31, 1999
---------------------------------------
AS PRO FORMA
REPORTED ADJUSTMENTS PRO FORMA
-------- -------------- ---------
<S> <C> <C> <C>
In millions, except share data
ASSETS
Current assets
Cash and cash equivalents................................. $ 213.6 $ -- $ 213.6
Short-term investments.................................... 681.4 (300.0)(a) 381.4
Accounts receivable....................................... 168.8 -- 168.8
Inventories............................................... 146.7 191.8(b) 338.5
Prepaid expenses and other current assets................. 51.9 120.0(a)
(43.5)(q) 128.4
-------- --------- ---------
Total current assets.............................. 1,262.4 (31.7) 1,230.7
Long-term marketable securities............................. 767.5 -- 767.5
Property, plant and equipment, net.......................... 698.8 16.5(c) 715.3
Goodwill.................................................... -- 472.8(d)
1,162.4(e) 1,635.2
Other intangible assets..................................... -- 117.3(f)
1,370.5(g)
64.1(q) 1,551.9
Other assets................................................ 197.4 (64.1) (q) 133.3
-------- --------- ---------
Total assets...................................... $2,926.1 $ 3,107.8 $ 6,033.9
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 31.6 $ -- $ 31.6
Other accrued liabilities................................. 288.2 19.9(e,i) 308.1
-------- --------- ---------
Total current liabilities......................... 319.8 19.9 339.7
Long-term debt.............................................. 150.0 -- 150.0
Deferred income taxes....................................... -- 453.2(e)
46.9(i)
41.5(q) 541.6
Other long-term liabilities................................. 66.6 (41.5)(q) 25.1
-------- ---------
Total liabilities................................. 536.4 520.0 1,056.4
Stockholders' equity
Special common stock (51,346,989 shares outstanding, none
pro forma)............................................. 1.0 (1.0)(j) --
Common stock (76,621,009 shares outstanding, 127,967,998
shares pro forma)...................................... 1.5 1.0(j) 2.5
Additional paid-in capital................................ 1,630.3 2,276.9(k)
2,992.2(k)
62.8(i) 6,962.2
Retained earnings (accumulated deficit)................... 707.5 (1,733.6)(h,l)
(993.2)(h,l) (2,019.3)
Accumulated other comprehensive income.................... 49.4 (17.3)(q) 32.1
-------- --------- ---------
Total stockholders' equity........................ 2,389.7 2,587.8 4,977.5
-------- --------- ---------
Total liabilities and stockholders' equity........ $2,926.1 $ 3,107.8 $ 6,033.9
======== ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
15
<PAGE> 19
GENENTECH, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------
AS PRO FORMA
REPORTED ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
In millions, except per share data
Revenues
Product sales............................................. $234.1 $ -- $234.1
Royalties................................................. 46.6 -- 46.6
Contract.................................................. 7.2 -- 7.2
Other..................................................... 12.0 -- 12.0
Interest.................................................. 22.4 (4.5)(m) 17.9
------ ------ ------
Total revenues.................................... 322.3 (4.5) 317.8
Cost and expenses
Cost of sales............................................. 45.7 -- 45.7
Research and development.................................. 90.7 -- 90.7
Marketing, general and administrative..................... 97.2 -- 97.2
Special charge -- legal settlement........................ 50.0 -- 50.0
Goodwill amortization..................................... -- 18.2(d)
19.4(e) 37.6
Amortization of other intangibles......................... -- 17.4(f)
38.7(g) 56.1
Interest.................................................. 1.4 -- 1.4
------ ------ ------
Total costs and expenses.......................... 285.0 93.7 378.7
------ ------ ------
Income (loss) before taxes.................................. 37.3 (98.2) (60.9)
Income tax provision (benefit).............................. 22.9 (24.2)(o)
(3.4)(p) (4.7)
------ ------ ------
Net income (loss)........................................... $ 14.4 $(70.6) $(56.2)
====== ====== ======
Earnings (loss) per share
Basic..................................................... $ 0.11 $(0.44)
Diluted................................................... 0.11 (0.44)
Weighted average shares used to compute earnings (loss) per
share
Basic..................................................... 127.7 127.7
Diluted................................................... 132.5 127.7
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
16
<PAGE> 20
GENENTECH, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED DECEMBER 31, 1998
---------------------------------------
AS PRO FORMA
REPORTED ADJUSTMENTS PRO FORMA
-------- -------------- ---------
<S> <C> <C> <C>
In millions, except per share data
Revenues
Product sales............................................. $ 717.8 $ -- $ 717.8
Royalties................................................. 229.6 -- 229.6
Contract.................................................. 106.0 -- 106.0
Other..................................................... 8.8 -- 8.8
Interest.................................................. 88.7 (18.1)(m) 70.6
-------- ------- --------
Total revenues.................................... 1,150.9 (18.1) 1,132.8
Cost and expenses
Cost of sales............................................. 138.6 191.8(n) 330.4
Research and development.................................. 396.2 -- 396.2
Marketing, general and administrative..................... 358.9 -- 358.9
Goodwill amortization..................................... -- 72.7(d)
77.5(e) 150.2
Amortization of other intangibles......................... -- 69.6(f)
154.7(g) 224.3
Interest.................................................. 4.6 -- 4.6
-------- ------- --------
Total costs and expenses.......................... 898.3 566.3 1,464.6
-------- --------
Income (loss) before taxes.................................. 252.6 (584.4) (331.8)
Income tax provision (benefit).............................. 70.7 (173.7) (o)
(11.5) (p) (114.5)
-------- ------- --------
Net income (loss)........................................... $ 181.9 $(399.2) $ (217.3)
======== ======= ========
Earnings (loss) per share
Basic..................................................... $ 1.45 $ (1.73)
Diluted................................................... 1.40 (1.73)
Weighted average shares used to compute earnings (loss) per
share
Basic..................................................... 125.8 125.8
Diluted................................................... 129.9 125.8
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
17
<PAGE> 21
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 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 into our consolidated financial statements. Under this method of
accounting, Genentech's assets and liabilities, including intangible assets,
will be recorded at their fair values not to exceed the aggregate purchase
price, including Roche's transaction costs. In 1990, 1991 through 1997, and 1999
Roche purchased 60%, 5% and 35%, respectively, of the outstanding stock of
Genentech. The push-down effect of Roche's purchase price in the accompanying
unaudited pro forma condensed consolidated balance sheet 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 March 31,
1999 for the June 1999 purchase. An independent third-party valuation firm
assisted Genentech's management in its determination of the valuation of the
intangible assets used in allocating the purchase price. The aggregate purchase
prices for Roche's purchase acquisitions of all of Genentech's outstanding
shares, including estimated transaction costs of $10.0 million, was $6,542.1
million, consisting of approximately $2,843.5 million for the period 1990 and
1991 through 1997 and approximately $3,698.6 million for the June 1999 purchase.
Approximately $300.0 million of compensation expense related to Genentech's
early cash settlement of employee stock options will be paid by Genentech and
charged to earnings at the Redemption date. In addition, we expect to record in
the second and third quarters of 1999 an aggregate of approximately $130.0
million and $ million, respectively, of non-cash compensation expense in
connection with the modification and remeasurement, for accounting purposes, of
a number of options assuming a public offering price of $ per share,
the midpoint of the range set forth on the cover of this prospectus, and
assuming none of the limited number of eligible employees elect to participate
in our new long-term deferred compensation plan.
The unaudited pro forma condensed consolidated statements of operations exclude
the effect of the charge for in-process research and development and the
employee-related compensation amounts described above, which are reflected as
charges to retained earnings in the unaudited pro forma condensed consolidated
balance sheet. The as reported balance sheet as of March 31, 1999 and the as
reported statements of operations for the year ended December 31, 1998 and for
the three months ended March 31, 1999 are derived from Genentech's historical
consolidated financial statements included elsewhere herein.
The following table shows details of the excess of purchase price over net book
value:
<TABLE>
<CAPTION>
-----------------------------------
PURCHASE PERIOD
-----------------------
1990 - 1997 1999 TOTAL
----------- -------- --------
<S> <C> <C> <C>
In millions
Total purchase price........................................ $2,843.5 $3,698.6 $6,542.1
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 $2,862.2 $5,139.1
======== ======== ========
</TABLE>
18
<PAGE> 22
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the allocation of the excess of the purchase price
over net book value:
<TABLE>
<CAPTION>
------------------------------------
PURCHASE PERIOD
-----------------------
1990 - 1997 1999 TOTAL
----------- -------- ---------
<S> <C> <C> <C>
In millions
Inventories................................................. $ 102.0 $ 191.8 $ 293.8
Land........................................................ -- 16.5 16.5
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 1,162.4 2,253.6
Deferred tax liability...................................... (456.8) (631.5) (1,088.3)
-------- -------- ---------
Total............................................. $2,276.9 $2,862.2 $ 5,139.1
======== ======== =========
</TABLE>
NOTE 2. PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on management's estimates of the value of
the tangible and intangible assets acquired. Following is a description of the
pro forma adjustments:
(a) Represents the cash to be paid by Genentech associated with the early cash
settlement of employee stock options. This amount, net of related income
tax benefit of $120 million, will be charged to earnings in the three
months ending June 30, 1999. (See also "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Redemption of
Our Special Common Stock" for a description of these stock option
arrangements.)
(b) Represents the adjustment of inventory to fair value. The estimated useful
life of the inventory adjustment is one year based upon the expected time
to sell inventories on hand at the balance sheet date. The entire
inventory adjustment related to the 1990 through 1997 purchases is assumed
to be reflected as a charge to earnings prior to January 1, 1998.
(c) Represents adjustment to record the fair value of land in 1999. There were
no such adjustments for the periods 1990 through 1997.
(d) Represents $1,091.2 million of goodwill recorded as a result of push-down
accounting applied to Roche's 1990 through 1997 purchases less related
accumulated amortization of $618.4 million through March 31, 1999.
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.
(e) Represents $1,162.4 million of goodwill recorded as a result of Roche's
June 1999 purchase. Included in goodwill is $631.5 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 this June 1999 purchase is amortized over 15 years.
19
<PAGE> 23
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) Represents $1,040.0 million of other intangible assets recorded as a
result of Roche's 1990 through 1997 purchases less related accumulated
amortization of $922.7 million of those assets through March 31, 1999. The
components of other intangible assets related to these purchases and their
estimated lives are as follows:
<TABLE>
<CAPTION>
-------------------------------------
FAIR ACCUMULATED ESTIMATED
VALUE AMORTIZATION LIFE
In millions -------- ------------ ---------
<S> <C> <C> <C>
Developed product technology........................... $ 429.0 $ 364.7 10
Core technology........................................ 240.5 204.4 10
Developed license technology........................... 292.5 292.5 6
Trained and assembled workforce........................ 32.5 32.5 7
Tradenames............................................. 39.0 22.1 15
Key distributor relationships.......................... 6.5 6.5 5
-------- --------
$1,040.0 $ 922.7
======== ========
</TABLE>
(g) Represents $1,370.5 million of other intangible assets which were recorded
as a result of Roche's June 1999 purchase. The components of other
intangible assets related to this purchase and their estimated lives are
as follows:
<TABLE>
<CAPTION>
---------------------
FAIR ESTIMATED
VALUE LIFE
In millions -------- ---------
<S> <C> <C>
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
========
</TABLE>
20
<PAGE> 24
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(h) Represents $500.5 million and $752.5 million of in-process research and
development recorded as a result of Roche's 1990 through 1997 purchases
and the June 1999 purchase, respectively. Such amounts are reflected as
charges to retained earnings in the unaudited pro forma condensed
consolidated balance sheet at March 31, 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 a discount rate that considers the complexity of each project, its state
of completion and the expected market risk of the product upon completion.
The discount rates employed ranged from 16% to 19%, representing a premium
above the observed estimated industry 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. Accordingly, actual results may vary from the
forecasted results. Any such variance may result in a material adverse
effect on Genentech's financial condition and results of operations.
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. 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.
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 overlayed the
time-based status of each project to this baseline model, in order to
calculate a percentage complete for each project.
21
<PAGE> 25
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 designed to deliver human growth hormone by
monthly or semi-monthly injections. This product is being developed in
collaboration with Alkermes. We are currently preparing FDA regulatory
filings. We estimate the initial indication on this project will be
substantially complete by the year 2000, and that this project will be
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 easier to administer. 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.
We estimate that this project will be substantially complete by the year
2000, and that it will be 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 will be 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 these projects to be
approximately 75% complete at the Redemption date. We are also preparing to
begin clinical testing of Pulmozyme delivery via Aradigm's AERx(TM)
delivery system. We estimate that this project will be approximately 45%
complete at the Redemption date. These indications will be substantially
complete by the year 2003.
Rituxan antibody -- A monoclonal antibody used to treat 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 will be approximately
60% complete at the Redemption date.
Xubix(TM) (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. 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 will be substantially complete by the year 2000 and that it will be
approximately 65% complete at the Redemption date.
Anti-CD11a antibody -- An antibody designed to block certain immune cells
as a potential treatment of psoriasis. This product is being developed in
collaboration with Xoma Corporation. We are currently preparing for Phase
III trials. We estimate that this project will be substantially complete by
the year 2003 and that it will be 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 in
patients who overexpress the HER2 protein and have early stage breast
cancer. We estimate that this project will be substantially complete by the
year 2007, and that it will be approximately 45% 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
22
<PAGE> 26
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimate that this project will be substantially complete by the year 2004,
and that it will be 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 cancer. 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 will be 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 planning to conduct 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
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.
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 will be approximately
55% 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 will be approximately 20% complete at the Redemption date.
LDP-02 -- A humanized 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 States. We estimate that
this project will be substantially complete by the year 2005, and that it
will be approximately 30% complete at the Redemption date.
We also have identified 6 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.
(i) Represents the elimination of the existing deferred tax asset valuation
allowance of $62.8 million at March 31, 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.
(j) Reflects the redemption of our special common stock and the issuance of
new shares of common stock to Roche which will result in the same number
of total shares outstanding as prior to the Redemption.
23
<PAGE> 27
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(k) Represents the push-down of the purchase price in excess of net book value
of $2,276.9 million for 1990 through 1997 and $2,862.2 million in 1999 and
$130.0 million for the remeasurement of continuing employee stock options
at the remeasurement date.
(l) Adjustments to retained earnings as follows:
<TABLE>
<CAPTION>
------------------------
1990 - 1997 1999
PURCHASES PURCHASE
In millions ----------- ---------
<S> <C> <C>
In-process research and development.................... $ (500.5) $ (752.5)
Amortization of goodwill, intangibles and fair value
adjustment to inventories, net of tax................. (1,233.1) --
Charge associated with the cash out of employee stock
options, net of taxes................................. -- (180.0)
Compensation related to the remeasurement of continuing
options, net of taxes................................. -- (78.0)
Adjustment to unrealized gains as assumable securities,
net of taxes.......................................... -- 17.3
--------- ---------
Total adjustment to retained earnings.................. $(1,733.6) $ (993.2)
========= =========
</TABLE>
(m) Represents the reduction to interest income at an assumed interest rate of
6% as a result of the cash outlay for the following transactions: (1)
approximately $300.0 million of cash to be paid for the early cash
settlement of employee stock options and (2) estimated $5.0 million in
Genentech transaction costs related to this offering.
(n) Represents the amortization of the fair value adjustment to inventory for
Roche's June 1999 purchase which occurs over a one-year period.
(o) Represents the tax benefit, at a marginal tax rate of 40%, related to the
amortization of other intangible assets, exclusive of goodwill, and the
inventory adjustment to fair value.
(p) To adjust Genentech's effective tax rate for the impact of non-deductible
goodwill and the estimated impact of the provisions of the Genentech/Roche
tax sharing agreement.
(q) Reflects reclassification of certain as reported asset and liability
balances to conform to the pro forma presentation.
24
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with, and are qualified by reference to, "Management's Discussion and Analysis
of Results of Operations and Financial Condition," the consolidated financial
statements and related notes and the unaudited pro forma consolidated financial
statements included elsewhere in this prospectus. The income statement data for
the years ended December 31, 1998, 1997 and 1996 and the balance sheet data as
of December 31, 1998 and 1997 are derived from, and qualified by reference to,
our audited consolidated financial statements included elsewhere in this
prospectus, and should be read in conjunction with those consolidated financial
statements and related notes. The income statement data for the three months
ended March 31, 1999 and 1998 and the balance sheet data as of March 31, 1999
and 1998 are derived from our unaudited consolidated financial statements which,
in our opinion, have been prepared on the same basis as the audited consolidated
financial statements and reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our results of
operations and financial position. Results for the three months ended March 31,
1999 are not necessarily indicative of results that may be expected for the
entire year.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
In millions, except per share data
INCOME STATEMENT DATA
Total revenues................................. $ 322.3 $ 264.7 $1,150.9 $1,016.7 $ 968.7 $ 917.8 $ 795.4
Product sales................................ 234.1 164.7 717.8 584.9 582.8 635.3 601.0
Royalties.................................... 46.6 64.5 229.6 241.1 214.7 190.8 126.0
Contract and other........................... 19.2 14.9 114.8 121.6 107.0 31.2 25.6
Interest..................................... 22.4 20.6 88.7 69.1 64.2 60.5 42.8
Total costs and expenses....................... $ 285.0 $ 207.7 $ 898.3 $ 846.9 $ 820.8 $ 745.6 $ 665.8
Cost of sales................................ 45.7 33.6 138.6 102.5 104.5 97.9 95.8
Research and development..................... 90.7 98.2 396.2 470.9 471.1 363.0 314.3
Marketing, general and administrative........ 97.2 74.9 358.9 269.9 240.1 251.7 248.6
Special charge............................... 50.0 -- -- -- -- 25.0 --
Interest..................................... 1.4 1.0 4.6 3.6 5.1 8.0 7.1
Income before taxes............................ $ 37.3 $ 57.0 $ 252.6 $ 169.8 $ 147.9 $ 172.2 $ 129.6
Income tax provision........................... 22.9 16.0 70.7 40.8 29.6 25.8 5.2
Net income..................................... $ 14.4 $ 41.0 $ 181.9 $ 129.0 $ 118.3 $ 146.4 $ 124.4
Effective tax rate............................. 61% 28% 28% 24% 20% 15% 4%
Earnings per share
Basic........................................ $ 0.11 $ 0.33 $ 1.45 $ 1.05 $ 0.98 $ 1.24 $ 1.07
Diluted...................................... 0.11 0.32 1.40 1.02 0.95 1.20 1.03
Weighted average shares outstanding
Basic........................................ 127.7 124.8 125.8 123.0 120.6 118.3 116.0
Diluted...................................... 132.5 128.8 129.9 126.4 124.0 121.7 120.2
Actual shares outstanding at period end........ 128.0 125.2 127.1 124.2 121.4 119.3 117.2
OTHER DATA
Depreciation expense........................... $ 20.2 $ 16.5 $ 72.7 $ 58.9 $ 57.6 $ 53.3 $ 50.9
Amortization expense........................... 1.7 1.4 5.4 6.6 4.5 5.1 2.6
Capital expenditures........................... 18.2 21.0 88.1 154.9 141.8 70.2 82.8
</TABLE>
The special charge in 1995 relates to the merger and new agreement with Roche
($21 million) and the resignation of our prior chief executive officer ($4
million).
The special charge in 1999 relates to a litigation settlement with respect to
past human growth hormone promotional practices.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AS OF MARCH 31, AS OF DECEMBER 31,
-------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
In millions (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents, short-term
investments and long-term marketable
securities................................... $1,662.5 $1,372.9 $1,604.6 $1,286.5 $1,159.1 $1,096.8 $ 920.9
Accounts receivable............................ 168.8 175.3 149.7 189.2 197.6 172.2 146.3
Inventories.................................... 146.7 117.7 148.6 116.0 91.9 93.6 103.2
Working capital................................ 942.6 958.9 950.6 904.4 705.1 812.0 776.6
Property, plant and equipment, net............. 698.8 688.4 700.2 683.3 586.2 503.7 485.3
Other assets................................... 197.4 165.0 196.3 177.2 149.2 105.5 61.0
Total assets................................... 2,926.1 2,573.5 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1
Total current liabilities...................... 319.8 273.4 291.3 289.6 250.0 233.4 220.5
Long-term debt................................. 150.0 150.0 150.0 150.0 150.0 150.0 150.4
Total liabilities.............................. 536.4 461.6 511.6 476.4 425.3 408.9 396.3
Total stockholders' equity..................... 2,389.7 2,111.9 2,343.8 2,031.2 1,801.1 1,602.0 1,348.8
Total liabilities and stockholders' equity..... 2,926.1 2,573.5 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1
</TABLE>
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
We are a leading biotechnology company that uses human genetic information to
discover, develop, manufacture and market human pharmaceuticals for significant
unmet medical needs. We manufacture and market seven products directly in the
United States, including: Herceptin, Rituxan, Activase, Protropin, Nutropin,
Nutropin AQ and Pulmozyme.
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 Hoffmann-La Roche. We also receive royalties on
sales of growth hormone products and t-PA outside of the United States and
Canada through other licensees. We receive worldwide royalties on five
additional licensed products that originated from our technology and are
marketed by other companies. We also received royalties for Humulin(R) under an
agreement that expired in August 1998.
REDEMPTION OF OUR SPECIAL COMMON STOCK
On June 30, 1999, we will redeem all of our outstanding 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. After the redemption, Roche will
own 100% of our common stock. As a result, push-down accounting is required
under U.S. generally accepted accounting principles to reflect in our financial
statements the amounts Roche had paid for our stock in excess of our net book
value. Push-down accounting will require us to record goodwill and other
intangible assets of approximately $1,635.2 million and $1,487.8 million,
respectively, onto our balance sheet 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 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
expect to record a $752.5 million charge to earnings in the quarter ending June
30, 1999 related to in-process research and development. For more information
about push-down accounting, you should read "Unaudited Pro Forma Condensed
Consolidated Financial Statements" above.
Stock Options
In connection with the redemption of the our special common stock, the following
changes with respect to our outstanding stock options will occur:
- options for the purchase of approximately 6.2 million shares of special
common stock will be canceled, as provided in the related stock option
plans, and the holders will receive $82.50 per share, less the exercise
price;
- options for the purchase of approximately 4.9 million shares of special
common stock will be converted, at our election, into options to purchase
a like number of shares of common stock at the same exercise price,
provided that the holder of such option has not previously elected a cash
payment as described above; and
- options for the purchase of approximately 4.9 million shares of special
common stock will be canceled, in accordance with the terms of the
applicable stock option plan. We expect to grant new options for 1.33
times the number of shares under the previous options with an exercise
price equal to the public offering price of the shares offered in this
offering.
In connection with these stock option transactions, we expect to record:
- In the quarter ending June 30, 1999, (1) cash compensation expense of
approximately $300 million associated with the cash-out of such stock
options and (2) non-cash compensation expense of approximately $ 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, and
26
<PAGE> 30
- In the quarter ending September 30, 1999, non-cash compensation expense
of approximately $ million associated with the remeasurement, for
accounting purposes, of the converted options, which non-cash amount
represents the difference between the redemption price of the special
common stock and $ , the midpoint of the range of the public
offering price set forth on the cover page of this prospectus.
We also expect to record an additional $ million of non-cash compensation
expense after the quarter ended September 30, 1999 over the three-year vesting
period of certain of the options.
A limited number of employees will also have the alternative to participate in a
cash basis deferred compensation plan, with an aggregate of $44 million
available to be earned over a two year period.
Licensing Agreement
Prior to the completion of this offering, we will amend our existing licensing
and marketing agreement with Hoffmann-La Roche to provide Hoffmann-La Roche with
an option to license to use and sell products in non-U.S. markets until at least
2015. You should read "Business--Relationship with F. Hoffmann-La Roche Ltd"
below for further information. See "Subsequent Events (Unaudited)" note in the
Notes to Consolidated Financial Statements for additional information.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
-----------------------------
THREE MONTHS
ENDED MARCH 31,
Revenues -----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Revenues.................................................... $322.3 $264.7 22%
</TABLE>
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS
ENDED MARCH 31,
Product Sales ----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Herceptin................................................... $ 39.9 $ -- --%
Rituxan..................................................... 57.1 37.7 51
Activase.................................................... 52.0 55.7 (7)
Protropin, Nutropin and Nutropin AQ......................... 56.2 50.9 10
Pulmozyme................................................... 28.2 19.5 45
Actimmune................................................... 0.7 0.9 (22)
------ ------
Total product sales............................... $234.1 $164.7 42%
====== ======
% of revenues............................................... 73% 62%
</TABLE>
Herceptin: Net sales of Herceptin, indicated for the treatment of certain
patients with metastatic breast cancer whose tumors overexpress HER2 protein and
who have received one or more chemotherapy regimens, were $39.9 million in the
first quarter of 1999. In 1998, we recorded $30.5 million in net sales of
Herceptin, which was introduced in September 1998. An increase of physician
acceptance of Herceptin has contributed to this positive sales trend and the
successful initial penetration of the breast cancer market.
Rituxan: Net sales of Rituxan, indicated for the treatment of patients with
relapsed or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkins lymphoma, a cancer of the immune system, increased 51% in the first
quarter of 1999 from the comparable period in 1998. This sales increase is
primarily due to increased market penetration for the treatment of B-cell
non-Hodgkins lymphoma. We co-developed Rituxan with IDEC, from whom we license
Rituxan.
Activase: Net sales of Activase tissue plasminogen activator decreased 7% in the
first quarter of 1999 from the comparable period in 1998. The decrease is due to
a continued decline in the overall size of the thrombolytic therapy market due
to mechanical reperfusion and continued competition from Centocor, Inc.'s
Retavase(R). The decrease also resulted from a temporary decrease in the
available commercial market due to patients receiving therapy through large,
recently completed Phase III clinical trials.
27
<PAGE> 31
Protropin, Nutropin and Nutropin AQ: Net sales of our three growth hormone
products--Protropin, Nutropin and Nutropin AQ--increased 10% in the first
quarter of 1999 from the comparable period in 1998. This increase primarily
reflects fluctuations in distributor ordering patterns.
Pulmozyme: Net sales of Pulmozyme increased 45% in the first quarter of 1999
from the comparable period in 1998 primarily due to increased sales to
Hoffmann-La Roche and increased market penetration for the management of cystic
fibrosis.
Actimmune: In 1998, in return for a royalty on net sales, we licensed to
Connetics Corporation our U.S. marketing and development rights to Actimmune
(interferon gamma-lb), which is used for the treatment of chronic granulomatous
disease, a rare, inherited disorder of the immune system. Thereafter, Connetics
Corporation sublicensed all of its rights to InterMune Pharmaceuticals, Inc., or
InterMune. After a transition period, as of January 1999, we no longer sell
Actimmune. We have agreed to supply bulk materials to InterMune at cost plus a
mark-up.
Royalties, Contract and Other, and Interest Income
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS
ENDED MARCH 31,
----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Royalties................................................... $46.6 $64.5 (28)%
Contract and other.......................................... 19.3 14.9 30
Interest income............................................. 22.4 20.6 9
</TABLE>
Royalty income decreased by 28% in the first quarter of 1999 from the comparable
period in 1998. The decrease primarily reflects the expiration of royalties from
Eli Lilly and Company in August 1998.
Contract and other revenue increased 30% in the first quarter of 1999 from the
comparable period in 1998 primarily due to higher gains on the sale of
biotechnology equity securities and higher revenues from strategic alliances,
partly offset by lower contract revenues from Hoffmann-La Roche.
Interest income increased 9% in the first quarter of 1999 from the comparable
period in 1998 due to a higher portfolio balance. The total investment
portfolio, consisting of cash and cash equivalents, and short- and long-term
marketable securities, increased to $1,662.4 million as of March 31, 1999 from
$1,372.9 million as of March 31, 1998 and from $1,604.6 million as of December
31, 1998.
Costs and Expenses
<TABLE>
<CAPTION>
---------------------------
THREE MONTHS
ENDED MARCH 31,
---------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Cost of sales............................................... $ 45.7 $ 33.6 36%
Research and development.................................... 90.7 98.2 (8)
Marketing, general and administrative....................... 97.2 74.9 30
Legal settlement............................................ 50.0 -- --
Interest expense............................................ 1.4 1.0 40
------ ------
Total costs and expenses.......................... $285.0 $207.7 37%
====== ======
</TABLE>
Cost of Sales: Cost of sales as a percent of product sales was 20% in the first
quarters of 1999 and 1998.
Research and Development: Research and development expenses decreased 8% in the
first quarter of 1999 from the comparable period in 1998. For the first quarter
of 1999, we invested approximately 28% of revenues into research and development
compared to 37% in the comparable period in 1998. This percentage decrease
reflects our goal to decrease research and development spending as a percent of
revenues as products progress through late-stage clinical trials and revenues
increase.
28
<PAGE> 32
Marketing, General and Administrative: Marketing, general and administrative
expenses increased 30% in the first quarter of 1999 from the comparable period
in 1998 due to higher marketing and sales expenses in support of oncology
products and higher profit sharing with IDEC related to higher sales of Rituxan.
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.
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS
ENDED MARCH 31,
Income Taxes ----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Income taxes................................................ $22.9 $16.0 43%
</TABLE>
Our effective income tax rate for the first quarter of 1999 was 61% compared to
28% in the first quarter of 1998. The 61% tax rate of the first quarter of 1999
reflects the effect of the $50 million legal settlement expense as well as an
increase in the income tax rate due to reduced benefits from both research and
development tax credits and realization of foreign losses. Excluding the legal
settlement expense, our effective tax rate would have been 33% for the first
quarter of 1999.
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS
ENDED MARCH 31,
Net Income ----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Net income.................................................. $14.4 $41.0 (65)%
Earnings per share
Basic..................................................... $0.11 $0.33 (67)
Diluted................................................... 0.11 0.32 (66)
</TABLE>
The 65% decrease in net income in the first quarter of 1999 from the comparable
period in 1998 was due to the $50 million legal settlement expense. Exclusive of
the legal settlement, net income in the first quarter of 1999 would have been
$58.5 million, an increase of 43% over the comparable period in 1998. This
increase was driven by higher product sales, primarily related to new sales of
Herceptin and higher sales of Rituxan. This increase was partly offset by lower
royalties, higher marketing and sales expenses and higher cost of sales.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
--------------------------------------------------------
YEAR ENDED DECEMBER 31, ANNUAL % CHANGE
Revenues ---------------------------------- ----------------
1998 1997 1996 98/97 97/96
-------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
In millions
Revenues......................................... $1,150.9 $1,016.7 $968.7 13% 5%
</TABLE>
Revenues for 1998 increased from 1997 primarily as a result of higher product
sales. Revenues for 1997 increased from 1996 in all areas, but primarily from
royalties and contract revenues.
29
<PAGE> 33
<TABLE>
<CAPTION>
----------------------------------------------------
YEAR ENDED DECEMBER 31, ANNUAL % CHANGE
Product Sales ------------------------------ ----------------
1998 1997 1996 98/97 97/96
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
In millions
Herceptin........................................... $ 30.5 -- -- -- --
Rituxan............................................. 162.6 $ 5.5 -- 2,856% --
Activase............................................ 213.0 260.7 $284.1 (18) (8)%
Protropin, Nutropin and Nutropin AQ................. 214.0 223.6 218.2 (4) 2
Pulmozyme........................................... 93.8 91.6 76.0 2 21
Actimmune........................................... 3.9 3.5 4.5 11 (22)
------ ------ ------
Total product sales............................ $717.8 $584.9 $582.8 23% 0%
====== ====== ======
% of revenues....................................... 62% 58% 60%
</TABLE>
Product sales increased in 1998 as a result of a full year of Rituxan sales and
initial Herceptin sales. These increases were partly offset by lower Activase
and growth hormone sales. Product sales in 1997 increased over 1996 due to
increases in Pulmozyme and growth hormone sales and new sales from the
introduction of Rituxan, offset by a decrease in Activase sales. Product sales
to Hoffmann-La Roche in conjunction with our then existing license agreement
were $28.7 million in 1998, $17.4 million in 1997 and $13.2 million in 1996.
Herceptin: In September 1998, we received FDA approval to market Herceptin in
the United States for use as first line therapy in combination with paclitaxel
and as a single agent in second and third line therapy in patients with
metastatic breast cancer who have tumors that overexpress the HER2 protein. We
recorded $30.5 million of initial net sales of Herceptin in 1998. Herceptin is
the first humanized monoclonal antibody for the treatment of HER2 overexpressing
metastatic breast cancer and the second U.S. approval in this new class of
biotherapeutic cancer drugs. The first was Rituxan, which was approved in
November 1997. We have granted Hoffmann-La Roche exclusive marketing rights to
Herceptin outside of the United States.
Rituxan: Rituxan (rituximab) was approved for marketing by the FDA in late
November 1997. We launched Rituxan on December 16, 1997, and recorded initial
sales of $5.5 million for 1997. Net sales of Rituxan were $162.6 million in
1998. The increase from 1997 was the result of one full year of sales. We
co-developed Rituxan with IDEC, from whom we license Rituxan. Rituxan was the
first monoclonal antibody approved in the United States to treat cancer. We are
jointly promoting Rituxan with IDEC in the United States and we share
responsibility with IDEC for manufacturing the product. Also in 1998, our
partner, Hoffmann-La Roche, received approval from the European Commission to
market rituximab under the tradename MabThera(TM) in the European Union.
Hoffmann-La Roche holds marketing rights for MabThera outside of the United
States, excluding Japan, and has agreed to pay us royalties and a mark-up on
MabThera supplied to Hoffmann-La Roche.
During the first quarter of 1998, we received FDA approval for the large-scale
(12,000-liter) bulk manufacture of Rituxan. Rituximab manufactured by us will
supplement the Rituxan manufactured by IDEC on our behalf. IDEC has agreed to
stop manufacturing Rituxan in August 1999.
In December 1998, a letter was sent to physicians advising them of some deaths
associated with administration of Rituxan. As a result, Genentech and IDEC are
updating the warning section of the package insert to include information on
infusion-related reactions and cardiovascular events.
Activase: Sales of Activase in 1998 and 1997 decreased primarily due to a
competitive thrombolytic agent, Centocor's Retavase. This decrease also
resulted, to a lesser extent, from a decline in the size of the thrombolytic
market due to increasing use of mechanical reperfusion and from a temporary
decrease in the available commercial market due to patients receiving therapy
through large recently completed Phase III clinical trials.
In July 1998, we discontinued development of Activase for treating acute
ischemic stroke in patients presenting later than three hours from symptom onset
after the termination of two clinical trials, one in acute ischemic stroke
patients presenting three to five hours from symptom onset, and another in acute
ischemic stroke patients presenting zero to six hours from symptom onset.
Neither study showed clinical benefit. Activase is approved for the treatment of
acute ischemic stroke within three hours of symptom onset.
Protropin, Nutropin and Nutropin AQ: Net sales of our three growth hormone
products--Protropin, Nutropin and Nutropin AQ--decreased in 1998 from 1997, but
increased slightly in 1997 from 1996. We experienced a small loss of market
share in 1998 due to increased competition. We continue to face increased
competition from five companies with growth hormone
30
<PAGE> 34
products, although one company has been preliminarily enjoined from selling its
product. In December 1997, we received approval from the FDA to market Nutropin
and Nutropin AQ, respectively, in the United States for the treatment of growth
hormone deficiency in adults. In December 1996 and January 1997, we received
approval from the FDA to market Nutropin and Nutropin AQ, respectively, in the
United States for the treatment of short stature associated with Turner
syndrome.
Pulmozyme: Net sales of Pulmozyme were slightly higher in 1998 compared to 1997
as a result of new patients in the mild to moderate cystic fibrosis patient
population in addition to new patients from the 1998 FDA approval for a label
extension to include cystic fibrosis patients under the age of five. Net sales
in 1997 were higher primarily due to continued penetration in the mild to
moderate cystic fibrosis patient populations as well as from variations in
customer ordering patterns for U.S. sales. In February 1998, we received
approval from the FDA for a label extension that includes the safety and
alternative administration of Pulmozyme in children with cystic fibrosis under
the age of five, adding to the product's previous approvals for patients five
years of age and older. In November 1996, Pulmozyme was approved by the FDA for
marketing in the United States for the management of cystic fibrosis patients
with advanced disease.
Actimmune: In the second quarter of 1998, in return for a royalty on net sales,
we licensed U.S. marketing and development rights to interferon gamma, including
Actimmune, to Connetics Corporation. Thereafter, Connetics Corporation
sublicensed all of its rights to InterMune. After a transition period, as of
January 1999, we no longer sell Actimmune. We have agreed to supply bulk
materials to InterMune at cost plus a mark-up.
Royalties, Contract and Other, and Interest Income
<TABLE>
<CAPTION>
----------------------------------------------------
YEAR ENDED DECEMBER 31, ANNUAL % CHANGE
------------------------------ ----------------
1998 1997 1996 98/97 97/96
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
In millions
Royalties........................................... $229.6 $241.1 $214.7 (5)% 12%
Contract and other.................................. 114.8 121.6 107.0 (6) 14
Interest income..................................... 88.7 69.1 64.2 28 8
</TABLE>
Total royalties decreased in 1998 from 1997 due to the expiration of royalties
from Lilly in August 1998. Royalties in 1997 increased from 1996 primarily due
to increased licensee sales from various licensees. Under a December 1994
settlement agreement with Lilly, royalties of $30.0 million per year were
payable to Genentech through 1998, subject to possible offsets and contingent
upon the continued marketing of Humulin in the United States. Under a prior
license agreement with Lilly, we received royalties from Lilly's sales of its
human insulin product until this royalty obligation expired in August 1998. Cash
flows from royalty income include non-dollar denominated revenues. We currently
purchase simple foreign currency put option contracts (option contracts) to
hedge these royalty cash flows. All of our option contracts expire within the
next two years.
Contract and other revenues in 1998 decreased from 1997 as a result of higher
1997 contract payments and gains from the sale of biotechnology equity
securities. Although we received significant nonrecurring payments from
Hoffmann-La Roche for exclusive marketing rights outside of the United States
for Herceptin and from Novo Nordisk A/S on the patent infringement litigation
settlement, other contract revenues from Hoffmann-La Roche decreased
significantly from 1997 primarily due to the discontinuation of several projects
or indications in development. Contract and other revenues were higher in 1997
compared to 1996 primarily due to $30.9 million received from Sumitomo
Pharmaceuticals Co., Ltd. and Pharmacia & Upjohn for strategic alliances and
$11.7 million of gains from the sale of biotechnology equity securities in 1997.
These increases were partly offset by higher revenues from Hoffmann-La Roche in
1996.
In July 1998, we and Novo agreed to settle a lawsuit brought by us in the U.S.
District Court for the Southern District of New York relating to our patents for
human growth hormone and insulin and a lawsuit brought in October 1997 by Novo
in the U.S. District Court for the District of New Jersey alleging infringement
of a patent held by Novo relating to our manufacture, use and sale of its
Nutropin human growth hormone products. Under the settlement agreement, we
agreed with Novo to cross-license worldwide certain patents relating to human
growth hormone. In August 1998, Novo received a worldwide license under our
patents relating to insulin and we received certain payments from Novo that were
recorded in contract revenues.
As part of a strategic alliance with Sumitomo, we have agreed to provide
Sumitomo exclusive distributorship rights in Japan for Nutropin AQ and a
sustained release formulation of human growth hormone.
In an agreement with Pharmacia & Upjohn, in exchange for development costs, fees
and, upon regulatory approval, royalties, we agreed to provide Pharmacia &
Upjohn exclusive worldwide rights for thrombopoietin, or TPO, which is in Phase
II trials
31
<PAGE> 35
for potential use in treating patients with complications of cancer
chemotherapy. Pharmacia & Upjohn and Genentech are jointly developing TPO for
one indication. While we are entitled to royalties and other payments, we have
no marketing rights for this indication.
We recorded nonrecurring contract revenues from Hoffmann-La Roche of $40.0
million in 1998 for Herceptin marketing rights outside of the United States and
$44.7 million in 1998 for the exercise of its options under our former license
agreement with Hoffmann-La Roche with respect to development of three products,
insulin-like growth factor and nerve growth factor, which were both subsequently
terminated, and Rituxan. All other contract revenue from Hoffmann-La Roche,
including reimbursement for ongoing development expenses after the option
exercise date, totaled $21.6 million in 1998, $67.6 million in 1997 and $50.6
million in 1996. All other revenue from Roche, Hoffmann-La Roche and their
affiliates, principally royalties under previous product licensing agreements,
and royalties and product sales under the licensing agreement, totaled $63.8
million in 1998, $42.8 million in 1997 and $39.5 million in 1996.
Interest income increased in 1998 primarily due to an increase in the investment
portfolio and, to a lesser extent, a higher average yield on the investment
portfolio. The increase in 1997 from 1996 was due to an increase in the average
yield on the investment portfolio and a larger investment portfolio. We enter
into interest rate swaps as part of our overall strategy of managing the
duration of our investment portfolio.
Costs and Expenses
<TABLE>
<CAPTION>
----------------------------------------------------
YEAR ENDED DECEMBER 31, ANNUAL % CHANGE
------------------------------ ----------------
1998 1997 1996 98/97 97/96
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
In millions
Cost of sales....................................... $138.6 $102.5 $104.5 35% (2)%
Research and development............................ 396.2 470.9 471.1 (16) 0
Marketing, general and administrative............... 358.9 269.9 240.1 33 12
Interest expense.................................... 4.6 3.6 5.1 28 (29)
------ ------ ------
Total costs and expenses.......................... $898.3 $846.9 $820.8 6 3
====== ====== ======
% of revenues....................................... 78% 83% 85%
Cost of sales as % of product sales................. 19 18 18
Research and development as % of revenues........... 34 46 49
Marketing, general and administrative as % of
revenues.......................................... 31 27 25
</TABLE>
Cost of Sales: Cost of sales as a percent of product sales increased in 1998 to
19%. This increase was primarily the result of increased sales to Hoffmann-La
Roche as well as a shift in the product mix, including the first full year of
Rituxan sales and the introduction of Herceptin. Cost of sales as a percent of
product sales was 18% in 1997, which was comparable to 1996. The economic
benefits from sales to Hoffmann-La Roche are reflected in product sales and
royalties.
Research and Development: Research and development expenses decreased in 1998
from 1997 primarily due to the wind-down of certain large late-stage clinical
trials and lower costs to license technology from third parties. These decreases
were partly offset by higher costs related to large scale development
collaborations. In 1997, research and development expenses were flat compared to
1996. Research and development as a percentage of revenues decreased to 34% in
1998, from 46% in 1997 and from 49% in 1996. The decrease in this percentage
from year to year reflects growing revenues and more recently in 1998 a decrease
in research and development expenses.
To gain additional access to potential new products and technologies, and to
utilize other companies to help develop our potential new products, we have
established strategic alliances with companies developing technologies that fall
outside our research focus and with companies having the potential to generate
new products through technology exchanges and investments. This has included our
acquisition of equity and convertible debt of such companies. We have also
entered into product-specific collaborations to acquire development and
marketing rights for products.
Marketing, General and Administrative: Marketing, general and administrative
expenses increased in 1998 from 1997. The marketing and sales increases were
driven by the introduction of Rituxan and the resultant profit sharing with
IDEC, the launch of Herceptin and the defense of Activase and our growth hormone
products against new competition and the launch of a new indication, growth
hormone deficiency in adults, for Nutropin and Nutropin AQ. General and
administrative expenses
32
<PAGE> 36
were higher principally as a result of the write-down of certain biotechnology
equity securities. Marketing, general and administrative expenses were also
higher in 1997 compared to 1996 primarily due to increased marketing and sales
expenses in the oncology area and competitive conditions with other marketed
products.
Interest Expense: Interest expense will fluctuate depending on the amount of
capitalized interest related to the amount of construction projects. Interest
expense, net of amounts capitalized, relates to interest on our 5% convertible
subordinated debentures.
Income Before Taxes and Income Taxes
<TABLE>
<CAPTION>
------------------------------------------------------
YEAR ENDED DECEMBER 31, ANNUAL % CHANGE
------------------------------ ------------------
1998 1997 1996 98/97 97/96
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
In millions
Income before taxes............................... $252.6 $169.8 $147.9 49% 15%
Income tax provision.............................. 70.7 40.8 29.6 73 38
Effective tax rate................................ 28% 24% 20% 17 20
</TABLE>
Our effective tax rate increased in 1998 over 1997 to 28%. This increase is
primarily due to the decreased benefit of research and development tax credits.
The tax rate for 1998 and 1997 reflected the legislative extension of research
and development tax credits effective beginning in the third quarter of 1997.
The increase in the effective tax rate in 1997 over 1996 was attributable to the
proportionally decreased realization of previously reserved deferred tax assets.
The valuation allowance for deferred tax assets was fully realized in 1996, with
the exception of the portion attributable to the realization of tax benefits on
stock option deductions which will be credited to additional paid-in-capital
when realized. The effective tax rate in 1998, 1997 and 1996 was less than the
U.S. statutory rate of 35% due in part to the research and development tax
credits, tax benefit of certain realized gains on securities available for sale
and realized foreign losses, except in 1997.
Net Income
<TABLE>
<CAPTION>
----------------------------------------------------
YEAR ENDED DECEMBER 31, ANNUAL % CHANGE
------------------------------ ----------------
1998 1997 1996 98/97 97/96
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
In millions
Net income.......................................... $181.9 $129.0 $118.3 41% 9%
Earnings per share
Basic............................................. $ 1.45 $ 1.05 $ 0.98 38 7
Diluted........................................... 1.40 1.02 0.95 37 7
</TABLE>
The increase in net income in 1998 from 1997 was driven primarily by sales of
Rituxan and Herceptin, lower research and development expenses and higher
interest income. These revenue increases and lower expenses were partly offset
by higher marketing, general and administration expenses, a decrease in Activase
sales, higher cost of sales and higher income taxes. Net income in 1997
increased over 1996 primarily due to higher royalties and contract and other
revenues partly offset by higher marketing, general and administration expenses.
33
<PAGE> 37
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
------------------------------------------------------------------
AS OF MARCH 31, AS OF DECEMBER 31,
------------------------ ------------------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
In millions
Cash and cash equivalents, short-term
investments and long-term marketable
securities.............................. $1,662.4 $1,372.9 $1,604.6 $1,286.5 $1,159.1
Working capital........................... 942.7 958.9 950.6 904.4 705.1
Cash provided by (used in):
Operating activities.................... 53.6 68.9 349.9 118.3 139.7
Investing activities.................... (156.4) (126.6) (421.1) (168.4) (141.7)
Financing activities.................... 35.2 34.6 107.9 87.3 72.2
Capital expenditures (included in
investing activities above)............. (18.2) (21.0) (88.1) (154.9) (141.8)
Current ratio............................. 3.9 : 1 4.5 : 1 4.3 : 1 4.1 : 1 3.8 : 1
</TABLE>
Cash and cash equivalents, short-term investments and long-term marketable
securities at March 31, 1999 increased by $57.8 million compared to December 31,
1998, and working capital decreased by $7.9 million in the first quarter of
1999. Cash generated from operations, income from investments and proceeds from
stock issuances were used to purchase marketable securities and make capital
investments in 1998.
Capital expenditures totaled $18.2 million in the first quarter of 1999 compared
to $21.0 million in the comparable period in 1998. The decrease in the first
quarter of 1999 was primarily due to a decrease in construction activity related
to existing manufacturing facilities partly offset by an increase in equipment
purchases.
Capital expenditures in 1998 included improvements to existing office and
laboratory facilities and equipment, and equipment purchases. In 1997, capital
expenditures primarily included building improvements to existing manufacturing
and office facilities and production systems. In 1996, capital expenditures
primarily included building and land purchases and improvements to existing
manufacturing and office facilities.
The affiliation agreement with Roche will require us to establish and maintain a
stock repurchase program. The dollar amounts associated with these future
purchases cannot currently be estimated.
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
affecting our cash position include, but are not limited to, future levels of
the company's product sales, royalty and contract revenues, expenses,
in-licensing activities, including the timing and amount of related development
funding or milestone payments, and capital expenditures.
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, one-half of the $82.50
redemption price and $18 in cash, or $59.25 in cash. The $18 in cash is
reimbursed by Roche to us. Generally, we may redeem the debentures until
maturity.
RESEARCH AND DEVELOPMENT
We are committed to aggressive research and development investment to discover
and develop new products. We currently have several products in late-stage
clinical testing and anticipate that our research and development expenses will
continue at a high percentage of revenues over the short-term. Over the
long-term, as revenues increase, research and development as a percent of
revenues is expected to decrease.
INCOME TAX PROVISION
Upon the redemption of our special common stock, we will be, and after this
offering are expected to continue to be, included in Roche's federal
consolidated income tax group. As a result, our tax liability will be included
in Roche's U.S. consolidated
34
<PAGE> 38
federal income tax group and our tax liability thus 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.
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. For additional
discussion of the Tax Sharing Agreement, you should read "Relationship with
Roche -- Tax Sharing Agreement".
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.
YEAR 2000
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 its computer systems and scientific and manufacturing equipment
containing computer related components for the Year 2000 and beyond.
Approximately half of our Year 2000 scheduled work is complete. The remaining
work is scheduled to be completed by the end of the third quarter 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.
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 60% complete. Testing of our information technology
infrastructure is approximately 60% complete. Testing of business critical
application programs is approximately 25% complete and is scheduled to be
completed by the third quarter of 1999. Contingency planning for business
critical processes, which will include provisions such as identifying alternate
services for materials and services and if necessary reverting to
non-computerized systems for processing information, was initiated in March
1999, is approximately 40% 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 its 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 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
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<PAGE> 39
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.
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.
A discussion of our accounting policies for financial instruments and further
disclosures relating to financial instruments is included in the Description of
Business and Significant Accounting Policies and the Financial Instruments notes
in the Notes to Consolidated Financial Statements.
We maintain risk management control systems to monitor the risks associated with
interest rates, foreign currency exchange rates and equity investment price
changes, and its derivative and financial instrument positions. The risk
management control systems use analytical techniques, including sensitivity
analysis and market values. Though 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
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(TM) dataset as of December 31, 1998.
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 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.
FOREIGN CURRENCY EXCHANGE RATES
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 its overall investment
strategy, a portion of our portfolio primarily in non-dollar
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<PAGE> 40
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-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 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.
EQUITY INVESTMENT SECURITIES
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 its
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 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 STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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. Based on
the requirements of FAS 133, there may be changes to the balance sheet and
reported assets and liabilities. We are currently evaluating the impact of FAS
133 on our financial position and results of operations.
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<PAGE> 41
BUSINESS
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. We manufacture and market seven products
directly in the United States. 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 our growth hormone products.
PRODUCTS
We have developed seven products, co-developed one product and manufactured and
marketed eight of our products (see also the Actimmune section below) in the
United States:
- Herceptin (trastuzumab) antibody as a single agent for the treatment of
patients with metastatic breast cancer whose tumors overexpress the HER2
protein and who have received one or more chemotherapy regimens.
Herceptin, in combination with Taxol(R), is indicated for the treatment
of patients with metastatic breast cancer whose tumors overexpress the
HER2 protein and who have not received chemotherapy for their metastatic
disease;
- Rituxan (rituximab) antibody 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;
- Activase (alteplase, recombinant) 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 (somatrem for injection) growth hormone for the treatment
(growth hormone deficiency) in children;
- Nutropin (somatropin (rDNA origin) for injection) 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 (somatropin (rDNA origin)) liquid formulation growth hormone
for the same indications as Nutropin; and
- Pulmozyme (dornase alfa, recombinant) inhalation solution for the
management of cystic fibrosis, in conjunction with standard therapies to
improve lung function and reduce the relative risk of respiratory tract
infections requiring parenteral antibiotics.
In 1998, in return for a royalty on net sales, we licensed to Connetics
Corporation our marketing and development rights to Actimmune (interferon
gamma-lb), which is used for the treatment of chronic granulomatous disease, a
rare, inherited disorder of the immune system. After a transition period, as of
January 1999, we no longer sell Actimmune.
We receive royalties on sales of our 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 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.
Herceptin
In September 1998, we received FDA approval to market Herceptin in the United
States for use as first line therapy in combination with Taxol and as a single
agent in second and third line therapy in patients with metastatic breast cancer
who have tumors that overexpress the HER2 protein.
Herceptin is the first humanized monoclonal antibody for the treatment of HER2
overexpressing metastatic breast cancer and the second U.S. approval in this new
class of monoclonal antibody biotherapeutic cancer drugs. The first was Rituxan,
which was approved in November 1997. We have granted Hoffmann-La Roche exclusive
marketing rights to Herceptin outside of the United States.
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<PAGE> 42
Rituxan
Rituxan is marketed in the United States 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. In November 1997, Rituxan was cleared for
marketing in the United States by the FDA. B-cell non-Hodgkin's lymphoma affects
approximately 250,000 people in the United States, of which one-half are
follicular or low-grade lymphoma patients. A portion of these patients will have
multiple relapses and may be eligible for Rituxan therapy. Rituxan was
co-developed with IDEC, from whom we license Rituxan. Rituxan was the first
monoclonal antibody approved in the United States to treat cancer. We are
jointly promoting Rituxan with IDEC in the United States and share
responsibility with IDEC for manufacturing the product. Hoffmann-La Roche is
responsible for marketing MabThera (rituximab) in the rest of the world,
excluding Japan.
In December 1998, a letter was sent to physicians advising them of some deaths
associated with administration of Rituxan. As a result, Genentech and IDEC are
updating the warning section of the package insert to include information on
infusion-related reactions and cardiovascular events.
Activase
Tissue plasminogen activator, or t-PA, is an enzyme that is produced naturally
by the body to dissolve blood clots. However, when a blood clot obstructs blood
flow in the coronary artery and causes a heart attack, the body is unable to
produce enough t-PA to dissolve the clot rapidly enough to prevent damage to the
heart. Through recombinant DNA technology, we produce Activase, a recombinant
form of t-PA, in sufficient quantity for therapeutic use. The FDA approved
Activase for marketing in the United States in 1987 for the treatment of acute
myocardial infarction (heart attack); in 1990 for use in the treatment of acute
pulmonary embolism (blood clots in the lungs); and in June 1996 for the
treatment of acute ischemic stroke or brain attack (blood clots in the brain)
within three hours of symptom onset.
In exchange for royalty payments, we have licensed marketing rights to a
recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd., or Kyowa, and Mitsubishi
Kasei Corporation, or Mitsubishi. Kyowa and Mitsubishi are marketing forms of a
recombinant t-PA under the trademarks Activacin(R) and GRTPA(R), respectively.
In a number of countries outside of the United States, Canada and Japan, we have
licensed t-PA marketing and manufacturing rights to Boehringer Ingelheim
International GmbH, or Boehringer. We have also licensed certain rights to
Boehringer regarding future sales of a second generation t-PA, TNK, which is
currently under late stage development. Boehringer markets a recombinant t-PA
under the trademark Actilyse(R).
In July 1998, we discontinued development of Activase for treating acute
ischemic stroke in patients presenting later than three hours from symptom onset
after the termination of two clinical trials, one in patients with acute
ischemic stroke presenting three to five hours from symptom onset, and another
in patients with acute ischemic stroke presenting zero to six hours from symptom
onset. Neither study showed clinical benefit. Activase is approved for the
treatment of acute ischemic stroke within three hours of symptom onset.
Protropin
Human growth hormone is a naturally occurring human protein produced in the
pituitary gland that regulates metabolism and is responsible for growth in
children. We developed a recombinant growth hormone product, Protropin, that was
approved by the FDA in 1985 for marketing in the United States for the treatment
of growth hormone inadequacy in children.
In exchange for royalty payments, we licensed rights to recombinant growth
hormone outside the United States and Canada to Pharmacia & Upjohn, which
manufactures and markets recombinant growth hormone under the trademarks
Somatonorm(TM) and Genotropin(TM). Under the terms of the agreement with
Pharmacia & Upjohn, commencing in late 1995, we have the right to sell growth
hormone in most European countries and Japan and Pharmacia & Upjohn has the
right to sell their own growth hormone in the United States and Canada.
Nutropin
Nutropin is a human growth hormone similar to Protropin; however, it does not
have the additional N-terminal amino acid, methionine, found in the Protropin
chemical structure. Nutropin was approved in November 1993 and launched in
January 1994 for marketing in the United States for the treatment of growth
failure in children associated with chronic renal insufficiency up to the time
of renal transplantation. Chronic renal insufficiency causes irreversible damage
to the kidneys and a variety of other medical problems. The condition affects an
estimated 3,000 children in the United States. Nutropin has been
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<PAGE> 43
designated as a U.S. Orphan Drug for treatment of growth failure in children
with chronic renal insufficiency. Nutropin was approved by the FDA in March 1994
for marketing for the treatment of growth hormone inadequacy in children. In
December 1996, the FDA approved Nutropin for the treatment of short stature
associated with Turner syndrome. In December 1997, we received FDA approval to
market Nutropin for the treatment of growth hormone deficiency in adults.
Nutropin AQ
In December 1995, we received regulatory approval to market Nutropin AQ, a
liquid formulation of Nutropin, aimed at providing improved convenience in
administration. Nutropin AQ is the first and only liquid (aqueous) recombinant
human growth hormone product available in the United States. Nutropin AQ was
approved for the treatment of growth hormone inadequacy in children, growth
hormone failure in children associated with chronic renal insufficiency to the
time of renal transplantation and short stature associated with Turner syndrome.
In December 1997, we received FDA approval to market Nutropin AQ for the
treatment of growth hormone deficiency in adults. As part of the strategic
alliance formed with Sumitomo in December 1997, we have agreed to provide
Sumitomo exclusive rights to develop, import and distribute in Japan, Nutropin
AQ and a sustained release formulation of human growth hormone. For more
information about this product see "Products in Development" below.
During the first quarter of 1999, we entered into an agreement with Schwarz
Pharma AG for the development and distribution of Nutropin AQ and the
sustained-release Nutropin Depot(TM) (somatropin (rDNA origin) for depot
suspension) for the treatment of certain pediatric and adult growth disorders in
Europe and certain other countries outside of the United States, Canada and
Japan. Under the terms of the agreement, we will receive a payment upon our
first filing of an NDA, and will receive additional benchmark payments upon
Schwarz Pharma's achievements of development of these products. With our partner
Alkermes Controlled Therapeutics, Inc. we will manufacture these products for
sale by Schwarz Pharma. Genentech is currently preparing U.S. regulatory filings
seeking marketing approval for Nutropin Depot.
Pulmozyme
Pulmozyme is marketed in the United States for the management of cystic
fibrosis, for which it has U.S. Orphan Drug designation and was first approved
for use in 1993. In November 1996, Pulmozyme was cleared for marketing by the
FDA for the management of cystic fibrosis patients with advanced disease. In
February 1998, we received approval from the FDA for a label extension that
includes the safety and alternative administration of Pulmozyme in children with
cystic fibrosis under the age of five, adding to the product's previous
approvals for patients five years of age and older.
Actimmune
Actimmune (interferon gamma-lb) is approved in the United States for the
treatment of chronic granulomatous disease, a rare, inherited disorder of the
immune system which affects an estimated 250 to 400 Americans. Actimmune
received designation by the FDA in 1990 as a U.S. Orphan Drug for the treatment
of chronic granulomatous disease. During the quarter ended June 30, 1998, we
licensed U.S. marketing and development rights to interferon gamma, including
Actimmune, to Connetics Corporation in return for a royalty on net sales.
Thereafter, Connetics Corporation sublicensed all of its rights to InterMune.
After a transition period, as of January 1999, we no longer sell Actimmune. We
have agreed to supply bulk materials to InterMune at cost plus a mark-up. We
receive royalty payment from Boehringer from the sale of interferon gamma in
certain countries outside of the United States, Canada and Japan and The
People's Republic of China.
LICENSED PRODUCTS
In addition to the royalties mentioned above, Genentech also receives royalties
on the following products:
<TABLE>
<CAPTION>
PRODUCT TRADEMARK COMPANY
------- --------- -------
<S> <C> <C>
Human growth hormone Humatrope Eli Lilly and Company
Recombinant interferon alpha Roferon-A Hoffmann-La Roche
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B SmithKline Beecham Biologicals S.A.
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Company
</TABLE>
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Under a December 1994 settlement agreement with Lilly regarding certain of our
patents, royalties of $30.0 million per year were payable to us through August
28, 1998, subject to possible offsets and contingent upon the continued
marketing of Humulin in the United States. These royalty obligations have now
expired. Under a prior license agreement with Lilly, we received royalties from
Lilly's sales of Humulin. These royalty payments on Humulin sales expired in
August 1998.
PRODUCTS IN DEVELOPMENT
A number of other products are in various stages of research and development.
Our product development efforts cover a wide range of medical conditions,
including cancer, respiratory disorders, cardiovascular diseases, endocrine
disorders and inflammatory and immune problems.
Below is a summary of products in clinical development:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Preparing Regulatory Filings
Nutropin Depot sustained- A sustained release version of human growth hormone, based
release growth hormone on Alkermes' ProLease sustained release drug delivery
system, designed to deliver human growth hormone by monthly
or semi-monthly injections. This product is being developed
in collaboration with Alkermes. We are currently preparing
FDA regulatory filings.
TNK-tPA A second generation t-PA that is a selectively mutated
version of wild-type t-PA. This t-PA version may be faster
acting, 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.
Phase III
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.
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.
Rituxan antibody A monoclonal antibody marketed to treat 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.
Xubix(TM) (sibrafiban) oral An orally administered inhibitor of platelet aggregation
IIb/IIIa antagonist that may be useful in the prevention of unwanted clotting in
certain cardiovascular conditions. Hoffmann-La Roche is
conducting global development of this molecule, and we
retain certain opt-in rights with respect to the United
States.
Preparing for Phase III trials
Anti-CD11a antibody An antibody designed to block certain immune cells as a
potential treatment for psoriasis. We are currently
preparing for Phase III trials of this product, which we are
developed in collaboration with Xoma Corporation.
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 in patients who overexpress the HER2 protein and
have early stage breast cancer.
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Phase II
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.
Anti-VEGF antibody An antibody developed to inhibit angiogenesis (the formation
of new blood vessels) as a potential treatment for several
types of cancer. 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.
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 planning to conduct Phase II
studies alone or in collaboration with Hoffmann-La Roche,
the National Cancer Institute or other clinical research
groups.
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.
VEGF A protein that ischemic tissues (tissues lacking in oxygen)
secrete, VEGF binds to receptors on nearby blood vessels and
causes angiogenesis, the formation of new blood vessels. A
recently completed Phase II clinical trial of VEGF in
patients with coronary artery disease did not meet its
primary objectives. We are currently deciding on next steps
for this program.
Phase I
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.
LDP-02 A monoclonal antibody for the treatment of inflammatory
bowel diseases. 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.
Pulmozyme inhalation solution A recombinant human protein used for the management of
with Aradigm's delivery system cystic fibrosis. We are preparing to begin Phase I clinical
testing Pulmozyme delivery via Aradigm Corp.'s AERx(TM)
delivery system.
</TABLE>
In addition to the products described above, we are working on additional
products and new indications for currently marketed products. Also, we retain
certain rights to gp120, a recombinant form of the gp120 envelope glycoprotein
of human immunodeficiency virus, which may serve as the basis for the
development of a prophylactic HIV/AIDS vaccine. Under a license agreement
entered into with VaxGen Inc., we are responsible for supplying specified
amounts of clinical quantities of gp120 and we have an option to supply
additional clinical supplies. VaxGen is responsible for conducting all clinical
trials necessary for worldwide product approvals. Currently, VaxGen is
conducting Phase III trials with gp120. Genentech has separate options for
worldwide marketing rights and commercial supply of gp120 in the event that
gp120 is approved as an AIDS vaccine.
In general, with respect to our products, Hoffmann-La Roche pays us a royalty on
aggregate sales outside of the United States. In addition, Hoffmann-La Roche has
rights to, and pays us royalties on, Canadian sales of Activase, Protropin,
Nutropin, Pulmozyme and Actimmune, sales of Pulmozyme outside of the United
States and sales of Rituxan outside of the United States, excluding Japan.
Genentech supplies its products to Hoffmann-La Roche, and has agreed to supply
its products for which Hoffmann-La Roche has exercised its option, for sales
outside of the United States.
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<PAGE> 46
In addition, on July 6, 1998, we entered into an agreement with Hoffmann-La
Roche to provide Hoffmann-La Roche exclusive marketing rights outside of the
United States for Herceptin.
In December 1997, Genentech and Alteon Inc. entered into a collaborative
agreement to develop and market pimagedine, an advanced glycosylation
end-product formation inhibitor to treat kidney disease in diabetic patients.
Under the terms of the agreement, we licensed pimagedine and second generation
compounds from Alteon and we have made investments in Alteon stock of $37.5
million. In 1998, as a result of unsuccessful clinical trials with pimagedine
and the decline in the value of our investment in Alteon, we wrote down $24.2
million of its marketable and nonmarketable equity investments in Alteon. The
agreement will be terminated as of June 30, 1999.
Genentech and CuraGen Corporation entered into a research collaborative
agreement in November 1997, whereby we invested $5.0 million in equity of
CuraGen and we agreed to provide a convertible equity loan to CuraGen of up to
$26.0 million. As of the date of this prospectus, no loan amounts have been
funded to CuraGen.
Also, in December 1997, Genentech and LeukoSite entered into a collaboration
agreement to develop and commercialize LeukoSite's LDP-02, a humanized
monoclonal antibody for the potential treatment of inflammatory bowel diseases.
Under the terms of the agreement, we made a $4.0 million equity investment in
LeukoSite and we agreed to provide a convertible equity loan for approximately
$15.0 million to fund Phase II development costs. Upon successful completion of
Phase II, if LeukoSite agrees to fund 25% of Phase III development costs, we
have agreed to provide a second loan to LeukoSite for such funding. As of the
date of this prospectus, no loan amounts have been funded to LeukoSite.
In May 1999, we entered into a collaboration agreement with Immunex Corporation,
or Immunex, to develop and commercialize TRAIL/APO2 Ligand, also known as tumor
necrosis factor-related apoptosis-inducing ligand, for the potential treatment
of cancer. Under the terms of the agreement, the two companies have agreed to
allocate clinical, manufacturing and marketing responsibilities, and to share
all development and commercialization costs. The companies have agreed to
co-promote TRAIL/APO2L worldwide, and to share profits from the worldwide sales
of the product. TRAIL/APO2L is designed to cause tumor cells, but not normal
cells, to undergo programmed cell death, or apoptosis.
In May 1999, we entered into a license agreement with Immunex whereby we granted
to Immunex a worldwide, co-exclusive license under our immunoadhesin patents to
make, use and sell Enbrel(R), Immunex' product to treat moderately to severely
active rheumatoid arthritis. Immunex paid us an initial license fee and has
agreed to pay royalties on sales of Enbrel from November 6, 1998, which was the
date of product launch, through the life of our patents.
DISTRIBUTION
We have a U.S.-based pharmaceutical marketing, sales and distribution
organization. Our sales efforts are focused on specialist physicians based at
major medical centers in the United States. In general, our products are sold to
distributors or directly to hospital pharmacies or medical centers. We utilize
common pharmaceutical company marketing techniques, including advertisements,
professional symposia, direct mail, public relations and other methods.
Our products are available at no charge to qualified patients under our
uninsured patient programs in the United States. We have established the
Genentech Endowment for Cystic Fibrosis so qualified cystic fibrosis patients in
the United States who need Pulmozyme can gain assistance in obtaining it.
During 1998, we provided certain marketing programs relating to Activase,
including comprehensive wastage replacement and expired product programs for
Activase that, subject to specific conditions, provides customers the right to
return Activase to us for replacement related to both patient-related product
wastage and product expiration. We maintain the right to renew, modify or
discontinue the above programs.
Hoffmann-La Roche contributed approximately 11% of our total revenues in 1998,
11% in 1997 and 14% in 1996. Three other major customers, Caremark, Inc., Bergen
Brunswig, and Cardinal Distribution, Inc., each contributed 10% or more of our
total revenues in at least one of the last three years. Caremark, Inc., a
national distributor, which accounted for 10%, 14% and 15% of total revenues in
1998, 1997 and 1996, respectively, distributes our growth hormone products,
Pulmozyme and Actimmune, through its extensive branch network and is then
reimbursed through a variety of sources. Bergen Brunswig, a national wholesale
distributor of all of our products, contributed 11% of our total revenues in
1998 and 10% in 1997 and 1996. Cardinal Distribution, Inc., a national
wholesaler distributor of all our products, contributed 11% of our total
revenues in 1998.
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LICENSING AGREEMENTS WITH F. HOFFMANN-LA ROCHE LTD
We currently have two major licensing agreements with Hoffmann-La Roche.
Herceptin Licensing Agreement
On July 6, 1998, we entered into an agreement with Hoffmann-La Roche to provide
Hoffmann-La Roche exclusive marketing rights outside of the United States for
Herceptin. Under the agreement, Hoffmann-La Roche paid $40.0 million to us and
has agreed to pay cash milestones tied to future product development activities,
to contribute equally with us up to a maximum of $40.0 million on global
development costs and to make royalty payments on product sales.
Amended and Restated Licensing Agreement
Summary of Key Changes: Under an agreement dated October 25, 1995, we granted to
Hoffmann-La Roche an option for ten years for licenses to use and sell some of
our products in non-U.S. markets. In connection with this offering, we have
amended this licensing agreement with Hoffmann-La Roche by extending until at
least 2015 Hoffmann-La Roche's option to license to use and sell products in
non-U.S. markets. Other key changes to the license agreement are summarized as
follows:
- Hoffmann-La Roche may choose to exercise its option at the end of a Phase
III trial, if it pays a $10 million fee to us to extend its option on the
product;
- if Hoffmann-La Roche exercises its option after the completion of a Phase
III trial, Hoffmann-La Roche will reimburse us for 75% of our development
costs incurred after the completion of the Phase II trial through the
completion of the Phase III trial, and 50% of our development costs
incurred before completion of the Phase II trial. Subsequent development
costs for other indications will be shared 75%/25% by Hoffmann-La Roche
and Genentech;
- on each Genentech Product for which Hoffmann-La Roche exercises its
option after completion of the Phase III trials, we will receive a
royalty of 15% on all sales until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction; however, $5 million of any option extension fee paid by
Hoffmann-La Roche shall 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 exceeds $100 million;
- Hoffmann-La Roche will have the right to manufacture our products itself
if it can demonstrate that it is able to manufacture products at a lower
price than our supply price, if we are not able to supply Hoffmann-La
Roche's commercial requirements or if we intend to have a third party
manufacture the product;
- Hoffmann-La Roche will have the right to terminate a license for a
product upon 30 days notice;
- if Hoffmann-La Roche terminates its license 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 European countries because of safety issues,
Hoffmann-La Roche will be liable for all obligations incurred primarily
to support registration outside the United States of that product for up
to six months after the termination is given; and
- if Hoffmann-La Roche terminates its license for other than safety
reasons, Hoffmann-La Roche shall be liable for all of its obligations
regarding the product for up to twelve months after the notice of
termination.
General: Pursuant to our amended and restated licensing agreement with
Hoffmann-La Roche, we have agreed to grant to Hoffmann-La Roche an exclusive
patent, know-how and trademark license to use, sell and, under certain
conditions, make in Canada (collectively, the "Canada Products"):
- Activase tissue plasminogen activator;
- Protropin and Nutropin human growth hormone;
- Actimmune interferon gamma-1b; and
- Pulmozyme inhalation solution.
We have also agreed to grant to Hoffmann-La Roche an exclusive patent, know-how
and trademark license to use, sell and, under certain conditions, make Pulmozyme
outside the United States (the "Roche Territory").
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Except as noted below with respect to certain "in-licensed" products, the
licensing agreement provides that we will grant to Hoffmann-La Roche an option
for an exclusive patent, know-how and trademark license in the Roche Territory
on a product-by-product basis to use, sell and, under certain circumstances,
make other products for which we have rights or for which we have subsequently
acquired rights ("Genentech Products"). We granted to Hoffmann-La Roche an
option for an exclusive patent and know-how license outside the United States to
use, sell and, under certain conditions, make products in-licensed from IDEC
(such products being referred to as "IDEC Product"). Hoffmann-La Roche exercised
its option with regard to Rituxan. In Canada, Hoffmann-La Roche's rights with
respect to IDEC Product are subject to our preexisting co-promotion obligation
for this product. Subject to the terms and conditions of any relevant license
agreements and Hoffmann-La Roche's acceptance of those terms and conditions, we
will grant to Hoffmann-La Roche an option for an exclusive patent and know-how
license in the Roche Territory on a product-by-product basis to use, sell and,
under certain circumstances, make other human pharmaceutical products for which
we have acquired rights in the Roche Territory by means of a patent and/or
know-how license from a third party ("In-Licensed Product").
Hoffmann-La Roche may exercise its option to license our products upon the
occurrence of any of the following:
- our decision to file an IND with the FDA for a product;
- at completion of a Phase II trial for a product with results sufficient
to support the undertaking of a Phase III trial; or
- if Hoffmann-La Roche paid a fee of $10 million at completion of the Phase
II trial to extend its option for that product, at completion of a Phase
III trial for that product with results sufficient to support the filing
of a BLA or NDA.
We must notify Hoffmann-La Roche and supply to Hoffmann-La Roche a reasonable
summary of available information regarding a product, including data from any
Phase II or Phase III trials, upon each of these events. Hoffmann-La Roche then
has 60 days to exercise its option. Within 30 days of this notification, the
joint commercialization committee described below must meet to review the
results of any Phase II or Phase III trials and other relevant data. Within 60
days of this notification and receipt by Hoffmann-La Roche of the information
regarding the product, Hoffmann-La Roche must either exercise its option for the
product or irrevocably waive it for that particular option period. If
Hoffmann-La Roche waives its option, we are permitted to develop and sell the
product ourselves or with another party. Prior to our decision to file an IND
exemption application with the FDA for a product, we retain authority to
discontinue sole development of that product and, subject to the provisions of
our affiliation agreement with Roche, to license that product to a third party.
See "Relationship with Roche -- Arrangements between Genentech and
Roche -- Licensing and Marketing Arrangements" below.
The options granted in the licensing agreement terminate on October 25, 2015,
except for the following:
- if Hoffmann-La Roche has paid to extend its option on a product,
Hoffmann-La Roche will retain an option on that product upon completion
of Phase III trials;
- for a product for which we have decided to file an IND with the FDA but
which has not yet reached completion of Phase II trials, Hoffmann-La
Roche may exercise its option upon completion of Phase II trials; and
- for a product for which a 60-day option exercise period had begun,
Hoffmann-La Roche may exercise its option up until the end of that 60-day
period.
We have the sole right outside the Roche Territory, and Hoffmann-La Roche has
the sole right in the Roche Territory, to register, use, sell and market such
products arising from our current collaborations with Hoffmann-La Roche on
IIb/IIIa antagonists, other than Xubix, and ras farnesyltransferase inhibitors.
All research efforts on these products will continue to be shared in an equal
manner; no royalties on sales shall be due from either party to the other. The
costs for development of certain products will be shared as described below
under "--Development and Marketing."
The licensing agreement grants us an option to participate and share in the
development and commercialization of Xubix within 30 days after approval of an
NDA by the FDA. If exercised, we would reimburse Hoffmann-La Roche for 50% of
its development costs (including Phase III development costs) incurred by
Hoffman-La Roche from and after May 1, 1997 through the date we exercised our
option and for Phase III development costs incurred prior to May 1, 1997 and
would pay an additional $25 million. If we exercise our option, we and
Hoffman-La Roche will negotiate and enter into a more detailed commercialization
and development agreement. We would have co-exclusive rights with Hoffmann-La
Roche in the United States to register, use, sell and market the products
resulting from our collaboration on Xubix. Hoffmann-La Roche would have
exclusive rights on Xubix in the Roche Territory.
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Commercialization Committees: To manage our collaborations with Hoffmann-La
Roche, the licensing agreement provides for the establishment of four
committees: a joint commercialization committee to provide a forum for the
exchange of information about Genentech Products; a development committee to
coordinate development efforts between us and Hoffmann-La Roche; a management
committee to review annually the development and commercialization of all
products covered by the licensing agreement; and a joint finance committee to
discuss financial activities relating to the licensing agreement. We and
Hoffmann-La Roche will review the committee structure within six months after
effectiveness of the licensing agreement to consider simplifying the committee
system.
Development and Marketing: Under the licensing agreement, we will have sole
responsibility and full autonomy for the development and marketing of our
products outside the Roche Territory, and also in the Roche Territory with
respect to products for which Hoffmann-La Roche does not exercise its option for
a license. Hoffmann-La Roche will have sole responsibility for the development
and marketing of products in the Roche Territory for which it has been granted a
license or exercised its option for a license.
Under the licensing agreement, Hoffmann-La Roche will, in general, reimburse us
for 50% of our development costs, depending on the payment mechanism described
below, incurred in connection with a product for which Hoffmann-La Roche has
exercised its option for a license except that if Hoffmann-La Roche exercises
its option to license a new product after receiving notice of the completion of
a Phase III trial for that product, Hoffmann-La Roche will reimburse us for 75%
of our development costs incurred between the time we gave notice of completion
of Phase II trials and the exercise of its option, in addition to reimbursing us
for 50% of our development costs incurred prior to notice of completion of Phase
II trials. However, $5 million of any option extension fee paid by Hoffmann-La
Roche will be credited against our development costs to be reimbursed by
Hoffmann-La Roche for that product.
The mechanism for reimbursement of our development costs incurred up to the date
of Hoffmann-La Roche's exercise of its option for a product shall be, at our
election and with Hoffmann-La Roche's consent, either of the following:
- upon Hoffmann-La Roche's exercise of its option by payment in full of the
appropriate percentage of the previously incurred development costs for
that product or
- by quarterly payments equal to 150% of prospective development costs for
that product until the appropriate percentage of all previously incurred
development costs for that product have been reimbursed.
If the option was exercised prior to completion of the product's Phase II
trials, 50% of the global development costs incurred after Hoffmann-La Roche's
exercise of its option shall be reimbursed by Hoffmann-La Roche on an ongoing
basis. If the option was exercised after completion of the product's Phase II
trials, 75% of the global development costs incurred after Hoffmann-La Roche's
exercise of its option shall be reimbursed by Hoffmann-La Roche on an ongoing
basis.
Once Hoffmann-La Roche has exercised an option to license a product, we will
share the subsequent global development costs of that product equally, except as
follows:
- Hoffmann-La Roche will bear 10% of the global development costs incurred
in connection with Canada Products on or after the date on which
Hoffmann-La Roche exercises its option for a license on the product;
- Hoffmann-La Roche will bear 60% of the global development costs incurred
in connection with IGF-1 products for any diabetes indication on or after
the date on which Hoffmann-La Roche exercises its option for a license on
the product;
- Hoffmann-La Roche will bear 60% of the global development costs incurred
in connection with any NGF products on or after the date on which
Hoffmann-La Roche exercises its option for a license on the product;
- for any additional indications, new formulations or new dosing schedules
of a product, we and Hoffmann-La Roche will share equally the subsequent
global development costs, unless Hoffmann-La Roche exercised its option
after completion of the Phase III trials, in which case Hoffmann-La Roche
will bear 75% and we will bear 25% of the subsequent global development
costs; and
- if Hoffmann-La Roche exercises its option after completion of the Phase
III trials, each company will bear its own subsequent global development
costs for clinical development and registration for the indication that
is the subject of these Phase III trials.
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Production and Supply: Pursuant to the licensing agreement, we or our
subsidiaries, as applicable, will manufacture and supply to Hoffmann-La Roche
its clinical requirements of Genentech Products at cost and its commercial
requirements at cost plus a margin of 20% on such cost. If Hoffmann-La Roche
exercises its option with respect to any synthetic molecules other than proteins
and peptides ("Small Molecule Products"), Hoffmann-La Roche will manufacture and
supply to us clinical requirements of Small Molecule Products at cost and
commercial requirements at cost plus a margin of 20% on such cost. In-Licensed
Products will be manufactured and supplied to Hoffmann-La Roche, whether by us,
the licensor or a third party, in a manner consistent with the license agreement
for that product. Hoffmann-La Roche will bear the same percentage of costs
associated with developing a manufacturing process for products licensed by
Hoffmann-La Roche as Hoffmann-La Roche is required to bear with respect to the
development of the product. We will pay that proportion of Hoffmann-La Roche's
costs associated with developing a manufacturing process for a Small Molecule
Product licensed by Hoffmann-La Roche that Genentech's expected revenues for
sales of that product in the United States bears to expected worldwide sales of
that product.
Hoffmann-La Roche will have the right to manufacture Genentech Products itself,
in bulk form or in vial form, under any of the following circumstances:
- if Hoffmann-La Roche can demonstrate that it is able to manufacture
products in either of these forms at a lower price than our supply price;
- if we are not able to, or it is foreseeable that we will not be in a
position to, supply Hoffmann-La Roche's commercial requirements in the
Roche Territory; or
- if we intend to have a third party manufacture a product in these forms.
Under any of these circumstances, at Hoffmann-La Roche's request, we shall
provide Hoffmann-La Roche with all information and any support, at Hoffman-La
Roche's expense, needed to enable Hoffmann-La Roche to manufacture a product in
these forms for use and sale in the Roche Territory, and we shall grant
Hoffmann-La Roche any necessary licenses to do so.
Royalties and Other Payments: We will receive the following royalties on
product sales from Hoffmann-La Roche:
- On Pulmozyme, (x) a royalty of 20% on sales in countries that are or will
become members of the European Union or the European Free Trade
Association and in Canada and (y) in all other countries which are part
of the Roche Territory, a royalty of 12.5% on the first $100 million in
aggregate sales and thereafter a royalty of 15% on aggregate sales in
excess of $100 million until the later in each country of the expiration
of our last relevant patent or 25 years from first commercial
introduction;
- On Canada Products, a royalty of 20% on sales of each such product until
the later of the expiration of our relevant patent in Canada or 25 years
from October 25, 1995 (with respect to Activase, Hoffmann-La Roche will
pay an additional 10% royalty on sales in each year that exceed 110% of
1994 Activase sales up to a total payment of $27 million);
- On each Genentech Product for which Hoffmann-La Roche exercises its
option upon either a decision to file an IND with the FDA or completion
of the Phase II trials, a royalty of 12.5% on the first $100 million in
aggregate sales and thereafter a royalty of 15% on aggregate sales in
excess of $100 million until the later in each country of the expiration
of our last relevant patent or 25 years from first commercial
introduction;
- On each Genentech Product for which Hoffmann-La Roche exercises its
option after completion of the Phase III trials, a royalty of 15% on all
sales until the later in each country of the expiration of our relevant
patent or 25 years from the first commercial introduction; however, $5
million of any option extension fee paid by Hoffmann-La Roche shall 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
exceeds $100 million;
- On IDEC Product, a royalty of 20% on sales for so long as we are paying
royalties to IDEC on sales of IDEC Product and thereafter a royalty of
10% for aggregate annual sales of $75 million or less and 8% for
aggregate annual sales in excess of $75 million until the later in each
country of the expiration of our last relevant patent or 25 years from
first commercial introduction;
- On In-Licensed Products, a mutually agreeable royalty to be negotiated
for each such product; and
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- On the expiration of any of the foregoing royalties, on a product for
which Hoffmann-La Roche continues to use our trademark, a royalty of 2%
on sales for so long as the trademark is used.
With respect to IDEC Product, Hoffmann-La Roche paid us $10 million and
reimbursed us for 50% of some of our development costs and for certain one-time
milestone payments that we were obligated to pay upon the occurrence of such
milestones to IDEC.
Any of the foregoing royalties shall be renegotiated in good faith to make that
royalty or rate significantly more economically viable for Hoffmann-La Roche if
(i) there exists a generically equivalent product competing with the product for
which Hoffmann-La Roche pays royalties to us and (ii) the equivalent product has
at least 25% of the market share for those products in that country.
Any of the foregoing royalties are subject to reductions in the event that
Hoffmann-La Roche, together with its affiliates, hold less than 50% of our
outstanding common stock.
Term and Termination: The licensing agreement expires for any individual product
when royalties are no longer payable by Hoffmann-La Roche to us on sales of that
product unless we and Hoffmann-La Roche agree to extend the licensing agreement
for such product. Provisions for termination by Hoffmann-La Roche include the
following:
- Hoffmann-La Roche has the right to terminate a license for a product upon
thirty days notice;
- if Hoffmann-La Roche terminates its license 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 that either are or become members of the
European Union or the European Free Trade Association because of safety
issues, Hoffmann-La Roche shall be liable for all obligations incurred
primarily to support registration in the Roche Territory of that product
for up to six months after Hoffmann-La Roche terminates its license;
- if Hoffmann-La Roche terminates its license for other than safety
reasons, Hoffmann-La Roche shall be liable for all of its obligations
regarding the product for up to twelve months after the termination
notice is given or if Hoffmann-La Roche terminates its license after at
least one Phase III clinical trial has been completed and the results of
that trial are unable to support the registration of that product, or the
results of other trials establish that further development would not
provide data sufficient to support registration, Hoffmann-La Roche shall
be liable for all of its obligations regarding the product for up to six
months after the termination notice is given; and
- if Hoffmann-La Roche terminates its license, all rights to the product
revert to us.
If Hoffmann-La Roche fails to use its best efforts to commercialize a product in
a country and fails to take adequate remedial measures within six months of
notice, we may
- terminate the agreement with respect to that product in that country if a
registration has not been initiated; or
- convert the exclusive license for that product in that country to a
nonexclusive one if registration has been initiated.
We may terminate our development or commercialization at any time for any
product which has been licensed to Hoffmann-La Roche, and such product will then
be subject to the provisions of our affiliation agreement with Roche described
under "Relationship with Roche--Arrangements between Genentech and
Roche--Licensing and Marketing Arrangements," provided that if such termination
is for reasons other than safety concerns, we will have an obligation for up to
two years to provide Hoffmann-La Roche's clinical and commercial supply
requirements. Either party may terminate the licensing agreement for the breach
of a material obligation of the other. We may terminate Hoffmann-La Roche's
option for a license for products if the equity ownership of Hoffmann-La Roche
and its affiliates in our company is less than 50% at any time. If we terminate
the license agreement for any product for any reason, Hoffmann-La Roche will
have a royalty-free right and license to produce and supply all of its clinical
and commercial supply requirements and we will be obligated to transfer to
Hoffmann-La Roche all manufacturing technology with respect to that product. If
Hoffmann-La Roche terminates its development or commercialization of a Small
Molecule Product at any time, we will have a royalty-free right and license to
produce and supply all of our clinical and commercial supply requirements and
Hoffmann-La Roche will be obligated to transfer to us all manufacturing
technology with respect to that product.
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RAW MATERIALS
Raw materials and supplies required for the production of our principal products
are generally available in quantities adequate to meet our needs.
PROPRIETARY TECHNOLOGY -- PATENTS AND TRADE SECRETS
We have a policy of seeking patents on inventions arising from our ongoing
research and development activities. Patents issued or applied for cover
inventions ranging from basic recombinant DNA techniques to processes relating
to specific products and to the products themselves. We have either been granted
patents or have patent applications pending which relate to a number of current
and potential products including products licensed to others. We consider that
in the aggregate our patent applications, patents and licenses under patents
owned by third-parties are of material importance to our operations. Important
legal issues remain to be resolved as to the extent and scope of available
patent protection for biotechnology products and processes in the United States
and other important markets outside of the United States. We expect that
litigation will likely be necessary to determine the validity and scope of
certain of our proprietary rights. We are currently involved in a number of
patent lawsuits, as either a plaintiff or defendant, and administrative
proceedings relating to the scope of protection of our patents and those of
others. These lawsuits and proceedings may result in a significant commitment of
our resources in the future. We cannot assure you that the patents we obtain or
the unpatented proprietary technology we hold will afford us significant
commercial protection.
In general, we have obtained licenses from various parties that we deem to be
necessary or desirable for the manufacture, use or sale of our products. These
licenses (both exclusive and non-exclusive) generally require us to pay
royalties to the parties on product sales.
Our trademarks, Actimmune, Activase, Herceptin, Nutropin, Nutropin AQ, Nutropin
Depot, Protropin, Pulmozyme and Rituxan, in the aggregate are considered to be
of material importance and are registered in the U.S. Patent and Trademark
Office and in other countries throughout the world.
Our royalty income during 1998, 1997 and 1996 for patent licenses, know-how and
other related rights amounted to $229.6 million, $241.1 million and $214.7
million, respectively. Royalty expenses for 1998, 1997 and 1996, were $66.3
million, $58.9 million and $58.9 million, respectively.
COMPETITION
We face competition, and believe significant long-term competition can be
expected, from large pharmaceutical companies and pharmaceutical divisions of
chemical companies as well as biotechnology companies. This competition can be
expected to become more intense as commercial applications for biotechnology
products increase. Some competitors, primarily large pharmaceutical companies,
have greater clinical, regulatory and marketing resources and experience than we
do. Many of these companies have commercial arrangements with other companies in
the biotechnology industry to supplement their own research capabilities.
The introduction of new products or the development of new processes by
competitors or new information about existing products may result in price
reductions or product replacements, even for products protected by patents.
However, we believe our competitive position is enhanced by our commitment to
research leading to the discovery and development of new products and
manufacturing methods. Other factors which should help us meet competition
include ancillary services provided to support our products, customer service,
and dissemination of technical information to prescribers of our products and to
the health care community, including payers.
Over the longer term, our and our collaborators' ability to successfully market
current products, expand their usage and bring new products to the marketplace
will depend on many factors, including but not limited to the effectiveness and
safety of the products, FDA and foreign regulatory agencies' approvals for new
indications, the degree of patent protection afforded to particular products,
and the effect of managed care as an important purchaser of pharmaceutical
products.
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Herceptin
Herceptin is the first humanized monoclonal antibody for the treatment of HER2
overexpressing metastatic breast cancer and the second United States approval in
this new class of monoclonal antibody biotherapeutic cancer drugs. The first was
Rituxan. We are aware of other potentially competitive biologic therapies in
development.
Rituxan
Rituxan received designation as a U.S. Orphan Drug by the FDA in 1994 for the
treatment of relapsed or refracting low grade or follicular CD20-positive B-cell
non-Hodgkins lymphoma. We are aware of other potentially competitive biologic
therapies in development. Coulter is preparing to file for approval with the FDA
with respect to one such product for a similar indication for which Rituxan is
approved.
Activase
We continue to face competition from Retavase, registered trademark, a
thrombolytic agent. Retavase received FDA approval in October 1996 for the
treatment of acute myocardial infarction. We believe Retavase infringes on our
patents and we have filed a patent infringement action against Boehringer
Mannheim. In 1998, Centocor, Inc. purchased the United States and Canadian
rights to Retavase from Boehringer Mannheim. In addition, the market for
thrombolytic therapy has declined as there is an increasing use of mechanical
reperfusion in lieu of thrombolytic therapy for the treatment of acute
myocardial infarction. In April 1995, the FDA approved for marketing an
accelerated dosage of Activase. In June 1996, we received clearance from the FDA
to market Activase for the treatment of acute ischemic stroke within three hours
of symptom onset. Activase is the first therapy to be indicated for the acute
treatment of stroke. In addition, we have concluded Phase III clinical trials on
a second generation of t-PA, TNK-tPA, and are currently preparing FDA regulatory
filings.
In March 1998, we received two new patents related to variant forms of t-PA.
Based on these patents, we filed an infringement action against Centocor Inc. in
the Northern District of California which alleges that Centocor's sale, offer
for sale, use in, and importation into, the United States of Retavase
(reteplase, recombinant), a t-PA, infringes these two new patents.
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 or if our former governance
agreement allows Roche to control us, 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.
We are aware of other companies actively pursuing the development for the U.S.
market of nonrecombinant or recombinant t-PA or t-PA variants, and additional
companies or combinations of companies pursuing the development of other types
of potentially competitive thrombolytic agents.
Protropin, Nutropin and Nutropin AQ
Lilly received FDA approval in 1987 to market its growth hormone product for
treatment of growth hormone inadequacy in children. Three other
companies--BioTechnology General, Novo Nordisk A/S and Pharmacia &
Upjohn--received FDA approval in 1995 to market their growth hormone products,
although BioTechnology General has been preliminarily enjoined from selling its
product. A fifth competitor, Serono Laboratories, Inc., received FDA approval in
October 1996 to market its growth hormone product. In the first quarter of 1997,
Serono, Novo and Pharmacia & Upjohn began selling their growth hormone products
in the United States market. In addition, three of our competitors have received
approval to market their existing human growth hormone products for additional
indications.
Pulmozyme
Sales of Pulmozyme for the management of cystic fibrosis in the United States,
Canada and some countries in Europe began in early 1994. In November 1996,
Pulmozyme was cleared for marketing by the FDA for the management of cystic
fibrosis patients with advanced disease; a condition that affects approximately
500 patients in the United States. In February 1998, we received approval from
the FDA for a label extension which includes the safety and alternative
administration of Pulmozyme in children under the age of five with cystic
fibrosis. In accordance with the then existing licensing agreement with Roche,
in the
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fourth quarter of 1995, Hoffmann-La Roche obtained exclusive rights to sell
Pulmozyme outside of the United States, and we receive a royalty on such sales.
We are not aware of any directly competing products in development.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of our products and in
ongoing research and product development activities. All of our products will
require regulatory approval by governmental agencies prior to commercialization.
In particular, our products are subject to rigorous preclinical and clinical
testing and other premarket approval requirements by the FDA and regulatory
authorities in other countries. Various statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such products. The lengthy process of seeking these approvals, and
the subsequent compliance with applicable statutes and regulations, require the
expenditure of substantial resources. We believe that we are currently in
compliance with such statutes and regulations. Any failure by us to obtain, or
any delay in obtaining, regulatory approvals could materially adversely affect
our business.
The activities required before a pharmaceutical product may be marketed in the
United States begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and animal studies to assess the
potential safety and efficacy of the product and its formulations. The results
of these studies must be submitted to the FDA as part of an IND application,
which must be reviewed by the FDA before proposed clinical testing can begin.
Typically, clinical testing involves a three-phase process. In Phase I, clinical
trials are conducted with a small number of subjects to determine the early
safety profile and the pattern of drug distribution and metabolism. In Phase II,
clinical trials are conducted with groups of patients afflicted with a specified
disease in order to provide enough data to statistically evaluate the
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large scale, multicenter, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data to
statistically evaluate the efficacy and safety of the product, as required by
the FDA. The results of the preclinical and clinical testing of a chemical
pharmaceutical product are then submitted to the FDA in the form of a NDA, or
for a biological pharmaceutical product in the form of BLA, for approval to
commence commercial sales. In responding to an NDA or BLA, the FDA may grant
marketing approval, request additional information or deny the application if it
determines that the application does not provide an adequate basis for approval.
We can not assure you that any approval required by the FDA will be obtained on
a timely basis, if at all.
Among the conditions for NDA or BLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
on an ongoing basis with Good Manufacturing Practices, or GMP. Before approval
of the BLA, the FDA will perform a prelicensing inspection of the facility to
determine its compliance with GMP and other rules and regulations. In complying
with GMP, manufacturers must continue to expend time, money and effort in the
area of production and quality control to ensure full compliance. After the
establishment is licensed for the manufacture of any product, it is subject to
periodic inspections by the FDA.
The requirements such as those described above which we must satisfy to obtain
regulatory approval by governmental agencies in other countries prior to
commercialization of our products in such countries can be as rigorous, costly
and uncertain.
We are also subject to various laws and regulations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with our research. We believe we are currently in compliance with
all these laws and regulations. The extent of governmental regulation which
might result from any legislative or administrative action cannot be accurately
predicted.
The levels of revenues and profitability of biopharmaceutical companies may be
affected by the continuing efforts of government and third party payers to
contain or reduce the costs of health care through various means. For example,
in certain foreign markets pricing or profitability of therapeutic and other
pharmaceutical products is subject to governmental control. In the United States
there have been, and we expect that there will continue to be, a number of
federal and state proposals to implement similar governmental control. While we
cannot predict whether any such legislative or regulatory proposals will be
adopted, the adoption of such proposals could have a material adverse effect on
our business, financial condition and profitability. In addition, in both the
United States and elsewhere, sales of therapeutic and other pharmaceutical
products are dependent in part on the availability of reimbursement to the
consumer from third party payers, such as government and private insurance
plans. Third party payers are increasingly challenging the prices charged for
medical products and services.
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We cannot assure you that any of our products will be considered cost effective
and that reimbursement to the consumer will be available or will be sufficient
to allow us to sell our products on a competitive and profitable basis.
RESEARCH AND DEVELOPMENT
A major portion of our operating expenses to date have been related to the
research and development of products either on our own behalf or under
contracts. During 1998, 1997 and 1996, our research and development expenses
were $396.2 million, $470.9 million and $471.1 million, respectively. During the
three months ended March 31, 1999, our research and development expenses were
$90.7 million.
Our research and development efforts have been the primary source of our
products. We intend to maintain our strong commitment to research and
development as an essential component of our product development effort.
Licensed technology developed by outside parties is an additional source of
potential products.
HUMAN RESOURCES
As of March 31, 1999, we had 3,452 employees.
ENVIRONMENT
We seek to comply with all applicable statutory and administrative requirements
concerning environmental quality. We have made, and will continue to make,
expenditures for environmental compliance and protection. Expenditures for
compliance with environmental laws have not had and are not expected to have a
material effect on our capital expenditures, results of operation, financial
position or competitive position.
PROPERTIES
Our primary facilities are located in a research and industrial park in South
San Francisco, California in both leased and owned properties. We currently
occupy twenty-two buildings for our research and development, manufacturing,
marketing and administrative activities. Fourteen of the buildings are owned
property and eight are leased. We have made and continue to make improvements to
these properties to accommodate our growth. In addition, we own approximately 17
acres adjacent to our current facilities that may be used for future expansion.
In 1995, we began development of a new manufacturing facility of approximately
300,000 square feet in Vacaville, California under an operating lease
arrangement. The project is expected to be operational by the third quarter of
1999, with licensure expected thereafter. We also have leases for certain
additional office facilities in several locations in the United States.
We believe our facilities are in good operating condition and that the real
property owned or leased, combined with the new Vacaville site, currently
conducted start-up and validation checks, are adequate for all present and near
term uses although additional manufacturing capacity may be added on the
Vacaville site dependent on the success of products in clinical trials. We
believe any additional facilities could be obtained or constructed with our
capital resources.
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 infringed 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 human growth hormone
products infringed the Goodman Patent. The 1997 case has been stayed pending the
conclusion of the 1990 case.
In May of 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 voted
8-1 in favor of UC. Because the jury could not reach a unanimous decision, no
finding of infringement was made and, at this time, there is no legal basis for
us to be held liable to UC for any claim of damages. On June 22, 1999, a meeting
known as a status conference will be held with the judge
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overseeing the case. It is possible that at this meeting UC will request that a
new trial be held on the issue of whether we infringe the Goodman Patent. At
that meeting, we will renew our request that the judge hold a non-jury trial and
decide whether UC defrauded the U.S. Patent 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. A ruling against us
would mean that UC could, if it wanted to, resubmit the issue of infringement to
the jury.
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. We are assessing the suit, the
merits of Glaxo Wellcome's claims and the strength of the patents.
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 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.
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MANAGEMENT
Upon consummation of this offering, our board will consist of two Roche
directors, Dr. Humer and Dr. Knowles, three independent directors to be
nominated by a nominating committee currently controlled by Roche, one of whom
will be Herbert W. Boyer, and one Genentech employee, Dr. Levinson, who will be
the chairman of the board. However, Roche has the right at any time to obtain
proportional representation on our board. See "Risk Factors--Roche, Our
Controlling Stockholder, May Have Interests That Are Adverse to Yours." The
executive officers and directors of Genentech after the offering and their
respective ages and positions with Genentech are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Arthur D. Levinson, Ph.D. ............... President, Chief Executive Officer and Chairman of the
49 Board
William D. Young......................... 54 Chief Operating Officer
Louis J. Lavigne, Jr. ................... 51 Executive Vice President and Chief Financial Officer
Susan D. Desmond-Hellmann, M.D., Senior Vice President--Development and Chief Medical
M.P.H. ................................ 41 Officer
Dennis J. Henner, Ph.D. ................. 48 Senior Vice President--Research
Judith A. Heyboer........................ 49 Senior Vice President--Human Resources
Stephen G. Juelsgaard.................... 50 Senior Vice President--General Counsel and Secretary
W. Robert Arathoon, Ph.D. ............... 47 Vice President--Process Sciences
Joffre B. Baker, Ph.D. .................. 51 Vice President--Research Discovery
J. Joseph Barta.......................... 51 Vice President--Quality
Stephen G. Dilly, M.D., Ph.D. ........... 40 Vice President--Medical Affairs
David Ebersman........................... 29 Vice President--Product Development
Robert L. Garnick, Ph.D. ................ 49 Vice President--Regulatory Affairs
Bradford S. Goodwin...................... 44 Vice President--Finance
Paula M. Jardieu, Ph.D. ................. 48 Vice President--Pharmacological Sciences
Edmon R. Jennings........................ 52 Vice President--Corporate Development
Sean A. Johnston, Ph.D................... 40 Vice President--Intellectual Property
Cynthia J. Ladd.......................... 44 Vice President--Corporate Law and Assistant Secretary
Walter K. Moore.......................... 47 Vice President--Government Affairs
James P. Panek........................... 46 Vice President--Manufacturing, Engineering and Facilities
Kimberly J. Popovits..................... 40 Vice President--Sales
Nicholas J. Simon........................ 45 Vice President--Business and Corporate Development
David C. Stump, M.D. .................... 49 Vice President--Clinical Research and Genentech Fellow
John M. Whiting.......................... 44 Controller and Chief Accounting Officer
Herbert W. Boyer, Ph.D. ................. 62 Director of Genentech
Franz B. Humer, Ph.D. ................... 52 Director of Genentech
Jonathan K.C. Knowles, Ph.D. ............ 51 Director of Genentech
</TABLE>
All officers are elected annually by the Board of Directors.
ARTHUR D. LEVINSON, PH.D. was appointed Chairman of the Board in June 1999 and
President and Chief Executive Officer of Genentech in July 1995. He had
previously served as Senior Vice President of Genentech since January 1993. Dr.
Levinson has held a number of other positions, including Vice President,
Research, Vice President, Research Technology, Director, Cell Genetics
Department and Staff Scientist subsequent to joining Genentech in May 1980 as a
Senior Scientist.
WILLIAM D. YOUNG was appointed Chief Operating Officer of Genentech in April
1997. He previously served as Executive Vice President of Genentech from January
1996 to April 1997, as Senior Vice President from September 1988 to January 1996
and as Vice President, Manufacturing and Process Sciences from April 1983 to
September 1988. Mr. Young joined Genentech in September 1980 as Director,
Manufacturing from Eli Lilly and Company.
LOUIS J. LAVIGNE, JR. was appointed Executive Vice President of Genentech in
March 1997 and Chief Financial Officer in August 1988. He previously served as
Senior Vice President from July 1994 to March 1997 and as Vice President from
July
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1986 to July 1994. Mr. Lavigne joined Genentech in July 1982 from Pennwalt
Corporation and became Controller in May 1983 and an officer of Genentech in
February 1984.
SUSAN D. DESMOND-HELLMANN, M.D., M.P.H. was appointed Senior Vice President,
Development in December 1997 and Chief Medical Officer in December 1996. She
joined Genentech in March 1995 as Clinical Scientist and subsequently held the
positions of Associate Director from August 1995 to January 1996, Senior
Director from January 1996 to March 1996 and Vice President, Medical Affairs
from March 1996 to November 1997. Prior to joining Genentech, she held the
positions of Associate Director at Bristol-Myers Squibb from February 1993 to
February 1995 and Medical Oncologist at Lexington Oncology Associates from June
1992 to February 1993.
DENNIS J. HENNER, PH.D. was appointed Senior Vice President, Research in May
1998. He had served as Vice President, Research from April 1996 to May 1998,
Vice President, Research Technology from July 1994 to April 1996, and as Senior
Director, Research Technology from December 1990 to July 1994. From May 1990 to
December 1990, Dr. Henner was Director and Senior Scientist, Cell Genetics
Department. Dr. Henner joined Genentech in 1981 as a Scientist in Research.
Prior to joining Genentech, he was at the Scripps Clinic and Research
Foundation.
JUDITH A. HEYBOER joined Genentech as Senior Vice President, Human Resources in
August 1996. Prior to joining Genentech, she held the positions of Vice
President, Employee Relations and later Senior Vice President at Acuson
Corporation from October 1983 to July 1996.
STEPHEN G. JUELSGAARD was appointed Senior Vice President in April 1998, Vice
President and General Counsel in July 1994 and Secretary in April 1997. He
joined Genentech in July 1985 as Corporate Counsel and subsequently served as
Senior Corporate Counsel from 1988 to 1990, Chief Corporate Counsel from 1990 to
1993, Vice President, Corporate Law from 1993 to 1994, and Assistant Secretary
from 1994 to 1997.
W. ROBERT ARATHOON, PH.D. was appointed Vice President, Process Sciences in
April 1996. Since joining Genentech in 1983 from The Wellcome Foundation, Dr.
Arathoon has held a series of positions of increasing responsibility, most
recently as Senior Director, Process Sciences from November 1994 to April 1996.
JOFFRE B. BAKER, PH.D. was appointed Vice President, Research Discovery in
February 1997. He previously held the positions of Senior Director, Research
Discovery from March 1993 to February 1997 and Director, Cardiovascular Research
Development from September 1990 to September 1993. He has also been a member of
the Research Review Committee (RRC) since March 1993.
J. JOSEPH BARTA was appointed Vice President, Quality in October 1998. He
previously held the positions of Senior Director, Quality from March to October
1998, Senior Director, Quality Assurance from January 1994 to February 1998,
Senior Director, Pharmaceutical Manufacturing from September to December 1993,
Director, Pharmaceutical Manufacturing from September 1989 to August 1993, and
Associate Director, Validation and Technical Services from June to September
1989. He joined Genentech in March 1988 as Manager, Validation. Prior to joining
Genentech, he held positions of Director, Quality Assurance and Quality Control
at Codon from May 1986 to March 1988 and Group Validation Manager at Miles
Laboratories, Inc. from September 1979 to March 1986.
STEPHEN G. DILLY, M.D., PH.D. joined Genentech as Vice President, Medical
Affairs in December 1998. Prior to joining Genentech he held various positions
with SmithKline Beecham Pharmaceuticals from August 1988, including Director and
Vice President Neurosciences Therapeutic Unit from December 1996 to December
1998, Director and Vice President CardioPulmonary Therapeutic Team from December
1994 to December 1996 and Group Director Neurosciences Therapeutic Unit from
April 1993 to December 1994.
DAVID EBERSMAN was appointed Vice President, Product Development in February
1999. He joined Genentech in February 1994 as a Business Development Analyst and
subsequently held the positions of Manager, Business Development from February
1995 to February 1996, Director, Business Development from February 1996 to
March 1998 and Senior Director, Product Development from March 1998 to February
1999. Prior to joining Genentech, he held the position of Research Analyst at
Oppenheimer & Company, Inc. beginning in 1991.
ROBERT L. GARNICK, PH.D. was appointed Vice President, Regulatory Affairs in
February 1998. He had previously served as Vice President, Quality since April
1994 and was Senior Director, Quality Control from 1990 to 1994 and Director,
Quality Control from 1988 to 1990. Dr. Garnick joined Genentech in August 1984
from Armour Pharmaceutical, where he worked from 1980. Prior to that, he was
Manager of Analytical Development at Merrell National Labs from 1977 to 1980.
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BRADFORD S. GOODWIN was appointed Vice President, Finance in October 1997. He
had served as Vice President, Finance and Controller since December 1996. He has
been a Vice President of Genentech since July 1993 and served as Controller from
June 1989 to October 1997. He has also held the positions of Director, Financial
Planning and Analysis, the Assistant Controller and the General Auditor. Before
joining Genentech in April 1987, Mr. Goodwin worked for Price Waterhouse, a
public accounting firm.
PAULA M. JARDIEU, PH.D. was appointed Vice President, Pharmacological Sciences
in February 1997. She previously held the positions of Senior Director,
Pharmacological Sciences from 1996 to February 1997, Staff Scientist from 1992
to 1996, Senior Scientist from 1989 to 1992 and Scientist from 1986 to 1989.
EDMON R. JENNINGS was appointed Vice President, Corporate Development in
December 1995. He was Vice President, Sales and Marketing from January 1994 to
December 1995, and had served as Vice President, Sales since January 1991. He
joined Genentech in September 1985 as Western Area Sales Manager. Prior to
joining Genentech, Mr. Jennings was Western Region Sales Manager of
Bristol-Myers' Oncology Division.
SEAN A. JOHNSTON, PH.D. was appointed Vice President, Intellectual Property in
June 1998. He joined Genentech in October 1990 as Patent Counsel and
subsequently held the positions of Senior Patent Counsel from October 1993 to
October 1995, Senior Patent Counsel and Manager of Patent Litigation from
October 1995 to April 1998, and Associate General Counsel, Patent Law from April
1998 to June 1998. Prior to joining Genentech, he served as a Law Clerk at the
United States District Court for the Central District of California from
September 1989 to September 1990 and was a Research Scientist at International
Genetic Engineering, Inc. from December 1984 to August 1986.
CYNTHIA J. LADD was appointed Vice President, Corporate Law in February 1996 and
Assistant Secretary in April 1997. She joined Genentech in 1989 as Corporate
Counsel and subsequently held the positions of Senior Corporate Counsel from
November 1990 to June 1993 and Chief Corporate Counsel from June 1993 to
February 1996.
WALTER K. MOORE was appointed Vice President, Government Affairs in May 1998. He
joined Genentech in September 1993 as Senior Director of Government Affairs.
Prior to joining Genentech, Mr. Moore served as Manager of Governmental
Relations at Eli Lilly and Company.
JAMES P. PANEK was appointed Vice President, Manufacturing, Engineering and
Facilities in July 1997. He joined Genentech in September 1982 and subsequently
held the positions of Director, Engineering and Facilities since May 1988,
Senior Director, Engineering and Facilities since July 1991, and Vice President,
Engineering and Facilities since July 1993.
KIMBERLY J. POPOVITS was elected Vice President, Sales in October 1994. She was
Director, Field Sales from January 1993 to October 1994 and Regional Manager,
Northeast Region from October 1989 to January 1993. Ms. Popovits was at American
Critical Care, a Division of American Hospital Supply Corporation, for six years
prior to joining Genentech in November 1987 as Division Manager, Southeast
Region.
NICHOLAS J. SIMON was appointed Vice President of Business and Corporate
Development in December 1995. He had been Vice President of Business Development
from December 1994 to December 1995, and was Senior Director of Business
Development from December 1993 to December 1994. He joined Genentech in 1989 as
Director of Business Development from Xoma Corporation.
DAVID C. STUMP, M.D. was appointed Genentech Fellow in January 1996, in addition
to his responsibilities as Vice President, Clinical Research, a position he has
held since July 1995. He joined Genentech in July 1989 as Director, Clinical
Research and was appointed Senior Director, Clinical Research in August 1991.
Prior to joining Genentech, Dr. Stump was Associate Professor of Medicine and
Biochemistry at the University of Vermont.
JOHN M. WHITING was appointed Controller and Chief Accounting Officer in October
1997. He previously held the positions of Director, Financial Planning and
Analysis from January 1997 to October 1997; Director, Operations, Financial
Planning and Analysis from December 1996 to January 1997; Associate Director,
Operations, Financial Planning and Analysis from March 1996 to December 1996;
Plant Controller from April 1993 to March 1996; and Group Controller from July
1991 to April 1993.
FRANZ B. HUMER, PH.D. joined The Roche Group in the spring of 1995 as the Head
of its Pharmaceuticals Division and became Chief Executive Officer of The Roche
Group in January 1998. He is also a member of the Board of Directors and
Chairman of the Executive Committee of The Roche Group. Prior to joining The
Roche Group, Dr. Humer was an Executive
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Director and Chief Operating Officer of Glaxo Holdings, a United Kingdom public
limited company. Dr. Humer also serves as a director of Cadbury Schweppes p.l.c.
Pursuant to the amended governance agreement, Dr. Humer is a designee of Roche.
JONATHAN K.C. KNOWLES, PH.D. joined The Roche Group as President of Global
Research in September 1997. In January 1998, he became a member of the Executive
Committee of The Roche Group. Prior to joining The Roche Group, Dr. Knowles
served as the Director of Research for Europe of Glaxo from 1995 and served as
the Director of the Geneva Institute of Glaxo from 1989 to 1995. Pursuant to the
amended governance agreement, Dr. Knowles is a designee of Roche.
HERBERT W. BOYER, PH.D., a founder of Genentech, has been a director of
Genentech since 1976 and is a consultant to Genentech. He served as a Vice
President of Genentech from 1976 to 1991. Dr. Boyer, a Professor of Biochemistry
at the University of California at San Francisco from 1976 to 1991, demonstrated
the usefulness of recombinant DNA technology to produce medicines economically,
which laid the groundwork for Genentech's development. In 1993, Dr. Boyer
received the 1993 Helmut Horten Research Award. He also received the National
Medal of Science from President Bush in 1990, the National Medal of Technology
in 1989 and the Albert Lasker Basic Medical Research Award in 1980. He is an
elected member of the National Academy of Sciences and a Fellow in the American
Academy of Arts and Sciences. In addition, Dr. Boyer serves as Chairman of the
Board of Directors of Allergan, Inc.
COMPENSATION OF DIRECTORS
In 1998, each of our directors, except Dr. Levinson and J. Richard Munro,
Chairman of the Board of Directors at that time, were paid an annual retainer of
$30,000. Mr. Munro, as Chairman of the Board of Directors, was paid an annual
retainer of $50,000. Dr. Levinson was not paid for his services as a director.
In addition, the directors, with the exception of Dr. Levinson, received a total
of $1,500 for each board and committee meeting at which the director was present
in person and a total of $500 for each board and committee meeting at which the
director was present by telephone. All directors were reimbursed for expenses
incurred in connection with their service on the board. In 1998, Dr. Boyer and
John T. Potts, M.D., one of our directors at that time, also served as our
consultants and received compensation for their services. In 1998, Drs. Boyer
and Potts received $24,000 and $25,000, respectively, in consideration for their
consulting services. During 1998, no directors exercised options granted under
any of our stock option plans other than Donald L. Murfin, one of our directors
at that time, who exercised options to purchase 4,125 shares for a gain of
$233,578.
In 1992, we established a Directors' Charitable Award Program (the "Award
Program") to acknowledge the service of our directors and enhance indirectly our
ability to attract and retain directors of the highest caliber. All members of
the board on or after May 1, 1992 are eligible for the Award Program, subject to
vesting requirements. The Award Program is funded by life insurance policies
purchased by us that provide for a $1 million death benefit on participating
directors. Upon the death of a participating director, Genentech may donate
$200,000 per year for five years to up to four educational institutions or
nonprofit organizations recommended by the director, provided that any such
institution or organization is approved by us in the year of the donation.
Individual directors derive no financial benefit from the Award Program since
all available insurance proceeds and tax deductions accrue solely to Genentech.
Under the Automatic Grant Program (the "1996 Grant Program") of our 1996 Stock
Option/Stock Incentive Plan (the "1996 Plan"), each nonemployee member of the
board who was first appointed or elected to the position after April 30, 1996,
will automatically be granted, on the date of such member's election to the
board, a nonstatutory option to purchase 20,000 shares of common stock. In
addition, each employee director who is first elected a member of the board and
who subsequently becomes a nonemployee director after April 30, 1996 shall
automatically be granted, on the date of such individual's change from employee
to nonemployee director, a nonstatutory option to purchase 20,000 shares of
common stock. Each option granted under the 1996 Grant Program vests in
increments of 5,000 shares on each of the first, second, third and fourth
anniversaries of the grant date and remains exercisable until the expiration or
earlier termination of the option term. Such options have a term of ten years
from the grant date. All options granted under the 1996 Grant Program have an
exercise price equal to 100% of the closing selling price per share of our
special common stock or common stock, as applicable, on the trading day prior to
the date of grant as reported in The Wall Street Journal.
In connection with the redemption of the special common stock by Roche, any
vested options or any vested portion of any option held by any director granted
pursuant to the 1996 Grant Program which were outstanding on June 30, 1999 will
be automatically converted into options to purchase a like number of shares of
common stock at the same exercise price per share unless such director made an
earlier decision to receive cash in consideration for the cancellation thereof
and any unvested
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options or any unvested portion of options held by any director granted pursuant
to the 1996 Grant Program which are outstanding on June 30, 1999 will be
canceled by the terms of the plan.
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Compensation
The following table shows for the fiscal years ended December 31, 1998, 1997 and
1996, certain compensation paid by us to our Chief Executive Officer and our
four other most highly compensated executive officers (the "Named Executive
Officers"), including salary, bonuses, stock options and certain other
compensation:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- AWARDS
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) OPTIONS(#)(3) COMPENSATION(4)
--------------------------- ---- --------- -------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D.............. 1998 $650,000 $950,000 -- 350,000 $41,600
President and Chief Executive
Officer 1997 $650,000 $390,000 -- -- $37,000
1996 $525,000 $275,000 -- 200,000 $31,000
William D. Young...................... 1998 $430,000 $400,000 -- 200,000 $25,400
Chief Operating Officer 1997 $430,000 $205,000 -- -- $24,800
1996 $390,000 $190,000 -- 125,000 $23,000
Louis J. Lavigne, Jr.................. 1998 $350,000 $310,000 -- 150,000 $21,400
Executive Vice President and Chief 1997 $350,000 $185,000 -- -- $20,400
Financial Officer 1996 $320,000 $160,000 -- 90,000 $19,000
Susan D. Desmond-Hellmann, M.D.,
M.P.H. ............................. 1998 $310,000 $310,000 -- 150,000 $18,400
Senior Vice President--Development 1997 $275,000 $150,000 -- 50,000 $15,800
and Chief Medical Officer 1996 $233,750 $120,077 -- 75,000 $10,950
Dennis J. Henner, Ph.D. .............. 1998 $271,979 $200,000 -- 120,000 $16,079
Senior Vice President--Research 1997 $262,500 $130,000 -- -- $15,300
1996 $233,959 $120,000 -- 75,000 $12,958
</TABLE>
- ---------------
(1) Includes amounts earned but deferred at the election of the executive, such
as salary deferrals under our Tax Reduction Investment Plan (the "401(k)
Plan") established under Section 401(k) of the Internal Revenue Code of
1986, as amended.
(2) As permitted by rules promulgated by the Securities and Exchange Commission,
no amounts are shown with respect to certain "perquisites" (such as imputed
interest on loans at below market value rates), where such amounts do not
exceed the lesser of (i) 10% of the sum of the amounts of salary and bonus
for the Named Executive Officer, or (ii) $50,000.
(3) We have awarded no stock appreciation rights ("SARs").
(4) Consists of our matching payments under the 401(k) Plan for 1998, 1997 and
1996 and our matching payments under the Supplemental Plan for 1998, 1997
and 1996. Each of the Named Executive Officers received $6,400 in matching
payments under the 401(k) Plan for 1998, and under the Supplemental Plan,
Dr. Levinson, Messrs. Young and Lavigne, and Drs. Desmond-Hellmann and
Henner received matching payments of $35,200, $19,000, $15,000, $12,000 and
$9,679, respectively, for 1998. Each of the Named Executive Officers
received $6,333 in matching payments under the 401(k) Plan for 1997, and
under the Supplemental Plan, Dr. Levinson, Messrs. Young and Lavigne, and
Drs. Desmond-Hellmann and Henner received matching payments of $30,667,
$18,467, $14,067, $9,467, and $8,967 respectively, for 1997. Each of the
Named Executive Officers received $6,000 in matching payments under the
401(k) Plan for 1996, and under the Supplemental Plan, Dr. Levinson, Messrs.
Young and Lavigne, and Drs. Desmond-Hellmann and Henner received matching
payments of $25,000, $17,000, $13,000, $4,950 and $6,958, respectively, for
1996.
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Stock Option Grants and Exercises
As of December 31, 1998, we had options outstanding under our 1984 Incentive
Stock Option Plan, our 1984 Non-Qualified Stock Option Plan (the "1984 Plans"),
our 1990 Stock Option/Stock Incentive Plan (the "1990 Plan"), our 1994 Stock
Option Plan (the "1994 Plan") and our 1996 Stock Option/Stock Incentive Plan
(the "1996 Plan").
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
NUMBER OF PERCENT OF
INDIVIDUAL OPTION GRANTS IN LAST FISCAL YEAR
-----------------------------------------------------------------------
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR(2) ($/SHARE)(3) DATE(4) VALUE(5)
---- ------------- -------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D.................... 350,000 6.53% $68.375 6/17/2008 $7,810,442
William D. Young............................ 200,000 4.35% $68.375 6/17/2008 $4,463,110
Louis J. Lavigne, Jr........................ 150,000 3.26% $68.375 6/17/2008 $3,347,332
Susan D. Desmond-Hellmann, M.D., M.P.H. .... 150,000 3.26% $68.375 6/17/2008 $3,347,332
Dennis J. Henner, Ph.D. .................... 120,000 2.61% $68.375 6/17/2008 $2,677,866
</TABLE>
- ---------------
(1) These options were granted pursuant to the 1996 Plan and are nonstatutory
options. These options become vested and exercisable as follows: 25% of the
total option shares vest on the first anniversary of the grant date, with
the remaining 75% vesting in equal monthly increments thereafter over the
next three years. Upon redemption of our special common stock, any of these
options that are unvested will be canceled as provided by the terms of the
1996 Plan. We plan to issue new options on common stock to the holders
thereof after this offering.
(2) Based on a total of 4,594,925 options granted to our employees, including
the Named Executive Officers, under all of our stock option plans in 1998.
(3) The exercise price per share of options granted represented the fair market
value of the underlying shares of special common stock as based on the
closing selling price per share of our special common stock on the trading
day prior to the date of grant.
(4) The options granted have a term of ten years subject to earlier termination
upon the occurrence of certain events related to termination of employment.
(5) Present value was determined under the Black-Scholes option pricing model
based on the following weighted average assumptions: volatility of 11.783,
representing the annual variance in the daily percentage change in the price
of our special common stock over a one-year period prior to the date of
grant; a risk-free interest rate of 5.41%, representing the average
seven-year treasury bill; an average expected term of 7 years; a stock price
at the grant date of $68.375 and a stock price upon exercise of $68.375.
This valuation model was not adjusted for the vesting restrictions or the
risk of forfeiture of the options. Under SFAS 123, forfeitures may be
estimated or assumed to be zero; in this model, the forfeiture rate was
assumed to be zero. Our use of this model in accordance with rules adopted
by the Securities and Exchange Commission does not constitute an endorsement
of the model nor an acknowledgment that such model can accurately determine
the value of options. The valuation calculations do not necessarily
represent the fair market value of individual options, and are not intended
to forecast possible future appreciation, if any, of the price of our
special common stock. The ultimate realizable value of an option will depend
on the market value of our special common stock on the date of exercise as
compared to the exercise price of the option.
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<PAGE> 63
The following table shows for the fiscal year ended December 31, 1998, certain
information regarding options exercised by, and held at year end by, the Named
Executive Officers:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES(1)
--------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE AT FY-END AT FY-END(3)
NAME EXERCISE REALIZED(2) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ---------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D..... 32,189 $1,774,242 423,751/545,000 $18,317,795/$9,229,063
William D. Young............. 8,600 $ 498,800 242,500/337,500 $10,063,906/$6,017,969
Louis J. Lavigne, Jr......... 0 $ 0 225,532/254,000 $ 9,989,359/$4,548,625
Susan D. Desmond-Hellmann,
M.D., M.P.H................ 0 $ 0 59,947/228,553 $ 1,512,887/$3,580,019
Dennis J. Henner, Ph.D....... 12,690 $ 687,701 125,500/187,500 $ 5,331,469/$3,167,344
</TABLE>
- ---------------
(1) We have awarded no SARs.
(2) Fair market value of our special common stock on the date of exercise minus
the exercise price.
(3) Fair market value of our special common stock, $79.6875, at the close of
business on December 31, 1998, the last business day of 1998, minus the
exercise price of the options.
Treatment of Options in Connection with the Redemption of the Special Common
Stock and the Issuance of Options prior to this Offering
Prior to the redemption, options were outstanding under our 1984 Plans, 1990
Plan, 1994 Plan and 1996 Plan. In general, all options granted under the 1984
and 1990 Plans, whether vested or not, outstanding on the redemption date and
unvested options granted under the 1994 Plan will be canceled on the redemption
date and we will pay the holder of each option in cash a per share amount equal
to the redemption price, $82.50, less the exercise price per share of the
option. A small number of outstanding unvested options granted under the 1990
Plan held by employees hired between January 1, 1997 and the redemption date
will be converted into options to purchase shares of our common stock,
exercisable for the same number of shares and at the same exercise price per
share as the options prior to such conversion. Under these plans, there are
vested and unvested options subject to cancellation and cash out of
approximately 6.2 million shares of special common stock.
All vested options granted under the 1994 and 1996 Plans outstanding as of the
redemption date will be converted into options (converted options) to purchase
approximately 4.9 million shares of common stock, provided that the option
holder does not elect to receive cash in exchange for the cancellation of such
option. These converted options to purchase shares of our common stock are
exercisable for the same number of shares and at the same exercise price per
share as the options prior to such conversion.
All outstanding unvested options granted under the 1996 Plan will be canceled as
provided by the terms of the 1996 Plan on the redemption date. As of the
redemption date there were approximately 4.9 million shares subject to issuance
under such options. The former holder of each canceled option from the 1996 Plan
who remains an employee of Genentech will receive a new option prior to this
offering which will vest over a three-year period and will entitle the holder to
purchase shares of common stock at the same price as public offering price in
this offering. The number of shares of common stock for which each new option
may be exercised will be 1.33 times the number of shares covered by the
applicable canceled option, subject to any adjustments necessary to reflect any
capital contributions by Roche. We may provide alternative arrangements for the
holders of certain of the unvested options under the 1996 Plan.
As a result of the conversion of the options on special common stock outstanding
at June 30, 1999 into options to purchase common stock, options will be
outstanding with respect to shares of common stock at exercise prices
ranging from $ per share to $ per share. These options are held by
approximately employees and directors. These options cannot be
exercised prior to the effective date of this offering. In addition, new options
to purchase shares of common stock will be granted to approximately
employees at an exercise price equal to the public offering price in the
offering, with the grant of such options to be made effective on the day prior
to the effective date of the offering hereunder.
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<PAGE> 64
The options to be granted prior to the effective date of with the offering
hereunder will be made pursuant to the our 1999 Stock Option Plan, which was
approved by the board of directors and Roche, our sole shareholder, on July ,
1999.
Committees of the Board of Directors
Upon completion of this offering, we will have four standing committees: an
executive committee of the board (the "Executive Committee"), an audit committee
of the board (the "Audit Committee"), a compensation committee of the board (the
"Compensation Committee") and a nominating committee of the board (the
"Nominating Committee"). Messrs. , and have been
appointed as the initial members of the Executive Committee. Messrs. ,
and have been appointed as the initial members of the Audit
Committee. Messrs. , and have been appointed as
the initial members of the Compensation Committee. Messrs.
, and have been appointed as the
initial members of the Nominating Committee. We expect that, so long as Roche
owns a majority of our outstanding common stock, the majority of the members of
the Executive Committee, the Compensation Committee and the Nominating Committee
will be directors who are nominees of Roche.
The Executive Committee will be authorized to exercise, between meetings of our
board, all of the powers and authority of the board in the direction and
management of Genentech, except as prohibited by applicable law or our
certificate of incorporation and except to the extent another committee shall
have been accorded authority over the matter. The Audit Committee will select
the independent public accountants to audit our annual financial statements and
will establish the scope and oversee the annual audit. The Nominating Committee
is responsible for the nomination of nominees for our board. The Compensation
Committee will determine the compensation for employee directors and, after
receiving and considering the recommendation of our President and Chief
Executive Officer, all our officers and any other employee that the Compensation
Committee may designate from time to time and will approve and administer
employee benefit plans. Our board may establish other committees from time to
time to facilitate the management of the business and affairs of our company.
For more information, see "Relationship with Roche--Arrangements between
Genentech and Roche."
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<PAGE> 65
RELATIONSHIP WITH ROCHE
HISTORY OF OWNERSHIP
On September 7, 1990, a wholly owned subsidiary of Roche was merged with and
into Genentech. Pursuant to the 1990 merger agreement, Genentech and Roche
entered into a governance agreement which contained terms relating to the
corporate governance of Genentech after the 1990 merger. Pursuant to the 1990
governance agreement, Genentech's board of directors elected two nominees of
Roche to serve on the Genentech board. On October 25, 1995, a second wholly
owned subsidiary of Roche was merged with and into Genentech, and Genentech and
Roche amended the 1990 governance agreement. In the 1995 merger, for Genentech
stockholders other than Roche, each share of common stock was converted into one
share of Genentech's special common stock. Roche maintained the same percentage
ownership of Genentech's equity as prior to the 1995 merger and continued to
have the right to nominate only two directors to Genentech's board of directors
under the amended governance agreement. The purpose of the conversion of the
common stock into special common stock was (i) to establish a four-year period
during which the publicly traded stock of Genentech could be redeemed by
Genentech at Roche's option at specified prices per share ranging from $62.50
during the quarter ending December 31, 1995 to $82.50 during the quarter ending
June 30, 1999 and (ii) to afford the holders of special common stock the right
to require the purchase of all or a portion at the option of the holder of their
shares of such stock at a price of $60.00 per share exercisable during the
30-business day period following June 30, 1999.
REDEMPTION OF THE SPECIAL COMMON STOCK
On June 30, 1999, we will redeem all of our common stock held by stockholders
other than Roche Holdings, Inc. at $82.50 per share in cash and retire all of
the shares of special common stock including those held by Roche Holdings, Inc.
As a result, Roche's percentage ownership of our outstanding common stock will
increase from approximately 65% to 100% and our existing governance agreement
will terminate, except for provisions relating to indemnification and stock
options, warrants and convertible securities. In connection with this offering,
we will amend our certificate of incorporation and bylaws and enter into an
affiliation agreement with Roche, described below. Upon completion of this
offering, Roche's percentage ownership of our outstanding common stock will be
reduced from 100% to approximately %.
ARRANGEMENTS BETWEEN GENENTECH AND ROCHE
As a result of the redemption of the special common stock, the existing
governance agreement between Genentech and Roche terminated pursuant to its
terms. We will enter into an affiliation agreement with Roche which is designed
to enable the current management of Genentech to conduct our business and
operations as we have done in the past while at the same time reflecting Roche's
interests as a % stockholder. The provisions of the affiliation agreement,
except for the registration rights, the proportional board representation and
the covenants regarding dispositions by Roche, business combinations by Roche,
compulsory acquisitions and tax matters described below, terminate upon Roche
owning less than 40% of our stock.
Composition of Board of Directors
Genentech and Roche have agreed that our board will consist of six members: two
nominees of Roche, one executive officer of Genentech who is nominated by the
nominating committee of the board and up to three independent directors
nominated by the nominating committee. Directors will be elected to serve one
year terms or until their successors are elected and qualified. Our board will
at all times include at least two independent directors and one executive
officer of Genentech.
Roche's Right to Proportional Representation
We have agreed that upon Roche's request Roche will be immediately entitled to
representation on our board proportional to its ownership interest in our common
stock. Roche will be entitled to have the number of Roche designated directors
equal to the percentage of our common stock owned by Roche times the total
number of directors, rounded up to the next whole number if Roche's ownership
interest is greater than 50% and rounded down if Roche's ownership percentage is
less than or equal to 50%. Upon Roche's request, we will immediately take action
to cause the size of our board to be increased and to cause our board to fill
the vacancies by electing Roche nominees in order to achieve Roche's
proportional representation. If Roche's ownership interest of our common stock
drops below 40%, Roche will cause its directors to resign to the extent its
representation is in excess of its proportional ownership interest. The number
of directors who are required to resign upon such event shall be rounded up to
the next whole number. Roche shall thereafter be entitled to nominate a number
of directors
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<PAGE> 66
which is proportional to Roche's ownership interest rounded down to the next
whole number, until Roche's ownership interest is less than 5%.
Membership of Committees
We will have four standing committees of the board: a nominating committee, an
executive committee, an audit committee and a compensation committee. Each
committee will have at least one director designated by Roche. Roche will be
entitled to its proportional representation on each committee. Roche's committee
members may designate another Roche director to serve as their alternates on any
committee.
The nominating committee shall at all times have three members. At any time
Roche owns 80% or more of the total voting power of our stock, the nominating
committee shall include two nominees of Roche and one of the independent
directors. At any time that Roche owns less than 80% of the total voting power
of our stock, the nominating committee shall (1) include a number of nominees of
Roche that is equal to the percentage owned by Roche of the total voting power
of our common stock times three, rounded up to the next whole number if Roche's
total voting power is greater than 50% and rounded down to the next whole number
if Roche's total voting power is less than or equal to 50% provided that Roche
shall at no time have more than two nominees and, provided further that if the
reason for Roche owning less than 80% of the total voting power is as result of
a breach of our obligations described under "--Tax Matters" below, the
nominating committee shall include two nominees of Roche and (2) include a
number of independent directors equal to three minus the number of nominees of
Roche as determined pursuant to clause (1) above.
Nomination of Directors
The nomination of any person for director requires the approval of a majority of
the members of the nominating committee.
Roche Approval Required for Certain Actions
Without the prior approval of the directors designated by Roche, we have agreed
not to approve:
- any acquisition that would constitute a substantial portion of our
business or assets,
- any sale, lease, license, transfer or other disposal of all or a
substantial portion of our business or assets other than in the ordinary
course of our business,
- any issuance of capital stock except (1) issuances of capital stock
pursuant to employee incentive plans not exceeding 5% of our voting
stock, (2) issuances of capital stock upon the exercise, conversion or
exchange of any of our outstanding capital stock, and (3) other issuances
of capital stock not exceeding 5% of our voting stock in any 24 month
period, and
- any repurchase or redemption of our capital stock other than redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
For purposes of the first and second bullet points in this paragraph, unless a
majority of the board of directors have made a contrary determination in good
faith a "substantial portion of our business or assets" shall mean a portion of
our business or assets accounting for 10% or more of our and our consolidated
subsidiaries' consolidated total assets, contribution to net income or revenues.
Following a request by Roche for proportional representation on the board, until
the Roche designees take office as directors we may not take any action other
than in the ordinary course of business without the consent of Roche.
Licensing and Marketing Arrangements
Except as otherwise provided in the marketing and licensing agreement with
Hoffmann-La Roche described under "Business -- Licensing Agreements with F.
Hoffmann-La Roche Ltd," we have agreed that we will not enter into any material
licensing or marketing agreement with respect to any products, processes,
inventions or developments subject to that agreement unless we first negotiate
in good faith with Roche for a reasonable period of not less than three months
and not more than six months with a view towards reaching a mutually beneficial
licensing or marketing agreement.
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<PAGE> 67
Registration Rights
We have agreed that, upon Roche's request, we will file one or more registration
statements under the Securities Act in order to permit Roche to offer and sell
shares of our common stock. We have agreed to use our best efforts to facilitate
the registration and offering of those shares designated for sale by Roche.
We have the right to postpone the filing or effectiveness of a registration
statement for a period of up to 60 days in any 12-month period if:
- in the reasonable good faith judgment of our board, fulfillment of our
obligations would require us to make disclosures that would be
detrimental to Genentech and premature, or
- we have filed a registration statement with respect to securities to be
distributed in an underwritten public offering and we have been advised
by the lead or managing underwriter that an offering by Roche would
materially and adversely affect the distribution of our securities.
Generally, all expenses incident to the performance by us of our obligations
with respect to the registration of Roche's shares of our common stock will be
paid by us except that Roche has agreed to pay any registration or filing fees
payable under any federal or state securities or Blue Sky laws and certain
expenses to be directly incurred by Roche, including underwriting fees,
discounts and commissions and counsel fees. In addition, we are only required to
pay for two registrations within a 12-month period. We and Roche each have
agreed to customary indemnification and contribution provisions with respect to
liability incurred in connection with these registrations.
Dispositions by Roche
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
- if the consideration is composed entirely of either cash or equity traded
on a U.S. national securities exchange, with consideration in the same
form and amounts per share as received by Roche and its affiliates; or
- in any other case, with consideration either in the same form and amounts
per share as received by Roche and its affiliates or 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 an investment
bank of nationally recognized standing appointed by a committee of
independent directors.
Roche has agreed to cause the buyer to agree to be bound by the obligations
described in the preceding paragraph as well as the obligations described under
"--Business Combinations with Roche" and "--Compulsory Acquisitions" below. We
have agreed that the buyer shall be entitled to succeed to Roche's rights
described under "--Roche's Right to Proportional Representation."
Business Combinations with Roche
Roche has agreed that as a condition to any merger of Genentech with Roche or
its affiliates or the sale of substantially all of our assets to Roche or its
affiliates, that either
- the merger or sale must be authorized by the favorable vote of a majority
of the shares of common stock voting at any meeting not owned by Roche,
provided that no person or group shall be entitled to cast more than 5%
of the votes cast at the meeting; or
- in the event such a favorable vote is not obtained, the value of the
consideration to be received by the holders of our common stock, other
than Roche, 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 of nationally recognized standing appointed by a
committee of independent directors.
Roche has agreed that it will not sell any shares of our common stock in the 90
days immediately preceding any proposal by Roche for a merger with us.
Roche has also agreed that in the event of any merger of Genentech with Roche or
its affiliates or sale of substantially all of our assets to Roche or its
affiliates, each unvested option then outstanding under our stock option plans
will either
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<PAGE> 68
- be accelerated so that each option shall become exercisable immediately
prior to the consummation of the transaction for the full number of
shares of common stock covered by the option;
- become exchangeable upon the consummation of the transaction for deferred
cash compensation, which vests on the same schedule as the shares of
common stock covered by the option, having a value equal to the product
of (A) the number of shares covered by the 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 in the transaction, minus the exercise
price per share under the option; or
- be canceled in exchange for a replacement option to purchase stock of the
surviving corporation in the transaction with the terms of the option to
provide value equivalent, as determined by Roche in its reasonable
discretion, to that of the canceled option.
Compulsory Acquisitions
If Roche owns more than 90% of our common stock for more than two months, Roche
has agreed to, as soon as reasonably practicable, effect a merger of Genentech
with Roche or an affiliate of Roche.
The merger shall be conditioned on the vote or the valuation described under the
first two bullets of "--Business Combinations with Roche" above.
If such merger occurs, each unvested option outstanding under our stock option
plans shall be treated as set forth under "--Business Combinations by Roche"
above.
Tax Matters
As discussed below under "Tax Sharing Agreement," we are now and expect to
continue to be a member of Roche's consolidated federal income tax group (as
well as certain consolidated or combined state and local income tax groups). In
order to preserve our status as a member of these consolidated or combined
groups, the affiliation agreement contains provisions designed to limit the
circumstances in which Roche's proportional ownership of Genentech can be
diluted. Under these provisions, we will be required to establish a program to
repurchase shares of its common stock from its public stockholders. We will be
required to repurchase a sufficient number of shares pursuant to this program to
ensure that, with respect to any issuance of common stock by us in the future,
the percentage of our common stock owned by Roche immediately after such
issuance will be no lower than Roche's lowest percentage ownership of our common
stock at any time after the offering of common stock described in this
prospectus and prior to the time of such issuance. We are required to provide
information to Roche each month regarding the status of the repurchase program
and previous and expected future issuances of common stock by us, and we also
will be obligated to notify Roche the day after the number of shares of common
stock issued in a month equals or exceeds 500,000. Furthermore, Roche will have
(i) a continuing option (which will be assignable by Roche to any of its
affiliates) to buy from us, prior to the occurrence of any event that could
result in a decrease in the percentage of common stock owned by Roche and its
affiliates, a sufficient amount of common stock to ensure that Roche and its
affiliates maintain the percentage ownership of our common stock owned by them,
and (ii) a continuing option (which will be assignable by Roche to any of its
affiliates) to buy from us 80% of any class of stock issued by us other than
common stock, in each case with a price per share equal to either the average of
the last sale price on each of the five immediately preceding trading days on a
U.S. national securities exchange on which the shares are traded or, if the sale
prices are unavailable, the value of the shares determined in accordance with
procedures reasonably satisfactory to Roche and us.
TAX SHARING AGREEMENT
We have been since the redemption of our special common stock, and after this
offering are expected to continue to be, included in Roche's U.S. consolidated
federal income tax group and our tax liability thus 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.
Genentech and Roche have entered into the 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) will be determined as if 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
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<PAGE> 69
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.
Under applicable law, Roche will continue to have all of the rights and
obligations of a parent of a consolidated federal income tax group (and similar
rights provided for by applicable state and local law with respect to a parent
of a consolidated or combined group), including: sole and exclusive
responsibility for the preparation and filing of consolidated federal and
consolidated or combined state and local income tax returns (or amended
returns); the power, in Roche's sole discretion, to contest or compromise any
asserted consolidated or combined tax adjustment or deficiency and to file,
litigate or compromise any claim for refund of a consolidated or combined tax on
behalf of us; and the authority to act as the sole and exclusive agent for us in
any and all other matters relating to consolidated or combined tax liabilities.
However, Roche and Genentech have agreed to cooperate under the tax sharing
agreement to assist in the defense of claims relating to us.
In general, we will be included in Roche's consolidated group for federal income
tax purposes for so long as Roche beneficially owns at least 80% of the total
voting power and value of our outstanding stock. Each member of a consolidated
group is severally liable for the federal income tax liability of the group.
Accordingly, although the tax sharing agreement determines tax liabilities
between Genentech and Roche, during the period in which we are included in
Roche's consolidated federal income tax group, we could be liable in the event
that any federal tax liability is incurred by the consolidated group but is not
discharged by Roche or its other subsidiaries. Similarly, we could be liable in
the event that a state or local tax liability is incurred by a Roche
consolidated or combined state or local tax group but is not discharged by Roche
or its other subsidiaries. Roche is required, under the terms of the tax sharing
agreement, to indemnify us for any tax liability of a Roche consolidated or
combined group that we must pay to a taxing authority, except to the extent that
such tax liability is attributable (as determined under the principles described
above relating to the computation of tax sharing payments by us to Roche) to us
and we have not yet made a corresponding tax sharing payment to Roche.
THE FUTURE OF GENENTECH
Roche acquired a 60% equity interest in us in 1990 because Roche believed that
the acquisition presented Roche with an opportunity to expand its investment in
biotechnology with a leading biotechnology enterprise--Genentech. It continues
to be the view of the board of directors of Roche that its investment in
Genentech is a worthwhile, long-term investment. The board of directors of Roche
also believes that its contractual agreements with us provide an opportunity for
both Roche and us to benefit from enhanced development and marketing of our
products outside the United States and that our innovative products can
increasingly benefit from Roche's global marketing, development and sales
resources. Roche intends to continue to allow our current management to conduct
our business and operations as we have done in the past. However, there can be
no assurance that Roche will not institute a new business plan in the future.
See "Risk Factors--Roche, Our Controlling Stockholder, May Have Interests That
Are Adverse to Yours."
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<PAGE> 70
SELLING STOCKHOLDER AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of July , 1999 regarding
the beneficial ownership of common stock by all stockholders. Prior to this
offering, Roche held 100% of the outstanding common stock. After this offering,
Roche will own approximately % of the outstanding common stock. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Except as
indicated by footnotes and subject to community property laws, where applicable,
the persons named below have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
--------------------------------------------------------------
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING AFTER OFFERING
--------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE CLASS
------------------------------------ ------- ---------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Roche Holdings, Inc. ........................ 100.00% % Common Stock
One Commerce Center, Suite 1050
Wilmington, DE 19801
</TABLE>
In addition, Roche has granted the underwriters an option to purchase an
additional shares of common stock to cover over-allotments. If the
underwriters exercise this option in full, Roche will own approximately % of
our outstanding stock after this offering.
The following table sets forth the beneficial ownership of shares of common
stock as of July , 1999, unless otherwise noted, of (i) each director of
Genentech, (ii) each of the Named Executive Officers, and (iii) all directors
and executive officers of Genentech as a group.
<TABLE>
<CAPTION>
-----------------------
COMMON STOCK
-----------------------
PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS
------------------------ ------- --------
<S> <C> <C>
Herbert W. Boyer, Ph.D. .................................... (1) *
Susan D. Desmond-Hellmann, M.D., M.P.H. .................... (2) *
Dennis J. Henner, Ph.D. .................................... (3) *
Franz B. Humer, Ph.D. ...................................... (4) *
Jonathan K. C. Knowles, Ph.D. .............................. (5) *
Louis J. Lavigne, Jr. ...................................... (6) *
Arthur D. Levinson, Ph.D. .................................. (7) *
William D. Young............................................ (8) *
All Directors and Executive Officers as a Group (
persons).................................................. (9) %
</TABLE>
- ---------------
* The amount beneficially owned is less than one percent (1%) of the
outstanding shares of common stock.
(1) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable.
(2) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable.
(3) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable.
(4) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable. Dr. Humer has
assigned beneficial and financial ownership of stock options to Hoffmann-La
Roche. In addition, Dr. Humer disclaims beneficial ownership of
shares of common stock owned by Roche.
(5) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable. Dr. Knowles has
assigned beneficial ownership and financial ownership of his stock options
to Hoffmann-La Roche. In addition, Dr. Knowles disclaims beneficial
ownership of shares of common stock owned by Roche.
(6) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable.
(7) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable.
(8) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable.
(9) Includes stock options outstanding on July , 1999 to purchase
shares of common stock that are currently exercisable.
67
<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
GENERAL
Prior to June , 1999, the authorized capital stock of Genentech consisted of
200,000,000 shares of common stock, 100,000,000 shares of callable putable
(special) common stock and 100,000,000 shares of preferred stock. Upon
redemption of the special common stock, the authorized common stock will consist
of shares. On June 30, 1999, we will retire all currently outstanding
shares of our special common stock.
COMMON STOCK
As of , 1999 there were shares of common stock outstanding,
all of which were held of record by Roche. There will be shares of
common stock outstanding, assuming no exercise of outstanding options, after
giving effect to the sale of the shares of common stock offered hereby. The
holders of common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. Subject to preferences that may be applicable to
any outstanding preferred stock, the holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the board of directors out of funds legally available therefor. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock,
if any, then outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and non-assessable, and the shares of common stock to be
issued upon completion of this offering will be fully paid and non-assessable.
PREFERRED STOCK
The board of directors has the authority to issue the preferred stock in one or
more series and to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
payments), redemption price or prices, and the liquidation preference of any
wholly unissued series of preferred stock and the number of shares constituting
any series or the designation of such series or any of them; and to increase or
decrease the number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series. If Roche did not own its current position in Genentech, the authorized
but unissued shares of preferred stock could be used by our board to make a
change in control of Genentech more difficult, or to discourage an attempt to
acquire control of Genentech. For example, our board could, subject to certain
limitations, authorize and issue a class of preferred stock which is entitled to
vote as a class with respect to mergers or other extraordinary transactions. Our
board has no current intention of using the authorized and unissued shares of
Preferred Stock for any such purposes.
ARRANGEMENTS BETWEEN GENENTECH AND ROCHE
Prior to the completion of this offering, we will amend our certificate of
incorporation and bylaws and enter into a new affiliation agreement with Roche.
For a description of these provisions see "Relationship with
Roche -- Arrangements between Genentech and Roche."
CERTAIN PROVISIONS OF GENENTECH'S CERTIFICATE OF INCORPORATION AND BYLAWS
Our bylaws require that notice of any stockholder proposal be received by the
Secretary of Genentech not less than 90 days prior to the meeting, unless fewer
than 100 days' notice of the meeting date is given or made to stockholders, in
which case notice of any stockholder proposal must be received not later than
the close of business on the 10th day following the day on which notice of the
meeting date was given. Any notice of a stockholder proposal must set forth in
writing as to each matter the stockholder proposes to bring before the Annual
Meeting (a) a brief description of the business desired to be brought before the
Annual Meeting and the reasons for conducting such business at the Annual
Meeting, (b) the name and address, as they appear on our books, of the
stockholder proposing such business, (c) the class and number of our shares that
are beneficially owned by the stockholder and (d) any material interest of the
stockholder in such business. Stockholders are advised to review our bylaws for
the requirements regarding stockholder proposals.
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<PAGE> 72
LISTING
We intend to list the common stock on the under the symbol
" ".
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is EquiServe, Boston
EquiServe Division, Stockholder Services, P. O. Box 8040, Boston, MA 02266-8040.
69
<PAGE> 73
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by a beneficial owner thereof that is a "Non-U.S. Holder." A
"Non-U.S. Holder" is a person or entity that, for U.S. federal income tax
purposes, is a non-resident alien individual, a foreign corporation, a foreign
partnership, or a foreign estate or trust.
This discussion is based on the Internal Revenue Code of 1986, as amended, and
administrative interpretations as of the date of this prospectus, all of which
are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of United States federal income and
estate taxation that may be relevant to Non-U.S. Holders in light of their
particular circumstances and does not address any tax consequences arising under
the laws of any state, local or foreign jurisdiction. Prospective holders should
consult their tax advisors with respect to the particular tax consequences to
them of owning and disposing of our common stock, including the consequences
under the laws of any state, local or foreign jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends, if any, paid to a Non-U.S. Holder of
our common stock generally will be subject to withholding tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty. For
purposes of determining whether tax is to be withheld at a 30% rate or at a
reduced rate as specified by an income tax treaty, Genentech ordinarily will
presume that dividends paid on or before December 31, 2000 to an address in a
foreign country are paid to a resident of such country absent knowledge that
such presumption is not warranted.
Under United States Treasury Regulations applicable to dividends paid after
December 31, 2000, to obtain a reduced rate of withholding under a treaty, a
Non-U.S. Holder generally will be required to provide an Internal Revenue
Service Form W-8 BEN certifying such Non-U.S. Holder's entitlement to benefits
under a treaty. The regulations also provide special rules to determine whether,
for purposes of determining the applicability of a tax treaty, dividends paid to
a Non-U.S. Holder that is an entity should be treated as paid to the entity or
those holding an interest in that entity.
There will be no withholding tax on dividends paid to a Non-U.S. Holder that are
effectively connected with the Non-U.S. Holder's conduct of a trade or business
within the United States if a Form 4224 or, after December 31, 2000, a Form W-8
ECI, stating that the dividends are so connected is filed with Genentech.
Instead, the effectively connected dividends will be subject to regular United
States income tax in the same manner as if the Non-U.S. Holder were a United
States resident. A non-U.S. corporation receiving effectively connected
dividends may also be subject to an additional "branch profits tax" which is
imposed, under certain circumstances, at a rate of 30% (or such lower rate as
may be specified by an applicable treaty) of the non-U.S. corporation's
effectively connected earnings and profits, subject to certain adjustments.
Generally, Genentech must report to the United States Internal Revenue Service
the amount of dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or certain other agreements, the United States Internal
Revenue Service may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a Non-U.S. Holder at an address within the United States may
be subject to backup withholding imposed at a rate of 31% if the Non-U.S. Holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and certain other information to Genentech.
Under current United States federal income tax law, backup withholding generally
does not apply to dividends paid on or before December 31, 2000 to a Non-U.S.
Holder at an address outside the United States, unless the payer has knowledge
that the payee is a U.S. person. Under the regulations described above, however,
a Non-U.S. Holder will be subject to backup withholding unless applicable
certification requirements are met.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal income
tax with respect to gain realized on a sale or other disposition of our common
stock unless (i) the gain is effectively connected with a trade or business of
such holder in the
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<PAGE> 74
United States, (ii) in the case of certain Non-U.S. Holders who are non-resident
alien individuals and hold our common stock as a capital asset, such individuals
are present in the United States for 183 or more days in the taxable year of the
disposition, (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the Code regarding the taxation of U.S. expatriates, or (iv)
Genentech is or has been a "U.S. real property holding corporation" within the
meaning of Section 897(c)(2) of the Code at any time within the shorter of the
five-year period preceding such disposition or such holder's holding period.
Genentech believes that it is not, and does not anticipate becoming, a U.S. real
property holding corporation.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK
Under current United States federal income tax law, information reporting and
backup withholding imposed at a rate of 31% will apply to the proceeds of a
disposition of our common stock effected by or through a United States office of
a broker unless the disposing holder certifies as to its non-U.S. status or
otherwise establishes an exemption. Generally, United States information
reporting and backup withholding will not apply to a payment of disposition
proceeds where the transaction is effected outside the United States through a
non-U.S. office of a non-U.S. broker. However, U.S. information reporting
requirements will apply to a payment of disposition proceeds where the
transaction is effected outside the United States by or through an office
outside the United States of a broker that fails to maintain documentary
evidence that the holder is a Non-U.S. Holder and that certain conditions are
met, or that the holder otherwise is entitled to an exemption, and the broker is
(i) a U.S. person, (ii) a foreign person which derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States, (iii) a "controlled foreign corporation" for U.S. federal income tax
purposes, or (iv) effective after December 31, 2000, a foreign partnership (A)
at least 50% of the capital or profits interest in which is owned by U.S.
persons, or (B) that is engaged in a U.S. trade or business.
Effective after December 31, 2000, backup withholding will apply to a payment of
those disposition proceeds if the broker has actual knowledge that the holder is
a U.S. person.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
FEDERAL ESTATE TAX
An individual Non-U.S. Holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in our common stock will be required
to include the value thereof in his gross estate for U.S. federal estate tax
purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
71
<PAGE> 75
SHARES ELIGIBLE FOR FUTURE SALE
The shares of our common stock sold in this offering will be freely
tradable without restriction under the Securities Act of 1933 except for any
such shares which may be acquired by an affiliate of Genentech as that term is
defined in Rule 144 promulgated under the Securities Act of 1933, which shares
will remain subject to the resale limitations of Rule 144.
The shares of our common stock that will continue to be held by Roche after the
offering constitute "restricted securities" within the meaning of Rule 144, and
will be eligible for sale by Roche in the open market after this offering,
subject to certain contractual lockup provisions and the applicable requirements
of Rule 144, both of which are described below.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three month period a number of shares
that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain post-sale notice requirements
and the availability of current public information about us.
In the event that any person other than Roche who is deemed to be our affiliate
purchases shares of our common stock pursuant to this offering or acquires
shares of our common stock pursuant to one of our employee benefit plans, the
shares held by such person are required under Rule 144 to be sold in brokers'
transactions, subject to the volume limitations described above. Shares properly
sold in reliance upon Rule 144 to persons who are not our affiliates are
thereafter freely tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. Subject to the lock-up agreement discussed in the next paragraph,
any shares sold in this offering will be eligible for immediate resale in the
public market without restrictions by persons other than our affiliates. Our
affiliates would be subject to the restrictions of Rule 144 described above.
We, Roche and our directors and executive officers have agreed that, without the
prior written consent of J.P. Morgan Securities Inc. on behalf of the
underwriters, none of us will, during the period ending 180 days after the date
of this prospectus, sell or otherwise dispose of any shares of our common stock,
subject to certain exceptions. See "Underwriting."
We have agreed that, upon Roche's request, we will file one or more registration
statements under the Securities Act in order to permit Roche to offer and sell
shares of our common stock. For a description of Roche's registration rights see
"Relationship with Roche--Arrangements between Genentech and Roche--Registration
Rights."
An aggregate of shares of our common stock are reserved for issuance
under the Stock Plan. We intend to file registration statements on
Form S-3 covering the issuance of shares of our common stock pursuant to the
Stock Plan. Accordingly, the shares issued pursuant to the
Stock Plan will be freely tradable, subject to the restrictions on resale by
affiliates under Rule 144 and the lock-up agreement discussed above.
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<PAGE> 76
UNDERWRITING
The underwriters named below, for whom J.P. Morgan Securities Inc., Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Warburg Dillon
Read LLC and BancBoston Robertson Stephens Inc. are acting as representatives,
have severally agreed, subject to the terms and conditions set forth in the
underwriting agreement among them, the selling stockholder and us, to purchase
from the selling stockholder, and the selling stockholder has agreed to sell to
the underwriters, the respective number of shares of common stock set forth
opposite their names below:
<TABLE>
<CAPTION>
---------
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
J.P. Morgan Securities Inc..................................
Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
Warburg Dillon Read LLC.....................................
BancBoston Robertson Stephens Inc. .........................
--------
Total.............................................
========
</TABLE>
The nature of the underwriters' obligations under the underwriting agreement is
such that all of the common stock being offered, excluding shares covered by the
over-allotment option granted to the underwriters, must be purchased if any are
purchased.
The representatives of the underwriters have advised us that the several
underwriters propose to offer the common stock to the public at the initial
public offering price set forth on the cover page of this prospectus and may
offer the common stock to selected dealers at such price less a concession not
to exceed $ per share. The underwriters may allow, and such dealers may
reallow, a concession to other dealers not to exceed $ per share. After the
initial public offering of the common stock, the public offering price and other
selling terms may be changed by the representatives.
The selling stockholder has granted the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to additional
shares of common stock at the same price per share to be paid by the
underwriters for the other shares offered hereby. If the underwriters purchase
any such additional shares pursuant to the option, each of the underwriters will
be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The underwriters may exercise the
option only to cover over-allotments, if any, made in connection with the
distribution of the common stock offered hereby.
The following table shows the per share and total underwriting discounts to be
paid to the underwriters by the selling stockholder, assuming both no exercise
and full exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................. $ $
Total..................................................... $ $
</TABLE>
We and the selling stockholder have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be $ . We are responsible for all expenses except
that Roche has agreed to pay the registration and filing fees payable under any
federal or state securities or Blue Sky laws in addition to certain expenses to
be directly incurred by Roche, including underwriting, discounts and its counsel
fees.
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot this offering, creating a syndicate
short position. In
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<PAGE> 77
addition, the underwriters may bid for, and purchase, shares of common stock in
the open market to cover syndicate shorts or to stabilize the price of the
common stock. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing shares of common stock in this offering, if
the syndicate repurchases previously distributed common stock in syndicate
covering transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the shares of common
stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
We and our executive officers and directors and the selling stockholder have
agreed, with limited exceptions, that, during the period beginning from the date
of this prospectus and continuing and including the date 180 days after the date
of this prospectus, none of us will, directly or indirectly, offer, sell, offer
to sell, contract to sell or otherwise dispose of any shares of common stock or
any of our securities which are substantially similar to the common stock,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, common stock or any
such substantially similar securities or enter into any swap, option, future,
forward or other agreement that transfers, in whole or in part, the economic
consequences of ownership of common stock or any securities substantially
similar to the common stock, other than pursuant to employee stock option and
restricted stock plans existing on the date of this prospectus, without the
prior written consent of J.P. Morgan Securities Inc.
At our request, the underwriters have reserved shares of common stock for sale
to directors, officers and employees of Genentech who have expressed an interest
in participating in this offering. We expect these persons to purchase no more
than % of the common stock offered in this offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares.
It is expected that delivery of the shares will be made to investors on or about
, 1999.
Immediately prior to this offering, there was no public market for the common
stock. The selling stockholder and the underwriters will negotiate the initial
public offering price. In determining the price, the selling stockholder and the
underwriters expect to consider a number of factors in addition to prevailing
market conditions, including:
- the history of and prospects for the biotechnology industry;
- an assessment of our management;
- our present operations;
- our historical results of operations; and
- our earnings prospects.
The selling stockholder and the underwriters will consider these and other
relevant factors in relation to the price of similar securities of generally
comparable companies. Neither we, the selling stockholder nor the underwriters
can assure investors that an active trading market will develop for the common
stock, or that the common stock will trade in the public market at or above the
initial public offering price.
We intend to list the common stock for trading on under the symbol
" ".
From time to time in the ordinary course of their respective businesses, certain
of the underwriters and their affiliates have engaged in and may in the future
engage in commercial and/or investment banking transactions with us, Roche and
our affiliates.
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<PAGE> 78
LEGAL MATTERS
Certain legal matters relating to the shares of common stock offered hereby will
be passed upon for Roche and Genentech by Davis Polk & Wardwell, New York, New
York. Legal matters in connection with this offering will be passed upon for the
underwriters by Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York.
EXPERTS
The consolidated financial statements of Genentech as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
included in this prospectus and in the registration statement have been audited
by Ernst & Young LLP, independent auditors, as stated in their report appearing
herein and in the registration statement, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. We have also filed with the SEC a registration
statement on Form S-3 to register the shares of common stock being offered in
this prospectus. This prospectus, which forms part of the registration
statement, does not contain all of the information included in the registration
statement. For further information about us and the shares of common stock
offered in this prospectus, you should refer to the registration statement and
its exhibits and our other SEC filings.
You may read and copy any document we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the Public
Reference Room. We file our SEC materials electronically with the SEC, so you
can also review our filings by accessing the website maintained by the SEC at
http://www.sec.gov. This website contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC.
The SEC allows us to "incorporate by reference" the information we file with it,
which means we can disclose important information to you by referring you to
those documents. The information included in the following documents is
incorporated by reference and is considered to be a part of this prospectus. The
most recent information that we file with the SEC automatically updates and
supersedes more dated information. We have previously filed the following
documents with the SEC and incorporate them by reference into this prospectus:
1. Our annual report on Form 10-K for the year ended December 31, 1998;
2. Our quarterly report on Form 10-Q for the quarter ended March 31, 1999;
and
3. Our current report on Form 8-K dated June , 1999.
We also incorporate by reference all documents subsequently filed by us pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act until all of the shares
being offered in this prospectus are sold.
We will provide without charge to each person to whom a prospectus is delivered,
including any beneficial owner, a copy of any or all of the information that has
been incorporated by reference in this prospectus. If you would like to obtain
this information from us, please direct your request, either in writing or by
telephone, to Genentech, Inc., 1 DNA Way, South San Francisco, California 94080,
Attention Investor Relations (650) 225-1260.
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<PAGE> 79
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-3
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996.............. F-6
Notes to Consolidated Financial Statements.................. F-7
Independent Accountants' Review Report...................... F-24
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended March 31, 1999 and 1998............ F-25
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998........ F-26
Unaudited Condensed Consolidated Balance Sheets as of March
31, 1999 and December 31, 1998............................ F-27
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-28
</TABLE>
F-1
<PAGE> 80
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Genentech, Inc.
We have audited the accompanying consolidated balance sheets of Genentech, Inc.
as of December 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Genentech, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
San Jose, California
January 20, 1999
F-2
<PAGE> 81
GENENTECH, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
In thousands, except per share data
Revenues
Product sales (including amounts from related parties:
1998--$28,738;
1997--$17,396; 1996--$13,216).......................... $ 717,795 $ 584,889 $582,829
Royalties (including amounts from related parties:
1998--$35,028;
1997--$25,362; 1996--$26,240).......................... 229,589 241,112 214,702
Contract and other (including amounts from related
parties: 1998--$61,583; 1997--$67,596;
1996--$95,299)......................................... 114,795 121,587 107,037
Interest.................................................. 88,764 69,160 64,110
---------- ---------- --------
Total revenues.................................... 1,150,943 1,016,748 968,678
Costs and expenses
Cost of sales (including amounts from related parties:
1998--$23,155;
1997--$14,348; 1996--$10,900).......................... 138,623 102,536 104,527
Research and development (including contract related:
1998--$27,660;
1997--$67,596; 1996--$50,586).......................... 396,186 470,923 471,143
Marketing, general and administrative..................... 358,931 269,852 240,063
Interest.................................................. 4,552 3,642 5,010
---------- ---------- --------
Total costs and expenses.......................... 898,292 846,953 820,743
Income before taxes......................................... 252,651 169,795 147,935
Income tax provision........................................ 70,742 40,751 29,587
---------- ---------- --------
Net income.................................................. $ 181,909 $ 129,044 $118,348
========== ========== ========
Earnings per share
Basic..................................................... $ 1.45 $ 1.05 $ 0.98
Diluted................................................... 1.40 1.02 0.95
Weighted average shares used to compute diluted earnings per
share..................................................... 129,872 126,397 123,969
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 82
GENENTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
-----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 181,909 $ 129,044 $ 118,348
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................. 78,101 65,533 62,124
Deferred income taxes..................................... 29,792 19,660 (34,021)
Gain on sales of securities available-for-sale............ (9,542) (13,203) (1,010)
Loss on sales of securities available-for-sale............ 1,809 2,096 663
Write-down of nonmarketable securities.................... 16,689 -- --
Write-down of securities available-for-sale............... 20,249 4,000 --
Loss on fixed asset dispositions.......................... 1,015 318 5,309
Changes in assets and liabilities
Net cash flow from trading securities..................... 12,725 (109,132) (8,184)
Receivables and other current assets...................... 33,767 11,194 (30,416)
Inventories............................................... (32,600) (24,083) 1,705
Accounts payable, other current liabilities and other
long-term liabilities.................................. 15,937 32,897 25,153
--------- --------- ---------
Net cash provided by operating activities................. 349,851 118,324 139,671
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held-to-maturity.................. (327,690) (304,932) (634,124)
Proceeds from maturities of securities held-to-maturity... 410,729 455,317 772,922
Purchases of securities available-for-sale................ (800,788) (512,727) (304,806)
Proceeds from sales of securities available-for-sale...... 430,936 410,395 182,564
Purchases of nonmarketable equity securities.............. (29,044) -- (9,323)
Capital expenditures...................................... (88,088) (154,902) (141,837)
Change in other assets.................................... (17,151) (61,529) (7,046)
--------- --------- ---------
Net cash used in investing activities..................... (421,096) (168,378) (141,650)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issuances........................................... 107,938 87,259 72,558
Reduction in long-term debt, including current portion.... -- -- (358)
--------- --------- ---------
Net cash provided by financing activities................. 107,938 87,259 72,200
--------- --------- ---------
Increase in cash and cash equivalents....................... 36,693 37,205 70,221
Cash and cash equivalents at beginning of year.............. 244,469 207,264 137,043
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 281,162 $ 244,469 $ 207,264
========= ========= =========
SUPPLEMENTAL CASH FLOW DATA
Cash paid during the year for:
Interest, net of portion capitalized................... $ 4,552 $ 3,642 $ 5,010
Income taxes........................................... 26,189 15,474 52,243
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 83
GENENTECH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
In thousands, except par value
ASSETS
Current assets
Cash and cash equivalents................................. $ 281,162 $ 244,469
Short-term investments.................................... 606,544 588,853
Accounts receivable--trade (net of allowances of:
1998--$14,661; 1997--$8,826)........................... 79,411 71,415
Accounts receivable--other (net of allowances of:
1998--$2,757; 1997--$5,709)............................ 47,480 73,444
Accounts receivable--related party........................ 22,850 44,386
Inventories............................................... 148,626 116,026
Prepaid expenses and other current assets................. 55,885 55,325
---------- ----------
Total current assets.............................. 1,241,958 1,193,918
Long-term marketable securities............................. 716,888 453,188
Property, plant and equipment, net.......................... 700,249 683,304
Other assets................................................ 196,307 177,202
---------- ----------
Total assets...................................... $2,855,402 $2,507,612
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 40,895 $ 48,992
Income taxes payable...................................... 46,447 40,293
Accrued liabilities--related party........................ 10,945 15,427
Other accrued liabilities................................. 193,040 184,845
---------- ----------
Total current liabilities......................... 291,327 289,557
Long-term debt.............................................. 149,990 150,000
Other long-term liabilities................................. 70,240 36,830
---------- ----------
Total liabilities................................. 511,557 476,387
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.02 par value; authorized: 100,000,000
shares; none issued.................................... -- --
Special Common Stock, $0.02 par value; authorized:
100,000,000 shares; outstanding: 1998--50,493,631;
1997--47,606,785....................................... 1,010 952
Common stock, $0.02 par value; authorized: 200,000,000
shares; outstanding: 1998 and 1997--76,621,009......... 1,532 1,532
Additional paid-in capital................................ 1,588,990 1,463,768
Retained earnings......................................... 693,050 511,141
Accumulated other comprehensive income.................... 59,263 53,832
---------- ----------
Total stockholders' equity........................ 2,343,845 2,031,225
---------- ----------
Total liabilities and stockholders' equity........ $2,855,402 $2,507,612
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 84
GENENTECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
SHARES
---------------- ACCUMULATED
SPECIAL SPECIAL ADDITIONAL OTHER
COMMON COMMON COMMON COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK STOCK STOCK STOCK CAPITAL EARNINGS INCOME TOTAL
------- ------ ------- ------ ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In thousands
Balance December 31, 1995........ 42,647 76,621 $ 853 $1,532 $1,281,640 $263,749 $54,273 $1,602,047
Comprehensive income
Net income..................... 118,348 118,348
Net unrealized (loss) on
securities
available-for-sale........... (324) (324)
----------
Comprehensive income............. 118,024
----------
Issuance of stock upon exercise
of options and warrants........ 1,738 35 55,103 55,138
Issuance of stock under employee
stock plan..................... 421 8 17,412 17,420
Income tax benefits realized from
employee stock option
exercises...................... 8,430 8,430
------ ------ ------ ------ ---------- -------- ------- ----------
Balance December 31, 1996........ 44,806 76,621 $ 896 $1,532 $1,362,585 $382,097 $53,949 $1,801,059
------ ------ ------ ------ ---------- -------- ------- ----------
Comprehensive income
Net income..................... 129,044 129,044
Net unrealized (loss) on
securities
available-for-sale........... (117) (117)
----------
Comprehensive income............. 128,927
----------
Issuance of stock upon exercise
of options and warrants........ 2,350 47 68,346 68,393
Issuance of stock under employee
stock plan..................... 451 9 18,857 18,866
Income tax benefits realized from
employee stock option
exercises...................... 13,980 13,980
------ ------ ------ ------ ---------- -------- ------- ----------
Balance December 31, 1997........ 47,607 76,621 $ 952 $1,532 $1,463,768 $511,141 $53,832 $2,031,225
------ ------ ------ ------ ---------- -------- ------- ----------
Comprehensive income
Net income..................... 181,909 181,909
Net unrealized gain on
securities
available-for-sale........... 5,431 5,431
----------
Comprehensive income............. 187,340
----------
Issuance of stock upon exercise
of options and warrants........ 2,460 49 86,835 86,884
Issuance of stock under employee
stock plan..................... 427 9 21,055 21,064
Income tax benefits realized from
employee stock option
exercises...................... 17,332 17,332
------ ------ ------ ------ ---------- -------- ------- ----------
Balance December 31, 1998........ 50,494 76,621 $1,010 $1,532 $1,588,990 $693,050 $59,263 $2,343,845
====== ====== ====== ====== ========== ======== ======= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 85
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Genentech, Inc. (the "Company") is a 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 Genentech science. The Company manufactures
and markets 8 products directly in the United States. In 1998, the Company
licensed its marketing and development rights to Actimmune(R), to Connetics
Corporation ("Connetics"). Following a transition period ending January 1999,
the Company will no longer market Actimmune, and Connetics has agreed to pay the
Company royalties on its sales of Actimmune.
In conjunction with an October 1995 agreement with F. Hoffmann-La Roche Ltd
("Hoffmann-La Roche"), a subsidiary of Roche Holdings, Inc. ("Roche"), the
Company receives royalties on sales of certain of its products in Canada, on
sales of Pulmozyme(R), outside of the United States and on sales of rituximab,
outside of the United States (excluding Japan) from Hoffmann-La Roche. See
Relationship with Roche Holdings, Inc. note for further discussion.
The Company receives royalties on sales of two of its products, growth hormone
and tissue-plasminogen activator, outside of the United States and Canada
through other licensees. The Company also receives worldwide royalties on five
additional licensed products, and received royalties on the sale of one other
licensed product for which those royalties expired in August 1998, that
originated from the Company's technology and are marketed by other companies.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all significant subsidiaries. Material intercompany
balances and transactions are eliminated.
Use of Estimates: 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.
Cash and Cash Equivalents: The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Short-term Investments and Long-term Marketable Securities: The Company invests
its excess cash balances in short-term and long-term marketable securities,
primarily corporate notes, certificates of deposit, treasury notes, asset-backed
securities and municipal bonds. As part of its strategic alliance efforts, the
Company also invests in equity securities, dividend bearing convertible
preferred stock and interest bearing convertible debt of other biotechnology
companies. Marketable equity securities are accounted for as available-for-sale
investment securities as described below. Nonmarketable equity securities and
convertible debt are carried at cost. At December 31, 1998 and 1997, the Company
had investments of $55.8 million and $55.2 million, respectively, in convertible
debt of various biotechnology companies.
Investment securities are classified into one of three categories:
held-to-maturity, available-for-sale, or trading. Securities are considered
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. These securities are recorded as either short-term
investments or long-term marketable securities on the balance sheet depending
upon their original contractual maturity dates. Held-to-maturity securities are
stated at amortized cost, including adjustments for amortization of premiums and
accretion of discounts. Securities are considered trading when bought
principally for the purpose of selling in the near term. These securities are
recorded as short-term investments and are carried at market value. Unrealized
holding gains and losses on trading securities are included in interest income.
Securities not classified as held-to-maturity or as trading are considered
available-for-sale. These securities are recorded as either short-term
investments or long-term marketable securities and are carried at market value
with unrealized gains and losses included in accumulated other comprehensive
income in stockholders' equity. If a decline in fair value below cost is
considered other than temporary, such securities are written down to estimated
fair value with a charge to marketing, general and administrative expenses. The
cost of all securities sold is based on the specific identification method.
Property, Plant and Equipment: The costs of buildings and equipment are
depreciated using the straight-line method over the following estimated useful
lives of the assets: buildings--25 years; certain manufacturing equipment--15
years; other equipment--4 or 8 years; leasehold improvements--length of
applicable lease. The costs of repairs and maintenance are expensed as incurred.
Repairs and maintenance expenses for the years ended December 31, 1998, 1997 and
1996 were
F-7
<PAGE> 86
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$35.9 million, $32.9 million and $28.8 million, respectively. Capitalized
interest on construction-in-progress of $3.0 million in 1998, $3.9 million in
1997 and $2.5 million in 1996 is included in property, plant and equipment.
Property, plant and equipment balances are summarized below:
<TABLE>
<CAPTION>
------------------------
AS OF DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
In thousands
At cost:
Land........................................................ $ 69,437 $ 69,010
Buildings................................................... 378,133 339,708
Equipment................................................... 607,369 494,874
Leasehold improvements...................................... 3,565 3,270
Construction in progress.................................... 86,960 152,533
---------- ----------
1,145,464 1,059,395
Less: accumulated depreciation.............................. 445,215 376,091
---------- ----------
Net property, plant and equipment........................... $ 700,249 $ 683,304
========== ==========
</TABLE>
Patents and Other Intangible Assets: As a result of its research and
development ("R&D") programs, the Company owns or is in the process of applying
for patents in the United States and other countries which relate to products
and processes of significant importance to the Company. Costs of patents and
patent applications are capitalized and amortized on a straight-line basis over
their estimated useful lives of approximately 12 years. Intangible assets are
generally amortized on a straight-line basis over their estimated useful lives.
Contract Revenue: Contract revenue for R&D is recorded as earned based on the
performance requirements of the contract. Nonrefundable contract fees for which
no further performance obligations exist are recognized when the payments are
received or when collection is assured. In return for contract payments,
contract partners may receive certain marketing and manufacturing rights,
products for clinical use and testing, and/or R&D services.
Royalty Expenses: Royalty expenses directly related to product sales are
classified in cost of sales. Other royalty expenses, relating to royalty
revenue, totaled $38.3 million, $39.8 million and $36.0 million in 1998, 1997
and 1996, respectively, and are classified in marketing, general and
administrative expenses.
Advertising Expenses: The Company expenses the costs of advertising, which also
includes promotional expenses, as incurred. Advertising expenses for the years
ended December 31, 1998, 1997 and 1996, were $47.7 million, $41.8 million and
$28.0 million, respectively.
Income Taxes: The Company accounts for income taxes by the asset and liability
approach for financial accounting and reporting of income taxes.
Earnings Per Share: Basic earnings per share is computed based on the weighted
average number of shares of the Company's Callable Putable Common Stock
("Special Common Stock") and Common Stock outstanding. Diluted earnings per
share is computed based on the weighted average number of shares of the
Company's Special Common Stock, Common Stock and other dilutive securities. See
also Earnings Per Share note.
Financial Instruments: As part of its overall portfolio, the Company uses two
external money managers to manage its investment portfolios that are held for
trading purposes and one external manager that manages an available-for-sale
portfolio. The investment portfolios consist entirely of debt securities. When
the money managers purchase securities denominated in a foreign currency, they
enter into foreign currency forward contracts which are recorded at fair value
with the related gain or loss recorded in interest income.
The Company purchases simple foreign currency put options ("options") with
expiration dates and amounts of currency that are based on a portion of probable
nondollar revenues so that the potential adverse impact of movements in currency
exchange
F-8
<PAGE> 87
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rates on the nondollar denominated revenues will be at least partially offset by
an associated increase in the value of the options. See the Financial
Instruments note for further discussion. At the time the options are purchased
they have little or no intrinsic value. Realized and unrealized gains related to
the options are deferred until the designated hedged revenues are recorded. The
associated costs, which are deferred and classified as other current assets, are
amortized over the term of the options and recorded as a reduction of the hedged
revenues. Realized gains, if any, are recorded in the income statement with the
related hedged revenues. Options are generally terminated, or offsetting
contracts are entered into, upon determination that purchased options no longer
qualify as a hedge or are determined to exceed probable anticipated net foreign
revenues. The realized gains and losses are recorded as a component of other
revenues. For early termination of options that qualify as hedges, the gain or
loss on termination will be deferred through the original term of the option and
then recognized as a component of the hedged revenues. Changes in the fair value
of hedging instruments that qualify as a hedge are not recognized and changes in
the fair value of instruments that do not qualify as a hedge would be recognized
in other revenues.
The Company may also enter into foreign currency forward contracts ("forward
contracts") as hedging instruments. Forward contracts are recorded at fair
value, and any gains and losses from these forward contracts are recorded in the
income statement with the related hedged revenues. Financial instruments, such
as forward contracts, not qualifying as hedges under generally accepted
accounting principles are marked to market with gains or losses recorded in
other revenues if they occur.
Interest rate swaps ("swaps") have been used and may be used in the future to
adjust the duration of the investment portfolio in order to meet duration
targets. Interest rate swaps are contracts in which two parties agree to swap
future streams of payments over a specified period. See the Financial
Instruments note for further discussion. The accrued net settlement amounts on
swaps are reflected on the balance sheet as other accounts receivable or other
accrued liabilities. Net payments made or received on swaps are included in
interest income as adjustments to the interest received on invested cash.
Amounts deferred on terminated swaps are classified as other assets and are
amortized to interest income over the original contractual term of the swaps by
a method that approximates the level-yield method. For early termination of
swaps where the underlying asset is not sold, the amount of the terminated swap
is deferred and amortized over the remaining life of the original swap. For
early termination of swaps with the corresponding termination or sale of the
underlying asset, the amounts are recognized through interest income. Changes in
the fair value of swap hedging instruments that qualify as a hedge are not
recognized and changes in the fair value of swap instruments that do not qualify
as a hedge would be recognized in other income.
The Company's marketable equity portfolio consists primarily of investments in
biotechnology companies whose risk of market fluctuations is greater than the
stock market in general. To manage a portion of this risk, the Company enters
into certain costless collar instruments to hedge certain equity securities
against changes in market value. See the Financial Instruments note for further
discussion. Gains and losses on these instruments are recorded as an adjustment
to unrealized gains and losses on marketable securities with a corresponding
receivable or payable recorded in short-term or long-term other assets or
liabilities. Equity collar instruments that do not qualify for hedge accounting
and early termination of these instruments with the sale of the underlying
security would be recognized through earnings. For early termination of these
instruments without the sale of the underlying security, the time value would be
recognized through earnings and the intrinsic value will adjust the cost basis
of the underlying security.
401(k) Plan: The Company's 401(k) Plan (the "Plan") covers substantially all of
its employees. Under the Plan, eligible employees may contribute up to 15% of
their eligible compensation, subject to certain Internal Revenue Service
restrictions. The Company matches a portion of employee contributions, up to a
maximum of 4% of each employee's eligible compensation. The match is effective
December 31 of each year and is fully vested when made. During 1998, 1997 and
1996, the Company provided $7.3 million, $6.7 million and $6.1 million,
respectively, for the Company match under the Plan.
Comprehensive Income: The Company adopted Statement of Financial Accounting
Standards ("FAS") 130, "Reporting Comprehensive Income," at December 31, 1998.
Under FAS 130, the Company is required to display comprehensive income and its
components as part of the Company's full set of financial statements. The
measurement and presentation of net income did not change. Comprehensive income
is comprised of net income and other comprehensive income. Other comprehensive
income includes certain changes in equity of the Company that are excluded from
net income. Specifically, FAS 130 requires unrealized holding gains and losses
on the Company's available-for-sale securities, which were reported separately
in
F-9
<PAGE> 88
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stockholders' equity, to be included in accumulated other comprehensive income.
Comprehensive income for years ended December 31, 1998, 1997 and 1996 has been
reflected in the Consolidated Statements of Stockholders' Equity.
New Accounting Standard: In June 1998, the Financial Accounting Standards Board
issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective beginning in the first quarter of 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
companies to recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting under FAS 133. The Company is currently evaluating the impact of FAS
133 on its financial position and results of operations.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined using a weighted-average approach which approximates the first-in
first-out method. Inventories are summarized below:
<TABLE>
<CAPTION>
--------------------
AS OF DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
In thousands
Raw materials and supplies.................................. $ 21,414 $ 17,544
Work in process............................................. 106,383 84,831
Finished goods.............................................. 20,829 13,651
-------- --------
Total............................................. $148,626 $116,026
======== ========
</TABLE>
Reclassifications: Certain reclassifications of prior year amounts have been
made to conform with the current year presentation.
SEGMENT, SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
The Company adopted FAS 131, "Disclosure about Segments of an Enterprise and
Related Information," at December 31, 1998. FAS 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Under FAS 131, the Company's operations are treated as one operating segment as
it only reports profit and loss information on an aggregate basis to chief
operating decision makers of the Company. Information about the Company's
product sales and major customers are as follows:
<TABLE>
<CAPTION>
--------------------------
YEAR ENDED DECEMBER 31,
--------------------------
PRODUCT SALES 1998 1997 1996
------------- ------ ------ ------
<S> <C> <C> <C>
In millions
Herceptin................................................... $ 30.5 -- --
Rituxan..................................................... 162.6 $ 5.5 --
Activase.................................................... 213.0 260.7 $284.1
Growth hormone (Protropin, Nutropin and Nutropin AQ)........ 214.0 223.6 218.2
Pulmozyme................................................... 93.8 91.6 76.0
Actimmune................................................... 3.9 3.5 4.5
------ ------ ------
Total product sales............................... $717.8 $584.9 $582.8
====== ====== ======
</TABLE>
Hoffmann-La Roche contributed approximately 11% of the Company's total revenues
in 1998, 11% in 1997 and 14% in 1996. See the Related Party Transactions note
below for further information. Three other major customers, Caremark, Inc.,
Bergen Brunswig and Cardinal Distribution, Inc., each contributed 10% or more of
the Company's total revenues in at least one of the last three years. Caremark,
Inc., a national distributor, which accounted for 10%, 14% and 15% of total
revenues in 1998, 1997 and 1996, respectively, distributes the Company's growth
hormone products, Pulmozyme and Actimmune through its extensive branch network
and is then reimbursed through a variety of sources. Bergen Brunswig, a national
wholesale
F-10
<PAGE> 89
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
distributor of all of the Company's products, contributed 11% of total revenues
in 1998 and 10% in 1997 and 1996. Cardinal Distribution, Inc., a national
wholesaler distributor of all the Company's products, contributed 11% of total
revenues in 1998.
Approximate foreign sources of revenues were as follows:
<TABLE>
<CAPTION>
--------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
In millions ------ ------ ------
<S> <C> <C> <C>
Europe...................................................... $171.0 $139.5 $146.4
Asia (primarily Japan)...................................... 16.9 34.2 17.8
Canada...................................................... 11.7 11.7 11.1
</TABLE>
The Company currently sells primarily to distributors and health care companies
throughout the United States, performs ongoing credit evaluations of its
customers' financial condition and extends credit generally without collateral.
In 1998, 1997 and 1996, the Company did not record any material additions to, or
losses against, its provision for doubtful accounts.
RESEARCH AND DEVELOPMENT ARRANGEMENTS
To gain access to potential new products and technologies and to utilize other
companies to help develop the Company's potential new products, the Company has
established strategic alliances with various companies. These strategic
alliances include the acquisition of both marketable and nonmarketable equity
investments and convertible debt of companies developing technologies that fall
outside the Company's research focus and include companies having the potential
to generate new products through technology exchanges and investments. Potential
future payments may be due to certain collaborative partners achieving certain
benchmarks as defined in the collaborative agreements. The Company has also
entered into product-specific collaborations to acquire development and
marketing rights for products.
In December 1997, the Company and Alteon, Inc. ("Alteon") entered into a
collaborative agreement to develop and market pimagedine, an advanced
glycosylation end-product formation inhibitor to treat kidney disease in
diabetic patients. Under the terms of the agreement, the Company licensed
pimagedine and second generation compounds from Alteon and has made investments
in Alteon stock of $37.5 million. In 1998, as a result of unsuccessful clinical
trials with pimagedine and the decline in the value of the Company's investment
in Alteon, the Company wrote down $24.2 million of its marketable and
nonmarketable equity investments in Alteon. The Company is in discussions with
Alteon as to the future direction of the collaboration.
INCOME TAXES
The income tax provision consists of the following amounts:
<TABLE>
<CAPTION>
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
In thousands ------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................................... $39,945 $ 30,617 $ 61,502
State..................................................... 1,004 432 2,104
Foreign................................................... -- 2 2
------- -------- --------
Total current..................................... 40,949 31,051 63,608
------- -------- --------
Deferred:
Federal................................................... 29,006 23,799 (34,021)
State..................................................... 787 (14,099) --
------- -------- --------
Total deferred.................................... 29,793 9,700 (34,021)
------- -------- --------
Total income tax provision........................ $70,742 $ 40,751 $ 29,587
======= ======== ========
</TABLE>
Actual current tax liabilities are lower by $17.3 million, $14.0 million and
$8.4 million in 1998, 1997 and 1996, respectively, due to employee stock option
related tax benefits which were credited to stockholders' equity.
F-11
<PAGE> 90
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate follows:
<TABLE>
<CAPTION>
--------------------------------------
TAX RATE
-----------------------
1998 AMOUNT 1998 1997 1996
----------- ----- ----- -----
<S> <C> <C> <C> <C>
In thousands
Tax at U.S. statutory rate.................................. $ 88,428 35.0% 35.0% 35.0%
R&D credits realized........................................ (11,919) (4.7) (11.4) (3.0)
Tax benefit of certain realized gains on securities
available-for-sale........................................ (2,982) (1.2) (3.8) --
Adjustment of deferred tax assets valuation allowance....... -- -- -- (15.3)
Foreign losses realized..................................... (10,500) (4.2) -- (3.4)
State taxes................................................. 7,491 3.0 2.3 2.3
Other....................................................... 224 0.1 1.9 4.4
-------- ----- ----- -----
Income tax provision.............................. $ 70,742 28.0% 24.0% 20.0%
======== ===== ===== =====
</TABLE>
The components of deferred taxes consist of the following:
<TABLE>
<CAPTION>
--------------------
AS OF DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
In thousands
Deferred tax liabilities
Depreciation.............................................. $ 66,471 $ 55,137
Unrealized gain on securities available-for-sale.......... 30,617 25,086
Other..................................................... 20,016 2,173
-------- --------
Total deferred tax liabilities.................... 117,104 82,396
Deferred tax assets
Capitalized R&D costs..................................... 42,317 33,950
Federal credit carryforwards.............................. 86,725 100,400
Expenses not currently deductible......................... 56,699 35,000
State credit carryforwards................................ 30,632 28,365
Other..................................................... 4,992 4,398
-------- --------
Total deferred tax assets.............................. 221,365 202,113
Valuation allowance.................................... (62,844) (48,508)
-------- --------
Total net deferred tax assets.......................... 158,521 153,605
-------- --------
Total net deferred taxes.......................... $ 41,417 $ 71,209
======== ========
</TABLE>
Total tax credit carryforwards of $117.4 million expire in the years 1999
through 2012, except for $43.0 million of alternative minimum tax credits which
have no expiration date. The valuation allowance at December 31, 1998, reflected
above relates to the tax benefits of stock option deductions which will be
credited to additional paid-in capital when realized.
The valuation allowance increased by $14.3 million and $12.7 million in 1998 and
1997, respectively, and decreased by $17.0 million in 1996. Realization of net
deferred taxes depends on future earnings from existing and new products and new
indications for existing products. The timing and amount of future earnings will
depend on continued success in marketing and sales of the Company's current
products, as well as the scientific success, results of clinical trials,
availability of third party reimbursement for therapies and regulatory approval
of products under development.
EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators of the basic
and diluted EPS computations for the years ended December 31, 1998, 1997 and
1996.
F-12
<PAGE> 91
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
--------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
In thousands
NUMERATOR
Net income--numerator for basic and diluted EPS........... $181,909 $129,044 $118,348
======== ======== ========
DENOMINATOR
Denominator for basic EPS--weighted-average shares........ 125,767 123,042 120,623
Effect of dilutive securities
Stock options............................................. 4,105 3,355 3,325
Warrants.................................................. -- -- 21
-------- -------- --------
Denominator for diluted EPS--adjusted weighted-average
shares and assumed conversions............................ 129,872 126,397 123,969
======== ======== ========
</TABLE>
Options to purchase 178,575 shares of the Company's Special Common Stock ranging
from $70.50 to $71.13 per share, 103,700 shares of Special Common Stock at
$59.00 per share and 5,251,665 shares of Special Common Stock at $54.25 per
share were outstanding during 1998, 1997 and 1996, respectively, but were not
included in the computation of diluted earnings per share. These options'
exercise price was greater than the average market price of the Special Common
Stock and therefore, the effect would be anti-dilutive. See Capital Stock note
for information on option expiration dates.
During 1998, 1997 and 1996, the Company had convertible subordinated debentures
which were convertible to 1,013,447, 1,013,514 and 1,013,514 shares,
respectively, of Special Common Stock, but were not included in the computation
of diluted earnings per share because they were anti-dilutive. See the Long-term
Debt note for additional information on the convertible subordinated debentures.
F-13
<PAGE> 92
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES
Securities classified as trading, available-for-sale and held-to-maturity at
December 31, 1998 and 1997 are summarized below. Estimated fair value is based
on quoted market prices for these or similar investments.
<TABLE>
<CAPTION>
-----------------------------------------------
AS OF DECEMBER 31, 1998
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
In thousands
Total trading securities (carried at estimated fair
value).................................................... $236,330 $ 3,817 $ (246) $239,901
======== ======= ======= ========
Securities available-for-sale (carried at estimated fair
value)
Equity securities......................................... $ 42,024 $77,364 $(1,042) $118,346
United States Treasury securities and obligations of other
United States government agencies maturing: between
5-10 years............................................. 31,294 1,812 (74) 33,032
Corporate debt securities maturing:
within 1 year.......................................... 251,238 233 (515) 250,956
between 1-5 years...................................... 309,762 3,525 (934) 312,353
between 5-10 years..................................... 149,410 6,603 (472) 155,541
Other debt securities maturing:
between 1-5 years...................................... 70,768 172 (2,502) 68,438
between 5-10 years..................................... 19,836 267 -- 20,103
greater than 10 years.................................. 9,033 49 (7) 9,075
-------- ------- ------- --------
Total Available-for-Sale.......................... $883,365 $90,025 $(5,546) $967,844
======== ======= ======= ========
Securities held-to-maturity (carried at amortized cost)
Corporate debt securities maturing:
within 1 year.......................................... $115,687 $ -- $ (79) $115,608
======== ======= ======= ========
Total held-to-maturity............................ $115,687 $ -- $ (79) $115,608
======== ======= ======= ========
</TABLE>
F-14
<PAGE> 93
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------------------------
AS OF DECEMBER 31, 1997
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
In thousands
Total trading securities (carried at estimated fair
value).................................................... $256,428 $ 686 $(4,487) $252,627
======== ======= ======= ========
Securities available-for-sale (carried at estimated fair
value)
Equity securities......................................... $ 46,262 $75,796 $(2,147) $119,911
United States Treasury securities and obligations of other
United States government agencies maturing
between 5-10 years..................................... 38,979 577 (3) 39,553
Corporate debt securities maturing:
within 1 year.......................................... 100,178 51 (8) 100,221
between 1-5 years...................................... 100,713 770 (103) 101,380
between 5-10 years..................................... 149,242 4,053 -- 153,295
Other debt securities maturing:
within 1 year.......................................... 41,061 -- (578) 40,483
between 1-5 years...................................... 41,057 -- (2,008) 39,049
-------- ------- ------- --------
Total Available-for-Sale.......................... $517,492 $81,247 $(4,847) $593,892
======== ======= ======= ========
Securities held-to-maturity (carried at amortized cost)
Corporate debt securities maturing:
within 1 year.......................................... $195,522 $ 19 -- $195,541
-------- ------- ------- --------
Total held-to-maturity............................ $195,522 $ 19 -- $195,541
======== ======= ======= ========
</TABLE>
The carrying value of all investment securities held at December 31, 1998 and
1997 is summarized below:
<TABLE>
<CAPTION>
-------------------
AS OF DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
In thousands
SECURITY
Trading securities.......................................... $239,901 $252,627
Securities available-for-sale maturing within one year...... 250,956 140,704
Securities held-to-maturity maturing within one year........ 115,687 195,522
-------- --------
Total short-term investments...................... $606,544 $588,853
======== ========
Securities available-for-sale maturing between 1-10 years,
including equity securities............................ $716,888 $453,188
-------- --------
Total long-term marketable securities............. $716,888 $453,188
======== ========
</TABLE>
In 1998, proceeds from the sales of available-for-sale securities totaled $431.0
million; gross realized gains totaled $9.5 million and gross realized losses
totaled $1.8 million. In 1997, proceeds from the sales of available-for-sale
securities totaled $410.4 million; gross realized gains totaled $13.2 million
and gross realized losses totaled $2.1 million. In 1996, proceeds from sales of
available-for-sale securities totaled $182.6 million; gross realized gains
totaled $1.0 million and gross realized losses totaled $0.7 million. The Company
recorded charges in 1998 and 1997 of $20.2 million and $4.0 million,
respectively, to write down certain available-for-sale biotechnology equity
securities for which the decline in fair value below cost was other than
temporary. In 1996, there were no such write-downs.
During the year ended December 31, 1998, 1997 and 1996, net change in unrealized
holding gains/(losses) on trading securities included in net income totaled $7.4
million, ($3.8) million and ($1.0) million, respectively.
F-15
<PAGE> 94
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Marketable debt securities held by the Company are issued by a diversified
selection of corporate and financial institutions with strong credit ratings.
The Company's investment policy limits the amount of credit exposure with any
one institution. Other than asset-backed securities, these debt securities are
generally not collateralized. The Company has not experienced any material
losses due to credit impairment on its investments in marketable debt securities
in the years 1998, 1997 and 1996.
FINANCIAL INSTRUMENTS
Foreign Currency Instruments Certain of the Company's revenues are earned
outside of the United States Moreover, the Company's foreign currency
denominated revenues exceed its foreign currency denominated expenses;
therefore, risk exists that net income may be impacted by changes in the
exchange rates between the United States dollar and foreign currencies. To hedge
a portion of anticipated nondollar denominated net revenues, the Company
currently purchases options and may enter into forward contracts. At December
31, 1998, the Company had hedged approximately 75% of probable net foreign
revenues anticipated within 12 months and 40% of its probable net foreign
revenues through the year 2000. At December 31, 1998 and 1997, the notional
amounts of the options totaled $75.0 million and $122.9 million, respectively,
and consisted of the following currencies: German marks, Spanish pesetas, French
francs, British pounds, Italian lire, Japanese yen and Swedish krona. All option
contracts mature within the next two years. The fair value of the options was
based on exchange rates and market conditions at December 31, 1998 and 1997. All
forward contracts were closed out at the end of 1997 and no forward contracts
were entered into in 1998.
Credit exposure is limited to the unrealized gains on these contracts. All
agreements are with a diversified selection of institutions with strong credit
ratings which minimizes risk of loss due to nonpayment from the counterparty.
The Company has not experienced any material losses due to credit impairment of
its foreign currency instruments.
Interest Rate Swaps Interest income is subject to fluctuations as interest rates
change, primarily United States interest rates. To manage this risk, the Company
periodically establishes duration targets for its investment portfolio that
reflect its anticipated use of cash and fluctuations in market rates of
interest. The Company may enter into swaps as part of its overall strategy of
managing the duration of its investment portfolio. For each swap, the Company
receives interest based on fixed rates and pays interest to counterparties based
on floating rates on a notional principal amount. The Company's swap
counterparties have strong credit ratings which minimize the risk of
non-performance on the swaps. The Company has not experienced any material
losses due to credit impairment. At December 31, 1998 and 1997, the Company had
three swap contracts outstanding with notional amounts totaling $150.0 million.
The Company's credit exposure on swaps and the net carrying amounts of swaps
held at December 31, 1998 and 1997, were not material. Net interest income from
swaps in 1998, 1997 and 1996 was also immaterial.
Equity Collar Instruments To hedge against fluctuations in the market value of a
portion of the marketable equity portfolio, the Company has entered into
costless collar instruments, a form of equity collar instrument, that expire in
1999 and will require settlement in equity securities or cash. A costless collar
instrument is a purchased put option and a written call option on a specific
equity security such that 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. The fair value of the purchased puts and the
written calls were determined based on quoted market prices at year end. At
December 31, 1998, the notional amounts of the put and call options were $32.0
million and $46.0 million, respectively. At December 31, 1997, the notional
amounts of the put and call options were $33.7 million and $50.1 million,
respectively.
Financial Instruments Held for Trading Purposes As part of its 1998 overall
investment strategy, the Company has contracted with two external money managers
to manage part of its investment portfolio. These portfolios at December 31,
1998, consisted of United States and nondollar denominated investments. To hedge
the nondollar denominated investments, the money managers enter into forward
contracts. The notional amounts of the forward contracts at December 31, 1998
and 1997, were $211.6 million and $209.3 million, respectively. The fair value
at December 31, 1998 and 1997, of the forward contracts, totaled $0.4 million
and $3.3 million, respectively. The average fair value during 1998 and 1997
totaled ($0.9) million and $2.1 million, respectively. Net realized and
unrealized trading gains on the portfolio totaled approximately $16.2 million in
F-16
<PAGE> 95
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998 and $9.1 million in 1997, respectively, and are included in interest
income. Counterparties have strong credit ratings which minimize the risk of
non-performance from the counterparties.
Summary of Fair Values
The table below summarizes the carrying value and fair value at December 31,
1998 and 1997, of the Company's financial instruments. The fair value of the
long-term debt was estimated based on the quoted market price at year end (in
thousands):
<TABLE>
<CAPTION>
-------------------------------------------------
1998 1997
----------------------- -----------------------
In thousands CARRYING FAIR CARRYING FAIR
FINANCIAL INSTRUMENTS VALUE VALUE VALUE VALUE
--------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investment securities............................... $1,323,432 $1,323,353 $1,042,041 $1,042,060
Convertible equity loans............................ 55,800 55,800 55,248 55,248
Purchased foreign exchange put options.............. 1,441 5,741 3,891 14,468
Outstanding interest rate swaps..................... 5,742 167,535 5,742 165,559
LIABILITIES:
Long-term debt...................................... 149,990 148,000 150,000 139,500
Equity collars...................................... 4,857 11,600 12,161 15,533
Outstanding interest rate swaps..................... 3,587 153,587 3,732 153,732
</TABLE>
OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
--------------------
1998 1997
In thousands -------- --------
<S> <C> <C>
Accrued compensation........................................ $ 47,057 $ 44,624
Accrued clinical and other studies.......................... 35,535 47,269
Accrued royalties........................................... 23,392 23,905
Accrued marketing and promotion costs....................... 9,417 13,369
Other....................................................... 77,639 55,678
-------- --------
Total other accrued liabilities................... $193,040 $184,845
======== ========
</TABLE>
LONG-TERM DEBT
The Company's long-term debt as of December 31, 1998 and 1997 consisted of
$150.0 million of convertible subordinated debentures, with interest payable at
5%, due in 2002. The debentures are convertible, at the option of the holder,
into shares of the Company's Special Common Stock. Upon conversion, the holder
receives, for each $74 in principal amount of debenture converted, one-half
share of the Company's Special Common Stock and $18 in cash. The $18 in cash is
reimbursed by Roche to the Company. Generally, the Company may redeem the
debentures until maturity.
LEASES, COMMITMENTS AND CONTINGENCIES
Leases: Future minimum lease payments under operating leases, net of sublease
income at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL
In thousands ------- ------- ------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$25,855 $23,591 $22,470 $19,627 $18,637 $36,707 $146,887
</TABLE>
The Company leases various real property under operating leases that generally
require the Company to pay taxes, insurance and maintenance. Rent expense was
approximately $12.7 million, $11.7 million and $11.7 million for the years 1998,
1997 and 1996, respectively. Sublease income was not material in any of the
three years presented.
Under four of the lease agreements, the Company has an option to purchase the
properties at an amount that does not constitute a bargain. Alternatively, the
Company can cause the property to be sold to a third party. The Company is
F-17
<PAGE> 96
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contingently liable, under residual value guarantees, for approximately $377.0
million. The Company also is required to maintain certain financial ratios and
is limited to the amount of additional debt it can assume.
Commitments: The Company and CuraGen Corporation entered into a research
collaborative agreement in November 1997, whereby the Company invested $5.0
million in equity of CuraGen and has agreed to provide a convertible equity loan
to CuraGen of up to $26.0 million. As of December 31, 1998, no loan amounts have
been funded to CuraGen.
Also, in December 1997, the Company and LeukoSite Inc. entered into a
collaboration agreement to develop and commercialize LeukoSite's LDP-02, a
humanized monoclonal antibody for the potential treatment of inflammatory bowel
diseases. Under the terms of the agreement, the Company made a $4.0 million
equity investment in LeukoSite and has agreed to provide a convertible equity
loan for approximately $15.0 million to fund Phase II development costs. Upon
successful completion of Phase II, if LeukoSite agrees to fund 25% of Phase III
development costs, the Company has agreed to provide a second loan to LeukoSite
for such funding. As of December 31, 1998, no loan amounts have been funded to
LeukoSite.
In addition, the Company has entered into research collaborations with companies
whereby potential future payments may be due to selective collaborative partners
achieving certain benchmarks as defined in the collaborative agreements. The
Company may also, from time to time, lend additional funds to these companies,
subject to approval.
The Company is a limited partner in the Vector Later-Stage Equity Fund II, LP
(Vector Fund). The General Partner is Vector Fund Management II, LLC, a Delaware
limited liability company. The purpose of the Vector Fund is to invest in
biotech equity and equity-related securities. Under the terms of the Vector Fund
agreement, the Company makes contributions to the capital of the Vector Fund
through installments in cash as called by the General Partner. The Company's
total commitment to the Vector Fund through September 2003 is $25.0 million, of
which $7.2 million was contributed as of December 31, 1998. The Vector Fund will
terminate and be dissolved in September 2007.
Contingencies: The Company is a party to various legal proceedings, including
patent infringement cases involving human growth hormone products and
Activase(R) and other matters.
In July 1997, an action was filed in the United States District Court for the
Northern District of California alleging that the Company's manufacture, use and
sale of its Nutropin(R) human growth hormone products infringed a patent (the
Goodman Patent) owned by the Regents of the University of California ("UC").
This action is substantially the same as a previous action filed in 1990 against
the Company by UC alleging that the Company's manufacture, use and sale of its
Protropin(R) human growth hormone products infringed the Goodman Patent. The
1997 case has been stayed pending the conclusion of the 1990 case, which is
expected to commence trial in April 1999.
Based upon the nature of the claims made and the information available to date
to the Company and its counsel through investigations and otherwise, the Company
believes the outcome of these actions is not likely to have a material adverse
effect on the financial position, results of operations or cash flows of the
Company. However, were an unfavorable ruling to occur in any quarterly period,
there exists the possibility of a material impact on the net income of that
period.
In addition to the above, in 1995, the Company received and responded to grand
jury document subpoenas from the United States District Court for the Northern
District of California for documents relating to the Company's past clinical,
sales and marketing activities associated with human growth hormone. In February
1997, February 1998 and October 1998, the Company received grand jury document
subpoenas from the same court related to the same subject matter. The government
is actively investigating this matter, and the Company is a target of that
investigation. The Company expects further activity with respect to this matter
in the near future. At this time, the Company cannot reasonably estimate a
possible range of loss, if any, that may result from this investigation due to
uncertainty regarding the outcome.
RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On October 25, 1995, the Company and Roche entered into the Agreement. Each
share of the Company's Common Stock not held by Roche or its affiliates on that
date automatically converted to one share of Special Common Stock. The Agreement
extends until June 30, 1999 Roche's option to cause the Company to redeem (call)
the outstanding Special Common Stock of the Company at predetermined prices.
Should the call be exercised, Roche will concurrently purchase from the Company
a like number of common shares for a price equal to the Company's cost to redeem
the Special Common Stock. During the
F-18
<PAGE> 97
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
quarter beginning January 1, 1999, the call price is $81.00 per share and
increases by $1.50 per share each quarter through the end of the option period
on June 30, 1999, on which date the price will be $82.50 per share. If Roche
does not cause the redemption as of June 30, 1999, the Company's stockholders
will have the option (put) to cause the Company to redeem none, some or all of
their shares of Special Common Stock at $60.00 per share (and Roche will
concurrently provide the necessary redemption funds to the Company by purchasing
a like number of shares of Common Stock at $60.00 per share) within thirty
business days commencing July 1, 1999. Roche Holding Ltd, a Swiss corporation,
has guaranteed Roche's obligation under the put.
In the event of the put, wherein sufficient shares of the Company's Special
Common Stock are tendered to result in Roche owning at least 85% of the total
outstanding shares of the Company's stock, the Company has in place an Incentive
Units Program ("Program") which could result in amounts payable to eligible
employees. These amounts are based on specified performance benchmarks achieved
by the Company during the term of the Program. In the event of the put, at
December 31, 1998, $14.8 million is contingently payable under the Program.
In conjunction with the Agreement, Hoffmann-La Roche was granted an option for
ten years for licenses to use and sell certain of the Company's products in
non-U.S. markets (the License Agreement). In 1997, the Company and Hoffmann-La
Roche agreed in principle to changes to the License Agreement. Key changes to
the License Agreement are summarized as follows: (1) For future products,
Hoffmann-La Roche may choose to exercise its option either when the Company
determines to move a product into development, or at the end of Phase II
clinical trials (as in the 1995 agreement). United States and European
development costs will be shared (discontinuing the distinction regarding
location or purpose of studies). (2) If Hoffmann-La Roche exercises its option
at the development determination point, United States and European development
costs will be shared 50/50. (3) If Hoffmann-La Roche exercises its option at the
end of Phase II clinical trials, Hoffmann-La Roche will reimburse the Company
for 50 percent of any development costs incurred, and subsequent United States
and European development costs will be shared 75/25, Hoffmann-La
Roche/Genentech. (4) For nerve growth factor, which Hoffmann-La Roche has
already exercised its option to develop, prospective United States and European
development costs will be shared 60/40, Hoffmann-La Roche/Genentech. (5)
Hoffmann-La Roche has assumed development of Xubix, trademark, (the oral
IIb/IIIa antagonist) globally on its own. The Company may subsequently opt-in
and join development at any time through the New Drug Application approval for
the first indication. If the Company does not opt-in, it will receive from
Hoffmann-La Roche a 6.0% royalty on worldwide sales of Xubix.
In general, with respect to the Company's products, Hoffmann-La Roche pays a
royalty of 12.5% until a product reaches $100.0 million in aggregate sales
outside of the United States, at which time the royalty rate on all sales
thereafter increases to 15%. In addition, Hoffmann-La Roche has rights to, and
pays the Company 20% royalties on, Canadian sales of Activase, Protropin,
Nutropin, Pulmozyme and Actimmune, sales of Pulmozyme outside of the United
States and sales of Rituxan outside of the United States, excluding Japan.
Hoffmann-La Roche currently has the right to sell Pulmozyme exclusively in
Canada and Europe and pays royalties to the Company on such sales. The Company
supplies its products to Hoffmann-La Roche, and has agreed to supply its
products for which Hoffmann-La Roche has exercised its option, for sales outside
of the United States at cost plus 20%.
Under the Agreement, independent of its right to cause the Company to redeem the
Special Common Stock, Roche may increase its ownership of the Company up to
79.9% by making purchases on the open market. Roche holds approximately 65.3% of
the outstanding common equity of the Company as of December 31, 1998.
RELATED PARTY TRANSACTIONS
The Company has transactions with Hoffmann-La Roche (an affiliate of Roche, with
two officers on the Company's Board of Directors) and its affiliates in the
ordinary course of business. The Company recorded nonrecurring contract revenues
from Hoffmann-La Roche of $40.0 million for Herceptin(R), (trastuzumab)
marketing rights outside of the United States in 1998 (see below) and $44.7
million for the exercise of its options under the License Agreement with respect
to three development projects (Rituxan, insulin-like growth factor ("IGF-I")
which was subsequently terminated, and nerve growth factor) in 1996. All other
contract revenue from Hoffmann-La Roche, including reimbursement for ongoing
development expenses after the option exercise date, totaled $21.6 million in
1998, $67.6 million in 1997, $50.6 million in 1996. All other revenue from
F-19
<PAGE> 98
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Hoffmann-La Roche and their affiliates, principally royalties under previous
product licensing agreements, and royalties and product sales under the License
Agreement, totaled $63.8 million in 1998, $42.8 million in 1997 and $39.5
million in 1996.
In July 1998, the Company entered into an agreement with Hoffmann-La Roche to
provide Hoffmann-La Roche exclusive marketing rights outside of the United
States for Herceptin. Under the agreement, Hoffmann-La Roche paid $40.0 million
and has agreed to pay cash milestones tied to future product development
activities, to contribute equally with the Company up to a maximum of $40.0
million on global development costs and to make royalty payments on product
sales. As of December 31, 1998, no additional amounts have been paid.
The Company has a contractual relationship with Novation, LLC ("Novation"), a
group purchasing organization that is a joint venture of VHA, Inc. and
University HealthSystem Consortium. One officer of VHA, Inc. is on the Company's
Board of Directors. Under the contractual relationship, the Company pays to
Novation an administrative fee, and pays to Novation member hospitals a rebate,
based on a percentage of the purchases of Activase by such member hospitals. In
1998, administrative fees and rebates paid to Novation and its member hospitals,
respectively, were not material.
The Company has contracted with Jacobs Engineering Group Inc. ("Jacobs") to
provide design and engineering services for various projects of the Company. One
of the members of the Board of Directors of Jacobs is also a member of the Board
of Directors of the Company. In 1998, the amounts the Company paid to Jacobs
were not material.
CAPITAL STOCK
Common Stock, Special Common Stock and Redeemable Common Stock: After the close
of business on June 30, 1995, each share of the Company's redeemable Common
Stock automatically converted to one share of Genentech Common Stock, in
accordance with the terms of the redeemable Common Stock put in place at the
time of its issuance in 1990 and as described in Genentech's Certificate of
Incorporation. On October 25, 1995, pursuant to the Agreement with Roche, each
share of the Company's Common Stock not held by Roche or its affiliates
automatically converted to one share of Special Common Stock. See the
Relationship with Roche Holdings, Inc. note above for a discussion of these
transactions.
Stock Award Plans: The Company has stock option plans adopted in 1996, 1994,
1990 and 1984, which variously allow for the granting of non-qualified stock
options, stock awards and stock appreciation rights to employees, non-employee
directors and consultants of the Company. Incentive stock options may only be
granted to employees under these plans. Generally, non-qualified options have a
maximum term of 20 years, except those granted under the 1996 Plan and options
granted prior to 1992 under the 1984 Plan, which have a term of 10 years.
Incentive options have a maximum term of 10 years. In general, options vest in
increments over four years from the date of grant, although the Company may
grant options with different vesting terms from time-to-time. No stock
appreciation rights have been granted to date.
The Company adopted the 1991 Employee Stock Plan (the "1991 Plan") on December
4, 1990, and amended it during 1993, 1995 and 1997. The 1991 Plan allows
eligible employees to purchase Special Common Stock at 85% of the lower of the
fair market value of the Special Common Stock on the grant date or the fair
market value on the first business day of each calendar quarter. Purchases are
limited to 15% of each employee's eligible compensation. All full-time employees
of the Company are eligible to participate in the 1991 Plan. Of the 4,500,000
shares of Special Common Stock reserved for issuance under the 1991 Plan,
3,743,789 shares have been issued as of December 31, 1998. During 1998, 2,818 of
the eligible employees participated in the 1991 Plan.
The Company has elected to continue to follow "Accounting Principles Board
("APB") 25" for accounting for its employee stock options because the
alternative fair value method of accounting prescribed by FAS 123, "Accounting
for Stock-Based Compensation", requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
"Accounting for Stock Issued to Employees", no compensation expense is
recognized because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options and
employee stock plan under the fair value method prescribed by FAS 123 and the
earnings per share method under FAS 128. The resulting effect on pro forma net
income and earnings per share disclosed is not likely to be representative of
the effects on net income and earnings per share on a pro forma basis in future
years, due to subsequent
F-20
<PAGE> 99
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years including additional grants and years of vesting. The fair value of
options was estimated at the date of grant using a Black-Scholes option
valuation model with the following weighted average assumptions for 1998, 1997
and 1996, respectively: risk-free interest rates of 5.5%, 6.2% and 5.8%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's Common Stock of 11.9%, 9.2% and 6.2%; and a weighted-average expected
life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to pro forma expense over the options' vesting period. Pro forma
information for the years ending December 31 follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
--------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
In thousands, except per share amounts
Net income--as reported..................................... $181,909 $129,044 $118,348
Net income--pro forma....................................... 140,995 111,441 104,358
Earnings per share--as reported:
Basic..................................................... $ 1.45 $ 1.05 $ 0.98
Diluted................................................... 1.40 1.02 0.95
Earnings per share--pro forma:
Basic..................................................... $ 1.12 $ 0.91 $ 0.87
Diluted................................................... 1.10 0.89 0.84
</TABLE>
A summary of the Company's stock option activity and related information were as
follows:
<TABLE>
<CAPTION>
---------------------------
WEIGHTED
SHARES AVERAGE PRICE
---------- -------------
<S> <C> <C>
Options outstanding at December 31, 1995.................... 15,209,074 $36.80
Grants...................................................... 6,761,545 53.99
Exercises................................................... (1,624,541) 29.39
Cancellations............................................... (743,569) 48.73
----------
Options outstanding at December 31, 1996.................... 19,602,509 42.89
Grants...................................................... 329,505 58.21
Exercises................................................... (2,443,696) 30.07
Cancellations............................................... (1,248,709) 52.35
----------
Options outstanding at December 31, 1997.................... 16,239,609 44.41
Grants...................................................... 4,594,925 67.82
Exercises................................................... (2,460,907) 35.32
Cancellations............................................... 1,248,021 54.64
----------
Options outstanding at December 31, 1998.................... 17,125,606 51.27
==========
</TABLE>
F-21
<PAGE> 100
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning currently outstanding and
exercisable options as of December 31, 1998:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER YEARS REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$15.990 - $21.375 214,951 0.58 $19.87 214,951 $19.87
$25.500 - $38.125 3,196,155 11.08 28.18 3,155,655 28.20
$41.750 - $59.000 9,306,775 11.98 52.09 4,937,820 51.35
$67.063 - $71.125 4,407,725 9.68 67.82 1,525 67.31
---------- -----------
17,125,606 8,309,951
========== ===========
</TABLE>
Using the Black-Scholes option valuation model, the weighted average fair value
of options granted in 1998, 1997 and 1996, respectively was $17.23, $15.37 and
$13.36. Shares of Special Common Stock available for future grants under all
stock option plans were 2,041,218 at December 31, 1998.
SUBSEQUENT EVENTS (UNAUDITED)
Contingencies
The Company has entered into a settlement agreement with the U.S. Department of
Justice and the U.S. Attorney for the Northern District of California concerning
an investigation, ongoing since 1995, into the Company's promotional practices
with respect to human growth hormone. As part of the settlement agreement, the
Company paid a criminal fine and restitution in the amount of $50 million and
pleaded guilty to a felony of promoting Protropin for medical uses for which it
was not approved. The Company recorded a $50 million charge in the first quarter
of 1999 related to the settlement.
In July 1997, an action was filed in the U.S. District Court for the Northern
District of California alleging that the Company's manufacture, use and sale of
Nutropin human growth hormone products infringed a patent owned by the Regents
of the University of California ("U.C."). In May of 1999 the case was submitted
to a jury, and on June 2, 1999 the jury announced it was deadlocked. Because the
jury could not reach a unanimous decision, no finding of infringement was made,
and, at this time, there is no legal basis for the Company to be held liable to
U.C. for any claim of damages. The Company intends to renew its request for a
non-jury trial to decide whether the Company's claim that U.C. defrauded the
U.S. Patent and Trademark Office when it obtained the patent. A ruling in favor
of the Company would render the University's patent unenforceable. A ruling
against the Company would allow the University, if it so chooses, to have a
retrial of its infringement claim.
Redemption of Special Common Stock
On June 30, 1999, the Company will redeem all of its special common stock by
paying $82.50 per share in cash to holders of special common stock other than
Roche. The funds for the redemption of the special common stock were deposited
by Roche. After the redemption, Roche will own 100% of the Company's common
stock. As a result, push-down accounting is required under generally accepted
accounting principles which will require the Company to record goodwill and
other intangible assets of approximately $1.5 billion and $1.6 billion,
respectively, on its balance sheet during the second quarter of 1999. Also as a
result of push down accounting, the Company expects to record $0.8 billion
charge related to in-process research and development in the second quarter of
1999.
Stock Options
In connection with the redemption of the Company's special common stock, the
following changes with respect to stock options outstanding will occur:
- Options for the purchase of approximately 6.2 million shares of special
common stock will be canceled, as provided in the related stock option
plans, and the holders will receive cash payments in the amount of the
Redemption amount, $82.50 per share, less the exercise price;
F-22
<PAGE> 101
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- Options for the purchase of approximately 4.9 million shares of special
common stock will be converted, at the election of the Company, into
options to purchase a like number of shares of common stock at the same
exercise price, provided that the holder of such option has not
previously elected a cash payment as described above; and
- Options for the purchase of approximately 4.9 million shares of special
common stock will be canceled, in accordance with the terms of the
applicable stock option plan. The Company expects to grant new options
for the purchase of 1.33 times the number of shares under the previous
options with a exercise price equal to the public offering price of the
shares offered in this offering.
In connection with these stock option transactions, the Company expects to
record, in the quarter ending June 30, 1999, cash compensation expense of
approximately $300 million associated with the cash out of stock options and
non-cash compensation expense of approximately $130 million associated with the
remeasurement, for accounting purposes, of the converted options. Additional
non-cash compensation expense in an amount equal to the difference between the
redemption price and the public offering price per share will be recorded for
these converted options in the quarter ending September 30, 1999. Approximately
$10 million of non-cash compensation expense is also expected to be recorded in
future periods over the three year vesting period of certain of the options.
Such estimated non-cash compensation amounts are based on an assumed public
offering price per share. A limited number of employees will also have the
alternative to participate in a cash based deferred compensation plan, with an
aggregate of $44 million available to be earned over a two year period.
Amended Agreement with Hoffmann-La Roche and Tax Sharing Agreement
In connection with this offering, Genentech and Roche have amended their
licensing and marketing agreement, the major provisions of which include:
- the extension of Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license the Company's
products upon the occurrence of any of the following: (1) the Company's
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 a fee of $10 million to extend
its option on a product, completion of a Phase III trial for that
product;
- Genentech agreed, in general, to manufacture for and supply to
Hoffmann-La Roche its clinical requirements of the Company's products at
cost, and its commercial requirements at cost plus a margin of 20%;
however, Hoffmann-La Roche will have the right to manufacture the
Company's 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 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 the Company's last relevant patent or 25 years from 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 the Company's 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 shall be credited against
royalties payable to Genentech in the first calendar year of sales by
Hoffmann-La Roche in which aggregate sales of that product exceed $100
million.
After the redemption of the Company's special common stock, Genentech will be
included in Roche Holdings, Inc. federal (and certain states and local
jurisdictions) consolidated (or combined) income tax group. As a result the
Company's tax liability will be included in the consolidated or combined tax
liability for federal and certain states and local purposes. The Company has
entered into a tax sharing agreement with Roche Holdings, Inc. which provides
that Genentech will make payments to Roche Holdings, Inc. on the basis as though
the Company filed separate, stand-alone federal, state and local income tax
returns rather than being treated as part of Roche Holdings, Inc.'s
consolidated/combined tax return.
F-23
<PAGE> 102
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of March 31, 1999, and the related condensed consolidated
statements of income and cash flows for the three-month periods ended March 31,
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 an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Genentech, Inc. as of December 31,
1998 and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended (included elsewhere 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
April 9, 1999
F-24
<PAGE> 103
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
--------------------
THREE MONTHS
ENDED MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
In thousands, except per share data
Revenues
Product sales (including amounts from related parties
1999--$13,624; 1998--$6,607)........................... $234,069 $164,719
Royalties (including amounts from related parties:
1999--$11,241; 1998--$7,129)........................... 46,618 64,493
Contract and other (including amounts from related
parties:
1999--$4,269; 1998--$7,798)............................ 19,266 14,865
Interest.................................................. 22,399 20,623
-------- --------
Total revenues.................................... 322,352 264,700
Costs and expenses
Cost of sales (including amounts from related parties:
1999--$10,786; 1998--$6,025)........................... 45,723 33,621
Research and development (including contract related:
1999--$7,860; 1998--$8,562)............................ 90,740 98,202
Marketing, general and administrative..................... 97,201 74,950
Legal settlement.......................................... 50,000 --
Interest.................................................. 1,363 959
-------- --------
Total costs and expenses.......................... 285,027 207,732
Income before taxes......................................... 37,325 56,968
Income tax provision........................................ 22,910 15,951
-------- --------
Net income.................................................. $ 14,415 $ 41,017
======== ========
Earnings per share
Basic..................................................... $ 0.11 $ 0.33
======== ========
Diluted................................................... $ 0.11 $ 0.32
======== ========
Weighted average shares used to compute diluted earnings per
share..................................................... 132,522 128,807
======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-25
<PAGE> 104
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------
THREE MONTHS
ENDED MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 14,415 $ 41,017
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 21,912 17,936
Deferred income taxes.................................. (924) 4,386
Gain on sales of securities available-for-sale......... (12,259) (5,835)
Loss on sales of securities available-for-sale......... 30 376
Write-down of securities available-for-sale............ 914 2,555
Write-down of nonmarketable securities................. 432 --
Changes in assets and liabilities:
Investments in trading securities...................... (2,772) 25,290
Receivables and other current assets................... (10,503) 15,071
Inventories............................................ 1,914 (1,685)
Accounts payable, other current liabilities and other
long-term liabilities................................. 40,466 (30,252)
--------- ---------
Net cash provided by operating activities................... 53,625 68,859
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held-to-maturity.................. (126,981) (128,731)
Proceeds from maturities of securities held-to-maturity... 112,357 102,874
Purchases of securities available-for-sale................ (220,652) (177,731)
Proceeds from sales of securities available-for-sale...... 113,533 96,636
Purchases of non-marketable equity securities............. (2,317) --
Capital expenditures...................................... (18,209) (21,002)
Change in other assets.................................... (14,148) 1,336
--------- ---------
Net cash used in investing activities..................... (156,417) (126,618)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issuances........................................... 35,190 34,578
--------- ---------
Net cash provided by financing activities................. 35,190 34,578
--------- ---------
Net decrease in cash and cash equivalents................... (67,602) (23,181)
--------- ---------
Cash and cash equivalents at beginning of period.......... 281,162 244,469
--------- ---------
Cash and cash equivalents at end of period................ $ 213,560 $ 221,288
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-26
<PAGE> 105
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
In thousands
ASSETS
Current assets
Cash and cash equivalents................................. $ 213,560 $ 281,162
Short-term investments.................................... 681,410 606,544
Accounts receivable, net (including amounts from related
party: 1999--$32,522; 1998--$22,850)................... 168,816 149,741
Inventories............................................... 146,712 148,626
Prepaid expenses and other current assets................. 51,940 55,885
---------- ----------
Total current assets.............................. 1,262,438 1,241,958
Long-term marketable securities............................. 767,450 716,888
Property, plant and equipment, less accumulated depreciation
(1999--$464,749; 1998--$445,215).......................... 698,887 700,249
Other assets................................................ 197,333 196,307
---------- ----------
Total assets...................................... $2,926,108 $2,855,402
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 31,576 $ 40,895
Accrued liabilities--related party........................ 12,778 10,945
Other accrued liabilities................................. 275,422 239,487
---------- ----------
Total current liabilities......................... 319,776 291,327
Long-term debt.............................................. 149,990 149,990
Other long-term liabilities................................. 66,638 70,240
---------- ----------
Total liabilities................................. 536,404 511,557
COMMITMENTS AND CONTINGENCIES
Stockholders' equity
Preferred stock........................................... -- --
Special Common Stock...................................... 1,027 1,010
Common Stock.............................................. 1,532 1,532
Additional paid-in capital................................ 1,630,326 1,588,990
Retained earnings......................................... 707,465 693,050
Accumulated other comprehensive income.................... 49,354 59,263
---------- ----------
Total stockholders' equity........................ 2,389,704 2,343,845
---------- ----------
Total liabilities and stockholders' equity........ $2,926,108 $2,855,402
========== ==========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-27
<PAGE> 106
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--STATEMENT OF ACCOUNTING PRESENTATION
In the opinion of Genentech, Inc. ("the Company"), the accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of adjustments of
a normal recurring nature) considered necessary for a fair presentation have
been included. Operating results for the three-month periods ended March 31,
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 annual consolidated
financial statements and notes thereto included elsewhere herein.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE 2--NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting under FAS 133. The
Company is currently evaluating the impact of FAS 133 on its financial position
and results of operations.
NOTE 3--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 quarters ended March
31, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Numerator:
Net income--numerator for basic and diluted EPS........... $ 14,415 $ 41,017
======== ========
Denominator:
Denominator for basic EPS--weighted-average shares........ 127,704 124,758
Effect of dilutive securities:
Stock options............................................. 4,818 4,049
-------- --------
Denominator for diluted EPS--adjusted weighted-average
shares and assumed conversions............................ 132,522 128,807
======== ========
</TABLE>
In the first quarter of 1999, all options outstanding were dilutive. In the
first quarter of 1998, options to purchase 2,850,050 shares of Special Common
Stock at $67.31 per share were outstanding, but were not included in the
computation of diluted EPS. These options' exercise price was greater than the
average market price of the Special Common Stock and therefore, the effect would
be anti-dilutive.
The Company had convertible subordinated debentures that were convertible to
1,013,447 shares of Special Common Stock in the first quarter of 1999 and had
convertible subordinated debentures that were convertible to 1,013,514 shares of
Special Common Stock in the comparable period in 1998, but were not included in
the computation of diluted EPS because they were anti-dilutive.
NOTE 4--COMPREHENSIVE INCOME
The Company adopted FAS 130, "Reporting Comprehensive Income," in 1998.
Comprehensive income is comprised of net income and other comprehensive income.
The Company's other comprehensive income includes unrealized holding gains and
F-28
<PAGE> 107
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses on its available-for-sale securities, which were reported separately in
stockholders' equity, and included in accumulated other comprehensive income.
Comprehensive income was $4.5 million for the quarter ended March 31, 1999 and
$46.1 million for the comparable period in 1998.
NOTE 5--RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On June 30, 1999, Roche Holdings, Inc.'s ("Roche") option to cause the Company
to redeem (the "call") the outstanding Callable Putable Common Stock ("Special
Common Stock") of the Company at $82.50 will expire. This arrangement was the
result of the October 1995 agreement (the "Agreement") between the Company and
Roche. Should the call be exercised, Roche will concurrently purchase from the
Company a like number of shares of Common Stock for a price equal to the
Company's cost to redeem the Special Common Stock. If Roche does not cause the
redemption as of June 30, 1999, within thirty business days commencing July 1,
1999, the Company's stockholders will have the option (the "put") to cause the
Company to redeem none, some, or all of their shares of Special Common Stock at
$60.00 per share (and Roche will concurrently provide the necessary redemption
funds to the Company by purchasing a like number of shares of Common Stock at
$60.00 per share). Roche Holding Ltd, a Swiss corporation, has guaranteed
Roche's obligation under the put.
In the event that sufficient shares of the Company's Special Common Stock are
tendered pursuant to the put to result in Roche owning at least 85% of the total
outstanding shares of the Company's outstanding equity, the Company has in place
an Incentive Units Program (the "Program") that would result in amounts becoming
payable to eligible employees if specified performance benchmarks are achieved
by the Company during the term of the Program. In event of the put, at March 31,
1999, $14.7 million is contingently payable under the Program.
Under the Agreement, independent of its right to cause the Company to redeem the
Special Common Stock, Roche may increase its ownership of the Company up to
79.9% by making purchases on the open market. Roche held approximately 64.9% of
the outstanding common equity of the Company as of March 31, 1999.
In conjunction with the Agreement, the Company and F. Hoffmann-La Roche Ltd
(Hoffmann-La Roche) entered into an agreement (the License Agreement), pursuant
to which Hoffmann-La Roche was granted an option for ten years for licenses to
use and sell certain of the Company's products in non-U.S. markets. In the
second quarter of 1997 and the second and fourth quarters of 1998, the Company
and Hoffmann-La Roche agreed in principle to changes to the License Agreement.
As so revised under the License Agreement, Hoffmann-La Roche may exercise its
option to license any such future product of the Company either when the Company
determines to move such product into development or at the end of Phase II
clinical trials. The License Agreement provides that the Company and Hoffmann-La
Roche will share the United States and European development costs regardless of
the location or purpose of studies. Also, as part of this Agreement, the Company
receives royalties on sales of certain of its products in Canada, on sales of
Pulmozyme(R) outside of the United States and on sales of rituximab outside of
the United States, excluding Japan.
Contract revenue from Hoffmann-La Roche for the reimbursement of ongoing
development expenses was $4.3 million for the first quarter of 1999 and $7.8
million for the comparable period in 1998.
In addition, on July 6, 1998, the Company entered into an agreement with
Hoffmann-La Roche to provide Hoffmann-La Roche exclusive marketing rights
outside of the United States for Herceptin(R) (trastuzumab). Under the
agreement, Hoffmann-La Roche paid $40.0 million and has agreed to pay cash
milestones tied to future product development activities, to contribute equally
with the Company up to a maximum of $40.0 million on global development costs
and to make royalty payments on product sales. As of March 31, 1999, no
additional amounts have been paid.
NOTE 6--LEGAL PROCEEDINGS
The Company is a party to various legal proceedings, including patent
infringement cases involving human growth hormone products and Activase, product
liability cases and other matters.
In July 1997, an action was filed in the United States District Court for the
Northern District of California alleging that the Company's manufacture, use and
sale of its Nutropin(R) human growth hormone products infringed a patent (the
"Goodman Patent") owned by the Regents of the University of California ("UC").
This action is substantially the same as a previous
F-29
<PAGE> 108
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
action filed in 1990 against the Company by UC alleging that the Company's
manufacture, use and sale of its Protropin(R) human growth hormone products
infringed the Goodman Patent. The 1997 case has been stayed pending the
conclusion of the 1990 case, which is now in trial. UC has publicly stated that
it is seeking $400 million in damages from the Company pursuant to the 1990
case.
In the 1990 case, UC contends that the Protropin production plasmid, developed
and used by the Company, infringes the claims of the Goodman Patent under the
doctrine of equivalents. UC contends that UC human growth hormone cDNA brought
to Genentech by an ex-employee of UC, Peter Seeburg, was used in the
construction of the Company's Protropin production plasmid, and that such use,
if it occurred, constitutes some evidence of infringement under the doctrine of
equivalents. The Company vigorously and emphatically denies that the UC human
growth hormone cDNA brought to Genentech by Mr. Seeburg was used in the
construction of Genentech's human growth hormone production plasmid. Rather, the
Company's records demonstrate that the plasmid was developed internally by Dr.
David Goeddel without any use of the UC cDNA. In addition, the Company believes
the evidence in the case strongly supports its position that there is no
infringement of the Goodman Patent under the doctrine of equivalents. The
Company also believes that UC committed fraud upon the United States Patent and
Trademark Office in obtaining the Goodman Patent when it was originally issued
to UC in 1982, and that the Goodman Patent is therefore invalid because of UC's
inequitable conduct.
Based upon the nature of the claims made and the information available to date
to the Company and its counsel through investigations and otherwise, the Company
believes the outcome of these actions is not likely to have a material adverse
effect on the financial position, results of operations or cash flows of the
Company. However, were an unfavorable ruling to occur in any quarterly period,
there exists the possibility of a material impact on the net income of that
period.
The Company has entered into a settlement agreement with the United States
Department of Justice and the United States Attorney for the Northern District
of California concerning an investigation, ongoing since 1995, into the
Company's past promotional practices with respect to human growth hormone. As
part of the settlement agreement, the Company will pay a criminal fine and
restitution in the amount of $50 million and will plead guilty to a felony of
promoting Protropin for medical uses for which it was not approved. The Company
recorded a $50 million charge in the first quarter of 1999 related to the
settlement.
NOTE 7--INVENTORIES
Inventories are summarized below:
<TABLE>
<CAPTION>
-------------------------
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
In thousands
Raw materials and supplies.................................. $ 21,700 $ 21,414
Work in process............................................. 102,520 106,383
Finished goods.............................................. 22,492 20,829
-------- --------
Total............................................. $146,712 $148,626
======== ========
</TABLE>
NOTE 8--SUBSEQUENT EVENTS
In July 1997, an action was filed in the U.S. District Court for the Northern
District of California alleging that the Company's manufacture, use and sale of
Nutropin human growth hormone products infringed a patent owned by the Regents
of the University of California ("U.C."). In May of 1999 the case was submitted
to a jury, and on June 2, 1999 the jury announced it was deadlocked. Because the
jury could not reach a unanimous decision, no finding of infringement was made,
and, at this time, there is no legal basis for the Company to be held liable to
U.C. for any claim of damages. The Company intends to renew its request for a
non-jury trial to decide whether the Company's claim that U.C. defrauded the
U.S. Patent and Trademark Office when it obtained the patent. A ruling in favor
of the Company would render the University's patent
F-30
<PAGE> 109
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unenforceable. A ruling against the Company would allow the University, if it so
chooses, to have a retrial of its infringement claim.
Redemption of Special Common Stock
On June 30, 1999, the Company will redeem all of its special common stock by
paying $82.50 per share in cash to holders of special common stock other than
Roche. The funds for the redemption of the special common stock were deposited
by Roche. After the redemption, Roche will own 100% of the Company's common
stock. As a result, push-down accounting is required under generally accepted
accounting principles which will require the Company to record goodwill and
other intangible assets of approximately $1.5 billion and $1.6 billion,
respectively, on its balance sheet during the second quarter of 1999. Also as a
result of push down accounting, the Company expects to record $0.8 billion
charge related to in-process research and development in the second quarter of
1999.
Stock Options
In connection with the redemption of the Company's special common stock, the
following changes with respect to stock options outstanding will occur:
- Options for the purchase of approximately 6.2 million shares of special
common stock will be canceled, as provided in the related stock option
plans, and the holders will receive cash payments in the amount of the
Redemption amount, $82.50 per share, less the exercise price;
- Options for the purchase of approximately 4.9 million shares of special
common stock will be converted, at the election of the Company, into
options to purchase a like number of shares of common stock at the same
exercise price, provided that the holder of such option has not
previously elected a cash payment as described above; and
- Options for the purchase of approximately 4.9 million shares of special
common stock will be canceled, in accordance with the terms of the
applicable stock option plan. The Company expects to grant new options
for the purchase of 1.33 times the number of shares under the previous
options with a exercise price equal to the public offering price of the
shares offered in this offering.
In connection with these stock option transactions, the Company expects to
record, in the quarter ending June 30, 1999, cash compensation expense of
approximately $300 million associated with the cash out of stock options and
non-cash compensation expense of approximately $130 million associated with the
remeasurement, for accounting purposes, of the converted options. Additional
non-cash compensation expense in an amount equal to the difference between the
redemption price and the public offering price per share will be recorded for
these converted options in the quarter ending September 30, 1999. Approximately
$10 million of non-cash compensation expense is also expected to be recorded in
future periods over the three year vesting period of certain of the options.
Such estimated non-cash compensation amounts are based on an assumed public
offering price per share. A limited number of employees will also have the
alternative to participate in a cash based deferred compensation plan, with an
aggregate of $44 million available to be earned over a two year period.
Amended Agreement with Hoffmann-La Roche and Tax Sharing Agreement
In connection with this offering, Genentech and Roche have amended their
licensing and marketing agreement, the major provisions of which include:
- the extension of Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license the Company's
products upon the occurrence of any of the following: (1) the Company's
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 a fee of $10 million to extend
its option on a product, completion of a Phase III trial for that
product;
F-31
<PAGE> 110
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- Genentech agreed, in general, to manufacture for and supply to
Hoffmann-La Roche its clinical requirements of the Company's products at
cost, and its commercial requirements at cost plus a margin of 20%;
however, Hoffmann-La Roche will have the right to manufacture the
Company's 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 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 the Company's last relevant patent or 25 years from 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 the Company's 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 shall be credited against
royalties payable to Genentech in the first calendar year of sales by
Hoffmann-La Roche in which aggregate sales of that product exceed $100
million.
After the redemption of the Company's special common stock, Genentech will be
included in Roche Holdings, Inc. federal (and certain states and local
jurisdictions) consolidated (or combined) income tax group. As a result the
Company's tax liability will be included in the consolidated or combined tax
liability for federal and certain states and local purposes. The Company has
entered into a tax sharing agreement with Roche Holdings, Inc. which provides
that Genentech will make payments to Roche Holdings, Inc. on the basis as though
the Company filed separate, stand-alone federal, state and local income tax
returns rather than being treated as part of Roche Holdings, Inc.'s
consolidated/combined tax return.
F-32
<PAGE> 111
[GENENTECH LOGO]
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
-----------
AMOUNT
TO BE PAID
-----------
<S> <C>
Registration fee............................................ $ 13,900
NASD Filing fee............................................. 5,500
Listing Fee.................................................
Transfer agent's fees.......................................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue Sky fees and expenses..................................
Miscellaneous...............................................
-----------
Total............................................. $
===========
</TABLE>
Each of the amounts set forth above, other than the Registration fee and the
NASD filing fee, is an estimate. Genentech is responsible for all expenses
except that Roche Holdings, Inc. has agreed to pay the registration and filing
fees payable under any federal or state securities or Blue Sky laws in addition
to certain expenses to be directly incurred by Roche, including underwriting,
discounts and its counsel fees.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the "DGCL")
provides, in summary, that directors and officers of Delaware corporations are
entitled, under certain circumstances, to be indemnified against all expenses
and liabilities (including attorneys' fees) incurred by them as a result of
suits brought against them in their capacity as a director or officer, if they
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful; provided, that no indemnification may be made against
expenses in respect of any claim, issue or matter as to which they shall have
been adjudged to be liable to the corporation, unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, they are fairly and reasonably entitled to indemnity
for such expenses which the court shall deem proper. Any such indemnification
may be made by the corporation only as authorized in each specific case upon a
determination by the stockholders or disinterested directors that
indemnification is proper because the indemnitee has met the applicable standard
of conduct.
Article Seventh of Genentech's Certificate of Incorporation ("Article Seventh")
provides that a director of Genentech is not personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability: (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts of
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for paying a dividend or approving a stock repurchase in
violation of Section 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit.
Article Seventh also provides that directors, officers and other individuals
will be indemnified by Genentech to the full extent permitted by law and shall
not be exclusive of any other right which any person may otherwise have or
acquire. It provides that each person who was or is made a party to or is
involved in, any action, suit or proceeding by reason of the fact that he is or
was a director, officer, employee or agent of Genentech (or is or was serving at
the request of Genentech as a director, officer, employee or agent for another
entity) while serving in such capacity shall be indemnified and held harmless by
Genentech, to the full extent authorized by the DGCL, as in effect (or, to the
extent indemnification is broadened, as it may be amended), against all expense,
liability or loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts to be paid in settlement) reasonably incurred by
such person in connection therewith. It allows such indemnified persons to bring
suit against Genentech to recover unpaid amounts claimed thereunder, and if such
suit is successful, the
II-1
<PAGE> 113
expense of bringing such suit shall be reimbursed by Genentech. It further
provides that while it is a defense to such a suit that the person claiming
indemnification has not met the applicable standards of conduct making
indemnification permissible under Delaware law, the burden of proving the
defense shall be on Genentech and neither the failure of Genentech's Board of
Directors to have made a determination that indemnification is proper, nor an
actual determination by Genentech that the claimant has not met the applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
Genentech's Certificate of Incorporation and By-laws provide that Genentech may
maintain insurance, at its expense, to protect itself and any of its officers,
employees or agents against any expense, liability or loss, whether or not
Genentech would have the power to indemnify such person against such expense,
liability or loss under Delaware law. Genentech maintains such insurance for
such purposes.
ITEM 16. EXHIBITS
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1 -- Form of Underwriting Agreement*
3.1 -- Certificate of Incorporation*
3.2 -- By-Laws*
4.1 -- Form of Common Stock Certificate*
5 -- Opinion of Davis Polk & Wardwell*
10.1 -- Form of Affiliation Agreement between Genentech, Inc. and
Roche Holdings, Inc.*
10.2 -- Form of 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 -- Form of Tax Sharing Agreement between Genentech, Inc. and
Roche Holdings, Inc.*
15.1 -- Letter re: Unaudited Interim Financial Information
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
23.2 -- Consent of Davis Polk & Wardwell (included in Exhibit 5)*
24.1 -- Power of Attorney (included on signature page)
</TABLE>
- ---------------
* To be filed by Amendment.
(b) The financial statement schedule included in the company's Annual Report on
Form 10-K for the year ended December 31, 1998 has been incorporated by
reference.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referenced in Item 15 of this Registration
Statement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-2
<PAGE> 114
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 115
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on the 14th day of June, 1999.
GENENTECH, INC.
By: /s/ ARTHUR D. LEVINSON
---------------------------------------
Name: Arthur D. Levinson
Title: President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Arthur D. Levinson, Ph.D. and Stephen G. Juelsgaard,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and any and all
additional registration statements pursuant to Rule 462(b) of the Securities Act
of 1933, as amended, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agents full power and
authority to do and perform each and every act in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them or their
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ARTHUR D. LEVINSON Principal Executive Officer and Director June 14, 1999
- -----------------------------------------------------
Arthur D. Levinson
/s/ LOUIS J. LAVIGNE, JR. Principal Financial Officer June 14, 1999
- -----------------------------------------------------
Louis J. Lavigne, Jr.
/s/ JOHN M. WHITING Principal Accounting Officer June 14, 1999
- -----------------------------------------------------
John M. Whiting
/s/ HERBERT W. BOYER Director June 14, 1999
- -----------------------------------------------------
Herbert W. Boyer
/s/ FRANZ B. HUMER Director June 14, 1999
- -----------------------------------------------------
Franz B. Humer
/s/ JONATHAN K.C. KNOWLES Director June 14, 1999
- -----------------------------------------------------
Jonathan K.C. Knowles
Director June 14, 1999
- -----------------------------------------------------
Linda Fayne Levinson
Director June 14, 1999
- -----------------------------------------------------
J. Richard Munro
</TABLE>
II-4
<PAGE> 116
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
15.1 -- Letter re: Unaudited Interim Financial Information
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
24.1 -- Power of Attorney (included on signature page)
</TABLE>
II-5
<PAGE> 1
EXHIBIT 15.1
June 14, 1999
The Board of Directors and Stockholders
Genentech, Inc.
We are aware of the inclusion in the Registration Statement (Form S-3) of
Genentech, Inc. for the registration of shares of its common stock of our
report dated April 9, 1999 relating to the unaudited condensed consolidated
interim financial statements of Genentech, Inc. for the quarter ended March 31,
1999.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Very truly yours,
ERNST & YOUNG LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 20, 1999, in the Registration Statement (Form
S-3) for the registration of shares of its common stock.
San Jose, California
June 14, 1999
