<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1999
REGISTRATION NO. 333-80601
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-3
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
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)
------------------------
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 or interest
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. [ ]
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 July 16, 1999
20,000,000 Shares
[Genentech]
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. Our common stock has been
approved for listing on the New York Stock Exchange under the symbol "DNA",
subject to official notice of issuance. It is estimated that the initial public
offering price of our common stock will be between $85.00 per share and $95.00
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
redeemed all of our special common stock held by stockholders other than Roche
Holdings, Inc. at $82.50 per share in cash and retired all of the shares of
special common stock including those held by Roche Holdings, Inc. As a result of
the redemption of our special common stock, Roche Holdings, Inc. currently owns
100% of our common stock and, after the completion of this offering, Roche
Holdings, Inc. will own approximately 84.3% of our common stock.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
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 2,000,000 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................................ 9
Special Note Regarding Forward-Looking
Statements................................ 14
Dividend Policy............................. 15
Price Range of Special Common Stock......... 15
Unaudited Pro Forma Condensed Consolidated
Financial Statements...................... 16
Selected Consolidated Financial Data........ 27
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................. 28
Business.................................... 40
Management.................................. 56
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PAGE
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Relationship with Roche..................... 65
Selling Stockholder and Principal
Stockholders.............................. 70
Description of Capital Stock................ 71
Material U.S. Federal Tax Considerations for
Non-U.S. Holders of Common Stock.......... 74
Shares Eligible for Future Sale............. 76
Underwriting................................ 77
Legal Matters............................... 79
Experts..................................... 79
Where You Can Find More Information......... 79
Index to Consolidated Financial
Statements................................ F-1
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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 this 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; 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 certain 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-Hodgkin's 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 17 projects in our development pipeline, including four
products or indications in preparation for Phase III clinical trials, four
products or indications in Phase III clinical trials, one product 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, and one
product for which we have made such regulatory filings and are awaiting
regulatory clearance.
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 redeemed all of our special common stock held by
stockholders, other than Roche, at $82.50 per share in cash and retired all of
the shares of special common stock including those held by Roche. As a result,
Roche currently owns 100% of our outstanding common stock. After the completion
of this offering, Roche will own approximately 84.3% of our common stock.
In connection with this offering, we will enter into certain affiliation
arrangements with Roche, amend our licensing and marketing agreement with
Hoffmann-La Roche, and enter 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 arrangements will not limit Roche's ability
to buy or sell our common stock. If Roche and its affiliates sell their majority
ownership of shares of our common stock to a successor, Roche has agreed that it
will cause the successor to purchase all shares of our common stock not held by
Roche as follows:
- with consideration, if that consideration is composed entirely of either
cash or equity traded on a U.S. national securities exchange, in the same
form and amounts per share as received by Roche and its affiliates; and
- in all other cases, with consideration that has a value per share not
less than the weighted average value per share received by Roche and its
affiliates as determined by a nationally recognized investment bank.
If Roche owns more than 90% of our common stock for more than two months, Roche
has agreed that it would, as soon as reasonably practicable, effect a merger of
Genentech with Roche or an affiliate of Roche.
Roche has agreed, as a condition to any merger of Genentech with Roche or the
sale of our assets to Roche, that either:
- the merger or sale must be authorized by the favorable vote of a majority
of non-Roche stockholders, provided no person will be entitled to cast
more than 5% of the votes at the meeting; or
- in the event such a favorable vote is not obtained, the value of the
consideration to be received by non-Roche stockholders would be equal to
or greater than the average of the means of the ranges of fair values for
the common stock as determined by two nationally recognized investment
banks.
We have agreed not to approve, without the prior approval of the directors
designated by Roche:
- any acquisition, sale or other disposal of all or a portion of our
business representing 10% or more of our assets, net income or revenues;
- any issuance of capital stock except under certain circumstances; or
- any repurchase or redemption of our capital stock other than a redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
2
<PAGE> 6
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.
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 will amend that agreement, the major
provisions of which include:
- extending Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license our products upon
the occurrence of any of the following: (1) our decision to file an
Investigational New Drug exemption application, or IND, for a product,
(2) completion of a Phase II trial for a product or (3) if Hoffmann-La
Roche previously paid us a fee of $10 million to extend its option on a
product, completion of a Phase III trial for that product;
- we have agreed, in general, to manufacture for and supply to Hoffmann-La
Roche its clinical requirements of our products at cost, and its
commercial requirements at cost plus a margin of 20%; however,
Hoffmann-La Roche will have the right to manufacture our products under
certain circumstances;
- Hoffmann-La Roche has agreed to pay, for each product for which
Hoffmann-La Roche exercises its option upon either a decision to file an
IND with the U.S. Food and Drug Administration, or FDA, or completion of
the Phase II trials, a royalty of 12.5% on the first $100 million on its
aggregate sales of that product and thereafter a royalty of 15% on its
aggregate sales of that product in excess of $100 million until the later
in each country of the expiration of our last relevant patent or 25 years
from the first commercial introduction of that product; and
- Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of
the expiration of our relevant patent or 25 years from the first
commercial introduction of that product; however, $5 million of any
option extension fee paid by Hoffmann-La Roche will be credited against
royalties payable to us in the first calendar year of sales by
Hoffmann-La Roche in which aggregate sales of that product exceed $100
million.
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 will enter 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."
Roche's Right to Maintain its Percentage Ownership Interest in Our Stock
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. In order to preserve our status as a
member of Roche's consolidated federal income tax group, the affiliation
agreement will require us to, among other things, establish a stock repurchase
program designed to maintain Roche's percentage ownership interest in our common
stock. In addition, Roche will have a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest. For more
information you should read "Relationship with Roche--Roche's Right to Maintain
its Percentage Ownership Interest in Our Stock."
3
<PAGE> 7
THE OFFERING
COMMON STOCK OFFERED BY ROCHE........20,000,000 shares
OVER-ALLOTMENT OPTION FROM ROCHE.....2,000,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING.............................127,298,588 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.
NEW YORK STOCK EXCHANGE SYMBOL......."DNA"
Unless we specifically state otherwise, the information in this prospectus does
not take into account the sale of up to 2,000,000 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 approximately 10,500,000 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 ($154.4 million) and other intangibles ($228.5
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 ($38.6 million) and other
intangibles ($57.1 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................. $318.0 $322.3 $264.7 $1,133.7 $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..................... 18.1 22.4 20.6 71.5 88.7 69.1 64.2
Total costs and expenses....... $380.7 $285.0 $207.7 $1,473.0 $ 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........ 38.6 -- -- 154.4 -- -- --
Amortization of other
intangibles............... 57.1 -- -- 228.5 -- -- --
Interest..................... 1.4 1.4 1.0 4.6 4.6 3.6 5.1
Income (loss) before taxes..... $(62.7) $ 37.3 $ 57.0 $ (339.3) $ 252.6 $ 169.8 $147.9
Income tax provision
(benefit).................... (5.1) 22.9 16.0 (115.8) 70.7 40.8 29.6
Net income (loss).............. $(57.6) $ 14.4 $ 41.0 $ (223.5) $ 181.9 $ 129.0 $118.3
Effective tax rate............. 8% 61% 28% 34% 28% 24% 20%
Earnings (loss) per share
Basic........................ $(0.45) $ 0.11 $ 0.33 $ (1.78) $ 1.45 $ 1.05 $ 0.98
Diluted...................... (0.45) 0.11 0.32 (1.78) 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...... $ 54.4 $ 53.6 $ 68.9 $ 351.1 $ 349.9 $ 118.3 $139.7
Depreciation expense........... 20.2 20.2 16.5 72.7 72.7 58.9 57.6
Amortization expense........... 97.4 1.7 1.4 388.3 5.4 6.6 4.5
Capital expenditures........... 18.2 18.2 21.0 88.1 88.1 154.9 141.8
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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........................... $1,378.0 $1,662.5
Working capital............................................. 820.4 942.6
Goodwill and other intangible assets........................ 3,302.3 64.1
Total assets................................................ 6,044.6 2,926.1
Long-term debt.............................................. 150.0 150.0
Total liabilities........................................... 965.5 536.4
Total stockholders' equity.................................. 5,079.1 2,389.7
Total liabilities and stockholders' equity.................. 6,044.6 2,926.1
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<PAGE> 10
RECENT DEVELOPMENTS
On July 12, 1999, we announced our 1999 second quarter results.
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SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------- ---------------------------
1999 1998 1999 1998
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(UNAUDITED) (UNAUDITED)
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In millions, except per share data
STATEMENT OF OPERATIONS DATA
Total revenues.................................... $ 717.5 $532.7 $ 395.2 $268.0
Product sales................................... 503.4 341.0 269.3 176.3
Royalties....................................... 92.6 121.9 46.0 57.4
Contract and other.............................. 77.1 28.9 57.9 14.0
Interest........................................ 44.4 40.9 22.0 20.3
Total costs and expenses.......................... $1,697.9 $419.6 $ 1,412.9 $211.9
Cost of sales................................... 98.4 70.8 52.7 37.2
Research and development........................ 184.9 191.1 94.2 92.9
Marketing, general and administrative........... 214.6 155.5 117.4 80.6
Special charge--legal settlement................ 50.0 -- -- --
Special charge related to redemption............ 1,147.3 -- 1,147.3 --
Interest........................................ 2.7 2.2 1.3 1.2
Income (loss) before taxes........................ $ (980.4) $113.1 $(1,017.7) $ 56.1
Income tax provision (benefit).................... (71.6) 31.7 (94.5) 15.7
Net income (loss)................................. $ (908.8) $ 81.4 $ (923.2) $ 40.4
Earnings (loss) per share
Basic........................................... $ (7.09) $ 0.65 $ (7.19) $ 0.32
Diluted......................................... (7.09) 0.63 (7.19) 0.31
Weighted average shares outstanding
Basic........................................... 128.1 125.2 128.5 125.6
Diluted......................................... 128.1 129.3 128.5 129.8
</TABLE>
<TABLE>
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----------------------
AS OF JUNE 30,
----------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
In millions
BALANCE SHEET DATA
Cash and cash equivalents, short-term investments and
long-term marketable securities........................... $1,721.0 $1,388.3
Working capital............................................. 823.1 1,004.9
Goodwill and other intangible assets........................ 3,269.6 65.0
Total assets................................................ 6,369.4 2,606.7
Long-term debt.............................................. 150.0 150.0
Total liabilities........................................... 1,240.5 447.7
Total stockholders' equity.................................. 5,128.9 2,159.0
Total liabilities and stockholders' equity.................. 6,369.4 2,606.7
</TABLE>
For the three months ended June 30, 1999:
- Exclusive of charges related to the redemption of our special common
stock, net income for the second quarter of 1999 would have been $73.2
million, or 55 cents per share, an increase in earnings per share of 77%
over the second quarter of 1998. Year-to-date earnings per share in 1999,
excluding the redemption related charges in the second quarter and the
legal settlement charge of $50 million in the first quarter of 1999,
would have been 99 cents per share, a 57% increase as compared to the
same period in 1998.
- The accounting treatment under U.S. generally accepted accounting
principles requires us to establish a new accounting basis for our assets
and liabilities based on the cost of Roche's 1990 through 1997 purchases
of our shares and the redemption of our special common stock. Roche's
cost of acquiring Genentech is "pushed down" to us and reflected on our
financial statements beginning June 30, 1999. The effect of the push-down
accounting on our statement of operations is primarily a non-cash
adjustment to earnings. In addition to the push-down impact, the special
charge includes the cash-out of certain stock options and a non-cash
charge related to the continuance of certain stock options.
- Due to the redemption of our special common stock and related accounting
treatment, we recorded a second quarter net loss of $923.2 million, or a
net loss per share of $7.19, as compared to net income of $40.4 million,
or 31 cents per share, in the second quarter of 1998.
7
<PAGE> 11
- Revenues increased 47% to $395.2 million from $268.0 million in the same
quarter of 1998. This revenue growth was driven primarily by sales of
Herceptin and Rituxan. Contract revenues increased due to the recognition
of $20.3 million corresponding to an adjustment to unrealized gains on
marketable securities due to the accounting treatment described above.
Contract revenues also include an initial license fee and retroactive
royalties from a licensing agreement with Immunex Corporation for
ENBREL(R) and a milestone payment from Schwarz Pharma AG related to the
FDA filing for Nutropin Depot. The revenue increases were offset
partially by a decrease in royalties, primarily related to the expiration
of royalties from Eli Lilly and Company in August 1998.
- As a result of the redemption of our special common stock and related
accounting treatment as described above, we recorded in the second
quarter of 1999 a special charge of $1,147.3 million, that includes
$752.5 million as a non-cash charge for in-process research and
development, $284.5 million primarily for the cash-out of special common
stock options and $102.3 million as a non-cash charge for the
remeasurement of the value of continuing employee stock options.
Product Sales
Sales of marketed products increased 53% in the second quarter of 1999 to $269.4
million from $176.3 million in the second quarter of 1998.
Sales of Herceptin in the second quarter of 1999 were $46.2 million. We first
recorded sales for Herceptin of $30.5 million in the fourth quarter of 1998. An
increase of physician acceptance of Herceptin has contributed to a positive
sales trend and successful penetration into the breast cancer market.
Sales of Rituxan in the second quarter of 1999 increased 114% to $74.4 million
from $34.8 million in the second quarter of 1998. This sales increase is due
primarily to increased market penetration for the treatment of non-Hodgkin's
lymphoma.
Sales of Activase during the second quarter of 1999 increased to $58.1 million
from $54.1 million in the second quarter of 1998. This increase in Activase
sales is due largely to usage in peripheral indications previously served by
another company's thrombolytic currently in short supply in the marketplace.
This increase is offset in part by a decline in the overall size of the
thrombolytic therapy market due to mechanical reperfusion and continued
competition.
Sales of our three growth hormone products, Protropin, Nutropin and Nutropin AQ,
decreased in the second quarter of 1999 to $59.3 million compared to $62.3
million in the second quarter of 1998. This decrease primarily reflects
fluctuations in distributor ordering patterns.
Sales of Pulmozyme increased to $30.6 million in the second quarter of 1999
compared to $24.1 million in the second quarter of 1998. This increase is due
primarily to increased market penetration in the early and mild patient
populations for the management of cystic fibrosis, partially offset by a
decrease in sales to Hoffmann-La Roche.
Total Costs and Expenses
Costs and expenses increased during the second quarter of 1999 as compared to
the second quarter of 1998 due primarily to redemption related charges described
above. Primarily as a result of the increase in product sales, costs of sales
increased to $52.7 million in the second quarter of 1999 from $37.2 million in
the second quarter of 1998.
Research and development expenses of $94.2 million in the second quarter of 1999
were comparable to $92.9 million in the second quarter of 1998. For the quarter,
we invested approximately 24% of revenues into research and development,
compared to 35% in the second quarter of 1998. This is consistent with the goal
of our long-range plan to decrease research and development spending as a
percent of revenues as products progress through late-stage clinical trials and
revenues increase.
Marketing, general and administrative expenses increased to $117.4 million in
the second quarter of 1999 from $80.6 million in the second quarter of 1998.
This increase was driven primarily by the growth of Rituxan and the resultant
profit sharing expense and the introduction of Herceptin, as well as the
write-down of certain biotechnology investments.
Income taxes reflect a benefit of $94.5 million in the second quarter of 1999
primarily due to the income tax benefit of redemption related charges. This was
partially offset by the effect of an increase in the income tax rate on
year-to-date earnings.
8
<PAGE> 12
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;
9
<PAGE> 13
- 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 84.3% 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. Our bylaws will
provide, among other things, that the composition of our board of directors will
consist of two Roche directors, three independent directors nominated by a
nominating committee and one Genentech employee who in the future will be
nominated by the nominating committee. As long as Roche owns in excess of 50% of
our common stock, Roche directors will comprise two of the three members of the
nominating committee. However, at any time until Roche owns less than 5% of our
stock, Roche will have the right to obtain proportional representation on our
board. Roche intends to continue to allow our current management to conduct our
business and operations as we have done in the past. However, we cannot assure
you that Roche will not institute a new business plan in the future. The
interests of Roche may conflict with the interests of other holders of common
stock. See "Relationship with Roche."
The affiliation agreement between us and Roche requires the approval of the
directors designated by Roche to make any acquisition or any sale or disposal of
all or a portion of our business representing 10% or more of our assets, net
income or revenues. Moreover, in order to preserve our status as a member of
Roche's consolidated federal income tax group, the affiliation agreement also
contains provisions which are designed to enable Roche to maintain its
percentage ownership interest in our common stock. These provisions may have the
effect of limiting our ability to make acquisitions. For more information, see
"Relationship with Roche -- Roche's Right to Maintain its Percentage Ownership
Interest in Our Stock."
Our certificate of incorporation will include provisions relating to competition
by Roche with us, allocations of corporate opportunities, transactions with
interested parties and intercompany agreements and provisions limiting the
liability of certain people. Our certificate of incorporation will provide that
any person purchasing or acquiring an interest in shares of our capital stock
shall be deemed to have consented to the provisions in the certificate of
incorporation relating to competition with Roche, conflicts of interest,
corporate opportunities and intercompany agreements, and such consent may
restrict such person's ability to challenge transactions carried out in
compliance with such provisions. Persons who are directors and/or officers of
ours and who are also directors and/or officers of Roche may choose to take
action in reliance on such provisions rather than act in a manner that might be
favorable to us but adverse to Roche. Two of our directors currently serve as
directors, officers and employees of Roche Holding Ltd and its affiliates. For
more information, see "Description of Capital Stock -- Certain Provisions of
Genentech's Certificate of Incorporation and Bylaws."
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, two of our existing employee stock
option plans terminated and a number of employee options, including many of
those held by senior management, were canceled. We intend to issue new employee
stock options to attract and retain employees. However, certain provisions of
our affiliation agreement with Roche are designed to enable Roche to maintain
its percentage ownership interest in our common stock, which may limit our
flexibility as to the number of shares we are able to grant under our stock
option plans. We cannot assure you that we will be able to attract or retain
such personnel or maintain such relationships. See "Management -- Treatment of
Options in Connection with the Redemption of the Special Common Stock and the
Issuance of Options Prior to this Offering."
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
10
<PAGE> 14
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, recently filed a Biologics License Application, or BLA, for a product
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;
- 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
As a result of the redemption of our special common stock, Roche currently owns
all of our outstanding stock. Because we are 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 requires us to record goodwill
and other intangible assets of approximately $1,706.0 million and $1,499.1
million, respectively, during the second quarter of 1999. The amortization of
this goodwill and other intangible assets will have a significant negative
impact on our financial results in future years. In addition, we will
continuously 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;
11
<PAGE> 15
- the timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees;
- fluctuations in foreign currency exchange rates;
- the initiation of new contractual arrangements with other companies;
- whether and when contract benchmarks are achieved;
- the failure of or refusal of a licensee to pay royalties; and
- the expiration or invalidation of patents or other licensed intellectual
property.
PROTECTING OUR PROPRIETARY RIGHTS IS DIFFICULT AND COSTLY
The patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. Accordingly, the
breadth of claims allowed in these companies' patents cannot be predicted.
Patent disputes are frequent and can preclude commercialization of products. We
have in the past been, are currently, and may in the future be involved in
material patent litigation. Patent litigation is costly in its own right and
could subject us to significant liabilities to third-parties and, if decided
adversely, we may need to obtain third-party licenses at a material cost or
cease using the technology or product in dispute. The presence of patents or
other proprietary rights belonging to other parties may lead to the termination
of the research and development of a particular product. We believe that we have
strong patent protection or the potential for strong patent protection for a
number of our products that generate sales and royalty revenue or that we are
developing. However, the courts will determine the ultimate strength of patent
protection of our products and those on which we earn royalties. You should read
"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 a BLA, are substantial and can require a
12
<PAGE> 16
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.
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 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."
13
<PAGE> 17
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."
14
<PAGE> 18
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.
PRICE RANGE OF SPECIAL COMMON STOCK
From October 26, 1995 until June 16, 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
redeemed all of our special common stock held by stockholders, other than Roche,
at $82.50 per share in cash and retired 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 16).......................... 90 81 15/16
</TABLE>
Our common stock has been approved for listing on the New York Stock Exchange
under the symbol "DNA", subject to official notice of issuance.
15
<PAGE> 19
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 (as defined below) 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"), resulting in
Roche owning 100% of our common stock. Roche will account for the Redemption as
a purchase of a business and we are required to push-down the effect of the
Redemption and Roche's 1990 through 1997 purchases of our common 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 and 1991 through 1997 Roche
purchased 60% and 5%, respectively, of our outstanding stock. The push-down
effect of Roche's aggregate purchase price and the Redemption 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 Redemption. 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 Redemption. 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."
16
<PAGE> 20
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 (284.5)(a) 396.9
Accounts receivable....................................... 168.8 -- 168.8
Inventories............................................... 146.7 191.8(b) 338.5
Prepaid expenses and other current assets................. 51.9 (43.5)(q) 8.4
-------- --------- ---------
Total current assets.............................. 1,262.4 (136.2) 1,126.2
Long-term marketable securities............................. 767.5 -- 767.5
Property, plant and equipment, net.......................... 698.8 16.5(c) 715.3
Goodwill.................................................... -- 495.8(d)
1,225.2(e) 1,721.0
Other intangible assets..................................... -- 146.7(f)
1,370.5(g)
64.1(q) 1,581.3
Other assets................................................ 197.4 (64.1) (q) 133.3
-------- --------- ---------
Total assets...................................... $2,926.1 $ 3,118.5 $ 6,044.6
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 31.6 $ -- $ 31.6
(56.9)(a)
23.0(r)
Other accrued liabilities................................. 288.2 19.9(e,i) 274.2
-------- --------- ---------
Total current liabilities......................... 319.8 (14.0) 305.8
Long-term debt.............................................. 150.0 -- 150.0
Deferred income taxes....................................... -- 464.3(e)
(56.9)(a)
(23.0)(r)
58.7(i)
41.5(q) 484.6
Other long-term liabilities................................. 66.6 (41.5)(q) 25.1
-------- --------- ---------
Total liabilities................................. 536.4 429.1 965.5
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, 127,298,588
shares pro forma)...................................... 1.5 1.0(j) 2.5
Additional paid-in capital................................ 1,630.3 2,276.9(k)
3,027.3(k)
62.8(i) 6,997.3
Retained earnings (accumulated deficit)................... 707.5 (1,693.0)(h,l)
(967.3)(h,l) (1,952.8)
Accumulated other comprehensive income.................... 49.4 (17.3)(l) 32.1
-------- --------- ---------
Total stockholders' equity........................ 2,389.7 2,689.4 5,079.1
-------- --------- ---------
Total liabilities and stockholders' equity........ $2,926.1 $ 3,118.5 $ 6,044.6
======== ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
17
<PAGE> 21
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 (4.3)(m) 18.1
------ ------- ------
Total revenues.................................... 322.3 (4.3) 318.0
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)
20.4(e) 38.6
Amortization of other intangibles......................... -- 18.4(f)
38.7(g) 57.1
Interest.................................................. 1.4 -- 1.4
------ ------- ------
Total costs and expenses.......................... 285.0 95.7 380.7
------ ------- ------
Income (loss) before taxes.................................. 37.3 (100.0) (62.7)
Income tax provision (benefit).............................. 22.9 (24.6)(o)
(3.4)(p) (5.1)
------ ------- ------
Net income (loss)........................................... $ 14.4 $ (72.0) $(57.6)
====== ======= ======
Earnings (loss) per share
Basic..................................................... $ 0.11 $(0.45)
Diluted................................................... 0.11 (0.45)
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
18
<PAGE> 22
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 (17.2)(m) 71.5
-------- ------- --------
Total revenues.................................... 1,150.9 (17.2) 1,133.7
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)
81.7(e) 154.4
Amortization of other intangibles......................... -- 73.8(f)
154.7(g) 228.5
Interest.................................................. 4.6 -- 4.6
-------- ------- --------
Total costs and expenses.......................... 898.3 574.7 1,473.0
-------- ------- --------
Income (loss) before taxes.................................. 252.6 (591.9) (339.3)
Income tax provision (benefit).............................. 70.7 (175.0) (o)
(11.5) (p) (115.8)
-------- ------- --------
Net income (loss)........................................... $ 181.9 $(405.4) $ (223.5)
======== ======= ========
Earnings (loss) per share
Basic..................................................... $ 1.45 $ (1.78)
Diluted................................................... 1.40 (1.78)
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
19
<PAGE> 23
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 and 1991 through 1997 Roche
purchased 60% and 5%, respectively, of the outstanding stock of Genentech.
Further, in June 1999, we redeemed all of our special common stock held by
stockholders other than Roche resulting in Roche owning 100% of our common
stock. The push-down effect of Roche's aggregate purchase price and the
Redemption price in the 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 Redemption. Management of
Genentech determined the values of tangible and intangible assets, including
in-process research and development, used in allocating the purchase prices. The
aggregate purchase prices for acquisition of all of Genentech's outstanding
shares, including Roche's estimated transaction costs of $10.0 million, was
$6,604.9 million, consisting of approximately $2,843.5 million for the 1990 and
1991 through 1997 purchases and approximately $3,761.4 million for the
Redemption. Approximately $284.5 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 June 30, 1999, the Redemption date. In
addition, we expect to record in the second and third quarters of 1999 an
aggregate of approximately $102.3 million and $30.4 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 $90 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 $3,761.4 $6,604.9
Less portion of net book value purchased.................. 566.6 836.4 1,403.0
-------- -------- --------
Excess of purchase price over net book value................ $2,276.9 $2,925.0 $5,201.9
======== ======== ========
</TABLE>
20
<PAGE> 24
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 1,225.2 2,316.4
Deferred tax liability...................................... (456.8) (631.5) (1,088.3)
-------- -------- ---------
Total............................................. $2,276.9 $2,925.0 $ 5,201.9
======== ======== =========
</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 $113.8 million, will be charged to earnings on June 30,
1999. The income tax benefit reduced the current tax payable in other
accrued liabilities by $56.9 million and reduced long-term deferred income
taxes by $56.9 million. (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 $595.4 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 $1,225.2 million of goodwill recorded as a result of the
Redemption. 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 the Redemption is amortized over 15 years.
21
<PAGE> 25
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 $893.3 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 $ 351.1 10
Core technology........................................ 240.5 196.8 10
Developed license technology........................... 292.5 286.1 6
Trained and assembled workforce........................ 32.5 31.6 7
Tradenames............................................. 39.0 21.3 15
Key distributor relationships.......................... 6.5 6.4 5
-------- --------
$1,040.0 $ 893.3
======== ========
</TABLE>
(g) Represents $1,370.5 million of other intangible assets which were recorded
as a result of the Redemption. 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>
22
<PAGE> 26
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 Redemption, respectively. At the date of each purchase, Genentech
concluded that technological feasibility of the acquired in-process
technology was not established and that the in-process technology had no
future alternative uses. 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 discount rates that incorporate both the weighted average cost of
capital (relative to the biotech industry and Genentech) as well as the
product-specific risk associated with the purchased in-process research and
development products. The product specific risk factors considered include
where each product is in each phase of development, type of molecule under
development, likelihood of regulatory approval, manufacturing process
capability, scientific rationale, pre-clinical safety and efficacy data,
target product profile and development plan. The discount rates employed
ranged from 16% to 19% for the 1999 valuation and 20% to 28% for the 1990
purchase valuation, all of which represent a significant risk premium to
Genentech's weighted average cost of capital.
The forecast data employed in the analyses was based upon internal product
level forecast information maintained by Genentech management in the
ordinary course of managing its business. The inputs used by Genentech in
analyzing in-process research and development were based upon assumptions
which Genentech believes to be reasonable but which are inherently
uncertain and unpredictable. These assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. 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.
23
<PAGE> 27
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Management's Estimate of Percentage Complete: Genentech's senior
product development management representatives provided an estimate of the
percentage complete, on a technological basis, of each project.
Nutropin Depot sustained-release growth hormone -- A sustained release
version of human growth hormone based on Alkermes' ProLease sustained
release drug delivery system, which is designed to deliver human growth
hormone by monthly or semi-monthly injections. This product is being
developed in collaboration with Alkermes. On June 25, 1999, Genentech made
U.S. regulatory filings seeking marketing approval for Nutropin Depot, and
we are currently awaiting regulatory clearance. We estimate the initial
indication on this project will be substantially complete by the year 2000,
and that this project was approximately 85% complete at the Redemption
date.
TNK-tPA -- A second generation t-PA that is a selectively mutated version
of a wild-type t-PA. This t-PA version may be faster acting and easier to
administer, and may restore blood flow faster. We have completed enrollment
in Phase III clinical trials in patients with acute myocardial infarction
and are currently preparing FDA regulatory filings. This product is being
developed in collaboration with Boehringer Ingelheim International GmbH. We
estimate that this project will be substantially complete by the year 2000,
and that it was approximately 90% complete at the Redemption date.
Anti-IgE antibody -- An anti-IgE monoclonal antibody designed to interfere
early in the process that leads to symptoms of allergic asthma and seasonal
allergic rhinitis. This product is being developed in collaboration with
Tanox, Inc. and Novartis Pharmaceuticals Corporation. Phase III trials are
ongoing in patients with allergic asthma. Phase III trials have been
completed in patients with seasonal allergic rhinitis and the results have
been analyzed. We estimate that this project was approximately 75% complete
at the Redemption date.
Pulmozyme inhalation solution -- A recombinant human protein that is an
approved treatment for the management of cystic fibrosis. We are conducting
a trial to determine the effect of Pulmozyme on pulmonary function in
patients with early-stage cystic fibrosis. We estimate this project to be
approximately 75% complete at the Redemption date. We are also preparing to
begin clinical testing of Pulmozyme delivery via Aradigm Corporation's
AERx(TM) delivery system. We estimate that this project was approximately
45% complete at the Redemption date. These projects will be substantially
complete by the year 2003.
Rituxan antibody -- A monoclonal antibody approved for the treatment of
relapsed or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkin's lymphoma, a cancer of the immune system. Genentech is in
Phase III clinical trials for the treatment of intermediate- and high-grade
non-Hodgkin's lymphoma. This product is being developed in collaboration
with IDEC Pharmaceuticals, Inc., or IDEC. We estimate that this project
will be substantially complete by the year 2004 and that it was
approximately 60% complete at the Redemption date.
Xubix(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, including acute
coronary syndrome. 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 was approximately 65% complete at the
Redemption date.
Activase t-PA -- A protein that is an approved treatment for heart attack,
acute ischemic stroke within three hours of symptom onset, and acute
massive pulmonary embolism. We are preparing for Phase III trials of this
product for intravenous catheter clearance. We estimate that this project
will be substantially complete by the end of 1999 and that it was
approximately 90% complete at the Redemption date.
Anti-CD11a antibody -- An antibody (also known as hu1124) designed to block
certain immune cells as a potential treatment of psoriasis. We are
currently preparing for Phase III trials of this product, which we are
developing in
24
<PAGE> 28
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
collaboration with Xoma Corporation. We estimate that this project will be
substantially complete by the year 2003 and that it was approximately 50%
complete at the Redemption date.
Herceptin antibody -- An antibody that is an approved treatment for
metastatic breast cancer. In collaboration with Hoffmann-La Roche and U.S.
national cooperative groups, we are preparing for Phase III trials for
adjuvant treatment of early-stage breast cancer in patients who overexpress
the HER2 protein. We estimate that this project will be substantially
complete by the year 2007, and that it was approximately 45% complete at
the Redemption date.
Thrombopoietin (TPO) -- A protein that is being studied for treatment of
thrombocytopenia, a reduction in clot-inducing platelets, in cancer
patients treated with chemotherapy. This molecule has been exclusively
licensed to Pharmacia & Upjohn. We estimate that this project will be
substantially complete by the year 2002, and that it was approximately 55%
complete at the Redemption date.
Anti-CD18 antibody -- An antibody designed to block certain immune cells
that may impact blood flow. We are conducting Phase II clinical trials
aimed at increasing blood flow in patients with acute myocardial
infarction. We estimate that this project will be substantially complete by
the year 2004, and that it was approximately 55% complete at the Redemption
date.
Anti-VEGF antibody -- An antibody developed to inhibit angiogenesis (the
formation of new blood vessels) as a potential treatment for several types
of solid-tumor cancers. In pre-clinical studies the anti-VEGF antibody
resulted in decreased vascularization and a decline in growth and
metastasis of a variety of solid tumors. Phase II studies are ongoing in
prostate cancer, breast cancer, renal cell carcinoma, lung cancer and
colorectal cancer. We estimate these projects will be substantially
complete by the year 2003, and that these different projects were 35% to
40% complete at the Redemption date.
Herceptin antibody -- An antibody that is an approved treatment for
metastatic breast cancer. Herceptin will also be evaluated for broader
application in other tumor types in which the HER2 protein is
overexpressed. We are 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.
AMD Fab -- A customized fragment of an anti-VEGF antibody for the potential
treatment of age-related macular degeneration (AMD). In this condition,
excessive blood vessel growth in the retina of the eye can lead to
blindness. We are currently preparing for Phase I clinical trials. We
estimate that this project will be substantially complete by the year 2004,
and that it was approximately 20% complete at the Redemption date.
LDP-02 -- A monoclonal antibody for the treatment of inflammatory bowel
disease. This product is licensed from and being developed in collaboration
with LeukoSite, Inc. This compound is currently in Phase Ib/IIa clinical
trials in Canada and the United Kingdom. We estimate that this project will
be substantially complete by the year 2005, and that it was approximately
30% complete at the Redemption date.
We also have identified five additional product programs that are at
different stages of in-process research and development. We expect these
projects to be substantially complete in years 1999 through 2004. The
percent completion for these additional programs range from an estimated
35% to 90%. These projects did not receive material allocations of the
purchase price.
In addition, our in-process research and development includes a process
technology program. The process technology program includes the research
and development of ideas and techniques that should improve the bulk
production of antibodies, including cell culture productivity, and
streamlined and improved recovery processes, and improvements in various
areas of pharmaceutical manufacturing. We estimate the process technology
program to be approximately 50% complete at the Redemption date.
25
<PAGE> 29
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 substantially the
same number of total shares outstanding as prior to the Redemption.
(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 $2,925.0 million in 1999 and
$102.3 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................. (1,192.5) --
Charge associated with the cash out of employee stock
options, net of taxes................................. -- (170.7)
Compensation related to the remeasurement of continuing
stock options, net of taxes........................... -- (61.4)
Adjustment to unrealized gains on marketable
securities, net of taxes.............................. -- 17.3
--------- ---------
Total adjustment to retained earnings.................. $(1,693.0) $ (967.3)
========= =========
</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 $284.5 million of cash to be paid for the early cash
settlement of employee stock options and (2) estimated $3.0 million in
Genentech transaction costs related to this offering.
(n) Represents the amortization, which occurs over a one-year period, of the
fair value adjustment to inventory for the Redemption.
(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.
(r) Represents $23.0 million reclassification of long-term deferred income
taxes to current tax payable in other accrued liabilities.
26
<PAGE> 30
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 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>
27
<PAGE> 31
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 (rituximab), 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 redeemed 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 that purpose. As a result, Roche currently owns
100% of our common stock. Consequently, push-down accounting is required under
U.S. generally accepted accounting principles to reflect in our financial
statements the amounts paid for our stock in excess of our net book value.
Push-down accounting requires us to record goodwill and other intangible assets
of approximately $1,706.0 million and $1,499.1 million, respectively, onto our
balance sheet in the second quarter of 1999. The amortization of this goodwill
and other intangible assets will have a significant negative impact on our
financial results in future years. In addition, we will continuously evaluate
whether events and circumstances have occurred that indicate any portion of the
remaining balance of these intangible assets may not be recoverable. When
factors indicate that assets should be evaluated for possible impairment, we may
be required to reduce the carrying value of our intangible assets, which could
have a material adverse effect on our financial condition and results of
operations during the periods in which such a reduction is recognized. Also as a
result of push-down accounting, we expect to record a $752.5 million charge to
earnings in the quarter ended 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 our special common stock, the following
changes with respect to our outstanding stock options have occurred:
- Options for the purchase of approximately 6.8 million shares of special
common stock have been canceled in accordance with the terms of the
applicable stock option plans, and the holders are receiving cash
payments in the amount of $82.50 per share, less the exercise price;
- Options for the purchase of approximately 4.0 million shares of special
common stock are being converted into options to purchase a like number
of shares of common stock at the same exercise price; and
- Options for the purchase of approximately 4.9 million shares of special
common stock have been canceled, in accordance with the terms of our 1996
Stock Option/Stock Incentive Plan (the "1996 Plan"). With certain
exceptions, we expect to grant new options for the purchase of 1.333
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. The number of shares that will be the subject of these new
options, which are expected to be issued under our 1999 Stock Plan (the
"1999 Plan"), will be approximately 5.0 million. Alternative arrangements
were provided for certain holders of some of the unvested options under
the 1996 Plan.
We expect that the majority of the options to be granted prior to the effective
date of this offering will be made pursuant to our 1999 Plan, which our board of
directors and Roche, our sole shareholder, intend to approve prior to the
effective date of this offering. Under the 1999 Plan, we intend to grant new
options to purchase approximately 6.5 million shares (including the 5.0 million
shares referred to above) of common stock to approximately 2,400 employees at an
exercise price equal to the
28
<PAGE> 32
public offering price in this offering, with the grant of such options to be
made effective on the day prior to the effective date of this offering.
In connection with these stock option transactions, we expect to record:
- In the quarter ended June 30, 1999, (1) cash compensation expense of
approximately $284.5 million associated with the cash-out of such stock
options and (2) non-cash compensation expense of approximately $102.3
million associated with the remeasurement, for accounting purposes, of
the converted options, which non-cash amount represents the difference
between each applicable option exercise price and the redemption price of
the special common stock;
- In the quarter ending September 30, 1999, non-cash compensation expense
of approximately $30.4 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 $90, the midpoint of the range of the public offering
price set forth on the cover page of this prospectus; and
- Over a two-year period, an aggregate of $27.4 million available to be
earned by a limited number of employees who elected the alternative
arrangements described above.
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,
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.
29
<PAGE> 33
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.
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.
30
<PAGE> 34
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.
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.
31
<PAGE> 35
<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
32
<PAGE> 36
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, or Novo, 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., or Sumitomo, 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 settled a lawsuit brought by us against Novo 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
33
<PAGE> 37
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
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<PAGE> 38
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.
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<PAGE> 39
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
As a result of the redemption of our special common stock, we are, 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.
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<PAGE> 40
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 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 end of the third quarter of 1999. Contingency planning for
business critical processes, which will include provisions such as identifying
alternate sources for materials and services and if necessary reverting to
non-computerized systems for processing information, was initiated in March
1999, is approximately 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 our computer systems and
equipment. However, if such modifications and conversions are not made, or are
not completed in a timely fashion, Year 2000-related problems could have a
material impact on our operations, the precise degree of which cannot be known
at this time.
In addition to risks associated with our own computer systems and equipment, we
have relationships with, and are to varying degrees dependent upon, a large
number of third parties that provide us with information, goods and services.
These include financial institutions, suppliers, vendors, research and business
partners, governmental entities and customers. If significant numbers of these
third parties experience failures in their computer systems or equipment due to
Year 2000 noncompliance, it could affect our ability to process transactions,
manufacture products, or engage in similar normal business activities. While
some of these risks are outside our control, we have instituted programs,
including internal records review and use of external questionnaires, to
identify key third parties, assess their level of Year 2000 compliance, update
contracts and address any noncompliance issues.
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<PAGE> 41
The total cost of the Year 2000 systems assessments and conversions is funded
through operating cash flows and we are expensing these costs as they are
incurred. We have created a mechanism to trace costs directly related to the
Year 2000 issue and have budgeted funds to address the issues of assessment and
conversion. The financial impact of making the required systems changes cannot
be known precisely at this time, but it is currently expected to be less than
$10.0 million. The actual financial impact could, however, exceed this estimate.
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
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<PAGE> 42
U.S. dollars. In addition, as part of its overall investment strategy, a portion
of our portfolio is primarily in non-dollar denominated investments. As a
result, we are exposed to changes in the exchange rates of the countries in
which these non-dollar denominated investments are made.
To mitigate this risk, we hedge certain of our anticipated revenues by
purchasing option contracts with expiration dates and amounts of currency that
are based on 25% to 90% of probable future revenues so that the potential
adverse impact of movements in currency exchange rates on the non-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 our
strategic alliance efforts, we hold dividend bearing convertible preferred stock
and have made interest bearing loans that are convertible into the equity
securities of the debtor.
Based on our overall exposure to fluctuations from market value changes in
marketable equity prices at 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> 43
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 of
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> 44
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. We have
completed enrollment in Phase III clinical trials for TNK in patients with acute
myocardial infarction and are currently preparing FDA regulatory filings.
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.
We are currently preparing to conduct Phase III clinical trials to test the use
of Activase for intravenous catheter clearance.
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 its 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
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<PAGE> 45
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 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 (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. With our
partner Alkermes Controlled Therapeutics, Inc., or Alkermes, we will manufacture
these products for sale by Schwarz Pharma. On June 25, 1999, Genentech made U.S.
regulatory filings seeking marketing approval for Nutropin Depot, and we are
currently awaiting regulatory clearance. As a result of our filing, we are due a
payment under the terms of our agreement with Schwarz Pharma. The agreement also
entitles us to receive additional benchmark payments upon Schwarz Pharma's
achievement of certain product development milestones.
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 that 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.
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
PRODUCT TRADEMARK COMPANY
------- --------- -------
<S> <C> <C>
Hepatitis B vaccine Engerix-B SmithKline Beecham Biologicals S.A.
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Company
</TABLE>
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>
Awaiting Regulatory Approval
Nutropin Depot sustained- A sustained release version of human growth hormone based on
release growth hormone Alkermes' ProLease sustained release drug delivery system,
which is designed to deliver human growth hormone by monthly
or semi-monthly injections. This product is being developed
in collaboration with Alkermes. On June 25, 1999, Genentech
made U.S. regulatory filings seeking marketing approval for
Nutropin Depot, and we are currently awaiting regulatory
clearance.
Preparing Regulatory Filings
TNK-tPA A second generation t-PA that is a selectively mutated
version of a wild-type t-PA. This t-PA version may be faster
acting and easier to administer, and may restore blood flow
faster. We have completed enrollment in Phase III clinical
trials in patients with acute myocardial infarction and are
currently preparing FDA regulatory filings. This product is
being developed in collaboration with Boehringer.
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 approved for the treatment of relapsed
or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkin's lymphoma, a cancer of the immune system.
Genentech is in Phase III clinical trials for the treatment
of intermediate- and high-grade non-Hodgkin's lymphoma. This
product is being developed in collaboration with IDEC.
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, including acute coronary
syndrome. Hoffmann-La Roche is conducting global development
of this molecule, and we retain certain opt-in rights with
respect to the United States.
</TABLE>
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<PAGE> 47
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Preparing for Phase III trials
Activase t-PA A protein that is an approved treatment for heart attack,
acute ischemic stroke within three hours of symptom onset,
and acute massive pulmonary embolism. We are preparing for
Phase III trials of this product for intravenous catheter
clearance.
Anti-CD11a (hu1124) 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
developing 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 for adjuvant treatment of early-stage breast
cancer in patients who overexpress the HER2 protein.
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.
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 solid-tumor cancers. In pre-clinical studies the
anti-VEGF antibody resulted in decreased vascularization and
a decline in growth and metastasis of a variety of solid
tumors. Phase II studies are ongoing in prostate cancer,
breast cancer, renal cell carcinoma, lung cancer and
colorectal cancer.
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.
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 of 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
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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.
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 was terminated in June 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.
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<PAGE> 49
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.
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 of 20% on aggregate net product
sales outside the United States up to $500 million in each calendar year and
22.5% on such sales in excess of $500 million in each calendar year.
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 will
amend 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
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<PAGE> 50
- 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").
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.
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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
Hoffmann-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
Hoffmann-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.
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;
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- 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.
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 will
provide Hoffmann-La Roche with all information and any support, at Hoffmann-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;
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- 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
- 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
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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.
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 seek 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 that 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 all are registered in the U.S. Patent and Trademark
Office and in other countries, other than Nutropin Depot, for which an
application is pending with the U.S. Patent and Trademark Office.
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 that should help us meet competition
include ancillary services provided to support
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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.
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-Hodgkin's lymphoma. We are aware of other potentially competitive
biologic therapies in development. Coulter recently filed a BLA with respect to
one such product for a similar indication for which Rituxan is approved.
Activase
We continue to face competition from Retavase(R), 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. Roche has requested
that we proceed with dismissing such litigations as required under the consent
decree, and we are in the process of discussing and resolving with Roche and
Centocor how to implement those dismissals.
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, Nutropin AQ and Nutropin Depot
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 in
the United States, although BioTechnology General has been preliminarily
enjoined from selling its product in the United States. 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
&
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Upjohn began selling their growth hormone products in the United States. On July
12, 1999, Novo announced the filing of an NDA for Norditropin(R) SimpleXx(TM), a
liquid form of its recombinant somatropin product, seeking approval for the
long-term treatment of children who have growth hormone failure due to
inadequate secretion of endogenous growth hormone. In addition, three of our
competitors have received approval to market their existing human growth hormone
products in the United States for additional indications.
In June 1999, we made U.S. regulatory filings seeking marketing approval for
Nutropin Depot, and we are currently awaiting regulatory approval. We are not
aware of any competing sustained release formulations of human growth hormone in
clinical development.
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 that includes the safety and alternative
administration of Pulmozyme in children under the age of five with cystic
fibrosis. In accordance with our then existing licensing agreement with Roche,
in the 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 an NDA, or
for a biological pharmaceutical product in the form of BLA, for approval to
commence commercial sales. In responding to an NDA or a 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, manufacturers are
subject to periodic inspections by the FDA.
The requirements that 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.
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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 that 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. 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 June 30, 1999, we had 3,551 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 facility is expected to be operational in the fourth 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.
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LEGAL PROCEEDINGS
We are a party to various legal proceedings, including patent infringement cases
involving human growth hormone products and Activase and other matters.
In July 1997, an action was filed in the U.S. District Court for the Northern
District of California alleging that our manufacture, use and sale of Nutropin
human growth hormone products infringes a patent known as the "Goodman Patent",
owned by the Regents of the University of California, or UC. This action is
substantially the same as a previous action filed in 1990 against us by UC
alleging that our manufacture, use and sale of Protropin recombinant human
growth hormone infringes the Goodman Patent. The 1997 case had been stayed until
recently, as described below.
In May 1999, the 1990 case was submitted to the jury and, on June 2, 1999, the
jury announced its findings. While the jury found that the Goodman Patent was
valid, the jurors could not agree among themselves whether our manufacture, use
or sale of Protropin infringed the Goodman Patent, although the jury publicly
reported that it voted 8-1 in favor of UC. Because the jury could not reach a
unanimous decision, no finding of infringement was made and there is no current
legal basis for us to be held liable to UC for any claim of damages. On June 22,
1999, the judge held a hearing known as a status conference to discuss further
proceedings relating to the 1990 and 1997 cases. At that time, Genentech renewed
its request that the judge hold a non-jury trial and decide whether UC defrauded
the U.S. Patent and Trademark Office when obtaining the Goodman Patent. The
judge has previously denied a request by UC that this defense be thrown out of
the case for lack of merit. A favorable ruling by the judge in any such trial
would render the Goodman Patent unenforceable. On July 1, 1999, the judge issued
a written decision setting the schedule for further proceedings. The judge
consolidated the 1990 and 1997 cases for a jury trial to begin on January 3,
2000. The issues of infringement and willfulness will be tried to the jury
first, and only if the jury finds liability would the issue of damages be tried.
Pursuant to the judge's decision, that jury trial is to be followed immediately
by a court trial of Genentech's fraud (inequitable conduct) claim against UC. In
addition, UC has made a motion for entry of a judgment as a matter of law that
Genentech's manufacture, use or sale of Protropin infringes the Goodman Patent
notwithstanding the lack of unanimous jury verdict on that issue. The judge
scheduled a hearing for July 23, 1999 to discuss that motion. The judge has
previously denied two similar motions made by UC while the trial was in
progress.
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.......................... 52 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
Diane L. Parks........................... 46 Vice President--Marketing
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
Franz B. Humer, Ph.D. ................... 52 Director of Genentech
Jonathan K.C. Knowles, Ph.D. ............ 51 Director of Genentech
Herbert W. Boyer, Ph.D. ................. 62 Director Nominee
</TABLE>
All officers are elected annually by the Board of Directors.
Dr. Levinson, Mr. Young, Mr. Lavigne, Dr. Desmond-Hellmann, Dr. Henner, Ms.
Heyboer and Mr. Juelsgaard are members of our management executive committee.
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
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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 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.
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<PAGE> 61
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.
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.
DIANE L. PARKS joined Genentech as Vice President, Marketing in June 1999. Prior
to joining Genentech, she held various positions with Marion Laboratories
(formerly, Marion Merrell Dow and Hoeschst Marion Roussel) from 1982, most
recently including Vice President, Marketing from March 1998 to June 1999, Group
Product Director, Respiratory and Metabolism from November 1994 to March 1998
and Director, U.S. Commercial Development from July 1993 to November 1994.
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.
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<PAGE> 62
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 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, had 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.
Except as set forth below, in connection with the redemption of our special
common stock, any vested options held by any director that were outstanding on
June 30, 1999 were automatically cashed out and any unvested options or any
unvested portion of options held by any director were canceled. In addition, all
vested and unvested options held by the Roche directors were canceled.
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<PAGE> 63
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.
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 Non-Qualified
Stock Option Plan (the "1984 Plan"), 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"). In general, all options
outstanding on the redemption date that were granted under the 1984 Plan and
1990 Plan, whether vested or not, and unvested options granted under the 1994
Plan were canceled on the redemption date, and we paid the holder of each option
in cash a per share amount equal to the redemption price,
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<PAGE> 64
$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 are being converted, at the
election of the holders of such options, 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.
Certain vested options granted under the 1994 and 1996 Plans outstanding as of
the redemption date are being converted into options (converted options) to
purchase shares of common stock, and, at the election of the holders of such
options, certain vested options granted under the 1994 and 1996 Plans were
canceled in exchange for cash. The 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 were canceled as
provided by the terms of the 1996 Plan on the redemption date. With certain
exceptions as described below, 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 that 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 1.333 times the number of shares
covered by the applicable canceled option, subject to any adjustments necessary
to reflect any capital contributions by Roche.
In connection with the redemption of our special common stock, and as a result
of the treatment of options described above, the following changes with respect
to stock options outstanding have occurred:
- Options for the purchase of approximately 6.8 million shares of special
common stock have been canceled in accordance with the terms of the
applicable stock option plans, and the holders are receiving cash
payments in the amount of $82.50 per share, less the exercise price;
- Options for the purchase of approximately 4.0 million shares of special
common stock are being converted into options to purchase a like number
of shares of common stock at exercise prices ranging from $48.125 per
share to $87.50 per share; and
- Options for the purchase of approximately 4.9 million shares of special
common stock have been canceled, in accordance with the terms of the 1996
Plan. With certain exceptions, we expect to grant new options for the
purchase of 1.333 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. The number of shares that will be the subject
of these new options, which are expected to be issued under our 1999
Plan, will be approximately 5.0 million. Alternative arrangements were
provided for certain holders of some of the unvested options under the
1996 Plan.
Of the approximately 4.0 million shares of converted options, options with
respect to approximately 3.8 million shares are currently exercisable, and
options with respect to approximately 230,000 shares are currently not
exercisable. These options are held by approximately 2,200 employees; no
directors hold these options.
We expect that the majority of the options to be granted prior to the effective
date of the offering hereunder will be made pursuant to our 1999 Plan, which our
board of directors and Roche, our sole shareholder, intend to approve prior to
the effective date of this offering. Under the 1999 Plan, we intend to grant new
options to purchase approximately 6.5 million shares (including the 5.0 million
shares referred to above) to approximately 2,400 employees at an exercise price
equal to the public offering price in this offering, with the grant of such
options to be made effective on the day prior to the effective date of this
offering.
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<PAGE> 65
Treatment of Options of and Issuance of Options to the Named Executive Officers
The following tables set forth, with respect to each of the Named Executive
Officers, (i) the amount of cash received for options canceled in connection
with the redemption of our special common stock, (ii) certain information with
respect to the number and value of options converted, in connection with the
redemption of our special common stock, into options to purchase a like number
of shares of common stock and (iii) certain information with respect to options
we intend to grant immediately prior to the effective time of this offering.
TREATMENT OF OPTIONS IN CONNECTION WITH THE REDEMPTION
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL
CONVERTED CONVERTED NUMBER/
OPTIONS OPTIONS EXERCISE
CASH-OUT EXERCISABLE/ HELD BY PRICE EXPIRATION PRESENT
NAME OF OPTIONS NONEXERCISABLE(1) EMPLOYEES(2) ($/SHARE)(3) DATE(S)(4) VALUE(5)
---- ------------- ----------------- ------------ ------------ ---------- -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D. .......... $15.4 300,000/0 7.3% 112,500@ 2/6/06 - $9.6
$50.125 4/26/14
100,000@
$54.25
87,500@
$68.375
William D. Young.................... $ 8.3 206,250/0 5.0% 93,750@ 2/6/06 - $6.5
$50.125 4/26/14
62,500@
$54.25
50,000@
$68.375
Louis J. Lavigne, Jr................ $10.3 112,500/0 2.7% 30,000@ 2/6/06 - $3.7
$50.125 4/26/14
45,000@
$54.25
37,500@
$68.375
Susan D. Desmond-Hellmann, M.D., $ 2.1 37,500/0 0.9% 37,500@ 6/17/08 $1.4
M.P.H. ........................... $68.375
Dennis J. Henner, Ph.D. ............ $ 4.5 101,250/0 2.5% 33,750@ 2/6/06 - $3.2
$50.125 4/26/14
37,500@
$54.25
30,000@
$68.375
</TABLE>
- ---------------
(1) These options were granted pursuant to the 1994 Plan and 1996 Plan and are
nonstatutory options.
(2) Based on a total of approximately 4.0 million converted options held by
employees, including the Named Executive Officers.
(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 to twenty years, as applicable,
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 assumptions: expected volatility of 45% (representing
the annual variance in the monthly change in the price of selected top-tier
biotechnology
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<PAGE> 66
companies over the prior 10 year period; used as a proxy for the expected
monthly volatility of the Genentech stock); a risk free rate of 6.01%
determined by the remaining life of each option. Each option is valued at
its exercise price, which is assumed to be equivalent to the market price at
the date of grant. 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 common stock on the date of exercise as compared to the
exercise price of the option.
OPTION GRANTS IMMEDIATELY PRIOR TO THIS OFFERING
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS GRANT
SECURITIES EXPECTED TO EXERCISE OR DATE
UNDERLYING BE GRANTED TO BASE PRICE EXPIRATION PRESENT
NAME OPTIONS(1) EMPLOYEES(2) ($/SHARE)(3) DATE(4) VALUE(5)
---- ---------- ------------- ------------ ---------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D. ............... 483,213 7.4% $24.4
William D. Young......................... 283,263 4.4% $14.3
Louis J. Lavigne, Jr..................... 209,948 3.2% $10.6
Susan D. Desmond-Hellmann, M.D., M.P.H... 233,275 3.6% $11.8
Dennis J. Henner, Ph.D. ................. 169,958 2.6% $ 8.6
</TABLE>
- ---------------
(1) We intend to grant these options pursuant to the 1999 Plan. It is
anticipated that these options will vest ratably on a monthly basis during
the 36 month period following the grant date.
(2) Based on a total of approximately 6.5 million options we currently plan to
grant to employees, including the Named Executive Officers.
(3) It is anticipated that the exercise price per share of options to be granted
will be the public offering price in this offering.
(4) It is anticipated that the options to be granted would 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 assumptions: expected volatility of 45% (representing
the annual variance in the monthly change in the price of selected top-tier
biotechnology companies over the prior 10 year period; used as a proxy for
the expected monthly volatility of the Genentech stock); a risk free rate of
6.01% determined by the remaining life of each option. Each option is valued
at its exercise price, which is assumed to be equivalent to the market price
at the date of grant. 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 common stock on the date of exercise as compared to the
exercise price of the option.
The 1999 Plan
We expect to recommend the adoption of the 1999 Plan prior to the effective time
of this offering. It is expected that the 1999 Plan will provide for the grant
of non-statutory options and incentive stock options. It is expected that an
aggregate of 7.5 million shares will be available for issuance pursuant to the
terms of such plan. It is expected that the exercise price of the options
granted under the 1999 Plan will be not less than 100% of fair market value of
the shares of common stock, which in connection with the options granted
immediately prior to the effective time of this offering, will be the public
offering price in this offering. It is anticipated that options granted under
the 1999 Plan will have a term of ten years. Under the 1999 Plan, we intend to
grant new options to purchase approximately 6.5 million shares of common stock
to approximately 2,400
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<PAGE> 67
employees at an exercise price equal to the public offering price in this
offering, with the grant of such options to be made effective on the day prior
to the effective date of this offering.
Committees of the Board of Directors
Upon completion of this offering, we will appoint 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"). 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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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 that 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 redeemed all of our common stock held by stockholders other
than Roche Holdings, Inc. at $82.50 per share in cash and retired 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 increased
from approximately 65% to 100% and our then existing governance agreement
terminated, 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 84.3%.
ARRANGEMENTS BETWEEN GENENTECH AND ROCHE
As a result of the redemption of the special common stock, the then existing
governance agreement between Genentech and Roche terminated, except for
provisions relating to indemnification and stock options, warrants and
convertible securities. We will enter into an affiliation agreement with Roche
that 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 an 84.3% stockholder.
Our certificate of incorporation provides that the provisions in our bylaws
described below under "--Composition of Board of Directors," "--Roche's Right to
Proportional Representation," "--Membership of Committees" and "--Nomination of
Directors" may be repealed or amended only by a 60% vote of our stockholders,
except for Roche's right to nominate a number of directors proportional to
Roche's ownership interest rounded down to the next whole number until Roche's
ownership interest is less than 5%, which may be repealed or amended only by a
90% vote of our shareholders. The provisions of the affiliation agreement
described below under "--Roche Approval Required for Certain Actions" and
"--Licensing and Marketing Arrangements" terminate upon Roche owning less than
40% of our stock.
For purposes of the following provisions, an independent director is a director
who is not
- one of our officers or
- an employee, director, principal stockholder or partner of Roche or any
affiliate of Roche or an entity that was dependent upon Roche for more
than 10% of its revenues or earnings in its most recent fiscal year.
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
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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 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 upon request 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 that
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.
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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.
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; and
- 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
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- 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
- 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.
ROCHE'S RIGHT TO MAINTAIN ITS PERCENTAGE OWNERSHIP INTEREST IN OUR STOCK
As discussed below under "Tax Sharing Agreement," we are now and expect to
continue to be a member of Roche's U.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 as soon as
practicable (but not more than 60 days after this offering) a program to
repurchase shares of our common stock from our 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, or more frequently if requested, 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. Our obligations with respect to this stock repurchase program will
terminate upon Roche owning less than 40% of our stock.
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
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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.
These provisions of the affiliation agreement may have the effect of limiting
our ability to use our capital stock as consideration for acquisitions.
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 will enter 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) 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 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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SELLING STOCKHOLDER AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of July 16, 1999 regarding
the beneficial ownership of common stock by Roche, currently our sole
stockholder.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY 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. ................. 127,298,588 100.00% 107,298,588 84.29% Common Stock
One Commerce Center, Suite 1050
Wilmington, DE 19801
</TABLE>
In addition, Roche has granted the underwriters an option to purchase an
additional 2,000,000 shares of common stock to cover over-allotments. If the
underwriters exercise this option in full, Roche will own approximately 82.72%
of our outstanding stock after this offering.
The following table sets forth the beneficial ownership of shares of common
stock as of July 1, 1999, unless otherwise noted, of (i) each director and the
director nominee of Genentech, (ii) each of the Named Executive Officers, and
(iii) all directors, the director nominee and all executive officers of
Genentech as a group. Beneficial ownership is determined in accordance with the
rules of the SEC and generally includes voting or investment power with respect
to securities and options that are exercisable within 60 days. 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. All of the
shares owned by the following persons are shares underlying currently
exercisable stock options.
<TABLE>
<CAPTION>
-------------------------
COMMON STOCK
-------------------------
PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS
------------------------ --------- --------
<S> <C> <C>
Herbert W. Boyer, Ph.D. .................................... -- --
Susan D. Desmond-Hellmann, M.D., M.P.H. .................... 37,500(1) *
Dennis J. Henner, Ph.D. .................................... 101,250(2) *
Franz B. Humer, Ph.D. ...................................... -- --
Jonathan K. C. Knowles, Ph.D. .............................. -- --
Louis J. Lavigne, Jr. ...................................... 112,500(3) *
Arthur D. Levinson, Ph.D. .................................. 300,000(4) *
William D. Young............................................ 206,250(5) *
All directors, the director nominee and all executive
officers as a group (28 persons).......................... 1,494,043(6) 1.16%
</TABLE>
- ---------------
* The amount beneficially owned is less than one percent (1%) of the
outstanding shares of common stock.
(1) Does not include 233,275 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 6,480 shares of common stock would be exercisable at
August 31, 1999.
(2) Does not include 169,958 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 4,721 shares of common stock would be exercisable at
August 31, 1999.
(3) Does not include 209,948 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 5,832 shares of common stock would be exercisable at
August 31, 1999.
(4) Does not include 483,213 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 13,423 shares of common stock would be exercisable at
August 31, 1999.
(5) Does not include 283,263 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 7,868 shares of common stock would be exercisable at
August 31, 1999.
(6) Does not include 2,181,568 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 60,599 shares of common stock would be exercisable at
August 31, 1999.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Prior to the redemption of our special common stock, 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. On June 30, 1999, we redeemed and retired all of our
outstanding special common stock. Our authorized capital stock consists of
300,000,000 shares of common stock and 100,000,000 shares of preferred stock.
COMMON STOCK
As of July , 1999, there were 127,298,588 shares of common stock outstanding,
all of which were held of record by Roche. 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.
DELAWARE TAKEOVER STATUTE
We have elected not to be governed by Section 203 of the Delaware General
Corporation Law. This section requires the vote of at least 66 2/3% of the
outstanding voting stock of a company not owned by an interested stockholder to
approve certain business combinations. Section 203 defines interested
stockholder as any entity or person owning 15% or more of the outstanding voting
stock of the company and any entity or person affiliated with, controlling or
controlled by such entity or person. As a result, if we decide to enter into any
such proposed business combination, we will only need the approval of a majority
of our outstanding voting stock except as described in "Relationship with
Roche -- Arrangements between Genentech and Roche -- Business Combinations with
Roche."
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."
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CERTAIN PROVISIONS OF GENENTECH'S CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation provides that any person purchasing or
acquiring an interest in shares of our capital stock is deemed to have consented
to the following provisions relating to intercompany agreements and to
transactions with interested parties and corporate opportunities. The following
provisions of our certificate of incorporation may only be repealed or amended
by a 90% vote of our stockholders.
For purposes of the foregoing, Genentech includes all corporations and other
entities in which Genentech owns fifty percent or more of the outstanding voting
interests, and Roche includes all corporations and other entities that are
"affiliates" of Roche within the meaning of Rule 12b-2 under Exchange Act.
Transactions with Roche
Our certificate of incorporation provides that no contract, agreement,
arrangement or transaction between us and Roche or any related entity will be
void or voidable solely because Roche is a party thereto or solely because any
of our directors or officers who are affiliated with Roche are present at or
vote with respect to the authorization of the contract, agreement, arrangement
or transaction. Our certificate of incorporation also provides that Roche and
the officers or directors of Roche will not be presumed liable to us or our
stockholders for:
- breach of any fiduciary duty or duty of loyalty,
- failure to act in the best interests of Genentech, or
- receipt of any improper personal benefit,
simply because Roche or any director or officer of Roche, in good faith, takes
any action, exercises any right or gives or withholds any consent with respect
to any agreement or contract between Roche and Genentech.
Competition by Roche with Us; Corporate Opportunities
Our certificate of incorporation provides that Roche has no duty to refrain from
engaging in the same or similar activities or lines of business as Genentech and
that neither Roche nor any of its directors or officers will be liable to us or
our stockholders for breach of any fiduciary duty due to any of these
activities. If Roche learns of a potential matter that may be a corporate
opportunity for both Roche and Genentech, Roche has no duty to communicate or
offer this opportunity to us. In addition, Roche will not be liable to us or our
stockholders for breach of any fiduciary duty if Roche pursues or acquires the
corporate opportunity or does not communicate it to us.
If a director, officer or employee of Genentech who is also a director, officer
or employee of Roche knows of a potential transaction or matter that may be a
corporate opportunity both for Genentech and Roche, the director, officer or
employee is entitled to offer the corporate opportunity to us or Roche as the
director, officer or employee deems appropriate under the circumstances in his
sole discretion, and no such director, officer or employee will be liable to us
or our stockholders for breach of any fiduciary duty or duty of loyalty or
failure to act in our best interests or the derivation of any improper personal
benefit by reason of the fact that
- such director, officer or employee offered such corporate opportunity to
Roche (rather than to us) or did not communicate information regarding
such corporate opportunity to us, or
- Roche pursues or acquires such corporate opportunity for itself or
directs such corporate opportunity to another person or does not
communicate the corporate opportunity to us.
While these provisions of our certificate of incorporation eliminate certain
rights that might have been available to stockholders under Delaware law, the
enforceability of such provisions has not been established under Delaware
corporate law.
Certain of the foregoing provisions of our certificate of incorporation expire
on the date that Roche ceases to own at least 5% of our outstanding shares of
common stock and no person who is a director or officer of Genentech is also a
director or officer of Roche or its affiliates.
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<PAGE> 76
Limitation on Directors' Liabilities
Our certificate of incorporation limits, to the fullest extent permitted by
Delaware corporate law, the personal liability of directors for monetary damages
for breach of their fiduciary duties.
Section 145 of the General Corporation Law of the State of Delaware permits us
to indemnify officers, directors or employees against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement in connection
with legal proceedings "if [as to any officer, director or employee] he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to
the best interests of the corporation, and, with respect to any criminal act or
proceeding, had no reasonable cause to believe his conduct was unlawful,"
provided that with respect to actions by, or in the right of the corporation
against, such individuals, indemnification is not permitted as to any matter as
to which such person "shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty 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, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper."
Individuals who are successful in the defense of such action are entitled to
indemnification against expenses reasonably incurred in connection therewith.
Our board of directors may provide similar indemnification to our officers,
employees and agents as they deem appropriate and as authorized by Delaware law.
We may purchase insurance on behalf of any director, officer, employee or agent
against any expense incurred by such person in his or her capacity.
LISTING
Our common stock has been approved for listing on the New York Stock Exchange
under the symbol "DNA", subject to official notice of issuance.
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.
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<PAGE> 77
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> 78
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.
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<PAGE> 79
SHARES ELIGIBLE FOR FUTURE SALE
The 20,000,000 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 our management executive committee members 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 90 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."
It is expected that an aggregate of 7.5 million shares of our common stock will
be available for issuance under the 1999 Plan. We intend to file a registration
statement on Form S-8 covering the issuance of shares of our common stock
pursuant to the 1999 Plan. Accordingly, the shares issued pursuant to the 1999
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> 80
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............................................. 20,000,000
==========
</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 2,000,000 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 $3 million. 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> 81
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 directors and our management executive committee members 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 90 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 employees, including officers, and former non-institutional stockholders 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.
Our common stock has been approved for listing on the New York Stock Exchange
under the symbol "DNA", subject to official notice of issuance. The underwriters
have undertaken to sell shares of the common stock to a minimum of 2,000
beneficial holders in lots of 100 or more shares so as to meet the distribution
requirements for listing on the New York Stock Exchange.
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> 82
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 28, 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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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.
During the 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
F-18
<PAGE> 101
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, (TM), (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
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.
F-19
<PAGE> 102
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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,
F-20
<PAGE> 103
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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> 104
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 May 1999, the 1990 case brought by UC referred to in "Leases, Commitments and
Contingencies" above 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 there is no current legal
basis for the Company to be held liable to UC for any claim of damages. On June
22, 1999, the judge held a hearing known as a status conference to discuss
further proceedings relating to the 1990 case and 1997 case referred to in
"Leases, Commitments and Contingencies" above. At that time, Genentech renewed
its request that the judge hold a non-jury trial and decide whether UC defrauded
the U.S. Patent and Trademark Office when obtaining the 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 patent unenforceable. On July 1, 1999, the judge issued a written
decision setting the schedule for further proceedings. The judge consolidated
the 1990 and 1997 cases for a jury trial to begin on January 3, 2000. The issues
of infringement and willfulness will be tried to the jury first, and only if the
jury finds liability would the issue of damages be tried. Pursuant to the
judge's decision, that jury trial is to be followed immediately by a court trial
of Genentech's fraud (inequitable conduct) claim against UC. In addition, UC has
made a motion for entry of judgment as a matter of law of infringement
notwithstanding the lack of unanimous jury verdict on that issue.
Redemption of Special Common Stock
On June 30, 1999, the Company redeemed 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. As a result, Roche currently owns 100% of the Company's common stock.
Consequently, push-down accounting is required under generally accepted
accounting principles which will require the Company to record goodwill and
other intangible assets of approximately $1.7 billion and $1.5 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.
F-22
<PAGE> 105
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Options
In connection with the redemption of the Company's special common stock, the
following changes with respect to stock options outstanding have occurred:
- Options for the purchase of approximately 6.8 million shares of special
common stock have been canceled in accordance with the terms of the
applicable stock option plans, and the holders are receiving cash
payments in the amount of $82.50 per share, less the exercise price;
- Options for the purchase of approximately 4.0 million shares of special
common stock are being converted into options to purchase a like number
of shares of common stock at the same exercise price; and
- Options for the purchase of approximately 4.9 million shares of special
common stock have been canceled, in accordance with the terms of the
Company's 1996 Stock Option/Stock Incentive Plan (the "1996 Plan"). With
certain exceptions, the Company expects to grant new options for the
purchase of 1.333 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. The number of shares that will be the subject
of these new options, which are expected to be issued under our 1999
Stock Plan, will be approximately 5.0 million. Alternative arrangements
were provided for certain holders of some of the unvested options under
the 1996 Plan.
The Company expects to record, in the quarter ending June 30, 1999, cash
compensation expense of approximately $284.5 million primarily associated with
the cash out of stock options and non-cash compensation expense of approximately
$102.3 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. 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 $27.4 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.
F-23
<PAGE> 106
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-24
<PAGE> 107
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-25
<PAGE> 108
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-26
<PAGE> 109
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-27
<PAGE> 110
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-28
<PAGE> 111
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-29
<PAGE> 112
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. 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 action filed in 1990 against
the Company by UC alleging that the Company's manufacture, use and sale of its
Protropin(R)
F-30
<PAGE> 113
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
Contingencies
In May 1999, the 1990 case brought by UC referred to in "Note 6 -- Legal
Proceedings" above 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 there is no current legal
basis for the Company to be held liable to UC for any claim of damages. On June
22, 1999, the judge held a hearing known as a status conference to discuss
further proceedings relating to the 1990 case and 1997 case referred to in "Note
6 -- Legal Proceedings" above. At that time, Genentech renewed its request that
the judge hold a non-jury trial and decide whether UC defrauded the U.S. Patent
and Trademark Office when obtaining the 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 patent
unenforceable. On July 1, 1999, the judge issued a written
F-31
<PAGE> 114
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
decision setting the schedule for further proceedings. The judge consolidated
the 1990 and 1997 cases for a jury trial to begin on January 3, 2000. The issues
of infringement and willfulness will be tried to the jury first, and only if the
jury finds liability would the issue of damages be tried. Pursuant to the
judge's decision, that jury trial is to be followed immediately by a court trial
of Genentech's fraud (inequitable conduct) claim against UC. In addition, UC has
made a motion for entry of judgment as a matter of law of infringement
notwithstanding the lack of unanimous jury verdict on that issue.
Redemption of Special Common Stock
On June 30, 1999, the Company redeemed 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. As a result, Roche currently owns 100% of the Company's common stock.
Consequently, push-down accounting is required under generally accepted
accounting principles which will require the Company to record goodwill and
other intangible assets of approximately $1.7 billion and $1.5 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 have occurred:
- Options for the purchase of approximately 6.8 million shares of special
common stock have been canceled in accordance with the terms of the
applicable stock option plans, and the holders are receiving cash
payments in the amount of $82.50 per share, less the exercise price;
- Options for the purchase of approximately 4.0 million shares of special
common stock are being converted into options to purchase a like number
of shares of common stock at the same exercise price; and
- Options for the purchase of approximately 4.9 million shares of special
common stock have been canceled, in accordance with the terms of the
Company's 1996 Stock Option/Stock Incentive Plan (the "1996 Plan"). With
certain exceptions, the Company expects to grant new options for the
purchase of 1.333 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. The number of shares that will be the subject
of these new options, which are expected to be issued under our 1999
Stock Option Plan, will be approximately 5.0 million. Alternative
arrangements were provided for certain holders of some of the unvested
options under the 1996 Plan.
The Company expects to record, in the quarter ending June 30, 1999, cash
compensation expense of approximately $284.5 million primarily associated with
the cash out of stock options and non-cash compensation expense of approximately
$102.3 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. 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 $27.4 million available to be earned
over a two year period.
Amended Agreement with Hoffmann-La Roche
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,
F-32
<PAGE> 115
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
Tax Sharing Agreement
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-33
<PAGE> 116
APPENDIX - DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
Graphic: Illustration of the Company's product "pipeline."
Caption: Pipeline as Lifeline -- With 17 projects in development, all for
treating serious medical conditions, Genentech's product pipeline
offers hope to waiting patients.
Phase I:
o AMD Fab, age-related macular degeneration. Currently preparing
for Phase I trial
o LDP-02 Antibody, inflammatory bowel disease
o Pulmezyme AERx(TM) delivery system, cystic fibrosis. Currently
preparing for Phase I clinical trial
Phase II:
o Anti-CD18 Antibody, acute myocardial infarction
o Anti-VEGF Antibody, several types of solid-tumor cancers
o Herceptin Antibody, other tumors
o VEGF, coronary artery disease. A recently completed Phase II
clinical trial did not meet its primary objectives. Genentech is
currently deciding on next steps for this program.
<PAGE> 117
Preparing for Phase III:
o Activase, catheter clearance
o Anti-CD11a Antibody (hu1124), psoriasis
o Herceptin Antibody, adjuvant therapy breast cancer
o Thrombopoietin, thrombocytopenia related to cancer treatment. Pharmacia
+ Upjohn has exclusive worldwide rights for thrombopoietin.
Preparing for Phase III
o Anti-IgE Antibody, allergic asthma and seasonal allergic rhinitis
o Pulmozyme, early-stage cystic fibrosis
o Rituxan Antibody, intermediate- and high-grade non-Hodgkin's Lymphoma
o Xubix, acute coronary syndrome. Under clinical development by Hoffmann-La
Roche, Genentech retains certain opt-in rights with respect to the United
States
Preparing Regulatory Filing
o TNK, acute myocardial infarcation
Awaiting Regulatory Clearance
o Nutropin Depot (TM), growth hormone deficiency in children
(The 17 projects are differentiated as either cardiovascular, endocrinology,
oncology or opportunistic.)
<PAGE> 118
GATEFOLD
Graphic: Photograph of ten patients representing Genentech's approved
indications.
Caption: In Business For Life. Genentech manufactures and markets seven
pharmaceutical products for ten serious medical conditions.
Celebrating life are ten patients who have found new hope with these
medicines, each patient representing one of the ten approved
indications.
Sandra Jones: Activase, Acute ischemic stroke
Dustin Watney: Protropin, Growth hormone deficiency in children
Mary Ann Noriux: Activase, Acute massive pulmonary embolism
Paul Workman: Ritoxan, Relapsed or refractory low-grade or
follicular, CD20 positive, B-cell non-Hodgkin's
lymphoma
Martha Lopez: Nutropin, short stature associated with Turner
Syndrome. Nutropin and Nutropin AQ
Amy Applebaum: Herceptin, Metastic breast cancer
Jenna Lismowski: Nutropin, Growth failure associated with chronic
renal insufficiency. Nutropin and Nutropin AQ.
Allen Strohmeier: Activase, Acute myocardial infarction
Lindsay Longcor: Nutropin, Growth hormone deficiency in adults.
Nutropin and Nutropin AQ.
Abigail Robinson: Pulmozyme, Cystic fibrosis
<PAGE> 119
[Genentech]
<PAGE> 120
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............................................ $ 581,020
NASD Filing fee............................................. 30,500
New York Stock Exchange Listing Fee......................... 5,300
Transfer agent's fees....................................... 20,000
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 650,000
Accounting fees and expenses................................ 850,000
Miscellaneous............................................... 613,180
----------
Total............................................. $3,000,000
==========
</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
Our certificate of incorporation limits, to the fullest extent permitted by
Delaware corporate law, the personal liability of directors for monetary damages
for breach of their fiduciary duties.
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.
Our board of directors may provide similar indemnification to our officers,
employees and agents as they deem appropriate and as authorized by Delaware law.
We may purchase insurance on behalf of any director, officer, employee or agent
against any expense incurred by such person in his or her capacity.
Our certificate of incorporation also provides that Roche and the officers or
directors of Roche will not be presumed liable to us or our stockholders for
breach of any fiduciary duty or duty of loyalty, failure to act in the best
interests of Genentech, or receipt of any improper personal benefit, simply
because Roche or any director or officer of Roche, in good faith, takes any
action, exercises any right or gives or withholds any consent with respect to
any agreement or contract between Roche and Genentech.
In addition, Roche will not be liable to us or our stockholders for breach of
any fiduciary duty if Roche pursues or acquires a potential corporate
opportunity of ours or does not inform us of a potential corporate opportunity.
If a director, officer or employee of Genentech who is also a director, officer
or employee of Roche knows of a potential transaction or matter that may be a
corporate opportunity both for Genentech and Roche, the director, officer or
employee is entitled to offer the corporate
II-1
<PAGE> 121
opportunity to us or Roche as the director, officer or employee deems
appropriate under the circumstances in his sole discretion, and no such
director, officer or employee will be liable to us or our stockholders for
breach of any fiduciary duty or duty of loyalty or failure to act in our best
interests or the derivation of any improper personal benefit by reason of the
fact that such director, officer or employee offered such corporate opportunity
to Roche (rather than to us) or did not communicate information regarding such
corporate opportunity to us, or Roche pursues or acquires such corporate
opportunity for itself or directs such corporate opportunity to another person
or does not communicate the corporate opportunity to us.
Neither Roche nor any officer or director thereof shall be liable to us or our
stockholders for breach of any fiduciary duty or duty of loyalty or failure to
act in (or not opposed to) our best interests or the derivation of any improper
personal benefit by reason of the fact that Roche or an officer of director
thereof in good faith takes any action or exercises any rights or gives or
withholds any consent in connection with any agreement or contract between Roche
and Genentech. No vote cast or other action taken by any person who is an
officer, director or other representative of Roche, which vote is cast or action
is taken by such person in his capacity as a director of Genentech, shall
constitute an action of or the exercise of a right by or a consent of Roche for
the purpose of any such agreement or contract.
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.
10.4 -- Form of 1999 Stock Option Plan
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>
- ---------------
** Previously filed.
(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.
II-2
<PAGE> 122
(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.
(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> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 3 to the 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 16th day of July, 1999.
GENENTECH, INC.
By: /s/ ARTHUR D. LEVINSON
---------------------------------------
Name: Arthur D. Levinson
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the 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 July 16, 1999
- -----------------------------------------------------
Arthur D. Levinson
* Principal Financial Officer July 16, 1999
- -----------------------------------------------------
Louis J. Lavigne, Jr.
* Principal Accounting Officer July 16, 1999
- -----------------------------------------------------
John M. Whiting
* Director July 16, 1999
- -----------------------------------------------------
Franz B. Humer
* Director July 16, 1999
- -----------------------------------------------------
Jonathan K.C. Knowles
*By: /s/ ARTHUR D. LEVINSON
-------------------------------------------------
Arthur D. Levinson
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 124
INDEX TO EXHIBITS
<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.
10.4 -- Form of 1999 Stock Option Plan
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>
- ---------------
** Previously filed.
<PAGE> 1
EXHIBIT 1
GENENTECH, INC.
20,000,000 Shares of Common Stock
Underwriting Agreement
July [ ], 1999
J.P. Morgan Securities Inc.
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Warburg Dillon Read LLC
BancBoston Robertson Stephens Inc.
As Representatives of the several Underwriters
listed in Schedule I hereto
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
Roche Holdings, Inc., a Delaware corporation (the "Selling Stockholder")
and the sole stockholder of Genentech, Inc., a Delaware corporation (the
"Company"), proposes to sell to the several Underwriters listed in Schedule I
hereto (the "Underwriters"), for whom you are acting as representatives (the
"Representatives"), an aggregate of 20,000,000 shares (the "Underwritten
Shares") of Common Stock, par value $0.02 per share, of the Company (the "Common
Stock"). In addition, for the sole purpose of covering over-allotments in
connection with the sale of the Underwritten Shares, the Selling Stockholder
proposes to issue and sell to the Underwriters, at the option of the
Underwriters, up to an additional 2,000,000 shares (the "Option Shares") of
Common Stock. The Underwritten Shares and the Option Shares are herein referred
to as the "Shares."
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Securities Act"), a registration
statement, including a prospectus, relating to the Shares. The registration
statement as amended at the time when it became or shall become effective,
in-
<PAGE> 2
-2-
cluding information (if any) deemed to be part of the registration statement at
the time of effectiveness pursuant to Rule 430A under the Securities Act, is
referred to in this Agreement as the "Registration Statement," and the
prospectus in the form first used to confirm sales of Shares is referred to in
this Agreement as the "Prospectus." If the Company has filed an abbreviated
registration statement pursuant to Rule 462(b) under the Securities Act (the
"Rule 462 Registration Statement"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement. Any reference in this Agreement to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the Securities Act, as of the effective date of the Registration Statement
or the date of such preliminary prospectus or the Prospectus, as the case may
be, and any reference to "amend," "amendment" or "supplement" with respect to
the Registration Statement, any preliminary prospectus or the Prospectus shall
be deemed to refer to and include any documents filed after such date under the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Commission thereunder (collectively, the "Exchange Act") that are deemed to
be incorporated by reference therein.
1. The Selling Stockholder agrees to sell the Underwritten Shares
to the several Underwriters as hereinafter provided, and each Underwriter, upon
the basis of the representations and warranties herein contained, but subject to
the conditions hereinafter stated, agrees to purchase, severally and not
jointly, from the Selling Stockholder at a purchase price per share of $[ ] (the
"Purchase Price") the number of Underwritten Shares to be purchased by such
Underwriter as set forth opposite the name of such Underwriter in Schedule I
hereto.
In addition, the Selling Stockholder agrees to issue and sell the Option
Shares to the several Underwriters as hereinafter provided, and the
Underwriters, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, shall have the
option to purchase, severally and not jointly, from the Selling Stockholder at
the Purchase Price that portion of the number of Option Shares as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional shares) determined by multiplying such number of Option Shares by a
fraction, the numerator of which is the maximum number of Underwritten Shares
which such Underwriter is entitled to purchase as set forth opposite the name of
such Underwriter in Schedule I hereto and the denominator of which is the
maximum number of Underwritten Shares which all of the Underwriters are entitled
to purchase hereunder, for the sole purpose of covering over-allotments (if any)
in the sale of Underwritten Shares by the several Underwriters.
The Underwriters may exercise the option to purchase the Option Shares
at any time (but not more than once) on or before the thirtieth day following
the date of this Agreement, by written notice from the Representatives to the
Selling Stockholder. Such notice shall set forth the aggregate number of Option
Shares as to which the option is being exercised and
<PAGE> 3
-3-
the date and time when the Option Shares are to be delivered and paid for, which
may be the same date and time as the Closing Date (as hereinafter defined) but
shall not be earlier than the Closing Date nor later than the tenth full
Business Day (as hereinafter defined) after the date of such notice (unless such
time and date are postponed in accordance with the provisions of Section 9
hereof). Any such notice shall be given at least two Business Days prior to the
date and time of delivery specified therein.
2. The Company and the Selling Stockholder understand that the
Underwriters intend (i) to make a public offering of the Shares as soon after
(A) the Registration Statement has become effective and (B) the parties hereto
have executed and delivered this Agreement as in the judgment of the
Representatives is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus.
3. Payment for the Shares shall be made by wire transfer in
immediately available funds to the account specified by the Selling Stockholder
to the Representatives, in the case of the Underwritten Shares, on July [ ],
1999, or at such other time on the same or such other date, not later than the
fifth Business Day thereafter, as the Representatives and the Selling
Stockholder may agree upon in writing, or, in the case of the Option Shares, on
the date and time specified by the Representatives in the written notice of the
Underwriters' election to purchase such Option Shares. The time and date of such
payment for the Underwritten Shares is referred to herein as the "Closing Date,"
and the time and date for such payment for the Option Shares, if other than the
Closing Date, are herein referred to as the "Additional Closing Date." As used
herein, the term "Business Day" means any day other than a day on which banks
are permitted or required to be closed in New York City.
Payment for the Shares to be purchased on the Closing Date or the
Additional Closing Date, as the case may be, shall be made against delivery to
the Representatives for the respective accounts of the several Underwriters of
the Shares to be purchased on such date registered in such names and in such
denominations as the Representatives shall request in writing not later than two
full Business Days prior to the Closing Date or the Additional Closing Date, as
the case may be, with any transfer taxes payable in connection with the transfer
to the Underwriters of the Shares duly paid by the Selling Stockholder. The
certificates for the Shares will be made available for inspection and packaging
by the Representatives at the office of J.P. Morgan Securities Inc. set forth
above not later than 1:00 P.M., New York City time, on the Business Day prior to
the Closing Date or the Additional Closing Date, as the case may be.
4. (A) The Company represents and warrants to each Underwriter and
the Selling Stockholder that:
<PAGE> 4
-4-
(a) no order preventing or suspending the use of any
preliminary prospectus has been issued by the Commission, and each
preliminary prospectus filed as part of the Registration Statement as
originally filed or as part of any amendment thereto, or filed pursuant
to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided that the foregoing representations and warranties shall not
apply to any statements or omissions made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Company in writing by such Underwriter through the Representatives
expressly for use therein;
(b) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that
purpose has been instituted or, to the knowledge of the Company,
threatened by the Commission; the Registration Statement and Prospectus
(as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) comply, or will comply, as the case
may be, in all material respects with the Securities Act and do not and
will not, as of the applicable effective date as to the Registration
Statement and any amendment thereto and as of the date of the Prospectus
and any amendment or supplement thereto, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
the Prospectus, as amended or supplemented, if applicable, at the
Closing Date or Additional Closing Date, as the case may be, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that
the foregoing representations and warranties shall not apply to any
statements or omissions in the Registration Statement or the Prospectus
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by such Underwriter
through the Representatives expressly for use therein;
(c) the documents incorporated by reference in the
Prospectus, when they became effective or were filed with the
Commission, as the case may be, conformed in all material respects to
the requirements of the Securities Act or the Exchange Act, as
applicable, and none of such documents contained an untrue statement of
a material fact or omitted to state a material fact necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading; any further documents so filed and
incorporated by reference in the Prospectus, when such documents are
filed with the Commission, will conform in all material respects to the
requirements of the Exchange Act, and will not contain an untrue
statement of a material
<PAGE> 5
-5-
fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(d) the financial statements, and the related notes thereto,
included or incorporated by reference in the Registration Statement and
the Prospectus present fairly the consolidated financial position of the
Company and its consolidated subsidiaries as of the dates indicated and
the results of their operations and changes in their consolidated cash
flows for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis, and the supporting schedules included or
incorporated by reference in the Registration Statement present fairly
the information required to be stated therein; and the pro forma
financial information, and the related notes thereto, included or
incorporated by reference in the Registration Statement and the
Prospectus has been prepared in accordance with the applicable
requirements of the Securities Act and the Exchange Act, as applicable,
and is based upon good faith estimates and assumptions believed by the
Company to be reasonable;
(e) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any change in the capital stock or long-term debt of the Company or
any of its subsidiaries, or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, business, prospects, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, taken as a whole (a "Material Adverse
Change"), otherwise than as set forth or contemplated in the Prospectus;
and except as set forth or contemplated in the Prospectus, neither the
Company nor any of its subsidiaries has entered into any transaction or
agreement (whether or not in the ordinary course of business) material
to the Company and its subsidiaries, taken as a whole;
(f) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have a material
adverse effect on the general affairs, business, prospects, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, taken as a whole (a "Material Adverse
Effect");
<PAGE> 6
-6-
(g) each of the Company's subsidiaries has been duly
incorporated and is validly existing as a corporation under the laws of
its jurisdiction of incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus, and has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws
of each jurisdiction in which it owns or leases properties, or conducts
any business, so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have a Material
Adverse Effect; and all the outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued,
are fully-paid and non-assessable, and (except, in the case of foreign
subsidiaries, for directors' qualifying shares and except as described
in the Prospectus) are owned by the Company, directly or indirectly,
free and clear of all liens, encumbrances, security interests and
claims;
(h) this Agreement has been duly authorized, executed and
delivered by the Company;
(i) the Company has an authorized capitalization as set
forth in the Prospectus and such authorized capital stock conforms as to
legal matters to the description thereof set forth in the Prospectus,
and all of the outstanding shares of capital stock of the Company
(including the Shares) have been duly authorized and validly issued, are
fully paid and non-assessable and are not subject to any pre-emptive or
similar rights; and, except as described in or expressly contemplated by
the Prospectus, there are no outstanding rights (including, without
limitation, pre-emptive rights), warrants or options to acquire, or
instruments convertible into or exchangeable for, any shares of capital
stock or other equity interest in the Company or any of its
subsidiaries, or any contract, commitment, agreement, understanding or
arrangement of any kind relating to the issuance of any capital stock of
the Company or any such subsidiary, any such convertible or exchangeable
securities or any such rights, warrants or options;
(j) neither the Company nor any of its subsidiaries is, or
with the giving of notice or lapse of time or both would be, in
violation of or in default under its certificate of incorporation or
by-laws or any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them or any of their
respective properties is bound, except for violations and defaults which
would not, individually or in the aggregate, have a Material Adverse
Effect; the performance by the Company of its obligations under this
Agreement and the consummation of the transactions contemplated herein
and in the Prospectus will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which the Company or any of its sub-
<PAGE> 7
-7-
sidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will any such action
result in any violation of the provisions of the certificate of
incorporation or the by-laws of the Company or any of its subsidiaries
or any applicable law or statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Company, its subsidiaries or any of their respective properties; and no
consent, approval, authorization, order, license, registration or
qualification of or with any such court or governmental agency or body
is required for the consummation by the Company of the transactions
contemplated by this Agreement and the Prospectus, except such consents,
approvals, authorizations, orders, licenses, registrations or
qualifications as have been obtained under the Securities Act and as may
be required under state securities or blue sky laws in connection with
the purchase and distribution of the Shares by the Underwriters;
(k) other than as set forth in the Prospectus, there are no
legal or governmental investigations, actions, suits or proceedings
pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its subsidiaries or any of their
respective properties or to which the Company or any of its subsidiaries
is or may be a party or to which any property of the Company or any of
its subsidiaries is or may be the subject which, if determined adversely
to the Company or any of its subsidiaries, could, individually or in the
aggregate, have, or reasonably be expected to have, a Material Adverse
Effect, and, to the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others; and there are no statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(l) the Company and its subsidiaries have good title in fee
simple to all items of real property and good title to all personal
property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described or referred to in
the Prospectus or such as do not materially interfere with the use made
or proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid, existing
and enforceable leases with such exceptions as are not material and do
not materially interfere with the use made or proposed to be made of
such property and buildings by the Company or its subsidiaries;
(m) no relationship, direct or indirect, exists between or
among the Company or any of its subsidiaries, on the one hand, and the
directors, officers, stockholders, customers or suppliers of the Company
or any of its subsidiaries, on the other hand,
<PAGE> 8
-8-
which is required by the Securities Act to be described in the
Registration Statement and the Prospectus which is not so described;
(n) no person has the right to require the Company to
register any securities for offering and sale under the Securities Act
by reason of the filing of the Registration Statement with the
Commission or, to the best knowledge of the Company, the sale of the
Shares by the Selling Stockholder pursuant hereto, except for rights
which have been waived;
(o) the Company is not an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(p) Ernst & Young LLP ("Ernst & Young"), who have certified
certain financial statements of the Company, are independent public
accountants as required by the Securities Act;
(q) the Company and its subsidiaries have filed all federal,
state, local and foreign tax returns which have been required to be
filed and have paid all taxes shown thereon and all assessments received
by them or any of them to the extent that such taxes have become due and
are not being contested in good faith; and, except as disclosed in the
Registration Statement and the Prospectus, no tax deficiency has been
determined adversely to the Company or any subsidiary which has had, nor
does the Company have any knowledge of any tax deficiency, which if
determined adversely to the Company or any subsidiary might have a
Material Adverse Effect;
(r) the Company has not taken nor will it take, directly or
indirectly, any action designed to, or that might be reasonably expected
to, cause or result in stabilization or manipulation of the price of the
Common Stock;
(s) the statistical and market-related data included in the
Registration Statement and the Prospectus are based on or derived from
sources which are believed by the Company to be reliable;
(t) each of the Company and its subsidiaries owns, is
licensed to use or otherwise possesses adequate rights to use the
patents, patent rights, licenses, inventions, trademarks, service marks,
trade names, copyrights and know-how, including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems, processes or procedures (collectively, the "Intellectual
Property"), reasonably necessary to carry on the business conducted by
it, except to the extent that the failure to own, be licensed to use or
otherwise possess adequate rights to use such Intellectual Property
would not, individually or in the aggregate, be reasonably expected to
have a
<PAGE> 9
-9-
Material Adverse Effect; except as set forth in the Prospectus, the
Company has not received any notice of infringement of or conflict with,
and the Company has no knowledge of any infringement of or conflict
with, asserted rights of others with respect to its Intellectual
Property which could reasonably be expected to result in a Material
Adverse Effect; except as set forth in the Prospectus, the discoveries,
inventions, products or processes of the Company referred to in the
Registration Statement and the Prospectus do not, to the knowledge of
the Company, infringe or conflict with any right or patent of any third
party, or any discovery, invention, product or process which is the
subject of a patent application filed by any third party which patent
application has been published or is otherwise known to the Company
which could reasonably be expected to result in a Material Adverse
Effect; except as set forth in the Prospectus, the Company is not
obligated to pay a royalty, grant a license or provide other
consideration to any third party in connection with its patents, patent
rights, licenses, inventions, trademarks, service marks, trade names,
copyrights and know-how which could reasonably be expected to result in
a Material Adverse Effect; and no third party, including any academic or
governmental organization, possesses rights to the Intellectual Property
which, if exercised, could reasonably be expected to have a Material
Adverse Effect;
(u) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, the studies,
tests and preclinical and clinical trials conducted by or on behalf of
the Company that are described in the Registration Statement and the
Prospectus were and, if still pending, are being conducted in accordance
with experimental protocols, procedures and controls pursuant to, where
applicable, accepted professional scientific standards, except where the
failure could not reasonably be expected to result in a Material Adverse
Effect; the descriptions of the results of such studies, tests and
trials contained in the Registration Statement and the Prospectus are
accurate and complete in all material respects; and the Company has not
received any notices or correspondence from the U.S. Food and Drug
Administration (the "FDA") or any foreign, state or local governmental
body exercising comparable authority requiring the termination,
suspension or material modification of any studies, tests or preclinical
or clinical trials conducted by or on behalf of the Company which
termination, suspension or material modification could reasonably be
expected to have a Material Adverse Effect;
(v) the Company has reviewed its operations and those of its
subsidiaries and has made inquiries of third parties with which the
Company or any of its subsidiaries has a material relationship to
evaluate the extent to which the business or operations of the Company
or any of its subsidiaries will be affected by the Year 2000 Problem; as
a result of such review and inquiries, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem will have a
Material Adverse Effect. The
<PAGE> 10
-10-
"Year 2000 Problem" as used herein means any significant risk that
computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1, 2000;
(w) there are no existing or, to the knowledge of the
Company, threatened labor disputes with the employees of the Company
which are likely to have a Material Adverse Effect;
(x) the Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of its
business and the value of its properties and as is customary for
companies engaged in similar businesses in similar industries;
(y) the Company (i) is in compliance with any and all
applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
(collectively, "Environmental Laws"), (ii) has received all permits,
licenses or other approvals required of it under applicable
Environmental Laws to conduct its businesses and (iii) is in compliance
with all terms and conditions of any such permit, license or approval,
except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect; and
(z) each employee benefit plan, within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), that is maintained, administered or contributed to by
the Company or any of its affiliates for employees or former employees
of the Company and its affiliates has been maintained in material
compliance with its terms and the requirements of any applicable
statutes, orders, rules and regulations, including but not limited to
ERISA and the Internal Revenue Code of 1986, as amended ("Code"); no
prohibited transaction, within the meaning of Section 406 of ERISA or
Section 4975 of the Code, has occurred with respect to any such plan
excluding transactions effected pursuant to a statutory or
administrative exemption; for each such plan which is subject to the
funding rules of Section 412 of the Code or Section 302 of ERISA, no
"accumulated funding deficiency," as defined in Section 412 of the Code,
has been incurred, whether or not waived, and the fair market value of
the assets of each such plan (excluding for these
<PAGE> 11
-11-
purposes accrued but unpaid contributions) exceed the present value of
all benefits accrued under such plan determined using reasonable
actuarial assumptions.
(B) The Selling Stockholder hereby represents and warrants
to each of the Underwriters that:
(a) the Selling Stockholder has been duly incorporated and
is validly existing as a corporation in good standing under the laws of
the State of Delaware;
(b) the Selling Stockholder has good and valid title to the
Shares to be sold by the Selling Stockholder hereunder, free and clear
of all mortgages, pledges, security interests, liens, claims,
encumbrances or equities, with full right and authority to deliver the
same hereunder; upon payment for the Shares to be sold by the Selling
Stockholder as provided herein, delivery of such Shares, as directed by
the Underwriter, to Cede & Co. ("Cede") or such other nominee as may be
designated by the Depository Trust Company ("DTC"), registration of such
Shares in the name of Cede or such other nominee and the crediting of
such Shares on the books of DTC to securities accounts of the
Underwriters, (A) DTC shall be a "protected purchaser" of such Shares
within the meaning of 8-303 of the Uniform Commercial Code as in effect
in the State of New York (the "UCC"), (B) under Section 8-501 of the
UCC, the Underwriters will acquire a valid security entitlement in
respect of such Shares and (C) no action based on any "adverse claim"
(as defined in Section 8-102 of the UCC) (other than any adverse claim
arising through the Underwriters) to such Shares may be asserted against
the Underwriters with respect to such security entitlement (it being
understood that for the purpose of this representation and warranty, the
Selling Stockholder may assume that when such payment, delivery and
crediting occur, (i) such Shares will have been registered in the name
of Cede or another nominee designated by DTC, in each case on the
Company's share registry in accordance with its certificate of
incorporation, bylaws and applicable law, (ii) DTC will be registered as
a "clearing corporation" within the meaning of Section 8-102 of the UCC,
and (iii) appropriate entries to the accounts of the several
Underwriters on the records of DTC will have been made pursuant to the
UCC);
(c) the Selling Stockholder has not taken nor will it take,
directly or indirectly, any action which is designed to, or that might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of the Common Stock;
(d) the sale of the Shares by the Selling Stockholder
pursuant to this Agreement is not prompted by any material information
concerning the Company which is not set forth in the Registration
Statement or the Prospectus;
<PAGE> 12
-12-
(e) each preliminary prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, did not
contain an untrue statement of a material fact or omit to state a
material fact, in each case with respect to information relating to the
Selling Stockholder furnished to the Company in writing by or on behalf
of the Selling Stockholder expressly for use therein, required to be
stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
(f) the Registration Statement and the Prospectus (as
amended or supplemented) do not and will not, as of the applicable
effective date of the Registration Statement and any amendment thereto
and as of the date of the Prospectus and any amendment or supplement
thereto, contain any untrue statement of a material fact or omit to
state any material fact, in each case with respect to information
relating to the Selling Stockholder furnished to the Company by or on
behalf of the Selling Stockholder expressly for use therein, required to
be stated therein or necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented, if
applicable, at the Closing Date or Additional Closing Date, as the case
may be, will not contain any untrue statement of a material fact or omit
to state a material fact, in each case relating to the Selling
Stockholder, necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(g) this Agreement has been duly authorized, executed and
delivered by the Selling Stockholder; and
(h) the sale of the Shares by the Selling Stockholder
hereunder, the compliance by the Selling Stockholder with all of the
provisions of this Agreement and the consummation of the transactions
contemplated herein will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Selling Stockholder is a
party or by which the Selling Stockholder is bound or to which any of
the property or assets of the Selling Stockholder is subject, nor will
such action result in any violation of the provisions of the certificate
of incorporation or by-laws of the Selling Stockholder, nor will such
action result in any violation of any applicable statute or any
applicable order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Selling Stockholder or any of its
properties; no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required for the sale of the Shares or the consummation by the
Selling Stockholder of the transactions contemplated by this Agreement,
except such consents, approvals, authorizations, orders, licenses,
registrations or qualifications as have been obtained or
<PAGE> 13
-13-
made under the Securities Act or the Exchange Act and as may be required
under state securities or blue sky laws in connection with the purchase
and distribution of the Shares by the Underwriters; the Selling
Stockholder has full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Shares to be
sold by it; and each agreement between the Company and the Selling
Stockholder referred to in the Prospectus has been duly executed and
delivered by the Selling Stockholder and constitutes a valid and binding
obligation of the Selling Stockholder enforceable against the Selling
Stockholder in accordance with its terms.
5. (A) The Company covenants and agrees with each of the
several Underwriters as follows:
(a) if the Registration Statement is not already effective,
to use its best efforts to cause the Registration Statement to become
effective at the earliest possible time and, if required, to file the
final Prospectus with the Commission within the time periods specified
by Rule 424(b) and Rule 430A under the Securities Act and to file
promptly all reports and any definitive proxy or information statements
required to be filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of the Prospectus and for so long as the delivery of a prospectus
is required in connection with the offering or sale of the Shares; and
to furnish copies of the Prospectus to the Underwriters in New York City
prior to 10:00 a.m., New York City time, on the Business Day next
succeeding the date of this Agreement in such quantities as the
Representatives may reasonably request;
(b) to deliver, at the expense of the Company, to the
Representatives five signed copies of the Registration Statement (as
originally filed) and each amendment thereto, in each case including
exhibits and documents incorporated by reference therein, and to each
other Underwriter a conformed copy of the Registration Statement (as
originally filed) and each amendment thereto, in each case without
exhibits but including the documents incorporated by reference therein
and, during the period mentioned in paragraph (e) below, to each of the
Underwriters as many copies of the Prospectus (including all amendments
and supplements thereto) and documents incorporated by reference therein
as the Representatives may reasonably request;
(c) before filing any amendment or supplement to the
Registration Statement or the Prospectus, whether before or after the
time the Registration Statement becomes effective, to furnish to the
Representatives a copy of the proposed amendment or supplement for
review and not to file any such proposed amendment or supplement to
which the Representatives reasonably object;
<PAGE> 14
-14-
(d) to advise the Representatives promptly, and to confirm
such advice in writing, (i) when the Registration Statement has become
effective, (ii) when any amendment to the Registration Statement has
been filed or becomes effective, (iii) when any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof, (iv) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for any additional
information, (v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any
order preventing or suspending the use of any preliminary prospectus or
the Prospectus or the initiation or threatening of any proceeding for
that purpose, (vi) of the occurrence of any event, during the period
mentioned in paragraph (e) below, as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, and (vii) of the
receipt by the Company of any notification with respect to any
suspension of the qualification of the Shares for offer and sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; and to use its best efforts to prevent the issuance of any such
stop order, or of any order preventing or suspending the use of any
preliminary prospectus or the Prospectus, or of any order suspending any
such qualification of the Shares, or notification of any such order
thereof, and, if issued, to obtain as soon as possible the withdrawal
thereof;
(e) if, during such period of time after the first date of
the public offering of the Shares as in the opinion of counsel for the
Underwriters a prospectus relating to the Shares is required by law to
be delivered in connection with sales by the Underwriters or any dealer,
any event shall occur as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in
light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if it is necessary to amend or supplement
the Prospectus to comply with law, forthwith to prepare and furnish, at
the expense of the Company if delivery of the prospectus is required at
any time prior to the expiration of 9 months after the Closing Date (and
at the expense of such Underwriters if delivery of the Prospectus is
required 9 months or more after the Closing Date), to the Underwriters
and to the dealers (whose names and addresses the Representatives will
furnish to the Company) to which Shares may have been sold by the
Representatives on behalf of the Underwriters and to any other dealers
upon request, such amendments or supplements to the Prospectus as may be
necessary so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus will comply with law;
<PAGE> 15
-15-
(f) to endeavor to qualify the Shares for offer and sale
under the securities or blue sky laws of such jurisdictions as the
Representatives shall reasonably request and to continue such
qualification in effect so long as reasonably required for distribution
of the Shares; provided that the Company shall not be required to file a
general consent to service of process in any jurisdiction;
(g) to make generally available to its security holders and
to the Representatives as soon as practicable an earnings statement
covering a period of at least twelve months beginning with the first
fiscal quarter of the Company occurring after the effective date of the
Registration Statement, which shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 of the Commission promulgated
thereunder;
(h) during the period of three years after the date of this
Agreement, to furnish to the Representatives copies of all reports or
other communications (financial or other) furnished to holders of the
Shares, and copies of any reports and financial statements furnished to
or filed with the Commission or any national securities exchange;
(i) for a period of 90 days after the date of the initial
public offering of the Shares not to, (i) directly or indirectly, offer,
pledge, announce the intention to sell, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities of the Company
which are substantially similar to the Common Stock, including but not
limited to any securities convertible into or exercisable or
exchangeable for, or that represent the right to receive, Common Stock
or any such substantially similar securities or (ii) enter into any
swap, option, future, forward or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the
Common Stock or any such substantially similar securities, whether any
such transaction described in clause (i) or (ii) above is to be settled
by delivery of Common Stock or such other securities, in cash or
otherwise without the prior written consent of J.P. Morgan Securities
Inc., other than (i) any options granted or shares of Common Stock of
the Company issued upon the exercise of options granted or to be granted
under the Company's employee stock option plans existing on the date of
the Prospectus and (ii) in connection with the agreement described under
"Relationship with Roche -- Roche's Right to Maintain its Percentage
Ownership Interest in Our Stock" in the Prospectus;
(j) to list the Shares on the New York Stock Exchange (the
"Exchange"); and
(k) whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all costs and ex-
<PAGE> 16
-16-
penses incident to the performance of its obligations hereunder,
including without limiting the generality of the foregoing, all costs
and expenses (i) incident to the preparation, registration, transfer,
execution and delivery of the Shares, (ii) except as provided in
paragraph (c) of Section 5(B), incident to the preparation, printing and
filing under the Securities Act of the Registration Statement, the
Prospectus and any preliminary prospectus, including in each case all
exhibits, amendments and supplements thereto prior to or during the
period specified in paragraph (e) of this Section 5(A), (iii) in
connection with the listing of the Shares on the Exchange, (iv) related
to the filing with, and clearance of the offering by, the National
Association of Securities Dealers, Inc., (v) in connection with the
printing (including word processing and duplication costs) and delivery
of this Agreement, any blue sky memoranda and the furnishing to the
Underwriters and dealers of copies of the Registration Statement and the
Prospectus, including mailing and shipping, as herein provided, (vi) any
expenses incurred by the Company in connection with a "road show"
presentation to potential investors, (vii) the cost of preparing stock
certificates, (viii) the cost and charges of the Company's transfer
agent and registrar and (ix) costs and expenses (other than the filing
fees contemplated by paragraph (c)(ii) of Section 5(B)) incurred in
connection with the registration or qualification of the Shares under
the laws of such jurisdictions as the Representatives may designate
(including fees of counsel for the Underwriters and its disbursements).
(B) The Selling Stockholder covenants and agrees with the
several Underwriters as follows:
(a) for a period of 90 days after the date of the initial
public offering of the Shares not to, (i) directly or indirectly, offer,
pledge, announce the intention to sell, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities of the Company
which are substantially similar to the Common Stock, including but not
limited to any securities convertible into or exercisable or
exchangeable for, or that represent the right to receive, Common Stock
or any such substantially similar securities or (ii) enter into any
swap, future, forward or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of the Common Stock
or any such substantially similar securities, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise
or (iii) make any demand for or exercise any right with respect to the
registration of any shares of Common Stock or any such substantially
similar securities without the prior written consent of J.P. Morgan
Securities Inc., in each case other than the Shares to be sold by such
Selling Stockholder hereunder;
<PAGE> 17
-17-
(b) to deliver to the Representatives prior to or at the
Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
the Treasury Department regulations in lieu thereof) in order to
facilitate the Underwriters' documentation of their compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated; and
(c) whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all costs and expenses incident to the performance of
its obligations hereunder, including without limiting the generality of
the foregoing, all (i) filing fees incident to the filing under the
Securities Act of the Registration Statement, including in each case all
amendments and supplements thereto, (ii) filing fees paid in connection
with the registration or qualification of the Shares under the laws of
such jurisdictions as the Representatives may designate and (iii) costs
and expenses incurred directly by the Selling Stockholder including,
without limitation, the fees and expenses of its counsel.
6. The several obligations of the Underwriters hereunder to
purchase the Shares on the Closing Date or the Additional Closing Date, as the
case may be, are subject to the performance by the Company and the Selling
Stockholder of their respective obligations hereunder and to the following
additional conditions:
(a) the Registration Statement shall have become effective
(or if a post-effective amendment is required to be filed under the
Securities Act, such post-effective amendment shall have become
effective) not later than 5:00 P.M., New York City time, on the date
hereof; and no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment shall be in
effect, and no proceedings for such purpose shall be pending before or
threatened by the Commission; the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing by the rules and regulations under the
Securities Act and in accordance with Section 5(A)(a) hereof; and all
requests for additional information shall have been complied with to the
satisfaction of the Representatives;
(b) the representations and warranties of the Company and
the Selling Stockholder contained herein are true and correct on and as
of the Closing Date or the Additional Closing Date, as the case may be,
as if made on the Closing Date or the Additional Closing Date, as the
case may be, and each of the Company and the Selling Stockholder shall
have complied with all agreements and all conditions on its part to be
performed or satisfied hereunder at or prior to the Closing Date or the
Additional Closing Date, as the case may be;
<PAGE> 18
-18-
(c) subsequent to the execution and delivery of this
Agreement and prior to the Closing Date or the Additional Closing Date,
as the case may be, there shall not have occurred any downgrading, nor
shall any notice have been given of (i) any downgrading, (ii) any
intended or potential downgrading or (iii) any review or possible change
that does not indicate an improvement, in the rating accorded any
securities of or guaranteed by the Company by any "nationally recognized
statistical rating organization," as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act;
(d) since the respective dates as of which information is
given in the Prospectus, there shall not have been any change in the
capital stock or long-term debt of the Company or its subsidiaries or
any Material Adverse Change otherwise than as set forth or contemplated
in the Prospectus, the effect of which in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares on the Closing Date or
the Additional Closing Date, as the case may be, on the terms and in the
manner contemplated in the Prospectus; and neither the Company nor any
of its subsidiaries has sustained since the date of the latest audited
financial statements included or incorporated by reference in the
Prospectus any material loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus;
(e) the Representatives shall have received on and as of the
Closing Date or the Additional Closing Date, as the case may be, (1) a
certificate of the Chief Executive Officer and Chief Financial Officer
of the Company, satisfactory to the Representatives, to the effect set
forth in subsections (a) through (c) (with respect to the respective
representations, warranties, agreements and conditions of the Company)
of this Section 6 and to the further effect that there has not occurred
any Material Adverse Change from that set forth or contemplated in the
Registration Statement and (2) a certificate from the Selling
Stockholder, satisfactory to the Representatives, to the effect set
forth in subsection (b) of this Section 6 (with respect to the
respective representations, warranties, agreements and conditions of the
Selling Stockholder);
(f) Davis Polk & Wardwell, counsel for the Company and the
Selling Stockholder, shall have furnished to the Representatives their
written opinion, dated the Closing Date or the Additional Closing Date,
as the case may be, in form and substance satisfactory to the
Representatives, to the effect that:
(i) each of the Company and the Selling Stockholder
has been duly incorporated and is validly existing as a
corporation in good standing under the
<PAGE> 19
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laws of the State of Delaware, with corporate power and
authority to own its properties and conduct its business as
described in the Prospectus;
(ii) this Agreement has been duly authorized,
executed and delivered by the Company and the Selling
Stockholder;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iv) the statements in the Prospectus under
"Description of Capital Stock," "Material U.S. Federal Tax
Considerations for Non-U.S. Holders of Common Stock" and
"Underwriting" and in the Registration Statement in Item 15,
insofar as such statements constitute a summary of the terms of
the Common Stock, legal matters or documents referred to
therein, fairly present the information called for with respect
to such terms, legal matters or documents;
(v) such counsel shall state that no facts have come
to their attention to cause them to believe that (A) the
Registration Statement and the Prospectus and any supplement or
amendment thereto (other than any financial statements and
related schedules and other financial or statistical information
therein as to which no opinion is expressed) do not comply as to
form in all material respects with the Securities Act, (B) the
Registration Statement (other than any financial statements and
related schedules and other financial or statistical information
therein as to which no opinion is expressed) at its effective
date and, as supplemented by the Prospectus, at the Closing Date
or the Additional Closing Date, as the case may be, contained
any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make
the statements contained therein not misleading and (C) the
Prospectus, as of the Closing Date or the Additional Closing
Date, as the case may be (other than any financial statements
and related schedules and other financial or statistical
information therein as to which no opinion is expressed),
contains any untrue statement of a material fact or omits to
state any material fact necessary to make the statements
contained therein, in the light of the circumstances under which
they were made, not misleading;
(vi) no consent, approval, authorization, order,
license, registration or qualification of or with any court or
government agency or body is required for the consummation by
the Company of the transactions contemplated by this Agreement
and the Prospectus, except such consents, approvals,
authorizations, orders, licenses, registrations or
qualifications as have been obtained under the Securities Act
and as may be required under state securities or blue sky
<PAGE> 20
-20-
laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(vii) the Company is not an "investment company" " as
such term is defined in the Investment Company Act;
(viii) upon payment for the Shares to be sold by the
Selling Stockholder as provided herein, delivery of such Shares,
as directed by the Underwriters, to Cede or such other nominee
as may be designated by DTC, registration of such Shares in the
name of Cede or such other nominee and the crediting of such
Shares on the books of DTC to securities accounts of the
Underwriters (assuming that neither DTC nor any such Underwriter
has notice of any adverse claim (as such phrase is defined in
Section 8-105 of the UCC) to such Shares)), (A) DTC shall be a
"protected purchaser" of such Shares within the meaning of 8-303
of the UCC, (B) under Section 8-501 of the UCC, the Underwriters
will acquire a valid security entitlement in respect of such
Shares and (C) no action based on any "adverse claim" (as
defined in Section 8-102 of the UCC) to such Shares may be
asserted against the Underwriters with respect to such security
entitlement (it being understood that for the purpose of this
opinion, such counsel may assume that when such payment,
delivery and crediting occur, (x) such Shares will have been
registered in the name of Cede or another nominee designated by
DTC, in each case on the Company's share registry in accordance
with its certificate of incorporation, bylaws and applicable
law, (y) DTC will be registered as a "clearing corporation"
within the meaning of Section 8-102 of the UCC and (z)
appropriate entries to the accounts of the several Underwriters
on the records of DTC will have been made pursuant to the UCC);
(ix) the sale of the Shares by the Selling
Stockholder hereunder, the compliance by the Selling Stockholder
with all of the provisions of this Agreement and the
consummation of the transactions contemplated herein will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Selling Stockholder
is a party or by which the Selling Stockholder is bound or to
which any of the property or assets of the Selling Stockholder
is subject, nor will such action result in any violation of the
provisions of the certificate of incorporation or by-laws of the
Selling Stockholder, nor will such action result in any
violation of any applicable statute or any applicable order,
rule or regulation of any court or governmental agency or body
having jurisdiction over the Selling Stockholder or any of its
properties; and
<PAGE> 21
-21-
(x) no consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the sale of the
Shares or the consummation by the Selling Stockholder of the
transactions contemplated by this Agreement, except such
consents, approvals, authorizations, orders, licenses,
registrations or qualifications as have been obtained or made
under the Securities Act or the Exchange Act and as may be
required under state securities or blue sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters.
In rendering such opinions, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the
United States and the State of New York and the General Corporation Law
of the State of Delaware, to the extent such counsel deems proper and to
the extent specified in such opinion, if at all, upon an opinion or
opinions (in form and substance reasonably satisfactory to the
Underwriters' counsel) of other counsel reasonably acceptable to the
Underwriters' counsel, familiar with the applicable laws; and (B) as to
matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company and the Selling
Stockholder, as applicable, and certificates or other written statements
of officials of jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and the Selling
Stockholder, as applicable. The opinion of such counsel for the Company
and the Selling Stockholder shall state that the opinion of any such
other counsel upon which they relied is in form satisfactory to such
counsel and, in such counsel's opinion, the Underwriters and they are
justified in relying thereon. With respect to the matters to be covered
in subparagraph (vii) above, counsel may state their opinion and belief
is based upon their participation in the preparation of the Registration
Statement and the Prospectus and any amendment or supplement thereto
(other than the documents incorporated by reference therein) and review
and discussion of the contents thereof (including the documents
incorporated by reference therein) but is without independent check or
verification except as specified.
The opinion of Davis Polk & Wardwell described above shall be
rendered to the Underwriters at the request of the Company and the
Selling Stockholder and shall so state therein;
(g) Stephen G. Juelsgaard, Esq., General Counsel of the
Company, shall have furnished to the Representatives his written
opinion, dated the Closing Date or the Additional Closing Date, as the
case may be, in form and substance satisfactory to the Representatives,
to the effect that:
<PAGE> 22
-22-
(i) the Company has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties, or conducts any business, so as to
require such qualification, other than where the failure to be
so qualified or in good standing would not have a Material
Adverse Effect;
(ii) each of the Company's subsidiaries has been duly
incorporated and is validly existing as a corporation under the
laws of its jurisdiction of incorporation with power and
authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus and has been
duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts
any business, so as to require such qualification, other than
where the failure to be so qualified and in good standing would
not have a Material Adverse Effect; and all of the outstanding
shares of capital stock of each subsidiary have been duly and
validly authorized and issued, are fully paid and non-assessable
and (except, in the case of foreign subsidiaries, for directors'
qualifying shares and except as otherwise set forth in the
Prospectus) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims;
(iii) the outstanding shares of capital stock of the
Company (including the Shares) have been duly authorized and are
validly issued, fully paid and non-assessable;
(iv) other than as set forth or contemplated in the
Prospectus, there are no legal or governmental investigations,
actions, suits or proceedings pending or, to the best of such
counsel's knowledge, threatened against or affecting the Company
or any of its subsidiaries or any of their respective properties
or to which the Company or any of its subsidiaries is or may be
a party or to which any property of the Company or its
subsidiaries is or may be the subject which, if determined
adversely to the Company or any of its subsidiaries, could,
individually or in the aggregate, have, or reasonably be
expected to have, a Material Adverse Effect, and, to the best of
such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by
others; and such counsel does not know of any statutes,
regulations, contracts or other documents that are required to
be described in the Registration Statement or Prospectus or to
be filed as exhibits to the Registration Statement that are not
described or filed as required;
<PAGE> 23
-23-
(v) such counsel (A) is of the opinion that the
Registration Statement and the Prospectus and any supplement or
amendment thereto (other than any financial statements and
related schedules and other financial or statistical information
therein as to which no opinion is expressed) comply as to form
in all material respects with the Securities Act, (B) shall
state that no facts have come to his attention to cause him to
believe that the Registration Statement (other than any
financial statements and related schedules and other financial
or statistical information therein as to which no opinion is
expressed) at its effective date and, as supplemented by the
Prospectus, at the Closing Date or the Additional Closing Date,
as the case may be, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements contained therein
not misleading, and (C) shall state that no facts have come to
his attention to cause him to believe that the Prospectus, as of
the Closing Date or the Additional Closing Date, as the case may
be (other than any financial statements and related schedules
and other financial or statistical information therein as to
which no opinion is expressed), contains any untrue statement of
a material fact or omits to state any material fact necessary to
make the statements contained therein, in the light of the
circumstances under which they were made, not misleading;
(vi) neither the Company nor any of its subsidiaries
is, or with the giving of notice or lapse of time or both would
be, in violation of or in default under, its certificate of
incorporation or by-laws or any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is
a party or by which it or any of them or any of their respective
properties is bound, except for violations and defaults which
would not, individually or in the aggregate, have a Material
Adverse Effect;
(vii) the performance by the Company of its
obligations under this Agreement and the consummation of the
transactions contemplated herein will not conflict with or
result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will any such action
result in any violation of the provisions of the certificate of
incorporation or the by-laws of the Company or any applicable
law or statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the
Company, its subsidiaries or any of their respective properties;
<PAGE> 24
-24-
(viii) (A) the documents incorporated by reference in
the Prospectus or any further amendment or supplement thereto
made by the Company prior to the Closing Date or the Additional
Closing Date, as the case may be (other than any financial
statements and related schedules and other financial or
statistical information therein as to which no opinion is
expressed), when they were filed with the Commission complied as
to form in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (B)
such counsel shall state that no facts have come to his
attention to cause him to believe that any of such documents,
when such documents were so filed (other than any financial
statements and related schedules and other financial or
statistical information therein as to which no opinion is
expressed), contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made when such documents were so filed, not
misleading;
(ix) each of the Company and its subsidiaries owns,
possesses or has obtained all licenses, permits, certificates,
consents, orders, approvals and other authorizations from, and
has made all declarations and filings with, all federal, state,
local and other governmental authorities (including foreign
regulatory agencies), all self-regulatory organizations and all
courts and other tribunals, domestic or foreign, necessary to
own or lease, as the case may be, and to operate its properties
and to carry on its business as conducted as of the date hereof,
and neither the Company nor any such subsidiary has received any
actual notice of any proceeding relating to revocation or
modification of any such license, permit, certificate, consent,
order, approval or other authorization, except as described in
the Registration Statement and the Prospectus; and each of the
Company and its subsidiaries is in compliance with all laws and
regulations relating to the conduct of its business as conducted
as of the date of the Prospectus where the failure to so comply
would have a Material Adverse Effect;
(x) the Company and its subsidiaries have good title
in fee simple to all real property and good title to all
personal property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are described
or referred to in the Prospectus or such as do not interfere
with the use made and proposed to be made of such property by
the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries
are held by them under valid, existing and enforceable leases
with such exceptions as are not material and do not interfere
with the use made or proposed to be made of such property and
buildings by the Company or its subsidiaries;
<PAGE> 25
-25-
(xi) each of the Company and its subsidiaries is in
compliance with all Environmental Laws, except, in each case,
where noncompliance, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect; there
are no legal or governmental proceedings pending or, to the
knowledge of such counsel, threatened against or affecting the
Company or any of its subsidiaries under any Environmental Law
which, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect;
(xii) each of the Company and its subsidiaries owns,
possesses or has adequate rights to use the Intellectual
Property employed by it in connection with the business
conducted by it as of the date hereof except to the extent that
the failure to own, possess or have adequate rights to use such
Intellectual Property would not, individually or in the
aggregate, have a Material Adverse Effect;
(xiii) such counsel is of the opinion that the
statements in the Registration Statement and the Prospectus
included therein at the time the Registration Statement became
effective set forth under (A) "Risk Factors -- Protecting our
Proprietary Rights is Difficult and Costly " and "Business --
Proprietary Technology -- Patents and Trade Secrets," insofar as
such statements concern patents, patent applications and patent
rights, and (B) "Risk Factors -- Our Products Are Subject to
Governmental Regulations and Approvals," "Business -- Products,"
"-- Products in Development," "-- Competition" and "--
Government Regulation," insofar as such statements concern the
Federal Food, Drug and Cosmetic Act, the Public Health Services
Act and the Food and Drug Administration Modernization Act of
1997 and the regulations promulgated thereunder and any similar
foreign statutes and regulations, in each case, did not contain
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading, and that such statements
in the captions set forth above in the Prospectus, as amended or
supplemented, if applicable, do not contain any untrue statement
of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(xiv) other than as set forth or contemplated in the
Prospectus, to the knowledge of such counsel, the Company has
not received any notice of infringement of or conflict with, and
such counsel has no knowledge of any infringement of or conflict
with, asserted rights of others with respect to its Intellectual
Property which could reasonably be expected to result in a
Material Adverse Effect;
<PAGE> 26
-26-
(xv) other than as set forth or contemplated in the
Prospectus, the discoveries, inventions, products or processes
of the Company referred to in the Registration Statement and the
Prospectus do not, to the knowledge of such counsel, infringe or
conflict with any rights of any third party, or any discovery,
invention, product or process which is the subject of a patent
application filed by any third party which patent application
has not been published or is otherwise known to the Company
except to the extent that any such infringement, individually or
in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect;
(xvi) other than as set forth or contemplated in the
Prospectus, no third party, including any academic or
governmental organization, possesses rights to the Company's
patents, patent applications or patent rights which, if
exercised, could reasonably be expected to have a Material
Adverse Effect; and
(xvii) to the knowledge of such counsel, the Company
has not received any notices or correspondence from the FDA or
any foreign, state or local governmental body exercising
comparable authority requiring the termination, suspension or
material modification of any studies, tests or preclinical or
clinical trials conducted by or on behalf of the Company which
termination, suspension or material modification could
reasonably be expected to have a Material Adverse Effect.
In rendering such opinions, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the
United States and the State of California and the General Corporation
Law of the State of Delaware, to the extent such counsel deems proper
and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to the
Underwriters' counsel) of other counsel reasonably acceptable to the
Underwriters' counsel, familiar with the applicable laws; and (B) as to
matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company and certificates or
other written statements of officials of jurisdictions having custody of
documents respecting the corporate existence or good standing of the
Company. The opinion of such counsel for the Company shall state that
the opinion of any such other counsel upon which they relied is in form
satisfactory to such counsel and, in such counsel's opinion, the
Underwriters and they are justified in relying thereon. With respect to
the matters to be covered in subparagraph (iv) above, counsel may state
his opinion and belief is based upon his participation in the
preparation of the Registration Statement and the Prospectus and any
amendment or supplement thereto and review and discussion of the
contents thereof but is without independent check or verification except
as specified.
<PAGE> 27
-27-
The opinion of the General Counsel of the Company described
above shall be rendered to the Underwriters at the request of the
Company and shall so state therein;
(h) on the date hereof and the effective date of the most
recently filed post-effective amendment filed on or subsequent to the
date hereof to the Registration Statement and also on the Closing Date
or Additional Closing Date, as the case may be, Ernst & Young shall have
furnished to you letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, containing
statements and information of the type customarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained or
incorporated by reference in the Registration Statement and the
Prospectus;
(i) the Representatives shall have received on and as of the
Closing Date or Additional Closing Date, as the case may be, an opinion
of Cahill Gordon & Reindel, counsel to the Underwriters, with respect to
the Registration Statement, the Prospectus and other related matters as
the Representatives may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(j) the Shares to be delivered on the Closing Date or
Additional Closing Date, as the case may be, shall have been approved
for listing on the Exchange;
(k) on or prior to the Closing Date or Additional Closing
Date, as the case may be, the Company and the Selling Stockholder shall
have furnished to the Representatives such further certificates and
documents as the Representatives shall reasonably request; and
(l) the "lock-up" agreements, each substantially in the form
of Exhibit A hereto, among you and the directors and management
executive committee members of the Company relating to sales and certain
other dispositions of shares of Common Stock or certain other
securities, delivered to you on or before the date hereof, shall be in
full force and effect on the Closing Date or Additional Closing Date, as
the case may be.
7. (a) The Company agrees to indemnify and hold harmless
each Underwriter, each affiliate of any Underwriter which assists such
Underwriter in the distribution of the Shares and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages and liabilities (including, without limitation, the
legal fees and other expenses incurred in connection with any suit, action or
proceeding or any claim as-
<PAGE> 28
-28-
serted) caused by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Underwriter furnished to the Company
in writing by such Underwriter through the Representatives expressly for use
therein; provided, however, that the foregoing indemnity agreement with respect
to any preliminary prospectus shall not inure to the benefit of any Underwriter
(or affiliate of such Underwriter which assists such Underwriter in the
distribution of the Shares) from whom the persons asserting any such losses,
claims, damages or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the sale
of the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage or liability.
(b) The Selling Stockholder agrees to indemnify and hold
harmless each Underwriter, each affiliate of any Underwriter which assists such
Underwriter in the distribution of the Shares and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, and the Company, its
directors, its officers who sign the Registration Statement and each person who
controls the Company within the meaning of either such Section, from and against
any and all losses, claims, damages and liabilities (including, without
limitation, the legal fees and other expenses incurred in connection with any
suit, action or proceeding or any claim asserted) caused by any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only with reference to information relating to the
Selling Stockholder furnished in writing by or on behalf of the Selling
Stockholder expressly for use in the Registration Statement or the Prospectus or
in any preliminary prospectus; provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter (or affiliate of such Underwriter which assists such
Underwriter in the distribution of the Shares) from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then
<PAGE> 29
-29-
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage or liability.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person who controls the Company within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act
and the Selling Stockholder to the same extent as the foregoing indemnity from
the Company to each Underwriter, but only with reference to information relating
to such Underwriter furnished to the Company in writing by such Underwriter
through the Representatives expressly for use in the Registration Statement, the
Prospectus, any amendment or supplement thereto, or any preliminary prospectus.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnity may be sought pursuant to the preceding
paragraphs of this Section 7, such person (the "Indemnified Person") shall
promptly notify the person or persons against whom such indemnity may be sought
(each an "Indemnifying Person") in writing, and such Indemnifying Persons, upon
request of the Indemnified Person, shall retain counsel reasonably satisfactory
to the Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Persons may designate in such proceeding and shall pay the
reasonable fees and expenses of such counsel related to such proceeding. In any
such proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person and not the Indemnifying Persons unless (i) the
Indemnifying Persons and the Indemnified Person shall have mutually agreed to
the contrary, (ii) the Indemnifying Person has failed within a reasonable time
to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the
named parties in any such proceeding (including any impleaded parties) include
both an Indemnifying Person and the Indemnified Person and representation of
both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that no
Indemnifying Person shall, in connection with any proceeding or related
proceeding in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm (in addition to any local counsel) for
all Indemnified Persons, and that all such fees and expenses shall be reimbursed
as they are incurred. Any such separate firm for the Underwriters, each
affiliate of any Underwriter which assists such Underwriter in the distribution
of the Shares and such control persons of Underwriters shall be desig-
<PAGE> 30
-30-
nated in writing by J.P. Morgan Securities Inc. and any such separate firm for
the Company, its directors, its officers who sign the Registration Statement and
such control persons of the Company shall be designated in writing by the
Company and any such separate firm for the Selling Stockholder shall be
designated in writing by the Selling Stockholder. No Indemnifying Person shall
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, each Indemnifying Person agrees to indemnify any Indemnified
Person from and against any loss or liability by reason of such settlement or
judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified
Person shall have requested an Indemnifying Person to reimburse the Indemnified
Person for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, such Indemnifying Person agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 90 days after receipt by such
Indemnifying Person of the aforesaid request and (ii) such Indemnifying Person
shall not have reimbursed the Indemnified Person in accordance with such request
prior to the date of such settlement. No Indemnifying Person shall, without the
prior written consent of the Indemnified Person, effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Person is
or could have been a party and indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement includes an unconditional
release of such Indemnified Person from all liability on claims that are the
subject matter of such proceeding.
If the indemnification provided for in paragraphs (a) through
(c) of this Section 7 is unavailable to an Indemnified Person or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each Indemnifying Person under such paragraph, in lieu of indemnifying such
Indemnified Person thereunder, shall contribute to the amount paid or payable by
such Indemnified Person as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholder on the one hand and
the Underwriters on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholder on the one hand and the Underwriters on the other hand
in connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other hand shall be
deemed to be in the same respective proportions as the net proceeds from the
offering (before deducting expenses) received by the Selling Stockholder and the
total underwriting discounts received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate public
offering price of the Shares. The relative fault of the Company and the Selling
Stockholder on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company and the Selling
Stock-
<PAGE> 31
-31-
holder by the Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholder and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
7 were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purposes) or by any other method of allocation that does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an Indemnified Person as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
Indemnified Person in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 7, in no event shall an
Underwriter be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages that
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares set forth opposite their names in Schedule I hereto,
and not joint.
The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company and the Selling
Stockholder set forth in this Agreement shall remain operative and in full force
and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company or the Selling Stockholder and (iii)
acceptance of and payment for any of the Shares.
8. Notwithstanding anything herein contained, this
Agreement (or the obligations of the several Underwriters with respect to the
Option Shares) may be terminated in the absolute discretion of the
Representatives, by notice given to the Company and the Selling Stockholder, if
after the execution and delivery of this Agreement and prior to the Closing Date
(or, in the case of the Option Shares, prior to the Additional Closing Date) (i)
trading generally shall have been suspended or materially limited on or by, as
the case may be, any of the New York Stock Exchange, the American Stock
Exchange, the Nasdaq National Market,
<PAGE> 32
-32-
the Chicago Board Options Exchange, the Chicago Mercantile Exchange or the
Chicago Board of Trade, (ii) trading of any securities of or guaranteed by the
Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York
shall have been declared by either federal or New York State authorities, or
(iv) there shall have occurred any outbreak or escalation of hostilities or any
change in financial markets or any calamity or crisis that, in the judgment of
the Representatives, is material and adverse and which, in the judgment of the
Representatives, makes it impracticable to market the Shares being delivered at
the Closing Date or the Additional Closing Date, as the case may be, on the
terms and in the manner contemplated in the Prospectus.
9. This Agreement shall become effective upon the later of
(x) execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Registration Statement (or, if
applicable, any post-effective amendment) by the Commission.
If on the Closing Date or the Additional Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Underwritten Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as the Representatives
may specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If on the Closing Date or the Additional Closing
Date, as the case may be, any Underwriter or Underwriters shall fail or refuse
to purchase Shares which it or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date, and arrangements satisfactory to the Representatives and the
Selling Stockholder for the purchase of such Shares are not made within 36 hours
after such default, this Agreement (or the obligations of the several
Underwriters to purchase the Option Shares, as the case may be) shall terminate
without liability on the part of any non-defaulting Underwriter or the Selling
Stockholder. In any such case either the Representatives or the Selling
Stockholder shall have the right to postpone the Closing Date (or, in the case
of the Option Shares, the Additional Closing Date), but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any de-
<PAGE> 33
-33-
faulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. If this Agreement shall be terminated by the
Underwriters, or any of them, because of any failure or refusal on the part of
the Company or the Selling Stockholder to comply with the terms or to fulfill
any of the conditions of this Agreement, or if for any reason any of the Company
or the Selling Stockholder shall be unable to perform its obligations under this
Agreement or any condition of the Underwriters' obligations cannot be fulfilled,
the Company and the Selling Stockholder agree to reimburse the Underwriters or
such Underwriters as have so terminated this Agreement with respect to
themselves, severally, for all out-of-pocket expenses (including the fees and
expenses of its counsel) reasonably incurred by the Underwriter in connection
with this Agreement or the offering contemplated hereunder.
11. This Agreement shall inure to the benefit of and be
binding upon the Company, the Selling Stockholder and the Underwriters, any
controlling persons referred to herein and their respective successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any other person, firm or corporation any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. No purchaser of Shares from any Underwriter shall be
deemed to be a successor by reason merely of such purchase.
12. Any action by the Underwriters hereunder may be taken by
the Representatives jointly or by J.P. Morgan Securities Inc. alone on behalf of
the Underwriters, and any such action taken by the Representatives jointly or by
J.P. Morgan Securities Inc. alone shall be binding upon the Underwriters. All
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be given to the
Representatives, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New
York 10260 (telefax: 212-648-5705), Attention: Syndicate Department, copy to
Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005 (telefax:
212-269-5420), Attention: Gerald S. Tanenbaum, Esq. Notices to the Company shall
be given to it at its office, 1 DNA Way, South San Francisco, California 94080
(telefax: 650-225-8654), Attention: Stephen G. Juelsgaard, Esq., Senior Vice
President, General Counsel. Notices to the Selling Stockholder shall be given to
it c/o Hoffmann-La Roche Inc., 340 Kingsland Street, Nutley, New Jersey 07110
(telefax: 973-235-3500), Attention: Law Department, Gerald Bohm, Esq. Copies of
notices to any of the Company or the Selling Stockholder should be given to
Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017 (telefax:
212-450-5527), Attention: Richard A. Drucker, Esq.
13. This Agreement may be signed in counterparts, each of
which shall be an original and all of which together shall constitute one and
the same instrument.
<PAGE> 34
-34-
14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAWS PROVISIONS THEREOF.
<PAGE> 35
If the foregoing is in accordance with your understanding,
please sign and return five counterparts hereof.
Very truly yours,
GENENTECH, INC.
By:
-------------------------------------
Name:
Title:
ROCHE HOLDINGS, INC.
By:
-------------------------------------
Name:
Title:
<PAGE> 36
Accepted: July [ ], 1999
J.P. MORGAN SECURITIES INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
WARBURG DILLON READ LLC
BANCBOSTON ROBERTSON STEPHENS INC.
Acting severally on behalf of themselves
and the several Underwriters
listed in Schedule I hereto.
By: J.P. MORGAN SECURITIES INC.
By:
---------------------------------
Name:
Title:
<PAGE> 37
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Underwritten
Shares
Underwriter To Be Purchased
- ----------- ---------------
<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.................................................... 20,000,000
===============
</TABLE>
<PAGE> 38
Exhibit A
[Form of Lock-Up Agreement]
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
GENENTECH, INC.
Genentech, Inc. (the "CORPORATION"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby amend the Certificate of Incorporation of the Corporation,
which was originally filed on December 23, 1986 under the name "Genentech
Delaware, Inc.", and subsequently amended.
The Certificate of Incorporation of the Corporation is hereby restated
and further amended to read in its entirety as follows:
ARTICLE 1
The name of the Corporation is: Genentech, Inc.
ARTICLE 2
The address of the registered office of the Corporation in the State of
Delaware is Corporation Service Company, 1013 Centre Road, City of Wilmington,
County of New Castle, Delaware 19805. The name of its registered agent at such
address is Corporation Service Company.
ARTICLE 3
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware as the same exists or may hereafter be amended
("DELAWARE LAW").
<PAGE> 2
ARTICLE 4
SECTION 4.01. Capital Stock. (a) The Corporation is authorized to issue
two classes of stock to be designated, respectively, preferred stock and common
stock. The total number of shares which the Corporation is authorized to issue
is four hundred million (400,000,000) shares. One hundred million (100,000,000)
shares shall be designated preferred stock, par value $0.02 per share
("PREFERRED STOCK"). Three hundred million (300,000,000) shares shall be
designated common stock, par value $0.02 per share ("COMMON STOCK") The Common
Stock of the Corporation shall be all of one class.
(b) The number of authorized shares of any class or classes of stock
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of a majority of the Common Stock of the
Corporation irrespective of the provisions of Section 242(b)(2) of Delaware Law.
SECTION 4.02. Common Stock. (a) Issuance and Consideration. Any unissued
or treasury shares of the Common Stock may be issued for such consideration as
may be fixed in accordance with applicable law from time to time by the Board of
Directors.
(b) Dividends. Subject to the rights of holders of the Preferred
Stock, the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of the assets of the Corporation which
are by law available therefor, dividends payable either in cash, in property, or
in shares of stock and the holders of the Preferred Stock shall not be entitled
to participate in any such dividends (unless otherwise provided by the Board of
Directors in any resolution providing for the issue of a series of Preferred
Stock).
SECTION 4.03. Preferred Stock.
(a) Series and Limits of Variations between Series. Any unissued or
treasury shares of the Preferred Stock may be issued from time to time in one or
more series for such consideration as may be fixed from time to time by the
Board of Directors and each share of a series shall be identical in all respects
with the other shares of such series, except that, if the dividends thereon are
cumulative, the date from which they shall be cumulative may differ. Before any
shares of Preferred Stock of any particular series shall be issued, a
certificate shall be filed with the Secretary of State of Delaware setting forth
the designation, rights, privileges, restrictions, and conditions to be attached
to the Preferred Stock of such series and such other matters as may be required,
and the Board of Directors
2
<PAGE> 3
shall fix and determine, and is hereby expressly empowered to fix and determine,
in the manner provided by law, the particulars of the shares of such series (so
far as not inconsistent with the provisions of this Article 4 applicable to all
series of Preferred Stock), including, but not limited to, the following:
(i) the distinctive designation of such series and the
number of shares which shall constitute such series, which number may be
increased (except where otherwise provided by the Board of Directors in
creating such series) or decreased (but not below the number of shares
thereof then outstanding) from time to time by like action of the Board
of Directors;
(ii) the annual rate of dividends payable on shares of such
series, the conditions upon which such dividends shall be payable and
the date from which dividends shall be cumulative in the event the Board
of Directors determines that dividends shall be cumulative;
(iii) whether such series shall have voting rights, in
addition to the voting rights provided by law and, if so, the terms of
such voting rights;
(iv) whether such series shall have conversion privileges
and, if so, the terms and conditions of such conversion, including, but
not limited to, provision for adjustment of the conversion rate upon
such events and in such manner as the Board of Directors shall
determine;
(v) whether or not the shares of such series shall be
redeemable and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates;
(vi) whether such series shall have a sinking fund for the
redemption or purchase of shares of that series and, if so, the terms
and amount of such sinking fund;
(vii) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of
shares of that series; and
(viii) any other relative rights, preferences and limitations
of such series.
3
<PAGE> 4
ARTICLE 5
SECTION 5.01. Amendment of Bylaws by Directors. (a) In furtherance and
not in limitation of the powers conferred by statute, the Board of Directors is
expressly authorized to make, alter, amend, repeal and rescind the bylaws of the
Corporation, subject to Sections 5.01(b) and 5.01(c) hereof.
(b) Sections 2.02, 3.02, 3.03(a), 3.03(b), 3.04, 3.05, 3.14, and
5.06 of the bylaws may only be altered, amended, repealed, or rescinded by the
affirmative vote of holders of capital stock entitled to vote thereon
representing more than 60% of the shares entitled to be voted thereon.
(c) Sections 3.03(c) and 3.15 of the bylaws may only be altered,
amended, repealed, or rescinded by the affirmative vote of holders of capital
stock entitled to vote thereon representing more than 90% of the shares entitled
to be voted thereon.
SECTION 5.02. Amendment of Certificate of Incorporation. Section 5.01(b)
of this Certificate of Incorporation may only be altered, amended, repealed, or
rescinded by the affirmative vote of holders of capital stock entitled to vote
thereon representing more than 60% of the shares entitled to be voted thereon.
Section 5.01(c) and Articles 10 and 11 of this Certificate of Incorporation may
only be altered, amended, repealed, or rescinded by the affirmative vote of
holders of capital stock entitled to vote thereon representing more than 90% of
the shares entitled to be voted thereon.
ARTICLE 6
SECTION 6.01. Election of Directors by Holders of Preferred Stock.
During any period when the holders of any Preferred Stock or any one or more
series thereof, voting as a class, shall be entitled to elect a specified number
of directors, by reason of dividend arrearages or other provisions giving them
the right to do so, then and during such time as such right continues (i) the
then otherwise authorized number of directors shall be increased by such
specified number of directors, and the holders of such Preferred Stock or such
series thereof, voting as a class, shall be entitled to elect the additional
directors so provided for, pursuant to the provisions of such Preferred Stock or
series; (ii) each such additional director shall serve for such term, and have
such voting powers, as shall be stated in the provisions pertaining to such
Preferred Stock or series; and (iii) whenever the holders of any such Preferred
Stock or series thereof are
4
<PAGE> 5
divested of such rights to elect a specified number of directors, voting as a
class, pursuant to the provisions of such Preferred Stock or series, the terms
of office of all directors elected by the holders of such Preferred Stock or
series, voting as a class pursuant to such provisions or elected to fill any
vacancies resulting from the death, resignation or removal of directors so
elected by the holders of such Preferred Stock or series, shall forthwith
terminate and the authorized number of directors shall be reduced accordingly.
SECTION 6.02. Ballots. Elections of directors at an annual or special
meeting of stockholders need not be by written ballot unless the bylaws of the
Corporation shall provide otherwise.
SECTION 6.03. Elimination of Certain Personal Liability of Directors.
(a) A director of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director to
the fullest extent permitted by Delaware Law.
(b) Each person (and the heirs, executors or administrators of such
person) who was or is a party or is threatened to be made a party to, or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director of the Corporation or is or was serving at
the request of the Corporation as a director of another corporation,
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by the Corporation to the fullest extent permitted by Delaware
Law. The right to indemnification conferred in this Section 6.03 shall also
include the right to be paid by the Corporation the expenses incurred in
connection with any such proceeding in advance of its final disposition to the
fullest extent authorized by Delaware Law. The right to indemnification
conferred in this Section 6.03 shall be a contract right.
(c) The Corporation may, by action of its Board of Directors,
provide indemnification to such of the officers, employees and agents of the
Corporation to such extent and to such effect as the Board of Directors shall
determine to be appropriate and authorized by Delaware Law.
(d) The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or loss
incurred by such person in any such capacity or arising out of his status as
such, whether or
5
<PAGE> 6
not the Corporation would have the power to indemnify him against such liability
under Delaware Law.
(e) The rights and authority conferred in this Section 6.03 shall
not be exclusive of any other right which any person may otherwise have or
hereafter acquire.
(f) Neither the alteration, amendment, repeal or recission of this
Section 6.03, nor the adoption of any provision of this Certificate of
Incorporation or the bylaws of the Corporation, nor, to the fullest extent
permitted by Delaware Law, any modification of law, shall eliminate or reduce
the effect of this Section 6.03 in respect of any acts or omissions occurring
prior to such alteration, amendment, repeal, recission, adoption or
modification.
ARTICLE 7
SECTION 7.01. Section 203 of Delaware Law. The Corporation hereby elects
not to be governed by Section 203 of Delaware Law.
ARTICLE 8
[Reserved].
ARTICLE 9
SECTION 9.01. Removal of Directors for Cause. Any director may be
removed at any special stockholders' meeting upon the affirmative vote of not
less than 50 percent of the outstanding shares of voting stock of the
Corporation at that time entitled to vote thereon; provided, however, that such
director may be removed only for cause and shall receive a copy of the charges
against him, delivered to him personally or by mail at his last known address at
least 10 days prior to the date of the stockholders' meeting; provided further,
that directors who shall have been elected by the holders of a series or class
of Preferred Stock,
6
<PAGE> 7
voting separately as a class, shall be removed only pursuant to the provisions
establishing the rights of such series or class to elect such directors.
ARTICLE 10
SECTION 10.01. Relationship With Roche. In anticipation that the
Corporation will cease to be a wholly owned subsidiary of Roche Holdings, Inc.,
but that Roche (as defined in Section 10.05) will remain a stockholder of the
Corporation, and in anticipation that the Corporation (as defined in Section
10.05) and Roche may engage in the same or similar activities or lines of
business and have an interest in the same areas of corporate opportunities, and
in recognition of (i) the benefits to be derived by the Corporation through its
continued contractual, corporate and business relations with Roche (including
service of officers and directors of Roche as directors of the Corporation) and
(ii) the difficulties attendant to any director, who desires and endeavors fully
to satisfy such director's fiduciary duties, in determining the full scope of
such duties in any particular situation, the provisions of this Article 10 are
set forth to regulate, define and guide the conduct of certain affairs of the
Corporation as they may involve Roche and its officers and directors, and the
powers, rights, duties and liabilities of the Corporation and its officers,
directors and stockholders in connection therewith.
SECTION 10.02. Similar Business Activities. Except as Roche Holdings,
Inc. may otherwise agree in writing,
(a) Roche shall not have a duty to refrain from engaging directly or
indirectly in the same or similar business activities or lines of business as
the Corporation, and
(b) neither Roche nor any officer or director thereof shall be
liable to the Corporation or its stockholders for breach of any fiduciary duty
by reason of any such activities of Roche or of such person's participation
therein.
In the event that Roche acquires knowledge of a potential transaction or
matter that may be a corporate opportunity for both Roche and the Corporation,
Roche shall have no duty to communicate or offer such corporate opportunity to
the Corporation and shall not be liable to the Corporation or its stockholders
for breach of any fiduciary duty as a stockholder of the Corporation or
controlling person of a stockholder by reason of the fact that Roche pursues or
acquires such
7
<PAGE> 8
corporate opportunity for itself, directs such corporate opportunity to another
person or entity, or does not communicate information regarding, or offer, such
corporate opportunity to the Corporation.
SECTION 10.03. Corporate Opportunities. In the event that a director,
officer or employee of the Corporation who is also a director, officer or
employee of Roche acquires knowledge of a potential transaction or matter that
may be a corporate opportunity for the Corporation and Roche (whether such
potential transaction or matter is proposed by a third-party or is conceived of
by such director, officer or employee of the Corporation), such director,
officer or employee shall be entitled to offer such corporate opportunity to the
Corporation or Roche as such director, officer or employee deems appropriate
under the circumstances in his sole discretion, and no such director, officer or
employee shall be liable to the Corporation or its stockholders for breach of
any fiduciary duty or duty of loyalty or failure to act in (or not opposed to)
the best interests of the Corporation or the derivation of any improper personal
benefit by reason of the fact that (i) such director, officer or employee
offered such corporate opportunity to Roche (rather than the Corporation) or did
not communicate information regarding such corporate opportunity to the
Corporation or (ii) Roche pursues or acquires such corporate opportunity for
itself or directs such corporate opportunity to another person or does not
communicate information regarding such corporate opportunity to the Corporation.
SECTION 10.04. Deemed Consent of Stockholders. Any person or entity
purchasing or otherwise acquiring any interest in any shares of capital stock of
the Corporation shall be deemed to have notice of and to have consented to the
provisions of this Article 10.
SECTION 10.05. Definitions. For purposes of this Article 10 and Article
11 only, (i) the term "CORPORATION" shall mean the Corporation and all
corporations, partnerships, joint ventures, associations and other entities in
which the Corporation beneficially owns (directly or indirectly) fifty percent
or more of the outstanding voting stock, voting power or similar voting
interests, and (ii) the term "ROCHE" shall mean Roche Holdings, Inc. and all
corporations, partnerships, joint ventures, associations and other entities
(other than the Corporation, defined in accordance with clause (i) of this
Section 10.05) that are "AFFILIATES" (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) of Roche Holdings, Inc.
SECTION 10.06. Termination; Binding Effect. Notwithstanding anything in
this Certificate of Incorporation to the contrary, the foregoing provisions of
this Article 10 shall expire on the date that Roche ceases to own beneficially
Common Stock representing at least 5% of the number of outstanding shares of
Common
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Stock of the Corporation and no person who is a director or officer of the
Corporation is also a director or officer of Roche. Neither such expiration, nor
the alteration, amendment, change or repeal of any provision of this Article 10
nor the adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with any provision of this Article 10 shall eliminate
or reduce the effect of this Article 10 in respect of any matter occurring, or
any cause of action, suit or claim that, but for this Article 10, would accrue
or arise, prior to such expiration, alteration, amendment, repeal or adoption.
SECTION 10.07. Article 11. The provisions of this Article 10 are in
addition to the provisions of Article 11.
ARTICLE 11
SECTION 11.01. Contracts Not Void. No contract, agreement, arrangement
or transaction (or any amendment, modification or termination thereof) between
the Corporation and Roche shall be void or voidable solely for the reason that
Roche is a party thereto, or solely because any directors or officers of the
Corporation who are affiliated with Roche are present at or participate in the
meeting of the Board of Directors or committee thereof which authorizes the
contract, agreement, arrangement, transaction, amendment, modification or
termination or solely because his or their votes are counted for such purpose,
but any such contract, agreement, arrangement or transaction (or any amendment,
modification or termination thereof) shall be governed by the provisions of this
Amended and Restated Certificate of Incorporation, the Corporation's Bylaws,
Delaware Law and other applicable law. For purposes of this Article 11, the
terms the "CORPORATION" and "ROCHE" have the meanings set forth in Section
10.05.
SECTION 11.02. Quorum. Directors of the Corporation who are also
directors or officers of Roche may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee that authorizes
or approves any such contract, agreement, arrangement or transaction (or
amendment, modification or termination thereof). Outstanding shares of Common
Stock owned by Roche may be counted in determining the presence of a quorum at a
meeting of stockholders that authorizes or approves any such contract,
agreement, arrangement or transaction (or amendment, modification or termination
thereof).
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SECTION 11.03. No Liability For Good Faith Actions. Neither Roche nor
any officer or director thereof shall be liable to the Corporation or its
stockholders for breach of any fiduciary duty or duty of loyalty or failure to
act in (or not opposed to) the best interests of the Corporation or the
derivation of any improper personal benefit by reason of the fact that Roche or
an officer of director thereof in good faith takes any action or exercises any
rights or gives or withholds any consent in connection with any agreement or
contract between Roche and the Corporation. No vote cast or other action taken
by any person who is an officer, director or other representative of Roche,
which vote is cast or action is taken by such person in his capacity as a
director of this Corporation, shall constitute an action of or the exercise of a
right by or a consent of Roche for the purpose of any such agreement or
contract.
SECTION 11.04. Deemed Consent by Stockholders. Any person or entity
purchasing or otherwise acquiring any interest in any shares of capital stock of
the Corporation shall be deemed to have notice of and to have consented to the
provisions of this Article 11.
SECTION 11.05. Contracts Covered. For purposes of this Article 11, any
contract, agreement, arrangement or transaction with the Corporation or any
corporation, partnership, joint venture, association or other entity in which
the Corporation beneficially owns (directly or indirectly) fifty percent or more
of the outstanding voting stock, voting power or similar voting interests shall
be deemed to be a contract, agreement, arrangement or transaction with the
Corporation.
SECTION 11.06. Binding Effect. Neither the alteration, amendment, change
or repeal of any provision of this Article 11 nor the adoption of any provision
inconsistent with any provision of this Article 11 shall eliminate or reduce the
effect of this Article 11 in respect of any matter occurring, or any cause of
action, suit or claim that, but for this Article 11, would accrue or arise,
prior to such alteration, amendment, change, repeal or adoption.
SECTION 11.07. Article 10. The provisions of this Article 11 are in
addition to the provisions of Article 10.
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IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation, having been duly adopted by the written consent of the sole
stockholder of the Corporation in accordance with the provisions of Sections
228, 242 and 245 of the General Corporation Law of the State of Delaware, has
been executed this __th day of July, 1999.
GENENTECH, INC.
By:
-------------------------------------
Name:
Title:
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EXHIBIT 3.2
BYLAWS
OF
GENENTECH, INC.
* * * * *
ARTICLE 1
OFFICES
SECTION 1.01. Registered Office. The registered office shall be
Corporation Service Company, 1013 Centre Road, City of Wilmington, County of New
Castle, State of Delaware. The name of its registered agent at such address is
Corporation Service Company.
SECTION 1.02. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
SECTION 1.03. Books. The books of the Corporation may be kept within or
without of the State of Delaware as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
SECTION 2.01. Time and Place of Meetings. All meetings of stockholders
shall be held at such place, either within or without the State of Delaware, on
such date and at such time as may be determined from time to time by the Board
of Directors (or the Chairman in the absence of a designation by the Board of
Directors).
SECTION 2.02. Annual Meetings; Election of Directors. An annual meeting
of stockholders, commencing with the year 2000, shall be held at such date and
time as directors may determine to transact such business as may
<PAGE> 2
properly be brought before the meeting. Prior to a Termination Event (as defined
below), directors shall be nominated and elected at the annual meeting in
accordance with Section 3.02 and Section 3.03. After a Termination Event has
occurred, directors shall (subject to Section 3.03(c)) be elected by
stockholders by ballot at the annual meeting, unless they are elected by written
consent in lieu of an annual meeting as permitted by the General Corporation Law
of the State of Delaware as the same exists or may hereafter be amended
("DELAWARE LAW"). For purposes of these bylaws, a "TERMINATION EVENT" means the
disposition by Roche and its "AFFILIATES" (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) of beneficial ownership of Common
Stock of the Corporation which disposition has the effect of causing Parent's
Voting Interest (as defined herein) to be less than 40%.
SECTION 2.03. Special Meetings. Special meetings of stockholders may be
called by the Board of Directors or the Chairman of the Board and shall be
called by the Secretary at the request in writing of holders of record of a
majority of the outstanding capital stock of the Corporation entitled to vote.
Such request shall state the purpose or purposes of the proposed meeting.
SECTION 2.04. Notice of Meetings and Adjourned Meetings; Waivers of
Notice. (a) Whenever stockholders are required or permitted to take any action
at a meeting, a written notice of the meeting shall be given which shall state
the place, date and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by Delaware Law, such notice shall be given not less than 10 nor more
than 60 days before the date of the meeting to each stockholder of record
entitled to vote at such meeting. Unless these bylaws otherwise require, when a
meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the Corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than 30 days, or after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
(b) A written waiver of any such notice signed by the person
entitled thereto, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Business
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transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice.
SECTION 2.05. Quorum. Unless otherwise provided under the certificate of
incorporation or these bylaws and subject to Delaware Law, the presence, in
person or by proxy, of the holders of a majority of the outstanding capital
stock of the Corporation entitled to vote at a meeting of stockholders shall
constitute a quorum for the transaction of business. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, the
stockholders present in person or represented by proxy shall adjourn the
meeting, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented any business may be transacted which might have
been transacted at the meeting as originally notified.
SECTION 2.06. Voting. (a) Unless otherwise provided in the certificate
of incorporation and subject to Delaware Law, each stockholder shall be entitled
to one vote for each outstanding share of capital stock of the Corporation held
by such stockholder. Any share of capital stock of the Corporation held by the
Corporation shall have no voting rights. Unless otherwise provided in Delaware
Law, the certificate of incorporation or these bylaws, the affirmative vote of a
majority of the shares of capital stock of the Corporation present, in person or
by written proxy, at a meeting of stockholders and entitled to vote on the
subject matter shall be the act of the stockholders.
(b) Each stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to a corporate action in writing without a
meeting may authorize another person or persons to act for him by written proxy,
but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period.
SECTION 2.07. Action by Consent. (a) Unless otherwise provided in the
certificate of incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting of stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in writing, setting
forth the action so taken, shall be signed by the holders of outstanding capital
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the Corporation by
delivery to its registered office in Delaware, its principal place of business,
or an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered
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office shall be by hand or by certified or registered mail, return receipt
requested. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing and who, if the action had been taken at a
meeting, would have been entitled to notice of the meeting if the record date
for such meeting had been the date that written consents signed by a sufficient
number of stockholders to take the action were delivered to the Corporation as
provided in Section 2.07(b).
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within 60 days of the
earliest dated consent delivered in the manner required by this section and
Delaware Law to the Corporation, written consents signed by a sufficient number
of holders to take action are delivered to the Corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
SECTION 2.08. Organization. At each meeting of stockholders, the
Chairman of the Board, if one shall have been elected, or in his absence or if
one shall not have been elected, the director designated by the vote of the
majority of the directors present at such meeting, shall act as chairman of the
meeting. The Secretary (or in his absence or inability to act, the person whom
the chairman of the meeting shall appoint secretary of the meeting) shall act as
secretary of the meeting and keep the minutes thereof.
SECTION 2.09. Order of Business; Conduct of Meetings. The order of
business at all meetings of stockholders shall be as determined by the chairman
of the meeting. In addition, the Board may adopt by resolution such rules and
regulations for the conduct of meetings of stockholders as it shall deem
appropriate. Except to the extent inconsistent with law and such rules and
regulations as adopted by the Board, the chairman of any meeting of stockholders
shall have the right and authority to convene and to adjourn the meeting, to
prescribe such rules, regulations and procedures and to do all such acts as, in
the judgment of such chairman, are appropriate for the proper conduct of the
meeting. Such rules, regulations, or procedures, whether adopted by the Board or
prescribed by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted
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proxies or such other persons as the chairman of the meeting may determine; (iv)
restrictions on entry to the meeting after the time fixed for the commencement
thereof; and (v) limitations on the time allotted to questions or comments by
participants. The chairman of the meeting, in addition to making any other
determinations that may be appropriate to the conduct of the meeting, shall, if
the facts warrant, determine and declare to the meeting that a matter or
business was not properly brought before the meeting and, if such chairman
should so determine, declare to the meeting that any such matter or business not
properly brought before the meeting shall not be transacted or considered.
Unless and to the extent determined by the Board or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with the
rules of parliamentary procedure.
SECTION 2.10. Inspectors of Election. The Corporation may, and shall if
required by law, in advance of any meeting of stockholders, appoint one or more
inspectors of election, who may be employees of the Corporation, to act at the
meeting or any adjournment thereof and to make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. In the event that no inspector so appointed or
designated is able to act at a meeting of stockholders, the chairman of the
meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath to execute faithfully the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspector or
inspectors so appointed or designated shall (i) ascertain the number of shares
of capital stock of the Corporation outstanding and the voting power of each
such share, (ii) determine the shares of capital stock of the Corporation
represented at the meeting and the validity of proxies and ballots, (iii) count
all votes and ballots, (iv) determine and retain for a reasonable period a
record of the disposition of any challenges made to any determination by the
inspectors, and (v) certify their determination of the number of shares of
capital stock of the Corporation represented at the meeting and such inspectors'
count of all votes and ballots. Such certification and report shall specify such
other information as may be required by law. In determining the validity and
counting of proxies and ballots cast at any meeting of stockholders of the
Corporation, the inspectors may consider such information as is permitted by
applicable law. No person who is a candidate for an office at an election may
serve as an inspector at such election.
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ARTICLE 3
DIRECTORS
SECTION 3.01. General Powers. Except as otherwise provided in Delaware
Law or the certificate of incorporation, the business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors.
SECTION 3.02. Composition of Board of Directors; Terms of Directors. (a)
Subject to the other provisions hereof, the number of directors comprising the
Board shall be six, and shall include two nominees of Roche Holdings, Inc.
("ROCHE"), one executive officer of the Corporation nominated by the nominating
or proxy committee, and three Independent Directors (as defined herein)
nominated by the nominating or proxy committee. The Board shall at all times
include at least two Independent Directors, and one executive officer of the
Corporation. For purposes of these bylaws, the term "INDEPENDENT DIRECTOR" means
a director of the Corporation who is not (i) an officer of the Corporation, (ii)
an employee, director, principal stockholder or partner of Roche or any
affiliate of Roche, or (iii) an employee, director, principal stockholder or
partner of an entity (other than the Corporation or any of its subsidiaries)
that was dependent upon Roche or any affiliate of Roche for more than 10% of its
revenues or earnings in its most recent fiscal year. After a Termination Event
has occurred, this Section 3.02(a) shall be of no further force or effect, and
directors shall be elected as set forth in Section 2.02.
(b) The directors of the Corporation shall be nominated as provided
in these bylaws, and shall serve until their successors have been duly elected
or appointed and qualified or until their earlier death, resignation or removal
in accordance with the Certificate of Incorporation and these bylaws. The term
of office of each director shall be one year, provided that this shall not
prevent any director from serving multiple or successive terms.
SECTION 3.03. Roche's Right to Proportional Representation. (a) Upon the
request of Roche at any time by notice to the Corporation (a "GOVERNANCE
NOTICE"), Roche shall be immediately entitled to representation on the Board
such that Roche shall have a number of directors designated by Roche equal to
Parent's Voting Interest times the total number of directors, rounded up to the
next whole number if Parent's Voting Interest is greater than 50% and rounded
down to the next whole number if Parent's Voting Interest is less than or equal
to 50%. For purposes of these bylaws, "PARENT'S VOTING INTEREST" means the
percentage of the outstanding common stock, par value $0.02 per share ("COMMON
STOCK"), of the Corporation beneficially owned by Roche and its affiliates.
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(b) Upon receipt of a Governance Notice, the Board and the
Corporation shall immediately take or cause to be taken all action not
previously taken to cause the numbers of directors constituting the Board to be
increased, and to cause the Board to fill the vacancies created by any such
increase by electing Roche's nominees for such vacancies, as necessary in order
to achieve the proportionality required by Section 3.03(a). Any directors
elected to fill a vacancy shall serve until the next annual meeting of
stockholders.
(c) After a Termination Event has occurred, Sections 3.03(a) and
3.03(b) shall be of no further force or effect, and Roche shall thereafter be
entitled to nominate a number of directors (and their successors) which is
proportional to Parent's Voting Interest, rounded down to the next whole number,
until and unless Parent's Voting Interest is less than 5%. Both prior to and
after a Termination Event, Roche may designate an affiliate of Roche to make
nominations of directors and committee members on its behalf.
SECTION 3.04. Committees. (a) The Board shall designate a nominating or
proxy committee, an executive committee, an audit committee and a compensation
committee. No action by any such committee shall be valid unless taken at a
meeting for which adequate notice has been duly given to or waived by the
members of such committee. Such notice shall include a description of the
general nature of the business to be transacted at the meeting and no other
business may be transacted at such meeting. Any committee member unable to
participate in person at any meeting shall be given the opportunity to
participate by telephone.
(b) Any such committee, to the extent provided by resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to the following matter: (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by
Delaware Law to be submitted to the stockholders for approval or (ii) adopting,
amending or repealing any bylaw of the Corporation. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required. The Corporation shall be governed by the provisions of Section
141(c)(2) of Delaware Law, as amended effective July 1, 1996.
(c) Each committee of the Board (other than any special committee or
committee of Independent Directors that may be constituted for purposes of
making any determination provided for by agreement between the Corporation and
Roche) shall at all times include at least one director designated by Roche
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(and, following a Governance Notice, no less than a proportional number of
directors designated by Roche). Any director designated by Roche to serve on any
committee may designate as his or her alternate another director designated by
Roche.
(d) The nominating or proxy committee shall at all times have three
members. At any time that Roche owns 80% or more of the TOTAL VOTING POWER of
the Corporation stock (within the meaning of Section 1504 of the Internal
Revenue Code of 1986, as amended), the nominating or proxy committee shall
include two nominees of Roche and one Independent Director. At any time that
Roche owns less than 80% of the total voting power, the nominating or proxy
committee shall include (i) a number of nominees of Roche that is equal to the
product of (A) the percentage owned by Roche of the total voting power and (B)
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 (X) Roche shall at no
time have more than two nominees, and (Y) if Roche's ownership of less than 80%
of the total voting power is the result of a breach by the Corporation of any
obligation under any agreement with Roche, the nominating or proxy committee
shall include two nominees of Roche, and (ii) a number of Independent Directors
equal to three minus the number of nominees of Roche determined pursuant to the
preceding clause (i).
(e) After a Termination Event has occurred, Sections 3.04(c) and
3.04(d) shall terminate and be of no further force or effect.
SECTION 3.05. Nomination of Directors. The nominating or proxy committee
shall require, for the nomination of any person not designated by Roche, the
approval of a majority of the nominating or proxy committee.
SECTION 3.06. Quorum and Manner of Acting. Unless the certificate of
incorporation or these bylaws require a greater number, a majority of the total
number of directors shall constitute a quorum for the transaction of business,
and the affirmative vote of a majority of the directors present at meeting at
which a quorum is present shall be the act of the Board of Directors. When a
meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the Board of Directors may transact any business which
might have been transacted at the original meeting. If a quorum shall not be
present at any meeting of the Board of Directors the directors present thereat
shall adjourn the meeting, from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
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SECTION 3.07. Time and Place of Meetings. The Board of Directors shall
hold its meetings at such place, either within or without the State of Delaware,
and at such time as may be determined from time to time by the Board of
Directors (or the Chairman in the absence of a determination by the Board of
Directors).
SECTION 3.08. Annual Meeting. The Board of Directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting shall be held.
Notice of such meeting need not be given. In the event such annual meeting is
not so held, the annual meeting of the Board of Directors may be held at such
place either within or without the State of Delaware, on such date and at such
time as shall be specified in a notice thereof given as hereinafter provided in
Section 3.10 herein or in a waiver of notice thereof signed by any director who
chooses to waive the requirement of notice.
SECTION 3.09. Regular Meetings. After the place and time of regular
meetings of the Board of Directors shall have been determined and notice thereof
shall have been once given to each member of the Board of Directors, regular
meetings may be held without further notice being given.
SECTION 3.10. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President and shall
be called by the Chairman of the Board, President or Secretary on the written
request of three directors. Notice of special meetings of the Board of Directors
shall be given to each director at least three days before the date of the
meeting in such manner as is determined by the Board of Directors.
SECTION 3.11. Action by Consent. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
SECTION 3.12. Telephonic Meetings. Unless otherwise restricted by the
certificate of incorporation or these bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or such committee, as the case may be, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
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SECTION 3.13. Resignation. Any director may resign at any time by giving
written notice to the Board of Directors or to the Secretary of the Corporation.
The resignation of any director shall take effect upon receipt of notice thereof
or at such later time as shall be specified in such notice; and unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 3.14. Vacancies. Except as otherwise provided in the certificate
of incorporation or these bylaws, vacancies and newly created directorships
resulting from any increase in the authorized number of directors elected by all
the stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. Whenever the holders of any class or classes of stock
or series thereof (or any particular holder or holders) are entitled to elect
one or more directors by the certificate of incorporation or these bylaws,
vacancies and newly created directorships of such class or classes or series may
be filled by a majority of directors elected by such class or classes or series
thereof (or particular holder or holders) then in office, or by a sole remaining
director so elected. Each director so chosen shall hold office until his
successor is elected and qualified, or until his earlier death, resignation or
removal. If there are no directors in office, then an election of directors may
be held in accordance with Delaware Law.
SECTION 3.15. Removal. Directors may be removed only as provided in the
Certificate of Incorporation.
SECTION 3.16. Compensation. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall have
authority to fix the compensation of directors, including fees and reimbursement
of expenses.
ARTICLE 4
OFFICERS
SECTION 4.01. Principal Officers. The principal officers of the
Corporation shall be a Chief Executive Officer, a Chief Operating Officer, a
Chief Financial Officer, one or more Executive Vice Presidents, one or more
Senior Vice Presidents, one or more Vice Presidents, a Treasurer and a Secretary
who shall have the duty, among other things, to record the proceedings of the
meetings of stockholders and directors in a book kept for that purpose. The
Corporation may also have such other principal officers, including one or more
Controllers, as the Board may in its discretion appoint. One person may hold the
offices and
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perform the duties of any two or more of said offices, except that no one person
shall hold the offices and perform the duties of President and Secretary.
SECTION 4.02. Election, Term of Office and Remuneration. The principal
officers of the Corporation shall be elected annually by the Board of Directors
at the annual meeting thereof. Each such officer shall hold office until his
successor is elected and qualified, or until his earlier death, resignation or
removal. The remuneration of all officers of the Corporation shall be fixed by
the Board of Directors. Any vacancy in any office shall be filled in such manner
as the Board of Directors shall determine.
SECTION 4.03. Subordinate Officers. In addition to the principal
officers enumerated in Section 4.01 herein, the Corporation may have one or more
Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such
other subordinate officers, agents and employees as the Board of Directors may
deem necessary, each of whom shall hold office for such period as the Board of
Directors may from time to time determine. The Board of Directors may delegate
to any principal officer the power to appoint and to remove any such subordinate
officers, agents or employees.
SECTION 4.04. Removal. Except as otherwise permitted with respect to
subordinate officers, any officer may be removed, with or without cause, at any
time, by resolution adopted by the Board of Directors.
SECTION 4.05. Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors (or to a principal officer if the Board
of Directors has delegated to such principal officer the power to appoint and to
remove such officer). The resignation of any officer shall take effect upon
receipt of notice thereof or at such later time as shall be specified in such
notice; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 4.06. Powers and Duties. The officers of the Corporation shall
have such powers and perform such duties incident to each of their respective
offices and such other duties as may from time to time be conferred upon or
assigned to them by the Board of Directors.
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ARTICLE 5
GENERAL PROVISIONS
SECTION 5.01. Fixing the Record Date. (a) In order that the Corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than 60 nor less than 10 days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided that the Board of Directors may fix a new record date for the adjourned
meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than 10 days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by Delaware Law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
Delaware Law, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change,
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conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than 60 days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
SECTION 5.02. Dividends. Subject to limitations contained in Delaware
Law and the certificate of incorporation, the Board of Directors may declare and
pay dividends upon the shares of capital stock of the Corporation, which
dividends may be paid either in cash, in property or in shares of the capital
stock of the Corporation.
SECTION 5.03. Year. The fiscal year of the Corporation shall commence on
January 1 and end on December 31 of each year.
SECTION 5.04. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed, affixed or otherwise reproduced.
SECTION 5.05. Voting of Stock Owned by the Corporation. The Board of
Directors may authorize any person, on behalf of the Corporation, to attend,
vote at and grant proxies to be used at any meeting of stockholders of any
corporation (except this Corporation) in which the Corporation may hold stock.
SECTION 5.06. Amendments. These bylaws or any of them, may be altered,
amended or repealed, or new bylaws may be made, by the stockholders entitled to
vote thereon at any annual or special meeting thereof or by the Board of
Directors, provided that Sections 2.02, 3.02, 3.03, 3.04, 3.05, 3.14, 3.15 and
5.06 of these bylaws may only be altered, amended, repealed or rescinded as
provided in the Certificate of Incorporation.
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<PAGE> 1
EXHIBIT 4.1
[FRONT OF STOCK CERTIFICATE]
This certifies that ____________________ is the record holder of __________
____________________________________________________ Seventy Shares of the
Capital Stock of Genentech, Inc. transferable only on the books of the
Corporation by the holder hereof in person or by Attorney upon surrender of this
Certificate properly endorsed, or assigned.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunder
affixed this ___ day of ____ A.D. 1999.
<PAGE> 2
[BACK OF STOCK CERTIFICATE]
For Value Received ____________ hereby sell, assign and transfer unto
_______________________________ ____________________ Shares of the Capital
Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint ______________________________, Attorney to transfer the
said Stock on the books of the within named Corporation with full power of
substitution in the premises.
Dated _______________________________ , 19___________
In presence of _________________________________________________________
<PAGE> 1
EXHIBIT 5
July 16, 1999
Genentech, Inc.
1 DNA Way
South San Francisco, CA 94080-4990
Ladies and Gentlemen:
We have acted as counsel to Genentech, Inc., a Delaware corporation
("Genentech"), in connection with the preparation of Genentech's Registration
Statement on Form S-3 as amended (File No. 333-80601) (the "Registration
Statement") filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
registration of shares (the "Shares") of common stock, par value $.02 per
share, of Genentech to be sold by Roche Holdings, Inc.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates of public
officials and other instruments as we have deemed necessary for the purposes of
rendering this opinion.
In rendering this opinion we have assumed that prior to the offering of
any of the Shares, the Registration Statement, as then amended, will have
become effective under the Securities Act.
On the basis of the foregoing, we are of the opinion that, when issued, the
Shares will have been duly authorized, validly issued, fully paid and
non-assessable.
<PAGE> 2
2 July 16, 1999
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York, the federal laws of
the United States of America and the General Corporation Law of the State of
Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to us under the
caption "Legal Matters" in the Prospectus contained in this Registration
Statement.
Very truly yours,
/s/ DAVIS POLK & WARDWELL
--------------------------------
Davis Polk & Wardwell
<PAGE> 1
EXHIBIT 10.1
DRAFT OF JULY 12, 1999
AFFILIATION AGREEMENT
AFFILIATION AGREEMENT dated as of July __, 1999 between Genentech, Inc.,
a Delaware corporation (the "COMPANY") and Roche Holdings, Inc., a Delaware
corporation ("ROCHE").
WHEREAS, the Amended and Restated Governance Agreement dated as of
October 25, 1995 between Roche and the Company (the "TERMINATED GOVERNANCE
AGREEMENT") was terminated pursuant to its terms on June 16, 1999;
WHEREAS, Roche owns, as of the date hereof, all of the outstanding
common stock, par value $0.02 per share, of the Company (the "COMMON STOCK");
WHEREAS, Roche expects to sell shares of Common Stock representing
approximately __% of the Company's equity in a registered public offering (the
"OFFERING");
WHEREAS, Roche and the Company desire to establish in this Agreement
certain terms and conditions concerning the corporate governance of the Company
after completion of the Offering; and
WHEREAS, Roche and the Company also desire to establish in this
Agreement certain terms and conditions concerning the acquisition and
disposition of securities of the Company by Roche and its Affiliates (as defined
herein) after completion of the Offering;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and agreements contained herein, Roche and the Company hereby agree as
follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions.
(a) "AFFILIATE" and "AFFILIATE" have the meaning defined in Rule
12b-2 promulgated under the Securities Exchange Act of 1934, as amended (such
Act, including the rules and regulations promulgated thereunder, the "1934
ACT").
<PAGE> 2
(b) "APPLICABLE STOCK" means, at any time, the (i) shares of Common
Stock owned by Roche and its affiliates at such time that were owned on the date
hereof, plus (ii) shares of Common Stock purchased by Roche and its affiliates
pursuant to Section 4.04 of this Agreement, plus (iii) shares of Common Stock
that were issued to Roche and its affiliates in respect of shares described in
either clause (i) or clause (ii) in any reclassification, share combination,
share subdivision, share dividend, share exchange, merger, consolidation or
similar transaction or event.
(c) "BENEFICIAL OWNERSHIP" has the meaning defined in Rule 13d-3
promulgated under the 1934 Act.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "EQUITY SECURITY" means any (A) voting stock of the Company
(other than shares of voting stock not having the right to vote generally in any
election of directors of the Company), (B) securities of the Company convertible
into or exchangeable for such stock, and (C) options, rights and warrants issued
by the Company to acquire such stock.
(f) "INDEPENDENT DIRECTOR" means a director of the Company who is
not (i) an officer of the Company, (ii) an employee, director, principal
stockholder or partner of Roche or any affiliate of Roche, or (iii) an employee,
director, principal stockholder or partner of an entity (other than the Company
or any of its subsidiaries) that was dependent upon Roche or any affiliate of
Roche for more than 10% of its revenues or earnings in its most recent fiscal
year.
(g) "MARKET PRICE" of any shares of Common Stock or Other Stock, as
the case may be, on any date means (i) the average of the last sale price of
such shares on each of the five trading days immediately preceding such date on
the New York Stock Exchange, Inc. or, if such shares are not listed thereon, on
the principal national securities exchange or automated interdealer quotation
system on which such shares are traded or (ii) if such sale prices are
unavailable or such shares are not so traded, the value of such shares on such
date determined in accordance with agreed-upon procedures reasonably
satisfactory to Roche and the Company.
(h) "OTHER STOCK" means any class of the Company's capital stock
other than Common Stock, and any other security of the Company that, in the
opinion of Roche, will or is likely to be treated as stock for purposes of
Section 1504 of the Code.
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(i) "OWNERSHIP PERCENTAGE" means, at any time, the fraction,
expressed as a percentage and rounded to the next highest thousandth of a
percent, whose numerator is the aggregate Value of the Applicable Stock and
whose denominator is the sum of the aggregate Value of the outstanding shares of
Common Stock of the Company plus Repurchased Shares; provided, however, that any
shares of Common Stock issued by the Company in violation of its obligations
under Section 4.04 of this Agreement shall not be deemed outstanding for the
purpose of determining the Ownership Percentage.
(j) "PARENT'S VOTING INTEREST" means the percentage of the
outstanding Common Stock beneficially owned by Roche and its affiliates.
(k) "REPURCHASED SHARES" means the aggregate Value of shares of the
Company's Common Stock that are, from and after the date hereof, repurchased by
the Company from its shareholders, less the aggregate Value of shares of Common
Stock (up to the aggregate Value so repurchased) that are re-issued from and
after the date hereof upon the exercise of stock options or otherwise.
(l) "VALUE" means, with respect to any share of stock, the value of
such share determined by Roche under principles applicable for purposes of
Section 1504 of the Code.
ARTICLE 2
CORPORATE GOVERNANCE
SECTION 2.01. Roche Approval Required for Certain Actions. The approval
of the directors designated by Roche pursuant to the Company's bylaws shall be
required to approve any of the following:
(a) the acquisition by the Company of any business or assets that
would constitute a substantial portion of the business or assets of the Company,
whether such acquisition be by merger or consolidation or the purchase of stock
or assets or otherwise;
(b) the sale, lease, license, transfer or other disposal of all or a
substantial portion of the business or assets of the Company other than in the
ordinary course of business, other than any such sale, lease, license, transfer
or other disposal which is subject to the other provisions hereof;
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(c) the issuance of any Equity Securities or other capital stock of
the Company, except for (i) issuances of shares of the Company's Common Stock,
or options, warrants or rights to acquire, or securities convertible into or
exchangeable for, such Common Stock pursuant to any employee compensation plan
that has been approved by Roche not exceeding 5% of the voting stock, (ii)
issuances thereof upon the exercise, conversion or exchange of any outstanding
Equity Securities or other capital stock; and (iii) other issuances thereof
during any 24 month period not exceeding 5% of the voting stock of the Company
outstanding at the beginning of such 24 month period; and
(d) the repurchase or redemption of any Equity Securities or other
capital stock of the Company, other than redemptions required by the terms
thereof and purchases made at fair market value in connection with any deferred
compensation plan maintained by the Company.
For purposes of clauses (a) and (b), unless a majority of Directors
shall have made a contrary determination in good faith, a "substantial portion
of the business or assets of the Company" shall mean a portion of the business
or assets of the Company accounting for 10% of the consolidated total assets,
contribution to net income or revenues of the Company and its consolidated
subsidiaries.
Following the giving of a Governance Notice (as defined in Section 3.03
of the Company's bylaws) , until the additional Roche designees shall have taken
office as directors of the Company, the Directors shall not take any action, or
fail to take any action, except in the ordinary course of business, without the
consent of Roche. Roche agrees to use its best efforts to cause such designees
to take office, and for any necessary filings to be made with respect thereto to
be made, as promptly as practicable following such Governance Notice.
SECTION 2.02. Licensing and Marketing Arrangements. Except as otherwise
provided in the Amended and Restated Agreement between Genentech, Inc. and F.
Hoffmann -- La Roche Ltd Regarding Commercialization of Genentech's Products
Outside of the United States dated as of [Date], 1999 (the "MARKETING
AGREEMENT"), the Company will not, and will not permit any of its subsidiaries
to, enter into any material licensing or marketing agreement with respect to any
products, processes, inventions or developments made by the Company or any
subsidiary of the Company unless it shall have first negotiated in good faith
with Roche for a reasonable period of not less than three or more than six
months with a view towards reaching a mutually beneficial licensing or marketing
agreement with respect to such products, processes, inventions or developments.
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ARTICLE 3
REGISTRATION RIGHTS
SECTION 3.01. Registration. (a) The Company agrees that upon the request
of Roche it will file one or more registration statements (each a "REGISTRATION
STATEMENT") under the Securities Act of 1933, as amended (the "1933 ACT") as to
the number of shares of Common Stock specified in such request (the "REGISTERED
SHARES"). Roche shall have the right to designate the underwriters for any
public offering of Registered Shares.
(b) The Company agrees to (i) use its best efforts to have any
registration of the Registered Shares declared effective as promptly as
practicable after the filing thereof and (ii) to keep such registration
statement effective for a period sufficient to complete the distribution of the
Registered Shares. The Company further agrees to supplement or make amendments
to the Registration Statement, if required by (x) the registration form utilized
by the Company for such registration or by the instructions applicable to such
registration form, (y) the 1933 Act or the rules and regulations thereunder or
(z) Roche (or any underwriter for Roche) with respect to information concerning
Roche or such underwriter or the plan of distribution to be utilized with
respect to the Registered Shares. The Company agrees to furnish to Roche copies
of any such supplement or amendment prior to its being used or filed with the
Securities and Exchange Commission (the "SEC").
SECTION 3.02. Registration Procedures. Subject to the provisions of
Section 3.01 hereof, in connection with the registration of shares of Common
Stock hereunder, the Company will as expeditiously as possible:
(a) furnish to Roche, prior to the filing of a Registration
Statement, copies of such Registration Statement as is proposed to be filed, and
thereafter such number of copies of such Registration Statement, each amendment
and supplement thereto (in each case including all exhibits thereto), the
prospectus included in such Registration Statement (including each preliminary
prospectus) and such other documents in such quantities as Roche may reasonably
request from time to time in order to facilitate the disposition of the
Registered Shares;
(b) use all reasonable efforts to register or qualify the Registered
Shares under such other securities or blue sky laws of such jurisdiction as
Roche reasonably requests and do any and all other acts and things as may be
reasonably necessary or advisable to enable Roche to consummate the disposition
in such jurisdictions of the shares of Common Stock owned by Roche; provided
that the Company will not be required to (i) qualify generally to do business in
any
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jurisdiction where it would not otherwise be required to qualify but for this
subsection (b), (ii) subject itself to taxation in any such jurisdiction or
(iii) consent to general service of process in any such jurisdiction;
(c) use all reasonable efforts to cause the Registered Shares to be
registered with or approved by such other governmental agencies or authorities
as may be necessary by virtue of the business and operations of the Company to
enable Roche to consummate the disposition of such shares of Common Stock;
(d) notify Roche, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of the happening of any event as a
result of which the prospectus included in such Registration Statement or
amendment contains an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company will prepare a supplement or amendment
to such prospectus so that, as thereafter delivered to the purchasers of the
Registered Shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading;
(e) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of the Registered
Shares;
(f) make available for inspection by Roche, any underwriter
participating in any disposition pursuant to such registration, and any
attorney, accountant or other agent retained by any Roche or any such
underwriter (collectively, the "INSPECTORS"), all financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"RECORDS") as shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the officers, directors and employees of the
Company to supply all information reasonably requested by any such Inspector in
connection with such registration; provided that (i) records and information
obtained hereunder shall be used by such persons only to exercise their due
diligence responsibility and (ii) records or information which the Company
determines, in good faith, to be confidential shall not be disclosed by the
Inspectors unless (x) the disclosure of such Records or information is necessary
to avoid or correct a misstatement or omission in the Registration Statement or
(y) the release of such Records or information is ordered pursuant to a subpoena
or other order from a court or governmental authority of competent jurisdiction.
Roche shall use reasonable efforts, prior to any such disclosure described in
(x) above, to inform the Company that such disclosure is necessary to avoid or
correct a misstatement or omission in the Registration Statement. Roche further
agrees that it will, upon
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learning that disclosure of such Records or information is sought in a court or
governmental authority, give notice to the Company and allow the Company, at the
expense of the Company, to undertake appropriate action to prevent disclosure of
the Records or information deemed confidential;
(g) use all reasonable efforts to obtain a comfort letter from the
independent public accountants for the Company in customary form and covering
such matters of the type customarily covered by comfort letters as Roche
reasonably requests;
(h) otherwise use all reasonable efforts to comply with all
applicable rules and regulations of the SEC, and make generally available to its
security holders, as soon as reasonably practicable, an earnings statement
covering a period of twelve months, beginning within three months after the
effective date of the registration, which earnings statement shall satisfy the
provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder; and
(i) use all reasonable efforts to cause all Registered Shares to be
listed on each securities exchange on which similar securities issued by the
Company are listed.
SECTION 3.03. Conditions to Offerings. The obligations of the Company to
take the actions contemplated by Sections 3.01 and 3.02 with respect to an
offering of shares of Common Stock shall be subject to the condition that Roche
shall conform to all applicable requirements of the 1933 Act and the 1934 Act
with respect to the offering and sale of securities and advise each underwriter,
broker or dealer (all of whom may be freely designated by Roche) through which
any of the Registered Shares are offered that the Registered Shares are part of
a distribution that is subject to the prospectus delivery requirements of the
1933 Act.
The Company may require Roche to furnish to the Company such information
regarding Roche or the distribution of the Registered Shares as the Company may
from time to time reasonably request in writing, in each case only as required
by the 1933 Act or the rules and regulations thereunder or under state
securities or Blue Sky laws.
Roche agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3.02(d) hereof, Roche
will forthwith discontinue disposition of Registered Shares pursuant to the
registration covering such shares of Common Stock until Roche's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 3.02(d)
hereof.
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SECTION 3.04. Additional Conditions. The Company's obligations pursuant
to Section 3.01 shall be suspended, for an aggregate period of up to sixty days
in any 12-month period, if (i) the fulfillment of such obligations would require
the Company to make a disclosure that would, in the reasonable good faith
judgment of the Company's board of directors, be detrimental to the Company and
premature, or (ii) the Company has filed a registration statement with respect
to Equity Securities to be distributed in an underwritten public offering and it
is advised by its lead or managing underwriter that an offering by Roche of the
Registered Shares would materially adversely affect the distribution of such
Equity Securities. Such obligations shall be reinstated (x) in the case of
clause (i) above, upon the making of such disclosure by the Company (or, if
earlier, when such disclosure would either no longer be necessary for the
fulfillment of such obligations or no longer be detrimental), and (y) in the
case of clause (ii) above, upon the conclusion of any period (not exceeding 6
months) during which the Company would not, pursuant to the terms of its
underwriting arrangements, be permitted to sell the Registered Securities for
its own account.
SECTION 3.05. Registration Expenses. All expenses incident to the
performance of or compliance with this Article by the Company, including,
without limitation, all fees and expenses of compliance with securities or blue
sky laws (including reasonable fees and disbursements of counsel in connection
with blue sky qualifications of the Registered Shares), rating agency fees,
printing expenses, messenger and delivery expenses, internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the fees and expenses incurred
in connection with the listing of the securities to be registered on each
securities exchange on which similar securities issued by the Company are then
listed, fees and disbursements of counsel for the Company and its independent
certified public accountants (including the expenses of any comfort letters
required by or incident to such performance), securities acts liability
insurance (if the Company elects to obtain such insurance), the reasonable fees
and expenses of any special experts retained by the Company in connection with
such registration and the fees and expenses of other persons retained by the
Company (all such expenses being herein called "REGISTRATION EXPENSES"), will be
borne by the Company, provided that any such expenses (other than internal
expenses) of a registration shall be paid by Roche if such registration is the
third (or any greater number) that the Company undertakes at Roche's request
within a twelve month period. The Company shall pay any registration or filing
fees payable under any federal or state securities or Blue Sky laws, provided
that any such fees of a registration shall be paid by Roche if (i) such
registration is the second (or any greater number) that the Company undertakes
at Roche's request within a twelve month period or (ii) the Company has paid
such fees pursuant to this sentence in connection with four previous
registrations. The Company will not have any responsibility for any of the
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expenses of the holders of Registrable Securities incurred in connection with
any registration hereunder including, without limitation, underwriting fees,
discounts and commissions and transfer taxes, if any, attributable to the sale
of Registrable Securities, counsel fees of such holders and travel costs.
SECTION 3.06. Indemnification; Contribution. (a) Indemnification by the
Company. The Company agrees to indemnify, to the fullest extent permitted by
law, Roche, its directors and officers and each person who controls Roche
(within the meaning of either the 1933 Act or the 1934 Act) against any and all
losses, claims, damages, liabilities and expenses (including attorneys' fees)
caused by any untrue or alleged untrue statement of material fact contained in
any Registration Statement, prospectus or preliminary prospectus (each as
amended and or supplemented, if the Company shall have furnished any amendments
or supplements thereto), or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein (in the case of a prospectus, in the light of the circumstances under
which they were made) not misleading, provided that the Company shall not be
required to indemnify any holder or its officers, directors or controlling
persons for any losses, claims, damages, liabilities or expenses resulting from
any such untrue statement or omission if such untrue statement or omission is
made in reliance on and conformity with any information with respect to such
holder furnished to the Company by such holder expressly for use therein. In
connection with an underwritten offering, the Company will indemnify each
underwriter thereof, the officers and directors of such underwriter, and each
person who controls such underwriter (within the meaning of either the 1933 Act
or 1934 Act) to the same extent as provided above with respect to the
indemnification of Roche; provided that such underwriter agrees to indemnify the
Company to the same extent as provided below with respect to the indemnification
of the Company by Roche.
(b) Indemnification by Roche. In connection with any registration in
which Roche is participating, Roche will furnish to the Company in writing such
information and affidavits with respect to Roche as the Company reasonably
requests for use in connection with any such registration, prospectus, or
preliminary prospectus and agrees to indemnify the Company, its directors, its
officers who sign the Registration Statement and each person, if any, who
controls the Company (within the meaning of either the 1933 Act or of the 1934
Act) to the same extent as the foregoing indemnity from the Company to such
holder, but only with respect to information relating to such holder furnished
to the Company in writing by Roche expressly for use in the Registration
Statement, the prospectus, any amendment or supplement thereto, or any
preliminary prospectus.
(c) Conduct of Indemnification Proceedings. In case any proceeding
(including any governmental investigation) shall be instituted involving any
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person in respect of which indemnity may be sought pursuant to Section 3.06(a)
or Section 3.06(b) such person (hereinafter called the indemnified party) shall
promptly notify the person against whom such indemnity may be sought
(hereinafter called the indemnifying party) in writing and the indemnifying
party, upon request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party and any
others the indemnifying party may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and the indemnified party
shall have been advised by counsel that representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all such indemnified parties, and that
all such fees and expenses shall be reimbursed as they are incurred. In the case
of any such separate firm for the indemnified parties, such firm shall be
designated in writing by the indemnified parties. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the third sentence of this
Section 3.06(c), the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement in entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request or reasonably
objected in writing, on the basis of the standards set forth herein, to the
propriety of such reimbursement prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
10
<PAGE> 11
(d) Contribution. If the indemnification provided for in this
Section 3.06 from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to in this Section 3.06, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and indemnified parties in connection
with the actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of such indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Section 3.06(c), any
legal or other fees or expenses reasonably incurred by such party in connection
with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.06(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
If indemnification is available under this Section 3.06, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in Sections 3.06(a) and 3.06(b) without regard to the relative fault of
said indemnifying party or indemnified party or any other equitable
consideration provided for in this Section 3.06(d).
SECTION 3.07. Rule 144. The Company covenants that it will file the
reports required to be filed by it under the 1933 Act and the 1934 Act and the
rules and regulations adopted by the SEC thereunder, and it will take such
further action as Roche may reasonably request, all to the extent required from
time to time to enable Roche to sell shares of Common Stock without registration
under the 1933 Act within the limitation of the exemptions provided by (a) Rule
144 under the 1933 Act, as such Rule may be amended from time to time, or (b)
any similar rule or regulation hereafter adopted by the SEC. Upon the request of
11
<PAGE> 12
Roche, the Company will deliver to Roche a written statement as to whether it
has complied with such requirements.
SECTION 3.08. No Inconsistent Agreements; etc. The Company will not
hereafter enter into any agreement with respect to its securities which is
inconsistent with the rights granted to Roche in this Agreement.
ARTICLE 4
COVENANTS
SECTION 4.01. Disposition by Roche. In the event that Roche and its
affiliates shall dispose, in one or a series of integrally related transactions,
of all or substantially all of their beneficial ownership of Common Stock to one
or more Persons (a "SUCCESSOR"), (a) Roche shall (i) in the event that
immediately prior to such transactions Roche and its affiliates own over 50% of
the Company, either make or cause such Successor to make adequate arrangement
for the simultaneous or prompt subsequent receipt by the holders of Common Stock
of consideration for their Common Stock which (A) in a transaction in which the
consideration is composed entirely of either (1) cash or (2) equity traded on a
U.S. national securities exchange, is in the same form and amount(s) per share
of Common Stock as that received by Roche and its affiliates, and (B) in any
other type of transaction, either (1) is in the same form(s) and amount(s) per
share of Common Stock as that received by Roche and its affiliates, or (2) has a
value per share of Common Stock not less than the weighted average value
(determined as of the time of receipt by Roche and its affiliates) per share of
Common Stock received by Roche and such affiliates, such value to be determined
by an investment bank of nationally recognized standing appointed by a committee
of Independent Directors (an "INVESTMENT BANK") and (ii) cause such Successor to
agree to be bound by the obligations of Roche under Sections 4.01, 4.02, and
4.03 hereof; and (b) the Company shall agree that such Successor shall succeed
to the rights of Roche under Section 3.03 of the Company's bylaws.
SECTION 4.02. Business Combinations with Roche. Roche agrees to require,
as a condition to consummation of any merger of the Company with Roche or an
affiliate of Roche or a sale of all or substantially all of the assets of the
Company to Roche or an affiliate of Roche, that (i) such merger or sale receive
the favorable vote of a majority of the shares of Common Stock voted at any
meeting or adjournment thereof not beneficially owned by Roche and its
affiliates, provided that no PERSON (as such term is defined in Section 16(a) of
the 1934 Act) or GROUP (as defined in Section 13(d) of the 1934 Act) shall be
entitled
12
<PAGE> 13
to cast more than 5% of the votes cast at such meeting, or, in the event such a
favorable vote is not obtained, (ii) the value of the consideration to be
received by the holders of Common Stock other than Roche and its affiliates in
connection with such merger or sale shall be equal to or greater than the
average of the means of the ranges of fair values for the Common Stock as
determined by two Investment Banks. Roche also agrees that in the 90 days
immediately preceding any proposal by Roche or an affiliate for a merger with
the Company, it will not sell any shares of Common Stock, and it will cause its
affiliates not to sell any shares of Common Stock. Roche further agrees that in
the event of any merger of the Company with Roche or an affiliate of Roche or a
sale of all or substantially all of the assets of the Company to Roche or an
affiliate of Roche, each unvested option then outstanding under the Company's
1990 Stock Option/Stock Incentive Plan, as amended, the Company's 1994 Stock
Option Plan, as amended, the Company's 1996 Stock Option/Stock Incentive Plan
and the Company's 1999 Stock Option Plan or any other option plan of the Company
shall (at the election of Roche in its sole discretion) either (x) be
accelerated so that each such option shall become exerciseable immediately prior
to the consummation of such transaction for the full number of shares of Common
Stock covered by such option, (y) become exchangeable upon the consummation of
such transaction for deferred cash compensation (vesting on the same schedule as
the shares of Common Stock covered by such option) having a value equal to the
product of (A) the number of shares of Common Stock covered by such option and
(B) the amount which Roche, in its reasonable judgment, considers to be
equivalent in value to the consideration per share received by holders of shares
of Common Stock other than Roche and its affiliates in the transaction, minus
the exercise price per share under such option or (z) be canceled in exchange
for a replacement option to purchase stock of the surviving corporation or any
successor thereto in any such transaction with the terms of such options to
provide value equivalent to that of the canceled option, such equivalent value
to be determined in the reasonable discretion of Roche.
SECTION 4.03. Compulsory Acquisitions. If Roche and its affiliates shall
have owned, for more than two months, beneficial ownership of Common Stock in
excess of 90% of the outstanding Common Stock, then Roche shall as soon as
reasonably practicable effect a merger of the Company with Roche or an affiliate
of Roche (either with the vote provided for in clause (i) of Section 4.02 or
with the valuation provided for in clause (ii) of Section 4.02). In such event,
each unvested option then outstanding under the Company's 1990 Stock
Option/Stock Incentive Plan, as amended, the Company's 1994 Stock Option Plan,
as amended, the Company's 1996 Stock Option/Stock Incentive Plan and the
Company's 1999 Stock Option Plan or any other option plan of the Company shall
(at the election of Roche in its sole discretion) either be treated in the
manner set forth in clause (x), clause (y) or clause (z) under Section 4.02
above.
13
<PAGE> 14
SECTION 4.04. Tax Consolidation Provisions.
(a) Common Stock Option. The Company hereby grants to Roche, on the
terms and conditions set forth herein, a continuing right (the "COMMON STOCK
OPTION") to purchase from the Company, at the times set forth herein, such
number of shares of Common Stock as is necessary to allow Roche and its
affiliates to maintain the then-current Ownership Percentage. The Common Stock
Option shall be assignable, in whole or in part and from time to time, by Roche
to any affiliate of Roche. The exercise price for the shares of Common Stock
purchased pursuant to the Common Stock Option shall be the Market Price of the
Common Stock as of the date of first delivery of notice of each exercise of the
Common Stock Option by Roche (or its permitted assignee hereunder) to the
Company.
(b) Other Stock Option. The Company hereby grants to Roche, on the
terms and conditions set forth herein, a continuing right (the "OTHER STOCK
OPTION" and, together with the Common Stock Option, the "OPTIONS") to purchase
from the Company, at the times set forth herein, such number of shares of Other
Stock as is necessary to allow Roche and its affiliates to own 80 percent of
each class of outstanding Other Stock. The Other Stock Option shall be
assignable, in whole or in part and from time to time, by Roche to any affiliate
of Roche. The exercise price for the shares of Other Stock purchased pursuant to
the Other Stock Option shall be the Market Price of the Other Stock as of the
date of first delivery of notice of each exercise of the Other Stock Option by
Roche (or its permitted assignee hereunder) to the Company.
(c) Notice. At least 20 business days prior to the issuance of any
shares of Common Stock or the first date on which any event could occur that, in
the absence of a full or partial exercise of the Common Stock Option, would
result in a reduction in the Ownership Percentage, the Company will notify Roche
in writing (a "COMMON STOCK OPTION NOTICE") of any plans that the Company has to
issue such shares or the date on which such event could first occur. At least 20
business days prior to the issuance of any shares of Other Stock or the first
date on which any event could occur that, in the absence of a full or partial
exercise of the Other Stock Option, would result in Roche and its affiliates
owning less than 80 percent of each class of outstanding Other Stock, the
Company will notify Roche in writing (an "OTHER STOCK OPTION NOTICE" and,
together with or separate from a Common Stock Option Notice, an "OPTION NOTICE")
of any plans that the Company has to issue such shares or the date on which such
event could first occur.
Each Option Notice must specify the date on which the Company intends to
issue such additional shares or on which such event could first occur (such
14
<PAGE> 15
issuance or event being referred to herein as an "ISSUANCE EVENT" and the date
of such issuance or event as an "ISSUANCE EVENT DATE"), the number of shares the
Company intends to issue or may issue and the other terms and conditions of such
Issuance Event.
(d) Exercise. The Common Stock Option may be exercised by Roche (or
any Roche affiliate to which all or any part of the Common Stock Option has been
assigned) for a number of shares equal to or less than the number of shares that
are necessary for Roche and its affiliates to maintain, in the aggregate, the
Ownership Percentage. The Other Stock Option may be exercised by Roche (or any
Roche affiliate to which all or any part of the Other Stock Option has been
assigned) for a number of shares equal to or less than the number of shares that
are necessary for Roche and its affiliates to own, in the aggregate, 80 percent
of each class of outstanding Other Stock. Each Option may be exercised at any
time after receipt of an applicable Option Notice and prior to the applicable
Issuance Event Date by the delivery to the Company of a written notice to such
effect specifying (i) the number of shares of Common Stock or Other Stock (as
the case may be) to be purchased by Roche or any of its affiliates, and (ii) a
calculation of the exercise price for such shares. Upon any such exercise of
either Option, the Company will, prior to the applicable Issuance Event Date,
deliver to Roche (or any Roche affiliate designated by Roche), against payment
therefor, certificates (issued in the name of Roche or its permitted assignee
hereunder, or as directed by Roche) representing the shares of Common Stock or
Other Stock (as the case may be) being purchased upon such exercise. Payment for
such shares shall be made by wire transfer or intrabank transfer to such account
as shall be specified by the Company, for the full purchase price for such
shares.
(e) Effect of Failure to Exercise. Any failure by Roche to exercise
either Option, or any exercise for less than all shares purchasable under either
Option, in connection with any particular Issuance Event shall not affect
Roche's right to exercise the relevant Option in connection with any subsequent
Issuance Event; provided, however, that, in the case of the Common Stock Option,
the Ownership Percentage following such Issuance Event in connection with which
Roche so failed to exercise such Option in full or in part shall be recalculated
as set forth in the definition thereof.
(f) Notwithstanding anything to the contrary herein, the Company and
Roche acknowledge that the procedures set forth above relating to the exercise
of the Common Stock Option shall not apply where the Company is not capable of
giving advance notice of the relevant Issuance Event. Roche and the Company
agree that, in such case, the Common Stock Option shall be exercisable at such
times and in such manner as Roche and the Company may from time to time agree,
and otherwise by Roche in a reasonable time and manner.
15
<PAGE> 16
(g) The Company will adopt, implement as soon as practicable (but
not more than 60 days after the Offering), and maintain a comprehensive,
long-term common stock repurchase program (the "COMMON STOCK REPURCHASE
PROGRAM") for general corporate purposes. The Company agrees that, pursuant to
the Common Stock Repurchase Program, prior to any issuance of shares of Common
Stock by the Company, it shall have repurchased a number of shares of Common
Stock such that, immediately after such issuance, Roche's Ownership Percentage
is equal to or greater than Roche's lowest Ownership Percentage at any time
after the Offering but prior to such issuance; provided that (i) nothing in this
Section 4.04(g) shall require the Company to take any action that would, in the
Company's reasonable determination, adversely affect the Company's accounting
for its stock option and employee stock purchase plans, and (ii) the parties
shall cooperate to effect repurchases in a manner that will not have a
substantial adverse economic impact on the Company. It is understood that any
reduction in the Company's cash position as a result of such repurchases is not
a "substantial adverse economic impact."
(h) The Company shall:
(i) provide to Roche at the end of each month, and at such
other times as Roche may request, information as to (A) the total number
of shares of Common Stock repurchased by the Company in the last month
and on a year-to-date basis, (B) the total number of shares of Common
Stock previously issued to date, (C) the Company's current forecasts as
to future issuances, and (D) such other information as Roche may request
in connection with Roche's ownership and tax consolidation objectives;
and
(ii) notify Roche within one business day after the date in
any month in which the total number of shares of Common Stock issued by
the Company in such month equals or exceeds 500,000.
SECTION 4.05. No Inconsistent Actions. The Company agrees not to take,
and agrees to cause its directors to refrain from taking, any action which could
impede or delay the exercise by Roche of any of its rights under this Agreement.
16
<PAGE> 17
ARTICLE 5
MISCELLANEOUS
SECTION 5.01. Effectiveness. This agreement shall become effective only
upon the closing of the Offering.
SECTION 5.02. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given:
If to the Company, to:
Genentech, Inc.
One DNA Way
South San Francisco, CA 94080
Attention: Dr. Arthur D. Levinson
Facsimile: 650-225-2929
If to Roche, to:
Roche Holdings, Inc.
1201 North Orange Street
Wilmington, DE 19801
Attention: Corporate Secretary
Facsimile: 302-425-4713
with a copy to:
Roche Holding AG
CH 4070 Basel
Switzerland
Attention: Dr. Franz B. Humer
Facsimile: 011-41-61-688-5030
with a further copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attention: Peter R. Douglas, Esq.
Facsimile: 212-450-4800
17
<PAGE> 18
or such other address or telecopier number as such party may hereafter specify
for the purpose by notice to the other party hereto. Each such notice, request
or other communication shall be effective (i) if given by telecopier, when such
telecopy is transmitted to the telecopier number specified in this Section and
the appropriate answerback is received or (ii) if given by any other means, when
delivered at the address specified in this Section.
SECTION 5.03. Amendments; No Waivers. (a) Any provision of this
Agreement may be amended or waived if, and only if, such amendment or waiver is
in writing and signed, in the case of an amendment, by Roche and the Company, or
in the case of a waiver, by the party against whom the waiver is to be
effective.
(b) No failure or delay by any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 5.04. Specific Performance. The Company acknowledges and agrees
that Roche's and the Company's respective remedies at law for a breach or
threatened breach of any of the provisions of this Agreement would be inadequate
and, in recognition of that fact, agrees that, in the event of a breach or
threatened breach by the Company or Roche of the provisions of this Agreement,
in addition to any remedies at law, Roche and the Company, respectively, without
posting any bond shall be entitled to obtain equitable relief in the form of
specific performance, a temporary restraining order, a temporary or permanent
injunction or any other equitable remedy which may then be available.
SECTION 5.05. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other party hereto except as provided herein.
SECTION 5.06. Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware.
SECTION 5.07. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
18
<PAGE> 19
SECTION 5.08. Termination. This Agreement (other than Article 3 and
Sections 4.01, 4.02, 4.03, 4.04(a), 4.04(b), 4.04(c), 4.04(d), 4.04(e), 4.04(f),
and 4.05) will terminate at such time as Roche and its affiliates dispose of
beneficial ownership of Common Stock of the Company which disposition has the
effect of causing Parent's Voting Interest to be less than 40% (a "TERMINATION
EVENT").
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first above
written.
GENENTECH, INC.
By
--------------------------------------
Name:
Title:
ROCHE HOLDINGS, INC.
By
--------------------------------------
Name:
Title:
20
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED
AGREEMENT BETWEEN
GENENTECH, INC. AND
F. HOFFMANN-LA ROCHE LTD
REGARDING COMMERCIALIZATION
OF GENENTECH'S PRODUCTS
OUTSIDE THE UNITED STATES
<PAGE> 2
TABLE OF CONTENTS
Whereas Clauses
Article I - Definitions
<TABLE>
<S> <C> <C>
1. Affiliate...................................................3
2. Agreement...................................................3
3. Asia........................................................3
4. Canada Products.............................................3
5. Clinical Requirements.......................................3
6. Collaborative Countries.....................................3
7. Commercial Requirements.....................................4
8. DNase.......................................................4
9. Dossier.....................................................4
10. Entry into Man .............................................4
11. Financial Appendix..........................................4
12. First Commercial Introduction...............................4
13. Effective Date..............................................4
14. GENENTECH...................................................4
15. Genentech Canada Ltd........................................4
16. Genentech Europe Limited ................................4
17. Roche Territory's Fully Burdened Manufacturing Cost.........5
18. Genentech Product...........................................5
19. Governance Agreement........................................5
20. IDEC Agreement..............................................5
21. IDEC Product................................................5
22. IGF-1 ......................................................5
23. In-Licensed Product ........................................5
24. Know-How ...................................................5
25. Manufacturing Technology....................................6
26. Net Sales...................................................6
27. NGF ........................................................6
28 Party.......................................................6
29. Patents.....................................................6
30. Phase II Completion Date....................................6
31. Phase III Trial.............................................6
32. Product.....................................................6
33. Registration................................................7
34. Restated Date ..............................................7
35. ROCHE.......................................................7
36. Roche Territory.............................................7
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
37. Scios Nova Agreement........................................7
38. Scios Product ..............................................7
39. Small Molecule Product......................................7
40. Trademark...................................................7
41. Valid Claim.................................................7
Article II - Licenses, Options, Know-How and Trademarks
1. Licenses for Canada Products and DNase......................7
2. Option for License for Other Products.......................8
3. Exercise of Option for License for Other Products...........9
4. License to Know-How and Option for License to
Know-How...............................................10
5. License to Trademark and Option for License to
Trademark..............................................11
6. Standard of Effort.........................................11
7. Reporting on Commercialization Progress....................11
8. License to Genentech.......................................12
9. Future In-Licenses.........................................13
10. IIbIIIa and Ras Farnesyltransferase Collaborations.........13
11. IIbIIIa Collaboration......................................13
Article III - Commercialization Committees
1. Commercialization Committee................................13
2. Management Committee.......................................14
3. Development Committee......................................14
4. Finance Committee..........................................14
Article IV - Development and Marketing
1. Development................................................14
2. Development Costs..........................................15
3. Marketing..................................................15
Article V - Production and Supply
1. Production of Product......................................15
2. Supply of Clinical Requirements........................... 15
3. Supply of Commercial Requirements..........................16
4. Supply Agreement...........................................16
5. Amendments to DNase Supply Agreement.......................16
6. Supply of Scios Product....................................18
7. Supply of IDEC Product.....................................19
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
8. Supply of In-Licensed Product..............................19
9. Supply of Small Molecule Product...........................19
10. Manufacturing Process and Facilities.......................19
11. Additional Capital Requirements............................20
12. Term of Supply Obligation..................................20
Article VI - Payments, Margins and Royalties
1. Payment for Product Requirements...........................20
2. Invoices and Method of Payment of Roche Territory's
Fully Burdened Manufacturing Cost and Margin...........21
3. Royalties on Sales of DNase................................21
4. Royalties and Other Payments on Sale of Canada
Products..............................................21
5. Royalties on Sale of Genentech Products....................22
6. Royalties and Other Payments on Sale of Scios
Product...............................................22
7. Royalties and Other Payments on Sale of IDEC
Product...............................................23
8. Royalties and Other Payments on Sale of In-Licensed
Product...............................................24
9. Calculation of Aggregate Net Sales.........................24
10. Timing of Royalty Payments.................................24
11. Restrictions on Transfer of Funds..........................25
13. Records Regarding Royalties................................26
14. Royalty for Use of Trademark...............................26
15. Generic Competition........................................26
16. Royalty Term if ROCHE Becomes Minority
Shareholder................................................26
Article VII - Transaction Provisions
1. General....................................................26
2. Personnel of Genentech Canada, Inc., Genentech
Europe Limited and Genentech Ltd. (Japan)..............27
3. Records and Property Leases................................27
4. Transfer of Dossier and Registration.......................27
Article IX - Patents, Inventions and Trademarks
1. Sole Inventions............................................28
2. Joint Inventions...........................................28
3. Patent Infringement........................................29
4. Third Party Patents........................................30
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
5. Reporting on Patent Status.................................30
6. Trademark..................................................31
Article X - Confidentiality and Publications
1. Confidential Information...................................31
2. Publications...............................................31
3. Restrictions on Transfer of Proprietary Materials..........32
Article XI - Liability
1. No Liability...............................................32
2. Indemnification by ROCHE...................................32
3. Indemnification By GENENTECH...............................32
Article XII - Term and Termination
1. Term.......................................................33
2. Termination By ROCHE.......................................33
3. Termination By GENENTECH...................................34
4. Termination of Development/Commercialization...............34
5. Termination for Breach.....................................35
6. Certain Proceedings........................................36
7. Termination For Change in Ownership........................36
8. Survival of Terms..........................................36
Article XIII - Miscellaneous
1. Disclaimer of Certain Warranties...........................36
2. Entire Agreement, Amendment................................36
3. Failure to Enforce.........................................37
4. Force Majeure..............................................37
5. Arbitration................................................37
6. Notices....................................................38
7. Use of Names...............................................39
8. Successors and Assigns.....................................39
9. Headings...................................................39
10. Counterparts...............................................39
11. Severability...............................................39
12. Governing Law..............................................39
13. Relationship...............................................40
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C>
Appendix A - Financial Appendix...........................................41
Appendix B - Article II Countries.........................................42
</TABLE>
<PAGE> 7
AMENDED AND RESTATED AGREEMENT
Effective as of the Effective Date
and
Amended and Restated as of the Restatement Date
Among
F. Hoffmann-La Roche Ltd, Grenzacherstrasse 124, CH 4070 Basel, Switzerland
and
Genentech, Inc., 1 DNA Way, South San Francisco, California, USA 94080,
Genentech Europe Limited, Reid House, 31 Church Street, Hamilton, Bermuda HM FXV
and Genentech Biopharmaceuticals Limited, Reid House, 31 Church Street,
Hamilton, Bermuda HM FXV.
WHEREAS, GENENTECH possesses rights outside the United States in and to
certain pharmaceutical products;
WHEREAS, GENENTECH wishes to have certain pharmaceutical products
developed and marketed outside the United States;
WHEREAS, ROCHE has considerable knowledge in developing, registering,
manufacturing, formulating and filling, promoting, detailing, distributing and
marketing pharmaceutical products in all of the significant countries outside
the United States that utilize pharmaceutical products, has in place in those
countries a well-experienced staff for performing these activities, and can
perform these activities in a diligent and aggressive manner for GENENTECH's
pharmaceutical products;
WHEREAS, GENENTECH and ROCHE believe that this Agreement covering the
development, registration, manufacture, supply, formulation and filling,
promotion, detailing, distribution and marketing of certain of GENENTECH's
products outside the United States will be desirable and compatible with both
GENENTECH's and ROCHE's business objectives with respect to such products;
<PAGE> 8
WHEREAS, GENENTECH believes that this Agreement would provide an
economic benefit to GENENTECH and speed up availability of unmarketed
pharmaceutical products of GENENTECH outside the United States and assist
GENENTECH in defraying the substantial costs associated with the development of
such products in the United States;
WHEREAS, GENENTECH and ROCHE intend that this Agreement should cover the
development, marketing and supply of certain GENENTECH pharmaceutical products
outside the United States and that this Agreement supersedes the following
agreements: Agreement Between F. Hoffmann-La Roche Ltd, Genentech, Inc. and
Genentech Europe Limited Regarding Commercialization of DNase in Collaborative
Countries; and Agreement Between F. Hoffmann-La Roche Ltd, Genentech, Inc., and
Genentech Europe Limited Regarding Commercialization of DNase in Rest Of World;
Agreement Among F. Hoffmann-La Roche Ltd, Nippon Roche K.K., Genentech, Inc.,
and Genentech Biopharmaceuticals Limited Regarding Commercialization of DNase in
Japan;
WHEREAS, GENENTECH and ROCHE intend that this Agreement should not cover
the development, marketing and supply of certain GENENTECH or jointly developed
pharmaceutical products and that this Agreement does not supersede the following
Agreements: Supply Agreement Between F. Hoffmann-La Roche Ltd, Genentech, Inc.
and Genentech Europe Limited Regarding DNase in Collaborative Countries, Rest of
World and Japan ("DNASE SUPPLY AGREEMENT") except that the terms of such
Agreement shall be expanded to include the supply of DNase in Canada; Joint
Research and Development Agreement between F. Hoffmann-La Roche Ltd, Hoffmann-La
Roche, Inc. and Genentech, Inc. Regarding LFA/ICAM Antagonists; the TNF-Receptor
Fusion Protein Agreement between Genentech, Inc., F. Hoffmann-La Roche Ltd, and
Hoffmann-La Roche, Inc. and the Development Agreement Between Genentech, Inc.
and Hoffmann-La Roche, Inc., dated January 6, 1980 concerning interferon alpha
and beta; Joint Research and Development Agreement between F. Hoffmann-La Roche
Ltd. and Hoffmann-La Roche, Inc. and Genentech, Inc. Regarding IL-8 Molecules
(expired); Small Molecule Screening and Collaboration Agreement between F.
Hoffmann-La Roche Ltd. and Genentech, Inc.; Joint Research and Development
Agreement among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc. and Genentech,
Inc. regarding Anti-Coagulants effective February 10, 1995; and Agreement among
F. Hoffmann-La Roche Ltd and Genentech, Inc. regarding Anti-Her2 effective July
6, 1998;
WHEREAS, Roche Holding Ltd, a corporation organized under the laws of
Switzerland, and Genentech, Inc. concluded, effective September 8, 1990, a
Mutual Confidentiality Agreement (the "MUTUAL CONFIDENTIALITY AGREEMENT")
covering the ongoing disclosure of all confidential scientific, financial,
technical and business information of any nature in any tangible form of
expression among Genentech, Inc. on
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the one hand and Roche Holding Ltd and its subsidiaries and affiliates
throughout the world, except Genentech, Inc., on the other hand.
WHEREAS, Roche Holding Ltd and Genentech, Inc. concluded effective July
17, 1991 a Mutual Agreement for Supply of Research Material covering the ongoing
transfer of proprietary materials, substances, reagents and the like among
Genentech, Inc. on the one hand and Roche Holding Ltd and its subsidiaries and
affiliates throughout the world, except Genentech, Inc., on the other hand.
WHEREAS, GENENTECH and ROCHE amended this Agreement at a meeting in
London on May 1, 1997 and made additional amendments with respect to the
commercialization of the GP-IIbIIIa antagonist, designated Xubix, pursuant to a
letter agreement dated May 29, 1998.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
ARTICLE I - DEFINITIONS
1. The term "AFFILIATE" shall mean --
(a) an organization fifty (50%) percent or more of the
voting stock of which is owned and/or controlled directly or indirectly
by either Party;
(b) an organization which directly or indirectly owns and/or
controls fifty percent (50%) or more of the voting stock of either
Party;
(c) an organization which is directly or indirectly under
common control of either Party through common share holdings.
The foregoing notwithstanding, neither Party shall be considered an
Affiliate of the other Party or of any other Party's Affiliates.
2. The term "AGREEMENT" shall mean this Agreement, including all Appendices
hereto, together with any valid amendments or modifications of the
foregoing, and any agreements or plans entered into in connection with
this Agreement.
3. The term "ASIA" shall mean the countries of Japan, Bangladesh, Myanmar,
Cambodia, Indonesia, People's Republic of China, Hong Kong, Republic of
Korea, Laos, Malaysia, Papua New Guinea, Philippines, Singapore, Sri
Lanka, Republic of China (Taiwan) and Thailand and the territories and
possessions of each.
4. The term "BULK PRODUCT" shall have the definition set forth in the
definition of "Product."
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5. The term "CANADA PRODUCTS" shall mean the pharmaceutical products
Activase(R) tissue plasminogen activator, Protropin(R) and Nutropin(R)
human growth hormone, Actimmune(R) interferon gamma and Pulmozyme(R)
dornase alpha each as sold in Canada.
6. The term "CLAIMS" shall have the meaning set forth in Article XI,
Sections 2 and 3 of this Agreement.
7. The term "CLINICAL REQUIREMENTS" shall mean those quantities of a
Product reasonably required by a Party for the conduct of preclinical
and clinical studies of such Product in that Party's Territory. The term
Clinical Requirements as used herein with respect to a Party shall also
include the Clinical Requirements of that Party's licensees, if any.
8. The term "COLLABORATIVE COUNTRIES" shall mean Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Italy, Ireland, Luxembourg,
Netherlands, Norway, Portugal, Spain, Switzerland, Sweden, United
Kingdom and any additional countries that may subsequently become
members of the EU.
9. The term "COMMERCIAL REQUIREMENTS" shall mean those quantities of a
Product reasonably required by a Party for promotion and sale of such
Product in the its Territory. The term Commercial Requirements as used
herein with respect to a Party shall also include the Commercial
Requirements of that Party's licensees, if any.
10. The term "DEVELOPMENT COSTS" shall have the meaning set forth in the
Financial Appendix.
11. The term "DNASE" shall mean the protein, DNase, as defined in the DNase
Supply Agreement.
12. The term "DNASE SUPPLY AGREEMENT" shall have the meaning set forth in
the preamble of this Agreement.
13. The term "DOSSIER" shall mean the document or documents filed with and
approved by the government or health authority in a country in the Roche
Territory for purposes of registration of a Product for sale in such
country.
14. The term "EFFECTIVE DATE" shall mean the date that the Amendment and
Restatement of Article Third of the Certificate of Incorporation of
Genentech, Inc. amending the terms of the Redeemable Common Stock, par
value $0.02, of GENENTECH became effective, i.e., October 25, 1995.
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15. The term "ENTRY INTO MAN" shall mean the occurrence of Genentech's
official decision to file an Investigational New Drug exemption
application (an "IND") with the U.S. Food and Drug Administration.
16. The term "FINANCIAL APPENDIX" shall mean Appendix A to this Agreement.
17. The term "FINISHED PRODUCT" shall have the meaning set forth in the
definition of "Product."
18. The term "FIRST COMMERCIAL INTRODUCTION" shall mean the first date upon
which a Product is shipped commercially by ROCHE to an independent third
party in a country in the Roche Territory, after formal marketing
approval in that country, including any required price approval, has
been granted from the relevant authority in that country for that
Product.
19. The term "GENENTECH" shall mean Genentech, Inc. and, where appropriate,
its affiliates.
20. The term "GENENTECH CANADA, INC." shall mean that Affiliate of
Genentech, Inc. located at 1100 Burloak Drive, Fifth Floor, Burlington,
Ontario L7L 6B2 and organized as Genentech Canada, Inc. under the laws
of Canada.
21. The term "GENENTECH EUROPE LIMITED" shall mean that Affiliate of
Genentech, Inc. located at 31 Church Street, Hamilton, Bermuda HM FX and
organized as Genentech Europe Limited under the laws of Bermuda.
22. The term "GENENTECH'S FULLY BURDENED MANUFACTURING COST" shall have the
meaning set forth in the Financial Appendix.
23. The term "GENENTECH PRODUCT" shall mean a Product for which GENENTECH
(i) has an ownership interest outside the United States as of April 12,
1995 or (ii) thereafter has or acquires an ownership interest during the
term of this Agreement but does not include Canada Products, DNase, IDEC
Product, Scios Product and In-Licensed Products, human growth hormone
products, tissue plasminogen activator products and interferon gamma
products.
24. The term "GLOBAL DEVELOPMENT COSTS" shall have the meaning set forth in
the Financial Appendix.
25. The term "GOVERNANCE AGREEMENT" shall mean the Governance Agreement
entered into between Roche Holdings, Inc., a Delaware corporation, and
Genentech, Inc. on September 7, 1990 as amended and restated on October
25, 1995 and as the same may be further amended by the Parties, or any
agreement which supercedes or replaces that agreement.
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26. The term "IDEC AGREEMENT" shall mean the Collaboration Agreement between
Genentech, Inc. and IDEC Pharmaceuticals Corporation, effective as of
March 16, 1995.
27. The term "IDEC PRODUCT" shall mean all of those products which are the
subject of the IDEC Agreement.
28. The term "IND" shall have the meaning set forth in the definition of
Entry Into Man.
29. The term "IIBIIIA AGREEMENT" shall mean the Joint Research and
Development Agreement, dated January 7, 1993, between F. Hoffmann-La
Roche Ltd, Hoffmann La-Roche Inc. and Genentech, Inc. regarding IIbIIIa
Antagonists.
30. The term "IN-LICENSED PRODUCT" shall mean any Product to which,
subsequent to April 12, 1995, GENENTECH acquires rights in the Roche
Territory by means of a patent and/or knowhow license from a third
party.
31. The term "KNOW-HOW" shall mean proprietary technical information,
know-how, data, test results, knowledge, techniques, discoveries,
inventions, specifications, designs, regulatory filings, and other
information (whether or not patentable) which are now and, unless
specified otherwise, hereafter during the term of this Agreement are in
the possession or control of a Party and are specifically related to a
Product or to the development, manufacture, use or sale of a Product of
that Party; provided, however, that Know-How shall not include any of
the foregoing (i) which are now or hereafter in the possession or
control of a Party as a result of a license taken from a third party and
which a Party is not free to transfer or license to the other Party or
which a Party may transfer or license but such transfer or license would
necessitate the payment of a fee or royalty to the licensor (unless
provision is made hereunder for the payment of such fee or royalty) or
(ii) which are generally ascertainable from publicly available
information.
32. The term "MUTUAL CONFIDENTIALITY AGREEMENT" shall have the meaning set
forth in the preamble of this Agreement.
33. The term "MANUFACTURING TECHNOLOGY" shall mean all Know-How of a Party
then existing which is necessary to make or have made a Product in the
manner that such Product is then manufactured by the Party to produce
Clinical Requirements or to produce Commercial Requirements, as
applicable.
34. The term "NET SALES" shall have the meaning set forth in the Financial
Appendix.
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35. The term "OPTION EXTENSION FEE" shall mean the nonrefundable amount of
$10,000,000 U.S. which is to be paid to GENENTECH by ROCHE within ten
(10) days of ROCHE's determination with respect to a Product not to
exercise its option for a right and license under Article II, Section 2
(a) after the Phase II Completion Date for that Product.
36. The term "PARTY" shall mean either GENENTECH or ROCHE, and when used in
the plural, shall mean both of them.
37. The term "PATENTS" shall mean any and all patent applications and
patents (including inventor's certificates), including any
substitutions, extensions, reissues, renewals, divisions, continuations
or continuations-in-part thereof or therefor covering a Product, its
administration, formulation or clinical use, which a Party now or
hereafter during the term of this Agreement owns or controls or with
respect to which a Party has the right to grant licenses or sublicenses
without the payment of a fee or royalty (unless provision is made
hereunder for the payment of such fee or royalty) to the licensor, but
only to the extent they specifically cover a Product or the manufacture,
use or sale of a Product.
38. The term "PHASE II COMPLETION DATE" shall mean the date by which
GENENTECH, in its reasonable judgement, has clinical trial data and
other information sufficient to undertake a Phase III Trial in the USA.
39. The term "PHASE III COMPLETION DATE" shall mean the date by which a
Phase III Trial is completed with respect to a Product, and the results
of that Phase III Trial are known, available and have been analyzed and,
in Genentech's reasonable judgement, allow filing for a Biologics
License Application or New Drug Application for that Product in the USA.
40. The term "PHASE III TRIAL" shall mean a controlled study in humans of
the efficacy and safety of a Product which is prospectively designed to
demonstrate statistically whether the Product is effective for use in a
particular indication in a manner sufficient to obtain regulatory
approval to market that Product or which is sufficient to permit a
filing with the competent authorities for a Registration in the USA.
41. The term "PRODUCT" shall mean any human pharmaceutical formulation of a
compound for which a Party has an ownership interest as of April 12,
1995 or thereafter acquires an ownership interest or rights by means of
a patent or knowhow license during the term of this Agreement. In the
case of GENENTECH, the term Product shall include Canada Products,
Genentech Products, IDEC Product, Scios Product, In-Licensed Products
and DNase. The term Product shall also include: (a) all bulk forms of a
Product ("BULK PRODUCT"); (b) Product which has been vialed but is not
finished or packaged ("VIALED
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PRODUCT"); and (c) finished, packaged final dosage units of a Product
("FINISHED PRODUCT"). The term Product shall include not only the
specific molecule involved but molecules derived from that molecule
whether by addition or deletion of other chemical subunits.
42. The term "REGISTRATION" shall mean the official approval by the
government or health authority or similar entity in one or more
countries in the Roche Territory which is required for a Product to be
offered for sale in that country or those countries, including such
authorizations as may be required for the production, importation,
pricing and sale of that Product to the extent they are needed for that
Product to be offered for sale in that country or those countries.
43. The term "RESTATEMENT DATE " shall mean ______________, 1999.
44. The term "ROCHE" shall mean F. Hoffmann-La Roche Ltd and its Affiliates
unless otherwise specified in this Agreement.
45. The term "ROCHE TERRITORY" shall mean all countries of the world except
the United States and its territories and possessions.
46. The term "SCIOS NOVA AGREEMENT " shall mean the Collaboration Agreement
between Genentech, Inc. and Scios Nova, Inc. effective as of December
30, 1994.
47. The term "SCIOS PRODUCT" shall mean all of those products which are the
subject of the Scios Nova Agreement.
48. The term "SMALL MOLECULE PRODUCT" shall mean a synthetic molecule that
is not a protein or peptide.
49. The term "TRADEMARK" shall mean the trademarks owned, registered,
maintained or used by GENENTECH in connection with a Product.
50. The term "UNITED STATES" shall mean, unless otherwise indicated, the
United States and its territories and possessions.
51. The term "VALID CLAIM" shall mean a subsisting claim of an issued and
unexpired Patent that has not been held invalid, unpatentable or
unenforceable by a decision of a governmental body or court of competent
jurisdiction, that is unappealable or unappealed within the time allowed
for appeal, and that has not been rendered unenforceable through
disclaimer or otherwise.
52. The term "VIALED PRODUCT" shall have the meaning set forth in the
definition of "Product."
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53. The term "XUBIX" shall mean the specific IIaIIIb antagonist currently
designated by the trademark Xubix, and any formulations thereof.
ARTICLE II - LICENSES, OPTIONS, KNOW-HOW AND TRADEMARKS
1. License for Canada Products and DNase.
(a) Subject to the terms and conditions of this Agreement,
GENENTECH hereby grants to ROCHE a sole and exclusive right and license
under GENENTECH's Patents, including the right to sublicense others with
GENENTECH's prior consent, which consent shall not be unreasonably
withheld, to register, use, sell and market (including the right to
detail and promote) Canada Products in Canada and DNase in the Roche
Territory.
(b) Subject to the terms and conditions of this Agreement,
GENENTECH hereby grants to ROCHE a sole and exclusive right and license
under GENENTECH's Patents, including the right to sublicense others with
GENENTECH's prior consent, which consent shall not be unreasonably
withheld, for each Canada Product in Canada and DNase in the Roche
Territory, dependent on the Parties' mutual agreement as to whether
GENENTECH will supply Vialed Product or Bulk Product (i) to make and/or
have made Finished Product from Vialed Product or (ii) to make and/or
have made Vialed Product from Bulk Product.
2. Option for License for Other Products.
(a) Subject to the terms and conditions of this Agreement,
GENENTECH hereby grants to ROCHE an option on a Product-by-Product
basis, exercisable for any Product at (i) such Product's Entry Into Man;
(ii) at the first Phase II Completion Date for such Product, or (iii) if
ROCHE has paid GENENTECH the Option Extension Fee, at the Phase III
Completion Date for such Product for a sole and exclusive (to the extent
available) right and license in the Roche Territory under GENENTECH's
Patents and, to the extent sublicensable by GENENTECH, patents of third
parties licensed to GENENTECH, including where available the right to
sublicense others with GENENTECH's prior consent, which consent shall
not be unreasonably withheld, to register, use, sell and market
(including the right to detail and promote) each Genentech Product and,
subject to the terms and conditions of the relevant license agreement,
In-Licensed Product and IDEC Product or Scios Product and shall include
the right for all indications. Such option shall be exercisable only
once for each Product. If ROCHE does not pay the Option Extension Fee
with respect to a Product, there shall be no additional option with
respect to that Product beyond that associated with the Phase II
Completion Date.
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(b) Subject to the terms and conditions of this Agreement
and contingent on ROCHE exercising its option under Section 2(a) of this
Article II, GENENTECH hereby grants to ROCHE, an option, exercisable
only once for any Product either at (i) such Product's Entry Into Man;
(ii) at the first Phase II Completion Date for such Product, or (iii) at
the Phase III Completion Date, for a sole and exclusive (to the extent
available) right and license in the Roche Territory, under GENENTECH's
Patents and, to the extent sublicensable by GENENTECH, patents of third
parties licensed to GENENTECH, including where available, the right to
sublicense others with GENENTECH's prior consent, which consent shall
not be unreasonably withheld, for Genentech Product and, subject to the
terms and conditions of the relevant license agreement, In-Licensed
Product and IDEC Product to the extent GENENTECH is contractually able
to do so under the IDEC Agreement and to Scios Product to the extent
GENENTECH is contractually able to do so under the Scios Nova Agreement,
to make Vialed Product from Bulk Product. Such option shall be
exercisable only once for each Product.
(c) The options described above may be exercised earlier
than the time periods described if the Parties mutually agree. The
options described above shall terminate on October 25, 2015 except as
follows:
(i) if Roche has paid an Option Extension Fee for a
Product, Roche shall retain an option for that Product
exercisable at the Phase III Completion Date for that Product;
(ii) for a Product for which Entry Into Man has occurred
but which has not yet reached the Phase II Completion Date,
Roche shall continue to have an option exercisable at the Phase
II Completion Date; and
(iii) for any Product for which the 60 day period to
exercise an option with respect to Entry Into Man or the Phase
II Completion Date or the Phase III Completion Date has arisen,
that option shall continue for the remaining portion of that 60
day period that is then unexpired.
(d) The foregoing notwithstanding, if at any time prior to
Entry Into Man of a Genentech Product or In-Licensed Product, GENENTECH
decides to discontinue sole development of such a Product and to license
a third party the rights to that Product, that Product shall be subject
to the provisions of Section 3.07 of the Governance Agreement and shall
no longer be subject to the provisions of this Agreement. If at any time
upon or after Entry Into Man of a Genentech Product or In-Licensed
Product, the occurrence of the first Phase II Completion Date for such a
Product, or thereafter unless ROCHE has paid the Option Extension Fee,
GENENTECH decides to discontinue sole development of such a Product and
to license a third party the rights in the Roche Territory to that
Product, that Product shall be subject to the provisions of Section 3.07
of the Governance Agreement provided, however, that if the parties do
not enter into
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an license agreement regarding such Product on the basis of Section 3.07
of the Governance Agreement, the terms of this Agreement (including but
not limited to ROCHE's option rights) with regard those rights to such
Product in the Roche Territory shall continue to remain in full force
and effect. If ROCHE has paid the Option Extension Fee, GENENTECH shall
have no rights to grant rights to third parties to that Product in the
Roche Territory. Upon receipt of notification with respect to a Product
as specified in the first sentence of Section 3 (a) of Article II, ROCHE
shall make a good faith determination as to its interest in the Product
in the Roche Territory. If ROCHE determines that it has no interest in
maintaining its future option rights it will so inform GENENTECH so that
GENENTECH may pursue other development and commercial arrangements with
others with respect to that Product in the Roche Territory so that
GENENTECH may realize the full commercial potential of such Product.
3. Exercise of Option for License for Other Products.
(a) Upon each of the occurrences of Entry Into Man, the
Phase II Completion Date and the Phase III Completion Date for a
GENENTECH Product or an In-Licensed Product for which an option
hereunder is still in effect, GENENTECH shall so notify ROCHE's primary
contact on the Commercialization Committee established in Article III.
In connection with such notice, GENENTECH shall provide ROCHE with all
relevant information regarding the Product, including results of
preclinical and clinical studies, third party rights (patent rights and
royalty obligations), and manufacturing process and cost information not
yet communicated to the Development Committee in accordance with this
Section 3, but such information shall not include marketing or other
commercial information other than market research information. At any
time, ROCHE shall have the right to request reasonable additional
non-marketing or noncommercial information. Within thirty (30) days of
such notification and the receipt by ROCHE of all information specified
herein, the Commercialization Committee shall meet to review such
information and the results of such studies and any other relevant
non-marketing or noncommercial information developed by or possessed by
GENENTECH regarding that Product which ROCHE may request. After the
notice to ROCHE's primary contact on the Commercialization Committee as
specified above, GENENTECH and ROCHE shall jointly formulate a
development plan with respect to the United States and Europe for the
Product, the terms of which shall be negotiated in good faith by the
Parties. Such plan shall address issues regarding initially envisioned
indications and additional indications to be developed and shall be
agreed upon ten (10) days prior to the expiry of the sixty (60) day
period mentioned below. If ROCHE does not exercise its option hereunder,
that development plan will not have any binding effect. Within sixty
(60) days of the notice to ROCHE's primary contact on the
Commercialization Committee as specified above and the receipt by ROCHE
of all information specified herein, ROCHE shall either exercise in
writing its option
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for a license for such Product under Section 2 of this Article II or if
ROCHE fails to so exercise, ROCHE shall be deemed to have irrevocably
waived the option with respect to that particular option exercise
period.
If ROCHE fails to exercise its option for a license for such Product
within 60 days of the notice to ROCHE of the Phase III Completion Date,
GENENTECH thereafter shall be free to develop, make, have made, use,
sell and market (including the right to promote and detail) such Product
in the Roche Territory in any manner it chooses, including by means of a
license to one or more third parties, and free of any restrictions under
Section 3.07 of the Governance Agreement.
(b) (1) Within forty-five (45) days of the Effective Date of
this Agreement, the Commercialization Committee shall meet to review
summary results of clinical data for any Genentech Product and
In-Licensed Product for which there has been a Phase II Completion Date
of the Effective Date and for IDEC Product and Scios Product. Within
ninety (90) days of the commencement of such meeting, ROCHE shall either
exercise in writing its option for a license for each such Product under
Section 2 of this Article II or if ROCHE fails to so exercise, it shall
be deemed to have irrevocably waived such option. If ROCHE waives its
option for a license for a Product under Section 2 of this Article II,
GENENTECH shall be free to develop, make, have made, use, sell and
market (including the right to detail and promote) such Product in the
Roche Territory in any manner it chooses including by means of a license
to one or more third parties and free of any restrictions of Section
3.07 of the Governance Agreement. If ROCHE waives its option for a
license for either IDEC Product or Scios Product pursuant to the
foregoing, ROCHE shall have no further rights to any IDEC Product or
Scios Product, as the case may be.
(2) The right of ROCHE to any license hereunder to IDEC
Product is subject to ROCHE's agreement to comply with all appropriate
obligations of the IDEC Agreement for IDEC Product and any required
consent of IDEC. The right of ROCHE to any license hereunder to Scios
Product is subject to ROCHE's agreement to comply with all appropriate
obligations of the Scios Nova Agreement for Scios Product and any
required consent of Scios Nova.
(c) Any information provided by GENENTECH to ROCHE for its
evaluation with respect to exercising an option under this Article shall
be returned to GENENTECH promptly if ROCHE decides not to exercise such
option and such information shall be subject to the provisions of
Article X below.
4. License to Know-How and Option for License to Know-How.
(a) Subject to the terms and conditions of this Agreement,
GENENTECH
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hereby grants to ROCHE, for the term of this Agreement, a right and
license, including the right to sublicense others with GENENTECH's prior
consent, which consent shall not be unreasonably withheld, to use in
Canada, GENENTECH Know-How specifically related to Canada Products and
to use in the Roche Territory, GENENTECH Know-How specifically related
to DNase (i) to register, use, sell and market (Including the right to
detail and promote) such Products; and dependent on the Parties' mutual
agreement as to whether GENENTECH will supply Vialed Product or Bulk
Product (ii) to make and/or have made Finished Product from Vialed
Product, or (iii) to make and/or have made Vialed Product from Bulk
Product.
(b) Subject to the terms and conditions of this Agreement
and the exercise of the option for such Product under Section 2 of this
Article II, GENENTECH hereby grants to ROCHE, for the term of this
Agreement, a right and license, including the right to sublicense others
with GENENTECH's prior consent, which consent shall not be unreasonably
withheld, to use in the Roche Territory, GENENTECH Know-How specifically
related to GENENTECH Products, In-Licensed Products, Scios Product or
IDEC Product (i) to register, use, sell and market (Including the right
to detail and promote) such Product; and dependent on the Parties mutual
agreement as to whether GENENTECH will supply Vialed Product or Bulk
Product (ii) to make and/or have made such Finished Product from such
Vialed Product or (iii) to make and/or have made such Vialed Product
from such Bulk Product.
5. License to Trademark and Option for License to Trademark.
(a) Subject to the terms and conditions of this Agreement,
GENENTECH grants to ROCHE a sole and exclusive right and license to use
the appropriate Trademarks in Canada for Canada Products and in the
Roche Territory for DNase including the right to sublicense others with
GENENTECH's prior consent, which consent shall not be unreasonably
withheld. ROCHE and its Affiliates shall use the appropriate Trademarks
for such Products in Canada in the case of Canada Products or in each
country in the Roche Territory in the case of DNase unless the Trademark
is not available in such country. If the appropriate Trademark for such
Product is not available in such country, ROCHE shall obtain GENENTECH's
prior consent before using any other trademark for such Product in such
country, which consent shall not be unreasonably withheld.
(b) Subject to the terms and conditions of this Agreement
and the exercise of the option for a Product under Section 2 of this
Article II, GENENTECH grants to ROCHE a sole and exclusive right and
license to use the Trademark for such Product in the Roche Territory
including the right to sublicense others with GENENTECH's prior consent,
which consent shall not be unreasonably withheld.
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ROCHE and its Affiliates shall use the Trademark for such Product in
each country in the Roche Territory unless the Trademark is not
available in such country. If the Trademark for such Product is not
available in such country, ROCHE shall obtain GENENTECH's prior consent
before using any other trademark for the Product in such country, which
consent shall not be unreasonably withheld.
6. Standard of Effort. ROCHE acknowledges that for those Products licensed
to ROCHE hereunder, GENENTECH's sole opportunity to receive maximum
potential revenue from sales of those Products in each country in the
Roche Territory is solely dependent on ROCHE's efforts and that a
failure to provide the level of effort specified herein is likely to
have a significant adverse effect on potential revenues to GENENTECH
which would be inimical to the purposes of this Agreement. Therefore,
the exclusive licenses granted to ROCHE under this Article shall be
conditioned on ROCHE using its "best efforts" in each country in the
Roche Territory to take all steps necessary in an expeditious fashion to
obtain regulatory approval to sell the Product and thereafter to sell
the Product in a manner so as to maximize its revenue potential. "Best
efforts" shall mean efforts, including the commitment of all necessary
personnel and financial resources, in a timeframe equivalent to that
used by ROCHE to develop, promote and sell ROCHE's major pharmaceutical
products.
7. Reporting on Commercialization Progress. ROCHE shall keep GENENTECH
informed of the progress of its efforts to develop, register, and market
the Product licensed by it hereunder in each country in the Roche
Territory. Such progress reports shall be made annually by November 30th
of each year. For each country listed on Appendix B hereto, such
progress reports shall specifically include information on --
(a) the status of, and plans for, clinical trials needed for
registration of the Product,
(b) the status of, and plans for, registering the Product
for sale, and
(c) the budgeted sales of the Product or the Net Sales of
the Product if it is registered;
(d) the Net Sales of the Product included in the business
plan for the Product; and
(e) summaries of promotional plans and market research.
In addition, GENENTECH may make reasonable requests for, and ROCHE shall
provide, specific information about efforts to register and sell the
Products in
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countries in the Roche Territory other than those set forth in Appendix
B and about the aggregate Net Sales budgeted or included in the business
plan for Products for all countries in the Roche Territory.
8. License to GENENTECH. Subject to the terms and conditions of this
Agreement, ROCHE hereby grants, and shall cause Hoffmann-La Roche, Inc.
to grant, to GENENTECH in the United States, a perpetual royalty-free,
nonexclusive right and license under ROCHE's Patents and Know-How, to
register, make, have made, use, sell and market (including the right to
promote) in the United States
(a) the Canada Products and DNase; and
(b) any Genentech Product, In-Licensed Product, IDEC Product
or Scios Product for which ROCHE exercises its option under Section 2 of
this Article II.
ROCHE shall not grant to any third party, and ROCHE shall cause
Hoffmann-La Roche, Inc. not to grant to any third party, any license
under ROCHE's Patents and Know-How in the United States to register,
make, have made, use, sell and market (including the right to promote)
any Product which is described in subsection (a) or (b) of this Section
8 without GENENTECH's prior written consent.
9. Future In-Licenses. With respect to future prospective in-licenses from
third parties where GENENTECH is the prospective licensee and the
license involves Products with rights in the Roche Territory, the
Parties shall discuss in advance the nature of reasonable terms for the
Roche Territory. Any final license agreement with respect to the Roche
Territory shall be on terms mutually acceptable to both Parties, and the
Parties shall discuss and agree to a worldwide development and
commercialization strategy with respect to such a Product.
10. Ras Farnesyltransferase Collaboration. With respect to the Parties'
current collaboration on ras farnesyltransferase inhibitors, GENENTECH
will have the sole right outside of the Roche Territory, and ROCHE shall
have the sole right in the Roche Territory to register, use, sell and
market (including the right to detail and promote) all Products
resulting from such collaboration. All research efforts and Development
Costs for these Products shall be shared in an equal manner. Neither
Party shall pay the other royalties for sales of any of these Products
in its Territory. In the event that any of the existing agreements
relating to such collaboration conflict with this Section 10 of Article
II, the terms of this Section shall govern.
11. IIbIIIa Collaborations Other than Xubix Collaboration. With respect to
the Parties' collaborations on IIbIIIa antagonists under the IIbIIIa
Agreement other than the
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collaboration on Xubix, GENENTECH will have the sole right outside of
the Roche Territory, and ROCHE shall have the sole right in the Roche
Territory to register, use, sell and market (including the right to
detail and promote) all Products resulting from such collaborations. All
research efforts and Global Development Costs for these Products shall
be shared in an equal manner. Neither Party shall pay the other
royalties for sales of any of these Products in its Territory. In the
event that any of the existing agreements relating to these
collaborations conflict with this Section 11 of Article II, the terms of
this Section shall govern.
12. GP-IIbIIIa (Xubix) Collaboration.
(a) ROCHE hereby grants to GENENTECH the option (the "OPT-IN
OPTION") to participate and share in the development and
commercialization of Xubix, exercisable at any time up to and
within thirty (30) days after NDA approval of the first
indication (acute or chronic therapy) in the United States. Such
Opt-in Option shall be exercisable with respect to Xubix for all
indications. Upon its exercise of the Opt-in Option, GENENTECH
shall reimburse ROCHE for fifty percent (50%) of ROCHE's
Development Costs for Xubix (including Phase III Development
Costs) incurred by ROCHE from and after May 1, 1997 through the
exercise date and for Phase III Development costs incurred prior
to May 1, 1997 and shall pay the additional sum of $25 million
U.S. Upon GENENTECH's exercise of the Opt-in Option, the Parties
shall negotiate in good faith and enter into a more detailed
commercialization and development agreement with respect to
Xubix based on the provisions contained herein it being
understood that any Development Costs incurred after such opt-in
date shall be equally shared.
(b) If GENENTECH exercises the Opt-in Option, GENENTECH and ROCHE
will have semi-exclusive rights in the United States, with
GENENTECH and ROCHE co-promoting Xubix and sharing net profits
on a basis of sixty percent (60%) to GENENTECH and forty percent
(40%) to ROCHE if the first indication for which marketing
approval is sought is for acute therapy or on a basis of fifty
percent (50%) to GENENTECH and fifty percent (50%) to ROCHE if
the first indication for which marketing approval is sought is
for chronic therapy. ROCHE shall have the sole right in the
Roche Territory to register, use, sell and market (including the
right to detail and promote) all Products resulting from such
collaboration.
(c) Upon ROCHE's filing of a NDA for the first indication (acute or
chronic therapy) of Xubix in the United States if GENENTECH has
not yet exercised its Opt-in Option, ROCHE shall provide
GENENTECH with all
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<PAGE> 23
relevant information requested by Genentech regarding Xubix
including results of preclinical and clinical studies.
(d) Neither Party shall pay the other royalties for sales of any
Xubix provided however, that ROCHE shall pay GENENTECH a six
percent (6%) royalty on Net Sales of Xubix in any country in
which Net Sales occur, in accordance with Article VI of this
Agreement, if GENENTECH does not exercise the Opt-in Option. The
royalty shall be paid in that country for the longer of (a) a
period of ten (10) years from First Commercial Introduction of
Xubix in that country or (b) until the last expiration of a
valid claim of a Genentech Patent which the sale of Xubix would
infringe in that country without the license granted in the
IIbIIIa Agreement. If there are one or more products generically
equivalent to Xubix which directly compete with Xubix in a
country so that the generically equivalent products have a
market share in that country of at least twenty-five percent
(25%) of the market (in units) for Xubix, GENENTECH and ROCHE
shall negotiate in good faith a modification to the royalty term
or rate so that the royalty payable by ROCHE in that case is
more economically viable.
(e) In the event that any of the existing agreements relating to
this collaboration conflict with this Section 12 of Article II,
the terms of this Section shall govern.
ARTICLE III - COMMERCIALIZATION COMMITTEES
1. Joint Commercialization Committee. Within fifteen (15) days of the
Effective Date, the Parties shall form a Joint Commercialization
Committee. The Joint Commercialization Committee shall be the (a) forum
for communicating to ROCHE information about Products, including the
results for a Product as of that Product's Entry Into Man, Phase II
Completion Date and Phase III Completion Date as well as all other
information about that Product in GENENTECH's possession at the time of
such communication which is specifically relevant to ROCHE's decision
whether to exercise its option for that Product (e.g., cost information,
market research, etc.) and (b) for communicating to GENENTECH
information about Products for which ROCHE has a license. The Joint
Commercialization Committee shall meet initially with respect to a
Product upon its Entry Into Man or earlier if the Parties mutually
agree. The Joint Commercialization Committee shall also be the forum for
ROCHE's communications, pursuant to Section 7 of Article II, above about
ROCHE's development and sales and marketing efforts for each Product for
which it has a license hereunder. The Joint Commercialization Committee
shall be comprised of an equal number but not more than five nominees of
ROCHE and GENENTECH respectively, appointed by their respective
organizations. The chairman of the Joint Commercialization Committee
will be designated by
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<PAGE> 24
GENENTECH. The chairman will call and chair meetings of the Joint
Commercialization Committee which will be held at GENENTECH's facilities
unless mutually agreed otherwise or by video conference where feasible.
2. Management Committee. Within ninety (90) days of the Effective Date, the
Parties shall form a Management Committee comprised of three
representatives from ROCHE, including its Chief Operating Officer or
Head of the Pharma Division and three representatives from GENENTECH,
including its Chief Executive Officer or Chief Operating Officer. The
Management Committee shall meet at least once per year to review the
development and commercialization status of all Products which are then
subject to this Agreement and any other matters brought to the
Committee's attention by the Commercialization Committee, the Finance
Committee or the Development Committee.
3. Development Committee. Within sixty (60) days of the Effective Date, the
Parties shall form a Development Committee comprised of three
representatives from ROCHE and three representatives from GENENTECH. The
Development Committee shall meet regularly but at least three (3) times
a year to discuss the development of Products for which ROCHE has
exercised its option under Article II. GENENTECH shall keep ROCHE
informed through the Development Committee on projects and products for
which an option of ROCHE is still in effect with an emphasis on those
projects which are approaching Entry Into Man (i.e. potential Entry Into
Man foreseen within the next four (4) months). The Development Committee
shall direct and coordinate development efforts on a global basis for a
Product for which ROCHE has exercised its option, consistent with the
development plan required by Section 3 of Article II. The Development
Committee shall meet initially with respect to a Product approaching its
Entry Into Man, or earlier if the Parties mutually agree, and shall be
responsible for formulating a joint development plan as required by
Section 3 of Article II. Except as otherwise specifically provided in
such plan with respect to a Product, GENENTECH will lead the planning of
world-wide development strategies for its Products. All decisions
related to GENENTECH's development efforts for a Product and GENENTECH's
filings for approval of a Registration outside the Roche Territory shall
be solely those of GENENTECH, except as otherwise specifically provided
in such plan. All decisions related to ROCHE's development efforts for a
Product for which ROCHE has exercised its option right and ROCHE's
filing for approval of a Registration in the Roche Territory shall be
solely those of ROCHE, except as otherwise specifically provided in such
plan. The activities of a party in its territory shall not negatively
impact the activities of the other party in its territory.
4. Joint Finance Committee. Within sixty (60) days of the Effective Date,
the Parties shall form a Joint Finance Committee comprised of two
representatives from ROCHE and two representatives from GENENTECH. The
Joint Finance
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<PAGE> 25
Committee shall meet on an as needed basis to review and discuss
financial activities and issues relating to this Agreement.
5. Review of Status. Within six (6) months of the Restatement Date, the
Parties shall review the Committee structure and composition described
above with a view to simplifying the Committee system where feasible.
ARTICLE IV - DEVELOPMENT AND MARKETING
1. Development. Subject to the terms and conditions of this Agreement and
the joint development plan with respect to a Product agreed to pursuant
to Section 3 of Article II, GENENTECH shall be solely responsible for,
and have full autonomy with respect to, the development of its Products
outside of the Roche Territory and in the Roche Territory with respect
to Products not licensed to ROCHE hereunder, and ROCHE shall be solely
responsible for the development in the Roche Territory of those Products
for which it has been granted a license under Section 2 of Article II
and has exercised its option for a license under Section 3 of Article
II. The Parties shall each have the Additional Indication Opt-Out Option
referred to in the Financial Appendix with respect to each Product
developed hereunder.
2. Development Costs Incurred prior to Opt-In. Except as set forth below,
GENENTECH shall be reimbursed by ROCHE for fifty percent (50%) of all of
GENENTECH's Development Costs incurred in connection with a Product
prior to the date on which ROCHE has exercised its option for such
license under Sections 2 and 3 of Article II. GENENTECH shall choose the
method for reimbursement from among those set forth in the Financial
Appendix.
If ROCHE exercises its option for a license for a Product after notice
of the Phase III Completion Date for that Product, GENENTECH will be
reimbursed by ROCHE for fifty percent (50%) of all of GENENTECH's
Development Costs incurred in connection with that Product prior to the
date of GENENTECH'S notice to ROCHE of the Phase II Completion Date for
that Product and seventy-five percent (75%) of all of GENENTECH's
Development Costs incurred in connection with that Product after the
date of the notice to ROCHE of the Phase II Completion Date and prior to
the exercise of ROCHE's option for a license to the Product after
receipt of the notice of the Phase III Completion Date. If ROCHE has
paid an Option Extension Fee for a Product, $5,000,000 shall be credited
against the Development Costs reimbursable by ROCHE at the time of the
exercise of the option following receipt of notice of the Phase III
Completion Date.
3. Development Costs after Opt-In. Except as noted below, GENENTECH and
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ROCHE shall share the Global Development Costs incurred in connection
with any development of a Product and incurred on or after the date on
which ROCHE has been granted a license to such Product under Section 2
of Article II and has exercised its option for such license under
Sections 2 and 3 of Article II. If ROCHE exercises its option for such
Product during the exercise period after the date of such Product's
Entry Into Man, ROCHE shall bear fifty percent (50%) of the Global
Development Costs and GENENTECH shall bear fifty percent (50%) of the
Global Development Costs for that Product. If ROCHE exercises its option
for such Product during the exercise period after the Phase II
Completion Date for such Product, ROCHE shall bear seventy-five percent
(75%) of the Global Development Costs and GENENTECH shall bear
twenty-five percent (25%) of the Global Development Costs for that
Product. The exceptions to the foregoing are as follows:
(a) Canada Products. With respect to Canada Products, GENENTECH
shall be reimbursed by ROCHE for ten percent (10%) of all of
GENENTECH's Development Costs incurred in connection with any
development of a Canada Product and incurred on or after the
date on which ROCHE has been granted a license to such Product
under Section 1 of Article II.
(b) IGF-1 Products. With respect to IGF-1 Products, ROCHE shall
bear sixty percent (60%) of all Global Development Costs
incurred in connection with any development of an IGF-1 Product
for any diabetes indication on or after the date on which ROCHE
has exercised its option for a license under Section 3 of
Article II and GENENTECH shall bear forty percent (40%) of such
Global Development Costs.
(c) NGF Products. With respect to NGF Product, ROCHE shall bear
sixty percent (60%) of all of Global Development Costs incurred
in connection with any development of a NGF Product on or after
the date on which ROCHE has exercised its option for a license
under Section 3 of Article II and GENENTECH shall bear forty
percent (40%) of such Global Development Costs, however any
costs related to AIDS related neuropathies shall be fully borne
by GENENTECH.
(d) Additional Indications, New Formulations and New Dosing
Schedules. With respect to any additional indications or new
formulations or new dosing schedules for a Product other than
the indication or formulation or dosing schedule for which the
Product is being developed for initial Registration and where
the additional indication or new formulation or new dosing
schedule would require a separate Phase III Trial for
Registration,
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(i) if ROCHE exercises its option associated with
the Phase II Completion Date, each Party shall
bear 50% of the Global Development Costs
incurred with respect to such additional
indications and new formulations and new dosing
schedules; and
(ii) if ROCHE exercise its option associated with the
Phase III Completion Date, ROCHE shall bear
seventy-five percent (75%) and GENENTECH shall
bear twenty-five percent (25%) of the Global
Development Costs incurred with respect to such
additional indications and new formulations and
new dosing schedules.
(e) Phase III Completion Date Option. If Roche exercises its
option for a Product after notice of the Phase III Completion
Date for that Product, no Global Development Costs will be
shared for the completion of any clinical development or filing
or preparation necessary for either Party's Registration for the
indication which was the subject of the Phase III Trial related
to the Phase III Completion Date.
The determination of the amount of the Development Costs and the Global
Development Costs, and the timing and mechanism for payment thereof, is
set forth in the Financial Appendix.
4. Marketing. GENENTECH shall be solely responsible for and have full
autonomy with respect to the marketing of its products in the United
States and in the Roche Territory with respect to Products not licensed
to ROCHE hereunder. Subject to the terms and conditions of this
Agreement, ROCHE shall be solely responsible for the marketing in the
Roche Territory of those Products for which it has been granted a
license under Section 2 of Article II and has exercised its option for a
license under Section 3 of Article II and for Canada Products and DNase.
ARTICLE V - PRODUCTION AND SUPPLY
1. Production of Product. Except as provided in Sections 6, 7 and 8 of this
Article V, GENENTECH, or Genentech Biopharmaceuticals Limited in the
case of DNase as Vialed Product or Finished Product, or Genentech
International Limited in the case of Genentech Products (except DNase)
which are Vialed Product or Finished Product, shall be responsible for
the manufacture of Clinical Requirements and Commercial Requirements of
Bulk Product, Vialed Product or Finished Product, as the case may be,
for which ROCHE has a license, for the Roche Territory.
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2. Supply of Clinical Requirements. Except as provided in Sections 5, 6, 7
and 8 of this Article, GENENTECH shall use its best efforts to supply
ROCHE with ROCHE's Clinical Requirements pursuant to a mutually
agreeable and reasonable production schedule. GENENTECH shall not be
obligated to supply Clinical Requirements to ROCHE other than in
accordance with the quantities mutually agreed to and at the approximate
dates of delivery mutually agreed to. All transportation and packing and
similar costs shall be borne by ROCHE. Title and risk of loss shall pass
to ROCHE upon delivery by GENENTECH FOB origin. The Parties shall agree
on specifications for the Clinical Requirements, and the Clinical
Requirements delivered by GENENTECH shall meet those specifications.
GENENTECH shall not favor the supply of its own clinical requirements of
a Product to it or its other licensees over ROCHE's Clinical
Requirements.
3. Supply of Commercial Requirements. Except as provided in Sections 5, 6,
7 and 8 of this Article, GENENTECH, or Genentech Biopharmaceuticals
Limited in the case of DNase as Vialed Product or Finished Product, or
Genentech International Limited in the case of Genentech Products
(except DNase) which are Vialed Product or Finished Product, shall
supply ROCHE with ROCHE's Commercial Requirements pursuant to a mutually
agreeable and reasonable production schedule for ROCHE's Commercial
Requirements, and ROCHE agrees to purchase its Commercial Requirements
from those entities. Those entities shall not be obligated to supply
Commercial Requirements to ROCHE other than in accordance with the
quantities mutually agreed to and at the approximate dates of delivery
mutually agreed to. All transportation and packing and similar costs
shall be borne by ROCHE. Title and risk of loss shall pass to ROCHE upon
delivery by those entities to ROCHE, FOB origin. The Parties shall agree
on specifications and procedures for the Commercial Requirements, and
the Commercial Requirements delivered by those entities shall meet those
specifications and procedures. Those entities shall not favor the supply
of their own commercial requirements of Product to themselves or their
other licensees over ROCHE's Commercial Requirements.
4. Supply Agreement.
(a) Except as provided in Sections 5, 6, 7 and 8 of this
Article, at the time that ROCHE exercises its option for a license for a
Product under Section 2 of Article II, the Parties agree to negotiate
and enter into a definitive Supply Agreement for such Product on a basis
consistent with this Article and the other terms and conditions of this
Agreement.
(b) For Canada Products other than DNase, the Parties will
negotiate and enter into a Supply Agreement consistent with this Article
V and the other terms and conditions of this Agreement.
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5. Amendments to DNase Supply Agreement. (a) GENENTECH's and Genentech
Biopharmaceutical Limited's obligation to supply ROCHE with ROCHE's
Clinical Requirements and Commercial Requirements of DNase in the Roche
Territory, and ROCHE's agreement to purchase such Requirements from
GENENTECH and Genentech Biopharmaceuticals Limited shall be governed by
the DNase Supply Agreement as amended by this Section 5. The DNase
Supply Agreement is amended as follows.
(a) The definition of Collaborative Countries is amended to
include Canada by striking Section 4 of Article I in its entirety and
inserting in lieu thereof:
"4. The term "COLLABORATIVE COUNTRIES" shall include those
countries listed in Appendix D of the Collaborative
Agreement and Canada.".
(b) The definition of Rest of World Countries is amended to
include Japan by striking Section 19 of Article I and inserting in lieu
thereof:
"19. The term "ROW COUNTRIES" shall include all countries
except the Collaborative Countries and the United
States.".
(c) The inclusion of Canada and Japan in the DNase Supply
Agreement and its effect on the provisions allocating DNase in the event
of a product shortfall shall be addressed by striking Section 9(c)(i) of
Article II and inserting in lieu thereof:
"(i) the United States,".
(d) In light of the changed marketing arrangement for DNase
and to provide for an arm's length margin on GENENTECH's manufacture of
DNase, Section 1 of Article III is stricken in its entirety and a new
Section 1 is inserted in lieu thereof:
"1. Payment for Clinical Requirements and Commercial
Requirements.
(a) All Vialed Product for Clinical Requirements
shall be supplied by Genentech Biopharmaceutical Limited
to ROCHE at Genentech Biopharmaceutical Limited's Fully
Burdened Manufacturing Cost.
(b) All Bulk Product for Commercial Requirements
shall be supplied by Genentech Biopharmaceutical Limited
to ROCHE at Genentech Biopharmaceutical Limited 's Fully
Burdened Manufacturing Cost plus a margin of twenty
percent (20%) on such Cost and all Vialed Product for
Commercial Requirements shall be
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supplied by Genentech Biopharmaceutical Limited to ROCHE
at Genentech Biopharmaceutical Limited's Fully Burdened
Manufacturing Cost plus a margin of twenty percent (20%)
and --
(1) in the case of Commercial
Requirements for use in a Collaborative Country,
such other amounts as specified in Section 3 of
Article VI of the Agreement Between Genentech,
Inc. and F. Hoffmann-La Roche Ltd Regarding the
Commercialization of Genentech's Products in the
Roche Territory; or
(2) in the case of Commercial
Requirements for use in a ROW country, such
other amounts as specified in Section 3 of
Article VI of the Agreement Between Genentech,
Inc. and F. Hoffmann-La Roche Ltd Regarding the
Commercialization of Genentech's Products in the
Roche Territory."
(e) In light of the changed marketing arrangement for DNase
and to extend Genentech Biopharmaceutical Limited's supply obligation to
reflect such change, Section 1 of Article IV is stricken in its entirety
and a new Section 1 is inserted in lieu thereof:
"1. Term. (a) This Agreement shall enter into force and
effect as of February 11, 1992.
(b) The term of Genentech Biopharmaceutical
Limited's obligation to supply ROCHE with Product and
ROCHE's obligation to purchase Product from Genentech
Biopharmaceutical Limited for use in each of the
Collaborative Countries and ROW Countries shall continue
only for so long as ROCHE is obligated to pay royalties
under Section 3 of Article VI of the Agreement Between
Genentech, Inc and F. Hoffmann-La Roche Ltd Regarding
the Commercialization of Genentech's Products in the
Roche Territory; provided, however, that when such term
ends with respect to a Collaborative or ROW Country,
ROCHE and Genentech Biopharmaceutical Limited shall
discuss in good faith terms and conditions for a
continuing supply of Product from Genentech
Biopharmaceutical Limited to ROCHE at a world market
price for use and sale in the Roche Territory.".
6. Supply of Scios Product. If ROCHE exercises its option for Scios Product
under Section 2 of Article II of this Agreement, Scios Product will be
supplied by Scios
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<PAGE> 31
Nova (or a third party contractor of Scios Nova) to ROCHE, and ROCHE
agrees to purchase such Product from Scios Nova (or a third party
contractor of Scios Nova), under the terms and conditions specified in
the Scios Nova Agreement and such other terms and conditions as may be
agreed to by GENENTECH and Scios Nova in a supply agreement yet to be
negotiated. In the event that ROCHE has exercised its option for a
license for the Scios Product prior to the negotiation and execution of
such supply agreement, GENENTECH shall keep ROCHE fully informed of the
negotiations regarding such supply agreement and shall invite a
representative of ROCHE to participate in such discussions.
7. Supply of IDEC Product. If ROCHE exercises its option for IDEC Product
under Section 2 of Article II of this Agreement, IDEC Product will be
supplied in a manner consistent with the IDEC Agreement.
8. Supply of In-Licensed Product. If ROCHE exercises its option for a
license for an In-Licensed Product under Section 2 of Article II of this
Agreement and if the terms and conditions of the agreement between
GENENTECH and the licensor covering the manufacture and supply of such
In-Licensed Product provide that such licensor (or a third party
contractor of such licensor) will be responsible for the manufacture and
supply of such In-Licensed Product, then such In-Licensed Product will
be supplied by such licensor (or a third party contractor of such
licensor) to ROCHE, and ROCHE agrees to purchase such In-Licensed
Product from such licensor (or a third party contractor of such
licensor) under the terms and conditions specified in the agreement
between GENENTECH and the licensor. In the event that ROCHE has
exercised its option for such In-Licensed Product and a supply agreement
has yet to be negotiated between GENENTECH and the licensor of such
In-Licensed Product, GENENTECH shall keep ROCHE fully informed of the
negotiations regarding such supply agreement and shall invite a
representative of ROCHE to participate in discussions regarding a supply
agreement.
9. Supply of Small Molecule Product. If ROCHE exercises its option for a
license for a Product under Section 2 of Article II of this Agreement
and if such Product is a Small Molecule Product, ROCHE shall be
responsible for the manufacture and supply of GENENTECH's Clinical
Requirements and Commercial Requirements of such Small Molecule Product.
In such case, the terms and conditions herein applicable to GENENTECH
when it is manufacturing and supplying Product to ROCHE shall be equally
applicable to ROCHE when it is manufacturing and supplying Small
Molecule Product to GENENTECH including, without limitation, those terms
and conditions set forth in Sections 2, 3, 4, 9 and 10 of this Article
and the Section 1 of Article VI.
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10. Manufacturing Process and Facilities..
(a) Except as provided in Sections 6, 7, 8 and 9 of this
Article, GENENTECH shall be solely responsible for the development of a
manufacturing process and facilities for Products for which ROCHE has a
license except Small Molecule Products. The fully burdened costs
associated with the development of a manufacturing process specifically
for such Product shall be considered part of the Development Costs and
shall be shared as set forth in Section 3 of the Financial Appendix.
(b) ROCHE shall be solely responsible for the development of
a manufacturing process and facilities for Small Molecule Products for
which ROCHE has a license. The fully burdened costs associated with the
development of a manufacturing process specifically for such Small
Molecule Product shall be shared by the Parties in proportion to their
expected share of the worldwide market, in terms of revenues, for the
Small Molecule Product for their Territory. For example, if GENENTECH's
expected proportionate share in terms of revenues of the worldwide
market is 33%, it shall bear 33% of the expense of developing a
manufacturing process for that Small Molecule Product.
11. Additional Capital Requirements. Except as provided in Sections 6, 7 and
8 of this Article, if GENENTECH or ROCHE determines that additional
dedicated manufacturing equipment, expansion or adaption of the then
existing manufacturing facilities or manufacturing equipment, or
construction of an additional manufacturing facility is needed to
manufacture a Product to meet Clinical Requirements or Commercial
Requirements for the other Party as provided herein, the manufacturing
Party shall be solely responsible for the capital costs associated with
such project.
12. Term of Supply Obligation. Except as provided in Sections 5, 6, 7 and 8
of this Article, each Party's obligation to provide the other Party with
Product for use and sale in that Party's Territory shall continue only
for so long as that Party is obligated to pay royalties hereunder for
such Product. Thereafter ROCHE and GENENTECH shall discuss in good faith
terms and conditions for a continuing supply of such Product from the
manufacturing Party to other Party at a mutually agreeable market price
for use and sale in that Party's Territory.
13. ROCHE Right to Manufacture. Notwithstanding anything to the contrary in
this Agreement, and subject to the provisions relating to Costs of Idle
Capacity in the Financial Appendix, ROCHE shall have the right to
manufacture Bulk Product or Vialed Product (i) if ROCHE can demonstrate
that it is able to manufacture Bulk Product or Vialed Product at a lower
price than the supply price of GENENTECH, or (ii) if GENENTECH is not
able to, or it is foreseeable that GENENTECH will not be in a position
to, supply Roche's Commercial
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Requirements in the Roche Territory, or (iii) if GENENTECH intends to
have a third party toll manufacture Bulk Product or Vialed Product. In
such case and if ROCHE so requests, GENENTECH shall provide ROCHE with
all information and, at Roche' expense, support needed to enable ROCHE
to manufacture Bulk Product or Vialed Product for use and sale in the
Roche Territory and GENENTECH shall grant ROCHE the respective licenses
necessary for ROCHE to effect its rights hereunder.
ARTICLE VI - PAYMENTS, MARGINS AND ROYALTIES
1. Payment for Product Requirements.
(a) Except for IDEC Product and Scios Product, unless the
terms and conditions applicable to an In-Licensed Product provide
otherwise, all Clinical Requirements shall be supplied by one Party to
the other at the manufacturing Party's Fully Burdened Manufacturing
Cost.
(b) Except for IDEC Product and Scios Product, unless the
terms and conditions applicable to an In-Licensed Product provide
otherwise, all Commercial Requirements in the form of Vialed Product
shall be supplied by GENENTECH to ROCHE at GENENTECH's Fully Burdened
Manufacturing Cost plus a margin of twenty (20%) on such Cost. Except
for IDEC Product and Scios Product, unless the terms and conditions
applicable to an In-Licensed Product provide otherwise, if ROCHE is
producing Vialed Product pursuant to the licenses granted in Sections 1
and 3 of Article II, then Bulk Product, necessary for the manufacture of
Vialed Product and Finished Product for Commercial Requirements outside
the United States, shall be supplied by GENENTECH to ROCHE at
GENENTECH's Fully Burdened Manufacturing Cost plus a margin of twenty
(20%) on such Cost.
2. Invoices and Method of Payment of GENENTECH's Fully Burdened
Manufacturing Cost and Margin. GENENTECH shall invoice ROCHE for each
shipment of Bulk Product or Vialed Product, as the case may be, and
ROCHE shall pay such invoice on the terms and conditions set forth in
the Financial Appendix.
3. Royalties on Sale of DNase.
(a) ROCHE shall pay GENENTECH a royalty of twenty percent
(20%) on Net Sales of DNase in each of the Collaborative Countries and
Canada.
(b) ROCHE shall pay GENENTECH a royalty of twelve and
one-half percent (12.5%) on the first $100 million in aggregate Net
Sales of DNase in
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<PAGE> 34
countries other than the Collaborative Countries and Canada and
thereafter a royalty of fifteen percent (15%) on aggregate Net Sales of
DNase in such countries in excess of $100 million.
(c) The payment of royalties on DNase Net Sales in each
country of the Roche Territory in (a) and (b) above shall continue until
the latter to occur of (i) the last expiration of a Valid Claim of a
GENENTECH Patent which the sale of that Product would infringe in that
country but for the license granted herein or (ii) for a period of 25
years from the date of First Commercial Introduction in that country.
4. Royalties and Other Payments on Sale of Canada Products.
(a) ROCHE shall pay GENENTECH a royalty of twenty percent
(20%) on Net Sales of each Canada Product. The payment of royalties on
each Canada Product's Net Sales shall continue until the latter to occur
of (i) the last expiration of a Valid Claim of a GENENTECH Patent which
the sale of that Product would infringe in that country but for the
license granted herein or (ii) a period of 25 years from the Effective
Date.
(b) For each annual increase in Net Sales of Activase in
Canada in excess of 110% of 1994 Net Sales of Activase in Canada, ROCHE
agrees to make an additional payment to GENENTECH of ten percent (10%)
of Net Sales of Activase in Canada for that year in excess of 1994 Net
Sales. In no event shall the total of such annual payments exceed $27
million.
5. Royalties on Sale of Genentech Products. Except for Genentech Products
for which ROCHE exercises its option granted under Section 2(b) of
Article II after the Phase III Completion Date, ROCHE shall pay
GENENTECH a royalty of twelve and one-half percent (12.5%) on the first
$100 million in aggregate Net Sales of each Genentech Product in the
Roche Territory and a royalty of fifteen percent (15%) on aggregate Net
Sales of such Genentech Product in excess of $100 million. For Genentech
Products for which ROCHE exercises its option granted under Section 2(b)
of Article II after the Phase III Completion Date, ROCHE shall pay
GENENTECH a royalty of fifteen percent (15%) on all Net Sales of such
Genentech Product. If ROCHE has paid an Option Extension Fee for a
Product, the amount of $5,000,000 shall be credited against royalties
payable GENENTECH by ROCHE in the first calendar year of sales by ROCHE
in which Net Sales of that product exceed $100 million U.S. The payment
of royalties on each GENENTECH Product's Net Sales in each country of
the Roche Territory shall continue until the latter to occur of (i) the
last expiration of a Valid Claim of a GENENTECH Patent which the sale of
that Product would infringe in that country but for the license granted
herein or (ii) a period of 25 years from the date of First Commercial
Introduction in that country.
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<PAGE> 35
6. Royalties and Other Payments on Sale of Scios Product.
(a) ROCHE shall pay GENENTECH a royalty of twenty percent
(20%) on annual Net Sales of Scios Product in each country of the Roche
Territory for so long as GENENTECH is paying a royalty to Scios Nova
under the Scios Nova Agreement in that country. Thereafter, ROCHE shall
pay GENENTECH a royalty on Net Sales in that country of ten percent
(10%) for aggregate annual Net Sales of up to and including $150 million
in all countries in that year and of eight percent (8%) for aggregate
annual Net Sales of over $150 million in all countries in that year, and
such royalties shall be payable with respect to each country until the
latter to occur of (i) the last expiration of a Valid Claim of a
GENENTECH Patent which the sale of that Product would infringe in that
country but for the license granted herein or (ii) a period of 25 years
from the date of First Commercial Introduction in that country.
(b) If ROCHE exercises its option pursuant to Sections 2 and
3 of Article II, within thirty (30) days thereafter ROCHE shall pay
GENENTECH a one time fee of $25,000,000 in lieu of paying one-half-of
the Development Costs for Scios Product. Such amount assumes that a
second Phase III Trial will be required for Registration of Scios
Product in the United States; if only one Phase III Trial is necessary,
the Parties will negotiate a higher one time fee. GENENTECH is obligated
to make certain one time milestone payments to Scios Nova, as set forth
in the Scios Nova Agreement, upon Net Sales of $150 million in the
Licensed Territory in any 12 month period (either $15 million or $7.5
million) or upon Regulatory Approval in Japan (either $5 million or $2.5
million) as those terms are used in the Scios Nova Agreement. ROCHE
shall promptly reimburse GENENTECH for each such milestone GENENTECH
pays to Scios Nova.
(c) With respect to Canada, the Scios Nova Agreement
provides that GENENTECH and Scios Nova will copromote Scios Product as
part of a copromotion arrangement for the United States and Canada and
that GENENTECH and Scios Nova will share Operating Profits and Losses on
the sale of Scios Product as part of an arrangement to share Operating
Profits and Losses for the United States and Canada. ROCHE's rights with
respect to Scios Product are subject to such obligations regarding
copromotion in Canada and the sharing of Operating Profits and Losses
with respect to Canada.
7. Royalties and Other Payments on Sale of IDEC Product.
(a) ROCHE shall pay GENENTECH a royalty of twenty percent
(20%) on Net Sales of IDEC Product in each country of the Roche
Territory for so long as GENENTECH is paying a royalty to IDEC under the
IDEC Agreement in that country. Thereafter, ROCHE shall pay GENENTECH a
royalty on Net Sales in
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<PAGE> 36
that country of ten percent (10%) for aggregate annual Net Sales of up
to and including $75 million in all countries in that year and eight
percent (8%) for aggregate annual Net Sales over $75 million in all
countries in that year, and such royalties shall be payable with respect
to each country until the latter to occur of (i) the last expiration of
a Valid Claim of a GENENTECH Patent which the sale of that Product would
infringe in that country but for the license granted herein or (ii) a
period of 25 years from the date of First Commercial Introduction in
that country.
(b) If ROCHE exercises its option pursuant to Sections 2 and
3 of Article II, within thirty (30) days thereafter ROCHE shall pay
GENENTECH a one time fee of $10 million in lieu of paying one-half of
the Development Costs for IDEC Product incurred as of the Effective
Date. Development Costs incurred after the Effective Date shall be
subject to Section 2 of Article IV. In addition, GENENTECH is obligated
to make certain one time milestone payments to IDEC, as set forth in the
IDEC Agreement, upon Regulatory Approval in the First Major European
Country ($10 million) and upon the Patent Milestone Event ($2.5 million)
as those terms are used in the IDEC Agreement. ROCHE shall promptly
reimburse GENENTECH for each such milestone which GENENTECH pays to
IDEC.
(c) GENENTECH has an option for a co-exclusive license for
rights to IDEC Product in Asia for a payment of $2.5 million if such
co-exclusive license becomes available to GENENTECH. If ROCHE exercises
its option for a license for the IDEC Product under Section 2 of Article
II and if ROCHE wishes GENENTECH to exercise the option for a
co-exclusive license to IDEC Product in Asia should such license become
available to GENENTECH, then ROCHE shall provide written notice of such
to GENENTECH at the time of exercise of its option and pay $2.5 million
to GENENTECH in conjunction therewith.
(d) With respect to Canada, the IDEC Agreement provides that
GENENTECH and IDEC will copromote IDEC Product as part of a copromotion
arrangement for the United States and Canada and that GENENTECH and IDEC
will share Operating Profits and Losses on the sale of IDEC Product as
part of an arrangement to share Operating Profits and Losses for the
United States and Canada. ROCHE's rights with respect to IDEC Product
are subject to such obligations regarding copromotion in Canada and the
sharing of Operating Profits and Losses with respect to Canada.
8. Royalties and Other Payments on Sale of In-Licensed Product.
(a) If ROCHE exercises its option under Article II for an
In-Licensed Product, the Parties will negotiate mutually agreeable
financial terms for payments by ROCHE to GENENTECH.
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<PAGE> 37
(b) In general, if ROCHE exercises its option under Article
II for an In-Licensed Product, ROCHE agrees to pay to GENENTECH a
license fee or similar acquisition fee for rights in the Roche Territory
and any milestone or similar payments related to the achievement of
progress either in development, registration or sales of an In-Licensed
Product or for other achievements in the Roche Territory.
(c) The Parties acknowledge that the specific terms and
conditions related to an In-Licensed Product cannot be anticipated and
agree to negotiate in good faith the allocation of responsibility for
such terms and conditions in a fair manner reflecting the benefit to be
received by each from the In-Licensed Product.
9. Calculation of Aggregate Net Sales. The calculation of the aggregate Net
Sales for determination of the applicable royalty percentage shall be
that set forth in the Financial Appendix.
10. Timing of Royalty Payments. Payment of amounts specified in this Article
shall be made within ninety (90) days of the end of each calendar
quarter in which the sale was made except where payments are made to
GENENTECH in consideration of royalty payments to be made to Scios Nova
or IDEC in which case those payments shall be made within sixty (60)
days of the end of each calendar quarter. For purposes of determining
when a sale of a Product occurs, the sale shall be deemed to occur when
an independent third party is invoiced for the Product. Any such payment
that is not paid on or before the date such payment is due under this
Agreement shall bear interest, to the extent permitted by applicable
law, at the LIBOR rate of interest as reported by Data Stream from time
to time, calculated on the number of days such payment is delinquent.
ROCHE shall make all payments hereunder by bank wire transfer in
immediately available funds to such account as GENENTECH shall designate
before such payment is due, free and clear of any taxes, duties, levies,
fees or charges, except for withholding taxes due on behalf of GENENTECH
(to the extent applicable). ROCHE shall make any withholding payments
due on behalf of GENENTECH and shall promptly provide GENENTECH with
written documentation of any such payment sufficient to satisfy the
reasonable requirements of an appropriate tax authority with respect to
an application by GENENTECH for a foreign tax credit for such payment or
for similar treatment. At the time of remittance of each payment
described in this Article, ROCHE shall provide GENENTECH with a
statement summarizing the Net Sales of the Product in each of country
outside the United States in the reporting currency of each such country
and the rate used to convert from each such country's currency to Swiss
Francs and, in the case of the Scios Agreement and IDEC Agreement, with
such other information as those Agreements require of GENENTECH.
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<PAGE> 38
11. Restrictions on Transfer of Funds.
(a) If ROCHE ships Product into a country outside the United
States for sale in that country and, at the time of shipment, such
country has legal restrictions on the transfer of funds which prevent
the prompt remittance of the part or all of the amount described in this
Article, ROCHE shall be obligated to pay such amounts in immediately
available funds to such account as GENENTECH shall designate.
(b) If ROCHE ships Product into a country outside the United
States for sale in that country and such country subsequently imposes
legal restrictions on the transfer of funds which prevents the prompt
remittance of part or all of the amount described in this Article with
respect to that shipment of the Product in that country, ROCHE shall be
obligated to --
(i) pay such portion of such amount as permitted by the
law of such country in immediately available funds to such
account as GENENTECH shall designate, and
(ii) pay the remainder of such amount to such account as
GENENTECH shall designate in a bank in such country.
In such event, the Parties shall discuss in good faith the best means of
utilizing the funds on deposit in such country. Shipments of the Product
into such country after the imposition of legal restrictions on the
transfer of funds shall be subject to subsection (a) of this Section.
13. Records Regarding Royalties. ROCHE agrees to keep for at least three (3)
years, records of all sales of Product on a country-by-country basis in
sufficient detail to permit GENENTECH to confirm the accuracy of the
ROCHE's calculations with respect to payment of the amounts described in
this Article. Once a year, at the request and the expense of GENENTECH
and upon at least five (5) days' prior written notice, ROCHE shall
permit its officially appointed world-wide auditor to examine its
records in a manner sufficient to report to GENENTECH on the accuracy of
ROCHE's calculations. Results of any such examination shall be made
available to both Parties. If such examination reveals an underpayment
of the amounts described in this Article by five percent (5%) or more,
ROCHE shall pay all costs of such examination. In the event such
examination concludes that additional amounts are owed, the additional
amounts shall be paid within thirty (30) days of the date GENENTECH
delivers to ROCHE such accountant's written report so concluding. In the
event such examination concludes that there has been an overpayment with
respect to such amounts, the excess shall be credited to ROCHE against
future payment of the amounts
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described in this Article. This Section shall survive any termination of
royalty payments for a particular country for a period of six (6) years.
14. Royalty for Use of Trademark. At the end of the term for the payment of
royalties as defined in this Article, ROCHE shall pay to GENENTECH a
royalty for the use of each Trademark in each country in the Roche
Territory at a rate of two percent (2%) of Net Sales by ROCHE in such
country of the Product represented by the Trademark for so long as the
Trademark is used.
15. Generic Competition. If there is one or more products generically
equivalent to a Product which compete with that Product in a country so
that the generically equivalent products have a market share in that
country of at least twenty-five percent (25%) of the market (in units)
for the Product, GENENTECH and ROCHE shall negotiate in good faith a
modification to the royalty term or rate so that the royalty payable by
ROCHE in that case is significantly more economically viable.
16. Royalty Term if ROCHE Becomes Minority Shareholder. Notwithstanding
anything to the contrary herein, if ROCHE's equity ownership of
GENENTECH securities is less than fifty percent (50%) of all such
securities then outstanding, the term for the payment of royalties for a
Product hereunder in each country shall be reduced to the latter to
occur of (i) the last expiration of a Valid Claim of a GENENTECH Patent
which the sale of that Product would infringe in that country but for
the license granted herein or (ii) a period of ten (10) years from the
date of First Commercial Introduction in that country. If at any time
ROCHE's equity ownership of GENENTECH securities becomes less than fifty
percent (50%) (the "Divestiture Date"), the term for the payment of
royalties specified above shall become immediately applicable. If
because of the immediate applicability of the shortened term for the
payment of royalties for a Product, royalties would no longer be payable
in a country, ROCHE shall continue to pay royalties on that Product in
that country over the following period in a decreasing manner as
follows:
<TABLE>
<CAPTION>
Period % of applicable royalty
------ -----------------------
<S> <C>
From Divestiture Date until 100
end of that calendar year
First full calendar year following 80
Divestiture Date
Second full calendar year following 60
Divestiture Date
</TABLE>
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<PAGE> 40
<TABLE>
<CAPTION>
Period % of applicable royalty
------ -----------------------
<S> <C>
Third full calendar year following 40
Divestiture Date
Fourth full calendar year following 20
Divestiture Date
` Fifth full calendar year following 0
Divestiture Date and thereafter
</TABLE>
Thereafter, ROCHE shall have a fully paid-up license for such Product.
ARTICLE VII - TRANSITION PROVISIONS
1. General. The Parties intend to effect a transfer of the operations of
Genentech Canada Ltd, Genentech Europe Limited and Genentech Ltd.
(Japan) to ROCHE in the manner described above and in the subsequent
provisions of this Article VII. The Parties acknowledge that a number of
actions must be taken to effect such transfers in an orderly manner so
as to minimize disruption to those operations and attendant costs and
maximize revenue receipt where such operations are generating or
involved in generating revenue. The Parties acknowledge that while they
will act expeditiously to take all such appropriate actions, a
substantial period is likely to be required to complete all of such
actions. Therefore, the Parties agree to effect such a transfer as
quickly as possible but no later than January 1, 1996 and the provisions
relating to such a transfer, including license grants, supply
obligation, like relating to Canada, shall be effective when such
transfer is completed and at a date to be mutually agreed to.
2. Personnel of Genentech Canada, Inc., Genentech Europe Limited and
Genentech Ltd. (Japan). The Parties shall discuss and mutually agree
with respect to the continuing status of the employees of Genentech
Canada, Inc., Genentech Europe Limited and Genentech Ltd. (Japan).
3. Records and Property Leases.
(a) Within ninety (90) days of the Effective Date of this
Agreement, copies of the records of Genentech Canada, Inc., Genentech
Europe Limited and Genentech Ltd. (Japan) relating to their operations
and needed by ROCHE to assume those operations shall be made available
to ROCHE.
(b) Within ninety (90) days of the Effective Date of this
Agreement, information regarding the real estate property leases of
Genentech Canada, Inc., Genentech Europe Limited and Genentech Ltd.
(Japan) shall be made available
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<PAGE> 41
to ROCHE and such leases shall promptly be assumed by ROCHE as well as
any other liabilities of these entities which have arisen in the
ordinary course of business except for a line of credit to Genentech
Canada, Inc. used to purchase Activase rights.
(c) Within ninety (90) days of the Effective Date of this
Agreement, information regarding office equipment and the like to ROCHE.
Within thirty (30) days after such information is made available ROCHE,
ROCHE shall advise GENENTECH whether it wishes to purchase any or all of
such equipment or the like.
4. Transfer of Dossier and Registration. The Dossiers for Canada Product,
including all data, information, results, and documents with respect to
pertinent Registrations in Canada, shall be transferred by GENENTECH to
ROCHE, and ROCHE shall be entitled to use the Dossiers and all such
data, information, results, and documents for its own purposes
consistent with the terms of this Agreement. GENENTECH shall cooperate
with ROCHE in a timely manner and in every proper way to effect the
transfer of the pertinent Registration or Registrations exclusively to
ROCHE and GENENTECH shall seek, and use its best efforts to obtain, the
necessary authorization from the pertinent governmental authorities
applicable to such transfer.
ARTICLE IX - PATENTS, INVENTIONS AND TRADEMARKS
1. Sole Inventions. The Parties recognize that either Party may
independently and separately make inventions in the course of this
Agreement relating to a Product, its administration, formulation or
clinical use. In such event, the Party making the invention shall be the
sole owner of that invention and of any patent applications and patents
thereon (including inventor's certificates) and shall be solely
responsible for the filing, prosecution and maintenance of all such
patent applications and patents and shall have sole authority to decide
what actions in that regard it shall take. If the other Party wishes to
have the Party owning the invention undertake actions which the Party
owning the invention does not routinely undertake or which it has
decided not to undertake, the other Party may request such Party to
undertake such actions and if the other Party does undertake such
actions, it shall be reimbursed for all internal and external costs it
incurs relating to such actions.
2. Joint Inventions. Any inventions relating to a Product, its
administration, formulation or clinical use arising from the Parties'
efforts under this Agreement that are jointly made by both Parties
(i.e., an invention in which one or more inventors from each Party,
including individuals normally obliged to assign an
35
<PAGE> 42
invention to a Party, have made an inventive contribution as determined
by United States Patent Law), and any patent applications and patents
thereon, shall be jointly owned by the Parties. With respect to any such
joint invention, the Parties intend that after consultation with each
other, the filing, prosecution and maintenance of any patent
applications thereon will be under the control of the Party from whom
the majority of the data underlying such patent application arises (the
"Controlling Party"), and the Controlling Party shall have the right
(but not the obligation) to undertake such filings, prosecutions and
maintenance at its sole expense, provided that: (a) the Controlling
Party notifies the non-Controlling Party within one (1) month after the
filing of any priority patent application by the Controlling Party; (b)
the Controlling Party informs the non-Controlling Party within eight (8)
months from the filing of the priority application whether and in which
countries it intends to file convention applications; (c) the
Controlling Party provides the non-Controlling Party promptly with
copies of all communications received from or filed in patent offices
with respect to such filings; and (d) the Controlling Party provides the
non-Controlling Party a reasonable time prior to taking or failing to
take action that would affect the scope or validity of rights under any
patent applications or patents (including but not limited to
substantially narrowing or canceling any claim, abandoning any patent or
not filing or perfecting the filing of any patent application in any
country), with notice of such proposed action or inaction so that the
non-Controlling Party has a reasonable opportunity to review and make
comments. In the event that the Controlling Party breaches the foregoing
obligations regarding updating and consultation, and such breach is not
cured with thirty (30) days of a written notice from the non-Controlling
Party to the Controlling Party describing such breach, or in the event
that the Controlling Party fails to undertake the filing of a patent
application within ninety (90) days of a written notice by the
non-Controlling Party to the Controlling Party that the non-Controlling
Party believes filing of such an application is appropriate, the
non-Controlling Party may undertake such filing, prosecution and
maintenance at its sole expense, in which case the Controlling Party
shall assign all its rights to such invention to the non-Controlling
Party, and any patent application and subsequently issued patent thereon
shall be owned solely by the non-Controlling Party.
3. Patent Infringement.
(a) In the event that GENENTECH or ROCHE become aware of any
infringement by a third party of any GENENTECH Patents in the Roche
Territory, whether solely or jointly held, each Party shall inform the
other in writing of all available evidence and details available
concerning such infringement. Before taking any action, the Parties
shall consult with each other as to the best manner in which to proceed.
Either Party which is the sole owner of a Patent shall have the sole
right but not the obligation to bring, defend, and maintain any
appropriate suit or action or to control the conduct thereof against the
infringer.
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<PAGE> 43
However, if the Parties agree to equally share all expenses, they shall
also share the recoveries due to any such action. If the Parties do not
agree to share all expenses, the paying Party will receive all
recoveries due to any such action. If one Party requests the other Party
to join in such suit or action, the other Party shall cooperate and
execute all papers and perform such other acts as may be reasonably
required.
(b) In the event that GENENTECH and/or ROCHE are sued or
threatened with suit in the Roche Territory, by a third party who claims
that the manufacture, use or sale of a Product is an infringement of one
or more claims of a patent owned or controlled by the third party,
GENENTECH and ROCHE shall each pay its own costs in defending such suit
or threatened suit. If the settlement of a lawsuit or threatened lawsuit
or other action or a judgment arising out of a lawsuit requires any
payments to a third party or license from a third party in order to
manufacture, use or sell Product in a country as a result of a
dominating third party patent right, GENENTECH agrees to reduce the
royalty for that Product in that country specified in this Agreement by
one-half of the amount of any such payments, up to a maximum reduction
of two percent (2%) of the royalty due on Net Sales of that Product in
that country. In such case, there shall be no additional reduction in
royalties on Net Sales of that Product for that country because of
dominating third party patent rights.
4. Third Party Patents.
(a) If either Party becomes aware of any patent or other
appropriate intellectual property belonging to a third party which the
Party reasonably believes that without a license thereto GENENTECH would
infringe by virtue of its obligations under Article IV to manufacture
and supply both clinical and commercial needs for Bulk Product or Vialed
Product in the Roche Territory, the Party shall notify the other Party
of such. The Parties shall thereafter discuss a means of resolving such
potential infringement including taking a license to such patent or
other intellectual property. If as a result of an agreement between the
parties, GENENTECH acquires a license to such patent or other
intellectual property, the associated intellectual property acquisition
and licensing costs shall be deemed to be part of the GENENTECH's Fully
Burdened Manufacturing Cost.
(b) If GENENTECH insists that such a license is necessary
but ROCHE does not agree, or if ROCHE is not willing to agree to terms
for such a license that are acceptable to the third party patent or
intellectual property owner, then ROCHE shall defend, indemnify and hold
harmless GENENTECH from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) and damages
arising out of or resulting from any infringement by GENENTECH of such
patent or intellectual property which covers the manufacture of the
Product. (c) If ROCHE insists that such a license is necessary but
GENENTECH does not agree, or if GENENTECH is not willing to agree to
terms for such a license that are acceptable to the third party patent
or intellectual property owner, then GENENTECH shall defend, indemnify
and hold harmless ROCHE from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) and damages
arising out of or resulting from any infringement by ROCHE of such
patent or intellectual property which covers the manufacture of the
Product.
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<PAGE> 44
(c) If ROCHE insists that such a license is necessary but
GENENTECH does not agree, or if GENENTECH is not willing to agree to
terms for such a license that are acceptable to the third party patent
or intellectual property owner, then GENENTECH shall defend, indemnify
and hold harmless ROCHE from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) and damages
arising out of or resulting from any infringement by ROCHE of such
patent or intellectual property which covers the manufacture of the
Product.
5. Reporting on Patent Status. GENENTECH shall keep ROCHE informed of its
efforts to secure one or more Patents its owns in the Roche Territory
with one or more valid claims covering as compositions
(a) Canada Products and DNase, and
(b) Genentech Products, IDEC Product, Scios Product and
In-Licensed Product for which ROCHE has exercised its option
under Section 2 of Article II,
or its use or sale in the Roche Territory. Such reports shall be made at
the end of each year beginning in the year of execution of this
Agreement and shall include the expiration date of any such patent
which.
6. Trademark. GENENTECH will register in each major country in the Roche
Territory, at its own expense, at least one Trademark for each Product
for which ROCHE has exercised its option under Section 2 of Article II
and will maintain it in force. GENENTECH shall monitor for trademarks
that may infringe such Trademark at its sole expense. ROCHE shall inform
GENENTECH of any infringing trademarks in major countries in the Roche
Territory of which ROCHE becomes aware. GENENTECH shall hold ROCHE
harmless from all loss, expense or damage such as interruption and loss
of sales, destruction and reprinting of packaging and promotional
material, damages to the adverse party and other similar consequences if
a third party succeeds in enjoining ROCHE from distributing and
marketing a Product outside the United States to the extent that such
loss, expense or damage results from the use of GENENTECH's Trademark.
In such event, ROCHE shall make best efforts to mitigate any losses both
prospectively and subsequently.
ARTICLE X - CONFIDENTIALITY AND PUBLICATIONS
1. Confidential Information. The Parties acknowledge that during the course
of this Agreement they may receive from each other information which is
proprietary and confidential and of significant commercial value to the
disclosing Party.
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<PAGE> 45
Such information shall specifically include all data provided to ROCHE
for its evaluation in connection the exercise of any option under
Section 2 of Article II. Such information as well as any Know-How, so
long as such Know-How is not generally ascertainable from publicly
available information, to the extent provided by the other Party, shall
be deemed "Information" as that term is used in the Mutual
Confidentiality Agreement entered into as of September 8, 1990 between
Roche Holding Ltd and GENENTECH, Inc. (the "Mutual Confidentiality
Agreement"), and the Parties agree that such Information shall be
subject to the terms and provisions of the Mutual Confidentiality
Agreement.
2. Publications. Notwithstanding Section 1 of this Article, ROCHE shall be
free to publish the results of the development activities hereunder to
the extent that such publication will not result in the disclosure of
Information of GENENTECH. ROCHE shall submit to GENENTECH any such
proposed publication at least thirty (30) days in advance to allow
GENENTECH to review such planned publication. GENENTECH will promptly
report any decisions regarding the existence of patentable inventions,
and should any patentable inventions be identified, ROCHE agrees to
delay disclosure for a reasonable time period to allow filing of such
patent applications. In addition, GENENTECH shall have the authority to
require deletion from any such planned publication of any Information of
GENENTECH.
3. Restrictions on Transfer of Proprietary Materials. Each Party agrees,
with respect to any proprietary materials, substances, reagents or the
like (except Product) received from the other Party ("Materials") that
such materials shall be subject to the provisions of Mutual Agreement
for Supply of Research Material entered into between GENENTECH Inc. and
Roche Holding Ltd as of July 17, 1991.
ARTICLE XI - LIABILITY
1. No Liability. Neither Party shall be liable to the other Party for
indirect, incidental or consequential damages arising out of the terms
and conditions of this Agreement or with respect to that Party's
performance hereunder or lack thereof.
2. Indemnification by ROCHE. ROCHE shall defend, indemnify and hold
harmless GENENTECH from and against all third party costs, claims,
suits, expenses (including reasonable attorneys' fees), assessments,
fines and damages (collectively "CLAIMS") arising out of or resulting
from ROCHE's manufacturing (if any), formulating (if any), filling (if
any), finishing, packaging, labeling, distributing, selling or using
after title to a Product has passed to ROCHE from GENENTECH. The
foregoing indemnification shall not extend to any claims which arise or
result from any defect in GENENTECH's manufacture, formulation
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or fill of the Product. The foregoing indemnification shall be
conditioned upon GENENTECH: (a) providing written notice to ROCHE within
twenty (20) days after GENENTECH has been given written notice of such
Claim; (b) permitting ROCHE the opportunity to assume full
responsibility (at ROCHE's expenses) for the investigation and defense
of any such Claim; and (c) not settling or compromising any such Claim
without ROCHE's prior written consent.
3. Indemnification by GENENTECH. GENENTECH shall defend and indemnify and
hold harmless ROCHE from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) assessments,
fines and damages (collectively "Claims") arising out of or resulting
from its manufacture, formulating, filling and testing prior to passage
of title to the Product to ROCHE from GENENTECH and which gives rise to
a defect which could not normally be detected by adequate quality
control testing on the part of ROCHE. The foregoing indemnification
shall not extend to any claims which arise or result from any defect in
ROCHE's manufacture of the Product (if such manufacture occurs). The
foregoing indemnification shall be conditioned upon ROCHE: (a) providing
written notice to GENENTECH within twenty (20) days after ROCHE has been
given written notice of such Claim, (b) permitting GENENTECH the
opportunity to assume full responsibility (at GENENTECH's expenses) for
the investigation and defense of any such Claim; and (c) not settling or
compromising any such Claim without GENENTECH's prior written consent.
ARTICLE XII - TERM AND TERMINATION
1. Term. This Agreement shall enter into force and effect as of the
Effective Date. This Agreement shall expire as to a Product when
royalties are no longer payable by ROCHE to GENENTECH with respect to
such Product unless the Parties mutually agree to extend this Agreement
with respect to such Product. Thereafter, ROCHE shall have a fully
paid-up license for such Product.
2. Termination by ROCHE. (a) ROCHE shall have the right to terminate its
license for a Product in the Roche Territory hereunder at any time upon
thirty (30) days prior written notice to GENENTECH. If ROCHE terminates
its license for a Product in the Roche Territory for other than safety
reasons, ROCHE shall continue to remain liable for all of its
obligations with respect to said Product, including its obligations with
respect to payment of its portion of Global Development Costs, for a
period of twelve (12) months from the date of the termination notice or
six (6) months from the date of termination notice in the specific
circumstance where GENENTECH or ROCHE has completed at least one Phase
III Trial for that Product and the results of that Trial, either alone
or in conjunction with any other Phase III Trial involving the Product,
are insufficient to support a Registration of the Product in a country
set forth on Appendix B, or if results of other preclinical or clinical
trials establish that further development
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would not provide data sufficient to support Registration of the Product
in a country set forth on Appendix B. If GENENTECH enters in a license
agreement with a third party with respect to such Product in the Roche
Territory within twelve (12) months from the date of termination notice,
ROCHE shall be relieved of its obligations to pay its share of Global
Development Costs during that twelve month period to the extent the
third party licensee is obligated to pay those same costs. GENENTECH
shall use diligent efforts to have such costs borne by the third party
licensee where it is reasonable to do so.
(b) If ROCHE terminates its license for a Product in the
Roche Territory based on a good faith determination, after consultation
with appropriate regulatory authorities in the relevant country, that
the Product cannot be approved for sale in one or more major countries
in the Collaborative Countries because of issues related to the safety
of the Product. ROCHE shall continue to remain liable for all
obligations with respect to that Product to the extent they are incurred
primarily to support Registration of that Product, for a period not to
exceed six (6) months from the date of termination, in the Roche
Territory. The Parties agree to attempt to wind down such obligations
and the activities associated therewith as soon as possible after ROCHE
has terminated its license because of safety issues.
(c) If ROCHE terminates its license,
(i) all rights and licenses granted to ROCHE herein with
respect to such Product and supply obligations of GENENTECH
hereunder shall automatically terminate as of the date of
termination;
(ii) the transfer and assignment to GENENTECH or
GENENTECH's designee of the Dossier and the Registration and all
associated data, information, results and documents for such
Product in the Roche Territory shall be done promptly and
GENENTECH shall thereafter have an nonexclusive license thereto
as well as to all ROCHE Patents and Know-How related to such
Product and generated by ROCHE under this Agreement; and
(iii) the Parties shall discuss and agree on a transfer
of stocks of such Product held by ROCHE.
3. Termination by GENENTECH
(a) If ROCHE fails to exercise its "best efforts" to
commercialize a Product in a country in the Roche Territory, GENENTECH
shall have the right to request ROCHE to take remedial measures. If
GENENTECH makes such a request and ROCHE thereafter does not exercise
such "best efforts" within a period of six (6)
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months after GENENTECH has requested ROCHE to take remedial measures or
if ROCHE fails to meet the requirements of Article III, Section 6, then
GENENTECH shall have the right (x) to terminate ROCHE's license
hereunder with respect to such country if Registration for the Product
has not been initiated or (y) to convert the license to a nonexclusive
one if Registration has been initiated and
(i) all rights and licenses granted to ROCHE herein and
Product supply obligations of GENENTECH with respect to such
Product in such country shall automatically terminate as of the
date of termination;
(ii) the transfer and assignment to GENENTECH or
GENENTECH's designee of the Dossier and the Registration and all
associated data, information, results and documents for such
Product in such country shall be done promptly and GENENTECH
shall thereafter have an nonexclusive license thereto in such
country as well as to all ROCHE Patents and Know-how related to
such Product and developed by ROCHE under this Agreement; and
(iii) the Parties shall discuss and agree on a transfer
of stocks of such Product held by ROCHE with respect to such
country.
4. Termination of Development/Commercialization.
(a) GENENTECH may terminate at any time its development
and/or commercialization of Product for which ROCHE has exercised its
option under Article II. If GENENTECH so terminates its development
and/or commercialization of a Product and if GENENTECH decides to enter
into an agreement with a third party with respect to rights to such
Product in the United States, the provisions of Section 3.07 of the
Governance Agreement shall apply. In such event, GENENTECH's obligation
to manufacture and supply Clinical Requirements or Commercial
Requirements of that Product to ROCHE shall terminate in the following
manner:
(1) If GENENTECH terminates for reasons related to the
safety of the Product, such obligation shall terminate
immediately.
(2) If GENENTECH terminates for reasons other than
safety, e.g., efficacy or cost effectiveness or the like, such
obligation shall continue until the earlier to occur of two (2)
years from the date of GENENTECH's notice to ROCHE of such
termination or on the date ROCHE advises GENENTECH that no such
further supply is required.
ROCHE thereafter shall have the royalty-free right and license to
produce and
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supply all of ROCHE's Clinical Requirements and Commercial Requirements
for use and sale in the Roche Territory. Upon such termination by
GENENTECH, it shall promptly transfer all of the Manufacturing
Technology for that Product to ROCHE.
(b) ROCHE may terminate at any time its development and/or
commercialization of a Small Molecule Product. In such event, ROCHE's
obligation to manufacture and supply Clinical Requirements or Commercial
Requirements of that Product to GENENTECH shall terminate in the
following manner:
(1) If ROCHE terminates for reasons related to the
safety of the Product, such obligation shall terminate
immediately.
(2) If ROCHE terminates for reasons other than safety,
e.g.., efficacy or cost effectiveness or the like, such
obligation shall continue until the earlier to occur of two (2)
years from the date of ROCHE's notice to GENENTECH of such
termination or on the date GENENTECH advises ROCHE that no such
further supply is required.
GENENTECH shall thereafter have the royalty-free right and
license to produce and supply all of its Clinical Requirements and
Commercial Requirements for sale in the United States. Upon such
termination by ROCHE, it shall promptly transfer all of the
Manufacturing Technology for that Product to GENENTECH.
5. Termination for Breach. Except as provided in Section 3 of this Article,
either Party may terminate this Agreement upon the failure of the other
Party to comply with any of its material obligations contained in this
Agreement or in the Governance Agreement. Such termination shall become
effective at any time after providing sixty (60) days' written notice by
the non-breaching Party specifying the breach and its intent to
terminate the Agreement; provided that the breaching Party shall have an
opportunity to cure any defect or omission during such sixty (60) day
period. Should such cure be effected, such notice shall be null and
void. Any other provision of this Agreement notwithstanding, termination
of this Agreement for failure to comply with a material obligation shall
be without prejudice to --
(a) any remedies which either Party may then or
thereafter have hereunder or at law; and
(b) either Party's right to obtain performance of any
obligations provided for in this Agreement which survive
termination by their terms or
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by a fair interpretation of this Agreement.
6. Certain Proceedings. In the event any action or proceeding before any
court or governmental agency or other regulatory or administrative
agency or commission, by any governmental or other regulatory or
administrative agency or commission or by any other person, successfully
challenging this Agreement or the relations or actions of the Parties
contemplated hereby or otherwise materially and adversely affecting the
business or property (including the goodwill and business reputation and
character) of a Party hereto, the Parties shall discuss an appropriate
termination of this Agreement and the terms and conditions associated
with such termination.
7. Termination For Change in Ownership. If at any time during the term of
this Agreement, ROCHE's equity ownership of GENENTECH securities is less
than fifty percent (50%) of all such securities then outstanding,
ROCHE's right to exercise any unexercised options set forth in Article
II above shall terminate immediately.
8. Survival of Terms. The foregoing notwithstanding, the provisions of
Articles IX, X, XI, XII and XIII as well as any provisions which by
their specific language or context are intended to or can be fairly read
to survive termination of this Agreement, shall survive any termination
of this Agreement for any reason.
ARTICLE XIII - MISCELLANEOUS
1. Disclaimer of Certain Warranties. Information, reagents and materials
(except Product) transferred from one Party to another in the course of
this Agreement are supplied "as is" without warranties, express or
implied, including any warranty of merchantability, title, freedom from
infringement or fitness for a particular use.
2. Entire Agreement, Amendment. (a) Except as provided in subsection (b),
this Agreement, as amended, constitutes the entire agreement between the
Parties with respect to the subject matter hereof, supersedes all prior
agreements, understandings and communications, oral or written, relating
to the subject matter hereof (including but not limited to the minutes
of the meeting between ROCHE and GENENTECH in London of May 1, 1997 and
the letter agreement dated May 29, 1998, between ROCHE and GENENTECH
with respect to Xubix), and shall not be modified, altered or amended
except by mutual written agreement of the Parties.
(b) This Agreement shall not supersede the DNase Supply
Agreement except that the terms of such Agreement shall be expanded to
include the supply of DNase in Canada.
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(c) This Agreement shall not supersede any terms of the
IIbIIIa Agreement unless specifically mentioned in Section 11 and 12 of
Article II.
3. Failure to Enforce. The failure by either Party at any time or for any
period of time to enforce any term or provision of this Agreement shall
not be construed as a waiver of such term or provision or of the right
of either Party to enforce each and every such term and provision.
4. Force Majeure. If either Party shall be delayed, interrupted in or
prevented from the performance of any obligation hereunder by reason of
Force Majeure including an act of God, fire, flood, war (declared or
undeclared), public disaster, strike or labor differences, governmental
enactment, rule or regulation, or any other cause beyond such Party's
control, such Party shall not be liable to the other therefor and the
time for performance of such obligation shall be extended for a period
equal to the duration of the contingency which occasioned the delay,
interruption or prevention. The Party invoking such Force Majeure rights
must notify the other Party within a period of fifteen (15) days, from
the first and the last day of the Force Majeure unless the Force Majeure
renders such notification impossible in which case notification will be
made as soon as possible. If the delay resulting from the Force Majeure
exceeds six (6) months, both Parties shall consult each other to find an
appropriate solution.
5. Arbitration. In the event of any dispute, controversy or claim arising
out of or relating to this Agreement, the Parties shall try to settle
such disputes, controversies or claims amicably between themselves
including referring such dispute, controversy or claim to the Chief
Executive Officer of GENENTECH and a member of ROCHE's Executive
Committee. If the Parties are unable to so settle such dispute,
controversy or claim, then any such dispute, controversy or claim
arising out of or relating to any provision of this Agreement or the
interpretation, enforceability, performance, breach, termination or
validity hereof, including, without limitation, this arbitration clause
shall be solely and finally settled by arbitration in the manner
specified in this Section.
All arbitration proceedings shall be conducted in New York City. If
ROCHE requests the commencement of such proceedings, the arbitration
proceedings shall be conducted under the procedural rules of the
American Arbitration Association. If GENENTECH requests the commencement
of proceedings, arbitration proceedings shall be conducted under the
procedural rules of the International Arbitration Rules of the Zurich
Chamber of Commerce. In either case, proceedings in the arbitration
shall conducted in the English language, and all documents not in
English submitted by either party must be accompanied by a translation
into English. The Party requesting arbitration shall serve upon the
other
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Party a written demand for arbitration stating the substance of the
controversy, dispute or claim, and the contention of the Party
requesting arbitration. Within sixty (60) days after the demand, the
Parties shall select three (3) mutually acceptable arbitrators. The
arbitrators are to act as neutral arbitrators and shall have no past,
present or anticipated future affiliation with the Parties or any
relationship with the Parties which would unduly influence the
independence of an arbitrator. If the Parties are unable to agree upon
three (3) mutually acceptable arbitrators, the arbitration agent under
whose rules the arbitration is proceeding shall appoint three (3)
arbitrators. No more than two arbitrators shall be citizens and/or
residents of the United States or citizens and/or residents of
Switzerland. The decision of the arbitrators shall be in writing setting
forth the basis therefore. The arbitrators shall have the authority to
award such remedies as they believe are appropriate in the
circumstances, including, but not limited to, compensatory damages,
consequential and incidental damages, interest, tort damages (but not
punitive or similar damages) and specific performance and other
equitable relief. The Parties shall abide by the award rendered in such
arbitration proceeding, and such award may be enforced and executed upon
in any court having jurisdiction over the Party against whom enforcement
of such award is sought. The Parties shall divide equally the
administrative charges, arbitrators's fees and related expenses of
arbitration, but each Party shall pay its own attorney's fees incurred
in connection with such arbitration; provided, however, if the
arbitrators determine that one Party prevailed clearly and substantially
over the other Party, then the non-prevailing party shall also pay the
prevailing Party's reasonable attorney's fees and expert witness costs
and arbitration costs.
6. Notices. Requests, notices and reports required or permitted under this
Agreement shall be in writing and shall be sent by telefax or telecopier
(with written confirmation) or express mail to the address set forth
below or such other address as a Party may designate from time to time
in accordance with this Section:
to ROCHE: F. Hoffmann-La Roche Ltd
Corporate Law
Grenzacherstrasse 124
CH-4070 Basel, Switzerland
to GENENTECH: Genentech, Inc.
Corporate Secretary
1 DNA Way
South San Francisco, California 94080
U.S.A.
7. Use of Names. Neither Party will use or refer to this Agreement in any
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promotional activity, or use the marks of the other Party, without
express prior written permission of the other Party. Either Party shall
refrain from making any public announcement or disclosure of this
Agreement and its terms without the prior written consent of the other
Party except as required by law.
8. Successors and Assigns. Neither Party may assign this Agreement or any
rights hereunder in any manner, whether by virtue of law or otherwise,
without the prior written consent of the other Party, except that
GENENTECH may assign part or all of its responsibilities and obligations
under this Agreement to one or more wholly-owned subsidiaries of
GENENTECH.
9. Headings. The section headings of this Agreement are for convenience
only and are not a part of this Agreement.
10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
11. Severability. The Parties hereby expressly state that it is not their
intention to violate any applicable rule, law or regulation. If any of
the provisions of this Agreement are held to be void or unenforceable
with regard to any particular country by a court of competent
jurisdiction, then, to the extent possible, such void or unenforceable
provision shall be replaced by a valid and enforceable provision which
will achieve as far as possible the economic business intentions of the
Parties. The provisions held to be void or unenforceable shall remain,
however, in full force and effect with regard to all other countries.
12. Governing Law. This Agreement shall be governed by and construed for all
purposes in accordance with the laws of the State of New York.
13. Relationship. Neither ROCHE or GENENTECH is in any way the legal
representative or agent of the other, nor authorized or empowered to
assume any obligation of any kind, implied or expressed, on behalf of
the other, without the express written consent of the other.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their duly authorized representatives as of the Effective Date.
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GENENTECH, INC. F. HOFFMANN-LA ROCHE LTD
By By
--------------------------------- --------------------------------------
Title Title
------------------------------ -----------------------------------
By
--------------------------------------
Title
-----------------------------------
GENENTECH EUROPE LIMITED
By
---------------------------------
Title
------------------------------
GENENTECH BIOPHARMACEUTICALS LIMITED
By
---------------------------------
Title
------------------------------
GENENTECH INTERNATIONAL LIMITED
By
---------------------------------
Title
------------------------------
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APPENDIX A
AMENDED AND RESTATED
FINANCIAL APPENDIX
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FINANCIAL APPENDIX TO THE AMENDED AND RESTATED AGREEMENT
This document is the Financial Appendix to the Amended and Restated Agreement
(the "License Agreement") effective as of the Effective Date, and amended and
restated as of the Restatement Date, between F. Hoffmann-La Roche Ltd (ROCHE)
and Genentech, Inc., Genentech Europe Limited, Genentech Biopharmaceuticals
Limited and Genentech International Limited (GENENTECH) and contains the
financial definitions and descriptions of their applicable to the License
Agreements.
1. DEFINITIONS
NET SALES - Shall mean the gross invoice price for sales of the product
to third parties less deductions of returns (including withdrawals and
recalls), rebates (price reductions including Medicare or similar types
of rebates), volume (quantity) discounts granted at the time of
invoicing, sales taxes and other taxes directly linked to sales, as
computed in the central ROCHE Sales Statistics (referred to as Markis)
for the countries concerned.
In addition to this above computed adjusted gross invoice price, for all
other expenses like Sales Deductions (outward freights, transportation
insurance, packing materials for dispatch of goods, custom duties),
Sales Expenses (discounts granted later than at the time for invoicing),
Cash Discounts and other direct expenses, there shall be a lump sum
deduction of three percent (3%).
COSTS OF SALES - Shall mean GENENTECH's Fully Burdened Manufacturing
Costs determined in accordance with GENENTECH accounting policy which is
based on U.S. GAAP as applied by GENENTECH.
GENENTECH'S FULLY BURDENED MANUFACTURING COST - shall mean GENENTECH's
consolidated fully burdened manufacturing costs (as defined in
GENENTECH's Accounting Policies) of Bulk Product, Vialed Product or
Finished Product, as the case may be, which in summary shall comprise
the sum of:
a) The cost of goods produced for clinical or commercial
use as determined in accordance with U.S. generally
accepted accounting principles as applied by GENENTECH
including, but not limited to, direct labor and material
and product testing costs as well as allocable overhead;
b) All of GENENTECH'S allocable intellectually property
acquisition, licensing and royalty costs paid to third
parties upon the sale of Product by ROCHE to third
parties (unless any such cost is specifically identified
as the sole cost of GENENTECH in the License Agreement);
c) Any other costs borne by GENENTECH for transport,
customs clearance and storage of product (if necessary)
at the request of ROCHE (i.e., freight, duty, insurance
and warehousing).
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DEVELOPMENT COSTS - shall mean the development costs actually
incurred by GENENTECH after the date of GENENTECH's decision to bring a
product into development through the date of marketing approval or
termination of development efforts of the final indication for which
marketing approval in any country is sought. Such costs shall comprise
those costs, both direct and indirect (i.e. fully burdened costs),
required to obtain the authorization and/or ability to manufacture,
formulate, fill, ship and/or sell the product in commercial quantities
to the third parties. Such Development Costs shall include but are not
limited to costs of development including cost of studies on the
toxicological, pharmacokinetical, metabolical or clinical aspects of the
product conducted internally or by individual investigators, or
consultants necessary for the purpose of obtaining and/or maintaining
approval in any country of the product, process development and scale up
costs, qualification lots, costs for preparing, submitting, reviewing or
developing data or information for the purpose of submission to the U.S.
Food and Drug Administration or other governmental authority to obtain
and/or maintain approval in any country. These costs shall include
expenses for data management, statistical designs and studies, document
preparation, and other administration expenses associated with the
clinical testing program. Development Costs shall include all such Costs
incurred by GENENTECH up to the product's Entry Into Man or Phase II
Completion Date, as applicable. Development Costs after the product's
Entry Into Man or Phase II Completion Date, as applicable, shall be
limited to all such Costs incurred by GENENTECH thereafter (i) to the
extent such Costs result in the development of data, information,
processes, materials or the like which are used by ROCHE in a filing for
a Registration or for the commercialization of that Product and (ii) to
the extent such costs are incurred in any development of a process or
processes used to manufacture the Product for supply to ROCHE.
In determining Development Costs, GENENTECH will use its Project Cost
System.
GLOBAL DEVELOPMENT COST - Shall mean the costs specifically
attributable to the development of a Product and actually incurred after
the date of decision to bring a Product into development (which date
shall usually be: -for a Genentech Product, the official decision of
Genentech's Executive Committee to develop a product - for Roche Product
a formal decision point which corresponds to Genentech's official
decision by the Executive Committee) through the date of marketing
approval or termination of development efforts of the final indication
for which marketing approval is sought in the USA and/or the
Collaborative Countries. For illustration purposes, Global Development
Costs for Product shall include IND enabling toxicology costs but shall
not include optimization of lead candidates.
Such costs shall comprise those costs, both direct and indirect
including Allocable Overhead (i.e. fully burdened costs), required to
obtain the authorization to manufacture, formulate, fill, ship and/or
sell a Product in commercial quantities in the USA and/or the
Collaborative Countries to third parties.
Such Global Development Costs shall include but are not limited to costs
of development including cost of studies on the toxicological,
pharmacokinetical,
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metabolical or clinical aspects of a Product conducted internally or by
individual investigators or consultants, manufacturing process
development and scale up costs, qualification lots, costs for preparing,
submitting, reviewing or developing data or information necessary for
the purpose of submission to the FDA, EMEA or other governmental
authority in order to obtain and/or maintain approval of a Product in
the USA and/or the Collaborative Countries.
These costs shall include expenses for data management, statistical
designs and studies, document preparation, and other administration
expenses associated with the clinical testing program.
These costs shall include costs incurred in geographical areas other
than USA and/or the Collaborative Countries (e.g.: Canada, South Africa
and Brazil) only to the extent that the activities related with such
costs are specifically planned (and specifically included in the
mutually approved global development plan and budget) to be incurred in
such geographical areas for the purpose of generating data or
information required to obtain the above mentioned authorization in the
USA and/or the Collaborative Countries.
These costs shall not include Patent costs, pre-registration marketing
costs (e.g. trademark costs, advertising agency selection costs,
pre-marketing studies), post-registration clinical and marketing studies
which are not conducted as part of the global development plan.
In determining Global Development Cost, each Party will use its
applicable project cost system with the purpose of tracking costs as
much as possible on a product indication- by-product indication basis.
ALLOCABLE OVERHEAD - Shall mean costs incurred by a Party or for
its account which are attributable to a Party's supervisory services,
occupancy costs, corporate bonus (to the extent not charged directly),
and its payroll, information systems, human resources or purchasing
functions and which are allocated to company departments based on a
space occupied or headcount or other activity-based method.
Allocable Overhead shall not include any costs attributable to general
corporate activities including, by way of example, executive management,
investor relations, business development, legal affairs and finance.
2. TRANSFER PRICE OF PRODUCT FROM GENENTECH TO ROCHE
Transfer Price of Product from GENENTECH to ROCHE - The total amount due
GENENTECH for the transfer of product from GENENTECH to ROCHE shall be
the amount defined below:
The first installment payment shall be GENENTECH's Cost of Sales plus a
margin of twenty (20%) of the Cost of Sales of the Product. Such margin
shall be calculated on Cost of Sale exclusive of the sum of (a)
GENENTECH's allocable intellectual property acquisition, licensing and
royalty costs paid to third parties upon the sale of product by
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ROCHE to third parties and (b) any other costs borne by GENENTECH for
transport, customs clearance and storage of product at the request of
ROCHE. Such installment will be billed to ROCHE in U.S. Dollars. Payment
of the first installment shall be made by ROCHE to GENENTECH in U.S.
Dollars within thirty (30) days after shipment.
The second installment payment to GENENTECH shall be the payment defined
in Article VI, Sections 3, 4, 5, 6, 7 and 8 of the License Agreement.
3. REIMBURSEMENT OF GENENTECH DEVELOPMENT COSTS
Development Costs incurred prior to ROCHE's exercise of its option for a
product -- Thirty days prior to the date by which ROCHE must exercise
its option for a product , GENENTECH shall choose one of the following
methods for reimbursement of Development Costs incurred prior to
exercise of such option, the choice being subject to ROCHE's consent
which shall not be unreasonably withheld:
A.) Lump sum payment equal to fifty percent (50%) of the cumulative
Development Costs incurred prior to ROCHE's exercise of such option, due
thirty days after ROCHE's exercise of such option, or
B.) Quarterly payments, due 30 days after invoicing from GENENTECH,
equal to one hundred and fifty percent (150%) of the Development Costs
incurred after ROCHE's exercise of a Product option until such the
cumulative amount paid thereunder equals fifty percent (50%) of the
cumulative Development Costs incurred prior to ROCHE's exercise of such
option plus interest at LIBOR from the date of such option exercise.
GENENTECH shall invoice ROCHE for the amount due hereunder within 30
days of the end of each quarter.
Development Costs incurred after ROCHE's exercise of a Product Option -
Quarterly payments, due 30 days after invoicing from GENENTECH, equal to
fifty percent (50%), in the event ROCHE exercised its option for such
Product within the exercise period after such Product's Entry Into Man,
or seventy-five percent (75%), in the event ROCHE exercised its option
for such Product within the allowable period after a Phase II Completion
Date for such Product, of GENENTECH's Development Costs incurred after
ROCHE's exercise of a Product option. GENENTECH shall invoice ROCHE for
the amount due hereunder within 30 days of the end of each quarter.
For products which GENENTECH can only license Canadian rights to ROCHE,
the fifty percent (50%) reimbursement of Development Costs provided in
this Section 3 of this Appendix shall be reduced to ten percent (10%).
For IGF-1 Products for any diabetes indication, the fifty percent (50%)
reimbursement of Development Costs provided in this section 3 of this
Appendix shall be increased to sixty percent (60%).
For NGF Products, the fifty percent (50%) reimbursement of Development
Costs
53
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provided in this section 3 of this Appendix shall be reduced to forty
percent (40%).
4. SHARING AND REIMBURSEMENT OF GLOBAL DEVELOPMENT COSTS
a) Global Development Costs incurred prior to a Party's exercise of
its option for a Product -
Unless specifically otherwise stated in Part 2 of this Appendix,
the following shall apply:
Lump sum payment equal to fifty percent (50%) of the cumulative
Global Development Cost incurred prior to the opting party's
exercise of such option, during thirty days after the opting
party's exercise of such option and receipt of an invoice from
the licensor.
b) Global Development Cost incurred after a party's exercise of its
option for a Product shall be shared as shown in Part 2 of this
Financial Appendix.
The global development plan and budget as agreed by the
Commercialization Committee for such Product shall be the
reference for sharing Global Development Cost. The parties shall
share development costs provided that they relate to activities
which have been planned for and budgeted either in a global
development plan and budget agreed between the parties before
the Option Date or in one of the subsequently jointly agreed
updates of such global development plan and budget after the
Option Date.
In the case of I) activities or costs which have not been
planned and budgeted but have actually been incurred by a Party
or ii) actual costs of planned activities which have
significantly exceeded (more than 10%) the amount budgeted, the
Commercialization Committee shall decide whether and/or how such
additional costs shall be shared between the parties.
On a quarterly calendar basis and after the opting party's
exercise of such option, within 30 days after the end of each
calendar quarter, each party shall provide the other with an
invoice for the amount of Global Development Cost it has
incurred and which is due for reimbursement by such other party
for such quarter, using the cost sharing rate as specified in
Part 2 of this Appendix for such Product. Such amount shall be
expressed in U.S. dollars and payable within 30 days from
receipt of such invoice. Such invoice shall be accompanied by a
report specifying such Global Development Costs on a product
indication-by-product indication basis and providing details per
activity as specified by the Commercialization Committee and
show in local currency and U.S. dollars in a manner consistent
with the amounts budgeted for such activities.
Whenever for the purpose of calculating conversation of Global
Development Costs from any foreign currency into U.S. dollars
shall be required, such conversion shall be made using the
average quarterly rate of exchange at the
54
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time for such currencies as retrieved from the Reuters System
for the countries concerned.
5. BUDGET AND BUSINESS PLAN
ROCHE shall provide GENENTECH within 30 days of availability in final
form, ROCHE's budget (prepared annually and covering a one year period)
and Business Plans (prepared annually and covering at least a three (3)
year period) for each Product for which ROCHE has exercised its option
under Article II of the Agreement.
6. AUDITS AND INTERIM REVIEWS
Audit work will be performed in the following manner.
If deemed necessary by either ROCHE or GENENTECH, an audit by
independent certified public accountants may be requested. Such audits
will be at the sole expense of the requesting Party and will be
performed by the officially appointed auditor of the Party audited. If
GENENTECH requests audit work of the ROCHE accounts, the audit will be
performed by ROCHE's appointed worldwide auditor which is currently
Price Waterhouse, LLP. If ROCHE requests audit work of the GENENTECH
accounts, the audit will be performed by the independent auditor
appointed by GENENTECH which is currently Ernst & Young, LLP.
7. STATE OF ACCOUNTING AND REIMBURSEMENT
Determination of Development Costs shall be made retroactive to the date
of GENENTECH's decision to bring each product into development for all
product other than those product indications marketed in the United
States as of June 30, 1995. There shall be no reimbursement of
Development Costs incurred prior to July 1, 1995 for any indication
marketed in the United States as of June 30, 1995 or for Pulmozyme for
COPD.
55
<PAGE> 62
Reimbursement of Development Costs owned to GENENTECH under section 3 of
this Appendix for Products which have reached ROCHE's product option
exercise date as of the effective date of this agreement shall be due 60
days after the exercise of such option.
Royalties due GENENTECH under the License Agreement will commence as set
forth in the Agreement.
Recognizing that ROCHE prepares complete accounts for its activities in
the GENRO collaboration only on June 30th and December 31st of each
year, the GENRO Finance Committee (as currently constituted) will agree
on an appropriate basis to settle profit sharing under the current
arrangement from July 1, 1995 to such items the operation of Genentech
Europe Ltd. are transferred to ROCHE in accordance with Article VII,
section 1, of the License Agreement.
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FINANCIAL APPENDIX
PART 2
When inconsistent with Part 1, terms and conditions of Part 2 shall
supersede those as defined in Part 1.
1) Sharing of Global Development Costs after Option
Global Development Costs shall be shared fifty percent by ROCHE and
fifty percent by GENENTECH.
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APPENDIX A
FINANCIAL APPENDIX TO THE AMENDED AND RESTATED AGREEMENT
This document is the Financial Appendix to the Amended and Restated Agreement
(the "License Agreement") effective as of the Effective Date, and amended and
restated as of the Restatement Date, between F. Hoffmann-La Roche Ltd. (ROCHE)
and Genentech, Inc., Genentech Europe Limited, Genentech Biopharmaceuticals
Limited and Genentech International Limited (GENENTECH) and contains the
financial definitions and descriptions applicable to the License Agreement.
When inconsistent with the License Agreement, terms and conditions of the
License Agreement shall prevail upon those as defined herein. Terms not defined
in this Financial Appendix shall have the meanings set forth in the License
Agreement.
1. DEFINITIONS
ADJUSTED GROSS SALES - Shall mean the gross sales amount invoiced by
either Party, their Affiliates, or sublicensees for a Product to
non-Affiliated third party purchasers in the Territory less, to the
extent such amounts are included in the amount of gross sales invoiced,
deductions of returns (including withdrawals and recalls), rebates
(price reductions including Medicaid and similar types of rebates, e.g.,
chargebacks or retroactive price reductions), volume (quantity)
discounts, discounts granted at the time of invoicing, sales taxes and
other taxes directly linked to the gross sales amount as computed on a
product-by-product basis and reported in the central ROCHE sales
statistics for the countries concerned.
NET SALES - Shall mean the amount calculated by subtracting from the
amount of Adjusted Gross Sales a lump sum deduction of three percent (3
%) for those sales related deductions which are not accounted for on a
product-by-product basis, to the extent not already included in the
determination of the Adjusted Gross Sales (such costs shall include but
are not limited to costs of outward freights, postage charges,
transportation insurance, packaging materials for dispatch of goods,
custom duties, discounts granted later than at the time of invoicing,
cash discounts and other direct sales expenses).
COSTS OF GOODS - For Bulk Product, semi-finished (e.g. Vialed Product),
or Finished Product, as the case may be, shall be the sum of :
i) Fully Burdened Manufacturing Cost (FBMC) ;
ii) Outbound Costs
Financial Appendix to the Amended and Restated Agreement 1
<PAGE> 65
In the event Product is supplied for clinical or commercial purposes,
such Cost of Goods shall not include item i) above to the extent it has
already been considered or charged within Genentech's Development Costs
or Global Development Costs.
FULLY BURDENED MANUFACTURING COST - (FBMC) - Shall mean GENENTECH's
fully burdened manufacturing costs of Bulk Product, semi-finished, or
Finished Product, as the case may be, shipped for clinical or commercial
use and determined in accordance with generally accepted accounting
principles as applied by GENENTECH.
Such FBMC shall include direct labor, materials, product testing costs
(including QC and QA bulk testing and in-process testing e.g.
adventitious virus and mycoplasma testing), and Allocable Overhead for
manufacturing or contracting for each stage of the manufacturing process
of the product shipped. GENENTECH will discuss annually with ROCHE the
main drivers of estimated and actual FBMC such as yields and Failures.
Four years after the launch of the Product the Parties will agree on an
annual standard cost for the bulk material manufactured to be charged.
Such standard cost will consider yields, success factors (Failures) and
other pertinent data. In any case, yield losses and Failures which go
beyond what could be reasonably expected and/or justified in this area
of technology shall remain the sole costs of GENENTECH.
Such FMBC shall not include any costs associated with expired products
to the extent that the actual quantity of material purchased is at least
equal to the amount of the firm orders. (Firm orders shall be ROCHE's
latest production quantity request prior to each manufacturing campaign
of GENENTECH.) GENENTECH agrees to consider the worldwide sales and
production needs when establishing its manufacturing campaign plans. A
supply agreement to be entered between the Parties shall determine which
and when forecasts shall become firm orders.
Such FBMC shall not include any costs associated with all of GENENTECH's
allocable intellectual property acquisition, licensing and royalty costs
payable by GENENTECH to third parties in relation with the manufacturing
formulation, filling, use or sale of a Product.
Such FBMC shall not include any costs associated with process
development, scale up costs, qualification lots and any other costs if
they are included in Genentech's Development Costs or Global Development
Cost.
OUTBOUND COSTS - Shall mean any outbound costs borne by GENENTECH at the
request of ROCHE including but not limited to transport, customs
clearance and storage of Product (i.e., freight, duty, insurance and
warehousing).
ALLOCABLE OVERHEAD - Shall mean costs incurred by a Party or for its
account which are attributable to a Party's supervisory services,
occupancy costs, corporate bonus (to the extent not charged directly),
and its payroll, information systems, human resources or purchasing
functions
Financial Appendix to the Amended and Restated Agreement 2
<PAGE> 66
and which are allocated to company departments based on a space occupied
or headcount or other activity-based method. Allocable Overhead shall
not include any costs attributable to general corporate activities
including, by way of example, executive management, investor relations,
business development, legal affairs and finance.
TRANSFER OF MANUFACTURING - In the case where ROCHE assumes
manufacturing for its supply requirements pursuant to Article V, Section
13 (i) of the License Agreement, ROCHE will reimburse GENENTECH for 100
% of the costs incurred by GENENTECH in making the transfer including
overhead and for the cost of Idle Capacity as describe in the next
section.
COST OF IDLE CAPACITY --- The principle of cost of Idle Capacity shall
only apply in the case of Article V, Section 13 (i) of the License
Agreement and for a period of four (4) years from notification by ROCHE
that it will assume manufacturing. The Cost of Idle Capacity (CIC) shall
be determined and charged to ROCHE as follows:
i) ROCHE will be charged other operating costs calculated
as follows:
(capacity utilized by ROCHE prior to ROCHE's
notification minus capacity actually used for the supply
for the ROCHE Territory)
divided by
(total capacity utilized by the Parties for the
Product(s) prior to ROCHE's notification minus capacity
actually used for the supply of Product(s) for
GENENTECH's and ROCHE's Territory)
multiplied by
depreciation, plant maintenance cost and other fixed
manufacturing cost related to the total capacity
utilized for Product(s) prior to ROCHE's notification.
The result of this method of accounting for idle capacity is to ensure
that GENENTECH charges ROCHE the share of depreciation, plant
maintenance cost and other fixed manufacturing cost related to the
capacity for the supply of the Product(s) for the ROCHE Territory
utilized prior to ROCHE's notification but actually not utilized after
ROCHE assumes manufacturing.
(ii) GENENTECH shall notify the Joint Finance
Committee (JFC) prospectively of any such charge
hereunder, including the calculation thereof, in
writing. The JFC shall review any such calculated charge
hereunder and shall be entitled to receive from
GENENTECH such financial and other information as
Financial Appendix to the Amended and Restated Agreement 3
<PAGE> 67
the JFC shall reasonably deem necessary in order to
confirm (or correct) the calculated charge.
(iii) To the extent feasible and reasonable, GENENTECH
will make best efforts to use idle capacity for its own
products that are not Products under the Agreement, with
the effect that the idle plant cost charge to ROCHE set
forth herein is reduced dollar for dollar for the
portion of capacity actually used by GENENTECH in such
fashion.
FAILURES - Shall mean Bulk Product, semi-finished, or Finished Product,
as the case may be, that:
1. does not meet the specifications, or
2. was not manufactured or tested in accordance with the
procedures, or
3. was not manufactured in accordance with cGMPs.
Only those tests listed in the specifications may be used to determine
conformity.
THIRD PARTY ROYALTIES - Shall mean all of GENENTECH's allocable
intellectual property acquisition, licensing and royalty costs paid to
third parties upon the sale of Product by ROCHE to third parties (unless
any such cost is specifically identified as the sole cost of GENENTECH
in the License Agreement) , such royalties being payable to third
parties as a result of licenses from third parties for the manufacture,
formulation, filling, use or sale of a Product.
Each Party shall bear the full cost related to Third Party Royalties for
the units of Product sold in its Territory. Procedures for converting
from foreign currencies and paying such royalty to the other Party shall
be as described below in section 6.
GENENTECH shall provide ROCHE the details of such Third Party Royalties
obligations including but not limited to the name of the third party,
the rate, the duration and the "Net Sales" basis for calculation of such
payment. Such information shall be periodically updated for changes (as
need be) by GENENTECH or at ROCHE's request.
DEVELOPMENT COSTS - With respect to GENENTECH whether as part of
Genentech's Development Costs or as part of Global Development Costs,
shall mean the development costs actually incurred by GENENTECH after
the date of GENENTECH's decision to bring a Product into development
(for illustration purposes Development Costs for Product shall include
IND enabling toxicology costs but shall not include optimization of lead
candidates ) through the date of marketing approval or termination of
development efforts of the final indication for which marketing approval
in any country is sought. Such costs shall comprise those costs, both
direct and indirect (i.e. fully burdened costs), required to obtain the
authorization and/or ability to manufacture, formulate, fill, ship
and/or sell the Product in commercial quantities to the third parties.
Such Development Costs shall include but are not limited to costs of
development including cost of studies on the toxicological,
pharmacokinetical, metabolical or clinical aspects
Financial Appendix to the Amended and Restated Agreement 4
<PAGE> 68
of the Product conducted internally or by individual investigators, or
consultants necessary for the purpose of obtaining and/or maintaining
approval in any country of the Product, process development and scale up
costs, qualification lots, costs for preparing, submitting, reviewing or
developing data or information for the purpose of submission to the U.S.
Food and Drug Administration or other governmental authority to obtain
and/or maintain approval in any country. These costs shall include
expenses for data management, statistical designs and studies, document
preparation, and other administration expenses associated with the
clinical testing program.
These costs shall not include Patent costs, pre-Registration marketing
costs (e.g. trademark costs, advertising agency selection costs,
pre-marketing studies), post-Registration clinical studies which are not
enabling for Registration of the Product and post-Registration marketing
studies.
GENENTECH'S DEVELOPMENT COSTS - shall include all such Costs incurred by
GENENTECH up to ROCHE's exercise of its option for a Product at Entry
Into Man or Phase II or Phase III Completion Date, as applicable. In
determining Development Costs, GENENTECH will use its Project Cost
System with the purpose of tracking costs as much as possible on a
product indication-by-product indication basis.
GLOBAL DEVELOPMENT COSTS - Shall mean the costs specifically
attributable to the development of a Product and actually incurred after
the date of ROCHE's decision to exercise its option for a GENENTECH or
an In-Licensed Product through the date of marketing approval or
termination of development efforts of the final indication or
formulation or dosing for which marketing approval is sought in the USA
and/or the Collaborative Countries.
Such costs shall comprise those costs, both direct and indirect
including Allocable Overhead (i.e. fully burdened costs), required to
obtain the authorization to manufacture, formulate, fill, ship and/or
sell a Product in commercial quantities in the USA and/or the
Collaborative Countries to third parties.
Such Global Development Costs shall include but are not limited to costs
of development including cost of studies on the toxicological,
pharmacokinetical, metabolical or clinical aspects of a Product
conducted internally or by individual investigators or consultants,
manufacturing process development and scale up costs, qualification
lots, costs for preparing, submitting, reviewing or developing data or
information necessary for the purpose of submission to the FDA, EMEA or
other governmental authority in order to obtain and/or maintain approval
of a Product in the USA and/or the Collaborative Countries.
These costs shall include expenses for data management, statistical
designs and studies, document preparation, and other administration
expenses associated with the clinical testing program.
Financial Appendix to the Amended and Restated Agreement 5
<PAGE> 69
These costs shall include costs incurred in geographical areas other
than USA and/or the Collaborative Countries (e.g.: Canada, South Africa
and Brazil) only to the extent that the activities related with such
costs are specifically planned (and specifically included in the
mutually approved global development plan and budget) to be incurred in
such geographical areas for the purpose of generating data or
information required to obtain the above mentioned authorization in the
USA and/or the Collaborative Countries.
These costs shall not include Patent costs, pre-registration marketing
costs (e.g. trademark costs, advertising agency selection costs,
pre-marketing studies), post-registration clinical and marketing studies
which are not conducted as part of the global development plan.
In determining Global Development Costs, each Party will use its
applicable project cost system with the purpose of tracking costs as
much as possible on a product indication-by-product indication basis.
As the case may be, Global Development Costs shall exclude for a Product
development costs attributable to specific indications for which one
Party has opted out as described in the next section for such Product as
updated from time to time.
ADDITIONAL INDICATION OPT OUT I OPT BACK IN - When ROCHE opts in for a
Product, it will opt in for all indications for such Product.
Each Party has the right to opt out of the development of an additional
indication for a Product beyond the initial indication for that Product
at one of the following three decision points:
a) Executive Committee decision of GENENTECH to develop an
indication or the equivalent ROCHE decision as defined
above
b) End of Phase II
c) A formal decision point in phase III defined in the
clinical study protocol and agreed upon by the parties
Prior to such opt out decision, the Parties shall have a good faith
discussion about the reasons and consequences of the opt out
The Party electing to opt out will provide the other Party with sixty
days notice prior to its election and will be obligated to pay its share
of the cost of all ongoing clinical and preclinical studies and its
share of other development costs already committed to third parties as
of the date of such notice. Thereafter the Party electing to opt out
will not share any costs or benefits of such indication.
Financial Appendix to Amended and Restated Agreement 6
<PAGE> 70
In the event that a Party which previously opted out of an indication
wishes to regain its rights to such indication then it may regain such
rights by electing to do so at the latest within thirty days of a formal
decision to file for approval for that indication and by paying within
thirty days, two hundred percent of the Global Development Costs it
would have otherwise incurred if it had not opted out for such
indication during the period of opt out and by thereafter assuming from
the opt back in date its ongoing obligations as if no opt out had
occurred.
2) PLANNING AND BUDGETING OF GLOBAL DEVELOPMENT COSTS
For a Product for which ROCHE has exercised its option, the Parties
shall agree on a global development plan and budget on an
indication-by-indication basis.
Such plan and budget shall i) identify activities and costs to be
incurred, by calendar quarter, ii) provide details of activities in a
manner to be specified by the Joint Development Committee and in a
manner consistent with the cost systems of each Party, iii) be updated
whenever needed, at least on a quarterly basis and when development of
indications additional to the initial indication shall be envisaged.
3. REIMBURSEMENT OF DEVELOPMENT COSTS
SHARING AND REIMBURSEMENT OF Genentech's Development Costs - Thirty days
prior to the date by which ROCHE must exercise its option for a Product,
GENENTECH shall choose one of the following methods for reimbursement of
Development Costs incurred prior to exercise of such option, the choice
being subject to ROCHE's consent which shall not be unreasonably
withheld:
A.) Lump sum payment for the appropriate percentage of the
cumulative Genentech's Development Costs incurred prior to ROCHE's
exercise of such option, due thirty days after ROCHE's exercise of such
option, or
B.) Quarterly payments, due 30 days after invoicing from GENENTECH,
equal to one hundred and fifty percent (150%) of the Global Development
Costs GENENTECH incurred after ROCHE's exercise of a Product option
until such the cumulative amount paid thereunder equals the appropriate
percentage of the cumulative Genentech's Development Costs incurred
prior to ROCHE's exercise of such option plus interest at LIBOR from the
date of such option exercise. GENENTECH shall invoice ROCHE for the
amount due hereunder within 30 days of the end of each quarter.
For products which GENENTECH can only license Canadian rights to ROCHE,
the appropriate percentage reimbursement of Genentech's Development
Costs provided in this Section 3 of this Appendix shall be reduced to
ten percent (10%).
Financial Appendix to the Amended and Restated Agreement 7
<PAGE> 71
SHARING AND REIMBURSEMENT OF GLOBAL DEVELOPMENT COSTS - The global
development plan and budget as agreed by the JCC for such Product shall
be the reference for sharing Global Development Costs. The Parties shall
share development costs provided that they relate to activities which
have been planned for and budgeted either in a global development plan
and budget agreed between the Parties before the Option Exercise or in
one of the subsequently jointly agreed updates of such global
development plan and budget after the Option Exercise.
In the case of i) activities or costs which have not been planned and
budgeted but have actually been incurred by a Party or ii) actual costs
of planned activities which have significantly exceeded (more than 10%)
the amount budgeted, the JCC shall decide whether and/or how such
additional costs shall be shared between the Parties.
On a quarterly calendar basis, within 30 days after the end of each
calendar quarter, each Party shall provide the other with an invoice for
the amount of Global Development Costs it has incurred and which is due
for reimbursement by such other Party for such quarter. The cost sharing
shall be that provided for in the License Agreement or in this Financial
Appendix. Such amount shall be expressed in US Dollars and payable
within 30 days from receipt of such invoice. Such invoice shall be
accompanied by a report specifying such Global Development Costs on a
product indication-by-product indication basis and providing details per
activity as specified by the JCC and show in local currency and US
Dollars in a manner consistent with the amounts budgeted for such
activities.
As the case may be, development costs attributable to specific
indications for which one Party has opted out pursuant to an Additional
Indication Opt Out shall not be included in the global development plan
and budget for such Product.
Whenever for the purpose of calculating conversation of Global
Development Costs from any foreign currency into US Dollars shall be
required, such conversion shall be made using the average quarterly rate
of exchange at the time for such currencies as retrieved from the
Reuters System for the countries concerned.
4. SALES BUSINESS PLAN AND BUDGET
ROCHE shall provide GENENTECH within 30 days of availability in final
form its sales budget (prepared annually and covering a one year period,
month by month) and sales business plan (prepared annually and covering
at least a three year period) for each Product for which it has
exercised its option for commercialization in the Roche Territory under
the License Agreement.
5. SUPPLY PRICE OF PRODUCT
The total amount due for the supply of Product between the Parties shall
be the amount defined below:
Financial Appendix to the Amended and Restated Agreement 8
<PAGE> 72
SUPPLY OF CLINICAL REQUIREMENTS - The sales price of Product for
clinical purposes shall be the FBMC for such Clinical Requirements.
Product manufactured as qualification lots and supplied for clinical
purposes shall only be charged to the extent not included in Genentech's
Development Costs or Global Development Costs.
SUPPLY OF COMMERCIAL REQUIREMENTS - The sales price of Product for
commercial purposes shall be GENENTECH's Cost of Goods plus a mark-up of
twenty percent (20%) on FBMC.
For the ROCHE Territory, such sales price will be billed to ROCHE and
paid as follows:
a) The amount corresponding to FBMC + 20 % mark-up will be
invoiced in US Dollars and paid by ROCHE in such currency within
30 days after shipment.
(b) Unless otherwise agreed upon in writing between the Parties,
the amount corresponding to Outbound Costs will be billed in US
Dollars on a quarterly basis and paid by ROCHE in such currency
within 30 days of receipt of the invoice.
Product manufactured as qualification lots and supplied for commercial
purposes shall only be charged to the extent not included in Genentech's
Development Costs or Global Development Costs.
6. TIMING AND PAYMENT OF ROYALTIES BETWEEN THE PARTIES
TIMING - Payment of Royalties due GENENTECH shall be made within ninety
(90) days of the end of each calendar quarter in which the sale was
made. For purposes of determining when a sale of a Product occurs, the
sale shall be deemed to occur when a non-Affiliated third party is
invoiced for the Product. Payment of Royalties due to third parties will
be made ten days prior to the date the royalties are due to the third
party under their respective licenses. Any royalty payment that is not
paid on or before the date such payment is due under the License
Agreement shall bear interest, to the extent permitted by applicable
law, at the LIBOR rate of interest as reported from time to time by a
qualified source that is mutually acceptable to the Parties, calculated
on the number of days such payment is delinquent.
PAYMENT --- WITHHOLDING TAXES - Unless otherwise agreed in writing
between the Parties, payments of royalties shall be made in US Dollars,
by wire transfer in immediately available funds to such account
GENENTECH shall designate before such payment is due, free and clear of
any taxes, duties, levies, fees or charges, except for withholding taxes
due on behalf of GENENTECH (to the extent applicable). ROCHE shall make
any withholding payments due on behalf of GENENTECH and shall promptly
provide GENENTECH with written documentation of any such payment
sufficient to satisfy the reasonable requirements of an appropriate tax
authority
Financial Appendix to the Amended and Restated Agreement 9
<PAGE> 73
with respect to an application by GENENTECH for a foreign tax credit for
such payment or for similar treatment.
ROYALTY REPORTING AND ROYALTY CALCULATION - Within thirty days after the
end of each calendar quarter, ROCHE shall provide GENENTECH with a
statement summarizing the monthly Net Sales of the Product in each
country in the reporting currency of each such country as well as the
rate used to convert from each such country's currency to Swiss Francs.
Whenever for the purpose of calculating royalties conversion from any
foreign currency shall be required, the amount of such Net Sales in
foreign currencies shall be converted into Swiss Francs using the
average monthly rate of exchange at the time for such currencies as
retrieved from the Reuters System, or another qualified source that is
mutually acceptable to the Parties.
The amount of royalties due for payment to GENENTECH and calculated in
Swiss Francs shall be translated into US Dollar at the rate retrieved
from the Reuters System during the morning of the "day two" before the
value date of such payment. The corresponding amount in US Dollars will
then be communicated to the bank for payment on the value date.
7. AUDIT AND INTERIM REVIEWS
Audit work will be performed in the following manner and according to
the specifications of the Article "Records Regarding Royalties" of the
1995 Agreement:
If deemed necessary by either ROCHE or GENENTECH , an audit by
independent certified public accountants may be requested. Such audit
will be at the sole expense of the requesting Party and will be
performed by the officially appointed auditor of the Party audited. If
GENENTECH requests audit work of the ROCHE accounts, the audit will be
performed by ROCHE's appointed worldwide auditor which is currently
Price Waterhouse, LLP. If ROCHE requests audit work of the GENENTECH
accounts, the audit will be performed by the independent auditor
appointed by GENENTECH which is currently Ernst & Young LLP.
Financial Appendix to Amended and Restated Agreement 10
<PAGE> 74
APPENDIX B
ARTICLE II COUNTRIES
Germany
Italy
France
United Kingdom
Spain
Japan
Canada
Mexico
Brazil
Argentina
People's Republic of China
Turkey
South Korea
Australia
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<PAGE> 1
EXHIBIT 10.3
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (the "Agreement") is dated as of June __, 1999
and executed effective as of the effective date (defined in Section 1.4 of this
Agreement), by and between ROCHE HOLDINGS, INC., a Delaware Corporation,
hereinafter referred to as "RHI", and GENENTECH, INC., a Delaware Corporation,
hereinafter referred to as "GNE".
W I T N E S S E T H :
WHEREAS, RHI has obtained control of at least 80% of the stock value and
80% of the voting power of GNE, permitting RHI and GNE under IRC Section 1504(a)
the privilege of filing a U.S. consolidated tax return and certain state and
local combined reports; and
WHEREAS, RHI will, from the above effective date, exercise that privilege
and include the taxable income, losses, credits, etc. of GNE as a fully
consolidated subsidiary in all of its consolidated federal and combined state
and local tax filings, payments, estimates, and other matters as are required
by law or in which it determines such inclusion is appropriate;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and agreements contained herein, RHI and GNE hereby agree as follows:
ARTICLE I
DEFINED TERMS; PREPARATION OF TAX RETURNS AND TAX ESTIMATES
SECTION 1.1 Defined Terms. As used in this Agreement:
"RHI Group" means, for U.S. federal tax purposes, the affiliated group (within
the meaning of IRC Section 1504(a)) filing a consolidated return of which RHI
(or any successor corporation) is the common parent, and for state and local
tax purposes, RHI and/or any subsidiaries of RHI (direct or indirect and past,
current or future) includible in a group filing a consolidated or combined
return.
"GNE Group" means GNE and its subsidiaries (direct or indirect and past,
current or future).
"GNE Consolidated Group" means, for U.S. federal tax purposes, the member or
members of the GNE Group that are includible in the consolidated return filed
by the RHI Group, and for state or local tax purposes, the member or members of
the GNE Group that are includible in a group that (i) also includes RHI or at
least one subsidiary of RHI (other than a member of the GNE Group) as a member
and (ii) files a consolidated or combined return.
SECTION 1.2 Preparation of Proforma Tax Returns. GNE will be responsible for
the preparation of a proforma Form 1120 for the GNE Consolidated Group for U.S.
federal tax purposes, as well as proforma tax returns for the GNE Consolidated
Group for all applicable state and local combined filings, reporting on such
proforma returns the GNE Consolidated Group's items of income, gain, expense,
deduction, loss, credit, carryforwards, carrybacks
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and other such tax reporting items pursuant to the Stand-Alone Method (as
defined below). Once prepared, such proforma returns will be delivered by GNE
to RHI for its approval or recomputation in accordance with the provisions of
Article IV of this Agreement.
SECTION 1.3. State and Local Tax Returns - Separate and Combined Filings. GNE
will continue to prepare and directly file, or cause to be prepared and filed,
state and local tax returns, extensions, and payments of tax liability in any
state or locality in which RHI does not file a combined return, and in which
GNE determines that one or more members of the GNE Group has a nexus. GNE
further acknowledges that the state combined returns which are currently
applicable to this Section (and thus will be filed with RHI on a combined RHI
Group basis) are those in California; Colorado; Illinois; Kansas; Minnesota;
and New Hampshire; however, GNE also acknowledges that RHI reserves the right
to commence additional state or local combined filings in the future based on
RHI's tax planning or tax strategies for the RHI Group, or where such a
combined state or local filing becomes necessary in order to comply with state
or local tax requirements.
SECTION 1.4. Preparation of Federal/State/Local Tax Estimates. GNE will be
responsible for the computation pursuant to the Stand-Alone Method (as defined
below) and submission to RHI for its approval or recomputation (in accordance
with Article IV of this Agreement) of the GNE Consolidated Group's quarterly
estimated tax liability (including the estimate of any final amount due on the
tax return extension due dates), based on the GNE Consolidated Group's items of
income, gain, deduction, loss, credit, etc.
SECTION 1.5. Effective Date. This Agreement shall be effective as of the first
day (the "Consolidation Date") on which GNE is a member of the RHI Group and
shall govern all taxable periods of the members of the RHI Group and/or the GNE
Group that are open as of such day and all subsequent taxable periods.
ARTICLE II
STAND-ALONE METHOD
SECTION 2.1. Stand-Alone Method. GNE shall prepare all of the proforma tax
returns of the GNE Consolidated Group, and RHI and GNE shall make all other
computations and determinations under this Agreement relating to the GNE
Consolidated Group or any of its members, using the "Stand-Alone Method." The
Stand-Alone Method is the method that would apply to the GNE Consolidated Group
if it never were a part of the RHI Group, but instead filed its own
consolidated or combined return under the applicable provisions of federal,
state or local tax law and regulations dealing with such returns (provided,
however, that transactions between (x) a member of the GNE Group and (y) a
member of the RHI Group that is not a member of the GNE Group, shall be
accounted for pursuant to the provisions of the regulations under IRC Section
1502 that govern intercompany transactions). Under the Stand-Alone Method, (a)
the income, gains, expenses, deductions, losses and credits in any taxable
period of any member of the RHI Group that is not a member of the GNE
Consolidated Group shall be disregarded, (b) the income, gains, expenses,
deductions, losses and credits in any taxable period of any member of the GNE
Consolidated Group shall be taken into account, (c) all computations shall be
made in conformity with the positions, elections and accounting methods used by
RHI in preparing the consolidated and combined
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returns of the RHI Group, (d) the highest marginal tax rate to which the GNE
Consolidated Group could be subject under applicable federal, state or local
law shall be deemed to be the only tax rate to which such group is subject
under such law, (e) subject to (c) and (d), all computations and other
determinations shall be made in accordance with the federal, state and local
tax laws and regulations applying to consolidated or combined groups
(including, in the case of any company that becomes or ceases to be a member of
the GNE Consolidated Group, the laws and regulations applicable to a company
that becomes or ceases to be a member of a consolidated or combined group), as
well as all other relevant federal, state and local tax laws and regulations.
RHI shall determine, in its sole discretion, the proper interpretation and
application of the Stand-Alone Method as it relates to any and all items and
calculations reflected in the computation of the GNE Consolidated Group's
proforma tax liability, an overpayment or refund of such liability, a
recomputation of such liability (together with any related interest, penalty or
additional amount) upon a subsequent adjustment of the RHI Group's tax
liability, or a carryforward or carryback of a loss, credit or other tax
attribute of the GNE Consolidated Group or any member thereof to a taxable
period beginning prior to the Consolidation Date or to a separate return year,
and in the event of a disagreement between RHI and GNE as to such matters,
RHI's determination shall be final and binding.
ARTICLE III
PAYMENT OF TAX LIABILITIES AND RECEIPT OF REFUNDS
SECTION 3.1. Payment of Tax Liabilities. After the initial computation by GNE
of a GNE Consolidated Group tax liability and the approval or recomputation of
such tax liability by RHI pursuant to Article IV, GNE will remit to RHI by
federal bank wire the amount of such tax liability as so approved or recomputed.
SECTION 3.2. Date of Payment. GNE shall remit to RHI the amounts necessary
under Section 3.1 of this Agreement at least one business day prior to the
applicable federal/state/local due dates as required by the specific
federal/state/local law which necessitated the computation. For example, GNE
shall remit to RHI payments for quarterly estimated Federal tax no later than
April 14, June 14, September 14, and December 14 of each calendar year.
SECTION 3.3. Tax Overpayments and Refunds. If GNE determines that it has
overpaid a GNE Consolidated Group tax liability to RHI or is entitled to a
refund from RHI of such a tax liability on account of a carryback of a tax
attribute, GNE may request a refund or the offset of such overpayment against
future tax liabilities. Upon approval or recomputation by RHI in accordance with
Article IV of the amount requested as a refund or offset, RHI will refund or
allow as an offset the amount so approved or recomputed (and, in the case of a
refund, will pay interest thereon which is computed pursuant to the Stand-Alone
Method (which method includes the applicable federal, state or local tax laws
and regulations which govern the computation of such interest)). Refund claims
made by GNE under Section 6.3 shall be governed by principles corresponding to
those set forth in the previous sentence.
SECTION 3.4. Limitation to GNE of RHI Group Tax Liabilities/Benefits. The
liability of the members of the GNE Group to RHI for payments of tax under this
Agreement shall include, and be exclusively limited to, tax liabilities of the
GNE Consolidated Group computed pursuant to the Stand-Alone Method. In
addition, the ability of the members of the GNE
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Group to claim tax benefits from RHI is exclusively limited to tax benefits of
the GNE Consolidated Group computed pursuant to the Stand-Alone Method. Under
no circumstances shall any member of the GNE Group be held liable for the tax
liability of the consolidated/combined RHI Group, or of any of its individual
members; provided, that a GNE Group member may be held liable for a tax of the
consolidated/combined RHI Group to the extent that such tax is attributable
(determined using the Stand-Alone Method) to the members of the GNE
Consolidated Group and GNE has not previously made a payment to RHI equal to
such attributable portion of such tax. In addition, under no circumstances will
any member of the GNE Group be the beneficiary of tax benefits which accrue to
any member of the RHI Group that is not a member of the GNE Group, or to the
RHI Group as a whole as a result of the RHI Group's consolidated/combined tax
filings.
ARTICLE IV
SUBMISSION OF TAX DATA TO RHI; RHI APPROVAL AND
RECOMPUTATION RIGHTS
SECTION 4.1 Submission of Data; RHI Approval and Recomputation Rights. GNE will
submit to RHI for its review the proforma GNE Consolidated Group tax returns,
quarterly estimates and refund or carryback claims (including refund claims
made under Section 6.3) prepared by GNE under this Agreement. Any such proforma
filing will include all official forms, consents, elections, riders, and other
such documents that may be required or appropriate for such proforma filing.
RHI may approve, or may adjust or modify, any of the computations reflected on a
proforma filing submitted by GNE. In the case of any such adjustment or
modification by RHI, RHI shall recompute GNE's liability to RHI, or RHI's
liability to GNE, in accordance with such adjustment or modification, and such
recomputation shall be binding on GNE. RHI will prepare the final RHI Group
returns or estimated tax filings utilizing the data and proforma filings
submitted by GNE (as adjusted or modified by RHI pursuant to this Section 4.1
or Section 4.2) and by RHI's other includible subsidiaries, and thereafter RHI
will submit such returns or filings directly to the appropriate taxing
authority.
SECTION 4.2 Adjustment of Tax Data. In order to comply with applicable laws and
regulations or for any other reason which RHI, in its sole discretion, deems to
be necessary, RHI reserves the right to adjust and change the tax data as
submitted by GNE on the GNE Consolidated Group proforma returns prior to, and
for purposes of, inclusion of that data in any consolidated/combined RHI Group
tax filing. This right of adjustment of RHI includes, but is not limited to,
any or all income, gain, expense, deduction, loss or credit items as shown on
the GNE proforma returns, and may be made by RHI for any reason which it deems
necessary.
SECTION 4.3 Timeliness of Submission. In order to permit RHI sufficient time to
prepare the final Group tax returns and estimates, GNE will submit the data
under Section 4.1 of this Agreement to RHI no later than the following dates:
o tax returns: 30 days prior to the governmental due date;
o tax estimates and extensions: 7 days prior to the tax payment due date.
SECTION 4.4 Group Tax Planning and Strategies. GNE agrees to provide to RHI
upon its request any and all financial and tax data relating to any GNE Group
member that is
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necessary in order to allow RHI to develop tax planning opportunities and
overall tax strategies for the RHI Group. In addition, it is expected that,
upon request, GNE will participate in tax planning meetings and discussions
with RHI from time to time.
SECTION 4.5 Representation to Outside Governmental Bodies. RHI will develop and
oversee implementation of all positions on behalf of the RHI Group regarding
federal, state and local tax legislation, regulations and all other related
governmental actions which could affect the RHI Group. All direct and indirect
contacts with any federal, state and local official or agency which could
affect the RHI Group shall be coordinated by RHI.
SECTION 4.6 Access to Consolidated and Combined Tax Returns, and GNE Proforma
Returns. Under no circumstances will GNE be given copies of, or access to, the
RHI Group's consolidated and combined tax filings in which any member of the
GNE Group is a member. In addition, no other RHI subsidiary (except Roche
Consulting Corporation) will be given a copy of, or be given access to, GNE's
proforma tax returns and other financial data submitted to RHI under Section
4.1 of this Agreement.
ARTICLE V
TAX EXAMINATIONS
SECTION 5.1 Pre-Acquisition Year Tax Examinations. For any federal, state
and/or local tax examinations of one or more members of the GNE Group for tax
periods beginning prior to the effective date of this Agreement, GNE will
conduct or cause the applicable GNE Group member to conduct such examinations
with the applicable taxing authority, provided that GNE will timely notify RHI
of the commencement of any such examination and, with respect to any
examination which RHI determines may affect or involve an issue relating to a
computation reflected on a return of the RHI Group or a member thereof, will
(or, as applicable, will cause the applicable member of the GNE Group to) (x)
timely and fully inform RHI of developments relating to such examination, (y)
consult regularly with RHI as to the conduct of such examination, and (z) not
settle, fail to appeal or otherwise compromise any issue raised in such
examination without RHI's prior consent.
SECTION 5.2 Post-Acquisition Year Tax Examinations. In accordance with any
federal, state and/or local tax examination conducted of the RHI Group in which
a GNE Group member was a member of the consolidated/combined RHI Group tax
filing, GNE and the applicable GNE Group member or members will cooperate fully
with RHI and/or its representatives to provide any additional tax data,
requested documentation, physical access, and/or financial information which,
in the discretion of RHI, is necessary to provide to governmental personnel.
RHI will have the sole authority to select and close such Post-Acquisition year
tax examinations for all federal, state and/or local RHI Group
consolidated/combined tax filings.
SECTION 5.3 GNE Tax Examination Adjustments. If any adjustment is made to a
consolidated or combined return of the RHI Group, after the filing thereof, in
which income or loss of the members of the GNE Consolidated Group is included,
then at the time of the Final Determination of such adjustment, GNE shall pay
to RHI or RHI shall pay to GNE, as the case may be, (x) the difference between
(I) all payments of tax liability of the GNE Consolidated Group actually made
by GNE under Article III with respect to the taxable
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period covered by such consolidated or combined return (less any related
refunds previously paid by RHI), and (II) all payments that would have been
made under Article III taking such adjustment into account, together with (y)
any applicable interest, penalties or additional amounts computed pursuant to
the Stand-Alone Method. "Final Determination" means (1) with respect to federal
taxes, a "determination" as defined in IRC Section 1313(a) or execution of an
IRS Form 870AD and, with respect to state or local taxes, any final
determination of liability in respect of a tax that, under applicable law, is
not subject to further appeal, review or modification through proceedings or
otherwise (including the expiration of a statute of limitations or a period for
the filing of claims for refunds, amended returns or appeals from adverse
determinations) or (2) the payment of tax by any member of the RHI Group with
respect to any item disallowed or adjusted by a taxing authority (including,
without limitation, a court or other judicial body), provided that RHI
determines that no action should be taken to recoup such payment.
SECTION 5.4 R&D Tax Credit. Promptly after the date hereof, GNE will notify the
Internal Revenue Service that GNE is withdrawing its present position relating
to the calculation and allocation of research and development tax credits and
will take all other appropriate actions to terminate its position with the
Internal Revenue Service. To the extent necessary and permitted by law, GNE
will file amended returns for all open taxable periods beginning prior to the
Consolidation Date, which amended returns shall adopt the methodology relating
to the research and development tax credits that is currently used by the RHI
Group.
ARTICLE VI
CARRYFORWARDS AND CARRYBACKS OF ATTRIBUTES TO AND FROM
SEPARATE RETURN YEARS
SECTION 6.1 Pre-Consolidation Tax Attribute Carryforwards. Any deduction, loss,
credit or tax attribute incurred by the GNE Consolidated Group in a tax period
beginning prior to the Consolidation Date, a carryforward of which is still
available to the GNE Consolidated Group as of that date, shall be carried
forward by the GNE Consolidated Group to the extent and in the manner dictated
by the Stand-Alone Method for purposes of computing GNE's tax liability payable
to RHI under Article III of this Agreement.
SECTION 6.2 Tax Attribute Carrybacks to Pre-Consolidation Periods. Any
deduction, loss, credit or tax attribute incurred by the GNE Consolidated Group
in a period beginning after the Consolidation Date shall be carried back to
taxable periods of the GNE Consolidated Group beginning before the
Consolidation Date to the extent and in the manner dictated by the Stand-Alone
Method. Section 3.3 shall govern any claim by GNE for a refund from RHI on
account of such a carryback; provided, that GNE shall be entitled to such a
refund from RHI only once GNE has taken all available steps under federal,
state or local law to obtain such refund from the applicable taxing authority
and, in such a case, only to the extent of the excess of (x) the refund as
computed pursuant to the Stand-Alone Method over (y) any refund actually
received by GNE from the applicable taxing authority; and provided further,
that at the time GNE requests such a refund from RHI, GNE shall provide RHI
with appropriate information (including copies of correspondence with the
applicable taxing authority) relating to GNE's entitlement to a refund under
this sentence, and GNE shall thereafter provide such additional related
information as RHI requests.
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SECTION 6.3 Carrybacks and Carryforwards of Tax Attributes to Separate Return
Years. In the case of any company that becomes or ceases to be a member of the
GNE Consolidated Group, the portion of any deduction, loss, credit or tax
attribute incurred by the GNE Consolidated Group in a taxable period in which
such company is a member of the group that is attributable to such company shall
be carried back or forward to taxable periods of such company in which it is not
a member of such group to the extent and in the manner dictated by the
Stand-Alone Method. GNE may, on behalf of such company, file with RHI a pro
forma refund claim on account of such a carryback or carryforward, provided,
however, that GNE's entitlement to receive such a refund from RHI on behalf of
such company shall be limited as set forth in the next two sentences. In the
case of a carryback, GNE shall be entitled to a refund only once the applicable
company has taken all available steps under federal, state or local law to
obtain a refund from the applicable taxing authority and, in such a case, only
to the extent of the excess of (x) the refund as computed pursuant to the
Stand-Alone Method over (y) any refund actually received by the company from the
applicable taxing authority. In the case of a carryforward, GNE shall be
entitled to a refund only to the extent of the excess of (1) the applicable
company's actual tax liability reflected on the return that the company files
with the applicable taxing authority for the relevant taxable period (as such
liability is adjusted by RHI upon a review by it of the computations reflected
on such return) over (2) the company's tax liability for such taxable period, as
computed pursuant to the Stand-Alone Method. At the time that GNE requests a
refund from RHI under this Section 6.3, GNE shall provide RHI with appropriate
information (including, in the case of a carryback, copies of correspondence
with the applicable taxing authority regarding a refund, and in the case of a
carryforward, the applicable company's return for the applicable period and
supporting workpapers) relating to GNE's entitlement to such refund, and GNE
shall thereafter provide such additional related information as RHI requests. In
addition to the rules set forth in this Section, Section 3.3 shall govern any
such refund claimed by GNE from RHI.
ARTICLE VII
CARRYFORWARDS AND CARRYBACKS OF ATTRIBUTES, OTHER THAN TO
AND FROM SEPARATE RETURN YEARS
SECTION 7.1 Carryforwards and Carrybacks of GNE Consolidated Group Tax
Attributes for Purposes of Pro Forma Returns. In the event a GNE Consolidated
Group proforma return includes losses, deductions, credits or other tax
attributes which were limited to the GNE Consolidated Group on its proforma
return (and hence can only be carried back or carried forward), that tax
attribute shall remain the property of the GNE Consolidated Group for
utilization in a future GNE Consolidated Group proforma return as a
carryforward, or for utilization in a prior GNE Consolidated Group return as a
carryback, in conformity with the Stand-Alone Method. Section 3.3 shall govern
any claim by GNE of a refund on account of such a carryback.
SECTION 7.2 Utilization of Tax Attributes by RHI on RHI Group Return.
Notwithstanding Sections 7.1 of this Agreement, RHI is entitled to fully
utilize currently any tax attributes arising from a GNE Consolidated Group
proforma return on the corresponding RHI Group consolidated/combined return,
and RHI will separately track whether that tax attribute may be carried back or
carried forward on an RHI Group-wide basis. Under no circumstances,
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however, will the utilization by RHI of a GNE Consolidated Group tax attribute
affect the GNE Consolidated Group's ability to utilize that attribute on the
GNE Consolidated Group's own proforma return. For example, a current GNE
Consolidated Group tax loss which RHI is able to utilize currently on an RHI
Group consolidated/combined basis, will be refunded by RHI to GNE at such time
when the GNE Consolidated Group is able to utilize that loss as either a
carryforward or carryback on a proforma return.
ARTICLE VIII
SUCCESSORS
SECTION 8.1 Successors. This agreement shall be binding on an inure to the
benefit of any successor, by merger, acquisition of assets or otherwise, to any
current or future member of the RHI Group and/or the GNE Group (including, but
not limited to any successor to such a member succeeding to the tax attributes
of such member under Section 381 of the Internal Revenue Code), to the same
extent as if such successor had been an original party hereto.
ARTICLE IX
AUTHORIZATION, ETC.
SECTION 9.1 Authorization, etc. RHI is entering into this Agreement on behalf
of itself and the other members (current and future) of the RHI Group (other
than those RHI Group members that are also members of the GNE Group), and GNE
is entering into this Agreement on behalf of itself and the other members
(current and future) of the GNE Group. RHI and GNE each hereby represents and
warrants that it has the power and authority, on behalf of itself and,
respectively, the other members (current and future) of the RHI Group (other
than those RHI Group members that are also members of the GNE Group), and the
other members (current and future) of the GNE Group, to execute, deliver and
perform this Agreement, that this Agreement has been duly authorized by all
necessary corporate action on the part of such party, that this Agreement
constitutes a legal, valid and binding obligation of each such party and that
the execution, delivery and performance of this Agreement by such party does
not contravene or conflict with any provision of law or of its charter or
bylaws or any agreement, instrument or order binding on such party.
ARTICLE X
GOVERNING LAW
SECTION 10.1 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect to
the laws and
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principles relating to conflicts of law.
ARTICLE XI
COUNTERPARTS
SECTION 11.1 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
ARTICLE XII
WAIVERS AND AMENDMENTS
SECTION 12.1 Waivers and Amendments. This Agreement shall not be waived,
amended or otherwise modified except in writing, duly executed by all of the
parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
GENENTECH, INC.
By
---------------------------
Title:
ROCHE HOLDINGS, INC.
By
---------------------------
Title:
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EXHIBIT 10.4
GENENTECH, INC.
1999 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1999 Stock Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or any of its Committees
as shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as
amended.
(e) "Committee" means a committee of Board members appointed
by the Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means Genentech, Inc., a Delaware corporation.
(h) "Consultant" means any person, including an advisor,
engaged by the Company or Subsidiary to render services to such entity but shall
not include an Employee.
(i) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
<PAGE> 2
(j) "Employee" means any person, including Officers,
employed by the Company or Subsidiary of the Company. An individual shall not
cease to be an Employee in the case of (i) any leave of absence approved by the
Company or (ii) transfers between locations of the Company or between the
Company, any Subsidiary, or any successor. For purposes of Incentive Stock
Options, no such leave may exceed ninety days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If reemployment
upon expiration of a leave of absence approved by the Company is not so
guaranteed, then three (3) months following the 91st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a member of the Company's Board of Directors
nor payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(l) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on
the day of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the day of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code and the regulations promulgated thereunder.
(n) "Nonstatutory Stock Option" means an Option not intended
to qualify as an Incentive Stock Option.
(o) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option or Stock
Purchase Right grant. The Notice of Grant is part of the Option Agreement.
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(p) "Officer" means a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the
Plan.
(r) "Option Agreement" means an agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(s) "Optioned Stock" means the Common Stock subject to an
Option or Stock Purchase Right.
(t) "Optionee" means the holder of an outstanding Option or
Stock Purchase Right granted under the Plan.
(u) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1999 Stock Plan.
(w) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(x) "Restricted Stock Purchase Agreement" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.
(y) "Retirement" means a Service Provider who leaves the
employment of the Company after reaching age sixty-five (65).
(z) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(aa) "Section 16(b) " means Section 16(b) of the Exchange
Act.
(bb) "Service Provider" means an Employee or Consultant.
(cc) "Share" means a share of the Common Stock, as adjusted
in accordance with Section 13 of the Plan.
(dd) "Stock Purchase Right" means the right to purchase
Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of
Grant.
(ee) "Subsidiary" means a "subsidiary corporation", whether
now or hereafter existing, as defined in Section 424(f) of the Code.
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3. Stock Subject to the Plan. Subject to the provisions of Section
13 of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan is 7,500,000 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, the unpurchased Shares
which were subject thereto shall become available for future grant or sale under
the Plan (unless the Plan has terminated); provided, however, that Shares that
have actually been issued under the Plan, whether upon exercise of an Option or
Right, shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if Shares of Restricted Stock
are repurchased by the Company at their original purchase price, such Shares
shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the
Administrator determines it to be desirable to qualify Options granted hereunder
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided
above, the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions
of the Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options
and Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common
Stock to be covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the
Plan;
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(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option or Stock Purchase Right
granted hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options or Stock Purchase Rights may
be exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right or the shares of Common
Stock relating thereto, based in each case on such factors as the Administrator,
in its sole discretion, shall determine;
(vi) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan;
(vii) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred treatment
under foreign laws;
(viii) to modify or amend each Option or Stock Purchase
Right (subject to Section 15(c) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of Options longer
than is otherwise provided for in the Plan;
(ix) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to (or less than) the minimum amount required
to be withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by an Optionee to have Shares withheld for this
purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
(x) to authorize any person to execute on behalf of
the Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xi) to make all other determinations deemed
necessary or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase
Rights may be granted to Service Providers. Incentive Stock Options may be
granted only to Employees.
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6. Limitations.
(a) Each Option shall be designated in the Option Agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right
shall confer upon an Optionee any right with respect to continuing the
Optionee's relationship as a Service Provider with the Company, nor shall they
interfere in any way with the Optionee's right or the Company's right to
terminate such relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of
Options:
(i) No Service Provider shall be granted, in any
fiscal year of the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a
Service Provider may be granted Options to purchase up to an additional 250,000
Shares which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the
Option Agreement. In the case of an Incentive Stock Option, the term shall be
ten (10) years from the date of grant or such shorter term as may be provided in
the Option Agreement. Moreover, in the case of an Incentive Stock Option granted
to an Optionee who, at the time the Incentive Stock Option is granted, owns
stock representing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the Incentive Stock Option shall be five (5) years from the date of
grant or such shorter term as may be provided in the Option Agreement.
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9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option, the
per Share exercise price shall be no less than 100% of the Fair Market Value per
Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the
per Share exercise price shall be determined by the Administrator. In the case
of a Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price of less than 100% of the Fair Market
Value per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) Waiting Period and Exercise Dates. At the time an Option
is granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions that must be satisfied before
the Option may be exercised.
(c) Form of Consideration. The Administrator shall determine
the acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the Administrator
shall determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
(vi) a reduction in the amount of any Company
liability to the Optionee, including any liability attributable to the
Optionee's participation in any Company-sponsored deferred compensation program
or arrangement;
(vii) any combination of the foregoing methods of
payment; or
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<PAGE> 8
(viii) such other consideration and method of payment
for the issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable according to the terms of the Plan
and at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement. Unless the Administrator provides in
writing otherwise, vesting of Options granted hereunder shall be tolled during
any unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death,
Disability, or Retirement, the Optionee may exercise his or her Option within
such period of time as is specified in the Option Agreement to the extent that
the Option is vested on the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement). In
the absence of a specified time in the Option Agreement, the Option shall remain
exercisable for three (3) months following the Optionee's termination. If, on
the date of termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a
Service Provider as a result of the Optionee's Disability, the Optionee may
exercise his or her Option within such period of time as is specified in the
Option Agreement to the extent the Option is vested on the date Optionee ceases
to be a Service Provider (but in no event later than the expiration of the term
of such Option
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<PAGE> 9
as set forth in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve (12) months
following the date the Optionee ceases to be a Service Provider. If, on the date
Optionee ceases to be a Service Provider, the Optionee is not vested as to his
or her entire Option, the Shares covered by the unvested portion of the Option
shall revert to the Plan. If, after Optionee ceases to be a Service Provider,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death or Retirement of Optionee. Unless otherwise
provided by the Administrator, immediately upon Optionee's death or Retirement,
the Option shall automatically accelerate and become fully-vested for all of the
Shares covered by such Option, and the expiration date of the Option shall
automatically be extended to the expiration date of the Option term specified in
the Option Agreement. If an Optionee dies while a Service Provider, the Option
may be exercised by the Optionee's designated beneficiary, provided such
beneficiary has been designated prior to Optionee's death in a form acceptable
by the Administrator. If no such beneficiary has been designated by the
Optionee, then such Option may be exercised by the personal representative of
the Optionee's estate or by the person or persons to whom the Option is
transferred pursuant to the Optionee's will or in accordance with the laws of
descent and distribution. In the event Optionee ceases to be a Service Provider
by reason of Retirement, the Option may be exercised by Optionee. If the Option
is not exercised following Optionee's death or Retirement within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time
offer to buy out for a payment in cash or Shares an Option previously granted
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically, by means of a Notice of Grant,
of the terms, conditions and restrictions related to the offer, including the
number of Shares that the offeree shall be entitled to purchase, the price to be
paid, and the time within which the offeree must accept such offer. The offer
shall be accepted by execution of a Restricted Stock Purchase Agreement in the
form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate or under such
conditions as shall be determined by the Administrator and set forth in the
Restricted Stock Purchase Agreement.
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(c) Other Provisions. The Restricted Stock Purchase
Agreement shall contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Administrator in its sole
discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right
is exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger
or Asset Sale.
(a) Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option and Stock Purchase Right, and the number of
shares of Common Stock which have been authorized for issuance under the Plan
but as to which no Options or Stock Purchase Rights have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option or Stock Purchase Right, as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock
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<PAGE> 11
Purchase Right shall lapse as to all such Shares, provided the
proposed dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an Option or
Stock Purchase Right will terminate immediately prior to the consummation of
such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially all of
the assets of the Company, each outstanding Option and Stock Purchase Right
shall be assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain
shareholder approval of any Plan amendment to the extent necessary and desirable
to comply with Applicable Laws.
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(c) Effect of Amendment or Termination. No amendment,
alteration, suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee and
the Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to Options
granted under the Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to
the exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the approval
of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the
exercise of an Option or Stock Purchase Right, the Company may require the
person exercising such Option or Stock Purchase Right to represent and warrant
at the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is
required.
17. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by
the shareholders of the Company within twelve (12) months after the date the
Plan is adopted. Such shareholder approval shall be obtained in the manner and
to the degree required under Applicable Laws.
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EXHIBIT 15.1
July 15, 1999
The Board of Directors and Stockholders
Genentech, Inc.
We are aware of the inclusion in Amendment No. 3 to the Registration Statement
(Form S-3 No. 333-80601) 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,
/s/ ERNST & YOUNG LLP
---------------------
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 Amendment No. 3 to the Registration
Statement (Form S-3 No. 333-80601) of Genentech, Inc. for the registration of
shares of its common stock.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Jose, California
July 15, 1999
