<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENENTECH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2347624
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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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<S> <C>
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
</TABLE>
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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.02 per share... 22,000,000 shares $152.46875 $3,354,312,500 $932,498.88
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes an aggregate of 2,000,000 shares which the Underwriters have the
option to purchase from the Selling Stockholder solely to cover over-
allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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.
Subject to Completion
Dated October 8, 1999
PROSPECTUS
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 is listed on
the New York Stock Exchange under the symbol "DNA". On October 7, 1999, the
closing price of our common stock on that exchange was $172 13/16 per share.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
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.
<TABLE>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT ROCHE HOLDINGS, INC.
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<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total $ $ $
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</TABLE>
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
ROBERTSON STEPHENS
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Prospectus Summary.......................... 1
Risk Factors................................ 10
Special Note Regarding Forward-Looking
Statements................................ 15
Dividend Policy............................. 16
Price Range of Special Common Stock......... 16
Price Range of Common Stock................. 16
Unaudited Pro Forma Condensed Consolidated
Financial Statements...................... 17
Selected Consolidated Financial Data........ 23
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................. 25
Business.................................... 40
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Management.................................. 57
Relationship with Roche..................... 67
Selling Stockholder and Principal
Stockholders.............................. 73
Description of Capital Stock................ 74
Material U.S. Federal Tax Considerations for
Non-U.S. Holders of Common Stock.......... 77
Shares Eligible for Future Sale............. 79
Underwriting................................ 80
Legal Matters............................... 81
Experts..................................... 81
Where You Can Find More Information......... 82
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
-------------------------
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; TNKase(TM) (tenecteplase) second generation
tissue plasminogen activator; 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. Thirteen 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 six
additional licensed products that originated from our technology and are
marketed by other companies.
We currently have 17 projects in our development pipeline, including two
products or indications in preparation for Phase III clinical trials, five
products or indications in Phase III clinical trials, and two products for which
Phase III clinical trials have been completed and for which we have made
regulatory filings to seek marketing approval in the United States 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. On July 28,
1999, Roche completed the sale of 22,000,000 shares of our common stock at $97
per share. As a result, Roche currently owns 82.0% of our common stock.
In July 1999, we entered into certain affiliation arrangements with Roche,
amended our licensing and marketing agreement with Hoffmann-La Roche, and
entered into a tax sharing agreement with Roche.
In addition, concurrently with this offering, Roche expects to issue zero-coupon
notes that will be exchangeable with Roche for an aggregate of up to
approximately 5,500,000 shares of our common stock owned by Roche.
Affiliation Arrangements
Our board consists 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, serves as the Genentech employee director and chairman of the
board. However, under the affiliation agreement, Roche has 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 do 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 will, 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 July
1999, we amended that agreement, the major provisions of which include:
- extending Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license our products upon
the occurrence of any of the following: (1) our decision to file an
Investigational New Drug exemption application, or IND, for a product,
(2) completion of a Phase II trial for a product or (3) if Hoffmann-La
Roche previously paid us a fee of $10 million to extend its option on a
product, completion of a Phase III trial for that product;
- we 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
Since the redemption of our special common stock in June of this year, we have
been, and we expect to continue to be until the completion of this offering,
included in Roche's U.S. consolidated federal income tax group and included with
Roche and/or one or more Roche subsidiaries in consolidated or combined income
tax groups for certain state and local tax jurisdictions. Beginning on the day
after this offering is completed, Genentech will cease to be a member of the
consolidated federal income tax group (and certain consolidated or combined
state or local income tax groups) of which Roche is the common parent.
Genentech and Roche have entered into a tax sharing agreement. Pursuant to this
agreement, Genentech and Roche are to make payments such that, with respect to
the period during which Genentech was a member of a Roche consolidated or
combined group, 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 had 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.
For more information about the tax sharing agreement, you should read
"Relationship with Roche--Tax Sharing Agreement."
3
<PAGE> 7
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. The affiliation agreement requires us to,
among other things, establish a stock repurchase program designed to maintain
Roche's percentage ownership interest in our common stock (which percentage
ownership interest will be 66.4% after the completion of this offering). 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."
4
<PAGE> 8
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.............................128,464,410 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 9,311,894 shares of common stock that may be issued
upon exercise of outstanding stock options.
5
<PAGE> 9
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. 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 ($154.6 million) and other intangibles ($219.3
million) and reflects the sale of inventories adjusted to fair value (such
adjustment totalling $186.2 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 six months ended June
30, 1999 includes amortization of goodwill ($77.4 million) and other intangibles
($105.4 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 six months ended June
30, 1999 excludes non-recurring special charges related to the redemption
($1,147.3 million) and 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. For more information regarding this pro forma data, you should
read the "Unaudited Pro Forma Condensed Consolidated Financial Statements"
elsewhere in this prospectus.
<TABLE>
<CAPTION>
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SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------------- ------------------------------------------------
PRO FORMA PRO FORMA
1999 1999 1998 1998 1998 1997 1996
----------- ----------- ----------- ----------- -------- -------- ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
In millions, except per
share
data and percentages
STATEMENT OF OPERATIONS DATA
Total revenues.............. $688.8 $ 717.6 $532.7 $1,133.7 $1,150.9 $1,016.7 $968.7
Product sales............. 503.4 503.4 341.0 717.8 717.8 584.9 582.8
Royalties................. 92.6 92.6 121.9 229.6 229.6 241.1 214.7
Contract and other........ 56.9 77.2 28.9 114.8 114.8 121.6 107.0
Interest.................. 35.9 44.4 40.9 71.5 88.7 69.1 64.2
Total costs and expenses.... $740.4 $1,698.0 $419.6 $1,472.1 $ 898.3 $ 846.9 $820.8
Cost of sales............. 98.4 98.4 70.8 324.8 138.6 102.5 104.5
Research and
development............ 185.0 185.0 191.1 396.2 396.2 470.9 471.1
Marketing, general and
administrative......... 214.6 214.6 155.5 358.9 358.9 269.9 240.1
Special charges
Legal settlement....... 50.0 50.0 -- -- -- -- --
Related to
redemption........... -- 1,147.3 -- -- -- -- --
Recurring charges related
to redemption.......... 189.7 -- -- 387.6 -- -- --
Interest.................. 2.7 2.7 2.2 4.6 4.6 3.6 5.1
Income (loss) before
taxes..................... $(51.6) $ (980.4) $113.1 $ (338.4) $ 252.6 $ 169.8 $147.9
Income tax (benefit)
provision................. (5.7) (71.6) 31.7 (115.3) 70.7 40.8 29.6
Net income (loss)........... $(45.9) $ (908.8) $ 81.4 $ (223.1) $ 181.9 $ 129.0 $118.3
Effective tax rate
(benefit)................. (11)% (7)% 28% (34)% 28% 24% 20%
Earnings (loss) per share
Basic..................... $(0.36) $ (7.09) $ 0.65 $ (1.77) $ 1.45 $ 1.05 $ 0.98
Diluted................... (0.36) (7.09) 0.63 (1.77) 1.40 1.02 0.95
Weighted average shares
outstanding
Basic..................... 128.1 128.1 125.2 125.8 125.8 123.0 120.6
Diluted................... 128.1 128.1 129.3 125.8 129.9 126.4 124.0
Actual shares outstanding at
period-end................ 128.6 128.6 125.8 127.1 127.1 124.2 121.4
OTHER DATA
Cash flow from operations... $121.9 $ 123.6 $100.0 $ 351.1 $ 349.9 $ 118.3 $139.7
Depreciation expense........ 39.6 39.6 33.8 72.7 72.7 58.9 57.6
Amortization expense........ 187.5 4.7 3.4 379.3 5.4 6.6 4.5
Capital expenditures........ 41.5 41.5 43.3 88.1 88.1 154.9 141.8
</TABLE>
The actual shares outstanding at period end for the six months ended June 30,
1999 is as of June 29, 1999, just prior to the redemption of the special common
stock on June 30, 1999.
6
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
-----------
AS OF
JUNE 30,
1999
-----------
(UNAUDITED)
<S> <C>
In millions
BALANCE SHEET DATA
Cash and cash equivalents, short-term investments and
long-term marketable securities........................... $1,721.0
Working capital............................................. 823.1
Goodwill and other intangible assets........................ 3,269.6
Total assets................................................ 6,369.4
Long-term debt.............................................. 150.0
Total liabilities........................................... 1,240.5
Total stockholders' equity.................................. 5,128.9
Total liabilities and stockholders' equity.................. 6,369.4
</TABLE>
7
<PAGE> 11
RECENT DEVELOPMENTS
On October 8, 1999, we announced our 1999 third quarter results.
<TABLE>
<CAPTION>
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NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- ------ --------- ------
(UNAUDITED) (UNAUDITED)
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In millions, except per share data
STATEMENT OF OPERATIONS DATA
Total revenues...................................... $ 1,062.9 $846.6 $ 345.3 $313.9
Product sales..................................... 770.4 504.1 267.0 163.1
Royalties......................................... 138.7 182.6 46.1 60.7
Contract and other................................ 84.7 95.0 7.5 66.1
Interest.......................................... 69.1 64.9 24.7 24.0
Total costs and expenses............................ $ 2,147.0 $645.5 $ 449.0 $225.9
Cost of sales..................................... 191.2 106.1 92.8 35.3
Research and development.......................... 269.6 291.0 84.6 99.9
Marketing, general and administrative............. 328.2 245.1 113.6 89.6
Special charges
Legal settlement............................... 50.0 -- -- --
Related to redemption.......................... 1,205.1 -- 57.8 --
Recurring charges related to redemption........... 98.9 -- 98.9 --
Interest.......................................... 4.0 3.3 1.3 1.1
Income (loss) before taxes.......................... $(1,084.1) $201.1 $ (103.7) $ 88.0
Income tax (benefit) provision...................... (112.5) 56.3 (40.9) 24.6
Net income (loss)................................... $ (971.6) $144.8 $ (62.8) $ 63.4
Earnings (loss) per share
Basic............................................. $ (7.59) $ 1.15 $ (0.49) $ .50
Diluted........................................... (7.59) 1.12 (0.49) .49
Weighted average shares outstanding
Basic............................................. 128.0 125.5 127.9 126.1
Diluted........................................... 128.0 129.5 127.9 129.9
</TABLE>
<TABLE>
<CAPTION>
----------------------
AS OF SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
In millions
BALANCE SHEET DATA
Cash and cash equivalents, short-term investments and
long-term marketable securities........................... $1,663.7 $1,553.8
Working capital............................................. 897.1 984.8
Goodwill and other intangible assets........................ 3,173.9 60.8
Total assets................................................ 6,169.4 2,748.3
Long-term debt.............................................. 149.7 150.0
Total liabilities........................................... 942.3 500.2
Total stockholders' equity.................................. 5,227.1 2,248.1
Total liabilities and stockholders' equity.................. 6,169.4 2,748.3
</TABLE>
For the three months ended September 30, 1999:
- Exclusive of special and recurring charges related to the redemption of
our special common stock, net income for the third quarter of 1999 would
have been $66.9 million, or 51 cents per share, an increase in earnings
per share of 4% over the third quarter of 1998. Year-to-date earnings per
share in 1999, excluding the legal settlement and redemption special
charges and the recurring charges related to the redemption, would have
been $1.50 per share, a 34% increase as compared to the same period in
1998.
- The accounting treatment under U.S. generally accepted accounting
principles required 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 on June 30,
1999. Roche's cost of acquiring Genentech was "pushed down" to us and
reflected on our financial statements beginning June 30, 1999. On a
year-to-date basis, 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 related to the
redemption primarily includes the cash-out of certain stock options and a
non-cash charge related to the continuance of certain stock options
recorded in the second quarter of
8
<PAGE> 12
1999 and includes a non-cash charge associated with the remeasurement,
for accounting purposes, of certain stock options recorded in the third
quarter of 1999.
- Due primarily to charges related to the redemption, we recorded a third
quarter 1999 net loss of $62.8 million, or a net loss of 49 cents per
share, as compared to net income of $63.4 million, or 49 cents per share,
in the third quarter of 1998.
- Revenues in the third quarter of 1999 increased 10% to $345.3 million
from $313.9 million in the same quarter of 1998. This revenue growth was
driven primarily by sales of Herceptin and Rituxan. This revenue increase
was recorded even though we experienced a significant decrease in
contract and other revenues and royalties as compared to the same period
last year. Contract and other revenues in the third quarter of 1998
included a $40 million payment from Roche related to an agreement
providing Roche exclusive marketing rights outside the United States for
Herceptin.
- As a result of the June 30, 1999 redemption of our special common stock
and related accounting treatment, we began recording recurring charges
related to the redemption in the third quarter of 1999. These recurring
charges are primarily comprised of the amortization of intangibles and
goodwill and were $98.9 million in the quarter. We also recorded a
special charge related to the redemption of $57.8 million, which is
primarily a non-cash charge associated with the remeasurement, for
accounting purposes, of certain stock options.
Product Sales
Sales of marketed products increased 64% in the third quarter of 1999 to $267.0
million from $163.1 million in the third quarter of 1998.
Sales of Herceptin in the third quarter of 1999 were $47.9 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 third quarter of 1999 increased 84% to $72.4 million
from $39.4 million in the third quarter of 1998. This sales increase is due
primarily to increased market penetration for the treatment of non-Hodgkin's
lymphoma.
Sales of Activase in the third quarter of 1999 increased to $59.2 million from
$45.1 million in the third quarter of 1998. This increase in Activase sales is
primarily the result of a competitive product not being available in the
marketplace. This increase is offset in part by a decline in the overall size of
the acute myocardial infarction market due to mechanical reperfusion and
continued competition.
Sales of our three growth hormone products, Protropin, Nutropin and Nutropin AQ,
increased to $60.1 million in the third quarter of 1999 from $52.9 million in
the third quarter of 1998. This increase primarily reflects fluctuations in
distributor ordering patterns.
Sales of Pulmozyme increased to $27.0 million in the third quarter of 1999
compared to $24.7 million in the third 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.
Total Costs and Expenses
Costs and expenses increased during the third quarter of 1999 as compared to the
third quarter of 1998 due primarily to the redemption related charges described
above, and as a result of the increase in product sales, cost of sales increased
to $92.8 million in the third quarter of 1999 from $35.3 million in the third
quarter of 1998.
Research and development expenses decreased to $84.6 million in the third
quarter of 1999 from $99.9 million in the third quarter of 1998. For the third
quarter of 1999, we invested approximately 25% of revenues into research and
development, compared to 32% in the third quarter of 1998. This decrease is
currently running ahead of the goal of our long-range plan to decrease research
and development spending as a percentage of revenues, and is expected to vary
over the next several periods as products progress through late-stage clinical
trials.
Marketing, general and administrative expenses increased to $113.6 million in
the third quarter of 1999 from $89.6 million in the third quarter of 1998. This
increase was driven primarily by the growth of Rituxan and the resultant profit
sharing expense as well as the introduction of Herceptin.
The income tax benefit of $40.9 million in the third quarter of 1999 reflects
the income tax benefit of a portion of the redemption related charges.
9
<PAGE> 13
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;
10
<PAGE> 14
- 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 66.4% of our outstanding
common stock. Roche may in the future, through open market purchases or
otherwise, acquire additional shares of our common stock. As our majority
stockholder, Roche controls the outcome of actions requiring the approval of our
stockholders. Our bylaws provide, among other things, that the composition of
our board of directors shall consist of two Roche directors, three independent
directors nominated by a nominating committee and one Genentech employee
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, the affiliation agreement also contains provisions
which are designed to enable Roche to maintain a certain 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 includes provisions relating to competition by
Roche with us, allocations of corporate opportunities, transactions with
interested parties and intercompany agreements and provisions limiting the
liability of certain people. Our certificate of incorporation provides that any
person purchasing or acquiring an interest in shares of our capital stock shall
be deemed to have consented to the provisions in the certificate of
incorporation relating to competition with Roche, conflicts of interest,
corporate opportunities and intercompany agreements, and such consent may
restrict such person's ability to challenge transactions carried out in
compliance with such provisions. Persons who are directors and/or officers of
ours and who are also directors and/or officers of Roche may choose to take
action in reliance on such provisions rather than act in a manner that might be
favorable to us but adverse to Roche. Two of our directors currently serve as
directors, officers and employees of Roche Holding Ltd and its affiliates. 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 have issued 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."
WE FACE GROWING AND NEW COMPETITION
We face growing competition in two of our therapeutic markets and expect new
competition in a third market. First, in the thrombolytic market, Activase has
lost market share and could lose additional market share to Centocor, Inc.'s
Retavase(R); the resulting adverse effect on sales could be material. Retavase
received approval from the FDA in October 1996 for the treatment of acute
myocardial infarction. In addition, Bristol-Myers Squibb recently completed a
Phase III trial for another competitive product for the treatment of acute
myocardial infarction and it may file for product approval in the near future.
11
<PAGE> 15
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, has 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 RECORDED
SUBSTANTIAL GOODWILL AND OTHER INTANGIBLES, THE AMORTIZATION OF WHICH WILL
ADVERSELY AFFECT OUR EARNINGS
As a result of the redemption of our special common stock, Roche owned all of
our outstanding common stock, requiring push-down accounting under generally
accepted accounting principles. Push-down accounting required us to establish a
new accounting basis for our assets and liabilities, based on Roche's cost in
acquiring all of our stock. In other words, Roche's cost of acquiring Genentech
was "pushed down" to us and reflected on our financial statements. Push-down
accounting required us to record goodwill and other intangible assets of
approximately $1,706.0 million and $1,499.0 million, respectively, during the
second quarter of 1999. The amortization of this goodwill and other intangible
assets will have a significant negative impact on our financial results in
future years. In addition, we will continuously evaluate whether events and
circumstances have occurred that indicate the remaining balance of this and
other intangible assets may not be recoverable. When factors indicate that
assets should be evaluated for possible impairment, we may be required to reduce
the carrying value of our intangible assets, which could have a material adverse
effect on our financial condition and results of operations during the periods
in which such a reduction is recognized. We may be required to write down
intangible assets in future periods. For more information about push-down
accounting, see "Unaudited Pro Forma Condensed Consolidated Financial
Statements."
OUR ROYALTY AND CONTRACT REVENUES COULD DECLINE
Royalty and contract revenues in future periods could vary significantly. Major
factors affecting these revenues include, but are not limited to:
- Hoffmann-La Roche's decisions whether to exercise its options to develop
and sell our future products in non-U.S. markets and the timing and
amount of any related development cost reimbursements;
- variations in Hoffmann-La Roche's sales and other licensees' sales of
licensed products;
- the conclusion of existing arrangements with other companies and
Hoffmann-La Roche;
- the timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees;
12
<PAGE> 16
- 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 investment
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
13
<PAGE> 17
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 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 which was 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 has been and may continue to
be more volatile 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 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 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."
14
<PAGE> 18
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."
15
<PAGE> 19
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>
PRICE RANGE OF COMMON STOCK
Since July 20, 1999, our common stock has traded on the New York Stock Exchange
under the symbol "DNA". The following table sets forth the high and low reported
sale prices for our common stock for the periods indicated.
<TABLE>
<CAPTION>
-----------------
HIGH LOW
---- ----
<S> <C> <C>
1999
Third Quarter (beginning July 20)......................... $179 1/2 $116 1/2
Fourth Quarter (through October 7)........................ 174 142 1/4
</TABLE>
Our board of directors has approved a 2-for-1 split of our common stock to be
effected in the form of a stock dividend to occur after the completion of this
offering. No share or per share data or other information in this document has
been adjusted to reflect this stock split.
16
<PAGE> 20
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"), which
resulted 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,
were recorded at their fair values not to exceed the aggregate Roche purchase
price, including Roche's transaction costs, at June 30, 1999. 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 our consolidated balance sheet was 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 June 30, 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, employee compensation for stock option related transactions, and
our transactions costs recorded at the redemption date and in July 1999.
17
<PAGE> 21
GENENTECH, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
----------------------------------------
AS OF JUNE 30, 1999
----------------------------------------
AS PRO FORMA
REPORTED ADJUSTMENTS PRO FORMA
--------- -------------- ---------
<S> <C> <C> <C>
In millions
ASSETS
Current assets
Cash and cash equivalents................................. $ 291.9 -- $ 291.9
Short-term investments.................................... 621.1 -- 621.1
Accounts receivable....................................... 191.7 -- 191.7
Inventories............................................... 324.5 -- 324.5
Prepaid expenses and other current assets................. 13.1 -- 13.1
--------- -------- ---------
Total current assets.............................. 1,442.3 -- 1,442.3
Long-term marketable securities............................. 808.0 -- 808.0
Property, plant and equipment, net.......................... 718.7 -- 718.7
Goodwill.................................................... 1,706.0 -- 1,706.0
Other intangible assets..................................... 1,563.6 -- 1,563.6
Other assets................................................ 130.8 -- 130.8
--------- -------- ---------
Total assets...................................... $ 6,369.4 -- $ 6,369.4
========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 32.2 -- $ 32.2
Other accrued liabilities................................. 587.0 $ (23.1)(a) 563.9
--------- -------- ---------
Total current liabilities......................... 619.2 (23.1) 596.1
Long-term debt.............................................. 150.0 -- 150.0
Deferred income taxes and other long-term liabilities....... 471.3 -- 471.3
--------- -------- ---------
Total liabilities................................. 1,240.5 (23.1) 1,217.4
Stockholders' equity
Common stock.............................................. 2.6 -- 2.6
Additional paid-in capital................................ 7,026.4 57.8(a) 7,084.2
Accumulated deficit....................................... (1,937.9) (34.7)(a) (1,972.6)
Accumulated other comprehensive income.................... 37.8 -- 37.8
--------- -------- ---------
Total stockholders' equity........................ 5,128.9 -- 5,152.0
--------- -------- ---------
Total liabilities and stockholders' equity........ $ 6,369.4 -- $ 6,369.4
========= ======== =========
</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>
-----------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------
AS PRO FORMA
REPORTED ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
In millions, except per share data
Revenues
Product sales............................................. $ 503.4 -- $ 503.4
Royalties................................................. 92.6 -- 92.6
Contract and other........................................ 77.2 $ (20.3)(b) 56.9
Interest.................................................. 44.4 (8.5)(c) 35.9
--------- --------- -------
Total revenues.................................... 717.6 (28.8) 688.8
Total costs and expenses
Cost of sales............................................. 98.4 -- 98.4
Research and development.................................. 185.0 -- 185.0
Marketing, general and administrative..................... 214.6 -- 214.6
Special charges
Legal settlement....................................... 50.0 -- 50.0
Related to redemption.................................. 1,147.3 (1,147.3)(e) --
Recurring charges related to redemption
Goodwill amortization.................................. -- 77.4(f) 77.4
Amortization of other intangibles...................... -- 105.4(g) 105.4
Deferred compensation charges.......................... -- 6.9(h) 6.9
Interest.................................................. 2.7 -- 2.7
--------- --------- -------
Total costs and expenses.......................... 1,698.0 (957.6) 740.4
--------- --------- -------
Income (loss) before taxes.................................. (980.4) 928.8 (51.6)
Income tax (benefit) provision.............................. (71.6) 65.9(i) (5.7)
--------- --------- -------
Net income (loss)........................................... $ (908.8) $ 862.9 $ (45.9)
========= ========= =======
Earnings (loss) per share
Basic..................................................... $ (7.09) $ (0.36)
Diluted................................................... (7.09) (0.36)
Weighted average shares used to compute earnings (loss) per
share
Basic..................................................... 128.1 128.1
Diluted................................................... 128.1 128.1
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
19
<PAGE> 23
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 and other........................................ 114.8 -- 114.8
Interest.................................................. 88.7 $ (17.2)(c) 71.5
-------- ------- --------
Total revenues.................................... 1,150.9 (17.2) 1,133.7
Total costs and expenses
Cost of sales............................................. 138.6 186.2(d) 324.8
Research and development.................................. 396.2 -- 396.2
Marketing, general and administrative..................... 358.9 -- 358.9
Recurring charges related to redemption
Goodwill amortization.................................. -- 154.6(f) 154.6
Amortization of other intangibles...................... -- 219.3(g) 219.3
Deferred compensation amortization..................... -- 13.7(h) 13.7
Interest.................................................. 4.6 -- 4.6
-------- ------- --------
Total costs and expenses.......................... 898.3 573.8 1,472.1
-------- ------- --------
Income (loss) before taxes.................................. 252.6 (591.0) (338.4)
Income tax provision (benefit).............................. 70.7 (186.0) (i) (115.3)
-------- ------- --------
Net income (loss)........................................... $ 181.9 $(405.0) $ (223.1)
======== ======= ========
Earnings (loss) per share
Basic..................................................... $ 1.45 $ (1.77)
Diluted................................................... 1.40 (1.77)
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
20
<PAGE> 24
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 were
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,
were recorded at their fair values not to exceed the aggregate purchase price,
including Roche's transaction costs, at June 30, 1999. 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 our consolidated balance sheet was allocated based on
Roche's ownership percentages as if the purchases occurred at the original
purchase dates for the 1990 and 1991 through 1997 purchases, and at June 30,
1999 for the Redemption. Management of Genentech determined the values of
tangible and intangible assets, including in-process research and development,
used in allocating the purchase prices. The aggregate purchase prices for the
acquisition of all of Genentech's outstanding shares, including Roche's
estimated transaction costs of $10.0 million, was $6,604.9 million, consisting
of approximately $2,843.5 million for the 1990 and 1991 through 1997 purchases
and approximately $3,761.4 million for the Redemption. Approximately $284.5
million of compensation expense related to Genentech's early cash settlement of
employee stock options was paid by Genentech and charged to earnings on June 30,
1999, the Redemption date. In addition, we recorded in the second and third
quarters of 1999 an aggregate of approximately $102.3 million and $57.8 million,
respectively, of non-cash compensation expense in connection with the
modification and remeasurement, for accounting purposes, of a number of stock
options.
The unaudited pro forma condensed consolidated statements of operations exclude
the effect of the non-recurring charges for in-process research and development,
the employee-related compensation amounts described above, and our transaction
costs. The as reported balance sheet as of June 30, 1999 and the as reported
statements of operations for the year ended December 31, 1998 and for the six
months ended June 30, 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>
21
<PAGE> 25
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 $ 186.2 $ 288.2
Land........................................................ -- 16.6 16.6
In-process research and development......................... 500.5 752.5 1,253.0
Developed product technology................................ 429.0 765.0 1,194.0
Core technology............................................. 240.5 203.0 443.5
Developed license technology................................ 292.5 175.0 467.5
Trained and assembled workforce............................. 32.5 49.0 81.5
Tradenames.................................................. 39.0 105.0 144.0
Key distributor relationships............................... 6.5 73.5 80.0
Goodwill.................................................... 1,091.2 1,225.2 2,319.6
Deferred tax liability...................................... (456.8) (629.2) (1,086.0)
-------- -------- ---------
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 and
related lives of the tangible and intangible assets acquired. Following is a
description of the pro forma adjustments:
(a) Represents the remeasurement, for accounting purposes, of certain
converted stock options for the difference between the $82.50 redemption
price per share of the Special Common Stock and the $97 July 1999 public
offering price per share. The related non-recurring compensation expense,
net of related taxes, is reflected as a charge to the accumulated deficit.
(b) Reflects non-recurring gains related to the write-up of marketable
securities as a result of the Redemption.
(c) 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 paid for the early cash settlement of
employee stock options and (2) approximately $3.0 million in Genentech
transaction costs related to the July offering.
(d) Represents the amortization, which occurs over a one-year period, of the
fair value adjustment to inventory for the Redemption.
(e) Represents the non-recurring charges related to the Redemption consisting
of (i) $752.5 million in-process research and development, (ii) $386.8
million of charges associated with the cash out and remeasurement, through
June 30, 1999, of employee stock options, and our transaction and other
costs.
(f) Represents the amortization of goodwill from Roche's 1990 through 1997
purchases and the Redemption, recognized over a period of 15 years from
the related purchase date.
(g) Represents the amortization of other intangible assets from Roche's 1990
through 1997 purchases and the Redemption, recognized over periods ranging
from 5 to 15 years from the related purchase date.
(h) Represents compensation expense associated with deferred cash-based
compensation arrangements, related to the exchange of stock options at the
Redemption date, recognized over an approximate two year period.
(i) Represents the income tax effect of the pro forma adjustments. The benefit
attributable to the tax sharing agreement only applies as long as Roche
maintains at least an 80% ownership interest.
22
<PAGE> 26
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 statement of operations data for the six
months ended June 30, 1999 and 1998 and the balance sheet data as of June 30,
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 six months ended
June 30, 1999 are not necessarily indicative of results that may be expected for
the entire year.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 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 and
percentages
STATEMENT OF OPERATIONS DATA
Total revenues................................. $ 717.6 $ 532.7 $1,150.9 $1,016.7 $ 968.7 $ 917.8 $ 795.4
Product sales................................ 503.4 341.0 717.8 584.9 582.8 635.3 601.0
Royalties.................................... 92.6 121.9 229.6 241.1 214.7 190.8 126.0
Contract and other........................... 77.2 28.9 114.8 121.6 107.0 31.2 25.6
Interest..................................... 44.4 40.9 88.7 69.1 64.2 60.5 42.8
Total costs and expenses....................... $1,698.0 $ 419.6 $ 898.3 $ 846.9 $ 820.8 $ 745.6 $ 665.8
Cost of sales................................ 98.4 70.8 138.6 102.5 104.5 97.9 95.8
Research and development..................... 185.0 191.1 396.2 470.9 471.1 363.0 314.3
Marketing, general and administrative........ 214.6 155.5 358.9 269.9 240.1 251.7 248.6
Special charges
Legal settlement and other................. 50.0 -- -- -- -- 25.0 --
Related to redemption...................... 1,147.3 -- -- -- -- -- --
Interest..................................... 2.7 2.2 4.6 3.6 5.1 8.0 7.1
Income (loss) before taxes..................... $ (980.4) $ 113.1 $ 252.6 $ 169.8 $ 147.9 $ 172.2 $ 129.6
Income tax (benefit) provision................. (71.6) 31.7 70.7 40.8 29.6 25.8 5.2
Net income (loss).............................. $ (908.8) $ 81.4 $ 181.9 $ 129.0 $ 118.3 $ 146.4 $ 124.4
Effective tax rate (benefit)................... (7)% 28% 28% 24% 20% 15% 4%
Earnings (loss) per share
Basic........................................ $ (7.09) $ 0.65 $ 1.45 $ 1.05 $ 0.98 $ 1.24 $ 1.07
Diluted...................................... (7.09) 0.63 1.40 1.02 0.95 1.20 1.03
Weighted average shares outstanding
Basic........................................ 128.1 125.2 125.8 123.0 120.6 118.3 116.0
Diluted...................................... 128.1 129.3 129.9 126.4 124.0 121.7 120.2
Actual shares outstanding at period-end........ 128.6 125.8 127.1 124.2 121.4 119.3 117.2
OTHER DATA
Depreciation expense........................... $ 39.6 $ 33.8 $ 72.7 $ 58.9 $ 57.6 $ 53.3 $ 50.9
Amortization expense........................... 4.7 3.4 5.4 6.6 4.5 5.1 2.6
Capital expenditures........................... 41.5 43.3 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 legal settlement charge in 1999 relates to a settlement in April 1999 with
respect to past human growth hormone promotional practices.
The actual shares outstanding at period end for the six months ended June 30,
1999 is as of June 29, 1999, just prior to the redemption of our special common
stock on June 30, 1999.
23
<PAGE> 27
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <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 $1,604.6 $1,286.5 $1,159.1 $1,096.8 $ 920.9
Accounts receivable.......... 191.7 180.1 149.7 189.2 197.6 172.2 146.3
Inventories.................. 324.5 116.8 148.6 116.0 91.9 93.6 103.2
Working capital.............. 823.1 1,004.9 950.6 904.4 705.1 812.0 776.6
Property, plant and
equipment, net............. 718.7 693.4 700.2 683.3 586.2 503.7 485.3
Other assets................. 130.7 174.2 196.3 177.2 149.2 105.5 61.0
Total assets................. 6,369.4 2,606.7 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1
Total current liabilities.... 619.2 267.2 291.3 289.6 250.0 233.4 220.5
Long-term debt............... 150.0 150.0 150.0 150.0 150.0 150.0 150.4
Total liabilities............ 1,240.5 447.7 511.6 476.4 425.3 408.9 396.3
Total stockholders' equity... 5,128.9 2,159.0 2,343.8 2,031.2 1,801.1 1,602.0 1,348.8
Total liabilities and
stockholders' equity....... 6,369.4 2,606.7 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1
</TABLE>
24
<PAGE> 28
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 six 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's percentage
ownership in our outstanding common stock increased from 65% to 100%.
Consequently, push-down accounting was required under U.S. generally accepted
accounting principles to reflect in our financial statements the amounts paid
for our stock in excess of our net book value. Push-down accounting required us
to record goodwill and other intangible assets of approximately $1,706.0 million
and $1,499.0 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 the second half of
1999 and in future years. In addition, we will continuously evaluate whether
events and circumstances have occurred that indicate any portion of the
remaining balance of these intangible assets may not be recoverable. When
factors indicate that assets should be evaluated for possible impairment, we may
be required to reduce the carrying value of our intangible assets, which could
have a material adverse effect on our financial condition and results of
operations during the periods in which such a reduction is recognized. Also as a
result of push-down accounting, we recorded a charge of $1,147.3 million. This
charge includes a non-cash charge of $752.5 million for in-process research and
development, $284.5 million for the cash-out of special common stock options and
$102.3 million as a non-cash charge for the remeasurement of the value of
continuing employee stock options. For more information about push-down
accounting, you should read "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 occurred:
- Options for the purchase of approximately 6.8 million shares of special
common stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $82.50 per share, less the exercise price;
- Options for the purchase of approximately 4.0 million shares of special
common stock were converted into options to purchase a like number of
shares of common stock at the same exercise price; and
- Options for the purchase of approximately 4.9 million shares of special
common stock were canceled, in accordance with the terms of our 1996
Stock Option/Stock Incentive Plan (the "1996 Plan"). With certain
exceptions, we granted new options for the purchase of 1.333 times the
number of shares under the previous options with an exercise price of $97
per share. The number of shares that are the subject of these new
options, which were issued under our 1999 Stock Plan (the "1999 Plan"),
was approximately 5.0 million. Alternative arrangements were provided for
certain holders of some of the unvested options under the 1996 Plan.
Our board of directors and Roche, then our sole stockholder, approved the 1999
Plan on July 16, 1999. Under the 1999 Plan, we granted new options to purchase
approximately 6.5 million shares (including the 5.0 million shares referred to
above) of
25
<PAGE> 29
common stock to approximately 2,400 employees at an exercise price of $97 per
share, with the grant of such options made effective as of July 16, 1999.
In connection with these stock option transactions, we recorded or expect to
record:
- In the quarter ended June 30, 1999, (1) cash compensation expense of
approximately $284.5 million associated with the cash-out of such stock
options and (2) non-cash compensation expense of approximately $102.3
million associated with the remeasurement, for accounting purposes, of
the converted options, which non-cash amount represents the difference
between each applicable option exercise price and the redemption price of
the special common stock;
- In the quarter ended September 30, 1999, non-cash compensation expense of
approximately $57.8 million associated with the remeasurement, for
accounting purposes, of the converted options, which non-cash amount
represents the difference between the redemption price of the special
common stock and the public offering price in the July 1999 public
offering; and
- Over a two-year period, an aggregate of $27.4 million available to be
earned by a limited number of employees who elected the alternative
arrangements described above.
The July 1999 Public Offering
On July 23, 1999, Roche completed a public offering of our common stock. After
the completion of the offering, Roche's percentage ownership of our outstanding
common stock was reduced to approximately 82.7%. We did not receive any of the
net proceeds from the offering.
Licensing Agreement
In July 1999, we amended our 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 and the "Subsequent
Events (Unaudited)" note in the Notes to Consolidated Financial Statements for
additional information.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
The as adjusted information presented below excludes the effect of push-down
accounting and the special charge in April 1999 related to the legal settlement.
Revenues
<TABLE>
<CAPTION>
-------------------------------------------
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1999
-------------------- 1998 AS ADJUSTED
ACTUAL AS ADJUSTED ACTUAL % CHANGE
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
In millions
Revenues.................................................... $717.6 $697.3 $532.7 31%
====== ====== ====== ====
Product Sales
Herceptin................................................... $ 86.1 $ 86.1 -- --
Rituxan..................................................... 131.5 131.5 $ 72.5 81%
Activase.................................................... 110.1 110.1 109.8 --
Protropin, Nutropin and Nutropin AQ......................... 115.5 115.5 113.2 2
Pulmozyme................................................... 58.8 58.8 43.6 35
Actimmune................................................... 1.4 1.4 1.9 (26)
------ ------ ------
Total product sales............................... $503.4 $503.4 $341.0 48%
====== ====== ======
</TABLE>
Herceptin: Net sales of Herceptin, indicated for the treatment of certain
patients with metastatic breast cancer who have tumors that overexpress the
human epidermal growth factor receptor (HER2) protein, were $46.2 million in the
second quarter of 1999. We recorded $39.9 million in net sales of Herceptin in
the first quarter of 1999 and $30.5 million of initial net sales in
26
<PAGE> 30
the fourth quarter of 1998 after Herceptin's introduction in September 1998. An
increase in physician acceptance of Herceptin has contributed to a positive
sales trend and successful penetration into the breast cancer market.
Rituxan: Net sales of Rituxan, indicated for the treatment of patients with
relapsed or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkin's lymphoma, a cancer of the immune system, increased 81% in the
first six months of 1999 from the comparable period in 1998. This increase was
primarily due to increased market penetration for the treatment of B-cell
non-Hodgkin's lymphoma. We co-developed Rituxan with IDEC Pharmaceuticals
Corporation, commonly known as IDEC, from whom we license Rituxan.
Activase: Net sales of Activase tissue plasminogen activator (t-PA) increased 7%
in the second quarter of 1999 from the comparable period in 1998. This increase
was due largely to physician initiated usage in peripheral indications
previously served by another company's thrombolytic currently in short supply in
the marketplace. This increase was offset in part by a continued decline in the
overall size of the thrombolytic therapy market due to mechanical reperfusion
and continued competition from Centocor, Inc.'s Retavase. Sales of Activase in
the first six months of 1999 were comparable to the first six months of last
year.
In connection with the acquisition by Roche of Corange Limited in 1998, Roche
entered into a consent decree with the Federal Trade Commission. Pursuant to the
consent decree, with Roche's acquisition of 100% of our stock or with Roche's
control of us under our former governance agreement, Roche would 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 under the
consent decree, and we are in process of discussing and resolving with Roche and
Centocor how to implement those dismissals.
Protropin, Nutropin and Nutropin AQ: Net sales of our three growth hormone
products -- Protropin, Nutropin and Nutropin AQ -- increased slightly in the
first six months of 1999 from the comparable period in 1998. These sales
variances primarily reflect fluctuations in distributor ordering patterns.
Pulmozyme: Net sales of Pulmozyme increased 35% in the first six months of 1999
from the comparable period in 1998. These increases were primarily due to
increased market penetration in the early and mild patient populations for the
management of cystic fibrosis.
Royalties, Contract and Other, and Interest Income
<TABLE>
<CAPTION>
-------------------------------------------
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1999
-------------------- 1998 AS ADJUSTED
ACTUAL AS ADJUSTED ACTUAL % CHANGE
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
In millions
Royalties................................................... $92.6 $92.6 $121.9 (24)%
Contract and other.......................................... 77.2 56.9 28.9 97
Interest income............................................. 44.4 44.4 40.9 9
</TABLE>
Royalty income decreased by 24% in the first six months of 1999 from the
comparable period in 1998. This decrease primarily relates to the expiration of
royalties from Lilly in August 1998, partly offset by higher royalties from
various licensees.
Contract and other revenues increased in the first six months of 1999 from the
comparable period in 1998. This increase was due in part to non-recurring gains
related to the write-up of marketable securities as a result of push-down
accounting as described above in the "Redemption of Our Special Common Stock."
As adjusted contract and other revenues, which excludes the effect of push-down
accounting, increased 97% in the first six months of 1999. This increase
reflects higher revenues from Hoffmann-La Roche related to a milestone payment
for Herceptin and higher revenues from our strategic alliances. In the second
quarter of 1999, we received from Immunex Corporation an initial license fee and
retroactive royalties pursuant to a licensing agreement with Immunex for
Enbrel(R) and a milestone payment from Schwarz Pharma AG related to an FDA
filing for Nutropin Depot.
27
<PAGE> 31
Interest income increased 9% in the first six months of 1999 from the comparable
period in 1998 primarily due to a higher portfolio balance. The total investment
portfolio, consisting of cash and cash equivalents, and short- and long-term
marketable securities, increased to $1,721.0 million as of June 30, 1999 from
$1,388.3 million as of June 30, 1998 and from $1,604.6 million as of December
31, 1998.
Costs and Expenses
<TABLE>
<CAPTION>
---------------------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1999
---------------------- 1998 AS ADJUSTED
ACTUAL AS ADJUSTED ACTUAL % CHANGE
-------- ----------- ------ -----------
<S> <C> <C> <C> <C>
In millions
Cost of sales............................................... $ 98.4 $ 98.4 $ 70.8 39%
Research and development.................................... 185.0 184.9 191.1 (3)
Marketing, general and administrative....................... 214.6 214.6 155.5 38
Legal settlement............................................ 50.0 -- -- --
Special charge related to redemption........................ 1,147.3 -- -- --
Interest expense............................................ 2.7 2.7 2.2 23
-------- ------ ------
Total costs and expenses.......................... $1,698.0 $500.6 $419.6 19%
======== ====== ======
</TABLE>
Cost of Sales: Cost of sales increased 39% in the first six months of 1999 from
the comparable period in 1998 primarily due to increased product sales.
Research and Development: In the first six months of 1999, research and
development expenses decreased from the comparable period in 1998. For the first
six months of 1999, we invested 27% of as adjusted revenues into research and
development compared to 36% from a year ago. The decrease in the first six
months of 1999 and the lower ratios reflect our long-range plan to reduce
research and development spending as a percent of revenues as products progress
through late-stage clinical trials and revenues increase.
Marketing, General and Administrative: Marketing, general and administrative
expenses increased 38% in the first six months of 1999 from the comparable
period in 1998. This increase was driven mainly by the growth of Rituxan and the
resultant profit sharing expense and the introduction of Herceptin, as well as
the write-down of certain biotechnology investments.
Special Charge Related to Redemption: The second quarter of 1999 included a
$1,147.3 million special charge, related to the redemption and the application
of push-down accounting. This charge includes a non-cash charge of $752.5
million for in-process research and development, $284.5 million for the cash-out
of special common stock options and $102.3 million as a non-cash charge for the
remeasurement of the value of continuing employee stock options. The first six
months of 1999 also included an April 1999 $50.0 million legal settlement
related to a federal investigation of our past clinical, sales and marketing
activities associated with human growth hormone.
At the redemption date, we concluded that technological feasibility of the
acquired in-process technology was not established and that the in-process
technology had no future alternative uses. As a result, $500.5 million of
in-process research and development related to Roche's 1990 through 1997
purchases of our common stock was charged to retained earnings and $752.5
million of in-process research and development related to the redemption was
charged to operations at June 30, 1999.
The amounts assigned to in-process research and development were determined
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
28
<PAGE> 32
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 our weighted average cost of capital.
The forecast data employed in the analyses was based upon internal product level
forecast information maintained by our management in the ordinary course of
managing our business. The inputs used by us in analyzing in-process research
and development were based upon assumptions, which we believe to be reasonable
but which are inherently uncertain and unpredictable. These assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur.
A brief description of in-process research and development projects is set forth
below including an estimated percentage of completion of products within each
project at the redemption date and an estimate made as of August 10, 1999 of
when products within each project will be substantially complete. We do 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 us on an ongoing basis, which is intended to represent the
current likelihood of project success, i.e., FDA approval. This is a
quantitative calculation based upon the stage of development and the
complexity of the project, and it is highly correlated with the project's
phase of development. PTS is periodically adjusted to reflect actual
experiences over a reasonable period of time.
Status compared to Baseline Model: We developed a baseline model which
allocated percentages of a standard development project to each major phase
of the project based upon our experience. We then overlaid the time-based
status of each project to this baseline model, in order to calculate a
percentage complete for each project.
Management's Estimate of Percentage Complete: Our 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, we 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.
TNKase -- 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. On July 30, 1999, we made U.S. regulatory
filings seeking marketing approval for TNKase, and we are currently awaiting
regulatory clearance. This product is being developed in collaboration with
Boehringer Ingelheim. We estimate that this project will be substantially
complete by the year 2000, and that it 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
29
<PAGE> 33
begin clinical testing of Pulmozyme delivery via Aradigm Corporation's AERx
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 (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 was approximately 65% complete at the redemption
date. On August 6, 1999, Hoffmann-La Roche announced that the preliminary
results from its Phase III trial of Xubix had not shown that Xubix was better
than aspirin in preventing recurrent ischemic events in patients suffering from
acute coronary syndrome. Hoffmann-La Roche has terminated its development of
Xubix based on these unsuccessful results.
Activase t-PA -- A protein that is an approved treatment for heart attack, acute
ischemic stroke within three hours of symptom onset, and acute massive pulmonary
embolism. We are preparing for Phase III trials of this product for intravenous
catheter clearance. We estimate that this project will be substantially complete
in 2000 and that it was approximately 90% complete at the redemption date.
Anti-CD11a antibody -- An antibody (also known as hu1124) designed to block
certain immune cells as a potential treatment of psoriasis. We are currently
preparing for Phase III trials of this product, which we are developing in
collaboration with Xoma Corporation. We estimate that this project will be
substantially complete by the year 2003 and that it was approximately 50%
complete at the redemption date.
Herceptin antibody -- An antibody that is an approved treatment for metastatic
breast cancer. In collaboration with Hoffmann-La Roche and U.S. national
cooperative groups, we are preparing for Phase III trials for adjuvant treatment
of early-stage breast cancer in patients who overexpress the HER2 protein. We
estimate that this project will be substantially complete by the year 2007, and
that it was approximately 45% complete at the redemption date.
Thrombopoietin (TPO) -- A protein that is being studied for treatment of
thrombocytopenia, a reduction in clot-inducing platelets, in cancer patients
treated with chemotherapy. This molecule has been exclusively licensed to
Pharmacia & Upjohn. We estimate that this project will be substantially complete
by the year 2002, and that it was approximately 55% complete at the redemption
date.
Anti-CD18 antibody -- An antibody designed to block certain immune cells that
may impact blood flow. We are conducting Phase II clinical trials aimed at
increasing blood flow in patients with acute myocardial infarction. We estimate
that this project will be substantially complete by the year 2004, and that it
was approximately 55% complete at the redemption date.
Anti-VEGF antibody -- An antibody developed to inhibit angiogenesis (the
formation of new blood vessels) as a potential treatment for several types of
solid-tumor cancers. In pre-clinical studies the anti-VEGF antibody resulted in
decreased vascularization and a decline in growth and metastasis of a variety of
solid tumors. Phase II studies are ongoing in prostate cancer, breast cancer,
renal cell carcinoma, lung cancer and colorectal cancer. We estimate these
projects will be substantially complete by the year 2003, and that these
different projects were 35% to 40% complete at the redemption date.
Herceptin antibody -- An antibody that is an approved treatment for metastatic
breast cancer. Herceptin will also be evaluated for broader application in other
tumor types in which the HER2 protein is overexpressed. We are conducting and
are planning to conduct additional Phase II studies alone or in collaboration
with Hoffmann-La Roche, the National Cancer Institute or other clinical research
groups. We estimate that the initial indications on 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.
30
<PAGE> 34
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, streamlined and improved
recovery processes, and improvements in various areas of pharmaceutical
manufacturing. We estimate the process technology program to be approximately
50% complete at the redemption date.
<TABLE>
<CAPTION>
Income Taxes
-------------------------------------------
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1999
-------------------- 1998 AS ADJUSTED
ACTUAL AS ADJUSTED ACTUAL % CHANGE
In millions ------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Income tax (benefit) provision.............................. $(71.6) $64.9 $31.7 105%
</TABLE>
The tax benefit of $71.6 million for the first six months ended June 30, 1999
consists of tax expense of $64.9 million on pretax income excluding special
charges and the legal settlement and tax benefits of $136.5 million related to
the income and deductions attributable to push-down accounting and legal
settlement. For the six months ended June 30, 1999, the effective tax rate was
7% primarily due to the non-deductibility of some non-recurring redemption
related special charges.
The effective tax rate for the six months ended June 30, 1999 was 41% on income
exclusive of non-recurring redemption related charges and the legal settlement,
and is expected to be 41% for the full year 1999.
The as adjusted tax provision of $64.9 million for the first six months ended
June 30, 1999 was based on a tax rate of 33% on as adjusted pretax income, which
excludes the effects of push-down accounting in the second quarter of 1999 and
the legal settlement in the first quarter of 1999. The full year 1999 as
adjusted effective tax rate is expected to remain at 33%.
<TABLE>
<CAPTION>
Net Income (Loss)
--------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1999
--------------------- 1998 AS ADJUSTED
ACTUAL AS ADJUSTED ACTUAL % CHANGE
------- ----------- ------ -----------
<S> <C> <C> <C> <C>
In millions
Net income (loss)........................................... $(908.8) $131.7 $81.4 62%
Earnings (loss) per share:
Basic..................................................... $ (7.09) $ 1.03 $0.65
Diluted................................................... (7.09) 0.99 0.63
</TABLE>
The net loss for the first six months of 1999 reflects the effect of push-down
accounting. In addition, the net loss for the first six months of 1999 also
reflects the legal settlement recorded in the first quarter of 1999.
As adjusted net income, which excludes the effect of push-down accounting and
the legal settlement, for the first six months of 1999 was $131.7 million, a 62%
increase from the comparable period in 1998. This increase represents revenue
growth primarily driven by sales of our oncology products, Rituxan and
Herceptin, and higher revenues from our strategic alliances. These revenue
increases were offset in part by the expiration of royalties from Eli Lilly and
Company, commonly known as Lilly, in August 1998 and higher marketing, general
and administrative expenses. See below for further information on the components
of operations.
31
<PAGE> 35
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.
<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 previously manufactured by IDEC on our behalf.
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
updated 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.
32
<PAGE> 36
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 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
33
<PAGE> 37
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 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.
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<PAGE> 38
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 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 JUNE 30, 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.............................. $1,721.0 $1,388.3 $1,604.6 $1,286.5 $1,159.1
Working capital........................... 823.1 1,004.9 950.6 904.4 705.1
Cash provided by (used in):
Operating activities.................... 123.6 100.0 349.9 118.3 139.7
Investing activities.................... (177.2) (216.0) (421.1) (168.4) (141.7)
Financing activities.................... 64.3 61.5 107.9 87.3 72.2
Capital expenditures (included in
investing activities above)............. 41.5 (43.3) (88.1) (154.9) (141.8)
Current ratio............................. 2.3 : 1 4.8 : 1 4.3 : 1 4.1 : 1 3.8 : 1
</TABLE>
We used cash generated from operations, maturities of investments and stock
issuances to make investments in marketable securities and for capital
additions.
Cash and cash equivalents, short-term investments and long-term marketable
securities at June 30, 1999 increased by $116.4 million compared to December 31,
1998. Working capital decreased by $127.5 million in the first half of 1999 from
December 31, 1998 primarily due to the effects of push-down accounting.
Capital expenditures totaled $41.5 million in the first half of 1999 compared to
$43.3 million in the comparable period of 1998. The slight decrease in 1999
compared to 1998 was primarily due to a decrease in construction activity
related to existing manufacturing facilities partly offset by an increase in
equipment purchases.
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 debt and, under certain circumstances,
capital markets. Factors that could negatively affect our cash position include,
but are not limited to, future levels of our product sales, royalty and contract
revenues, expenses, in-licensing activities, including the timing and amount of
related development funding or milestone payments, acquisitions, capital
expenditures and the amount of any stock repurchased under any stock repurchase
program. The affiliation agreement with Roche requires us to, among other
things, establish a stock repurchase program designed to maintain Roche's
percentage ownership interest in our common stock. While the dollar amounts
associated with these future purchases cannot currently be estimated, such stock
repurchases could have a material adverse impact on our liquidity.
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 will be
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
Since the redemption of our special common stock in June 1999, we have been, and
we expect to continue to be until the completion of this offering, included in
Roche's federal consolidated income tax group and included with Roche and/or one
or more Roche subsidiaries in consolidated or combined income tax groups for
certain state and local tax jurisdictions. Beginning
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<PAGE> 40
on the day after this offering is completed, Genentech will cease to be a member
of the consolidated federal income tax group (and certain consolidated or
combined state or local income tax groups) of which Roche is the common parent.
Genentech and Roche have entered into a tax sharing agreement. Pursuant to this
agreement, Genentech and Roche are to make payments such that, with respect to
the period during which Genentech was a member of a Roche consolidated or
combined group, 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 had 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. More than
three-quarters of our Year 2000 scheduled work is complete. The remaining work
is scheduled to be completed before December 31, 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 completed. Compliance
analysis is approximately 95% complete for these systems. Remediation activities
vary by department, however, on the average, remediation activities are
approximately 95% complete. Testing of our information technology infrastructure
is approximately 100% complete. Testing of business critical application
programs is approximately 85% complete and is scheduled to be completed by the
end of November 1999. Contingency planning for business critical processes,
which will include provisions such as identifying alternate sources for
materials and services and if necessary reverting to non-computerized systems
for processing information, was initiated in March 1999, is approximately 80%
complete and is scheduled for completion by the end of November 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 June 30, 1999 and December 31,
1998, including derivative and other interest rate sensitive instruments, a
near-term change in interest rates, within a 95% confidence level based on
historical interest rate movements, would not materially affect the fair value
of interest rate sensitive instruments.
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 June 30, 1999 and December 31,
1998, including derivative and other foreign currency sensitive instruments, a
near-term change in currency rates within a 95% confidence level based on
historical currency rate movements, would not materially affect the fair value
of foreign currency sensitive instruments.
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 June 30, 1999 and December 31, 1998, a near-term
change in equity prices within a 95% confidence level based on historic
volatilities could result in a potential loss in fair value of the equity
securities portfolio of $10.6 million.
NEW ACCOUNTING STANDARD
In July 1999, the Financial Accounting Standards Board announced the delay of
the effective date of Statement of Financial Accounting Standards ("FAS") 133,
"Accounting for Derivative Instruments and Hedging Activities," for one year, to
the first quarter of 2001 (its effective date had been set as 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.
At the end of March 1999, the Financial Accounting Standards Board issued a
proposed interpretation of Accounting Principles Board Opinion number 25.
"Accounting for Certain Transactions involving Stock Compensation" (proposal).
This proposal would be effective upon issuance of the final interpretation,
which is expected before the end of 1999, but generally would cover events that
occur after December 15, 1998. To the extent that events covered by this
proposal occur during the period after December 15, 1998, but before issuance of
the final interpretation, the effects of applying this proposal would be
recognized on a prospective basis from the effective date. The potential impact
of this proposal may be significant in relation to non-employee director stock
options and stock option repricings. We are currently evaluating the impact of
this proposal on our financial position and results of operations.
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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. Thirteen 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 six 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.
In September of 1999, Roche announced it had obtained authorization to sell
Herceptin in Switzerland as a treatment for breast cancer. This is the product's
first European approval and comes shortly after authorization of the product in
Canada for treatment of metastatic or advanced breast cancer, alone, and in
combination with Taxol (paxlitaxel), a product made by Bristol
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<PAGE> 44
Myers Squibb. Recent clinical data indicates that Herceptin combined with
chemotherapy, including Taxol, improves survival by twenty-five percent over
chemotherapy alone in women with metastatic breast cancers which overexpress the
HER2 protein. The results of the first of two pivotal clinical trials with
Herceptin were recently published in the Journal of Clinical Oncology.
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
low-grade or follicular 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. IDEC expects to transfer
all bulk manufacturing responsibilities to us by the end of the third quarter
1999. 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 the administration of Rituxan. As a result, Genentech and IDEC,
in consultation with the FDA, have updated 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 Ingelheim. We have also licensed certain
rights to Boehringer Ingelheim regarding future sales of a second generation
t-PA, TNKase. On July 30, 1999, we made U.S. regulatory filings seeking
marketing approval for TNKase, and we are currently awaiting regulatory
clearance. Boehringer Ingelheim, which markets a recombinant t-PA under the
trademark Actilyse(R), filed a marketing application for TNKase with European
regulatory authorities in September 1999.
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 initiating 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
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<PAGE> 45
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 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 payments from Boehringer Ingelheim from the sale of interferon
gamma in certain countries outside of the United States, Canada and Japan and
The People's Republic of China.
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LICENSED PRODUCTS
In addition to the royalties mentioned above, Genentech also receives royalties
on the following products:
<TABLE>
<CAPTION>
PRODUCT TRADEMARK COMPANY
------- --------- -------
<S> <C> <C>
Human growth hormone Humatrope Eli Lilly and Company
Recombinant interferon alpha Roferon-A Hoffmann-La Roche
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B SmithKline Beecham Biologicals S.A.
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Company
</TABLE>
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.
Nutropin Depot 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. These filings were accepted by
the FDA, and we are currently awaiting regulatory clearance.
The FDA has indicated that this product will be given
"priority" review status. In addition to reviewing the
clinical submissions of Genentech, the FDA must also review
submissions from Alkermes and inspect and certify their
facilities.
TNKase t-PA 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. On July 30, 1999, we made U.S. regulatory filings
seeking marketing approval for TNKase. These filings were
accepted by the FDA, and we are currently awaiting
regulatory clearance. This product is being developed in
collaboration with Boehringer Ingelheim, which filed a
marketing application with European regulatory authorities
in September 1999.
Phase III
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-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 clinical trials in
allergies are complete and the clinical data relating to
efficacy is being evaluated. By the end of the year we
expect that a full set of safety and efficacy data relating
to allergic asthma will be available for review.
</TABLE>
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<PAGE> 47
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
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. The
FDA has indicated its acceptance of our proposed plan for
Phase III trials.
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.
Preparing for Phase III trials
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.
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.
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. On October 6,
1999, we filed an IND for AMD Fab, and 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>
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<PAGE> 48
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Preparing for Phase I trials
Anti-CD11a (hu1124) antibody Antibody designed to block certain immune cell function as
an adjunct to organ transplant to prevent rejection. This
indication is being developed in collaboration with XOMA. We
are preparing for Phase I clinical trials for this product.
TRAIL/APO2 Ligand A protein, also known as tumor necrosis factor-related
apoptosis-inducing ligand, for the potential treatment of
cancer. We are currently preparing for Phase I clinical
trials for this product, which we are developing in
collaboration with Immunex Corporation.
</TABLE>
In addition to the products described above, we are working on additional
products and new indications for currently marketed products. Also, we retain
certain rights to gp120, a recombinant form of the gp120 envelope glycoprotein
of human immunodeficiency virus, which may serve as the basis for the
development of a prophylactic HIV/AIDS vaccine. Under a license agreement
entered into with VaxGen Inc., we are responsible for supplying specified
amounts of clinical quantities of gp120 and we have an option to supply
additional clinical supplies. VaxGen is responsible for conducting all clinical
trials necessary for worldwide product approvals. Currently, VaxGen is
conducting Phase III trials with gp120. Genentech has separate options for
worldwide marketing rights and commercial supply of gp120 in the event that
gp120 is approved as an AIDS vaccine.
In general, with respect to our products, Hoffmann-La Roche pays us a royalty on
aggregate sales outside of the United States. In addition, Hoffmann-La Roche has
rights to, and pays us royalties on, Canadian sales of Activase, Protropin,
Nutropin, Pulmozyme and Actimmune, sales of Pulmozyme outside of the United
States and sales of Rituxan outside of the United States, excluding Japan.
Genentech supplies its products to Hoffmann-La Roche, and has agreed to supply
its products for which Hoffmann-La Roche has exercised its option, for sales
outside of the United States.
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, CuraGen has provided us with
notice of its intent to borrow $16 million under the loan.
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 license agreement with Immunex whereby we granted
to Immunex a worldwide, co-exclusive license under our immunoadhesin patents to
make, use and sell Enbrel, Immunex's 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.
On August 6, 1999, Hoffmann-La Roche announced that the preliminary results from
its Phase III trial of Xubix had not shown that Xubix was better than aspirin in
preventing recurrent ischemic events in patients suffering from acute coronary
syndrome. Hoffmann-La Roche has terminated its development of Xubix based on
these unsuccessful results.
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DISTRIBUTION
We have a U.S.-based pharmaceutical marketing, sales and distribution
organization. Our sales efforts are focused on specialist physicians based at
major medical centers in the United States. In general, our products are sold to
distributors or directly to hospital pharmacies or medical centers. We utilize
common pharmaceutical company marketing techniques, including advertisements,
professional symposia, direct mail, public relations and other methods.
Our products are available at no charge to qualified patients under our
uninsured patient programs in the United States. We have established the
Genentech Endowment for Cystic Fibrosis so qualified cystic fibrosis patients in
the United States who need Pulmozyme can gain assistance in obtaining it.
During 1998, we provided certain marketing programs relating to Activase,
including comprehensive wastage replacement and expired product programs for
Activase that, subject to specific conditions, provides customers the right to
return Activase to us for replacement related to both patient-related product
wastage and product expiration. We maintain the right to renew, modify or
discontinue the above programs.
Hoffmann-La Roche contributed approximately 11% of our total revenues in 1998,
11% in 1997 and 14% in 1996. Three other major customers, Caremark, Inc., Bergen
Brunswig, and Cardinal Distribution, Inc., each contributed 10% or more of our
total revenues in at least one of the last three years. Caremark, Inc., a
national distributor, which accounted for 10%, 14% and 15% of total revenues in
1998, 1997 and 1996, respectively, distributes our growth hormone products,
Pulmozyme and Actimmune, through its extensive branch network and is then
reimbursed through a variety of sources. Bergen Brunswig, a national wholesale
distributor of all of our products, contributed 11% of our total revenues in
1998 and 10% in 1997 and 1996. Cardinal Distribution, Inc., a national
wholesaler distributor of all our products, contributed 11% of our total
revenues in 1998.
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 July 1999, we amended this licensing
agreement with Hoffmann-La Roche by extending until at least 2015 Hoffmann-La
Roche's option to license to use and sell products in non-U.S. markets. Other
key changes to the license agreement are summarized as follows:
- Hoffmann-La Roche may choose to exercise its option at the end of a Phase
III trial, if it pays a $10 million fee to us to extend its option on the
product;
- if Hoffmann-La Roche exercises its option after the completion of a Phase
III trial, Hoffmann-La Roche will reimburse us for 75% of our development
costs incurred after the completion of the Phase II trial through the
completion of the Phase III trial, and 50% of our development costs
incurred before completion of the Phase II trial. Subsequent development
costs for other indications will be shared 75%/25% by Hoffmann-La Roche
and Genentech;
- on each Genentech Product for which Hoffmann-La Roche exercises its
option after completion of the Phase III trials, we will receive a
royalty of 15% on all sales until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction; however, $5 million of any option extension fee paid by
Hoffmann-La Roche shall be credited against royalties payable to us in
the first calendar year of sales by Hoffmann-La Roche in which aggregate
sales of that product exceeds $100 million;
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<PAGE> 50
- Hoffmann-La Roche will have the right to manufacture our products itself
if it can demonstrate that it is able to manufacture products at a lower
price than our supply price, if we are not able to supply Hoffmann-La
Roche's commercial requirements or if we intend to have a third party
manufacture the product;
- Hoffmann-La Roche will have the right to terminate a license for a
product upon 30 days notice;
- if Hoffmann-La Roche terminates its license based on a good faith
determination, after consultation with appropriate regulatory authorities
in the relevant country, that the product cannot be approved for sale in
one or more major European countries because of safety issues,
Hoffmann-La Roche will be liable for all obligations incurred primarily
to support registration outside the United States of that product for up
to six months after the termination is given; and
- if Hoffmann-La Roche terminates its license for other than safety
reasons, Hoffmann-La Roche shall be liable for all of its obligations
regarding the product for up to twelve months after the notice of
termination.
General: Pursuant to our amended and restated licensing agreement with
Hoffmann-La Roche, we have agreed to grant to Hoffmann-La Roche an exclusive
patent, know-how and trademark license to use, sell and, under certain
conditions, make in Canada (collectively, the "Canada Products"):
- Activase tissue plasminogen activator;
- Protropin and Nutropin human growth hormone;
- Actimmune interferon gamma-1b; and
- Pulmozyme inhalation solution.
We have also agreed to grant to Hoffmann-La Roche an exclusive patent, know-how
and trademark license to use, sell and, under certain conditions, make Pulmozyme
outside the United States (the "Roche Territory").
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
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<PAGE> 51
provisions of our affiliation agreement with Roche, to license that product to a
third party. See "Relationship with Roche -- Arrangements between Genentech and
Roche -- Licensing and Marketing Arrangements" below.
The options granted in the licensing agreement terminate on October 25, 2015,
except for the following:
- if Hoffmann-La Roche has paid to extend its option on a product,
Hoffmann-La Roche will retain an option on that product upon completion
of Phase III trials;
- for a product for which we have decided to file an IND with the FDA but
which has not yet reached completion of Phase II trials, Hoffmann-La
Roche may exercise its option upon completion of Phase II trials; and
- for a product for which a 60-day option exercise period had begun,
Hoffmann-La Roche may exercise its option up until the end of that 60-day
period.
We have the sole right outside the Roche Territory, and Hoffmann-La Roche has
the sole right in the Roche Territory, to register, use, sell and market such
products arising from our current collaborations with Hoffmann-La Roche on
IIb/IIIa antagonists, other than Xubix, and ras farnesyltransferase inhibitors.
All research efforts on these products will continue to be shared in an equal
manner; no royalties on sales shall be due from either party to the other. The
costs for development of certain products will be shared as described below
under "--Development and Marketing."
The licensing agreement grants us an option to participate and share in the
development and commercialization of Xubix within 30 days after approval of an
NDA by the FDA. If exercised, we would reimburse Hoffmann-La Roche for 50% of
its development costs (including Phase III development costs) incurred by
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 has
terminated its development of Xubix based on unsuccessful results of a Phase III
trial.
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
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- by quarterly payments equal to 150% of prospective development costs for
that product until the appropriate percentage of all previously incurred
development costs for that product have been reimbursed.
If the option was exercised prior to completion of the product's Phase II
trials, 50% of the global development costs incurred after Hoffmann-La Roche's
exercise of its option shall be reimbursed by Hoffmann-La Roche on an ongoing
basis. If the option was exercised after completion of the product's Phase II
trials, 75% of the global development costs incurred after Hoffmann-La Roche's
exercise of its option shall be reimbursed by Hoffmann-La Roche on an ongoing
basis.
Once Hoffmann-La Roche has exercised an option to license a product, we will
share the subsequent global development costs of that product equally, except as
follows:
- Hoffmann-La Roche will bear 10% of the global development costs incurred
in connection with Canada Products on or after the date on which
Hoffmann-La Roche exercises its option for a license on the product;
- Hoffmann-La Roche will bear 60% of the global development costs incurred
in connection with IGF-1 products for any diabetes indication on or after
the date on which Hoffmann-La Roche exercises its option for a license on
the product;
- Hoffmann-La Roche will bear 60% of the global development costs incurred
in connection with any NGF products on or after the date on which
Hoffmann-La Roche exercises its option for a license on the product;
- for any additional indications, new formulations or new dosing schedules
of a product, we and Hoffmann-La Roche will share equally the subsequent
global development costs, unless Hoffmann-La Roche exercised its option
after completion of the Phase III trials, in which case Hoffmann-La Roche
will bear 75% and we will bear 25% of the subsequent global development
costs; and
- if Hoffmann-La Roche exercises its option after completion of the Phase
III trials, each company will bear its own subsequent global development
costs for clinical development and registration for the indication that
is the subject of these Phase III trials.
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
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Territory, a royalty of 12.5% on the first $100 million in aggregate
sales and thereafter a royalty of 15% on aggregate sales in excess of
$100 million until the later in each country of the expiration of our
last relevant patent or 25 years from first commercial introduction;
- On Canada Products, a royalty of 20% on sales of each such product until
the later of the expiration of our relevant patent in Canada or 25 years
from October 25, 1995 (with respect to Activase, Hoffmann-La Roche will
pay an additional 10% royalty on sales in each year that exceed 110% of
1994 Activase sales up to a total payment of $27 million);
- On each Genentech Product for which Hoffmann-La Roche exercises its
option upon either a decision to file an IND with the FDA or completion
of the Phase II trials, a royalty of 12.5% on the first $100 million in
aggregate sales and thereafter a royalty of 15% on aggregate sales in
excess of $100 million until the later in each country of the expiration
of our last relevant patent or 25 years from first commercial
introduction;
- On each Genentech Product for which Hoffmann-La Roche exercises its
option after completion of the Phase III trials, a royalty of 15% on all
sales until the later in each country of the expiration of our relevant
patent or 25 years from the first commercial introduction; however, $5
million of any option extension fee paid by Hoffmann-La Roche shall be
credited against royalties payable to us in the first calendar year of
sales by Hoffmann-La Roche in which aggregate sales of that product
exceeds $100 million;
- On IDEC Product, a royalty of 20% on sales for so long as we are paying
royalties to IDEC on sales of IDEC Product and thereafter a royalty of
10% for aggregate annual sales of $75 million or less and 8% for
aggregate annual sales in excess of $75 million until the later in each
country of the expiration of our last relevant patent or 25 years from
first commercial introduction;
- On In-Licensed Products, a mutually agreeable royalty to be negotiated
for each such product; and
- 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
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development would not provide data sufficient to support registration,
Hoffmann-La Roche shall be liable for all of its obligations regarding
the product for up to six months after the termination notice is given;
and
- if Hoffmann-La Roche terminates its license, all rights to the product
revert to us.
If Hoffmann-La Roche fails to use its best efforts to commercialize a product in
a country and fails to take adequate remedial measures within six months of
notice, we may
- terminate the agreement with respect to that product in that country if a
registration has not been initiated; or
- convert the exclusive license for that product in that country to a
nonexclusive one if registration has been initiated.
We may terminate our development or commercialization at any time for any
product which has been licensed to Hoffmann-La Roche, and such product will then
be subject to the provisions of our affiliation agreement with Roche described
under "Relationship with Roche--Arrangements between Genentech and
Roche--Licensing and Marketing Arrangements," provided that if such termination
is for reasons other than safety concerns, we will have an obligation for up to
two years to provide Hoffmann-La Roche's clinical and commercial supply
requirements. Either party may terminate the licensing agreement for the breach
of a material obligation of the other. We may terminate Hoffmann-La Roche's
option for a license for products if the equity ownership of Hoffmann-La Roche
and its affiliates in our company is less than 50% at any time. If we terminate
the license agreement for any product for any reason, Hoffmann-La Roche will
have a royalty-free right and license to produce and supply all of its clinical
and commercial supply requirements and we will be obligated to transfer to
Hoffmann-La Roche all manufacturing technology with respect to that product. If
Hoffmann-La Roche terminates its development or commercialization of a Small
Molecule Product at any time, we will have a royalty-free right and license to
produce and supply all of our clinical and commercial supply requirements and
Hoffmann-La Roche will be obligated to transfer to us all manufacturing
technology with respect to that product.
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, Rituxan and TNKase, 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 and TNKase,
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.
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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 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, in July
1999, we made U.S. regulatory filings seeking marketing approval for our second
generation t-PA, TNKase, to be used in treating heart attack patients, and we
are currently waiting for regulatory clearance.
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, with Roche's acquisition of 100% of our stock or with Roche's
control of us under our former governance agreement, Roche would 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
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dismissing such litigations 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
& 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
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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.
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
six months ended June 30, 1999, our research and development expenses were
$185.0 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 September 30, 1999, we had 3,699 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.
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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 operational and we expect to file for licensure by
December 31, 1999. We also have leases for certain additional office facilities
in several locations in the United States.
We believe our facilities are in good operating condition and that the real
property owned or leased, combined with the new Vacaville site, currently
conducted start-up and validation checks, are adequate for all present and near
term uses although additional manufacturing capacity may be added on the
Vacaville site dependent on the success of products in clinical trials. We
believe any additional facilities could be obtained or constructed with our
capital resources.
LEGAL PROCEEDINGS
We are a party to various legal proceedings, including patent infringement cases
involving human growth hormone products, anitbody products 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.
On May 28, 1999, Glaxo Wellcome Inc. filed a patent infringement lawsuit against
us in the U.S. District Court in Delaware. That suit asserts that we infringe
four U.S. patents owned by Glaxo Wellcome. Two of the patents relate to the use
of specific kinds of monoclonal antibodies for the treatment of human disease,
including cancer. The other two patents asserted against us relate to
preparations of specific kinds of monoclonal antibodies which are made more
stable and the methods by which such preparations are made. We have been served
with the complaint. The complaint fails to specify which of our products or
methods of manufacture are allegedly infringing the four patents at issue.
However, we believe that the suit relates to the manufacture, use and sale of
our Herceptin and Rituxan antibody products. On July 19, 1999, we filed our
answer to Glaxo Wellcome's complaint, and in our answer we also stated
counterclaims against Glaxo Wellcome. The judge has scheduled the trial of this
suit to begin January 29, 2001.
We and the City of Hope Medical Center are parties to a 1976 agreement relating
to work conducted by two City of Hope employees, Arthur Riggs and Keiichi
Itakura, and patents resulting therefrom ("Riggs/Itakura Patents"). Since that
time, Genentech has entered into license agreements with various companies to
make, use and sell the products covered by the Riggs/Itakura Patents. On August
13, 1999 the City of Hope filed a complaint against us in the Superior Court in
Los Angeles County, California alleging that we owe royalties to the City of
Hope in connection with these license agreements, as well as
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product license agreements that involve the grant of licenses under the
Riggs/Itakura Patents. The complaint states claims for declaratory relief,
breach of contract, breach of implied covenant of good faith and fair dealing,
and breach of fiduciary duty. We have not yet filed our answer to the complaint.
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
Our board consists of two Roche directors, Franz B. Humer and Jonathan K.C.
Knowles, three independent directors, Herbert W. Boyer, Charles A. Sanders and
Mark Richmond, and one Genentech employee, Arthur D. Levinson, who is also 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 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(1)...................... 54 Chief Operating Officer
Louis J. Lavigne, Jr. ................... 51 Executive Vice President and Chief Financial Officer
Susan D. Desmond-Hellmann, M.D., Executive Vice President--Development and Product
M.P.H. ................................ 41 Operations
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
James P. Panek........................... 46 Senior Vice President--Product Operations
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
Laura Leber.............................. 37 Vice President--Corporate Communications
Walter K. Moore.......................... 47 Vice President--Government Affairs
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.(2) ................. 49 Vice President--Clinical Research and Genentech Fellow
Daniel S. Sulzbach....................... 50 Vice President--Information Resources
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 of Genentech
Sir Mark Richmond, Ph.D.................. 68 Director of Genentech
Charles A. Sanders, M.D.................. 67 Director of Genentech
</TABLE>
- ---------------
(1) Mr. Young has resigned from Genentech effective November 1, 1999.
(2) Dr. Stump has resigned from Genentech effective November 1, 1999.
All officers are elected annually by the Board of Directors.
Dr. Levinson, Mr. Lavigne, Dr. Desmond-Hellmann, Dr. Henner, Ms. Heyboer, Mr.
Juelsgaard and Mr. Panek are members of our management executive committee.
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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. Mr. Young has resigned from Genentech effective November 1, 1999. Prior to
becoming Chief Operating Officer, Mr. Young had served as Executive Vice
President of Genentech from January 1996 to April 1997, as Senior Vice President
from September 1988 to January 1996 and as Vice President, Manufacturing and
Process Sciences from April 1983 to September 1988. Mr. Young joined Genentech
in September 1980 as Director, Manufacturing from Eli Lilly and Company.
LOUIS J. LAVIGNE, JR. was appointed Executive Vice President of Genentech in
March 1997 and Chief Financial Officer in August 1988. He previously served as
Senior Vice President from July 1994 to March 1997 and as Vice President from
July 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 Executive Vice President,
Development and Product Operations in September 1999. She had served as Senior
Vice President, Development from December 1997 until September 1999 and as Chief
Medical Officer from December 1996 until September 1999. 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.
JAMES P. PANEK was appointed Senior Vice President, Product Operations in August
1999. He previously held the positions of Vice President, Manufacturing,
Engineering and Facilities from July 1997 to August 1999, Vice President,
Engineering and Facilities from July 1993 to July 1997 and Senior Director,
Engineering and Facilities from July 1991 to July 1993.
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
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<PAGE> 62
and Quality Control at Codon from May 1986 to March 1988 and Group Validation
Manager at Miles Laboratories, Inc. from September 1979 to March 1986.
STEPHEN G. DILLY, M.D., PH.D. joined Genentech as Vice President, Medical
Affairs in December 1998. Prior to joining Genentech he held various positions
with SmithKline Beecham Pharmaceuticals from August 1988, including Director and
Vice President Neurosciences Therapeutic Unit from December 1996 to December
1998, Director and Vice President CardioPulmonary Therapeutic Team from December
1994 to December 1996 and Group Director Neurosciences Therapeutic Unit from
April 1993 to December 1994.
DAVID EBERSMAN was appointed Vice President, Product Development in February
1999. He joined Genentech in February 1994 as a Business Development Analyst and
subsequently held the positions of Manager, Business Development from February
1995 to February 1996, Director, Business Development from February 1996 to
March 1998 and Senior Director, Product Development from March 1998 to February
1999. Prior to joining Genentech, he held the position of Research Analyst at
Oppenheimer & Company, Inc. beginning in 1991.
ROBERT L. GARNICK, PH.D. was appointed Vice President, Regulatory Affairs in
February 1998. He had previously served as Vice President, Quality since April
1994 and was Senior Director, Quality Control from 1990 to 1994 and Director,
Quality Control from 1988 to 1990. Dr. Garnick joined Genentech in August 1984
from Armour Pharmaceutical, where he worked from 1980. Prior to that, he was
Manager of Analytical Development at Merrell National Labs from 1977 to 1980.
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.
LAURA LEBER was appointed Vice President, Corporate Communications in August
1999. She joined Genentech in 1992 as Director of Corporate Communications, and
served as Senior Director of Corporate Communications from January 1996 to
August 1999. Prior to joining Genentech, Ms. Leber was an Associate Director of
Corporate Communications at G.D. Searle and Co., a division of Monsanto Company.
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.
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
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<PAGE> 63
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. Dr. Stump has resigned from Genentech effective November
1, 1999. 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.
DANIEL S. SULZBACH was appointed Vice President, Information Resources in
September 1999. He joined Genentech in March 1994 as director of Scientific
Computing and subsequently held the position of Head and Senior Director of
Information Resources from March 1998 to September 1999. Prior to joining
Genentech, Mr. Sulzbach was executive director of the San Diego Supercomputer
Center from August 1985 to March 1994.
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 from 1976 until June 1999, when he resigned from the board in
connection with the redemption of our callable putable common stock. He was
reelected to the board in September 1999. Dr. Boyer 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.
SIR MARK RICHMOND, PH.D., was elected a director of Genentech in August 1999. He
has been a senior research fellow at the School of Public Policy, University
College London since February 1996. Previously, he held positions as science
advisor at Glaxo Wellcome plc from 1995 to February 1996, as Group Head of
Research at Glaxo plc from 1993 to 1995, as chairman of the Science and
Engineering Council, London, from 1990 to 1993, as vice chancellor at the
University of Manchester from 1981 to 1990, professor and head of the Department
of Bacteriology at the University of Bristol from 1968 to 1981. Sir Mark is
currently a member of the Scientific Advisory Committee of the Institute for
Biotechnology, ETH, Zurich and a member of the Scientific Advisory Board of the
SPP-Biotechnology, Swiss National Foundation.
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<PAGE> 64
CHARLES A. SANDERS, M.D. was elected a director of Genentech in August 1999. He
served as Chief Executive Officer of Glaxo Inc. from 1989 to 1994, and was the
Chairman of the Board of Glaxo Inc. from 1992 to 1995. He also has served on the
Board of Directors of Glaxo plc. Previously, he held a number of positions at
Squibb Corporation, a multinational pharmaceutical corporation, including Vice
Chairman, Chief Executive Officer of the Science and Technology Group and
Chairman of the Science and Technology Committee of the Board. Dr. Sanders is a
member of the Boards of Directors of Scios Inc., Magainin Pharmaceuticals,
Vertex Pharmaceuticals, StaffMark, Inc., Kendle International Inc., Trimeris,
Inc., Biopure Corporation and Pharmacopeia, 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. The Board
cancelled the program in September 1999, except with respect to former director
Bob Swanson, who is 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.
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<PAGE> 65
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.
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(5)................... 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
Executive Vice
President--Development 1997 $275,000 $150,000 -- 50,000 $15,800
and Product Operations 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.
(5) Mr. Young has resigned from Genentech effective November 1, 1999.
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Treatment of Options in Connection with the Redemption of the Special Common
Stock and the Issuance of Options
Prior to the redemption, options to purchase special common stock were
outstanding under several of our stock option plans. In connection with the
redemption, certain of these options were canceled in exchange for cash payments
or the issuance of replacement options to purchase common stock and certain of
the options were converted or "rolled over" into options to purchase common
stock. Two of the existing option plans were terminated and a new option plan
was implemented.
Specifically, the following changes with respect to stock options outstanding
were effected:
- Options for the purchase of approximately 6.8 million shares of special
common stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $82.50 per share, less the exercise price;
- Options for the purchase of approximately 4.0 million shares of special
common stock were converted into options to purchase a like number of
shares of common stock at 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 were canceled, in accordance with their terms. With certain
exceptions, we granted new options for the purchase of 1.333 times the
number of shares under the previous options with an exercise price of $97
per share. The number of shares that are the subject of these new
options, which were issued under our 1999 Plan, was 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.
Our board of directors and Roche, then our sole stockholder, approved the 1999
Plan on July 16, 1999. Under the 1999 Plan, we granted 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 of $97 per share,
with the grant of such options made effective as of July 16, 1999.
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Treatment of Options of and Issuance of Options to the Named Executive Officers
The following tables set forth, with respect to each of the Named Executive
Officers, (i) the amount of cash received for options canceled in connection
with the redemption of our special common stock, (ii) certain information with
respect to the number and value of options converted, in connection with the
redemption of our special common stock, into options to purchase a like number
of shares of common stock and (iii) certain information with respect to options
we granted prior to the effective time of our July 1999 public offering.
TREATMENT OF OPTIONS IN CONNECTION WITH THE REDEMPTION
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL
CONVERTED CONVERTED NUMBER/
OPTIONS OPTIONS EXERCISE
CASH-OUT EXERCISABLE/ HELD BY PRICE EXPIRATION PRESENT
NAME OF OPTIONS NONEXERCISABLE(1) EMPLOYEES(2) ($/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(6)................. $ 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> 68
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.
(6) Mr. Young has resigned from Genentech effective November 1, 1999.
OPTION GRANTS IMMEDIATELY PRIOR TO OUR JULY 1999 PUBLIC 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) DATE(3) VALUE(4)
---- ---------- ------------- ------------ ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D. ........... 483,213 7.4% 97.00 July 16, 2009 $24.4
William D. Young(5).................. 283,263 4.4% 97.00 July 16, 2009 $14.3
Louis J. Lavigne, Jr................. 209,948 3.2% 97.00 July 16, 2009 $10.6
Susan D. Desmond-Hellmann, M.D.,
M.P.H.............................. 233,275 3.6% 97.00 July 16, 2009 $11.8
Dennis J. Henner, Ph.D. ............. 169,958 2.6% 97.00 July 16, 2009 $ 8.6
</TABLE>
- ---------------
(1) We granted these options pursuant to the 1999 Plan. These options 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 have granted under
our 1999 Plan to employees, including the Named Executive Officers.
(3) These options have a term of ten years subject to earlier termination upon
the occurrence of certain events related to termination of employment.
(4) 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.
(5) Mr. Young has resigned from Genentech effective November 1, 1999.
The 1999 Plan
On July 16, 1999, we adopted the 1999 Plan which provides for the grant of
non-statutory options and incentive stock options. An aggregate of 7.5 million
shares is available for issuance pursuant to the terms of such plan. 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 on the date of the grant
of those options. In general, options granted under the 1999 Plan will have a
term of ten years. Under the 1999 Plan, we granted new options to purchase
approximately 6.5 million shares of common stock to approximately 2,400
employees at $97 per share, with the grant of such options made effective as of
July 16, 1999.
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Committees of the Board of Directors
We currently have five 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"), a nominating committee of the board (the "Nominating Committee"),
and a corporate governance committee of the board (the "Corporate Governance
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.
Currently, Drs. Levinson, Boyer and Humer are members of the Executive
Committee; Drs. Knowles and Sanders and Sir Mark are members of the Audit
Committee; Drs. Boyer, Humer and Knowles are members of the Nominating
Committee; Drs. Boyer, Humer, Knowles and Sanders and Sir Mark are members of
the Compensation Committee; and Dr. Knowles and Sir Mark are members of the
Corporate Governance Committee.
The Executive Committee is 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 selects the
independent public accountants to audit our annual financial statements and
establishes the scope and oversees the annual audit. The Nominating Committee is
responsible for the nomination of nominees for our board. The Compensation
Committee determines 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.
JULY 1999 OFFERING OF OUR COMMON STOCK
On July 19, 1999, Roche made a public offering of 22 million shares of our
common stock. In connection with that offering, we amended our certificate of
incorporation and bylaws and entered into an affiliation agreement with Roche,
described below. Upon completion of that offering, Roche's percentage ownership
of our outstanding common stock was reduced from 100% to 82.7%. Upon completion
of this offering, Roche's percentage ownership of our outstanding common stock
will be reduced to 66.4%.
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. Subsequently, we entered into an affiliation agreement
with Roche that enabled the current management of Genentech to conduct our
business and operations as we had done in the past while at the same time
reflecting Roche's ownership interest in us.
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.
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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
Our board consists of six members: two nominees of Roche, one executive officer
of Genentech who is nominated by the nominating committee of the board and up to
three independent directors nominated by the nominating committee. Directors are
elected to serve one year terms or until their successors are elected and
qualified. At all times our board will 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 have five standing committees of the board: a Nominating Committee, an
Executive Committee, an Audit Committee, a Compensation Committee and a
Corporate Governance Committee. Roche is 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
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outstanding capital stock, and (3) other issuances of capital stock not
exceeding 5% of our voting stock in any 24 month period, and
- any repurchase or redemption of our capital stock other than redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
For purposes of the first and second bullet points in this paragraph, unless a
majority of the board of directors have made a contrary determination in good
faith, a "substantial portion of our business or assets" shall mean a portion of
our business or assets accounting for 10% or more of our and our consolidated
subsidiaries' consolidated total assets, contribution to net income or revenues.
Following a request by Roche for proportional representation on the board, until
the Roche designees take office as directors we may not take any action other
than in the ordinary course of business without the consent of Roche.
Licensing and Marketing Arrangements
Except as otherwise provided in the marketing and licensing agreement with
Hoffmann-La Roche described under "Business -- Licensing Agreements with F.
Hoffmann-La Roche Ltd," we have agreed that we will not enter into any material
licensing or marketing agreement with respect to any products, processes,
inventions or developments subject to that agreement unless we first negotiate
in good faith with Roche for a reasonable period of not less than three months
and not more than six months with a view towards reaching a mutually beneficial
licensing or marketing agreement.
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
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agreed that the buyer shall be entitled to succeed to Roche's rights described
under "--Roche's Right to Proportional Representation."
Business Combinations with Roche
Roche has agreed that as a condition to any merger of Genentech with Roche or
its affiliates or the sale of substantially all of our assets to Roche or its
affiliates, that either
- the merger or sale must be authorized by the favorable vote of a majority
of the shares of common stock voting at any meeting not owned by Roche,
provided that no person or group shall be entitled to cast more than 5%
of the votes cast at the meeting; or
- in the event such a favorable vote is not obtained, the value of the
consideration to be received by the holders of our common stock, other
than Roche, shall be equal to or greater than the average of the means of
the ranges of fair values for the common stock as determined by two
investment banks of nationally recognized standing appointed by a
committee of independent directors.
Roche has agreed that it will not sell any shares of our common stock in the 90
days immediately preceding any proposal by Roche for a merger with us.
Roche has also agreed that in the event of any merger of Genentech with Roche or
its affiliates or sale of substantially all of our assets to Roche or its
affiliates, each unvested option then outstanding under our stock option plans
will
- 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
Under the affiliation agreement, we are obligated to maintain a program whereby
we repurchase shares of our common stock from our public stockholders. We are
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 occurring in July 1999 and
prior to the time of such issuance. Following the completion of this offering,
Roche will own 66.4% of our common stock, which will be the lowest percentage of
the common stock owned by it since the completion of the July 1999 offering. In
addition, 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.
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Furthermore, Roche has (i) a continuing option (which is 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
(which percentage ownership will be 66.4% after the completion of this
offering), and (ii) a continuing option (which is assignable by Roche to any of
its affiliates) to buy from us 80% of any class of stock issued by us other than
common stock, in each case with a price per share equal to either the average of
the last sale price on each of the five immediately preceding trading days on a
U.S. national securities exchange on which the shares are traded or, if the sale
prices are unavailable, the value of the shares determined in accordance with
procedures reasonably satisfactory to Roche and us.
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
Since the redemption of our special common stock we have been, and we expect to
continue to be until the completion of this offering, included in Roche's U.S.
consolidated federal income tax group and included with Roche and/or one or more
Roche subsidiaries in consolidated or combined income tax groups for certain
state and local tax jurisdictions. Beginning on the day after this offering is
completed, Genentech will cease to be a member of the consolidated federal
income tax group (and certain consolidated or combined state or local income tax
groups) of which Roche is the common parent.
Genentech and Roche have entered into a tax sharing agreement. Pursuant to this
agreement, Genentech and Roche are to make payments such that, with respect to
the period during which Genentech is a member of a Roche consolidated or
combined group, 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 had 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, for periods during which Genentech is a member of a
consolidated or combined group of which Roche is the parent, 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.
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, we could be liable in
the event that any federal tax liability is incurred by Roche's consolidated
federal income tax group with respect to the period during which we were a
member of such consolidated group (including the portion of Roche's current
taxable year following the completion of this offering) and such liability has
not been 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
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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 October 6, 1999
regarding the beneficial ownership of common stock by Roche, the only beneficial
owner of 5% or more of our common stock.
<TABLE>
<CAPTION>
------------------------------------------------------
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
------------------------- -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
------------------------------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Roche Holdings, Inc. ................................. 105,298,588 82.0% 85,298,588 66.4%
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 64.8% of our
outstanding common stock after this offering. Concurrently with this offering,
Roche expects to issue zero-coupon notes that will be exchangeable with Roche
for an aggregate of up to approximately 5,500,000 shares of our common stock
owned by Roche.
The following table sets forth the beneficial ownership of shares of common
stock as of September 30, 1999, unless otherwise noted, of (i) each director of
Genentech, (ii) each of the Named Executive Officers, and (iii) all directors
and executive officers of Genentech as a group. 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 persons listed by
name in the following table 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) *
Sir Mark Richmond, Ph.D. ................................... -- --
Charles A. Sanders, M.D. ................................... -- --
William D. Young............................................ 206,250(5) *
All directors and executive officers as a group (32
persons).................................................. 1,182,260(6) *%
</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 granted under our 1999 Plan to
replace shares canceled under the 1996 Plan, of which options to purchase
25,919 shares of common stock will be exercisable at November 29, 1999.
(2) Does not include 169,958 stock options we granted under our 1999 Plan to
replace shares canceled under the 1996 Plan, of which options to purchase
18,884 shares of common stock will be exercisable at November 29, 1999.
(3) Does not include 209,948 stock options we granted under our 1999 Plan to
replace shares canceled under the 1996 Plan, of which options to purchase
23,328 shares of common stock will be exercisable at November 29, 1999.
(4) Does not include 483,213 stock options we granted under our 1999 Plan to
replace shares canceled under the 1996 Plan, of which options to purchase
53,690 shares of common stock will be exercisable at November 29, 1999.
(5) Does not include 283,263 stock options we granted under our 1999 Plan to
replace shares canceled under the 1996 Plan, of which options to purchase
31,474 shares of common stock will be exercisable at November 29, 1999.
(6) Does not include 2,208,229 stock options we granted under our 1999 Plan to
replace shares canceled under the 1996 Plan, of which options to purchase
245,361 shares of common stock will be exercisable at November 29, 1999.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
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 October 6, 1999, there were 128,464,410 shares of common stock
outstanding. 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
In July 1999, we amended our certificate of incorporation and bylaws and entered
into a new affiliation agreement with Roche. For a description of these
provisions see "Relationship with Roche -- Arrangements between Genentech and
Roche."
CERTAIN PROVISIONS OF GENENTECH'S CERTIFICATE OF INCORPORATION AND BYLAWS
Our 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.
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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.
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
75
<PAGE> 79
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 is listed on the New York Stock Exchange under the symbol
"DNA".
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> 80
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
77
<PAGE> 81
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> 82
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
(180 days in the case of Roche) after the date of this prospectus, sell or
otherwise dispose of any shares of our common stock, subject to certain
exceptions. See "Underwriting."
We have agreed that, upon Roche's request, we will file one or more registration
statements under the Securities Act in order to permit Roche to offer and sell
shares of our common stock. For a description of Roche's registration rights see
"Relationship with Roche--Arrangements between Genentech and Roche--Registration
Rights."
An aggregate of 7.5 million shares of our common stock is available for issuance
under the 1999 Plan. On July 19, 1999, we filed 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 are 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> 83
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 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
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 $ million. We are responsible for all expenses except that
Roche has agreed to pay certain expenses to be directly incurred by Roche.
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<PAGE> 84
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 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 (180 days in the case of the selling stockholder) 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.
It is expected that delivery of the shares will be made to investors on or about
, 1999.
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.
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.
With respect to the unaudited condensed consolidated interim financial
information for the three-month periods ended March 31, 1999 and 1998 and for
the three-month and six-month periods ended June 30, 1999 and 1998, included and
incorporated by reference in this Prospectus, Ernst & Young LLP have reported
that they have applied limited procedures in accordance with professional
standards for a review of such information. However, separate reports, included
herein and in Genentech's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 1999, and incorporated herein by reference, state
that they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their reports on
such information should be restricted considering the limited nature of the
review procedures applied. The independent auditors are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 (the "Act") for
their reports on the unaudited interim financial information because those
reports are not a "report" or a "part" of the Registration Statement prepared or
certified by the auditors within the meaning of Sections 7 and 11 of the Act.
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<PAGE> 85
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 reports on Form 10-Q for the quarters ended March 31, 1999
and June 30, 1999;
3. Our current report on Form 8-K dated June 28, 1999; and
4. Our current report on Form 8-K dated July 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> 86
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-25
Unaudited Condensed Consolidated Statements of Income for
the Six Months Ended June 30, 1999 and 1998............... F-26
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998........... F-27
Unaudited Condensed Consolidated Balance Sheets as of June
30, 1999 and December 31, 1998............................ F-28
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-29
</TABLE>
F-1
<PAGE> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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.
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 owned 100% of the Company's common stock.
Consequently, push-down accounting is required under generally accepted
accounting principles which required 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 recorded an $0.8 billion charge related to
in-process research and development in the second quarter of 1999.
F-22
<PAGE> 108
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 is the subject of
these new options, which were issued under our 1999 Stock Plan, is
approximately 5.0 million. Alternative arrangements were provided for
certain holders of some of the unvested options under the 1996 Plan.
The Company recorded, in the quarter ended 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 ($57.8
million) equal to the difference between the redemption price and the public
offering price per share was recorded for these converted options in the quarter
ended September 30, 1999. A limited number of employees elected 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> 109
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> 110
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of June 30, 1999, and the related condensed consolidated
statements of operations for the six-month periods ended June 30, 1999 and 1998.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such 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 (not presented herein) and in our report
dated January 20, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1998,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
ERNST & YOUNG LLP
San Jose, California
July 9, 1999
F-25
<PAGE> 111
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
------------ ----------
<S> <C> <C>
In thousands, except per share data
Revenues:
Product sales (including amounts from related parties:
1999--$26,998; 1998--$13,173).......................... $ 503,424 $340,982
Royalties (including amounts from related parties:
1999--$20,111; 1998--$15,881).......................... 92,604 121,881
Contract and other (including amounts from related
parties:
1999--$19,944; 1998--$15,648).......................... 77,181 28,921
Interest.................................................. 44,385 40,928
---------- --------
Total revenues.................................... 717,594 532,712
Costs and expenses:
Cost of sales (including amounts from related parties:
1999--$21,931; 1998--$11,772).......................... 98,404 70,771
Research and development (including contract related:
1999--$14,426; 1998--$19,741).......................... 184,951 191,151
Marketing, general and administrative..................... 214,573 155,593
Legal settlement.......................................... 50,000 --
Special charge, related to redemption..................... 1,147,304 --
Interest.................................................. 2,719 2,154
---------- --------
Total costs and expenses.......................... 1,697,951 419,669
Income (loss) before taxes.................................. (980,357) 113,043
Income tax (benefit) provision.............................. (71,580) 31,652
---------- --------
Net income (loss)........................................... $ (908,777) $ 81,391
========== ========
Earnings (loss) per share:
Basic..................................................... $ (7.09) $ 0.65
========== ========
Diluted................................................... $ (7.09) $ 0.63
========== ========
Weighted average shares used to compute earnings (loss) per
share:
Basic..................................................... 128,092 125,179
========== ========
Diluted................................................... 128,092 129,291
========== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-26
<PAGE> 112
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(908,777) $ 81,391
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 44,317 37,246
In-process research and development.................... 752,500 --
Non-cash compensation related to stock options, net of
tax................................................... 61,353 --
Write-up of securities available-for-sale.............. (20,337) --
Deferred income taxes.................................. (114,672) (8,480)
Gain on sales of securities available-for-sale......... (12,283) (5,835)
Loss on sales of securities available-for-sale......... 921 389
Write down of securities available-for-sale............ 8,467 7,193
Write down of non-marketable equity securities......... 432 --
Gain on fixed asset dispositions....................... (16) --
Changes in assets and liabilities:
Investments in trading securities...................... (4,944) (16,263)
Receivables and other current assets................... (38,643) 12,458
Inventories............................................ 10,333 (814)
Accounts payable, other current liabilities and other
long-term liabilities................................. 344,920 (7,281)
--------- ---------
Net cash provided by operating activities................. 123,571 100,004
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held-to-maturity.................. (186,612) (177,416)
Proceeds from maturities of securities held-to-maturity... 150,357 152,182
Purchases of securities available-for-sale................ (300,254) (302,359)
Proceeds from sales of securities available-for-sale...... 257,752 162,945
Purchases of non-marketable equity securities............. (39,177) (5,425)
Capital expenditures...................................... (41,513) (43,331)
Change in other assets.................................... (17,721) (2,568)
--------- ---------
Net cash used in investing activities..................... (177,168) (215,972)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issuances........................................... 64,291 61,451
--------- ---------
Net cash provided by financing activities................. 64,291 61,451
--------- ---------
Net (decrease) increase in cash and cash equivalents........ 10,694 (54,517)
Cash and cash equivalents at beginning of period.......... 281,162 244,469
--------- ---------
Cash and cash equivalents at end of period................ $ 291,856 $ 189,952
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-27
<PAGE> 113
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
In thousands
ASSETS
Current assets:
Cash and cash equivalents................................. $ 291,856 $ 281,162
Short-term investments.................................... 621,122 606,544
Accounts receivable, net (including amounts from related
party: 1999--$34,743; 1998--$22,850)................... 191,743 149,741
Inventories............................................... 324,473 148,626
Prepaid expenses and other current assets................. 13,115 55,885
---------- ----------
Total current assets.............................. 1,442,309 1,241,958
Long-term marketable securities............................. 808,024 716,888
Property, plant and equipment, less accumulated depreciation
(1999--$484,755; 1998--$445,215).......................... 718,743 700,249
Goodwill.................................................... 1,706,042 --
Other intangible assets..................................... 1,563,601 65,033
Other assets................................................ 130,660 131,274
---------- ----------
Total assets...................................... $6,369,379 $2,855,402
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 32,173 $ 40,895
Accrued liabilities -- related party...................... 13,975 10,945
Other accrued liabilities................................. 573,087 239,487
---------- ----------
Total current liabilities......................... 619,235 291,327
Long-term debt.............................................. 149,989 149,990
Deferred taxes and other long-term liabilities.............. 471,304 70,240
---------- ----------
Total liabilities................................. 1,240,528 511,557
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock........................................... -- --
Special Common Stock...................................... -- 1,010
Common Stock.............................................. 2,573 1,532
Additional paid-in capital................................ 7,026,381 1,588,990
Retained earnings (accumulated deficit)................... (1,937,871) 693,050
Net unrealized gain on securities available-for-sale...... 37,768 59,263
---------- ----------
Total stockholders' equity........................ 5,128,851 2,343,845
---------- ----------
Total liabilities and stockholders' equity........ $6,369,379 $2,855,402
========== ==========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-28
<PAGE> 114
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--STATEMENT OF ACCOUNTING PRESENTATION
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of adjustments of a normal
recurring nature) considered necessary for a fair presentation have been
included. Operating results for the six-month periods ended June 30, 1999 and
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. The condensed consolidated balance sheet as of
December 31, 1998 has been derived from the audited financial statements as of
that date. For further information, refer to the consolidated financial
statements and notes thereto included elsewhere herein.
The unaudited condensed consolidated financial statements give effect to our
June 30, 1999 redemption of all of our outstanding callable putable common
stock, par value $.02 per share (referred to as our "Special Common Stock") held
by stockholders other than Roche Holdings, Inc., commonly known as Roche, at a
price of $82.50 per share in cash with funds deposited by Roche for such purpose
(the "Redemption"), resulting in Roche owning 100% of our common stock. Roche
will account for the Redemption as a purchase of a business and we are required
to push down the effect of the Redemption and Roche's 1990 through 1997
purchases of our Common Stock and Special Common Stock into our consolidated
financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.
NOTE 2--REDEMPTION OF GENENTECH'S SPECIAL COMMON STOCK
Basis of Presentation
Roche will account for the Redemption as a purchase of a business and we are
required to push down the effect of the Redemption and Roche's 1990 through 1997
purchases of our Common and Special Common Stock into our consolidated financial
statements at the date of the Redemption. Under this method of accounting,
Genentech's assets and liabilities, including intangible assets, were recorded
at their fair values not to exceed the aggregate purchase price plus Roche's
transaction costs. In 1990 and 1991 through 1997, Roche purchased 60% and 5%,
respectively, of the outstanding stock of Genentech. Further, in June 1999, we
redeemed all of our Special Common Stock held by stockholders other than Roche
resulting in Roche owning 100% of our common stock. The push-down effect of
Roche's aggregate purchase price and the Redemption price in the unaudited
condensed consolidated balance sheet as of June 30, 1999 is allocated based on
Roche's ownership percentages as if the purchases occurred at the original
purchase dates for the 1990 and 1991 through 1997 purchases, and at June 30,
1999 for the Redemption. Management of Genentech determined the values of
tangible and intangible assets, including in-process research and development,
used in allocating the purchase prices. The aggregate purchase prices for the
acquisition of all of Genentech's outstanding shares, including Roche's
estimated transaction costs of $10.0 million, was $6,604.9 million, consisting
of approximately $2,843.5 million for the 1990 and 1991 through 1997 purchases
and approximately $3,761.4 million for the Redemption.
The following table shows details of the excess of purchase price over net book
value (in millions):
<TABLE>
<CAPTION>
-------------------------------
PURCHASE PERIOD
--------------------
1990-1997 1999 TOTAL
--------- -------- --------
<S> <C> <C> <C>
Total purchase price........................................ $2,843.5 $3,761.4 $6,604.9
Less portion of net book value purchased.................. 566.6 836.4 1,403.0
-------- -------- --------
Excess of purchase price over net book value................ $2,276.9 $2,925.0 $5,201.9
======== ======== ========
</TABLE>
F-29
<PAGE> 115
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the allocation of the excess of the purchase price
over net book value (in millions):
<TABLE>
<CAPTION>
--------------------------------
PURCHASE PERIOD
--------------------
1990-1997 1999 TOTAL
--------- -------- ---------
<S> <C> <C> <C>
Inventories................................................. $ 102.0 $ 186.2 $ 288.2
Land........................................................ -- 16.6 16.6
In-process research and development......................... 500.5 752.5 1,253.0
Developed product technology................................ 429.0 765.0 1,194.0
Core technology............................................. 240.5 203.0 443.5
Developed license technology................................ 292.5 175.0 467.5
Trained and assembled workforce............................. 32.5 49.0 81.5
Tradenames.................................................. 39.0 105.0 144.0
Key distributor relationships............................... 6.5 73.5 80.0
Goodwill.................................................... 1,091.2 1,228.4 2,319.6
Deferred tax liability...................................... (456.8) (629.2) (1,086.0)
-------- -------- ---------
Total............................................. $2,276.9 $2,925.0 $ 5,201.9
======== ======== =========
</TABLE>
Push-Down Accounting Adjustments
The following is a description of accounting adjustments made to reflect
push-down accounting on our financial statements. These adjustments were based
on management's estimates of the value of the tangible and intangible assets
acquired:
- As a result of push-down accounting, we recorded in the second quarter of
1999 a charge of $1,147.3 million. This charge includes a non-cash charge
of $752.5 million for in-process research and development, $284.5 million
of compensation expense related to Genentech's early cash settlement of
certain employee stock options and an aggregate of approximately $102.3
million of non-cash compensation expense in connection with the
modification and remeasurement, for accounting purposes, of continuing
employee stock options, which represents the difference between each
applicable option exercise price and the redemption price of the Special
Common Stock. (You should read "Stock Option Changes" note for further
information on these charges.) In addition, we recognized $20.3 million
of gains related to the write-up of marketable securities as a result of
push-down accounting.
- We recorded an income tax benefit of $113.8 million related to the above
early cash settlement of certain employee stock options. The income tax
benefit reduced the current tax payable in other accrued liabilities by
$56.9 million and reduced long-term deferred income taxes by $56.9
million.
- The estimated useful life of the inventory adjustment to fair value is
approximately one year based upon the expected time to sell inventories
on hand at June 30, 1999. The entire inventory adjustment related to
Roche's 1990 through 1997 purchases was reflected as a charge to retained
earnings.
- An adjustment was made to record the fair value of land as a result of
the Redemption. There were no such adjustments for the purchase periods
from 1990 through 1997.
- $1,091.2 million of goodwill, which reflects Roche's 1990 through 1997
purchases less related accumulated amortization of $613.6 million through
June 30, 1999, was recorded as a charge to retained earnings. Included in
goodwill is $456.8 million related to the recording of deferred tax
liabilities. Deferred taxes were recorded for the adjustment to fair
value for other intangible assets and inventories as a result of Roche's
1990 through 1997 purchases. The deferred tax liability was calculated
based on a marginal tax rate of 40%. The goodwill related to the 1990
through 1997 purchases is amortized over 15 years.
- $1,228.4 million of goodwill was recorded as a result of the Redemption.
Included in goodwill is $629.2 million related to the recording of
deferred tax liabilities. Deferred taxes were recorded for the adjustment
to fair value for other intangible assets, inventories and land. The
deferred tax liability was calculated based on a marginal tax rate of 40%
F-30
<PAGE> 116
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and has been allocated between short- and long-term classifications to
match the asset classifications. The goodwill related to the Redemption
is amortized over 15 years.
- The existing deferred tax asset valuation allowance of $62.8 million was
eliminated at June 30, 1999 related to the tax benefits of stock option
deductions which have been realized and credited to paid-in capital as a
result of establishing deferred tax liabilities under push-down
accounting.
- The redemption of our Special Common Stock and the issuance of new shares
of common stock to Roche resulted in substantially the same number of
total shares outstanding as prior to the Redemption.
- The excess of purchase price over net book value of $2,276.9 million for
1990 through 1997 and $2,925.0 million in 1999, and $102.3 million for
the remeasurement of continuing employee stock options at the
remeasurement date was recorded in paid-in capital.
- The following adjustments were made to retained earnings for the 1990
through 1997 purchase period (in millions):
<TABLE>
<CAPTION>
---------
1990-1997
PURCHASES
---------
<S> <C>
In-process research and development......................... $ (500.5)
Amortization of goodwill, intangibles and fair value
adjustment to inventories, net of tax..................... (1,221.8)
---------
Total adjustment to retained earnings............. $(1,722.3)
=========
</TABLE>
- The tax provision benefit of $94.5 million for the second quarter of 1999
consists of tax expense of $51.8 million on pretax income before
push-down accounting of $109.3 million and a benefit of $146.3 million
related to the income and deductions attributable to push-down
accounting.
- $1,040.0 million of other intangible assets, which reflects Roche's 1990
through 1997 purchases less related accumulated amortization of $911.5
million of those assets through June 30, 1999, was recorded as a charge
to retained earnings. The components of other intangible assets related
to these purchases and their estimated lives are as follows (in
millions):
<TABLE>
<CAPTION>
-----------------------------------
FAIR ACCUMULATED ESTIMATED
VALUE AMORTIZATION LIFE
-------- ------------ ---------
<S> <C> <C> <C>
Developed product technology................................ $ 429.0 $361.8 10
Core technology............................................. 240.5 202.9 10
Developed license technology................................ 292.5 286.9 6
Trained and assembled workforce............................. 32.5 31.6 7
Tradenames.................................................. 39.0 21.9 15
Key distributor relationships............................... 6.5 6.4 5
-------- ------
$1,040.0 $911.5
======== ======
</TABLE>
F-31
<PAGE> 117
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- $1,370.5 million of other intangible assets was recorded as a result of
the Redemption. The components of other intangible assets related to the
Redemption and their estimated lives are as follows (in millions):
<TABLE>
<CAPTION>
--------------------
FAIR ESTIMATED
VALUE LIFE
-------- ---------
<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>
- $500.5 million and $752.5 million of in-process research and development
was recorded as a result of Roche's 1990 through 1997 purchases and the
Redemption, respectively. At the date of each purchase, Genentech
concluded that technological feasibility of the acquired in-process
technology was not established and that the in-process technology had no
future alternative uses. The amount related to the 1990 through 1997
purchases was charged to retained earnings in the unaudited condensed
consolidated balance sheet at June 30, 1999. The amount related to the
Redemption was charged to operations at June 30, 1999.
The amounts assigned to in-process research and development were
determined based upon an analysis employing the risk-adjusted cash flows
expected to be generated by the products that result from the in-process
projects. The analyses performed included forecasting future cash flow
that was expected to result from the progress made on each of the in-
process projects prior to the purchase dates. These cash flows were
estimated by first forecasting, on a product-by-product basis, total
revenues expected to result from sales of the first generation of each
in-process product. From this amount, a portion of the gross in-process
product revenues was removed to account for the contribution provided by
any core technology, which was considered to benefit the in-process
products. The net in-process revenue was then multiplied by the project's
estimated percentage of completion as of the purchase dates to arrive at a
forecast of net in-process research and development revenues attributable
to projects completed prior to the purchase dates. From this forecast,
appropriate operating expenses, cash flow adjustments and contributory
asset returns were deducted to arrive at a forecast of net returns on the
completed portion of the in-process technology. Finally, these net returns
were discounted to a present value at discount rates that incorporate both
the weighted average cost of capital (relative to the biotech industry and
Genentech) as well as the product-specific risk associated with the
purchased in-process research and development products. The product
specific risk factors considered include where each product is in each
phase of development, type of molecule under development, likelihood of
regulatory approval, manufacturing process capability, scientific
rationale, pre-clinical safety and efficacy data, target product profile
and development plan. The discount rates employed ranged from 16% to 19%
for the 1999 valuation and 20% to 28% for the 1990 purchase valuation, all
of which represent a significant risk premium to Genentech's weighted
average cost of capital.
The forecast data employed in the analyses was based upon internal product
level forecast information maintained by Genentech management in the
ordinary course of managing its business. The inputs used by Genentech in
analyzing in-process research and development were based upon assumptions,
which Genentech believes to be reasonable but which are inherently
uncertain and unpredictable. These assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur.
NOTE 3--RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On June 30, 1999, Roche exercised its option to cause us to redeem all of our
Special Common Stock held by stockholders, other than Roche, at a price of
$82.50 per share in cash with funds deposited by Roche for such purpose and we
retired all of the shares of Special Common Stock including those held by Roche.
As a result, Roche owned 100% of our outstanding
F-32
<PAGE> 118
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stock. On July 23, 1999, Roche completed a public offering of 22,000,000
shares of our common stock and received all of the proceeds from the offering.
After the completion of the offering, Roche's percentage ownership of our
outstanding common stock was reduced from 100% to approximately 82.4% at July
31, 1999. Our common stock began trading on the New York Stock Exchange under
the symbol "DNA" on July 20, 1999.
In connection with the July 1999 offering, we entered into certain affiliation
arrangements with Roche, amended our licensing and marketing agreement with F.
Hoffmann-La Roche Ltd, an affiliate of Roche commonly known as Hoffmann-La
Roche, and entered into a tax sharing agreement with Roche.
Affiliation Arrangements
We have amended our certificate of incorporation and bylaws and entered into an
affiliation agreement with Roche. As a result, the size and composition of our
board of directors changed to consist of two Roche directors, three independent
directors nominated by a nominating committee currently controlled by Roche, and
one Genentech employee. However, under the new affiliation agreement, Roche will
have the right to obtain proportional representation on our board at any time.
Roche intends to continue to allow our current management to conduct our
business and operations as we have done in the past. However, we cannot ensure
that Roche will not implement a new business plan in the future.
Licensing Agreement
In 1995, we entered into a licensing and marketing agreement with Hoffmann-La
Roche and its affiliates granting it a ten-year option to license to use and
sell products in non-U.S. markets. In connection with the offering, we amended
that agreement, the major provisions of which include:
- extended Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license our products upon
the occurrence of any of the following: (1) our decision to file an
Investigational New Drug exemption application, or IND, for a product,
(2) completion of a Phase II trial for a product or (3) if Hoffmann-La
Roche previously paid us a fee of $10 million to extend its option on a
product, completion of a Phase III trial for that product;
- we have agreed, in general, to manufacture for and supply to Hoffmann-La
Roche its clinical requirements of our products at cost, and its
commercial requirements at cost plus a margin of 20%; however,
Hoffmann-La Roche will have the right to manufacture our products under
certain circumstances;
- Hoffmann-La Roche has agreed to pay, for each product for which
Hoffmann-La Roche exercises its option upon either a decision to file an
IND with the U.S. Food and Drug Administration, or FDA, or completion of
the Phase II trials, a royalty of 12.5% on the first $100 million on its
aggregate sales of that product and thereafter a royalty of 15% on its
aggregate sales of that product in excess of $100 million until the later
in each country of the expiration of our last relevant patent or 25 years
from the first commercial introduction of that product; and
- Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of
the expiration of our relevant patent or 25 years from the first
commercial introduction of that product; however, $5 million of any
option extension fee paid by Hoffmann-La Roche will be credited against
royalties payable to us in the first calendar year of sales by
Hoffmann-La Roche in which aggregate sales of that product exceed $100
million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, we have been included in
Roche's U.S. federal consolidated income tax group. As a result, our tax
liability will be included in the consolidated federal income tax liability of
Roche and its subsidiaries as long as Roche holds at least an 80% ownership
interest in our common stock. We also will be included with Roche and/or one or
more Roche subsidiaries in consolidated or combined income tax groups for
certain state and local tax jurisdictions. Accordingly, we have entered into a
tax sharing agreement with Roche. Pursuant to the tax sharing agreement, we and
Roche will make payments so that the net amount paid by us on account of Roche's
consolidated or combined taxes
F-33
<PAGE> 119
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
will be determined as though Genentech had filed separate, stand-alone income
tax returns as the common parent of a group of corporations rather than a
consolidated subsidiary of Roche.
Roche's Right to Maintain its Percentage Ownership Interest in our Stock
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. In order to preserve our status as a
member of Roche's consolidated federal income tax group, the affiliation
agreement will require us to, among other things, establish a stock repurchase
program designed to maintain Roche's percentage ownership interest in our common
stock. In addition, Roche will have a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest.
NOTE 4--STOCK OPTION CHANGES
In connection with the redemption of our Special Common Stock, the following
changes have occurred with respect to our stock options that were outstanding as
of June 30, 1999:
- Options for the purchase of approximately 6.8 million shares of Special
Common Stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $82.50 per share, less the exercise price;
- Options for the purchase of approximately 4.0 million shares of Special
Common Stock were converted into options to purchase a like number of
shares of common stock at the same exercise price; and
- Options for the purchase of approximately 4.9 million shares of Special
Common Stock were canceled, in accordance with the terms of our 1996
Stock Option/Stock Incentive Plan (the "1996 Plan"). With certain
exceptions, we granted new options for the purchase of 1.333 times the
number of shares under the previous options with an exercise price of $97
per share, which was the public offering price of the common stock. The
number of shares that were the subject of these new options, which were
issued under our 1999 Stock Plan (the "1999 Plan"), was approximately 5.0
million. Alternative arrangements were provided for certain holders of
some of the unvested options under the 1996 Plan.
In connection with these stock option transactions, we recorded or expect to
record:
- In the quarter ended June 30, 1999, (1) cash compensation expense of
approximately $284.5 million associated with the cash-out of such stock
options and (2) non-cash compensation expense of approximately $102.3
million associated with the remeasurement, for accounting purposes, of
the converted options, which non-cash amount represents the difference
between each applicable option exercise price and the redemption price of
the Special Common Stock;
- In the quarter ending September 30, 1999, non-cash compensation expense
of approximately $57.8 million associated with the remeasurement, for
accounting purposes, of the converted options, which non-cash amount
represents the difference between the $82.50 redemption price of the
Special Common Stock and the $97 public offering price of the common
stock; and
- Over a two-year period, an aggregate of $27.4 million available to be
earned by a limited number of employees who elected the alternative
arrangements described above.
NOTE 5--RELATED PARTY TRANSACTIONS
Genentech entered into a license agreement with Immunex Corporation that grants
rights under Genentech's immunoadhesin patent portfolio to Immunex for its
product Enbrel(R). In exchange for a worldwide, co-exclusive license covering
fusion proteins such as Enbrel, Immunex paid Genentech an initial non-refundable
license fee which was recorded in contract revenues net of a portion to be paid
to Roche pursuant to an agreement between Roche and Genentech.
NOTE 6--LONG-TERM DEBT
Our long-term debt consists of $150.0 million of convertible subordinated
debentures, with interest payable at 5%, due in 2002. Prior to the redemption of
our Special Common Stock, the debentures were convertible, at the option of the
holder, into
F-34
<PAGE> 120
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
one-half share of our Special Common Stock and $18 in cash, for each $74 in
principal amount of debenture converted. As a result of the redemption of our
Special Common Stock, upon conversion, the holder receives, for each $74 in
principal amount of debenture converted, $59.25 in cash, which represents
one-half of the $82.50 redemption price and $18 in cash. The $18 in cash is
reimbursed by Roche to us. Generally, we may redeem the debentures until
maturity.
NOTE 7--NEW ACCOUNTING STANDARDS
In July 1999, the Financial Accounting Standards Board (FASB) announced the
delay of the effective date of Statement of Financial Accounting Standards (FAS)
133, "Accounting for Derivative Instruments and Hedging Activities," for one
year, to the first quarter of 2001. FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires companies
to recognize all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. Gains or losses resulting
from changes in the values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting under
FAS 133. We are currently evaluating the impact of FAS 133 on our financial
position and results of operations.
At the end of March 1999, the FASB issued a proposed Interpretation of
Accounting Principles Board Opinion number 25, "Accounting for Certain
Transactions involving Stock Compensation" (proposal). This proposal would be
effective upon issuance of the final interpretation, which is expected in the
fourth quarter of 1999, but generally would cover events that occur after
December 15, 1998. To the extent that events covered by this proposal occur
during the period after December 15, 1998, but before issuance of the final
interpretation, the effects of applying this proposal would be recognized on a
prospective basis from the effective date. The potential impact of this proposal
may be significant in relation to non-employee director stock options and stock
option repricings. We are currently evaluating the impact of this proposal on
our financial position and results of operations.
NOTE 8--EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators of the basic
and diluted earnings per share (EPS) computations for the six-month periods
ended June 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
---------------------
SIX MONTHS
ENDED JUNE 30,
---------------------
1999 1998
--------- --------
<S> <C> <C>
Numerator:
Net income (loss) -- numerator
for basic and diluted EPS:................................ $(908,777) $ 81,391
========= ========
Denominator:
Denominator for basic EPS -- weighted-average shares...... 128,092 125,179
Effect of dilutive securities:
Stock options............................................. -- 4,112
--------- --------
Denominator for diluted EPS -- adjusted weighted-average
shares and assumed conversions......................... 128,092 129,291
========= ========
</TABLE>
Options to purchase 1,580,150 shares of Special Common Stock between $68.19 per
share and $68.38 per share were outstanding in the six-month period ended June
30, 1998, but were not included in the computations of diluted EPS because the
options were anti-dilutive.
In the six-month period ended June 30, 1998, we had convertible subordinated
debentures that were convertible to 1,013,514 shares of Special Common Stock.
These were not included in the computations of diluted EPS because they were
anti-dilutive. As a result of the Redemption, the convertible subordinated
debentures are no longer convertible to Special
F-35
<PAGE> 121
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Stock. For further information, you should read "Long-term Debt" note in
the Notes to Condensed Consolidated Financial Statements above.
NOTE 9.--COMPREHENSIVE INCOME
We adopted FAS 130, "Reporting Comprehensive Income," in 1998. Comprehensive
income is comprised of net income and other comprehensive income. Our other
comprehensive income includes unrealized holding gains and losses on its
available-for-sale securities, which were reported separately in stockholders'
equity, and included in accumulated other comprehensive income. For the six
months ended June 30, 1999, comprehensive income (loss) was $(930.3) and $66.3
for the comparable period in 1998.
NOTE 10 -- LEGAL PROCEEDINGS
We are a party to various legal proceedings, including patent infringement cases
involving human growth hormone products, antibody products and other matters.
In July 1997, an action was filed in the U.S. District Court for the Northern
District of California alleging that our manufacture, use and sale of Nutropin
human growth hormone products infringes a patent known as the "Goodman Patent,"
owned by the Regents of the University of California, or UC. This action is
substantially the same as a previous action filed in 1990 against us by UC
alleging that our manufacture, use and sale of Protropin recombinant human
growth hormone infringes the Goodman Patent. The 1997 case had been stayed until
recently, as described below.
In May 1999, the 1990 case was submitted to the jury and, on June 2, 1999, the
jury announced its findings. While the jury found that the Goodman Patent was
valid, the jurors could not agree among themselves whether our manufacture, use
or sale of Protropin infringed the Goodman Patent, although the jury publicly
reported that it voted 8-1 in favor of UC. Because the jury could not reach a
unanimous decision, no finding of infringement was made and there is no current
legal basis for us to be held liable to UC for any claim of damages. On June 22,
1999, the judge held a hearing known as a status conference to discuss further
proceedings relating to the 1990 and 1997 cases. At that time, Genentech renewed
its request that the judge hold a non-jury trial and decide whether UC defrauded
the U.S. Patent and Trademark Office when obtaining the Goodman Patent. The
judge has previously denied a request by UC that this defense be thrown out of
the case for lack of merit. A favorable ruling by the judge in any such trial
would render the Goodman Patent unenforceable. On July 1, 1999, the judge issued
a written decision setting the schedule for further proceedings. The judge
consolidated the 1990 and 1997 cases for a jury trial to begin on January 3,
2000. The issues of infringement and willfulness will be tried to the jury
first, and only if the jury finds liability would the issue of damages be tried.
Pursuant to the judge's decision, that jury trial is to be followed immediately
by a court trial of Genentech's fraud (inequitable conduct) claim against UC. In
addition, UC made a motion for entry of a judgment as a matter of law (a
"directed verdict") that Genentech's manufacture, use or sale of Protropin
infringes the Goodman Patent notwithstanding the lack of unanimous jury verdict
on that issue. The judge scheduled a hearing for July 23, 1999 to discuss that
motion. On July 15, 1999, the judge issued a written decision denying UC's
motion for a directed verdict, and the judge canceled the July 23, 1999 hearing.
On May 28, 1999, Glaxo Wellcome Inc. filed a patent infringement lawsuit against
us in the U.S. District Court in Delaware. That suit asserts that we infringe
four U.S. patents owned by Glaxo Wellcome. Two of the patents relate to the use
of specific kinds of monoclonal antibodies for the treatment of human disease,
including cancer. The other two patents asserted against us relate to
preparations of specific kinds of monoclonal antibodies which are made more
stable and the methods by which such preparations are made. We have been served
with the complaint. The complaint fails to specify which of our products or
methods of manufacture are allegedly infringing the four patents at issue.
However, we believe that the suit relates to the manufacture, use and sale of
our Herceptin and Rituxan antibody products. On July 19, 1999, we filed our
answer to Glaxo Wellcome's complaint, and in our answer we also stated
counterclaims against Glaxo Wellcome. The judge has scheduled the trial of this
suit to begin January 29, 2001.
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,
F-36
<PAGE> 122
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
result of operations or cash flows. However, were an unfavorable ruling to occur
in any quarterly period, there exists the possibility of a material impact on
the net income of that period.
In addition to the above, in April 1999, we agreed to make a $50 million payment
to settle a federal investigation relating to our past clinical, sales and
marketing activities associated with human growth hormone.
NOTE 11 -- INVENTORIES
As a result of push-down accounting, we wrote-up inventory by $186,181,000 of
which $170,320,000 was allocated to work in process and $15,861,000 was
allocated to finished goods. Inventories are summarized below (in thousands):
<TABLE>
<CAPTION>
-----------------------
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials and supplies.................................. $ 21,678 $ 21,414
Work in process............................................. 270,981 106,383
Finished goods.............................................. 31,814 20,829
-------- --------
Total............................................. $324,473 $148,626
======== ========
</TABLE>
NOTE 12 -- SUBSEQUENT EVENT
We and the City of Hope Medical Center are parties to a 1976 agreement relating
to work conducted by two City of Hope employees, Arthur Riggs and Keiichi
Itakura, and patents resulting therefrom ("Riggs/Itakura Patents"). Since that
time, Genentech has entered into license agreements with various companies to
make, use and sell the products covered by the Riggs/Itakura Patents. On August
13, 1999, the City of Hope filed a complaint against us in the Superior Court in
Los Angeles County, California alleging that we owe royalties to the City of
Hope in connection with these license agreements, as well as product license
agreements that involve the grant of licenses under the Riggs/Itakura Patents.
The complaint states claims for declaratory relief, breach of contract, breach
of implied covenant of good faith and fair dealing, and breach of fiduciary
duty. We have not yet filed our answer to the complaint.
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 this action 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.
F-37
<PAGE> 123
[Genentech]
<PAGE> 124
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............................................ $932,499
NASD Filing fee............................................. 30,500
New York Stock Exchange Listing Fee......................... *
Transfer agent's fees....................................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be filed by amendment.
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 certain expenses to be
directly incurred by Roche.
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
II-1
<PAGE> 125
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.
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
5 -- Opinion of Davis Polk & Wardwell*
15.1 -- Letter re: Unaudited Interim Financial Information
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
23.2 -- Consent of Davis Polk & Wardwell (included in Exhibit 5)*
24.1 -- Power of Attorney (included on signature page)
</TABLE>
- ---------------
* To be filed by amendment.
(b) The financial statement schedule included in the company's Annual Report on
Form 10-K for the year ended December 31, 1998 has been incorporated by
reference.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referenced in Item 15 of this Registration
Statement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(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-2
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of South San Francisco,
State of California, on the 8th day of October, 1999.
GENENTECH, INC.
By: /s/ STEPHEN G. JUELSGAARD
---------------------------------------
Name: Stephen G. Juelsgaard
Title: Senior Vice President,
General Counsel and
Secretary
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Arthur D. Levinson and Stephen G. Juelsgaard, and each
or any one of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and any and all
additional registration statements pursuant to Rule 462(b) of the Securities Act
of 1933, as amended, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ARTHUR D. LEVINSON Principal Executive Officer and Director October 8, 1999
- -----------------------------------------------------
Arthur D. Levinson
/s/ LOUIS J. LAVIGNE, JR. Principal Financial Officer October 8, 1999
- -----------------------------------------------------
Louis J. Lavigne, Jr.
/s/ JOHN M. WHITING Principal Accounting Officer October 8, 1999
- -----------------------------------------------------
John M. Whiting
/s/ HERBERT W. BOYER Director October 8, 1999
- -----------------------------------------------------
Herbert W. Boyer
/s/ FRANZ B. HUMER Director October 8, 1999
- -----------------------------------------------------
Franz B. Humer
/s/ JONATHAN K.C. KNOWLES Director October 8, 1999
- -----------------------------------------------------
Jonathan K.C. Knowles
Director
- -----------------------------------------------------
Charles A. Sanders
/s/ MARK RICHMOND Director October 8, 1999
- -----------------------------------------------------
Mark Richmond
</TABLE>
II-3
<PAGE> 127
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1 -- Form of Underwriting Agreement
15.1 -- Letter re: Unaudited Interim Financial Information
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
24.1 -- Power of Attorney (included on signature page)
</TABLE>
<PAGE> 1
EXHIBIT 1
GENENTECH, INC.
20,000,000 Shares of Common Stock
Underwriting Agreement
[ ], 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 a 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,
<PAGE> 2
-2-
including 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 sell the Option
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, 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
<PAGE> 3
-3-
set forth the aggregate number of Option Shares as to which the option is being
exercised and 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 [ ], 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
<PAGE> 7
-7-
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 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
<PAGE> 10
-10-
not believe, that the Year 2000 Problem will have a Material Adverse
Effect. The "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 Section 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; and
(j) 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 costs and expenses (i) incident to the
<PAGE> 16
-16-
preparation, registration, transfer, execution and delivery of the
Shares, (ii) except as provided in paragraph (b) 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) related to the filing with, and
clearance of the offering by, the National Association of Securities
Dealers, Inc., (iv) 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, (v) any expenses incurred by
the Company in connection with a "road show" presentation to potential
investors, (vi) the cost of preparing stock certificates, (vii) the cost
and charges of the Company's transfer agent and registrar and (viii)
costs and expenses (including all filing fees) 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 180 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., other than (x) the sale of Shares to be sold by the
Selling Stockholder hereunder and (y) (A) the issuance by the Selling
Stockholder of its zero-coupon notes that are exchangeable for Common
Stock and (B) the registration and transfer of not in excess of [ ]
shares of Common Stock transferred to holders of such zero-coupon notes
upon exchange of such zero-coupon notes for shares of Common Stock in
accordance with the terms thereof; and
<PAGE> 17
-17-
(b) 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 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;
(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
<PAGE> 18
-18-
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) the Selling Stockholder has been duly incorporated and
each of the Company and the Selling Stockholder is validly
existing as a corporation in good standing under the 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;
<PAGE> 19
-19-
(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 laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(vii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be
required to register as an "investment company" as such term is
defined in the Investment Company Act;
<PAGE> 20
-20-
(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 Section 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 material indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or
instrument known to such counsel 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
(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,
<PAGE> 21
-21-
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:
(i) the Company has been duly incorporated 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
<PAGE> 22
-22-
failure to be so qualified or in good standing would not have a
Material Adverse Effect;
(ii) each of the Company's material 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 material 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;
(v) such counsel shall state that no facts have come to his
attention to cause him 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
<PAGE> 23
-23-
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) 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 material subsidiaries is a party or by
which the Company or any of its material subsidiaries is bound or
to which any of the property or assets of the Company or any of
its material 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 material subsidiaries or any of their respective properties,
except for such conflicts, breaches and defaults which would not,
individually or in the aggregate, have a Material Adverse Effect;
(viii) such counsel shall state that no facts have come to
his attention to cause him to believe that (A) the documents
incorporated by reference in the
<PAGE> 24
-24-
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 did not comply 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) 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 material 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 material 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
such 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
reasonably necessary to carry on 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 the Company's
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) 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
(k) 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
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,
<PAGE> 28
-28-
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 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
<PAGE> 29
-29-
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 designated 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 con-
<PAGE> 30
-30-
sent 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
Stockholder by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
<PAGE> 31
-31-
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, 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
<PAGE> 32
-32-
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 defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
<PAGE> 33
-33-
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: [ ], 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 15.1
October 7, 1999
The Board of Directors and Stockholders
Genentech, Inc.
We are aware of the use and incorporation by reference in the Registration
Statement (Form S-3) and related Prospectus of our reports dated April 9, 1999
and July 9, 1999 relating to the unaudited condensed consolidated interim
financial statements of Genentech, Inc. that are included in or incorporated by
reference from its quarterly reports on Form 10-Q for the quarters ended March
31, 1999 and June 30, 1999, respectively.
Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not a
part of the registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
Very truly yours,
/s/ ERNST & YOUNG LLP
San Jose, California
<PAGE> 1
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 20, 1999, in the Registration Statement (Form
S-3) and related Prospectus of Genentech, Inc. for the registration of
22,000,000 shares of its common stock and to the incorporation by reference
therein of our report dated January 20, 1999, with respect to the related
financial statement schedule included in its Annual Report (Form 10-K) for the
year ended December 31, 1998, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
San Jose, California
October 7, 1999
