<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1999
REGISTRATION NO. 333-80601
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENENTECH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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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RICHARD A. DRUCKER, ESQ. GERALD S. TANENBAUM, ESQ.
DAVIS POLK & WARDWELL CAHILL GORDON & REINDEL
450 LEXINGTON AVENUE 80 PINE STREET
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10005
(212) 450-4000 (212) 701-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with dividend of reinvestment
plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2)
- -----------------------------------------------------------------------------------------------------------------
Common Stock, par value $.02 per share......... 22,000,000 shares $95.00 $2,090,000,000
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<CAPTION>
<S> <C>
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TITLE OF EACH CLASS AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTRATION FEE(3)
- -------------------------------------------------------------------------------------------
Common Stock, par value $.02 per share......... $581,020
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</TABLE>
(1) Includes 2,000,000 shares of common stock which may be issued upon exercise
of the underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457 under the Securities Act of 1933.
(3)Of this amount $13,900 has been previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
Subject to Completion
Dated July 1, 1999
20,000,000 Shares
[Genentech]
Common Stock
Roche Holdings, Inc. is offering all of these shares of our common stock and
will receive all of the proceeds of this offering. We intend to list the common
stock on the New York Stock Exchange under the symbol "DNA". It is estimated
that the initial public offering price of our common stock will be between
$85.00 per share and $95.00 per share.
Prior to this offering, we had two classes of common stock outstanding: our
common stock, offered hereby, and our special common stock. On June 30, 1999, we
redeemed all of our special common stock held by stockholders other than Roche
Holdings, Inc. at $82.50 per share in cash and retired all of the shares of
special common stock including those held by Roche Holdings, Inc. As a result of
the redemption of our special common stock, Roche Holdings, Inc. currently owns
100% of our common stock and, after the completion of this offering, Roche
Holdings, Inc. will own approximately 84.3% of our common stock.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<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 $ $ $
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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
BANCBOSTON ROBERTSON STEPHENS
, 1999
<PAGE> 3
TABLE OF CONTENTS
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PAGE
<S> <C>
Prospectus Summary.......................... 1
Risk Factors................................ 7
Special Note Regarding Forward-Looking
Statements................................ 12
Dividend Policy............................. 13
Price Range of Special Common Stock......... 13
Unaudited Pro Forma Condensed Consolidated
Financial Statements...................... 14
Selected Consolidated Financial Data........ 25
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................. 26
Business.................................... 38
Management.................................. 54
</TABLE>
<TABLE>
<CAPTION>
PAGE
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Relationship with Roche..................... 63
Selling Stockholder and Principal
Stockholders.............................. 68
Description of Capital Stock................ 69
Material U.S. Federal Tax Considerations for
Non-U.S. Holders of Common Stock.......... 72
Shares Eligible for Future Sale............. 74
Underwriting................................ 75
Legal Matters............................... 77
Experts..................................... 77
Where You Can Find More Information......... 77
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
-------------------------
Until , 1999, all dealers that effect transactions in the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
In this prospectus, "Genentech," "we," "us" and "our" refer to Genentech, Inc.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. Roche Holdings, Inc. is offering to sell, and
seeking offers to buy, shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
We have not taken any action to permit a public offering of the shares of common
stock outside the United States or to permit the possession or distribution of
this prospectus outside the United States. Persons outside the United States who
come into possession of this prospectus must inform themselves about and observe
any restrictions relating to this offering of the shares of common stock and the
distribution of this prospectus outside the United States.
-------------------------
We own or have rights to various copyrights, trademarks and trade names used in
our business including the following: Actimmune(R) interferon gamma-1b;
Activase(R) (alteplase, recombinant) tissue-plasminogen activator;
Herceptin(R)(trastuzumab) anti-HER2 antibody; Nutropin(R) (somatropin (rDNA
origin) for injection) growth hormone; Nutropin AQ(R) (somatropin (rDNA origin)
injection) liquid formulation growth hormone; Nutropin Depot(TM) encapsulated
sustained-release growth hormone; Protropin(R) (somatrem for injection) growth
hormone; Pulmozyme(R) (dornase alfa, recombinant) inhalation solution;
Rituxan(R) (rituximab) antibody; and Xubix(TM)(sibrafiban) oral IIb/IIIa
antagonist. This prospectus also includes trademarks, service marks and trade
names of other companies.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information that you should consider before
deciding to invest in our common stock. We urge you to read this entire
prospectus carefully, including the "Risk Factors" section, the consolidated
financial statements and the notes to those statements and the unaudited pro
forma condensed consolidated financial statements and the notes to those
statements.
GENENTECH, INC.
Genentech is a leading biotechnology company that uses human genetic information
to discover, develop, manufacture and market human pharmaceuticals for
significant unmet medical needs. Twelve of the approved products of
biotechnology stem from our science. Science at Genentech focuses primarily on
two areas of medicine: cardiovascular and oncology. We also pursue projects
where there exists a significant opportunity to fill a therapeutic void in other
important areas of medicine, such as with our growth hormone products. In 1998,
we had total revenues of $1,150.9 million and net income of $181.9 million.
We manufacture and market the following seven products directly in the United
States:
- Herceptin(R) antibody for the treatment of patients with metastatic
breast cancer whose tumors overexpress the human epidermal growth factor
receptor2, or HER2, protein;
- Rituxan(R) (rituximab) antibody for the treatment of patients with
relapsed or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkins lymphoma;
- Activase(R) tissue plasminogen activator, or t-PA, for the treatment of
heart attack, acute ischemic stroke within three hours of the onset of
symptoms, and acute massive pulmonary embolism;
- Protropin(R) growth hormone for the treatment of lack of adequate
endogenous growth hormone secretion, or growth hormone deficiency, in
children;
- Nutropin(R) growth hormone for the treatment of growth hormone deficiency
in children and adults, growth failure associated with chronic renal
insufficiency prior to kidney transplantation and short stature
associated with Turner syndrome;
- Nutropin AQ(R) liquid formulation growth hormone for the same indications
as Nutropin; and
- Pulmozyme(R) inhalation solution for the management of cystic fibrosis.
We receive royalties on sales of our products in Canada, on sales of Pulmozyme
outside of the United States and on sales of rituximab outside of the United
States (excluding Japan) from F. Hoffmann-La Roche Ltd, an affiliate of Roche
Holdings, Inc., commonly known as Hoffmann-La Roche. We receive royalties on
sales of growth hormone products and t-PA outside of the United States and
Canada through other licensees. We also receive worldwide royalties on five
additional licensed products that originated from our technology and are
marketed by other companies.
We currently have 17 projects in our development pipeline, including four
products or indications in preparation for Phase III clinical trials, four
products or indications in Phase III clinical trials, one product for which
Phase III clinical trials have been completed and for which we are preparing
regulatory filings to seek marketing approval in the United States, and one
product for which we have made such regulatory filings and are awaiting
regulatory clearance.
Our principal executive offices are located at 1 DNA Way, South San Francisco,
California 94080-4990 and our telephone number is (650) 225-1000.
1
<PAGE> 5
RELATIONSHIP WITH ROCHE HOLDINGS, INC.
Since 1990, Roche Holdings, Inc., a Delaware corporation, commonly known as
Roche, has been our majority stockholder. Roche is an indirect, wholly owned
subsidiary of Roche Holding Ltd, a Swiss company, and is the holding company for
the principal operating subsidiaries of Roche Holding Ltd in the United States.
Roche Holding Ltd, through its various direct and indirect subsidiaries, engages
primarily in the development and manufacture of pharmaceuticals, vitamins and
fine chemicals, diagnostics, flavors and fragrances, and in the business of
analytical laboratory services.
On June 30, 1999, we redeemed all of our special common stock held by
stockholders, other than Roche, at $82.50 per share in cash and retired all of
the shares of special common stock including those held by Roche. As a result,
Roche currently owns 100% of our outstanding common stock. After the completion
of this offering, Roche will own approximately 84.3% of our common stock.
In connection with this offering, we will enter into certain affiliation
arrangements with Roche, amend our licensing and marketing agreement with
Hoffmann-La Roche, and enter into a tax sharing agreement with Roche.
Affiliation Arrangements
Prior to the completion of this offering, we will amend our certificate of
incorporation and bylaws and enter into an affiliation agreement with Roche. In
order to provide continuity while at the same time reflecting Roche's
controlling interest in our company, the size and composition of our board of
directors will change. Upon completion of this offering, our board will consist
of two Roche directors, three independent directors nominated by a nominating
committee currently controlled by Roche, and one Genentech employee. Arthur D.
Levinson, Ph.D., the President and Chief Executive Officer of Genentech, will
serve as the Genentech employee director and chairman of the board. However,
under the new affiliation agreement, Roche will have the right to obtain
proportional representation on our board at any time. Roche intends to continue
to allow our current management to conduct our business and operations as we
have done in the past. However, we cannot assure you that Roche will not
implement a new business plan in the future.
Except as follows, the affiliation arrangements will not limit Roche's ability
to buy or sell our common stock. If Roche and its affiliates sell their majority
ownership of shares of our common stock to a successor, Roche has agreed that it
will cause the successor to purchase all shares of our common stock not held by
Roche as follows:
- with consideration, if that consideration is composed entirely of either
cash or equity traded on a U.S. national securities exchange, in the same
form and amounts per share as received by Roche and its affiliates; and
- in all other cases, with consideration that has a value per share not
less than the weighted average value per share received by Roche and its
affiliates as determined by a nationally recognized investment bank.
If Roche owns more than 90% of our common stock for more than two months, Roche
has agreed that it would, as soon as reasonably practicable, effect a merger of
Genentech with Roche or an affiliate of Roche.
Roche has agreed, as a condition to any merger of Genentech with Roche or the
sale of our assets to Roche, that either:
- the merger or sale must be authorized by the favorable vote of a majority
of non-Roche stockholders, provided no person will be entitled to cast
more than 5% of the votes at the meeting; or
- in the event such a favorable vote is not obtained, the value of the
consideration to be received by non-Roche stockholders would be equal to
or greater than the average of the means of the ranges of fair values for
the common stock as determined by two nationally recognized investment
banks.
We have agreed not to approve, without the prior approval of the directors
designated by Roche:
- any acquisition, sale or other disposal of all or a portion of our
business representing 10% or more of our assets, net income or revenues;
- any issuance of capital stock except under certain circumstances; or
- any repurchase or redemption of our capital stock other than a redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
2
<PAGE> 6
For more information about our relationship with Roche and its impact on
investors, please read "Relationship with Roche" and "Risk Factors--Roche, Our
Controlling Stockholder, May Have Interests That Are Adverse to Yours" below.
Licensing Agreement
We have, in the past, cooperated in various business collaborations with Roche.
We expect such cooperation to continue. In 1995, we entered into a licensing and
marketing agreement with Hoffmann-La Roche and its affiliates granting it a
ten-year option to license to use and sell products in non-U.S. markets. In
connection with this offering, we will amend that agreement, the major
provisions of which include:
- extending Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license our products upon
the occurrence of any of the following: (1) our decision to file an
Investigational New Drug exemption application, or IND, for a product,
(2) completion of a Phase II trial for a product or (3) if Hoffmann-La
Roche previously paid us a fee of $10 million to extend its option on a
product, completion of a Phase III trial for that product;
- we have agreed, in general, to manufacture for and supply to Hoffmann-La
Roche its clinical requirements of our products at cost, and its
commercial requirements at cost plus a margin of 20%; however,
Hoffmann-La Roche will have the right to manufacture our products under
certain circumstances;
- Hoffmann-La Roche has agreed to pay, for each product for which
Hoffmann-La Roche exercises its option upon either a decision to file an
IND with the U.S. Food and Drug Administration, or FDA, or completion of
the Phase II trials, a royalty of 12.5% on the first $100 million on its
aggregate sales of that product and thereafter a royalty of 15% on its
aggregate sales of that product in excess of $100 million until the later
in each country of the expiration of our last relevant patent or 25 years
from the first commercial introduction of that product; and
- Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of
the expiration of our relevant patent or 25 years from the first
commercial introduction of that product; however, $5 million of any
option extension fee paid by Hoffmann-La Roche will be credited against
royalties payable to us in the first calendar year of sales by
Hoffmann-La Roche in which aggregate sales of that product exceed $100
million.
For more information about this agreement, see "Business--Licensing Agreements
with F. Hoffmann-La Roche Ltd--Amended and Restated Licensing Agreement."
Tax Sharing Agreement
After the redemption of our special common stock, we will be included in Roche's
U.S. federal consolidated income tax group. As a result, our tax liability will
be included in the consolidated federal income tax liability of Roche and its
subsidiaries. We also will be included with Roche and/or one or more Roche
subsidiaries in consolidated or combined income tax groups for certain state and
local tax jurisdictions. Accordingly, we will enter into a tax sharing agreement
with Roche. Pursuant to the tax sharing agreement, we and Roche will make
payments so that the net amount paid by us on account of Roche's consolidated or
combined taxes will be determined as though Genentech had filed separate,
stand-alone income tax returns as the common parent of a group of corporations
rather than a consolidated subsidiary of Roche. For more information about the
tax sharing agreement, you should read "Relationship with Roche--Tax Sharing
Agreement."
Roche's Right to Maintain its Percentage Ownership Interest in Our Stock
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. In order to preserve our status as a
member of Roche's consolidated federal income tax group, the affiliation
agreement will require us to, among other things, establish a stock repurchase
program designed to maintain Roche's percentage ownership interest in our common
stock. In addition, Roche will have a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest. For more
information you should read "Relationship with Roche--Roche's Right to Maintain
its Percentage Ownership Interest in Our Stock."
3
<PAGE> 7
THE OFFERING
COMMON STOCK OFFERED BY ROCHE........20,000,000 shares
OVER-ALLOTMENT OPTION FROM ROCHE.....2,000,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING.............................127,298,588 shares
USE OF PROCEEDS......................We will not receive any of the net proceeds
from this offering.
DIVIDEND POLICY......................We do not intend to declare or pay any cash
dividends on our common stock in the
foreseeable future. We plan to retain any
earnings for use in the operation of our
business and to fund future growth.
PROPOSED NEW YORK STOCK EXCHANGE
SYMBOL..............................."DNA"
Unless we specifically state otherwise, the information in this prospectus does
not take into account the sale of up to 2,000,000 shares of common stock by
Roche that the underwriters have the option to purchase solely to cover
over-allotments.
The number of shares of our common stock outstanding listed above does not take
into account approximately 10,600,000 shares of common stock that may be issued
upon exercise of either outstanding stock options or stock options which will be
issued prior to this offering.
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data for our
company. The historical and pro forma data presented in this table are derived
from our reported consolidated financial statements and notes thereto and
unaudited pro forma condensed consolidated financial statements and notes
thereto, respectively, which are included elsewhere in this prospectus. The pro
forma information gives effect to the June 1999 redemption of our special common
stock as if it occurred at January 1, 1998 in the case of the statement of
operations data and March 31, 1999 in the case of the balance sheet data. The
pro forma information also gives effect to the 1990 through 1997 purchases of
our common stock and special common stock by Roche.
The pro forma statement of operations data for the year ended December 31, 1998
includes amortization of goodwill ($154.4 million) and other intangibles ($224.3
million) and reflects the sale of inventories adjusted to fair value (such
adjustment totalling $191.8 million) related to the allocation to our financial
statements of Roche's purchase prices and our redemption of the special common
stock. The pro forma statement of operations data for the three months ended
March 31, 1999 includes amortization of goodwill ($38.6 million) and other
intangibles ($56.1 million) related to the allocation of Roche's purchase prices
and our redemption of the special common stock to our financial statements. The
unaudited pro forma statement of operations data for the three months ended
March 31, 1999 excludes an adjustment for the sale of inventories adjusted to
fair value as it is assumed that these inventories were sold in 1998 as there is
approximately twelve months of inventory on hand. The pro forma statements of
operations data also reflect the book tax benefits related to each of these pre-
tax pro forma adjustments other than goodwill (which has and will have no book
tax benefit) at a 40% marginal rate. For more information regarding this pro
forma data, you should read the "Unaudited Pro Forma Condensed Consolidated
Financial Statements" elsewhere in this prospectus.
<TABLE>
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THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------------- ------------------------------------------------
PRO FORMA PRO FORMA
1999 1999 1998 1998 1998 1997 1996
----------- ----------- ----------- ----------- -------- -------- ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
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In millions, except per share
data
STATEMENT OF OPERATIONS DATA
Total revenues................. $318.1 $322.3 $264.7 $1,134.1 $1,150.9 $1,016.7 $968.7
Product sales................ 234.1 234.1 164.7 717.8 717.8 584.9 582.8
Royalties.................... 46.6 46.6 64.5 229.6 229.6 241.1 214.7
Contract and other........... 19.2 19.2 14.9 114.8 114.8 121.6 107.0
Interest..................... 18.2 22.4 20.6 71.9 88.7 69.1 64.2
Total costs and expenses....... $379.7 $285.0 $207.7 $1,468.8 $ 898.3 $ 846.9 $820.8
Cost of sales................ 45.7 45.7 33.6 330.4 138.6 102.5 104.5
Research and development..... 90.7 90.7 98.2 396.2 396.2 470.9 471.1
Marketing, general and
administrative............ 97.2 97.2 74.9 358.9 358.9 269.9 240.1
Special charge -- legal
settlement................ 50.0 50.0 -- -- -- -- --
Goodwill amortization........ 38.6 -- -- 154.4 -- -- --
Amortization of other
intangibles............... 56.1 -- -- 224.3 -- -- --
Interest..................... 1.4 1.4 1.0 4.6 4.6 3.6 5.1
Income (loss) before taxes..... $(61.6) $ 37.3 $ 57.0 $ (334.7) $ 252.6 $ 169.8 $147.9
Income tax provision
(benefit).................... (4.6) 22.9 16.0 (114.0) 70.7 40.8 29.6
Net income (loss).............. $(57.0) $ 14.4 $ 41.0 $ (220.7) $ 181.9 $ 129.0 $118.3
Effective tax rate............. 7% 61% 28% 34% 28% 24% 20%
Earnings (loss) per share
Basic........................ $(0.45) $ 0.11 $ 0.33 $ (1.75) $ 1.45 $ 1.05 $ 0.98
Diluted...................... (0.45) 0.11 0.32 (1.75) 1.40 1.02 0.95
Weighted average shares
outstanding
Basic........................ 127.7 127.7 124.8 125.8 125.8 123.0 120.6
Diluted...................... 127.7 132.5 128.8 125.8 129.9 126.4 124.0
Actual shares outstanding at
period-end................... 128.0 128.0 125.2 127.1 127.1 124.2 121.4
OTHER DATA
Cash flow from operations...... $ 54.5 $ 53.6 $ 68.9 $ 351.3 $ 349.9 $ 118.3 $139.7
Depreciation expense........... 20.2 20.2 16.5 72.7 72.7 58.9 57.6
Amortization expense........... 96.4 1.7 1.4 384.1 5.4 6.6 4.5
Capital expenditures........... 18.2 18.2 21.0 88.1 88.1 154.9 141.8
</TABLE>
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
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AS OF MARCH 31, 1999
----------------------
PRO FORMA ACTUAL
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(UNAUDITED)
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In millions
BALANCE SHEET DATA
Cash and cash equivalents, short-term investments and
long-term marketable securities........................... $1,385.5 $1,662.5
Working capital............................................. 904.8 942.6
Goodwill and other intangible assets........................ 3,249.9 64.1
Total assets................................................ 6,110.5 2,926.1
Long-term debt.............................................. 150.0 150.0
Total liabilities........................................... 1,067.5 536.4
Total stockholders' equity.................................. 5,043.0 2,389.7
Total liabilities and stockholders' equity.................. 6,110.5 2,926.1
</TABLE>
6
<PAGE> 10
RISK FACTORS
You should carefully consider each of the risks and uncertainties described
below and all of the other information in this prospectus or incorporated by
reference before deciding to invest in shares of our common stock. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual events, our
business, financial condition or results of operations could be materially and
adversely affected. In such case, the trading price of our common stock could
decline.
FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON STOCK
Our operating results may vary from period to period for several reasons
including, but not limited to:
- the overall competitive environment for our products;
- the amount and timing of sales to customers in the United States;
- the amount and timing of our sales to Hoffmann-La Roche and the timing of
its sales to its customers;
- the timing and volume of bulk shipments to licensees;
- the availability of third-party reimbursements for the cost of therapy;
- the effectiveness and safety of our products;
- the rate of adoption and use of our products for approved indications and
additional indications;
- the potential introduction of new products and additional indications for
existing products in 1999 and beyond; and
- the ability to manufacture sufficient quantities of any particular
marketed product.
These fluctuations may not match the expectations of securities analysts and
investors. This could cause the trading price of our common stock to decline.
THE RESULTS OF OUR RESEARCH AND DEVELOPMENT ARE UNPREDICTABLE
Successful pharmaceutical product development is highly uncertain and is
dependent on numerous factors, many of which are beyond our control. Products
that appear promising in the early phases of development may fail to reach the
market for numerous reasons, including, but not limited to:
- they may be found to be ineffective or to have harmful side effects in
preclinical or clinical testing;
- they may fail to receive necessary regulatory approvals;
- they may turn out to be uneconomical because of manufacturing costs or
other factors; or
- they may be precluded from commercialization by the proprietary rights of
others or by competing products or technologies for the same indication.
Success in preclinical and early clinical trials does not ensure that
large-scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical trials
and to submit an application for marketing approval for a final decision by a
regulatory authority varies significantly and may be difficult to predict.
Factors affecting our research and development expenses include, but are not
limited to:
- the number of and the outcome of clinical trials currently being
conducted by us and/or our collaborators;
- the number of products entering into development from late-stage
research;
- Hoffmann-La Roche's decisions whether to exercise its options to develop
and sell our future products in non-U.S. markets and the timing and
amount of any related development cost reimbursement;
7
<PAGE> 11
- in-licensing activities, including the timing and amount of related
development funding or milestone payments; and
- future levels of revenues.
ROCHE, OUR CONTROLLING STOCKHOLDER, MAY HAVE INTERESTS THAT ARE ADVERSE TO YOURS
Upon the completion of this offering, Roche will own approximately 84.3% of our
outstanding common stock. Roche may in the future, through open market purchases
or otherwise, acquire additional shares of our common stock. Roche will control
the outcome of actions requiring the approval of our stockholders. Prior to the
completion of this offering, we will amend our certificate of incorporation and
bylaws and enter into a new affiliation agreement with Roche. Our bylaws will
provide, among other things, that the composition of our board of directors will
consist of two Roche directors, three independent directors nominated by a
nominating committee and one Genentech employee who in the future will be
nominated by the nominating committee. As long as Roche owns in excess of 50% of
our common stock, Roche directors will comprise two of the three members of the
nominating committee. However, at any time until Roche owns less than 5% of our
stock, Roche will have the right to obtain proportional representation on our
board. Roche intends to continue to allow our current management to conduct our
business and operations as we have done in the past. However, we cannot assure
you that Roche will not institute a new business plan in the future. The
interests of Roche may conflict with the interests of other holders of common
stock. See "Relationship with Roche."
The affiliation agreement between us and Roche requires the approval of the
directors designated by Roche to make any acquisition or any sale or disposal of
all or a portion of our business representing 10% or more of our assets, net
income or revenues. Moreover, in order to preserve our status as a member of
Roche's consolidated federal income tax group, the affiliation agreement also
contains provisions which are designed to enable Roche to maintain its
percentage ownership interest in our common stock. These provisions may have the
effect of limiting our ability to make acquisitions. For more information, see
"Relationship with Roche -- Roche's Right to Maintain its Percentage Ownership
Interest in Our Stock."
Our certificate of incorporation will include provisions relating to competition
by Roche with us, allocations of corporate opportunities, transactions with
interested parties and intercompany agreements and provisions limiting the
liability of certain people. Our certificate of incorporation will provide that
any person purchasing or acquiring an interest in shares of our capital stock
shall be deemed to have consented to the provisions in the certificate of
incorporation relating to competition with Roche, conflicts of interest,
corporate opportunities and intercompany agreements, and such consent may
restrict such person's ability to challenge transactions carried out in
compliance with such provisions. Persons who are directors and/or officers of
ours and who are also directors and/or officers of Roche may choose to take
action in reliance on such provisions rather than act in a manner that might be
favorable to us but adverse to Roche. Two of our directors currently serve as
directors, officers and employees of Roche Holding Ltd and its affiliates. For
more information, see "Description of Capital Stock -- Certain Provisions of
Genentech's Certificate of Incorporation and Bylaws."
WE DEPEND ON SKILLED PERSONNEL AND KEY RELATIONSHIPS
The success of our business depends, in large part, on our continued ability to
attract and retain highly qualified management, scientific, manufacturing and
sales and marketing personnel, and on our ability to develop and maintain
important relationships with leading research institutions and key distributors.
Competition for such personnel and relationships is intense. In connection with
the redemption of our special common stock, two of our existing employee stock
option plans terminated and a number of employee options, including many of
those held by senior management, were canceled. We intend to issue new employee
stock options to attract and retain employees. However, certain provisions of
our affiliation agreement with Roche are designed to enable Roche to maintain
its percentage ownership interest in our common stock, which may limit our
flexibility as to the number of shares we are able to grant under our stock
option plans. We cannot assure you that we will be able to attract or retain
such personnel or maintain such relationships. See "Management -- Treatment of
Options in Connection with the Redemption of the Special Common Stock and the
Issuance of Options Prior to this Offering."
WE FACE GROWING AND NEW COMPETITION
We face growing competition in two of our therapeutic markets and expect new
competition in a third market. First, in the thrombolytic market, Activase has
lost market share and could lose additional market share to Centocor, Inc.'s
Retavase(R); the resulting adverse effect on sales could be material. Retavase
received approval from the FDA in October 1996 for the treatment of acute
myocardial infarction. In addition, Bristol-Myers Squibb recently completed a
Phase III trial for another
8
<PAGE> 12
competitive product for the treatment of acute myocardial infarction and it may
file for product approval in the near future. There is also an increasing use of
mechanical reperfusion in lieu of thrombolytic therapy for the treatment of
acute myocardial infarction, which we expect to continue.
Second, in the growth hormone market, we continue to face increased competition
from five other companies with growth hormone products, although one company has
been preliminarily enjoined from selling its product. As a result of this
competition, we have experienced a loss in new patient market share. Four of
these competitors have also received approval to market their existing human
growth hormone products for additional indications. As a result of this
competition, our sales of Protropin, Nutropin and Nutropin AQ may decline,
perhaps significantly.
Third, in the non-Hodgkin's lymphoma market, Coulter Pharmaceutical Inc., or
Coulter, recently filed a Biologics License Application, or BLA, for a product
that would compete with our product Rituxan. We are also aware of other
potentially competitive biologic therapies for non-Hodgkin's lymphoma in
development.
OTHER COMPETITIVE FACTORS COULD AFFECT OUR PRODUCT SALES
Other competitive factors that could affect our product sales include, but are
not limited to:
- the timing of FDA approval, if any, of competitive products;
- our pricing decisions and the pricing decisions of our competitors;
- the degree of patent protection afforded to particular products;
- the outcome of litigation involving our patents and patents of other
companies for products and processes related to production and
formulation of those products;
- the increasing use and development of alternate therapies; and
- the rate of market penetration by competing products.
IN CONNECTION WITH THE REDEMPTION OF OUR SPECIAL COMMON STOCK WE WILL RECORD
SUBSTANTIAL GOODWILL AND OTHER INTANGIBLES, THE AMORTIZATION OF WHICH WILL
ADVERSELY AFFECT OUR EARNINGS
As a result of the redemption of our special common stock, Roche currently owns
all of our outstanding stock. Because we are wholly owned by Roche, push-down
accounting is required under generally accepted accounting principles. Push-down
accounting requires that we establish a new accounting basis for our assets and
liabilities, based on Roche's cost in acquiring all of our stock. In other
words, Roche's cost of acquiring Genentech is "pushed down" to us and reflected
on our financial statements. Push-down accounting requires us to record goodwill
and other intangible assets of approximately $1,698.0 million and $1,487.8
million, respectively, during the second quarter of 1999. The amortization of
this goodwill and other intangible assets will have a significant negative
impact on our financial results in future years. In addition, we will
continuously evaluate whether events and circumstances have occurred that
indicate the remaining balance of this and other intangible assets may not be
recoverable. When factors indicate that assets should be evaluated for possible
impairment, we may be required to reduce the carrying value of our intangible
assets, which could have a material adverse effect on our financial condition
and results of operations during the periods in which such a reduction is
recognized. We may be required to write down intangible assets in future
periods. For more information about push-down accounting, see "Unaudited Pro
Forma Condensed Consolidated Financial Statements."
OUR ROYALTY AND CONTRACT REVENUES COULD DECLINE
Royalty and contract revenues in future periods could vary significantly. Major
factors affecting these revenues include, but are not limited to:
- Hoffmann-La Roche's decisions whether to exercise its options to develop
and sell our future products in non-U.S. markets and the timing and
amount of any related development cost reimbursements;
- variations in Hoffmann-La Roche's sales and other licensees' sales of
licensed products;
- the conclusion of existing arrangements with other companies and
Hoffmann-La Roche;
9
<PAGE> 13
- the timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees;
- fluctuations in foreign currency exchange rates;
- the initiation of new contractual arrangements with other companies;
- whether and when contract benchmarks are achieved;
- the failure of or refusal of a licensee to pay royalties; and
- the expiration or invalidation of patents or other licensed intellectual
property.
PROTECTING OUR PROPRIETARY RIGHTS IS DIFFICULT AND COSTLY
The patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions. Accordingly, the
breadth of claims allowed in these companies' patents cannot be predicted.
Patent disputes are frequent and can preclude commercialization of products. We
have in the past been, are currently, and may in the future be involved in
material patent litigation. Patent litigation is costly in its own right and
could subject us to significant liabilities to third-parties and, if decided
adversely, we may need to obtain third-party licenses at a material cost or
cease using the technology or product in dispute. The presence of patents or
other proprietary rights belonging to other parties may lead to the termination
of the research and development of a particular product. We believe that we have
strong patent protection or the potential for strong patent protection for a
number of our products that generate sales and royalty revenue or that we are
developing. However, the courts will determine the ultimate strength of patent
protection of our products and those on which we earn royalties. You should read
"Business--Legal Proceedings."
WE ARE EXPOSED TO MARKET RISK
We are exposed to market risk, including changes to interest rates, foreign
currency exchange rates and equity investment prices. To reduce the volatility
relating to these exposures, we enter into various derivative transactions
pursuant to our investment and risk management policies and procedures in areas
such as hedging and counterparty exposure practices. We could be exposed to
losses related to these financial instruments should one of our counterparties
default. Variations in interest rates, foreign currency exchange rates and
equity investment prices may also affect our financial results. You should read
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Market Risk."
WE MAY INCUR MATERIAL LITIGATION COSTS
We are subject to legal proceedings, including those matters described in
"Business--Legal Proceedings." Litigation to which we are currently or have been
subjected relates to, among other things, our patent and intellectual property
rights, licensing arrangements with other persons, product liability and
financing activities. We cannot predict with certainty the eventual outcome of
pending litigation, and we could be required to incur substantial expense in
defending these lawsuits. We have in the past taken substantial special charges
relating to certain litigation, including a special charge of $50 million in the
first quarter of 1999.
WE MAY INCUR MATERIAL PRODUCT LIABILITY COSTS
The testing and marketing of medical products entail an inherent risk of product
liability. We maintain limited product liability insurance coverage. Our
business may be materially and adversely affected by a successful product
liability claim in excess of our insurance coverage. We cannot assure you that
product liability insurance coverage will continue to be available to us in the
future on reasonable terms or at all.
OUR PRODUCTS ARE SUBJECT TO GOVERNMENTAL REGULATIONS AND APPROVALS
The pharmaceutical industry is subject to stringent regulation with respect to
product safety and efficacy by various federal, state and local authorities. Of
particular significance are the FDA's requirements covering research and
development, testing, manufacturing, quality control, labeling and promotion of
drugs for human use. A pharmaceutical product cannot be marketed in the United
States until it has been approved by the FDA, and then can only be marketed for
the indications and claims approved by the FDA. As a result of these
requirements, the length of time, the level of expenditures and the laboratory
and clinical information required for approval of a New Drug Application, or
NDA, or a BLA, are substantial and can require a
10
<PAGE> 14
number of years. We cannot be sure that we can obtain necessary regulatory
approvals on a timely basis, if at all, for any of the products we are
developing, and all of the following could have a material adverse effect on our
business:
- significant delays in obtaining or failing to obtain required approvals;
- loss of or changes to previously obtained approvals; and
- failing to comply with existing or future regulatory requirements.
Moreover, it is possible that the current regulatory framework could change or
additional regulations could arise at any stage during our product development,
which may affect our ability to obtain approval of our products.
OUR STOCK PRICE, LIKE THAT OF MANY BIOTECHNOLOGY COMPANIES, IS LIKELY TO BE
HIGHLY VOLATILE
The market prices for securities of biotechnology companies in general have been
highly volatile and may continue to be highly volatile in the future. In
addition, due to the absence of the put and call associated with our special
common stock and the reduction in the number of shares of our publicly traded
stock, the market price of our common stock may be more volatile in the future
than our special common stock was in the past. The following factors, in
addition to other risk factors described in this section, may have a significant
impact on the market price of our common stock:
- announcements of technological innovations or new commercial products by
us or our competitors;
- developments concerning proprietary rights, including patents;
- publicity regarding actual or potential medical results relating to
products under development by us or our competitors;
- regulatory developments in the United States and foreign countries;
- public concern as to the safety of biotechnology products;
- economic and other external factors or other disaster or crisis; and
- period-to-period fluctuations in financial results.
WE MAY LOSE REVENUE OR INCUR SIGNIFICANT COSTS IF YEAR 2000 COMPLIANCE ISSUES
ARE NOT PROPERLY ADDRESSED
We use and rely on a wide variety of information technologies, computer systems
and scientific and manufacturing equipment containing computer related
components (such as programmable logic controllers and other embedded systems).
Some of our older computer software programs and equipment are unable to
distinguish between the year 1900 and the year 2000. As a result, time-sensitive
functions of those software programs and equipment may misinterpret dates after
January 1, 2000 to refer to the twentieth century rather than the twenty-first
century. This could cause system or equipment shutdowns, failures or
miscalculations resulting in inaccuracies in computer output or disruptions of
operations, including, among other things, inaccurate processing of financial
information and/or temporary inabilities to process transactions, manufacture
products or engage in similar normal business activities. In addition to risks
associated with our own computer systems and equipment, we have relationships
with, and are to varying degrees dependent upon, a large number of third parties
that provide information, goods and services to us. These include financial
institutions, suppliers, vendors, research partners, governmental entities and
customers. If significant numbers of these third parties experience failures in
their computer systems or equipment due to Year 2000 non-compliance, it could
affect our ability to process transactions, manufacture products, or engage in
similar normal business activities.
FUTURE SALES BY ROCHE COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE
Sales of a substantial number of shares of our common stock in the public market
following this offering could adversely affect the market price of our common
stock. You should read "Shares Eligible for Future Sale."
11
<PAGE> 15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this prospectus are
forward-looking statements concerning our operations, economic performance and
financial condition. Forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, are included, for
example, in the discussions about:
- our strategy;
- our future relationship with Roche;
- our liquidity;
- product sales, royalties and contract revenues;
- new product development or product introduction;
- expenses and net income;
- our credit risk management;
- our asset/liability risk management;
- our operational and legal risks;
- the assumptions used in our unaudited pro forma condensed consolidated
financial statements;
- our consumer business;
- Year 2000 issues; and
- how we may be affected by certain legal proceedings.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
12
<PAGE> 16
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>
We intend to list our common stock on the New York Stock Exchange under the
symbol "DNA".
13
<PAGE> 17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements
are presented for illustrative purposes only. These statements are not
necessarily indicative of our financial position or results of operations for
future periods or the results that actually would have been realized had the
Redemption (as defined below) occurred and had push-down accounting for Roche's
purchases of our common and special common stock and the Redemption (as defined
below) been applied during the specified periods. The unaudited pro forma
condensed consolidated financial statements, including the notes thereto, are
based on and qualified in their entirety by reference to, and should be read in
conjunction with our reported audited consolidated financial statements and
unaudited condensed consolidated financial statements and the notes thereto,
which are included elsewhere herein.
The unaudited pro forma condensed consolidated financial statements give effect
to our June 30, 1999 redemption of all of our outstanding special common stock
held by stockholders other than Roche at a price of $82.50 per share in cash
with funds deposited by Roche for such purpose (the "Redemption"), resulting in
Roche owning 100% of our common stock. Roche will account for the Redemption as
a purchase of a business and we are required to push-down the effect of the
Redemption and Roche's 1990 through 1997 purchases of our common and special
common stock into our consolidated financial statements. Under this method of
accounting, our assets and liabilities, including intangible assets, will be
recorded at their fair values not to exceed the aggregate Roche purchase price,
including Roche's transaction costs. In 1990 and 1991 through 1997 Roche
purchased 60% and 5%, respectively, of our outstanding stock. The push-down
effect of Roche's aggregate purchase price and the Redemption price in the
following unaudited pro forma condensed consolidated balance sheet is allocated
based on Roche's ownership percentages as if the purchases had occurred at the
original purchase dates for the 1990 and 1991 through 1997 purchases and at
March 31, 1999 for the Redemption. The unaudited pro forma condensed
consolidated statements of operations assume that the purchases had occurred at
the original purchase dates for the 1990 and 1991 through 1997 purchases and at
January 1, 1998 for the Redemption. The unaudited pro forma condensed
consolidated statements of operations exclude the effect of charges for
in-process research and development and employee compensation for stock option
related transactions to be recorded at the redemption date and thereafter.
The projected or assumed completion dates, revenues, expenses, cash flows and
other financial information described below are forward-looking statements that
involve substantial risks and uncertainties. Actual results or performance may
differ materially for a variety of reasons. There are a number of risks with
respect to the timely completion and commercialization of the in-process
research and development projects, including the risk that the product
candidates may be found to be ineffective or to have harmful side effects in
clinical testing and that a competitor may develop products which compete with
or replace the in-process research and development projects or that we may lose
key personnel. Other risks that may affect future results or performance are
described under "Risk Factors."
14
<PAGE> 18
GENENTECH, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
---------------------------------------
AS OF MARCH 31, 1999
---------------------------------------
AS PRO FORMA
REPORTED ADJUSTMENTS PRO FORMA
-------- -------------- ---------
<S> <C> <C> <C>
In millions, except share data
ASSETS
Current assets
Cash and cash equivalents................................. $ 213.6 $ -- $ 213.6
Short-term investments.................................... 681.4 (277.0)(a) 404.4
Accounts receivable....................................... 168.8 -- 168.8
Inventories............................................... 146.7 191.8(b) 338.5
Prepaid expenses and other current assets................. 51.9 110.8(a)
(43.5)(q) 119.2
-------- --------- ---------
Total current assets.............................. 1,262.4 (17.9) 1,244.5
Long-term marketable securities............................. 767.5 -- 767.5
Property, plant and equipment, net.......................... 698.8 16.5(c) 715.3
Goodwill.................................................... -- 472.8(d)
1,225.2(e) 1,698.0
Other intangible assets..................................... -- 117.3(f)
1,370.5(g)
64.1(q) 1,551.9
Other assets................................................ 197.4 (64.1) (q) 133.3
-------- --------- ---------
Total assets...................................... $2,926.1 $ 3,184.4 $ 6,110.5
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 31.6 $ -- $ 31.6
Other accrued liabilities................................. 288.2 19.9(e,i) 308.1
-------- --------- ---------
Total current liabilities......................... 319.8 19.9 339.7
Long-term debt.............................................. 150.0 -- 150.0
Deferred income taxes....................................... -- 464.3(e)
46.9(i)
41.5(q) 552.7
Other long-term liabilities................................. 66.6 (41.5)(q) 25.1
-------- --------- ---------
Total liabilities................................. 536.4 531.1 1,067.5
Stockholders' equity
Special common stock (51,346,989 shares outstanding, none
pro forma)............................................. 1.0 (1.0)(j) --
Common stock (76,621,009 shares outstanding, 127,298,588
shares pro forma)...................................... 1.5 1.0(j) 2.5
Additional paid-in capital................................ 1,630.3 2,276.9(k)
3,027.3(k)
62.8(i) 6,997.3
Retained earnings (accumulated deficit)................... 707.5 (1,733.6)(h,l)
(962.8)(h,l) (1,988.9)
Accumulated other comprehensive income.................... 49.4 (17.3)(l) 32.1
-------- --------- ---------
Total stockholders' equity........................ 2,389.7 2,653.3 5,043.0
-------- --------- ---------
Total liabilities and stockholders' equity........ $2,926.1 $ 3,184.4 $ 6,110.5
======== ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
15
<PAGE> 19
GENENTECH, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------
AS PRO FORMA
REPORTED ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
In millions, except per share data
Revenues
Product sales............................................. $234.1 $ -- $234.1
Royalties................................................. 46.6 -- 46.6
Contract.................................................. 7.2 -- 7.2
Other..................................................... 12.0 -- 12.0
Interest.................................................. 22.4 (4.2)(m) 18.2
------ ------ ------
Total revenues.................................... 322.3 (4.2) 318.1
Cost and expenses
Cost of sales............................................. 45.7 -- 45.7
Research and development.................................. 90.7 -- 90.7
Marketing, general and administrative..................... 97.2 -- 97.2
Special charge -- legal settlement........................ 50.0 -- 50.0
Goodwill amortization..................................... -- 18.2(d)
20.4(e) 38.6
Amortization of other intangibles......................... -- 17.4(f)
38.7(g) 56.1
Interest.................................................. 1.4 -- 1.4
------ ------ ------
Total costs and expenses.......................... 285.0 94.7 379.7
------ ------ ------
Income (loss) before taxes.................................. 37.3 (98.9) (61.6)
Income tax provision (benefit).............................. 22.9 (24.1)(o)
(3.4)(p) (4.6)
------ ------ ------
Net income (loss)........................................... $ 14.4 $(71.4) $(57.0)
====== ====== ======
Earnings (loss) per share
Basic..................................................... $ 0.11 $(0.45)
Diluted................................................... 0.11 (0.45)
Weighted average shares used to compute earnings (loss) per
share
Basic..................................................... 127.7 127.7
Diluted................................................... 132.5 127.7
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
16
<PAGE> 20
GENENTECH, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED DECEMBER 31, 1998
---------------------------------------
AS PRO FORMA
REPORTED ADJUSTMENTS PRO FORMA
-------- -------------- ---------
<S> <C> <C> <C>
In millions, except per share data
Revenues
Product sales............................................. $ 717.8 $ -- $ 717.8
Royalties................................................. 229.6 -- 229.6
Contract.................................................. 106.0 -- 106.0
Other..................................................... 8.8 -- 8.8
Interest.................................................. 88.7 (16.8)(m) 71.9
-------- ------- --------
Total revenues.................................... 1,150.9 (16.8) 1,134.1
Cost and expenses
Cost of sales............................................. 138.6 191.8(n) 330.4
Research and development.................................. 396.2 -- 396.2
Marketing, general and administrative..................... 358.9 -- 358.9
Goodwill amortization..................................... -- 72.7(d)
81.7(e) 154.4
Amortization of other intangibles......................... -- 69.6(f)
154.7(g) 224.3
Interest.................................................. 4.6 -- 4.6
-------- ------- --------
Total costs and expenses.......................... 898.3 570.5 1,468.8
-------- ------- --------
Income (loss) before taxes.................................. 252.6 (587.3) (334.7)
Income tax provision (benefit).............................. 70.7 (173.2) (o)
(11.5) (p) (114.0)
-------- ------- --------
Net income (loss)........................................... $ 181.9 $(402.6) $ (220.7)
======== ======= ========
Earnings (loss) per share
Basic..................................................... $ 1.45 $ (1.75)
Diluted................................................... 1.40 (1.75)
Weighted average shares used to compute earnings (loss) per
share
Basic..................................................... 125.8 125.8
Diluted................................................... 129.9 125.8
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
17
<PAGE> 21
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Roche will account for the Redemption as a purchase of a business and we are
required to push down the effect of the Redemption and Roche's 1990 through 1997
purchases into our consolidated financial statements. Under this method of
accounting, Genentech's assets and liabilities, including intangible assets,
will be recorded at their fair values not to exceed the aggregate purchase
price, including Roche's transaction costs. In 1990 and 1991 through 1997 Roche
purchased 60% and 5%, respectively, of the outstanding stock of Genentech.
Further, in June 1999, we redeemed all of our special common stock held by
stockholders other than Roche resulting in Roche owning 100% of our common
stock. The push-down effect of Roche's aggregate purchase price and the
Redemption price in the accompanying unaudited pro forma condensed consolidated
balance sheet is allocated based on Roche's ownership percentages as if the
purchases occurred at the original purchase dates for the 1990 and 1991 through
1997 purchases, and at March 31, 1999 for the Redemption. Management of
Genentech determined the values of tangible and intangible assets, including
in-process research and development, used in allocating the purchase prices. The
aggregate purchase prices for acquisition of all of Genentech's outstanding
shares, including Roche's estimated transaction costs of $10.0 million, was
$6,604.9 million, consisting of approximately $2,843.5 million for the 1990 and
1991 through 1997 purchases and approximately $3,761.4 million for the
Redemption. Approximately $277.0 million of compensation expense, before tax
effect, related to Genentech's early cash settlement of employee stock options
will be paid by Genentech and charged to earnings at June 30, 1999, the
Redemption date. In addition, we expect to record in the second and third
quarters of 1999 an aggregate of approximately $102.3 million and $30.4 million,
before tax effect, respectively, of non-cash compensation expense in connection
with the modification and remeasurement, for accounting purposes, of a number of
options assuming a public offering price of $90 per share, the midpoint of the
range set forth on the cover of this prospectus, and assuming none of the
limited number of eligible employees elect to participate in our new long-term
deferred compensation plan.
The unaudited pro forma condensed consolidated statements of operations exclude
the effect of the charge for in-process research and development and the
employee-related compensation amounts described above, which are reflected as
charges to retained earnings in the unaudited pro forma condensed consolidated
balance sheet. The as reported balance sheet as of March 31, 1999 and the as
reported statements of operations for the year ended December 31, 1998 and for
the three months ended March 31, 1999 are derived from Genentech's historical
consolidated financial statements included elsewhere herein.
The following table shows details of the excess of purchase price over net book
value:
<TABLE>
<CAPTION>
-----------------------------------
PURCHASE PERIOD
-----------------------
1990 - 1997 1999 TOTAL
----------- -------- --------
<S> <C> <C> <C>
In millions
Total purchase price........................................ $2,843.5 $3,761.4 $6,604.9
Less portion of net book value purchased.................. 566.6 836.4 1,403.0
-------- -------- --------
Excess of purchase price over net book value................ $2,276.9 $2,925.0 $5,201.9
======== ======== ========
</TABLE>
18
<PAGE> 22
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the allocation of the excess of the purchase price
over net book value:
<TABLE>
<CAPTION>
------------------------------------
PURCHASE PERIOD
-----------------------
1990 - 1997 1999 TOTAL
----------- -------- ---------
<S> <C> <C> <C>
In millions
Inventories................................................. $ 102.0 $ 191.8 $ 293.8
Land........................................................ -- 16.5 16.5
In-process research and development......................... 500.5 752.5 1,253.0
Developed product technology................................ 429.0 765.0 1,194.0
Core technology............................................. 240.5 203.0 443.5
Developed license technology................................ 292.5 175.0 467.5
Trained and assembled workforce............................. 32.5 49.0 81.5
Tradenames.................................................. 39.0 105.0 144.0
Key distributor relationships............................... 6.5 73.5 80.0
Goodwill.................................................... 1,091.2 1,225.2 2,316.4
Deferred tax liability...................................... (456.8) (631.5) (1,088.3)
-------- -------- ---------
Total............................................. $2,276.9 $2,925.0 $ 5,201.9
======== ======== =========
</TABLE>
NOTE 2. PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on management's estimates of the value of
the tangible and intangible assets acquired. Following is a description of the
pro forma adjustments:
(a) Represents the cash to be paid by Genentech associated with the early cash
settlement of employee stock options. This amount, net of related income
tax benefit of $110.8 million, will be charged to earnings in the three
months ended June 30, 1999. (See also "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Redemption of
Our Special Common Stock" for a description of these stock option
arrangements.)
(b) Represents the adjustment of inventory to fair value. The estimated useful
life of the inventory adjustment is one year based upon the expected time
to sell inventories on hand at the balance sheet date. The entire
inventory adjustment related to the 1990 through 1997 purchases is assumed
to be reflected as a charge to earnings prior to January 1, 1998.
(c) Represents adjustment to record the fair value of land in 1999. There were
no such adjustments for the periods 1990 through 1997.
(d) Represents $1,091.2 million of goodwill recorded as a result of push-down
accounting applied to Roche's 1990 through 1997 purchases less related
accumulated amortization of $618.4 million through March 31, 1999.
Included in goodwill is $456.8 million related to the recording of
deferred tax liabilities. Deferred taxes were recorded for the adjustment
to fair value for other intangible assets and inventories as a result of
Roche's 1990 through 1997 purchases. The deferred tax liability was
calculated based on a marginal tax rate of 40%. The goodwill related to
the 1990 through 1997 purchases is amortized over 15 years.
(e) Represents $1,225.2 million of goodwill recorded as a result of the
Redemption. Included in goodwill is $631.5 million related to the
recording of deferred tax liabilities. Deferred taxes were recorded for
the adjustment to fair value for other intangible assets, inventories and
land. The deferred tax liability was calculated based on a marginal tax
rate of 40% and has been allocated between short- and long-term
classifications to match the asset classifications. The goodwill related
to the Redemption is amortized over 15 years.
19
<PAGE> 23
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) Represents $1,040.0 million of other intangible assets recorded as a
result of Roche's 1990 through 1997 purchases less related accumulated
amortization of $922.7 million of those assets through March 31, 1999. The
components of other intangible assets related to these purchases and their
estimated lives are as follows:
<TABLE>
<CAPTION>
-------------------------------------
FAIR ACCUMULATED ESTIMATED
VALUE AMORTIZATION LIFE
In millions -------- ------------ ---------
<S> <C> <C> <C>
Developed product technology........................... $ 429.0 $ 364.7 10
Core technology........................................ 240.5 204.4 10
Developed license technology........................... 292.5 292.5 6
Trained and assembled workforce........................ 32.5 32.5 7
Tradenames............................................. 39.0 22.1 15
Key distributor relationships.......................... 6.5 6.5 5
-------- --------
$1,040.0 $ 922.7
======== ========
</TABLE>
(g) Represents $1,370.5 million of other intangible assets which were recorded
as a result of the Redemption. The components of other intangible assets
related to this purchase and their estimated lives are as follows:
<TABLE>
<CAPTION>
---------------------
FAIR ESTIMATED
VALUE LIFE
In millions -------- ---------
<S> <C> <C>
Developed product technology........................... $ 765.0 10
Core technology........................................ 203.0 10
Developed license technology........................... 175.0 6
Trained and assembled workforce........................ 49.0 7
Tradenames............................................. 105.0 15
Key distributor relationships.......................... 73.5 5
--------
$1,370.5
========
</TABLE>
20
<PAGE> 24
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(h) Represents $500.5 million and $752.5 million of in-process research and
development recorded as a result of Roche's 1990 through 1997 purchases
and the Redemption, respectively. At the date of each purchase, Genentech
concluded that technological feasibility of the acquired in-process
technology was not established and that the in-process technology had no
future alternative uses. Such amounts are reflected as charges to retained
earnings in the unaudited pro forma condensed consolidated balance sheet
at March 31, 1999.
The amounts assigned to in-process research and development were determined
based upon an analysis employing the risk-adjusted cash flows expected to
be generated by the products that result from the in-process projects. The
analyses performed included forecasting future cash flow that was expected
to result from the progress made on each of the in-process projects prior
to the purchase dates. These cash flows were estimated by first
forecasting, on a product-by-product basis, total revenues expected to
result from sales of the first generation of each in-process product. From
this amount, a portion of the gross in-process product revenues was removed
to account for the contribution provided by any core technology which was
considered to benefit the in-process products. The net in-process revenue
was then multiplied by the project's estimated percentage of completion as
of the purchase dates to arrive at a forecast of net in-process research
and development revenues attributable to projects completed prior to the
purchase dates. From this forecast, appropriate operating expenses, cash
flow adjustments and contributory asset returns were deducted to arrive at
a forecast of net returns on the completed portion of the in-process
technology. Finally, these net returns were discounted to a present value
at discount rates that incorporate both the weighted average cost of
capital (relative to the biotech industry and Genentech) as well as the
product-specific risk associated with the purchased in-process research and
development products. The product specific risk factors considered include
where each product is in each phase of development, type of molecule under
development, likelihood of regulatory approval, manufacturing process
capability, scientific rationale, pre-clinical safety and efficacy data,
target product profile and development plan. The discount rates employed
ranged from 16% to 19% for the 1999 valuation and 20% to 28% for the 1990
purchase valuation, all of which represent a significant risk premium to
Genentech's weighted average cost of capital.
The forecast data employed in the analyses was based upon internal product
level forecast information maintained by Genentech management in the
ordinary course of managing its business. The inputs used by Genentech in
analyzing in-process research and development were based upon assumptions
which Genentech believes to be reasonable but which are inherently
uncertain and unpredictable. These assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary from the
forecasted results. Any such variance may result in a material adverse
effect on Genentech's financial condition and results of operations.
A brief description of in-process research and development projects is set
forth below including an estimated percentage of completion of products
within each project at the Redemption date. Genentech does not track all
costs associated with research and development on a project-by-project
basis, therefore we believe a calculation of cost incurred as a percentage
of total incurred project cost as of FDA approval is not possible.
Management estimates, however, that the research and development
expenditures that will be required to complete the in-process projects will
total at least $700 million.
We have estimated percentage complete data for each project based upon an
equal weighting of three indicators, as follows:
PTS: Probability of technical success ("PTS") is a project level
statistic maintained by Genentech on an ongoing basis, which is intended to
represent the current likelihood of project success, i.e., FDA approval.
This is a quantitative calculation based upon the stage of development and
the complexity of the project, and it is highly correlated with the
project's phase of development. PTS is periodically adjusted to reflect
actual experiences over a reasonable period of time.
21
<PAGE> 25
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Status compared to Baseline Model: We developed a baseline model
which allocated percentages of a standard development project to each major
phase of the project based upon our experience. We then overlayed the
time-based status of each project to this baseline model, in order to
calculate a percentage complete for each project.
Management's Estimate of Percentage Complete: Genentech's senior
product development management representatives provided an estimate of the
percentage complete, on a technological basis, of each project.
Nutropin Depot sustained-release growth hormone -- A sustained release
version of human growth hormone based on Alkermes' ProLease sustained
release drug delivery system designed to deliver human growth hormone by
monthly or semi-monthly injections. This product is being developed in
collaboration with Alkermes. On June 25, 1999, Genentech made U.S.
regulatory filings seeking marketing approval for Nutropin Depot and we are
currently awaiting regulatory clearance. We estimate the initial indication
on this project will be substantially complete by the year 2000, and that
this project was approximately 85% complete at the Redemption date.
TNK-tPA -- A second generation t-PA that is a selectively mutated version
of a wild-type t-PA. This t-PA version may be faster acting and easier to
administer, and may restore blood flow faster. We have completed enrollment
in Phase III clinical trials in patients with acute myocardial infarction
and are currently preparing FDA regulatory filings. This product is being
developed in collaboration with Boehringer Ingelheim International GmbH. We
estimate that this project will be substantially complete by the year 2000,
and that it was approximately 90% complete at the Redemption date.
Anti-IgE antibody -- An anti-IgE monoclonal antibody designed to interfere
early in the process that leads to symptoms of allergic asthma and seasonal
allergic rhinitis. This product is being developed in collaboration with
Tanox, Inc. and Novartis Pharmaceuticals Corporation. Phase III trials are
ongoing in patients with allergic asthma. Phase III trials have been
completed in patients with seasonal allergic rhinitis and the results have
been analyzed. We estimate that this project was approximately 75% complete
at the Redemption date.
Pulmozyme inhalation solution -- A recombinant human protein that is an
approved treatment for the management of cystic fibrosis. We are conducting
a trial to determine the effect of Pulmozyme on pulmonary function in
patients with early-stage cystic fibrosis. We estimate this project to be
approximately 75% complete at the Redemption date. We are also preparing to
begin clinical testing of Pulmozyme delivery via Aradigm's AERx(TM)
delivery system. We estimate that this project was approximately 45%
complete at the Redemption date. These projects will be substantially
complete by the year 2003.
Rituxan antibody -- A monoclonal antibody approved for the treatment of
relapsed or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkin's lymphoma, a cancer of the immune system. Genentech is in
Phase III clinical trials for the treatment of intermediate- and high-grade
non-Hodgkin's lymphoma. This product is being developed in collaboration
with IDEC Pharmaceuticals, Inc., or IDEC. We estimate that this project
will be substantially complete by the year 2004 and that it was
approximately 60% complete at the Redemption date.
Xubix(TM) (sibrafiban) oral IIb/IIIa antagonist -- An orally administered
inhibitor of platelet aggregation that may be useful in the prevention of
unwanted clotting in certain cardiovascular conditions, including acute
coronary syndrome. Hoffmann-La Roche is conducting global development of
this molecule, and we retain certain opt-in rights with respect to the
United States. We estimate that this project will be substantially complete
by the year 2000 and that it was approximately 65% complete at the
Redemption date.
Activase t-PA -- A protein that is an approved treatment for heart attack,
acute ischemic stroke within three hours of symptom onset, and acute
massive pulmonary embolism. We are preparing for Phase III trials of this
product for intravenous catheter clearance. We estimate that this project
will be substantially complete by the end of 1999 and that it was
approximately 90% complete at the Redemption date.
Anti-CD11a antibody -- An antibody (also known as hu1124) designed to block
certain immune cells as a potential treatment of psoriasis. This product is
being developed in collaboration with Xoma Corporation. We are currently
22
<PAGE> 26
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preparing for Phase III trials. 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 cancer. In pre-clinical studies the anti-VEGF antibody resulted in
decreased vascularization and a decline in growth and metastasis of a
variety of solid tumors. Phase II studies are ongoing in several types of
solid-tumor cancers: prostate cancer, breast cancer, renal cell carcinoma,
lung cancer and colorectal cancer. We estimate these projects will be
substantially complete by the year 2003, and that these different projects
were 35% to 40% complete at the Redemption date.
Herceptin antibody -- An antibody that is an approved treatment for
metastatic breast cancer. Herceptin will also be evaluated for broader
application in other tumor types in which the HER2 protein is
overexpressed. We are planning to conduct Phase II studies alone or in
collaboration with Hoffmann-La Roche, the National Cancer Institute or
other clinical research groups. We estimate that the initial indications on
this project will be substantially complete by the year 2004. These broader
applications have projects that are estimated to be 40% to 45% complete at
the Redemption date.
AMD Fab -- A customized fragment of an anti-VEGF antibody for the potential
treatment of age-related macular degeneration (AMD). In this condition,
excessive blood vessel growth in the retina of the eye can lead to
blindness. We are currently preparing for Phase I clinical trials. We
estimate that this project will be substantially complete by the year 2004,
and that it was approximately 20% complete at the Redemption date.
LDP-02 -- A humanized monoclonal antibody for the treatment of inflammatory
bowel disease. This product is licensed from and being developed in
collaboration with LeukoSite, Inc. This compound is currently in Phase
Ib/IIa clinical trials in Canada and the United States. We estimate that
this project will be substantially complete by the year 2005, and that it
was approximately 30% complete at the Redemption date.
We also have identified five additional product programs that are at
different stages of in-process research and development. We expect these
projects to be substantially complete in years 1999 through 2004. The
percent completion for these additional programs range from an estimated
35% to 90%. These projects did not receive material allocations of the
purchase price.
In addition, our in-process research and development includes a process
technology program. The process technology program includes the research
and development of ideas and techniques that should improve the bulk
production of antibodies, including cell culture productivity, and
streamlined and improved recovery processes, and improvements in various
areas of pharmaceutical manufacturing. We estimate the process technology
program to be approximately 50% complete at the Redemption date.
23
<PAGE> 27
GENENTECH, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(i) Represents the elimination of the existing deferred tax asset valuation
allowance of $62.8 million at March 31, 1999 related to the tax benefits
of stock option deductions which have been realized and credited to
paid-in-capital as a result of establishing deferred tax liabilities under
push-down accounting.
(j) Reflects the redemption of our special common stock and the issuance of
new shares of common stock to Roche which will result in substantially the
same number of total shares outstanding as prior to the Redemption.
(k) Represents the push-down of the purchase price in excess of net book value
of $2,276.9 million for 1990 through 1997 and $2,925.0 million in 1999 and
$102.3 million for the remeasurement of continuing employee stock options
at the remeasurement date.
(l) Adjustments to retained earnings as follows:
<TABLE>
<CAPTION>
------------------------
1990 - 1997 1999
PURCHASES PURCHASE
In millions ----------- ---------
<S> <C> <C>
In-process research and development.................... $ (500.5) $ (752.5)
Amortization of goodwill, intangibles and fair value
adjustment to inventories, net of tax................. (1,233.1) --
Charge associated with the cash out of employee stock
options, net of taxes................................. -- (166.2)
Compensation related to the remeasurement of continuing
stock options, net of taxes........................... -- (61.4)
Adjustment to unrealized gains on marketable
securities, net of taxes.............................. -- 17.3
--------- ---------
Total adjustment to retained earnings.................. $(1,733.6) $ (962.8)
========= =========
</TABLE>
(m) Represents the reduction to interest income at an assumed interest rate of
6% as a result of the cash outlay for the following transactions: (1)
approximately $277.0 million of cash to be paid for the early cash
settlement of employee stock options and (2) estimated $3.0 million in
Genentech transaction costs related to this offering.
(n) Represents the amortization of the fair value adjustment to inventory for
the Redemption which occurs over a one-year period.
(o) Represents the tax benefit, at a marginal tax rate of 40%, related to the
amortization of other intangible assets, exclusive of goodwill, and the
inventory adjustment to fair value.
(p) To adjust Genentech's effective tax rate for the impact of non-deductible
goodwill and the estimated impact of the provisions of the Genentech/Roche
tax sharing agreement.
(q) Reflects reclassification of certain as reported asset and liability
balances to conform to the pro forma presentation.
24
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with, and are qualified by reference to, "Management's Discussion and Analysis
of Results of Operations and Financial Condition," the consolidated financial
statements and related notes and the unaudited pro forma consolidated financial
statements included elsewhere in this prospectus. The income statement data for
the years ended December 31, 1998, 1997 and 1996 and the balance sheet data as
of December 31, 1998 and 1997 are derived from, and qualified by reference to,
our audited consolidated financial statements included elsewhere in this
prospectus, and should be read in conjunction with those consolidated financial
statements and related notes. The income statement data for the three months
ended March 31, 1999 and 1998 and the balance sheet data as of March 31, 1999
and 1998 are derived from our unaudited consolidated financial statements which,
in our opinion, have been prepared on the same basis as the audited consolidated
financial statements and reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our results of
operations and financial position. Results for the three months ended March 31,
1999 are not necessarily indicative of results that may be expected for the
entire year.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
In millions, except per share data
INCOME STATEMENT DATA
Total revenues................................. $ 322.3 $ 264.7 $1,150.9 $1,016.7 $ 968.7 $ 917.8 $ 795.4
Product sales................................ 234.1 164.7 717.8 584.9 582.8 635.3 601.0
Royalties.................................... 46.6 64.5 229.6 241.1 214.7 190.8 126.0
Contract and other........................... 19.2 14.9 114.8 121.6 107.0 31.2 25.6
Interest..................................... 22.4 20.6 88.7 69.1 64.2 60.5 42.8
Total costs and expenses....................... $ 285.0 $ 207.7 $ 898.3 $ 846.9 $ 820.8 $ 745.6 $ 665.8
Cost of sales................................ 45.7 33.6 138.6 102.5 104.5 97.9 95.8
Research and development..................... 90.7 98.2 396.2 470.9 471.1 363.0 314.3
Marketing, general and administrative........ 97.2 74.9 358.9 269.9 240.1 251.7 248.6
Special charge............................... 50.0 -- -- -- -- 25.0 --
Interest..................................... 1.4 1.0 4.6 3.6 5.1 8.0 7.1
Income before taxes............................ $ 37.3 $ 57.0 $ 252.6 $ 169.8 $ 147.9 $ 172.2 $ 129.6
Income tax provision........................... 22.9 16.0 70.7 40.8 29.6 25.8 5.2
Net income..................................... $ 14.4 $ 41.0 $ 181.9 $ 129.0 $ 118.3 $ 146.4 $ 124.4
Effective tax rate............................. 61% 28% 28% 24% 20% 15% 4%
Earnings per share
Basic........................................ $ 0.11 $ 0.33 $ 1.45 $ 1.05 $ 0.98 $ 1.24 $ 1.07
Diluted...................................... 0.11 0.32 1.40 1.02 0.95 1.20 1.03
Weighted average shares outstanding
Basic........................................ 127.7 124.8 125.8 123.0 120.6 118.3 116.0
Diluted...................................... 132.5 128.8 129.9 126.4 124.0 121.7 120.2
Actual shares outstanding at period end........ 128.0 125.2 127.1 124.2 121.4 119.3 117.2
OTHER DATA
Depreciation expense........................... $ 20.2 $ 16.5 $ 72.7 $ 58.9 $ 57.6 $ 53.3 $ 50.9
Amortization expense........................... 1.7 1.4 5.4 6.6 4.5 5.1 2.6
Capital expenditures........................... 18.2 21.0 88.1 154.9 141.8 70.2 82.8
</TABLE>
The special charge in 1995 relates to the merger and new agreement with Roche
($21 million) and the resignation of our prior chief executive officer ($4
million).
The special charge in 1999 relates to a litigation settlement with respect to
past human growth hormone promotional practices.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AS OF MARCH 31, AS OF DECEMBER 31,
-------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
In millions (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents, short-term
investments and long-term marketable
securities................................... $1,662.5 $1,372.9 $1,604.6 $1,286.5 $1,159.1 $1,096.8 $ 920.9
Accounts receivable............................ 168.8 175.3 149.7 189.2 197.6 172.2 146.3
Inventories.................................... 146.7 117.7 148.6 116.0 91.9 93.6 103.2
Working capital................................ 942.6 958.9 950.6 904.4 705.1 812.0 776.6
Property, plant and equipment, net............. 698.8 688.4 700.2 683.3 586.2 503.7 485.3
Other assets................................... 197.4 165.0 196.3 177.2 149.2 105.5 61.0
Total assets................................... 2,926.1 2,573.5 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1
Total current liabilities...................... 319.8 273.4 291.3 289.6 250.0 233.4 220.5
Long-term debt................................. 150.0 150.0 150.0 150.0 150.0 150.0 150.4
Total liabilities.............................. 536.4 461.6 511.6 476.4 425.3 408.9 396.3
Total stockholders' equity..................... 2,389.7 2,111.9 2,343.8 2,031.2 1,801.1 1,602.0 1,348.8
Total liabilities and stockholders' equity..... 2,926.1 2,573.5 2,855.4 2,507.6 2,226.4 2,011.0 1,745.1
</TABLE>
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
We are a leading biotechnology company that uses human genetic information to
discover, develop, manufacture and market human pharmaceuticals for significant
unmet medical needs. We manufacture and market seven products directly in the
United States, including: Herceptin, Rituxan (rituximab), Activase, Protropin,
Nutropin, Nutropin AQ and Pulmozyme.
We receive royalties on sales of products in Canada, on sales of Pulmozyme
outside of the United States and on sales of rituximab outside of the United
States (excluding Japan) from Hoffmann-La Roche. We also receive royalties on
sales of growth hormone products and t-PA outside of the United States and
Canada through other licensees. We receive worldwide royalties on five
additional licensed products that originated from our technology and are
marketed by other companies. We also received royalties for Humulin(R) under an
agreement that expired in August 1998.
REDEMPTION OF OUR SPECIAL COMMON STOCK
On June 30, 1999, we redeemed all of our outstanding special common stock held
by stockholders other than Roche at a price of $82.50 per share in cash with
funds deposited by Roche for that purpose. As a result, Roche currently owns
100% of our common stock. Consequently, push-down accounting is required under
U.S. generally accepted accounting principles to reflect in our financial
statements the amounts paid for our stock in excess of our net book value.
Push-down accounting requires us to record goodwill and other intangible assets
of approximately $1,698.0 million and $1,487.8 million, respectively, onto our
balance sheet during the second quarter of 1999. The amortization of this
goodwill and other intangible assets will have a significant negative impact on
our financial results in future years. In addition, we will continuously
evaluate whether events and circumstances have occurred that indicate any
portion of the remaining balance of these intangible assets may not be
recoverable. When factors indicate that assets should be evaluated for possible
impairment, we may be required to reduce the carrying value of our intangible
assets, which could have a material adverse effect on our financial condition
and results of operations during the periods in which such a reduction is
recognized. Also as a result of push-down accounting, we expect to record a
$752.5 million charge to earnings in the quarter ending June 30, 1999 related to
in-process research and development. For more information about push-down
accounting, you should read "Unaudited Pro Forma Condensed Consolidated
Financial Statements" above.
Stock Options
In connection with the redemption of our special common stock, the following
changes with respect to our outstanding stock options have occurred:
- Options for the purchase of approximately 6.7 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 4.1 million shares of special
common stock are being converted into options to purchase a like number
of shares of common stock at the same exercise price; and
- Options for the purchase of approximately 4.9 million shares of special
common stock have been canceled, in accordance with the terms of our 1996
Stock Option/Stock Incentive Plan (the "1996 Plan"). With certain
exceptions, we expect to grant new options for the purchase of 1.333
times the number of shares under the previous options with an exercise
price equal to the public offering price of the shares offered in this
offering. The number of shares that will be the subject of these new
options, which are expected to be issued under our 1999 Stock Option Plan
(the "1999 Plan"), will be approximately 5.1 million. Alternative
arrangements were provided for certain holders of some of the unvested
options under the 1996 Plan.
We expect that the majority of the options to be granted prior to the effective
date of this offering hereunder will be made pursuant to our 1999 Plan, which
our board of directors and Roche, our sole shareholder, intend to approve prior
to the effective date of this offering. Under the 1999 Plan, we intend to grant
new options to purchase approximately 6.6 million shares (including the 5.1
million shares referred to above) of common stock to approximately 2,400
employees at an exercise
26
<PAGE> 30
price equal to the public offering price in this offering, with the grant of
such options to be made effective on the day prior to the effective date of this
offering.
In connection with these stock option transactions, we expect to record:
- In the quarter ended June 30, 1999, (1) cash compensation expense, before
tax effect, of approximately $277.0 million associated with the cash-out
of such stock options and (2) non-cash compensation expense, before tax
effect, of approximately $102.3 million associated with the
remeasurement, for accounting purposes, of the converted options, which
non-cash amount represents the difference between each applicable option
exercise price and the redemption price of the special common stock;
- In the quarter ending September 30, 1999, non-cash compensation expense
of approximately $30.4 million associated with the remeasurement, for
accounting purposes, of the converted options, which non-cash amount
represents the difference between the redemption price of the special
common stock and $90, the midpoint of the range of the public offering
price set forth on the cover page of this prospectus; and
- Over a two year period an aggregate of $27.8 million available to be
earned by a limited number of employees who elected the alternative
described above.
Licensing Agreement
Prior to the completion of this offering, we will amend our existing licensing
and marketing agreement with Hoffmann-La Roche to provide Hoffmann-La Roche with
an option to license to use and sell products in non-U.S. markets until at least
2015. You should read "Business--Relationship with F. Hoffmann-La Roche Ltd"
below for further information. See "Subsequent Events (Unaudited)" note in the
Notes to Consolidated Financial Statements for additional information.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
-----------------------------
THREE MONTHS
ENDED MARCH 31,
Revenues -----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Revenues.................................................... $322.3 $264.7 22%
</TABLE>
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS
ENDED MARCH 31,
Product Sales ----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Herceptin................................................... $ 39.9 $ -- --%
Rituxan..................................................... 57.1 37.7 51
Activase.................................................... 52.0 55.7 (7)
Protropin, Nutropin and Nutropin AQ......................... 56.2 50.9 10
Pulmozyme................................................... 28.2 19.5 45
Actimmune................................................... 0.7 0.9 (22)
------ ------
Total product sales............................... $234.1 $164.7 42%
====== ======
% of revenues............................................... 73% 62%
</TABLE>
Herceptin: Net sales of Herceptin, indicated for the treatment of certain
patients with metastatic breast cancer whose tumors overexpress HER2 protein,
were $39.9 million in the first quarter of 1999. In 1998, we recorded $30.5
million in net sales of Herceptin, which was introduced in September 1998. An
increase of physician acceptance of Herceptin has contributed to this positive
sales trend and the successful initial penetration of the breast cancer market.
Rituxan: Net sales of Rituxan, indicated for the treatment of patients with
relapsed or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkins lymphoma, a cancer of the immune system, increased 51% in the first
quarter of 1999
27
<PAGE> 31
from the comparable period in 1998. This sales increase is primarily due to
increased market penetration for the treatment of B-cell non-Hodgkins lymphoma.
We co-developed Rituxan with IDEC, from whom we license Rituxan.
Activase: Net sales of Activase tissue plasminogen activator decreased 7% in the
first quarter of 1999 from the comparable period in 1998. The decrease is due to
a continued decline in the overall size of the thrombolytic therapy market due
to mechanical reperfusion and continued competition from Centocor, Inc.'s
Retavase(R). The decrease also resulted from a temporary decrease in the
available commercial market due to patients receiving therapy through large,
recently completed Phase III clinical trials.
Protropin, Nutropin and Nutropin AQ: Net sales of our three growth hormone
products--Protropin, Nutropin and Nutropin AQ--increased 10% in the first
quarter of 1999 from the comparable period in 1998. This increase primarily
reflects fluctuations in distributor ordering patterns.
Pulmozyme: Net sales of Pulmozyme increased 45% in the first quarter of 1999
from the comparable period in 1998 primarily due to increased sales to
Hoffmann-La Roche and increased market penetration for the management of cystic
fibrosis.
Actimmune: In 1998, in return for a royalty on net sales, we licensed to
Connetics Corporation our U.S. marketing and development rights to Actimmune
(interferon gamma-lb), which is used for the treatment of chronic granulomatous
disease, a rare, inherited disorder of the immune system. Thereafter, Connetics
Corporation sublicensed all of its rights to InterMune Pharmaceuticals, Inc., or
InterMune. After a transition period, as of January 1999, we no longer sell
Actimmune. We have agreed to supply bulk materials to InterMune at cost plus a
mark-up.
Royalties, Contract and Other, and Interest Income
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS
ENDED MARCH 31,
----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Royalties................................................... $46.6 $64.5 (28)%
Contract and other.......................................... 19.3 14.9 30
Interest income............................................. 22.4 20.6 9
</TABLE>
Royalty income decreased by 28% in the first quarter of 1999 from the comparable
period in 1998. The decrease primarily reflects the expiration of royalties from
Eli Lilly and Company in August 1998.
Contract and other revenue increased 30% in the first quarter of 1999 from the
comparable period in 1998 primarily due to higher gains on the sale of
biotechnology equity securities and higher revenues from strategic alliances,
partly offset by lower contract revenues from Hoffmann-La Roche.
Interest income increased 9% in the first quarter of 1999 from the comparable
period in 1998 due to a higher portfolio balance. The total investment
portfolio, consisting of cash and cash equivalents, and short- and long-term
marketable securities, increased to $1,662.4 million as of March 31, 1999 from
$1,372.9 million as of March 31, 1998 and from $1,604.6 million as of December
31, 1998.
28
<PAGE> 32
Costs and Expenses
<TABLE>
<CAPTION>
---------------------------
THREE MONTHS
ENDED MARCH 31,
---------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Cost of sales............................................... $ 45.7 $ 33.6 36%
Research and development.................................... 90.7 98.2 (8)
Marketing, general and administrative....................... 97.2 74.9 30
Legal settlement............................................ 50.0 -- --
Interest expense............................................ 1.4 1.0 40
------ ------
Total costs and expenses.......................... $285.0 $207.7 37%
====== ======
</TABLE>
Cost of Sales: Cost of sales as a percent of product sales was 20% in the first
quarters of 1999 and 1998.
Research and Development: Research and development expenses decreased 8% in the
first quarter of 1999 from the comparable period in 1998. For the first quarter
of 1999, we invested approximately 28% of revenues into research and development
compared to 37% in the comparable period in 1998. This percentage decrease
reflects our goal to decrease research and development spending as a percent of
revenues as products progress through late-stage clinical trials and revenues
increase.
Marketing, General and Administrative: Marketing, general and administrative
expenses increased 30% in the first quarter of 1999 from the comparable period
in 1998 due to higher marketing and sales expenses in support of oncology
products and higher profit sharing with IDEC related to higher sales of Rituxan.
In addition to the above, in April 1999, we agreed to make a $50 million payment
to settle a federal investigation relating to our past clinical, sales and
marketing activities associated with human growth hormone.
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS
ENDED MARCH 31,
Income Taxes ----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Income taxes................................................ $22.9 $16.0 43%
</TABLE>
Our effective income tax rate for the first quarter of 1999 was 61% compared to
28% in the first quarter of 1998. The 61% tax rate of the first quarter of 1999
reflects the effect of the $50 million legal settlement expense as well as an
increase in the income tax rate due to reduced benefits from both research and
development tax credits and realization of foreign losses. Excluding the legal
settlement expense, our effective tax rate would have been 33% for the first
quarter of 1999.
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS
ENDED MARCH 31,
Net Income ----------------
1999 1998 % CHANGE
------ ------ --------
<S> <C> <C> <C>
In millions
Net income.................................................. $14.4 $41.0 (65)%
Earnings per share
Basic..................................................... $0.11 $0.33 (67)
Diluted................................................... 0.11 0.32 (66)
</TABLE>
The 65% decrease in net income in the first quarter of 1999 from the comparable
period in 1998 was due to the $50 million legal settlement expense. Exclusive of
the legal settlement, net income in the first quarter of 1999 would have been
$58.5 million, an increase of 43% over the comparable period in 1998. This
increase was driven by higher product sales, primarily related to new sales of
Herceptin and higher sales of Rituxan. This increase was partly offset by lower
royalties, higher marketing and sales expenses and higher cost of sales.
29
<PAGE> 33
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 manufactured by IDEC on our behalf. IDEC has agreed to
stop manufacturing Rituxan in August 1999.
In December 1998, a letter was sent to physicians advising them of some deaths
associated with administration of Rituxan. As a result, Genentech and IDEC are
updating the warning section of the package insert to include information on
infusion-related reactions and cardiovascular events.
Activase: Sales of Activase in 1998 and 1997 decreased primarily due to a
competitive thrombolytic agent, Centocor's Retavase. This decrease also
resulted, to a lesser extent, from a decline in the size of the thrombolytic
market due to
30
<PAGE> 34
increasing use of mechanical reperfusion and from a temporary decrease in the
available commercial market due to patients receiving therapy through large
recently completed Phase III clinical trials.
In July 1998, we discontinued development of Activase for treating acute
ischemic stroke in patients presenting later than three hours from symptom onset
after the termination of two clinical trials, one in acute ischemic stroke
patients presenting three to five hours from symptom onset, and another in acute
ischemic stroke patients presenting zero to six hours from symptom onset.
Neither study showed clinical benefit. Activase is approved for the treatment of
acute ischemic stroke within three hours of symptom onset.
Protropin, Nutropin and Nutropin AQ: Net sales of our three growth hormone
products--Protropin, Nutropin and Nutropin AQ--decreased in 1998 from 1997, but
increased slightly in 1997 from 1996. We experienced a small loss of market
share in 1998 due to increased competition. We continue to face increased
competition from five companies with growth hormone 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. 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.
31
<PAGE> 35
In July 1998, we settled a lawsuit brought by us against Novo in the U.S.
District Court for the Southern District of New York relating to our patents for
human growth hormone and insulin and a lawsuit brought in October 1997 by Novo
in the U.S. District Court for the District of New Jersey alleging infringement
of a patent held by Novo relating to our manufacture, use and sale of its
Nutropin human growth hormone products. Under the settlement agreement, we
agreed with Novo to cross-license worldwide certain patents relating to human
growth hormone. In August 1998, Novo received a worldwide license under our
patents relating to insulin and we received certain payments from Novo that were
recorded in contract revenues.
As part of a strategic alliance with Sumitomo, we have agreed to provide
Sumitomo exclusive distributorship rights in Japan for Nutropin AQ and a
sustained release formulation of human growth hormone.
In an agreement with Pharmacia & Upjohn, in exchange for development costs, fees
and, upon regulatory approval, royalties, we agreed to provide Pharmacia &
Upjohn exclusive worldwide rights for thrombopoietin, or TPO, which is in Phase
II trials 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
32
<PAGE> 36
1997 and from 49% in 1996. The decrease in this percentage from year to year
reflects growing revenues and more recently in 1998 a decrease in research and
development expenses.
To gain additional access to potential new products and technologies, and to
utilize other companies to help develop our potential new products, we have
established strategic alliances with companies developing technologies that fall
outside our research focus and with companies having the potential to generate
new products through technology exchanges and investments. This has included our
acquisition of equity and convertible debt of such companies. We have also
entered into product-specific collaborations to acquire development and
marketing rights for products.
Marketing, General and Administrative: Marketing, general and administrative
expenses increased in 1998 from 1997. The marketing and sales increases were
driven by the introduction of Rituxan and the resultant profit sharing with
IDEC, the launch of Herceptin and the defense of Activase and our growth hormone
products against new competition and the launch of a new indication, growth
hormone deficiency in adults, for Nutropin and Nutropin AQ. General and
administrative expenses were higher principally as a result of the write-down of
certain biotechnology equity securities. Marketing, general and administrative
expenses were also higher in 1997 compared to 1996 primarily due to increased
marketing and sales expenses in the oncology area and competitive conditions
with other marketed products.
Interest Expense: Interest expense will fluctuate depending on the amount of
capitalized interest related to the amount of construction projects. Interest
expense, net of amounts capitalized, relates to interest on our 5% convertible
subordinated debentures.
Income Before Taxes and Income Taxes
<TABLE>
<CAPTION>
------------------------------------------------------
YEAR ENDED DECEMBER 31, ANNUAL % CHANGE
------------------------------ ------------------
1998 1997 1996 98/97 97/96
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
In millions
Income before taxes............................... $252.6 $169.8 $147.9 49% 15%
Income tax provision.............................. 70.7 40.8 29.6 73 38
Effective tax rate................................ 28% 24% 20% 17 20
</TABLE>
Our effective tax rate increased in 1998 over 1997 to 28%. This increase is
primarily due to the decreased benefit of research and development tax credits.
The tax rate for 1998 and 1997 reflected the legislative extension of research
and development tax credits effective beginning in the third quarter of 1997.
The increase in the effective tax rate in 1997 over 1996 was attributable to the
proportionally decreased realization of previously reserved deferred tax assets.
The valuation allowance for deferred tax assets was fully realized in 1996, with
the exception of the portion attributable to the realization of tax benefits on
stock option deductions which will be credited to additional paid-in-capital
when realized. The effective tax rate in 1998, 1997 and 1996 was less than the
U.S. statutory rate of 35% due in part to the research and development tax
credits, tax benefit of certain realized gains on securities available for sale
and realized foreign losses, except in 1997.
Net Income
<TABLE>
<CAPTION>
----------------------------------------------------
YEAR ENDED DECEMBER 31, ANNUAL % CHANGE
------------------------------ ----------------
1998 1997 1996 98/97 97/96
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
In millions
Net income.......................................... $181.9 $129.0 $118.3 41% 9%
Earnings per share
Basic............................................. $ 1.45 $ 1.05 $ 0.98 38 7
Diluted........................................... 1.40 1.02 0.95 37 7
</TABLE>
The increase in net income in 1998 from 1997 was driven primarily by sales of
Rituxan and Herceptin, lower research and development expenses and higher
interest income. These revenue increases and lower expenses were partly offset
by higher marketing, general and administration expenses, a decrease in Activase
sales, higher cost of sales and higher income taxes. Net income in 1997
increased over 1996 primarily due to higher royalties and contract and other
revenues partly offset by higher marketing, general and administration expenses.
33
<PAGE> 37
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
------------------------------------------------------------------
AS OF MARCH 31, AS OF DECEMBER 31,
------------------------ ------------------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
In millions
Cash and cash equivalents, short-term
investments and long-term marketable
securities.............................. $1,662.4 $1,372.9 $1,604.6 $1,286.5 $1,159.1
Working capital........................... 942.7 958.9 950.6 904.4 705.1
Cash provided by (used in):
Operating activities.................... 53.6 68.9 349.9 118.3 139.7
Investing activities.................... (156.4) (126.6) (421.1) (168.4) (141.7)
Financing activities.................... 35.2 34.6 107.9 87.3 72.2
Capital expenditures (included in
investing activities above)............. (18.2) (21.0) (88.1) (154.9) (141.8)
Current ratio............................. 3.9 : 1 4.5 : 1 4.3 : 1 4.1 : 1 3.8 : 1
</TABLE>
Cash and cash equivalents, short-term investments and long-term marketable
securities at March 31, 1999 increased by $57.8 million compared to December 31,
1998, and working capital decreased by $7.9 million in the first quarter of
1999. Cash generated from operations, income from investments and proceeds from
stock issuances were used to purchase marketable securities and make capital
investments in 1998.
Capital expenditures totaled $18.2 million in the first quarter of 1999 compared
to $21.0 million in the comparable period in 1998. The decrease in the first
quarter of 1999 was primarily due to a decrease in construction activity related
to existing manufacturing facilities partly offset by an increase in equipment
purchases.
Capital expenditures in 1998 included improvements to existing office and
laboratory facilities and equipment, and equipment purchases. In 1997, capital
expenditures primarily included building improvements to existing manufacturing
and office facilities and production systems. In 1996, capital expenditures
primarily included building and land purchases and improvements to existing
manufacturing and office facilities.
The affiliation agreement with Roche will require us to establish and maintain a
stock repurchase program. The dollar amounts associated with these future
purchases cannot currently be estimated.
We believe that our cash, cash equivalents and short-term investments, together
with funds provided by operations and leasing arrangements, will be sufficient
to meet our foreseeable operating cash requirements. In addition, we believe we
could access additional funds from the capital and debt markets. Factors
affecting our cash position include, but are not limited to, future levels of
the company's product sales, royalty and contract revenues, expenses,
in-licensing activities, including the timing and amount of related development
funding or milestone payments, and capital expenditures.
Our long-term debt consists of $150.0 million of convertible subordinated
debentures, with interest payable at 5%, due in 2002. Prior to the redemption of
our special common stock, the debentures were convertible, at the option of the
holder, into one-half share of our special common stock and $18 in cash, for
each $74 in principal amount of debenture converted. As a result of the
redemption of our special common stock, upon conversion, the holder receives,
for each $74 in principal amount of debenture converted, one-half of the $82.50
redemption price and $18 in cash, or $59.25 in cash. The $18 in cash is
reimbursed by Roche to us. Generally, we may redeem the debentures until
maturity.
RESEARCH AND DEVELOPMENT
We are committed to aggressive research and development investment to discover
and develop new products. We currently have several products in late-stage
clinical testing and anticipate that our research and development expenses will
continue at a high percentage of revenues over the short-term. Over the
long-term, as revenues increase, research and development as a percent of
revenues is expected to decrease.
INCOME TAX PROVISION
As a result of the redemption of our special common stock, we are, and after
this offering are expected to continue to be, included in Roche's federal
consolidated income tax group. As a result, our tax liability will be included
in Roche's U.S.
34
<PAGE> 38
consolidated federal income tax group and our tax liability thus will be
included in the consolidated federal income tax liability of Roche and its
subsidiaries. We also will be included with Roche and/or one or more Roche
subsidiaries in consolidated or combined income tax groups for certain state and
local tax jurisdictions.
Genentech and Roche have entered into a tax sharing agreement. Pursuant to this
agreement, Genentech and Roche will make payments such that, with respect to any
period, the net amount paid by us on account of consolidated or combined income
taxes (including any amounts determined to be due as a result of a
redetermination of the consolidated or combined income tax liability of a Roche
group by reason of an audit by a taxing authority) will be determined as though
we filed separate, stand-alone federal, state and local income tax returns as
the common parent of an affiliated group of corporations filing consolidated or
combined federal, state and local returns rather than a consolidated subsidiary
of Roche. Such stand-alone tax returns will be prepared on a basis as if we were
an independent taxpayer with no affiliation with Roche. For additional
discussion of the tax sharing agreement, you should read "Relationship with
Roche -- Tax Sharing Agreement".
We expect our effective tax rate to increase in 1999 as a result of
non-deductible goodwill amortization and a charge for in-process research and
development and beyond 1999 for goodwill amortization.
YEAR 2000
We use and rely on a wide variety of information technologies, computer systems
and scientific and manufacturing equipment containing computer related
components (such as programmable logic controllers and other embedded systems).
Some of our older computer software programs and equipment are unable to
distinguish between the year 1900 and the year 2000. As a result, time-sensitive
functions of those software programs and equipment may misinterpret dates after
January 1, 2000, to refer to the twentieth century rather than the twenty-first
century. This could cause system or equipment shutdowns, failures or
miscalculations resulting in inaccuracies in computer output or disruptions of
operations, including, among other things, inaccurate processing of financial
information and/or temporary inabilities to process transactions, manufacture
products, or engage in similar normal business activities.
We have a Year 2000 Project in place to address the potential exposures related
to the impact on its computer systems and scientific and manufacturing equipment
containing computer related components for the Year 2000 and beyond.
Approximately half of our Year 2000 scheduled work is complete. The remaining
work is scheduled to be completed by the end of the third quarter of 1999. The
Year 2000 Project phases include: (1) inventorying and prioritizing business
critical systems; (2) Year 2000 compliance analysis; (3) remediation activities
including repairing or replacing identified systems; (4) testing; and (5)
developing contingency plans.
An inventory of business critical financial, informational and operational
systems, including manufacturing control systems, has been essentially
completed. Compliance analysis is approximately 90% complete for these systems.
Remediation activities vary by department, however, on the average, remediation
activities are approximately 60% complete. Testing of our information technology
infrastructure is approximately 60% complete. Testing of business critical
application programs is approximately 25% complete and is scheduled to be
completed by the third quarter of 1999. Contingency planning for business
critical processes, which will include provisions such as identifying alternate
services for materials and services and if necessary reverting to
non-computerized systems for processing information, was initiated in March
1999, is approximately 40% complete and is scheduled for completion in September
1999. We believe that with the completed modifications, the Year 2000 issue will
not pose significant operational problems for its computer systems and
equipment. However, if such modifications and conversions are not made, or are
not completed in a timely fashion, Year 2000-related problems could have a
material impact on our operations, the precise degree of which cannot be known
at this time.
In addition to risks associated with our own computer systems and equipment, we
have relationships with, and are to varying degrees dependent upon, a large
number of third parties that provide us with information, goods and services.
These include financial institutions, suppliers, vendors, research partners,
governmental entities and customers. If significant numbers of these third
parties experience failures in their computer systems or equipment due to Year
2000 noncompliance, it could affect our ability to process transactions,
manufacture products, or engage in similar normal business activities. While
some of these risks are outside our control, we have instituted programs,
including internal records review and use of external questionnaires, to
identify key third parties, assess their level of Year 2000 compliance, update
contracts and address any noncompliance issues.
The total cost of the Year 2000 systems assessments and conversions is funded
through operating cash flows and we are expensing these costs as they are
incurred. We have created a mechanism to trace costs directly related to the
Year 2000 issue
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<PAGE> 39
and have budgeted funds to address the issues of assessment and conversion. The
financial impact of making the required systems changes cannot be known
precisely at this time, but it is currently expected to be less than $10.0
million. The actual financial impact could, however, exceed this estimate.
MARKET RISK
We are exposed to market risk, including changes to interest rates, foreign
currency exchange rates and equity investment prices. To reduce the volatility
relating to these exposures, we enter into various derivative investment
transactions pursuant to our investment and risk management policies and
procedures in areas such as hedging and counterparty exposure practices. We do
not use derivatives for speculative purposes.
A discussion of our accounting policies for financial instruments and further
disclosures relating to financial instruments is included in the Description of
Business and Significant Accounting Policies and the Financial Instruments notes
in the Notes to Consolidated Financial Statements.
We maintain risk management control systems to monitor the risks associated with
interest rates, foreign currency exchange rates and equity investment price
changes, and its derivative and financial instrument positions. The risk
management control systems use analytical techniques, including sensitivity
analysis and market values. Though we intend for our risk management control
systems to be comprehensive, there are inherent risks that may only be partially
offset by our hedging programs should there be unfavorable movements in interest
rates, foreign currency exchange rates or equity investment prices.
The estimated exposures discussed below are intended to measure the maximum
amount we could lose from adverse market movements in interest rates, foreign
currency exchange rates and equity investment prices, given a specified
confidence level, over a given period of time. Loss is defined in the value at
risk estimation as fair market value loss. The exposures to interest rate,
foreign currency exchange rate and equity investment price changes are
calculated based on proprietary modeling techniques from a Monte Carlo
simulation value at risk model using a 30-day holding period and a 95%
confidence level. The value at risk model assumes non-linear financial returns
and generates potential paths various market prices could take and tracks the
hypothetical performance of a portfolio under each scenario to approximate its
financial return. The value at risk model takes into account correlations and
diversification across market factors, including interest rates, foreign
currencies and equity prices. Market volatilities and correlations are based on
J.P. Morgan Riskmetrics(TM) dataset as of December 31, 1998.
INTEREST RATES
Our interest income is sensitive to changes in the general level of interest
rates, primarily U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on our cash equivalents, short-term
investments, convertible preferred stock investments, convertible loans and
long-term investments. To mitigate the impact of fluctuations in U.S. interest
rates, we may enter into swap transactions, which involve the receipt of fixed
rate interest and the payment of floating rate interest without the exchange of
the underlying principal. By investing our cash in an amount equal to the
notional amount of the swap contract, with a maturity date equal to the maturity
date of the floating rate obligation, we hedge ourselves from any potential
earnings impact due to changes in interest rates.
Based on our overall interest rate exposure at December 31, 1998, including
derivative and other interest rate sensitive instruments, a near-term change in
interest rates, within a 95% confidence level based on historical interest rate
movements, would not materially affect the fair value of interest rate sensitive
instruments.
FOREIGN CURRENCY EXCHANGE RATES
We receive royalty revenues from licensees selling products in countries
throughout the world. As a result, our financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which our licensed products are
sold. We are exposed to changes in exchange rates in Europe, Asia (primarily
Japan) and Canada. Our exposure to foreign exchange rates primarily exists with
the euro. When the U.S. dollar strengthens against the currencies in these
countries, the U.S. dollar value of non-U.S. dollar-based revenue decreases;
when the U.S. dollar weakens, the U.S. dollar value of the non-U.S. dollar-based
revenues increases. Accordingly, changes in exchange rates, and in particular a
strengthening of the U.S. dollar, may adversely affect our royalty revenues as
expressed in U.S. dollars. In addition, as part of its overall investment
strategy, a portion of our portfolio is primarily in non-dollar
36
<PAGE> 40
denominated investments. As a result, we are exposed to changes in the exchange
rates of the countries in which these non-dollar denominated investments are
made.
To mitigate this risk, we hedge certain of our anticipated revenues by
purchasing option contracts with expiration dates and amounts of currency that
are based on 25% to 90% of probable future revenues so that the potential
adverse impact of movements in currency exchange rates on the non-dollar
denominated revenues will be at least partly offset by an associated increase in
the value of the option. Currently, the duration of these options is generally
one to four years. We may also enter into foreign currency forward contracts to
lock in the dollar value of a portion of these anticipated revenues. The
duration of these forward contracts is generally less than one year. Also, to
hedge the non-dollar denominated investments in the portfolio, we also enter
into forward contracts.
Based on our overall currency rate exposure at December 31, 1998, including
derivative and other foreign currency sensitive instruments, a near-term change
in currency rates within a 95% confidence level based on historical currency
rate movements, would not materially affect the fair value of foreign currency
sensitive instruments.
EQUITY INVESTMENT SECURITIES
As part of our strategic alliance efforts, we invest in equity instruments of
biotechnology companies that are subject to fluctuations from market value
changes in stock prices. To mitigate this risk, certain equity securities are
hedged with costless collars. A costless collar is a purchased put option and a
written call option in which the cost of the purchased put and the proceeds of
the written call offset each other; therefore, there is no initial cost or cash
outflow for these instruments at the time of purchase. The purchased put
protects us from a decline in the market value of the security below a certain
minimum level (the put "strike" level); while the call effectively limits our
potential to benefit from an increase in the market value of the security above
a certain maximum level (the call "strike" level). In addition, as part of its
strategic alliance efforts, we hold dividend bearing convertible preferred stock
and have made interest bearing loans that are convertible into the equity
securities of the debtor.
Based on our overall exposure to fluctuations from market value changes in
marketable equity prices at December 31, 1998, a near-term change in equity
prices within a 95% confidence level based on historic volatilities could result
in a potential loss in fair value of the equity securities portfolio of $10.6
million.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for, depending on the use of the
derivative and whether it qualifies for hedge accounting under FAS 133. Based on
the requirements of FAS 133, there may be changes to the balance sheet and
reported assets and liabilities. We are currently evaluating the impact of FAS
133 on our financial position and results of operations.
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<PAGE> 41
BUSINESS
Genentech is a leading biotechnology company that uses human genetic information
to discover, develop, manufacture and market human pharmaceuticals for
significant unmet medical needs. Twelve of the approved products of
biotechnology stem from our science. We manufacture and market seven products
directly in the United States. Science at Genentech focuses primarily on two
areas of medicine: cardiovascular and oncology. We also pursue projects where
there exists a significant opportunity to fill a therapeutic void in other
important areas of medicine, such as our growth hormone products.
PRODUCTS
We have developed seven products, co-developed one product and manufactured and
marketed eight of our products (see also the Actimmune section below) in the
United States:
- Herceptin (trastuzumab) antibody as a single agent for the treatment of
patients with metastatic breast cancer whose tumors overexpress the HER2
protein and who have received one or more chemotherapy regimens.
Herceptin, in combination with Taxol(R), is indicated for the treatment
of patients with metastatic breast cancer whose tumors overexpress the
HER2 protein and who have not received chemotherapy for their metastatic
disease;
- Rituxan (rituximab) antibody for the treatment of patients with relapsed
or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's
lymphoma, a cancer of the immune system;
- Activase (alteplase, recombinant) t-PA for the treatment of heart attack,
acute ischemic stroke within three hours of the onset of symptoms, and
acute massive pulmonary embolism;
- Protropin (somatrem for injection) growth hormone for the treatment of
growth hormone deficiency in children;
- Nutropin (somatropin (rDNA origin) for injection) growth hormone for the
treatment of growth hormone deficiency in children and adults, growth
failure associated with chronic renal insufficiency prior to kidney
transplantation and short stature associated with Turner syndrome;
- Nutropin AQ (somatropin (rDNA origin)) liquid formulation growth hormone
for the same indications as Nutropin; and
- Pulmozyme (dornase alfa, recombinant) inhalation solution for the
management of cystic fibrosis, in conjunction with standard therapies to
improve lung function and reduce the relative risk of respiratory tract
infections requiring parenteral antibiotics.
In 1998, in return for a royalty on net sales, we licensed to Connetics
Corporation our marketing and development rights to Actimmune interferon
gamma-lb, which is used for the treatment of chronic granulomatous disease, a
rare, inherited disorder of the immune system. After a transition period, as of
January 1999, we no longer sell Actimmune.
We receive royalties on sales of our products in Canada, on sales of Pulmozyme
outside of the United States and on sales of rituximab outside of the United
States (excluding Japan) from Hoffmann-La Roche. We receive royalties on sales
of growth hormone products and t-PA outside of the United States and Canada
through other licensees. We also receive worldwide royalties on five additional
licensed products that originated from our technology and are marketed by other
companies.
Herceptin
In September 1998, we received FDA approval to market Herceptin in the United
States for use as first line therapy in combination with Taxol and as a single
agent in second and third line therapy in patients with metastatic breast cancer
who have tumors that overexpress the HER2 protein.
Herceptin is the first humanized monoclonal antibody for the treatment of HER2
overexpressing metastatic breast cancer and the second U.S. approval in this new
class of monoclonal antibody biotherapeutic cancer drugs. The first was Rituxan,
which was approved in November 1997. We have granted Hoffmann-La Roche exclusive
marketing rights to Herceptin outside of the United States.
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<PAGE> 42
Rituxan
Rituxan is marketed in the United States for the treatment of relapsed or
refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma,
a cancer of the immune system. In November 1997, Rituxan was cleared for
marketing in the United States by the FDA. B-cell non-Hodgkin's lymphoma affects
approximately 250,000 people in the United States, of which one-half are
follicular or low-grade lymphoma patients. A portion of these patients will have
multiple relapses and may be eligible for Rituxan therapy. Rituxan was
co-developed with IDEC, from whom we license Rituxan. Rituxan was the first
monoclonal antibody approved in the United States to treat cancer. We are
jointly promoting Rituxan with IDEC in the United States and share
responsibility with IDEC for manufacturing the product. Hoffmann-La Roche is
responsible for marketing MabThera (rituximab) in the rest of the world,
excluding Japan.
In December 1998, a letter was sent to physicians advising them of some deaths
associated with administration of Rituxan. As a result, Genentech and IDEC are
updating the warning section of the package insert to include information on
infusion-related reactions and cardiovascular events.
Activase
Tissue plasminogen activator, or t-PA, is an enzyme that is produced naturally
by the body to dissolve blood clots. However, when a blood clot obstructs blood
flow in the coronary artery and causes a heart attack, the body is unable to
produce enough t-PA to dissolve the clot rapidly enough to prevent damage to the
heart. Through recombinant DNA technology, we produce Activase, a recombinant
form of t-PA, in sufficient quantity for therapeutic use. The FDA approved
Activase for marketing in the United States in 1987 for the treatment of acute
myocardial infarction (heart attack); in 1990 for use in the treatment of acute
pulmonary embolism (blood clots in the lungs); and in June 1996 for the
treatment of acute ischemic stroke or brain attack (blood clots in the brain)
within three hours of symptom onset.
In exchange for royalty payments, we have licensed marketing rights to a
recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd., or Kyowa, and Mitsubishi
Kasei Corporation, or Mitsubishi. Kyowa and Mitsubishi are marketing forms of a
recombinant t-PA under the trademarks Activacin(R) and GRTPA(R), respectively.
In a number of countries outside of the United States, Canada and Japan, we have
licensed t-PA marketing and manufacturing rights to Boehringer Ingelheim
International GmbH, or Boehringer. We have also licensed certain rights to
Boehringer regarding future sales of a second generation t-PA, TNK, which is
currently under late stage development. Boehringer markets a recombinant t-PA
under the trademark Actilyse(R).
In July 1998, we discontinued development of Activase for treating acute
ischemic stroke in patients presenting later than three hours from symptom onset
after the termination of two clinical trials, one in patients with acute
ischemic stroke presenting three to five hours from symptom onset, and another
in patients with acute ischemic stroke presenting zero to six hours from symptom
onset. Neither study showed clinical benefit. Activase is approved for the
treatment of acute ischemic stroke within three hours of symptom onset.
We are currently preparing to conduct Phase III clinical trials to test the use
of Activase for intravenous catheter clearance.
Protropin
Human growth hormone is a naturally occurring human protein produced in the
pituitary gland that regulates metabolism and is responsible for growth in
children. We developed a recombinant growth hormone product, Protropin, that was
approved by the FDA in 1985 for marketing in the United States for the treatment
of growth hormone inadequacy in children.
In exchange for royalty payments, we licensed rights to recombinant growth
hormone outside the United States and Canada to Pharmacia & Upjohn, which
manufactures and markets recombinant growth hormone under the trademarks
Somatonorm(TM) and Genotropin(TM). Under the terms of the agreement with
Pharmacia & Upjohn, commencing in late 1995, we have the right to sell growth
hormone in most European countries and Japan and Pharmacia & Upjohn has the
right to sell their own growth hormone in the United States and Canada.
Nutropin
Nutropin is a human growth hormone similar to Protropin; however, it does not
have the additional N-terminal amino acid, methionine, found in the Protropin
chemical structure. Nutropin was approved in November 1993 and launched in
January 1994 for marketing in the United States for the treatment of growth
failure in children associated with chronic renal
39
<PAGE> 43
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(TM) (somatropin (rDNA origin) for depot
suspension) for the treatment of certain pediatric and adult growth disorders in
Europe and certain other countries outside of the United States, Canada and
Japan. With our partner Alkermes Controlled Therapeutics, Inc. 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 which affects an estimated 250 to 400 Americans. Actimmune received
designation by the FDA in 1990 as a U.S. Orphan Drug for the treatment of
chronic granulomatous disease. During the quarter ended June 30, 1998, we
licensed U.S. marketing and development rights to interferon gamma, including
Actimmune, to Connetics Corporation in return for a royalty on net sales.
Thereafter, Connetics Corporation sublicensed all of its rights to InterMune.
After a transition period, as of January 1999, we no longer sell Actimmune. We
have agreed to supply bulk materials to InterMune at cost plus a mark-up. We
receive royalty payment from Boehringer from the sale of interferon gamma in
certain countries outside of the United States, Canada and Japan and The
People's Republic of China.
LICENSED PRODUCTS
In addition to the royalties mentioned above, Genentech also receives royalties
on the following products:
<TABLE>
<CAPTION>
PRODUCT TRADEMARK COMPANY
------- --------- -------
<S> <C> <C>
Human growth hormone Humatrope Eli Lilly and Company
Recombinant interferon alpha Roferon-A Hoffmann-La Roche
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B SmithKline Beecham Biologicals S.A.
</TABLE>
40
<PAGE> 44
<TABLE>
<CAPTION>
PRODUCT TRADEMARK COMPANY
------- --------- -------
<S> <C> <C>
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
release growth hormone on Alkermes' ProLease sustained release drug delivery
system, designed to deliver human growth hormone by monthly
or semi-monthly injections. This product is being developed
in collaboration with Alkermes. On June 25, 1999, Genentech
made U.S. regulatory filings seeking marketing approval for
Nutropin Depot, and we are currently awaiting regulatory
clearance.
Preparing Regulatory Filings
TNK-tPA A second generation t-PA that is a selectively mutated
version of wild-type t-PA. This t-PA version may be faster
acting, easier to administer and may restore blood flow
faster. We have completed enrollment in Phase III clinical
trials in patients with acute myocardial infarction and are
currently preparing FDA regulatory filings. This product is
being developed in collaboration with Boehringer.
Phase III
Anti-IgE antibody An anti-IgE monoclonal antibody designed to interfere early
in the process that leads to symptoms of allergic asthma and
seasonal allergic rhinitis. This product is being developed
in collaboration with Tanox Inc. and Novartis
Pharmaceuticals Corporation. Phase III trials are ongoing in
patients with allergic asthma. Phase III trials have been
completed in patients with seasonal allergic rhinitis and
the results have been analyzed.
Pulmozyme inhalation solution A recombinant human protein that is an approved treatment
for the management of cystic fibrosis. We are conducting a
trial to determine the effect of Pulmozyme on pulmonary
function in patients with early stage cystic fibrosis.
Rituxan antibody A monoclonal antibody approved for the treatment of relapsed
or refractory low-grade or follicular, CD20-positive B-cell
non-Hodgkin's lymphoma, a cancer of the immune system.
Genentech is in Phase III clinical trials for the treatment
of intermediate- and high-grade non-Hodgkin's lymphoma. This
product is being developed in collaboration with IDEC.
Xubix(TM) (sibrafiban) oral An orally administered inhibitor of platelet aggregation
IIb/IIIa antagonist that may be useful in the prevention of unwanted clotting in
certain cardiovascular conditions, including acute coronary
syndrome. Hoffmann-La Roche is conducting global development
of this molecule, and we retain certain opt-in rights with
respect to the United States.
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Preparing for Phase III trials
Activase t-PA A protein that is an approved treatment for heart attack,
acute ischemic stroke within three hours of symptom onset,
and acute massive pulmonary embolism. We are preparing for
Phase III trials of this product for intravenous catheter
clearance.
Anti-CD11a (hu1124) antibody An antibody designed to block certain immune cells as a
potential treatment for psoriasis. We are currently
preparing for Phase III trials of this product, which we are
developing in collaboration with Xoma Corporation.
Herceptin antibody An antibody that is an approved treatment for metastatic
breast cancer. In collaboration with Hoffmann-La Roche and
U.S. national cooperative groups, we are preparing for Phase
III trials for adjuvant treatment of early-stage breast
cancer in patients who overexpress the HER2 protein.
Thrombopoietin (TPO) A protein that is being studied for treatment of
thrombocytopenia, a reduction in clot-inducing platelets, in
cancer patients treated with chemotherapy. This molecule has
been exclusively licensed to Pharmacia & Upjohn.
Phase II
Anti-CD18 antibody An antibody designed to block certain immune cells that may
impact blood flow. We are conducting Phase II clinical
trials aimed at increasing blood flow in patients with acute
myocardial infarction.
Anti-VEGF antibody An antibody developed to inhibit angiogenesis (the formation
of new blood vessels) as a potential treatment for several
types of solid-tumor cancers. In pre-clinical studies the
anti-VEGF antibody resulted in decreased vascularization and
a decline in growth and metastasis of a variety of solid
tumors. Phase II studies are ongoing in prostate cancer,
breast cancer, renal cell carcinoma, lung cancer and
colorectal cancer.
Herceptin antibody An antibody that is an approved treatment for metastatic
breast cancer. Herceptin will also be evaluated for broader
application in other tumor types in which the HER2 protein
is overexpressed. We are planning to conduct Phase II
studies alone or in collaboration with Hoffmann-La Roche,
the National Cancer Institute or other clinical research
groups.
VEGF A protein that ischemic tissues (tissues lacking in oxygen)
secrete, VEGF binds to receptors on nearby blood vessels and
causes angiogenesis, the formation of new blood vessels. A
recently completed Phase II clinical trial of VEGF in
patients with coronary artery disease did not meet its
primary objectives. We are currently deciding on next steps
for this program.
Phase I
AMD Fab A customized fragment of an anti-VEGF antibody for the
potential treatment of age-related macular degeneration
(AMD). In this condition, excessive blood vessel growth in
the retina of the eye can lead to blindness. We are
currently preparing for Phase I clinical trials.
LDP-02 A monoclonal antibody for the treatment of inflammatory
bowel diseases. This product is licensed from and being
developed in collaboration with LeukoSite, Inc. This
compound is currently in Phase Ib/IIa clinical trials in
Canada and the United Kingdom.
Pulmozyme inhalation solution A recombinant human protein used for the management of
with Aradigm's delivery system cystic fibrosis. We are preparing to begin Phase I clinical
testing of Pulmozyme delivery via Aradigm Corp.'s AERx(TM)
delivery system.
</TABLE>
In addition to the products described above, we are working on additional
products and new indications for currently marketed products. Also, we retain
certain rights to gp120, a recombinant form of the gp120 envelope glycoprotein
of human
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immunodeficiency virus, which may serve as the basis for the development of a
prophylactic HIV/AIDS vaccine. Under a license agreement entered into with
VaxGen Inc., we are responsible for supplying specified amounts of clinical
quantities of gp120 and we have an option to supply additional clinical
supplies. VaxGen is responsible for conducting all clinical trials necessary for
worldwide product approvals. Currently, VaxGen is conducting Phase III trials
with gp120. Genentech has separate options for worldwide marketing rights and
commercial supply of gp120 in the event that gp120 is approved as an AIDS
vaccine.
In general, with respect to our products, Hoffmann-La Roche pays us a royalty on
aggregate sales outside of the United States. In addition, Hoffmann-La Roche has
rights to, and pays us royalties on, Canadian sales of Activase, Protropin,
Nutropin, Pulmozyme and Actimmune, sales of Pulmozyme outside of the United
States and sales of Rituxan outside of the United States, excluding Japan.
Genentech supplies its products to Hoffmann-La Roche, and has agreed to supply
its products for which Hoffmann-La Roche has exercised its option, for sales
outside of the United States.
In addition, on July 6, 1998, we entered into an agreement with Hoffmann-La
Roche to provide Hoffmann-La Roche exclusive marketing rights outside of the
United States for Herceptin.
In December 1997, Genentech and Alteon Inc. entered into a collaborative
agreement to develop and market pimagedine, an advanced glycosylation
end-product formation inhibitor to treat kidney disease in diabetic patients.
Under the terms of the agreement, we licensed pimagedine and second generation
compounds from Alteon and we have made investments in Alteon stock of $37.5
million. In 1998, as a result of unsuccessful clinical trials with pimagedine
and the decline in the value of our investment in Alteon, we wrote down $24.2
million of its marketable and nonmarketable equity investments in Alteon. The
agreement will be terminated as of June 30, 1999.
Genentech and CuraGen Corporation entered into a research collaborative
agreement in November 1997, whereby we invested $5.0 million in equity of
CuraGen and we agreed to provide a convertible equity loan to CuraGen of up to
$26.0 million. As of the date of this prospectus, no loan amounts have been
funded to CuraGen.
Also, in December 1997, Genentech and LeukoSite entered into a collaboration
agreement to develop and commercialize LeukoSite's LDP-02, a humanized
monoclonal antibody for the potential treatment of inflammatory bowel diseases.
Under the terms of the agreement, we made a $4.0 million equity investment in
LeukoSite and we agreed to provide a convertible equity loan for approximately
$15.0 million to fund Phase II development costs. Upon successful completion of
Phase II, if LeukoSite agrees to fund 25% of Phase III development costs, we
have agreed to provide a second loan to LeukoSite for such funding. As of the
date of this prospectus, no loan amounts have been funded to LeukoSite.
In May 1999, we entered into a collaboration agreement with Immunex Corporation,
or Immunex, to develop and commercialize TRAIL/APO2 Ligand, also known as tumor
necrosis factor-related apoptosis-inducing ligand, for the potential treatment
of cancer. Under the terms of the agreement, the two companies have agreed to
allocate clinical, manufacturing and marketing responsibilities, and to share
all development and commercialization costs. The companies have agreed to
co-promote TRAIL/APO2L worldwide, and to share profits from the worldwide sales
of the product. TRAIL/APO2L is designed to cause tumor cells, but not normal
cells, to undergo programmed cell death, or apoptosis.
In May 1999, we entered into a license agreement with Immunex whereby we granted
to Immunex a worldwide, co-exclusive license under our immunoadhesin patents to
make, use and sell Enbrel(R), Immunex' product to treat moderately to severely
active rheumatoid arthritis. Immunex paid us an initial license fee and has
agreed to pay royalties on sales of Enbrel from November 6, 1998, which was the
date of product launch, through the life of our patents.
DISTRIBUTION
We have a U.S.-based pharmaceutical marketing, sales and distribution
organization. Our sales efforts are focused on specialist physicians based at
major medical centers in the United States. In general, our products are sold to
distributors or directly to hospital pharmacies or medical centers. We utilize
common pharmaceutical company marketing techniques, including advertisements,
professional symposia, direct mail, public relations and other methods.
Our products are available at no charge to qualified patients under our
uninsured patient programs in the United States. We have established the
Genentech Endowment for Cystic Fibrosis so qualified cystic fibrosis patients in
the United States who need Pulmozyme can gain assistance in obtaining it.
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During 1998, we provided certain marketing programs relating to Activase,
including comprehensive wastage replacement and expired product programs for
Activase that, subject to specific conditions, provides customers the right to
return Activase to us for replacement related to both patient-related product
wastage and product expiration. We maintain the right to renew, modify or
discontinue the above programs.
Hoffmann-La Roche contributed approximately 11% of our total revenues in 1998,
11% in 1997 and 14% in 1996. Three other major customers, Caremark, Inc., Bergen
Brunswig, and Cardinal Distribution, Inc., each contributed 10% or more of our
total revenues in at least one of the last three years. Caremark, Inc., a
national distributor, which accounted for 10%, 14% and 15% of total revenues in
1998, 1997 and 1996, respectively, distributes our growth hormone products,
Pulmozyme and Actimmune, through its extensive branch network and is then
reimbursed through a variety of sources. Bergen Brunswig, a national wholesale
distributor of all of our products, contributed 11% of our total revenues in
1998 and 10% in 1997 and 1996. Cardinal Distribution, Inc., a national
wholesaler distributor of all our products, contributed 11% of our total
revenues in 1998.
LICENSING AGREEMENTS WITH F. HOFFMANN-LA ROCHE LTD
We currently have two major licensing agreements with Hoffmann-La Roche.
Herceptin Licensing Agreement
On July 6, 1998, we entered into an agreement with Hoffmann-La Roche to provide
Hoffmann-La Roche exclusive marketing rights outside of the United States for
Herceptin. Under the agreement, Hoffmann-La Roche paid $40.0 million to us and
has agreed to pay cash milestones tied to future product development activities,
to contribute equally with us up to a maximum of $40.0 million on global
development costs and to make royalty payments of 20% on aggregate net product
sales outside the United States up to $500 million in each calendar year and
22.5% on such sales in excess of $500 million in each calendar year.
Amended and Restated Licensing Agreement
Summary of Key Changes: Under an agreement dated October 25, 1995, we granted to
Hoffmann-La Roche an option for ten years for licenses to use and sell some of
our products in non-U.S. markets. In connection with this offering, we will
amend this licensing agreement with Hoffmann-La Roche by extending until at
least 2015 Hoffmann-La Roche's option to license to use and sell products in
non-U.S. markets. Other key changes to the license agreement are summarized as
follows:
- Hoffmann-La Roche may choose to exercise its option at the end of a Phase
III trial, if it pays a $10 million fee to us to extend its option on the
product;
- if Hoffmann-La Roche exercises its option after the completion of a Phase
III trial, Hoffmann-La Roche will reimburse us for 75% of our development
costs incurred after the completion of the Phase II trial through the
completion of the Phase III trial, and 50% of our development costs
incurred before completion of the Phase II trial. Subsequent development
costs for other indications will be shared 75%/25% by Hoffmann-La Roche
and Genentech;
- on each Genentech Product for which Hoffmann-La Roche exercises its
option after completion of the Phase III trials, we will receive a
royalty of 15% on all sales until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction; however, $5 million of any option extension fee paid by
Hoffmann-La Roche shall be credited against royalties payable to us in
the first calendar year of sales by Hoffmann-La Roche in which aggregate
sales of that product exceeds $100 million;
- Hoffmann-La Roche will have the right to manufacture our products itself
if it can demonstrate that it is able to manufacture products at a lower
price than our supply price, if we are not able to supply Hoffmann-La
Roche's commercial requirements or if we intend to have a third party
manufacture the product;
- Hoffmann-La Roche will have the right to terminate a license for a
product upon 30 days notice;
- if Hoffmann-La Roche terminates its license based on a good faith
determination, after consultation with appropriate regulatory authorities
in the relevant country, that the product cannot be approved for sale in
one or more major European countries because of safety issues,
Hoffmann-La Roche will be liable for all obligations incurred primarily
to support registration outside the United States of that product for up
to six months after the termination is given; and
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- if Hoffmann-La Roche terminates its license for other than safety
reasons, Hoffmann-La Roche shall be liable for all of its obligations
regarding the product for up to twelve months after the notice of
termination.
General: Pursuant to our amended and restated licensing agreement with
Hoffmann-La Roche, we have agreed to grant to Hoffmann-La Roche an exclusive
patent, know-how and trademark license to use, sell and, under certain
conditions, make in Canada (collectively, the "Canada Products"):
- Activase tissue plasminogen activator;
- Protropin and Nutropin human growth hormone;
- Actimmune interferon gamma-1b; and
- Pulmozyme inhalation solution.
We have also agreed to grant to Hoffmann-La Roche an exclusive patent, know-how
and trademark license to use, sell and, under certain conditions, make Pulmozyme
outside the United States (the "Roche Territory").
Except as noted below with respect to certain "in-licensed" products, the
licensing agreement provides that we will grant to Hoffmann-La Roche an option
for an exclusive patent, know-how and trademark license in the Roche Territory
on a product-by-product basis to use, sell and, under certain circumstances,
make other products for which we have rights or for which we have subsequently
acquired rights ("Genentech Products"). We granted to Hoffmann-La Roche an
option for an exclusive patent and know-how license outside the United States to
use, sell and, under certain conditions, make products in-licensed from IDEC
(such products being referred to as "IDEC Product"). Hoffmann-La Roche exercised
its option with regard to Rituxan. In Canada, Hoffmann-La Roche's rights with
respect to IDEC Product are subject to our preexisting co-promotion obligation
for this product. Subject to the terms and conditions of any relevant license
agreements and Hoffmann-La Roche's acceptance of those terms and conditions, we
will grant to Hoffmann-La Roche an option for an exclusive patent and know-how
license in the Roche Territory on a product-by-product basis to use, sell and,
under certain circumstances, make other human pharmaceutical products for which
we have acquired rights in the Roche Territory by means of a patent and/or
know-how license from a third party ("In-Licensed Product").
Hoffmann-La Roche may exercise its option to license our products upon the
occurrence of any of the following:
- our decision to file an IND with the FDA for a product;
- at completion of a Phase II trial for a product with results sufficient
to support the undertaking of a Phase III trial; or
- if Hoffmann-La Roche paid a fee of $10 million at completion of the Phase
II trial to extend its option for that product, at completion of a Phase
III trial for that product with results sufficient to support the filing
of a BLA or NDA.
We must notify Hoffmann-La Roche and supply to Hoffmann-La Roche a reasonable
summary of available information regarding a product, including data from any
Phase II or Phase III trials, upon each of these events. Hoffmann-La Roche then
has 60 days to exercise its option. Within 30 days of this notification, the
joint commercialization committee described below must meet to review the
results of any Phase II or Phase III trials and other relevant data. Within 60
days of this notification and receipt by Hoffmann-La Roche of the information
regarding the product, Hoffmann-La Roche must either exercise its option for the
product or irrevocably waive it for that particular option period. If
Hoffmann-La Roche waives its option, we are permitted to develop and sell the
product ourselves or with another party. Prior to our decision to file an IND
exemption application with the FDA for a product, we retain authority to
discontinue sole development of that product and, subject to the provisions of
our affiliation agreement with Roche, to license that product to a third party.
See "Relationship with Roche -- Arrangements between Genentech and
Roche -- Licensing and Marketing Arrangements" below.
The options granted in the licensing agreement terminate on October 25, 2015,
except for the following:
- if Hoffmann-La Roche has paid to extend its option on a product,
Hoffmann-La Roche will retain an option on that product upon completion
of Phase III trials;
- for a product for which we have decided to file an IND with the FDA but
which has not yet reached completion of Phase II trials, Hoffmann-La
Roche may exercise its option upon completion of Phase II trials; and
- for a product for which a 60-day option exercise period had begun,
Hoffmann-La Roche may exercise its option up until the end of that 60-day
period.
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We have the sole right outside the Roche Territory, and Hoffmann-La Roche has
the sole right in the Roche Territory, to register, use, sell and market such
products arising from our current collaborations with Hoffmann-La Roche on
IIb/IIIa antagonists, other than Xubix, and ras farnesyltransferase inhibitors.
All research efforts on these products will continue to be shared in an equal
manner; no royalties on sales shall be due from either party to the other. The
costs for development of certain products will be shared as described below
under "--Development and Marketing."
The licensing agreement grants us an option to participate and share in the
development and commercialization of Xubix within 30 days after approval of an
NDA by the FDA. If exercised, we would reimburse Hoffmann-La Roche for 50% of
its development costs (including Phase III development costs) incurred by
Hoffmann-La Roche from and after May 1, 1997 through the date we exercised our
option and for Phase III development costs incurred prior to May 1, 1997 and
would pay an additional $25 million. If we exercise our option, we and
Hoffmann-La Roche will negotiate and enter into a more detailed
commercialization and development agreement. We would have co-exclusive rights
with Hoffmann-La Roche in the United States to register, use, sell and market
the products resulting from our collaboration on Xubix. Hoffmann-La Roche would
have exclusive rights on Xubix in the Roche Territory.
Commercialization Committees: To manage our collaborations with Hoffmann-La
Roche, the licensing agreement provides for the establishment of four
committees: a joint commercialization committee to provide a forum for the
exchange of information about Genentech Products; a development committee to
coordinate development efforts between us and Hoffmann-La Roche; a management
committee to review annually the development and commercialization of all
products covered by the licensing agreement; and a joint finance committee to
discuss financial activities relating to the licensing agreement. We and
Hoffmann-La Roche will review the committee structure within six months after
effectiveness of the licensing agreement to consider simplifying the committee
system.
Development and Marketing: Under the licensing agreement, we will have sole
responsibility and full autonomy for the development and marketing of our
products outside the Roche Territory, and also in the Roche Territory with
respect to products for which Hoffmann-La Roche does not exercise its option for
a license. Hoffmann-La Roche will have sole responsibility for the development
and marketing of products in the Roche Territory for which it has been granted a
license or exercised its option for a license.
Under the licensing agreement, Hoffmann-La Roche will, in general, reimburse us
for 50% of our development costs, depending on the payment mechanism described
below, incurred in connection with a product for which Hoffmann-La Roche has
exercised its option for a license except that if Hoffmann-La Roche exercises
its option to license a new product after receiving notice of the completion of
a Phase III trial for that product, Hoffmann-La Roche will reimburse us for 75%
of our development costs incurred between the time we gave notice of completion
of Phase II trials and the exercise of its option, in addition to reimbursing us
for 50% of our development costs incurred prior to notice of completion of Phase
II trials. However, $5 million of any option extension fee paid by Hoffmann-La
Roche will be credited against our development costs to be reimbursed by
Hoffmann-La Roche for that product.
The mechanism for reimbursement of our development costs incurred up to the date
of Hoffmann-La Roche's exercise of its option for a product shall be, at our
election and with Hoffmann-La Roche's consent, either of the following:
- upon Hoffmann-La Roche's exercise of its option by payment in full of the
appropriate percentage of the previously incurred development costs for
that product or
- by quarterly payments equal to 150% of prospective development costs for
that product until the appropriate percentage of all previously incurred
development costs for that product have been reimbursed.
If the option was exercised prior to completion of the product's Phase II
trials, 50% of the global development costs incurred after Hoffmann-La Roche's
exercise of its option shall be reimbursed by Hoffmann-La Roche on an ongoing
basis. If the option was exercised after completion of the product's Phase II
trials, 75% of the global development costs incurred after Hoffmann-La Roche's
exercise of its option shall be reimbursed by Hoffmann-La Roche on an ongoing
basis.
Once Hoffmann-La Roche has exercised an option to license a product, we will
share the subsequent global development costs of that product equally, except as
follows:
- Hoffmann-La Roche will bear 10% of the global development costs incurred
in connection with Canada Products on or after the date on which
Hoffmann-La Roche exercises its option for a license on the product;
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- Hoffmann-La Roche will bear 60% of the global development costs incurred
in connection with IGF-1 products for any diabetes indication on or after
the date on which Hoffmann-La Roche exercises its option for a license on
the product;
- Hoffmann-La Roche will bear 60% of the global development costs incurred
in connection with any NGF products on or after the date on which
Hoffmann-La Roche exercises its option for a license on the product;
- for any additional indications, new formulations or new dosing schedules
of a product, we and Hoffmann-La Roche will share equally the subsequent
global development costs, unless Hoffmann-La Roche exercised its option
after completion of the Phase III trials, in which case Hoffmann-La Roche
will bear 75% and we will bear 25% of the subsequent global development
costs; and
- if Hoffmann-La Roche exercises its option after completion of the Phase
III trials, each company will bear its own subsequent global development
costs for clinical development and registration for the indication that
is the subject of these Phase III trials.
Production and Supply: Pursuant to the licensing agreement, we or our
subsidiaries, as applicable, will manufacture and supply to Hoffmann-La Roche
its clinical requirements of Genentech Products at cost and its commercial
requirements at cost plus a margin of 20% on such cost. If Hoffmann-La Roche
exercises its option with respect to any synthetic molecules other than proteins
and peptides ("Small Molecule Products"), Hoffmann-La Roche will manufacture and
supply to us clinical requirements of Small Molecule Products at cost and
commercial requirements at cost plus a margin of 20% on such cost. In-Licensed
Products will be manufactured and supplied to Hoffmann-La Roche, whether by us,
the licensor or a third party, in a manner consistent with the license agreement
for that product. Hoffmann-La Roche will bear the same percentage of costs
associated with developing a manufacturing process for products licensed by
Hoffmann-La Roche as Hoffmann-La Roche is required to bear with respect to the
development of the product. We will pay that proportion of Hoffmann-La Roche's
costs associated with developing a manufacturing process for a Small Molecule
Product licensed by Hoffmann-La Roche that Genentech's expected revenues for
sales of that product in the United States bears to expected worldwide sales of
that product.
Hoffmann-La Roche will have the right to manufacture Genentech Products itself,
in bulk form or in vial form, under any of the following circumstances:
- if Hoffmann-La Roche can demonstrate that it is able to manufacture
products in either of these forms at a lower price than our supply price;
- if we are not able to, or it is foreseeable that we will not be in a
position to, supply Hoffmann-La Roche's commercial requirements in the
Roche Territory; or
- if we intend to have a third party manufacture a product in these forms.
Under any of these circumstances, at Hoffmann-La Roche's request, we will
provide Hoffmann-La Roche with all information and any support, at Hoffmann-La
Roche's expense, needed to enable Hoffmann-La Roche to manufacture a product in
these forms for use and sale in the Roche Territory, and we shall grant
Hoffmann-La Roche any necessary licenses to do so.
Royalties and Other Payments: We will receive the following royalties on
product sales from Hoffmann-La Roche:
- On Pulmozyme, (x) a royalty of 20% on sales in countries that are or will
become members of the European Union or the European Free Trade
Association and in Canada and (y) in all other countries which are part
of the Roche Territory, a royalty of 12.5% on the first $100 million in
aggregate sales and thereafter a royalty of 15% on aggregate sales in
excess of $100 million until the later in each country of the expiration
of our last relevant patent or 25 years from first commercial
introduction;
- On Canada Products, a royalty of 20% on sales of each such product until
the later of the expiration of our relevant patent in Canada or 25 years
from October 25, 1995 (with respect to Activase, Hoffmann-La Roche will
pay an additional 10% royalty on sales in each year that exceed 110% of
1994 Activase sales up to a total payment of $27 million);
- On each Genentech Product for which Hoffmann-La Roche exercises its
option upon either a decision to file an IND with the FDA or completion
of the Phase II trials, a royalty of 12.5% on the first $100 million in
aggregate sales and thereafter a royalty of 15% on aggregate sales in
excess of $100 million until the later in each country of the expiration
of our last relevant patent or 25 years from first commercial
introduction;
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- On each Genentech Product for which Hoffmann-La Roche exercises its
option after completion of the Phase III trials, a royalty of 15% on all
sales until the later in each country of the expiration of our relevant
patent or 25 years from the first commercial introduction; however, $5
million of any option extension fee paid by Hoffmann-La Roche shall be
credited against royalties payable to us in the first calendar year of
sales by Hoffmann-La Roche in which aggregate sales of that product
exceeds $100 million;
- On IDEC Product, a royalty of 20% on sales for so long as we are paying
royalties to IDEC on sales of IDEC Product and thereafter a royalty of
10% for aggregate annual sales of $75 million or less and 8% for
aggregate annual sales in excess of $75 million until the later in each
country of the expiration of our last relevant patent or 25 years from
first commercial introduction;
- On In-Licensed Products, a mutually agreeable royalty to be negotiated
for each such product; and
- On the expiration of any of the foregoing royalties, on a product for
which Hoffmann-La Roche continues to use our trademark, a royalty of 2%
on sales for so long as the trademark is used.
With respect to IDEC Product, Hoffmann-La Roche paid us $10 million and
reimbursed us for 50% of some of our development costs and for certain one-time
milestone payments that we were obligated to pay upon the occurrence of such
milestones to IDEC.
Any of the foregoing royalties shall be renegotiated in good faith to make that
royalty or rate significantly more economically viable for Hoffmann-La Roche if
(i) there exists a generically equivalent product competing with the product for
which Hoffmann-La Roche pays royalties to us and (ii) the equivalent product has
at least 25% of the market share for those products in that country.
Any of the foregoing royalties are subject to reductions in the event that
Hoffmann-La Roche, together with its affiliates, hold less than 50% of our
outstanding common stock.
Term and Termination: The licensing agreement expires for any individual product
when royalties are no longer payable by Hoffmann-La Roche to us on sales of that
product unless we and Hoffmann-La Roche agree to extend the licensing agreement
for such product. Provisions for termination by Hoffmann-La Roche include the
following:
- Hoffmann-La Roche has the right to terminate a license for a product upon
thirty days notice;
- if Hoffmann-La Roche terminates its license based on a good faith
determination, after consultation with appropriate regulatory authorities
in the relevant country, that the product cannot be approved for sale in
one or more major countries that either are or become members of the
European Union or the European Free Trade Association because of safety
issues, Hoffmann-La Roche shall be liable for all obligations incurred
primarily to support registration in the Roche Territory of that product
for up to six months after Hoffmann-La Roche terminates its license;
- if Hoffmann-La Roche terminates its license for other than safety
reasons, Hoffmann-La Roche shall be liable for all of its obligations
regarding the product for up to twelve months after the termination
notice is given or if Hoffmann-La Roche terminates its license after at
least one Phase III clinical trial has been completed and the results of
that trial are unable to support the registration of that product, or the
results of other trials establish that further development would not
provide data sufficient to support registration, Hoffmann-La Roche shall
be liable for all of its obligations regarding the product for up to six
months after the termination notice is given; and
- if Hoffmann-La Roche terminates its license, all rights to the product
revert to us.
If Hoffmann-La Roche fails to use its best efforts to commercialize a product in
a country and fails to take adequate remedial measures within six months of
notice, we may
- terminate the agreement with respect to that product in that country if a
registration has not been initiated; or
- convert the exclusive license for that product in that country to a
nonexclusive one if registration has been initiated.
We may terminate our development or commercialization at any time for any
product which has been licensed to Hoffmann-La Roche, and such product will then
be subject to the provisions of our affiliation agreement with Roche described
under "Relationship with Roche--Arrangements between Genentech and
Roche--Licensing and Marketing Arrangements," provided that if such termination
is for reasons other than safety concerns, we will have an obligation for up to
two years to provide
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Hoffmann-La Roche's clinical and commercial supply requirements. Either party
may terminate the licensing agreement for the breach of a material obligation of
the other. We may terminate Hoffmann-La Roche's option for a license for
products if the equity ownership of Hoffmann-La Roche and its affiliates in our
company is less than 50% at any time. If we terminate the license agreement for
any product for any reason, Hoffmann-La Roche will have a royalty-free right and
license to produce and supply all of its clinical and commercial supply
requirements and we will be obligated to transfer to Hoffmann-La Roche all
manufacturing technology with respect to that product. If Hoffmann-La Roche
terminates its development or commercialization of a Small Molecule Product at
any time, we will have a royalty-free right and license to produce and supply
all of our clinical and commercial supply requirements and Hoffmann-La Roche
will be obligated to transfer to us all manufacturing technology with respect to
that product.
RAW MATERIALS
Raw materials and supplies required for the production of our principal products
are generally available in quantities adequate to meet our needs.
PROPRIETARY TECHNOLOGY -- PATENTS AND TRADE SECRETS
We have a policy of seeking patents on inventions arising from our ongoing
research and development activities. Patents issued or applied for cover
inventions ranging from basic recombinant DNA techniques to processes relating
to specific products and to the products themselves. We have either been granted
patents or have patent applications pending which relate to a number of current
and potential products including products licensed to others. We consider that
in the aggregate our patent applications, patents and licenses under patents
owned by third-parties are of material importance to our operations. Important
legal issues remain to be resolved as to the extent and scope of available
patent protection for biotechnology products and processes in the United States
and other important markets outside of the United States. We expect that
litigation will likely be necessary to determine the validity and scope of
certain of our proprietary rights. We are currently involved in a number of
patent lawsuits, as either a plaintiff or defendant, and administrative
proceedings relating to the scope of protection of our patents and those of
others. These lawsuits and proceedings may result in a significant commitment of
our resources in the future. We cannot assure you that the patents we obtain or
the unpatented proprietary technology we hold will afford us significant
commercial protection.
In general, we have obtained licenses from various parties that we deem to be
necessary or desirable for the manufacture, use or sale of our products. These
licenses (both exclusive and non-exclusive) generally require us to pay
royalties to the parties on product sales.
Our trademarks, Actimmune, Activase, Herceptin, Nutropin, Nutropin AQ, Nutropin
Depot, Protropin, Pulmozyme and Rituxan, in the aggregate are considered to be
of material importance and are registered in the U.S. Patent and Trademark
Office and in other countries throughout the world.
Our royalty income during 1998, 1997 and 1996 for patent licenses, know-how and
other related rights amounted to $229.6 million, $241.1 million and $214.7
million, respectively. Royalty expenses for 1998, 1997 and 1996, were $66.3
million, $58.9 million and $58.9 million, respectively.
COMPETITION
We face competition, and believe significant long-term competition can be
expected, from large pharmaceutical companies and pharmaceutical divisions of
chemical companies as well as biotechnology companies. This competition can be
expected to become more intense as commercial applications for biotechnology
products increase. Some competitors, primarily large pharmaceutical companies,
have greater clinical, regulatory and marketing resources and experience than we
do. Many of these companies have commercial arrangements with other companies in
the biotechnology industry to supplement their own research capabilities.
The introduction of new products or the development of new processes by
competitors or new information about existing products may result in price
reductions or product replacements, even for products protected by patents.
However, we believe our competitive position is enhanced by our commitment to
research leading to the discovery and development of new products and
manufacturing methods. Other factors which should help us meet competition
include ancillary services provided to
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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-Hodgkins lymphoma. We are aware of other potentially competitive biologic
therapies in development. Coulter recently filed a BLA with respect to one such
product for a similar indication for which Rituxan is approved.
Activase
We continue to face competition from Retavase(R), a thrombolytic agent. Retavase
received FDA approval in October 1996 for the treatment of acute myocardial
infarction. We believe Retavase infringes on our patents and we have filed a
patent infringement action against Boehringer Mannheim. In 1998, Centocor, Inc.
purchased the United States and Canadian rights to Retavase from Boehringer
Mannheim. In addition, the market for thrombolytic therapy has declined as there
is an increasing use of mechanical reperfusion in lieu of thrombolytic therapy
for the treatment of acute myocardial infarction. In April 1995, the FDA
approved for marketing an accelerated dosage of Activase. In June 1996, we
received clearance from the FDA to market Activase for the treatment of acute
ischemic stroke within three hours of symptom onset. Activase is the first
therapy to be indicated for the acute treatment of stroke. In addition, we have
concluded Phase III clinical trials on a second generation of t-PA, TNK-tPA, and
are currently preparing FDA regulatory filings.
In March 1998, we received two new patents related to variant forms of t-PA.
Based on these patents, we filed an infringement action against Centocor Inc. in
the Northern District of California which alleges that Centocor's sale, offer
for sale, use in, and importation into, the United States of Retavase
(reteplase, recombinant), a t-PA, infringes these two new patents.
In connection with the acquisition by Roche of Corange Limited in 1998, Roche
entered into a consent decree with the Federal Trade Commission. Pursuant to the
consent decree, if Roche acquires 100% of our stock or if our former governance
agreement allows Roche to control us, Roche shall cause us to dismiss, with
prejudice, all pending litigation we have against Centocor regarding the rights
for the research, development, manufacture or sale of Centocor's Retavase
product, and we shall refrain from instituting any new litigation against
Centocor challenging or seeking to render invalid any of the patents divested or
licensed to Centocor pursuant to the terms of the decree.
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. In
addition, three of our competitors have received approval to market their
existing human growth hormone products in the United States for additional
indications.
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In June 1999, we filed a marketing application for Nutropin Depot and 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 the then existing licensing agreement with Roche,
in the fourth quarter of 1995, Hoffmann-La Roche obtained exclusive rights to
sell Pulmozyme outside of the United States, and we receive a royalty on such
sales. We are not aware of any directly competing products in development.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of our products and in
ongoing research and product development activities. All of our products will
require regulatory approval by governmental agencies prior to commercialization.
In particular, our products are subject to rigorous preclinical and clinical
testing and other premarket approval requirements by the FDA and regulatory
authorities in other countries. Various statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such products. The lengthy process of seeking these approvals, and
the subsequent compliance with applicable statutes and regulations, require the
expenditure of substantial resources. We believe that we are currently in
compliance with such statutes and regulations. Any failure by us to obtain, or
any delay in obtaining, regulatory approvals could materially adversely affect
our business.
The activities required before a pharmaceutical product may be marketed in the
United States begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and animal studies to assess the
potential safety and efficacy of the product and its formulations. The results
of these studies must be submitted to the FDA as part of an IND application,
which must be reviewed by the FDA before proposed clinical testing can begin.
Typically, clinical testing involves a three-phase process. In Phase I, clinical
trials are conducted with a small number of subjects to determine the early
safety profile and the pattern of drug distribution and metabolism. In Phase II,
clinical trials are conducted with groups of patients afflicted with a specified
disease in order to provide enough data to statistically evaluate the
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large scale, multicenter, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data to
statistically evaluate the efficacy and safety of the product, as required by
the FDA. The results of the preclinical and clinical testing of a chemical
pharmaceutical product are then submitted to the FDA in the form of a NDA, or
for a biological pharmaceutical product in the form of BLA, for approval to
commence commercial sales. In responding to an NDA or BLA, the FDA may grant
marketing approval, request additional information or deny the application if it
determines that the application does not provide an adequate basis for approval.
We can not assure you that any approval required by the FDA will be obtained on
a timely basis, if at all.
Among the conditions for NDA or BLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
on an ongoing basis with Good Manufacturing Practices, or GMP. Before approval
of the BLA, the FDA will perform a prelicensing inspection of the facility to
determine its compliance with GMP and other rules and regulations. In complying
with GMP, manufacturers must continue to expend time, money and effort in the
area of production and quality control to ensure full compliance. After the
establishment is licensed for the manufacture of any product, it is subject to
periodic inspections by the FDA.
The requirements such as those described above which we must satisfy to obtain
regulatory approval by governmental agencies in other countries prior to
commercialization of our products in such countries can be as rigorous, costly
and uncertain.
We are also subject to various laws and regulations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with our research. We believe we are currently in compliance with
all these laws and regulations. The extent of governmental regulation which
might result from any legislative or administrative action cannot be accurately
predicted.
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The levels of revenues and profitability of biopharmaceutical companies may be
affected by the continuing efforts of government and third party payers to
contain or reduce the costs of health care through various means. For example,
in certain foreign markets pricing or profitability of therapeutic and other
pharmaceutical products is subject to governmental control. In the United States
there have been, and we expect that there will continue to be, a number of
federal and state proposals to implement similar governmental control. While we
cannot predict whether any such legislative or regulatory proposals will be
adopted, the adoption of such proposals could have a material adverse effect on
our business, financial condition and profitability. In addition, in both the
United States and elsewhere, sales of therapeutic and other pharmaceutical
products are dependent in part on the availability of reimbursement to the
consumer from third party payers, such as government and private insurance
plans. Third party payers are increasingly challenging the prices charged for
medical products and services. We cannot assure you that any of our products
will be considered cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow us to sell our products on a
competitive and profitable basis.
RESEARCH AND DEVELOPMENT
A major portion of our operating expenses to date have been related to the
research and development of products either on our own behalf or under
contracts. During 1998, 1997 and 1996, our research and development expenses
were $396.2 million, $470.9 million and $471.1 million, respectively. During the
three months ended March 31, 1999, our research and development expenses were
$90.7 million.
Our research and development efforts have been the primary source of our
products. We intend to maintain our strong commitment to research and
development as an essential component of our product development effort.
Licensed technology developed by outside parties is an additional source of
potential products.
HUMAN RESOURCES
As of June 30, 1999, we had 3,551 employees.
ENVIRONMENT
We seek to comply with all applicable statutory and administrative requirements
concerning environmental quality. We have made, and will continue to make,
expenditures for environmental compliance and protection. Expenditures for
compliance with environmental laws have not had and are not expected to have a
material effect on our capital expenditures, results of operation, financial
position or competitive position.
PROPERTIES
Our primary facilities are located in a research and industrial park in South
San Francisco, California in both leased and owned properties. We currently
occupy twenty-two buildings for our research and development, manufacturing,
marketing and administrative activities. Fourteen of the buildings are owned
property and eight are leased. We have made and continue to make improvements to
these properties to accommodate our growth. In addition, we own approximately 17
acres adjacent to our current facilities that may be used for future expansion.
In 1995, we began development of a new manufacturing facility of approximately
300,000 square feet in Vacaville, California under an operating lease
arrangement. The facility is expected to be operational in the fourth quarter of
1999, with licensure expected thereafter. We also have leases for certain
additional office facilities in several locations in the United States.
We believe our facilities are in good operating condition and that the real
property owned or leased, combined with the new Vacaville site, currently
conducted start-up and validation checks, are adequate for all present and near
term uses although additional manufacturing capacity may be added on the
Vacaville site dependent on the success of products in clinical trials. We
believe any additional facilities could be obtained or constructed with our
capital resources.
LEGAL PROCEEDINGS
We are a party to various legal proceedings, including patent infringement cases
involving human growth hormone products and Activase and other matters.
In July 1997, an action was filed in the U.S. District Court for the Northern
District of California alleging that our manufacture, use and sale of Nutropin
human growth hormone products infringes a patent known as the "Goodman Patent",
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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 has been stayed
pending the conclusion of the 1990 case.
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. Also during the hearing, UC
advised the court that it wishes to have a retrial with a new jury of its
infringement case against our Protropin product, and proposed that the retrial
be consolidated with the infringement case against our Nutropin products. The
judge is expected to issue a written decision setting the schedule for those
further proceedings. In addition, UC has made a motion for entry of a judgment
as a matter of law that Genentech's manufacture, use or sale of Protropin
infringes the Goodman Patent notwithstanding the lack of unanimous jury verdict
on that issue. The judge scheduled a hearing for July 23, 1999 to discuss that
motion. The judge has previously denied two similar motions made by UC while the
trial was in progress.
On May 28, 1999, Glaxo Wellcome Inc. filed a patent infringement lawsuit against
us in the U.S. District Court in Delaware. That suit asserts that we infringe
four U.S. patents owned by Glaxo Wellcome. Two of the patents relate to the use
of specific kinds of monoclonal antibodies for the treatment of human disease,
including cancer. The other two patents asserted against us relate to
preparations of specific kinds of monoclonal antibodies which are made more
stable and the methods by which such preparations are made. We have been served
with the complaint. The complaint fails to specify which of our products or
methods of manufacture are allegedly infringing the four patents at issue.
However, we believe that the suit relates to the manufacture, use and sale of
our Herceptin and Rituxan antibody products. We are assessing the suit, the
merits of Glaxo Wellcome's claims and the strength of the patents.
Based upon the nature of the claims made and the information available to date
to us and our counsel through investigations and otherwise, we believe the
outcome of these actions is not likely to have a material adverse effect on our
financial position, result of operations or cash flows. However, were an
unfavorable ruling to occur in any quarterly period, there exists the
possibility of a material impact on the net income of that period.
In addition to the above, in April 1999, we agreed to make a $50 million payment
to settle a federal investigation relating to our past clinical, sales and
marketing activities associated with human growth hormone.
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MANAGEMENT
Upon consummation of this offering, our board will consist of two Roche
directors, Dr. Humer and Dr. Knowles, three independent directors to be
nominated by a nominating committee currently controlled by Roche, one of whom
will be Herbert W. Boyer, and one Genentech employee, Dr. Levinson, who will be
the chairman of the board. However, Roche has the right at any time to obtain
proportional representation on our board. See "Risk Factors--Roche, Our
Controlling Stockholder, May Have Interests That Are Adverse to Yours." The
executive officers and directors of Genentech after the offering and their
respective ages and positions with Genentech are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Arthur D. Levinson, Ph.D. ............... 49 President, Chief Executive Officer and Chairman of the
Board
William D. Young......................... 54 Chief Operating Officer
Louis J. Lavigne, Jr. ................... 51 Executive Vice President and Chief Financial Officer
Susan D. Desmond-Hellmann, M.D., Senior Vice President--Development and Chief Medical
M.P.H. ................................ 41 Officer
Dennis J. Henner, Ph.D. ................. 48 Senior Vice President--Research
Judith A. Heyboer........................ 49 Senior Vice President--Human Resources
Stephen G. Juelsgaard.................... 50 Senior Vice President--General Counsel and Secretary
W. Robert Arathoon, Ph.D. ............... 47 Vice President--Process Sciences
Joffre B. Baker, Ph.D. .................. 51 Vice President--Research Discovery
J. Joseph Barta.......................... 51 Vice President--Quality
Stephen G. Dilly, M.D., Ph.D. ........... 40 Vice President--Medical Affairs
David Ebersman........................... 29 Vice President--Product Development
Robert L. Garnick, Ph.D. ................ 49 Vice President--Regulatory Affairs
Bradford S. Goodwin...................... 44 Vice President--Finance
Paula M. Jardieu, Ph.D. ................. 48 Vice President--Pharmacological Sciences
Edmon R. Jennings........................ 52 Vice President--Corporate Development
Sean A. Johnston, Ph.D................... 40 Vice President--Intellectual Property
Cynthia J. Ladd.......................... 44 Vice President--Corporate Law and Assistant Secretary
Walter K. Moore.......................... 47 Vice President--Government Affairs
James P. Panek........................... 46 Vice President--Manufacturing, Engineering and Facilities
Diane L. Parks........................... 46 Vice President--Marketing
Kimberly J. Popovits..................... 40 Vice President--Sales
Nicholas J. Simon........................ 45 Vice President--Business and Corporate Development
David C. Stump, M.D. .................... 49 Vice President--Clinical Research and Genentech Fellow
John M. Whiting.......................... 44 Controller and Chief Accounting Officer
Franz B. Humer, Ph.D. ................... 52 Director of Genentech
Jonathan K.C. Knowles, Ph.D. ............ 51 Director of Genentech
Herbert W. Boyer, Ph.D. ................. 62 Director Nominee
</TABLE>
All officers are elected annually by the Board of Directors.
Dr. Levinson, Mr. Young, Mr. Lavigne, Dr. Desmond-Hellmann, Dr. Henner, Ms.
Heyboer and Mr. Juelsgaard are members of our management executive committee.
ARTHUR D. LEVINSON, PH.D. was appointed Chairman of the Board in June 1999 and
President and Chief Executive Officer of Genentech in July 1995. He had
previously served as Senior Vice President of Genentech since January 1993. Dr.
Levinson has held a number of other positions, including Vice President,
Research, Vice President, Research Technology, Director, Cell Genetics
Department and Staff Scientist subsequent to joining Genentech in May 1980 as a
Senior Scientist.
WILLIAM D. YOUNG was appointed Chief Operating Officer of Genentech in April
1997. He previously served as Executive Vice President of Genentech from January
1996 to April 1997, as Senior Vice President from September 1988 to January 1996
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and as Vice President, Manufacturing and Process Sciences from April 1983 to
September 1988. Mr. Young joined Genentech in September 1980 as Director,
Manufacturing from Eli Lilly and Company.
LOUIS J. LAVIGNE, JR. was appointed Executive Vice President of Genentech in
March 1997 and Chief Financial Officer in August 1988. He previously served as
Senior Vice President from July 1994 to March 1997 and as Vice President from
July 1986 to July 1994. Mr. Lavigne joined Genentech in July 1982 from Pennwalt
Corporation and became Controller in May 1983 and an officer of Genentech in
February 1984.
SUSAN D. DESMOND-HELLMANN, M.D., M.P.H. was appointed Senior Vice President,
Development in December 1997 and Chief Medical Officer in December 1996. She
joined Genentech in March 1995 as Clinical Scientist and subsequently held the
positions of Associate Director from August 1995 to January 1996, Senior
Director from January 1996 to March 1996 and Vice President, Medical Affairs
from March 1996 to November 1997. Prior to joining Genentech, she held the
positions of Associate Director at Bristol-Myers Squibb from February 1993 to
February 1995 and Medical Oncologist at Lexington Oncology Associates from June
1992 to February 1993.
DENNIS J. HENNER, Ph.D. was appointed Senior Vice President, Research in May
1998. He had served as Vice President, Research from April 1996 to May 1998,
Vice President, Research Technology from July 1994 to April 1996, and as Senior
Director, Research Technology from December 1990 to July 1994. From May 1990 to
December 1990, Dr. Henner was Director and Senior Scientist, Cell Genetics
Department. Dr. Henner joined Genentech in 1981 as a Scientist in Research.
Prior to joining Genentech, he was at the Scripps Clinic and Research
Foundation.
JUDITH A. HEYBOER joined Genentech as Senior Vice President, Human Resources in
August 1996. Prior to joining Genentech, she held the positions of Vice
President, Employee Relations and later Senior Vice President at Acuson
Corporation from October 1983 to July 1996.
STEPHEN G. JUELSGAARD was appointed Senior Vice President in April 1998, Vice
President and General Counsel in July 1994 and Secretary in April 1997. He
joined Genentech in July 1985 as Corporate Counsel and subsequently served as
Senior Corporate Counsel from 1988 to 1990, Chief Corporate Counsel from 1990 to
1993, Vice President, Corporate Law from 1993 to 1994, and Assistant Secretary
from 1994 to 1997.
W. ROBERT ARATHOON, Ph.D. was appointed Vice President, Process Sciences in
April 1996. Since joining Genentech in 1983 from The Wellcome Foundation, Dr.
Arathoon has held a series of positions of increasing responsibility, most
recently as Senior Director, Process Sciences from November 1994 to April 1996.
JOFFRE B. BAKER, Ph.D. was appointed Vice President, Research Discovery in
February 1997. He previously held the positions of Senior Director, Research
Discovery from March 1993 to February 1997 and Director, Cardiovascular Research
Development from September 1990 to September 1993. He has also been a member of
the Research Review Committee (RRC) since March 1993.
J. JOSEPH BARTA was appointed Vice President, Quality in October 1998. He
previously held the positions of Senior Director, Quality from March to October
1998, Senior Director, Quality Assurance from January 1994 to February 1998,
Senior Director, Pharmaceutical Manufacturing from September to December 1993,
Director, Pharmaceutical Manufacturing from September 1989 to August 1993, and
Associate Director, Validation and Technical Services from June to September
1989. He joined Genentech in March 1988 as Manager, Validation. Prior to joining
Genentech, he held positions of Director, Quality Assurance and Quality Control
at Codon from May 1986 to March 1988 and Group Validation Manager at Miles
Laboratories, Inc. from September 1979 to March 1986.
STEPHEN G. DILLY, M.D., Ph.D. joined Genentech as Vice President, Medical
Affairs in December 1998. Prior to joining Genentech he held various positions
with SmithKline Beecham Pharmaceuticals from August 1988, including Director and
Vice President Neurosciences Therapeutic Unit from December 1996 to December
1998, Director and Vice President CardioPulmonary Therapeutic Team from December
1994 to December 1996 and Group Director Neurosciences Therapeutic Unit from
April 1993 to December 1994.
DAVID EBERSMAN was appointed Vice President, Product Development in February
1999. He joined Genentech in February 1994 as a Business Development Analyst and
subsequently held the positions of Manager, Business Development from February
1995 to February 1996, Director, Business Development from February 1996 to
March 1998 and Senior Director, Product Development from March 1998 to February
1999. Prior to joining Genentech, he held the position of Research Analyst at
Oppenheimer & Company, Inc. beginning in 1991.
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ROBERT L. GARNICK, Ph.D. was appointed Vice President, Regulatory Affairs in
February 1998. He had previously served as Vice President, Quality since April
1994 and was Senior Director, Quality Control from 1990 to 1994 and Director,
Quality Control from 1988 to 1990. Dr. Garnick joined Genentech in August 1984
from Armour Pharmaceutical, where he worked from 1980. Prior to that, he was
Manager of Analytical Development at Merrell National Labs from 1977 to 1980.
BRADFORD S. GOODWIN was appointed Vice President, Finance in October 1997. He
had served as Vice President, Finance and Controller since December 1996. He has
been a Vice President of Genentech since July 1993 and served as Controller from
June 1989 to October 1997. He has also held the positions of Director, Financial
Planning and Analysis, the Assistant Controller and the General Auditor. Before
joining Genentech in April 1987, Mr. Goodwin worked for Price Waterhouse, a
public accounting firm.
PAULA M. JARDIEU, Ph.D. was appointed Vice President, Pharmacological Sciences
in February 1997. She previously held the positions of Senior Director,
Pharmacological Sciences from 1996 to February 1997, Staff Scientist from 1992
to 1996, Senior Scientist from 1989 to 1992 and Scientist from 1986 to 1989.
EDMON R. JENNINGS was appointed Vice President, Corporate Development in
December 1995. He was Vice President, Sales and Marketing from January 1994 to
December 1995, and had served as Vice President, Sales since January 1991. He
joined Genentech in September 1985 as Western Area Sales Manager. Prior to
joining Genentech, Mr. Jennings was Western Region Sales Manager of
Bristol-Myers' Oncology Division.
SEAN A. JOHNSTON, Ph.D. was appointed Vice President, Intellectual Property in
June 1998. He joined Genentech in October 1990 as Patent Counsel and
subsequently held the positions of Senior Patent Counsel from October 1993 to
October 1995, Senior Patent Counsel and Manager of Patent Litigation from
October 1995 to April 1998, and Associate General Counsel, Patent Law from April
1998 to June 1998. Prior to joining Genentech, he served as a Law Clerk at the
United States District Court for the Central District of California from
September 1989 to September 1990 and was a Research Scientist at International
Genetic Engineering, Inc. from December 1984 to August 1986.
CYNTHIA J. LADD was appointed Vice President, Corporate Law in February 1996 and
Assistant Secretary in April 1997. She joined Genentech in 1989 as Corporate
Counsel and subsequently held the positions of Senior Corporate Counsel from
November 1990 to June 1993 and Chief Corporate Counsel from June 1993 to
February 1996.
WALTER K. MOORE was appointed Vice President, Government Affairs in May 1998. He
joined Genentech in September 1993 as Senior Director of Government Affairs.
Prior to joining Genentech, Mr. Moore served as Manager of Governmental
Relations at Eli Lilly and Company.
JAMES P. PANEK was appointed Vice President, Manufacturing, Engineering and
Facilities in July 1997. He joined Genentech in September 1982 and subsequently
held the positions of Director, Engineering and Facilities since May 1988,
Senior Director, Engineering and Facilities since July 1991, and Vice President,
Engineering and Facilities since July 1993.
DIANE L. PARKS joined Genentech as Vice President, Marketing in June 1999. Prior
to joining Genentech, she held various positions with Marion Laboratories
(formerly, Marion Merrell Dow and Hoeschst Marion Roussel) from 1982, most
recently including Vice President, Marketing from March 1998 to June 1999, Group
Product Director, Respiratory and Metabolism from November 1994 to March 1998
and Director, U.S. Commercial Development from July 1993 to November 1994.
KIMBERLY J. POPOVITS was elected Vice President, Sales in October 1994. She was
Director, Field Sales from January 1993 to October 1994 and Regional Manager,
Northeast Region from October 1989 to January 1993. Ms. Popovits was at American
Critical Care, a Division of American Hospital Supply Corporation, for six years
prior to joining Genentech in November 1987 as Division Manager, Southeast
Region.
NICHOLAS J. SIMON was appointed Vice President of Business and Corporate
Development in December 1995. He had been Vice President of Business Development
from December 1994 to December 1995, and was Senior Director of Business
Development from December 1993 to December 1994. He joined Genentech in 1989 as
Director of Business Development from Xoma Corporation.
DAVID C. STUMP, M.D. was appointed Genentech Fellow in January 1996, in addition
to his responsibilities as Vice President, Clinical Research, a position he has
held since July 1995. He joined Genentech in July 1989 as Director, Clinical
Research and was appointed Senior Director, Clinical Research in August 1991.
Prior to joining Genentech, Dr. Stump was Associate Professor of Medicine and
Biochemistry at the University of Vermont.
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JOHN M. WHITING was appointed Controller and Chief Accounting Officer in October
1997. He previously held the positions of Director, Financial Planning and
Analysis from January 1997 to October 1997; Director, Operations, Financial
Planning and Analysis from December 1996 to January 1997; Associate Director,
Operations, Financial Planning and Analysis from March 1996 to December 1996;
Plant Controller from April 1993 to March 1996; and Group Controller from July
1991 to April 1993.
FRANZ B. HUMER, Ph.D. joined The Roche Group in the spring of 1995 as the Head
of its Pharmaceuticals Division and became Chief Executive Officer of The Roche
Group in January 1998. He is also a member of the Board of Directors and
Chairman of the Executive Committee of The Roche Group. Prior to joining The
Roche Group, Dr. Humer was an Executive Director and Chief Operating Officer of
Glaxo Holdings, a United Kingdom public limited company. Dr. Humer also serves
as a director of Cadbury Schweppes p.l.c. Pursuant to the amended governance
agreement, Dr. Humer is a designee of Roche.
JONATHAN K.C. KNOWLES, Ph.D. joined The Roche Group as President of Global
Research in September 1997. In January 1998, he became a member of the Executive
Committee of The Roche Group. Prior to joining The Roche Group, Dr. Knowles
served as the Director of Research for Europe of Glaxo from 1995 and served as
the Director of the Geneva Institute of Glaxo from 1989 to 1995. Pursuant to the
amended governance agreement, Dr. Knowles is a designee of Roche.
HERBERT W. BOYER, Ph.D., a founder of Genentech, had been a director of
Genentech since 1976 and is a consultant to Genentech. He served as a Vice
President of Genentech from 1976 to 1991. Dr. Boyer, a Professor of Biochemistry
at the University of California at San Francisco from 1976 to 1991, demonstrated
the usefulness of recombinant DNA technology to produce medicines economically,
which laid the groundwork for Genentech's development. In 1993, Dr. Boyer
received the 1993 Helmut Horten Research Award. He also received the National
Medal of Science from President Bush in 1990, the National Medal of Technology
in 1989 and the Albert Lasker Basic Medical Research Award in 1980. He is an
elected member of the National Academy of Sciences and a Fellow in the American
Academy of Arts and Sciences. In addition, Dr. Boyer serves as Chairman of the
Board of Directors of Allergan, Inc.
COMPENSATION OF DIRECTORS
In 1998, each of our directors, except Dr. Levinson and J. Richard Munro,
Chairman of the Board of Directors at that time, were paid an annual retainer of
$30,000. Mr. Munro, as Chairman of the Board of Directors, was paid an annual
retainer of $50,000. Dr. Levinson was not paid for his services as a director.
In addition, the directors, with the exception of Dr. Levinson, received a total
of $1,500 for each board and committee meeting at which the director was present
in person and a total of $500 for each board and committee meeting at which the
director was present by telephone. All directors were reimbursed for expenses
incurred in connection with their service on the board. In 1998, Dr. Boyer and
John T. Potts, M.D., one of our directors at that time, also served as our
consultants and received compensation for their services. In 1998, Drs. Boyer
and Potts received $24,000 and $25,000, respectively, in consideration for their
consulting services. During 1998, no directors exercised options granted under
any of our stock option plans other than Donald L. Murfin, one of our directors
at that time, who exercised options to purchase 4,125 shares for a gain of
$233,578.
In 1992, we established a Directors' Charitable Award Program (the "Award
Program") to acknowledge the service of our directors and enhance indirectly our
ability to attract and retain directors of the highest caliber. All members of
the board on or after May 1, 1992 are eligible for the Award Program, subject to
vesting requirements. The Award Program is funded by life insurance policies
purchased by us that provide for a $1 million death benefit on participating
directors. Upon the death of a participating director, Genentech may donate
$200,000 per year for five years to up to four educational institutions or
nonprofit organizations recommended by the director, provided that any such
institution or organization is approved by us in the year of the donation.
Individual directors derive no financial benefit from the Award Program since
all available insurance proceeds and tax deductions accrue solely to Genentech.
Except as set forth below, in connection with the redemption of our special
common stock, any vested options held by any director that were outstanding on
June 30, 1999 were automatically cashed out and any unvested options or any
unvested portion of options held by any director were canceled. In addition, all
vested and unvested options held by the Roche directors were canceled.
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<PAGE> 61
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Compensation
The following table shows for the fiscal years ended December 31, 1998, 1997 and
1996, certain compensation paid by us to our Chief Executive Officer and our
four other most highly compensated executive officers (the "Named Executive
Officers"), including salary, bonuses, stock options and certain other
compensation:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- AWARDS
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) OPTIONS(#)(3) COMPENSATION(4)
--------------------------- ---- --------- -------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D.............. 1998 $650,000 $950,000 -- 350,000 $41,600
President and Chief Executive
Officer 1997 $650,000 $390,000 -- -- $37,000
1996 $525,000 $275,000 -- 200,000 $31,000
William D. Young...................... 1998 $430,000 $400,000 -- 200,000 $25,400
Chief Operating Officer 1997 $430,000 $205,000 -- -- $24,800
1996 $390,000 $190,000 -- 125,000 $23,000
Louis J. Lavigne, Jr.................. 1998 $350,000 $310,000 -- 150,000 $21,400
Executive Vice President and Chief 1997 $350,000 $185,000 -- -- $20,400
Financial Officer 1996 $320,000 $160,000 -- 90,000 $19,000
Susan D. Desmond-Hellmann, M.D.,
M.P.H. ............................. 1998 $310,000 $310,000 -- 150,000 $18,400
Senior Vice President--Development 1997 $275,000 $150,000 -- 50,000 $15,800
and Chief Medical Officer 1996 $233,750 $120,077 -- 75,000 $10,950
Dennis J. Henner, Ph.D. .............. 1998 $271,979 $200,000 -- 120,000 $16,079
Senior Vice President--Research 1997 $262,500 $130,000 -- -- $15,300
1996 $233,959 $120,000 -- 75,000 $12,958
</TABLE>
- ---------------
(1) Includes amounts earned but deferred at the election of the executive, such
as salary deferrals under our Tax Reduction Investment Plan (the "401(k)
Plan") established under Section 401(k) of the Internal Revenue Code of
1986, as amended.
(2) As permitted by rules promulgated by the Securities and Exchange Commission,
no amounts are shown with respect to certain "perquisites" (such as imputed
interest on loans at below market value rates), where such amounts do not
exceed the lesser of (i) 10% of the sum of the amounts of salary and bonus
for the Named Executive Officer, or (ii) $50,000.
(3) We have awarded no stock appreciation rights ("SARs").
(4) Consists of our matching payments under the 401(k) Plan for 1998, 1997 and
1996 and our matching payments under the Supplemental Plan for 1998, 1997
and 1996. Each of the Named Executive Officers received $6,400 in matching
payments under the 401(k) Plan for 1998, and under the Supplemental Plan,
Dr. Levinson, Messrs. Young and Lavigne, and Drs. Desmond-Hellmann and
Henner received matching payments of $35,200, $19,000, $15,000, $12,000 and
$9,679, respectively, for 1998. Each of the Named Executive Officers
received $6,333 in matching payments under the 401(k) Plan for 1997, and
under the Supplemental Plan, Dr. Levinson, Messrs. Young and Lavigne, and
Drs. Desmond-Hellmann and Henner received matching payments of $30,667,
$18,467, $14,067, $9,467, and $8,967 respectively, for 1997. Each of the
Named Executive Officers received $6,000 in matching payments under the
401(k) Plan for 1996, and under the Supplemental Plan, Dr. Levinson, Messrs.
Young and Lavigne, and Drs. Desmond-Hellmann and Henner received matching
payments of $25,000, $17,000, $13,000, $4,950 and $6,958, respectively, for
1996.
Treatment of Options in Connection with the Redemption of the Special Common
Stock and the Issuance of Options prior to this Offering
Prior to the redemption, options were outstanding under our 1984 Non-Qualified
Stock Option Plan (the "1984 Plan"), our 1990 Stock Option/Stock Incentive Plan
(the "1990 Plan"), our 1994 Stock Option Plan (the "1994 Plan") and our 1996
Stock Option/Stock Incentive Plan (the "1996 Plan"). In general, all options
outstanding on the redemption date that were granted under the 1984 Plan and
1990 Plan, whether vested or not, and unvested options granted under the 1994
Plan were canceled on the redemption date, and we are paying the holder of each
option in cash a per share amount equal to the redemption
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<PAGE> 62
price, $82.50, less the exercise price per share of the option. A small number
of outstanding unvested options granted under the 1990 Plan held by employees
hired between January 1, 1997 and the redemption date are being converted, at
the election of the holders of such options, into options to purchase shares of
our common stock, exercisable for the same number of shares and at the same
exercise price per share as the options prior to such conversion.
Certain vested options granted under the 1994 and 1996 Plans outstanding as of
the redemption date are being converted into options (converted options) to
purchase shares of common stock, and, at the election of option holders, certain
vested options granted under the 1994 and 1996 Plans were canceled in exchange
for cash. The converted options to purchase shares of our common stock are
exercisable for the same number of shares and at the same exercise price per
share as the options prior to such conversion.
All outstanding unvested options granted under the 1996 Plan were canceled as
provided by the terms of the 1996 Plan on the redemption date. With certain
exceptions as described below, the former holder of each canceled option from
the 1996 Plan who remains an employee of Genentech will receive a new option
prior to this offering that will vest over a three-year period and will entitle
the holder to purchase shares of common stock at the same price as public
offering price in this offering. The number of shares of common stock for which
each new option may be exercised will be 1.333 times the number of shares
covered by the applicable canceled option, subject to any adjustments necessary
to reflect any capital contributions by Roche.
In connection with the redemption of our special common stock, and as a result
of the treatment of options described above, the following changes with respect
to stock options outstanding have occurred:
- Options for the purchase of approximately 6.7 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 4.1 million shares of special
common stock are being converted into options to purchase a like number
of shares of common stock at exercise prices ranging from $48.125 per
share to $87.50 per share; and
- Options for the purchase of approximately 4.9 million shares of special
common stock have been canceled, in accordance with the terms of the 1996
Plan. With certain exceptions, we expect to grant new options for the
purchase of 1.333 times the number of shares under the previous options
with an exercise price equal to the public offering price of the shares
offered in this offering. The number of shares that will be the subject
of these new options, which are expected to be issued under our 1999
Plan, will be approximately 5.1 million. Alternative arrangements were
provided for certain holders of some of the unvested options under the
1996 Plan.
Of the approximately 4.1 million shares of converted options, options with
respect to approximately 3.8 million shares are currently exercisable, and
options with respect to approximately 226,000 shares are currently not
exercisable. These options are held by approximately 2,200 employees; no
directors hold these options. These options cannot be exercised prior to the
effective date of this offering.
We expect that the majority of the options to be granted prior to the effective
date of the offering hereunder will be made pursuant to our 1999 Plan, which our
board of directors and Roche, our sole shareholder, intend to approve prior to
the effective date of this offering. Under the 1999 Plan, we intend to grant new
options to purchase approximately 6.6 million shares (including the 5.1 million
shares referred to above) to approximately 2,400 employees at an exercise price
equal to the public offering price in this offering, with the grant of such
options to be made effective on the day prior to the effective date of this
offering.
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<PAGE> 63
Treatment of Options of and Issuance of Options to the Named Executive Officers
The following tables set forth, with respect to each of the Named Executive
Officers, (i) the amount of cash received for options canceled in connection
with the redemption of our special common stock, (ii) certain information with
respect to the number and value of options converted, in connection with the
redemption of our special common stock, into options to purchase a like number
of shares of common stock and (iii) certain information with respect to options
we intend to grant immediately prior to the effective time of this offering.
TREATMENT OF OPTIONS IN CONNECTION WITH THE REDEMPTION
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL
CONVERTED CONVERTED NUMBER/
OPTIONS OPTIONS EXERCISE
CASH-OUT EXERCISABLE/ HELD BY PRICE EXPIRATION PRESENT
NAME OF OPTIONS NONEXERCISABLE(1) EMPLOYEES(2) ($/SHARE)(3) DATE(S)(4) VALUE(S)
---- ------------- ----------------- ------------ ------------ ---------- -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D. .......... $15.4 300,000/0 7.3% 112,500@ 2/6/06 - $9.6
$50.125 4/26/14
100,000@
$54.25
87,500@
$68.375
William D. Young.................... $ 8.3 206,250/0 5.0% 93,750@ 2/6/06 - $6.5
$50.125 4/26/14
62,500@
$54.25
50,000@
$68.375
Louis J. Lavigne, Jr................ $10.3 112,500/0 2.7% 30,000@ 2/6/06 - $3.7
$50.125 4/26/14
45,000@
$54.25
37,500@
$68.375
Susan D. Desmond-Hellmann, M.D., $ 2.1 37,500/0 0.9% 37,500@ 6/17/08 $1.4
M.P.H. ........................... $68.375
Dennis J. Henner, Ph.D. ............ $ 4.5 101,250/0 2.5% 33,750@ 2/6/06 - $3.2
$50.125 4/26/14
37,500@
$54.25
30,000@
$68.375
</TABLE>
- ---------------
(1) These options were granted pursuant to the 1994 Plan and 1996 Plan and are
nonstatutory options.
(2) Based on a total of approximately 4.1 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> 64
companies over the prior 10 year period; used as a proxy for the expected
monthly volatility of the Genentech stock); a risk free rate of 6.01%
determined by the remaining life of each option. Each option is valued at
its exercise price, which is assumed to be equivalent to the market price at
the date of grant. This valuation model was not adjusted for the vesting
restrictions or the risk of forfeiture of the options. Under SFAS 123,
forfeitures may be estimated or assumed to be zero; in this model, the
forfeiture rate was assumed to be zero. Our use of this model in accordance
with rules adopted by the Securities and Exchange Commission does not
constitute an endorsement of the model nor an acknowledgment that such model
can accurately determine the value of options. The valuation calculations do
not necessarily represent the fair market value of individual options, and
are not intended to forecast possible future appreciation, if any, of the
price of our common stock on the date of exercise as compared to the
exercise price of the option.
OPTION GRANTS IMMEDIATELY PRIOR TO THIS OFFERING
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS GRANT
SECURITIES EXPECTED TO EXERCISE OR DATE
UNDERLYING BE GRANTED TO BASE PRICE EXPIRATION PRESENT
NAME OPTIONS(1) EMPLOYEES(2) ($/SHARE)(3) DATE(4) VALUE(S)
---- ---------- ------------- ------------ ---------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Arthur D. Levinson, Ph.D. ............... 483,213 7.6% $24.4
William D. Young......................... 283,263 4.4% $14.3
Louis J. Lavigne, Jr..................... 209,948 3.3% $10.6
Susan D. Desmond-Hellmann, M.D., M.P.H... 233,275 3.6% $11.8
Dennis J. Henner, Ph.D. ................. 169,958 2.7% $ 8.6
</TABLE>
- ---------------
(1) We intend to grant these options pursuant to the 1999 Plan. It is
anticipated that these options will vest ratably on a monthly basis during
the 36 month period following the grant date.
(2) Based on a total of approximately 6.4 million options we currently plan to
grant to employees, including the Named Executive Officers.
(3) It is anticipated that the exercise price per share of options to be granted
will be the public offering price in this offering.
(4) It is anticipated that the options to be granted would have a term of ten
years subject to earlier termination upon the occurrence of certain events
related to termination of employment.
(5) Present value was determined under the Black-Scholes option pricing model
based on the following assumptions: expected volatility of 45% (representing
the annual variance in the monthly change in the price of selected top-tier
biotechnology companies over the prior 10 year period; used as a proxy for
the expected monthly volatility of the Genentech stock); a risk free rate of
6.01% determined by the remaining life of each option. Each option is valued
at its exercise price, which is assumed to be equivalent to the market price
at the date of grant. This valuation model was not adjusted for the vesting
restrictions or the risk of forfeiture of the options. Under SFAS 123,
forfeitures may be estimated or assumed to be zero; in this model, the
forfeiture rate was assumed to be zero. Our use of this model in accordance
with rules adopted by the Securities and Exchange Commission does not
constitute an endorsement of the model nor an acknowledgment that such model
can accurately determine the value of options. The valuation calculations do
not necessarily represent the fair market value of individual options, and
are not intended to forecast possible future appreciation, if any, of the
price of our common stock on the date of exercise as compared to the
exercise price of the option.
The 1999 Plan
We expect to recommend the adoption of the 1999 Plan prior to the effective time
of this offering. It is expected that the 1999 Plan will provide for the grant
of non-statutory options and incentive stock options. It is expected that an
aggregate of shares will be available for issuance pursuant to the terms
of such plan. It is expected that the exercise price of the options granted
under the 1999 Plan will be not less than 100% of fair market value of the
shares of Common Stock, which in connection with the options granted immediately
prior to the effective time of this offering, will be the public offering price
in this offering. It is anticipated that options granted under the 1999 Plan
will have a term of ten years. Under the 1999 Plan, we intend to grant new
options to purchase approximately 6.6 million shares of common stock to
approximately 2,400 employees
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<PAGE> 65
at an exercise price equal to the public offering price in this offering, with
the grant of such options to be made effective on the day prior to the effective
date of this offering.
Committees of the Board of Directors
Upon completion of this offering, we will appoint four standing committees: an
executive committee of the board (the "Executive Committee"), an audit committee
of the board (the "Audit Committee"), a compensation committee of the board (the
"Compensation Committee") and a nominating committee of the board (the
"Nominating Committee").We expect that, so long as Roche owns a majority of our
outstanding common stock, the majority of the members of the Executive
Committee, the Compensation Committee and the Nominating Committee will be
directors who are nominees of Roche.
The Executive Committee will be authorized to exercise, between meetings of our
board, all of the powers and authority of the board in the direction and
management of Genentech, except as prohibited by applicable law or our
certificate of incorporation and except to the extent another committee shall
have been accorded authority over the matter. The Audit Committee will select
the independent public accountants to audit our annual financial statements and
will establish the scope and oversee the annual audit. The Nominating Committee
is responsible for the nomination of nominees for our board. The Compensation
Committee will determine the compensation for employee directors and, after
receiving and considering the recommendation of our President and Chief
Executive Officer, all our officers and any other employee that the Compensation
Committee may designate from time to time and will approve and administer
employee benefit plans. Our board may establish other committees from time to
time to facilitate the management of the business and affairs of our company.
For more information, see "Relationship with Roche--Arrangements between
Genentech and Roche."
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RELATIONSHIP WITH ROCHE
HISTORY OF OWNERSHIP
On September 7, 1990, a wholly owned subsidiary of Roche was merged with and
into Genentech. Pursuant to the 1990 merger agreement, Genentech and Roche
entered into a governance agreement which contained terms relating to the
corporate governance of Genentech after the 1990 merger. Pursuant to the 1990
governance agreement, Genentech's board of directors elected two nominees of
Roche to serve on the Genentech board. On October 25, 1995, a second wholly
owned subsidiary of Roche was merged with and into Genentech, and Genentech and
Roche amended the 1990 governance agreement. In the 1995 merger, for Genentech
stockholders other than Roche, each share of common stock was converted into one
share of Genentech's special common stock. Roche maintained the same percentage
ownership of Genentech's equity as prior to the 1995 merger and continued to
have the right to nominate only two directors to Genentech's board of directors
under the amended governance agreement. The purpose of the conversion of the
common stock into special common stock was (i) to establish a four-year period
during which the publicly traded stock of Genentech could be redeemed by
Genentech at Roche's option at specified prices per share ranging from $62.50
during the quarter ending December 31, 1995 to $82.50 during the quarter ending
June 30, 1999 and (ii) to afford the holders of special common stock the right
to require the purchase of all or a portion at the option of the holder of their
shares of such stock at a price of $60.00 per share exercisable during the
30-business day period following June 30, 1999.
REDEMPTION OF THE SPECIAL COMMON STOCK
On June 30, 1999, we 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 existing governance agreement terminated,
except for provisions relating to indemnification and stock options, warrants
and convertible securities. In connection with this offering, we will amend our
certificate of incorporation and bylaws and enter into an affiliation agreement
with Roche, described below. Upon completion of this offering, Roche's
percentage ownership of our outstanding common stock will be reduced from 100%
to approximately 84.3%.
ARRANGEMENTS BETWEEN GENENTECH AND ROCHE
As a result of the redemption of the special common stock, the existing
governance agreement between Genentech and Roche terminated pursuant to its
terms. We will enter into an affiliation agreement with Roche which is designed
to enable the current management of Genentech to conduct our business and
operations as we have done in the past while at the same time reflecting Roche's
interests as an 84.3% stockholder.
Our certificate of incorporation provides that the provisions in our bylaws
described below under "--Composition of Board of Directors," "--Roche's Right to
Proportional Representation," "--Membership of Committees" and "--Nomination of
Directors" may be repealed or amended only by a 60% vote of our stockholders,
except for Roche's right to nominate a number of directors proportional to
Roche's ownership interest rounded down to the next whole number until Roche's
ownership interest is less than 5%, which may be repealed or amended only by a
90% vote of our shareholders. The provisions of the affiliation agreement
described below under "--Roche Approval Required for Certain Actions" and
"--Licensing and Marketing Arrangements" terminate upon Roche owning less than
40% of our stock.
For purposes of the following provisions, an independent director is a director
who is not
- one of our officers or
- an employee, director, principal stockholder or partner of Roche or any
affiliate of Roche or an entity that was dependent upon Roche for more
than 10% of its revenues or earnings in its most recent fiscal year.
Composition of Board of Directors
Genentech and Roche have agreed that our board will consist of six members: two
nominees of Roche, one executive officer of Genentech who is nominated by the
nominating committee of the board and up to three independent directors
nominated by the nominating committee. Directors will be elected to serve one
year terms or until their successors are elected and qualified. Our board will
at all times include at least two independent directors and one executive
officer of Genentech.
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Roche's Right to Proportional Representation
We have agreed that upon Roche's request Roche will be immediately entitled to
representation on our board proportional to its ownership interest in our common
stock. Roche will be entitled to have the number of Roche designated directors
equal to the percentage of our common stock owned by Roche times the total
number of directors, rounded up to the next whole number if Roche's ownership
interest is greater than 50% and rounded down if Roche's ownership percentage is
less than or equal to 50%. Upon Roche's request, we will immediately take action
to cause the size of our board to be increased and to cause our board to fill
the vacancies by electing Roche nominees in order to achieve Roche's
proportional representation. If Roche's ownership interest of our common stock
drops below 40%, Roche will cause its directors to resign to the extent its
representation is in excess of its proportional ownership interest. The number
of directors who are required to resign upon such event shall be rounded up to
the next whole number. Roche shall thereafter be entitled to nominate a number
of directors which is proportional to Roche's ownership interest rounded down to
the next whole number, until Roche's ownership interest is less than 5%.
Membership of Committees
We will have four standing committees of the board: a nominating committee, an
executive committee, an audit committee and a compensation committee. Each
committee will have at least one director designated by Roche. Roche will be
entitled upon request to its proportional representation on each committee.
Roche's committee members may designate another Roche director to serve as their
alternates on any committee.
The nominating committee shall at all times have three members. At any time
Roche owns 80% or more of the total voting power of our stock, the nominating
committee shall include two nominees of Roche and one of the independent
directors. At any time that Roche owns less than 80% of the total voting power
of our stock, the nominating committee shall (1) include a number of nominees of
Roche that is equal to the percentage owned by Roche of the total voting power
of our common stock times three, rounded up to the next whole number if Roche's
total voting power is greater than 50% and rounded down to the next whole number
if Roche's total voting power is less than or equal to 50% provided that Roche
shall at no time have more than two nominees and, provided further that if the
reason for Roche owning less than 80% of the total voting power is as result of
a breach of our obligations described under "--Tax Matters" below, the
nominating committee shall include two nominees of Roche and (2) include a
number of independent directors equal to three minus the number of nominees of
Roche as determined pursuant to clause (1) above.
Nomination of Directors
The nomination of any person for director requires the approval of a majority of
the members of the nominating committee.
Roche Approval Required for Certain Actions
Without the prior approval of the directors designated by Roche, we have agreed
not to approve:
- any acquisition that would constitute a substantial portion of our
business or assets,
- any sale, lease, license, transfer or other disposal of all or a
substantial portion of our business or assets other than in the ordinary
course of our business,
- any issuance of capital stock except (1) issuances of capital stock
pursuant to employee incentive plans not exceeding 5% of our voting
stock, (2) issuances of capital stock upon the exercise, conversion or
exchange of any of our outstanding capital stock, and (3) other issuances
of capital stock not exceeding 5% of our voting stock in any 24 month
period, and
- any repurchase or redemption of our capital stock other than redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
For purposes of the first and second bullet points in this paragraph, unless a
majority of the board of directors have made a contrary determination in good
faith a "substantial portion of our business or assets" shall mean a portion of
our business or assets accounting for 10% or more of our and our consolidated
subsidiaries' consolidated total assets, contribution to net income or revenues.
Following a request by Roche for proportional representation on the board, until
the Roche designees take office as directors we may not take any action other
than in the ordinary course of business without the consent of Roche.
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Licensing and Marketing Arrangements
Except as otherwise provided in the marketing and licensing agreement with
Hoffmann-La Roche described under "Business -- Licensing Agreements with F.
Hoffmann-La Roche Ltd," we have agreed that we will not enter into any material
licensing or marketing agreement with respect to any products, processes,
inventions or developments subject to that agreement unless we first negotiate
in good faith with Roche for a reasonable period of not less than three months
and not more than six months with a view towards reaching a mutually beneficial
licensing or marketing agreement.
Registration Rights
We have agreed that, upon Roche's request, we will file one or more registration
statements under the Securities Act in order to permit Roche to offer and sell
shares of our common stock. We have agreed to use our best efforts to facilitate
the registration and offering of those shares designated for sale by Roche.
We have the right to postpone the filing or effectiveness of a registration
statement for a period of up to 60 days in any 12-month period if:
- in the reasonable good faith judgment of our board, fulfillment of our
obligations would require us to make disclosures that would be
detrimental to Genentech and premature, or
- we have filed a registration statement with respect to securities to be
distributed in an underwritten public offering and we have been advised
by the lead or managing underwriter that an offering by Roche would
materially and adversely affect the distribution of our securities.
Generally, all expenses incident to the performance by us of our obligations
with respect to the registration of Roche's shares of our common stock will be
paid by us except that Roche has agreed to pay any registration or filing fees
payable under any federal or state securities or Blue Sky laws and certain
expenses to be directly incurred by Roche, including underwriting fees,
discounts and commissions and counsel fees. In addition, we are only required to
pay for two registrations within a 12-month period. We and Roche each have
agreed to customary indemnification and contribution provisions with respect to
liability incurred in connection with these registrations.
Dispositions by Roche
If Roche and its affiliates sell their majority ownership of shares of our
common stock to a successor, Roche has agreed that it will cause the successor
to purchase all shares of our common stock not held by Roche
- if the consideration is composed entirely of either cash or equity traded
on a U.S. national securities exchange, with consideration in the same
form and amounts per share as received by Roche and its affiliates; and
- in any other case, with consideration either in the same form and amounts
per share as received by Roche and its affiliates or with consideration
that has a value per share not less than the weighted average value per
share received by Roche and its affiliates as determined by an investment
bank of nationally recognized standing appointed by a committee of
independent directors.
Roche has agreed to cause the buyer to agree to be bound by the obligations
described in the preceding paragraph as well as the obligations described under
"--Business Combinations with Roche" and "--Compulsory Acquisitions" below. We
have agreed that the buyer shall be entitled to succeed to Roche's rights
described under "--Roche's Right to Proportional Representation."
Business Combinations with Roche
Roche has agreed that as a condition to any merger of Genentech with Roche or
its affiliates or the sale of substantially all of our assets to Roche or its
affiliates, that either
- the merger or sale must be authorized by the favorable vote of a majority
of the shares of common stock voting at any meeting not owned by Roche,
provided that no person or group shall be entitled to cast more than 5%
of the votes cast at the meeting; or
- 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
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for the common stock as determined by two investment banks of nationally
recognized standing appointed by a committee of independent directors.
Roche has agreed that it will not sell any shares of our common stock in the 90
days immediately preceding any proposal by Roche for a merger with us.
Roche has also agreed that in the event of any merger of Genentech with Roche or
its affiliates or sale of substantially all of our assets to Roche or its
affiliates, each unvested option then outstanding under our stock option plans
will
- be accelerated so that each option shall become exercisable immediately
prior to the consummation of the transaction for the full number of
shares of common stock covered by the option;
- become exchangeable upon the consummation of the transaction for deferred
cash compensation, which vests on the same schedule as the shares of
common stock covered by the option, having a value equal to the product
of (A) the number of shares covered by the option and (B) the amount
which Roche, in its reasonable judgment, considers to be equivalent in
value to the consideration per share received by holders of shares of
common stock other than Roche in the transaction, minus the exercise
price per share under the option; or
- be canceled in exchange for a replacement option to purchase stock of the
surviving corporation in the transaction with the terms of the option to
provide value equivalent, as determined by Roche in its reasonable
discretion, to that of the canceled option.
Compulsory Acquisitions
If Roche owns more than 90% of our common stock for more than two months, Roche
has agreed to, as soon as reasonably practicable, effect a merger of Genentech
with Roche or an affiliate of Roche.
The merger shall be conditioned on the vote or the valuation described under the
first two bullets of "--Business Combinations with Roche" above.
If such merger occurs, each unvested option outstanding under our stock option
plans shall be treated as set forth under "--Business Combinations by Roche"
above.
ROCHE'S RIGHT TO MAINTAIN ITS PERCENTAGE OWNERSHIP INTEREST IN OUR STOCK
As discussed below under "Tax Sharing Agreement," we are now and expect to
continue to be a member of Roche's U.S. consolidated federal income tax group
(as well as certain consolidated or combined state and local income tax groups).
In order to preserve our status as a member of these consolidated or combined
groups, the affiliation agreement contains provisions designed to limit the
circumstances in which Roche's proportional ownership of Genentech can be
diluted. Under these provisions, we will be required to establish as soon as
practicable (but not more than 60 days after this offering) a program to
repurchase shares of our common stock from our public stockholders. We will be
required to repurchase a sufficient number of shares pursuant to this program to
ensure that, with respect to any issuance of common stock by us in the future,
the percentage of our common stock owned by Roche immediately after such
issuance will be no lower than Roche's lowest percentage ownership of our common
stock at any time after the offering of common stock described in this
prospectus and prior to the time of such issuance. We are required to provide
information to Roche each month, or more frequently if requested, regarding the
status of the repurchase program and previous and expected future issuances of
common stock by us, and we also will be obligated to notify Roche the day after
the number of shares of common stock issued in a month equals or exceeds
500,000. Our obligations with respect to this stock repurchase program will
terminate upon Roche owning less than 40% of our stock.
Furthermore, Roche will have (i) a continuing option (which will be assignable
by Roche to any of its affiliates) to buy from us, prior to the occurrence of
any event that could result in a decrease in the percentage of common stock
owned by Roche and its affiliates, a sufficient amount of common stock to ensure
that Roche and its affiliates maintain the percentage ownership of our common
stock owned by them, and (ii) a continuing option (which will be assignable by
Roche to any of its affiliates) to buy from us 80% of any class of stock issued
by us other than common stock, in each case with a price per share equal to
either the average of the last sale price on each of the five immediately
preceding trading days on a U.S. national securities 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.
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These provisions of the affiliation agreement may have the effect of limiting
our ability to use our capital stock as consideration for acquisitions.
TAX SHARING AGREEMENT
We have been since the redemption of our special common stock, and after this
offering are expected to continue to be, included in Roche's U.S. consolidated
federal income tax group and our tax liability thus will be included in the
consolidated federal income tax liability of Roche and its subsidiaries. We also
will be included with Roche and/or one or more Roche subsidiaries in
consolidated or combined income tax groups for certain state and local tax
jurisdictions.
Genentech and Roche will enter into a tax sharing agreement. Pursuant to this
agreement, Genentech and Roche will make payments such that, with respect to any
period, the net amount paid by us on account of consolidated or combined income
taxes (including any amounts determined to be due as a result of a
redetermination of the consolidated or combined income tax liability of a Roche
group by reason of an audit) will be determined as if we filed separate,
stand-alone federal, state and local income tax returns as the common parent of
an affiliated group of corporations filing consolidated or combined federal,
state and local returns rather than a consolidated subsidiary of Roche. Such
stand-alone tax returns will be prepared on a basis as if we were an independent
taxpayer with no affiliation with Roche.
Under applicable law, Roche will continue to have all of the rights and
obligations of a parent of a consolidated federal income tax group (and similar
rights provided for by applicable state and local law with respect to a parent
of a consolidated or combined group), including: sole and exclusive
responsibility for the preparation and filing of consolidated federal and
consolidated or combined state and local income tax returns (or amended
returns); the power, in Roche's sole discretion, to contest or compromise any
asserted consolidated or combined tax adjustment or deficiency and to file,
litigate or compromise any claim for refund of a consolidated or combined tax on
behalf of us; and the authority to act as the sole and exclusive agent for us in
any and all other matters relating to consolidated or combined tax liabilities.
However, Roche and Genentech have agreed to cooperate under the tax sharing
agreement to assist in the defense of claims relating to us.
In general, we will be included in Roche's consolidated group for federal income
tax purposes for so long as Roche beneficially owns at least 80% of the total
voting power and value of our outstanding stock. Each member of a consolidated
group is severally liable for the federal income tax liability of the group.
Accordingly, although the tax sharing agreement determines tax liabilities
between Genentech and Roche, during the period in which we are included in
Roche's consolidated federal income tax group, we could be liable in the event
that any federal tax liability is incurred by the consolidated group but is not
discharged by Roche or its other subsidiaries. Similarly, we could be liable in
the event that a state or local tax liability is incurred by a Roche
consolidated or combined state or local tax group but is not discharged by Roche
or its other subsidiaries. Roche is required, under the terms of the tax sharing
agreement, to indemnify us for any tax liability of a Roche consolidated or
combined group that we must pay to a taxing authority, except to the extent that
such tax liability is attributable (as determined under the principles described
above relating to the computation of tax sharing payments by us to Roche) to us
and we have not yet made a corresponding tax sharing payment to Roche.
THE FUTURE OF GENENTECH
Roche acquired a 60% equity interest in us in 1990 because Roche believed that
the acquisition presented Roche with an opportunity to expand its investment in
biotechnology with a leading biotechnology enterprise--Genentech. It continues
to be the view of the board of directors of Roche that its investment in
Genentech is a worthwhile, long-term investment. The board of directors of Roche
also believes that its contractual agreements with us provide an opportunity for
both Roche and us to benefit from enhanced development and marketing of our
products outside the United States and that our innovative products can
increasingly benefit from Roche's global marketing, development and sales
resources. Roche intends to continue to allow our current management to conduct
our business and operations as we have done in the past. However, there can be
no assurance that Roche will not institute a new business plan in the future.
See "Risk Factors--Roche, Our Controlling Stockholder, May Have Interests That
Are Adverse to Yours."
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SELLING STOCKHOLDER AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of July , 1999 regarding
the beneficial ownership of common stock by Roche, currently our sole
stockholder.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
------------------------- -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE CLASS
------------------------------------ ----------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Roche Holdings, Inc. ................. 127,298,588 100.00% 107,298,588 84.29% Common Stock
One Commerce Center, Suite 1050
Wilmington, DE 19801
</TABLE>
In addition, Roche has granted the underwriters an option to purchase an
additional 2,000,000 shares of common stock to cover over-allotments. If the
underwriters exercise this option in full, Roche will own approximately 82.72%
of our outstanding stock after this offering.
The following table sets forth the beneficial ownership of shares of common
stock as of July 1, 1999, unless otherwise noted, of (i) each director 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 following persons are
shares underlying currently exercisable stock options.
<TABLE>
<CAPTION>
-------------------------
COMMON STOCK
-------------------------
PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS
------------------------ --------- --------
<S> <C> <C>
Herbert W. Boyer, Ph.D. .................................... -- --
Susan D. Desmond-Hellmann, M.D., M.P.H. .................... 37,500(1) *
Dennis J. Henner, Ph.D. .................................... 101,250(2) *
Franz B. Humer, Ph.D. ...................................... -- --
Jonathan K. C. Knowles, Ph.D. .............................. -- --
Louis J. Lavigne, Jr. ...................................... 112,500(3) *
Arthur D. Levinson, Ph.D. .................................. 300,000(4) *
William D. Young............................................ 206,250(5) *
All Directors and Executive Officers as a Group (28
persons).................................................. 1,494,043(6) 1.16%
</TABLE>
- ---------------
* The amount beneficially owned is less than one percent (1%) of the
outstanding shares of common stock.
(1) Does not include 233,275 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 6,480 shares of common stock would be exercisable at
August 31, 1999.
(2) Does not include 169,958 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 4,721 shares of common stock would be exercisable at
August 31, 1999.
(3) Does not include 209,948 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 5,832 shares of common stock would be exercisable at
August 31, 1999.
(4) Does not include 483,213 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 13,423 shares of common stock would be exercisable at
August 31, 1999.
(5) Does not include 283,263 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 7,868 shares of common stock would be exercisable at
August 31, 1999.
(6) Does not include 2,181,568 stock options we expect to grant under our
proposed 1999 Plan to replace shares canceled under the 1996 Plan, of which
options to purchase 60,599 shares of common stock would be exercisable at
August 31, 1999.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Prior to the redemption of our special common stock, the authorized capital
stock of Genentech consisted of 200,000,000 shares of common stock, 100,000,000
shares of callable putable (special) common stock and 100,000,000 shares of
preferred stock. On June 30, 1999, we redeemed and retired all of our
outstanding special common stock. Our authorized capital stock consists of
300,000,000 shares of common stock and 100,000,000 shares of preferred stock.
COMMON STOCK
As of July , 1999, there were 127,298,588 shares of common stock outstanding,
all of which were held of record by Roche. The holders of common stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available therefor. See "Dividend Policy." In the
event of our liquidation, dissolution or winding up, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and non-assessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and non-assessable.
PREFERRED STOCK
The board of directors has the authority to issue the preferred stock in one or
more series and to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
payments), redemption price or prices, and the liquidation preference of any
wholly unissued series of preferred stock and the number of shares constituting
any series or the designation of such series or any of them; and to increase or
decrease the number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series. If Roche did not own its current position in Genentech, the authorized
but unissued shares of preferred stock could be used by our board to make a
change in control of Genentech more difficult, or to discourage an attempt to
acquire control of Genentech. For example, our board could, subject to certain
limitations, authorize and issue a class of preferred stock which is entitled to
vote as a class with respect to mergers or other extraordinary transactions. Our
board has no current intention of using the authorized and unissued shares of
Preferred Stock for any such purposes.
DELAWARE TAKEOVER STATUTE
We have elected not to be governed by Section 203 of the Delaware General
Corporation Law. This section requires the vote of at least 66 2/3% of the
outstanding voting stock of a company not owned by an interested stockholder to
approve certain business combinations. Section 203 defines interested
stockholder as any entity or person owning 15% or more of the outstanding voting
stock of the company and any entity or person affiliated with, controlling or
controlled by such entity or person. As a result, if we decide to enter into any
such proposed business combination, we will only need the approval of a majority
of our outstanding voting stock except as described in "Relationship with
Roche -- Arrangements between Genentech and Roche -- Business Combinations with
Roche."
ARRANGEMENTS BETWEEN GENENTECH AND ROCHE
Prior to the completion of this offering, we will amend our certificate of
incorporation and bylaws and enter into a new affiliation agreement with Roche.
For a description of these provisions see "Relationship with
Roche -- Arrangements between Genentech and Roche."
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CERTAIN PROVISIONS OF GENENTECH'S CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation provides that any person purchasing or
acquiring an interest in shares of our capital stock is deemed to have consented
to the following provisions relating to intercompany agreements and to
transactions with interested parties and corporate opportunities. The following
provisions of our certificate of incorporation may only be repealed or amended
by a 90% vote of our stockholders.
For purposes of the foregoing, Genentech includes all corporations and other
entities in which Genentech owns fifty percent or more of the outstanding voting
interests, and Roche includes all corporations and other entities that are
"affiliates" of Roche within the meaning of Rule 12b-2 under Exchange Act.
Transactions with Roche
Our certificate of incorporation provides that no contract, agreement,
arrangement or transaction between us and Roche or any related entity will be
void or voidable solely because Roche is a party thereto or solely because any
of our directors or officers who are affiliated with Roche are present at or
vote with respect to the authorization of the contract, agreement, arrangement
or transaction. Our certificate of incorporation also provides that Roche and
the officers or directors of Roche will not be presumed liable to us or our
stockholders for:
- breach of any fiduciary duty or duty of loyalty,
- failure to act in the best interests of Genentech, or
- receipt of any improper personal benefit,
simply because Roche or any director or officer of Roche, in good faith, takes
any action, exercises any right or gives or withholds any consent with respect
to any agreement or contract between Roche and Genentech.
Competition by Roche with Us; Corporate Opportunities
Our certificate of incorporation provides that Roche has no duty to refrain from
engaging in the same or similar activities or lines of business as Genentech and
that neither Roche nor any of its directors or officers will be liable to us or
our stockholders for breach of any fiduciary duty due to any of these
activities. If Roche learns of a potential matter that may be a corporate
opportunity for both Roche and Genentech, Roche has no duty to communicate or
offer this opportunity to us. In addition, Roche will not be liable to us or our
stockholders for breach of any fiduciary duty if Roche pursues or acquires the
corporate opportunity or does not communicate it to us.
If a director, officer or employee of Genentech who is also a director, officer
or employee of Roche knows of a potential transaction or matter that may be a
corporate opportunity both for Genentech and Roche, the director, officer or
employee is entitled to offer the corporate opportunity to us or Roche as the
director, officer or employee deems appropriate under the circumstances in his
sole discretion, and no such director, officer or employee will be liable to us
or our stockholders for breach of any fiduciary duty or duty of loyalty or
failure to act in our best interests or the derivation of any improper personal
benefit by reason of the fact that
- such director, officer or employee offered such corporate opportunity to
Roche (rather than to us) or did not communicate information regarding
such corporate opportunity to us, or
- Roche pursues or acquires such corporate opportunity for itself or
directs such corporate opportunity to another person or does not
communicate the corporate opportunity to us.
While these provisions of our certificate of incorporation eliminate certain
rights that might have been available to stockholders under Delaware law, the
enforceability of such provisions has not been established under Delaware
corporate law.
Certain of the foregoing provisions of our certificate of incorporation expire
on the date that Roche ceases to own at least 5% of our outstanding shares of
common stock and no person who is a director or officer of Genentech is also a
director or officer of Roche or its affiliates.
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Limitation on Directors' Liabilities
Our certificate of incorporation limits, to the fullest extent permitted by
Delaware corporate law, the personal liability of directors for monetary damages
for breach of their fiduciary duties.
Section 145 of the General Corporation Law of the State of Delaware permits us
to indemnify officers, directors or employees against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement in connection
with legal proceedings "if [as to any officer, director or employee] he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to
the best interests of the corporation, and, with respect to any criminal act or
proceeding, had no reasonable cause to believe his conduct was unlawful,"
provided that with respect to actions by, or in the right of the corporation
against, such individuals, indemnification is not permitted as to any matter as
to which such person "shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation, unless, and only
to the extent that, the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper."
Individuals who are successful in the defense of such action are entitled to
indemnification against expenses reasonably incurred in connection therewith.
Our board of directors may provide similar indemnification to our officers,
employees and agents as they deem appropriate and as authorized by Delaware law.
We may purchase insurance on behalf of any director, officer, employee or agent
against any expense incurred by such person in his or her capacity.
LISTING
We intend to list the common stock 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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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by a beneficial owner thereof that is a "Non-U.S. Holder." A
"Non-U.S. Holder" is a person or entity that, for U.S. federal income tax
purposes, is a non-resident alien individual, a foreign corporation, a foreign
partnership, or a foreign estate or trust.
This discussion is based on the Internal Revenue Code of 1986, as amended, and
administrative interpretations as of the date of this prospectus, all of which
are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of United States federal income and
estate taxation that may be relevant to Non-U.S. Holders in light of their
particular circumstances and does not address any tax consequences arising under
the laws of any state, local or foreign jurisdiction. Prospective holders should
consult their tax advisors with respect to the particular tax consequences to
them of owning and disposing of our common stock, including the consequences
under the laws of any state, local or foreign jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends, if any, paid to a Non-U.S. Holder of
our common stock generally will be subject to withholding tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty. For
purposes of determining whether tax is to be withheld at a 30% rate or at a
reduced rate as specified by an income tax treaty, Genentech ordinarily will
presume that dividends paid on or before December 31, 2000 to an address in a
foreign country are paid to a resident of such country absent knowledge that
such presumption is not warranted.
Under United States Treasury Regulations applicable to dividends paid after
December 31, 2000, to obtain a reduced rate of withholding under a treaty, a
Non-U.S. Holder generally will be required to provide an Internal Revenue
Service Form W-8 BEN certifying such Non-U.S. Holder's entitlement to benefits
under a treaty. The regulations also provide special rules to determine whether,
for purposes of determining the applicability of a tax treaty, dividends paid to
a Non-U.S. Holder that is an entity should be treated as paid to the entity or
those holding an interest in that entity.
There will be no withholding tax on dividends paid to a Non-U.S. Holder that are
effectively connected with the Non-U.S. Holder's conduct of a trade or business
within the United States if a Form 4224 or, after December 31, 2000, a Form W-8
ECI, stating that the dividends are so connected is filed with Genentech.
Instead, the effectively connected dividends will be subject to regular United
States income tax in the same manner as if the Non-U.S. Holder were a United
States resident. A non-U.S. corporation receiving effectively connected
dividends may also be subject to an additional "branch profits tax" which is
imposed, under certain circumstances, at a rate of 30% (or such lower rate as
may be specified by an applicable treaty) of the non-U.S. corporation's
effectively connected earnings and profits, subject to certain adjustments.
Generally, Genentech must report to the United States Internal Revenue Service
the amount of dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or certain other agreements, the United States Internal
Revenue Service may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a Non-U.S. Holder at an address within the United States may
be subject to backup withholding imposed at a rate of 31% if the Non-U.S. Holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and certain other information to Genentech.
Under current United States federal income tax law, backup withholding generally
does not apply to dividends paid on or before December 31, 2000 to a Non-U.S.
Holder at an address outside the United States, unless the payer has knowledge
that the payee is a U.S. person. Under the regulations described above, however,
a Non-U.S. Holder will be subject to backup withholding unless applicable
certification requirements are met.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal income
tax with respect to gain realized on a sale or other disposition of our common
stock unless (i) the gain is effectively connected with a trade or business of
such holder in the
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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.
73
<PAGE> 77
SHARES ELIGIBLE FOR FUTURE SALE
The 20,000,000 shares of our common stock sold in this offering will be freely
tradable without restriction under the Securities Act of 1933 except for any
such shares which may be acquired by an affiliate of Genentech as that term is
defined in Rule 144 promulgated under the Securities Act of 1933, which shares
will remain subject to the resale limitations of Rule 144.
The shares of our common stock that will continue to be held by Roche after the
offering constitute "restricted securities" within the meaning of Rule 144, and
will be eligible for sale by Roche in the open market after this offering,
subject to certain contractual lockup provisions and the applicable requirements
of Rule 144, both of which are described below.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three month period a number of shares
that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain post-sale notice requirements
and the availability of current public information about us.
In the event that any person other than Roche who is deemed to be our affiliate
purchases shares of our common stock pursuant to this offering or acquires
shares of our common stock pursuant to one of our employee benefit plans, the
shares held by such person are required under Rule 144 to be sold in brokers'
transactions, subject to the volume limitations described above. Shares properly
sold in reliance upon Rule 144 to persons who are not our affiliates are
thereafter freely tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. Subject to the lock-up agreement discussed in the next paragraph,
any shares sold in this offering will be eligible for immediate resale in the
public market without restrictions by persons other than our affiliates. Our
affiliates would be subject to the restrictions of Rule 144 described above.
We, Roche and our directors and our management executive committee members have
agreed that, without the prior written consent of J.P. Morgan Securities Inc. on
behalf of the underwriters, none of us will, during the period ending 90 days
after the date of this prospectus, sell or otherwise dispose of any shares of
our common stock, subject to certain exceptions. See "Underwriting."
We have agreed that, upon Roche's request, we will file one or more registration
statements under the Securities Act in order to permit Roche to offer and sell
shares of our common stock. For a description of Roche's registration rights see
"Relationship with Roche--Arrangements between Genentech and Roche--Registration
Rights."
An aggregate of shares of our common stock are reserved for issuance
under the 1999 Plan. We intend to file registration statements on Form S-3
covering the issuance of shares of our common stock pursuant to the 1999 Plan.
Accordingly, the shares issued pursuant to the 1999 Plan will be freely
tradable, subject to the restrictions on resale by affiliates under Rule 144 and
the lock-up agreement discussed above.
74
<PAGE> 78
UNDERWRITING
The underwriters named below, for whom J.P. Morgan Securities Inc., Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Warburg Dillon
Read LLC and BancBoston Robertson Stephens Inc. are acting as representatives,
have severally agreed, subject to the terms and conditions set forth in the
underwriting agreement among them, the selling stockholder and us, to purchase
from the selling stockholder, and the selling stockholder has agreed to sell to
the underwriters, the respective number of shares of common stock set forth
opposite their names below:
<TABLE>
<CAPTION>
----------
NUMBER
UNDERWRITERS OF SHARES
------------ ----------
<S> <C>
J.P. Morgan Securities Inc..................................
Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
Warburg Dillon Read LLC.....................................
BancBoston Robertson Stephens Inc. .........................
----------
Total............................................. 20,000,000
==========
</TABLE>
The nature of the underwriters' obligations under the underwriting agreement is
such that all of the common stock being offered, excluding shares covered by the
over-allotment option granted to the underwriters, must be purchased if any are
purchased.
The representatives of the underwriters have advised us that the several
underwriters propose to offer the common stock to the public at the initial
public offering price set forth on the cover page of this prospectus and may
offer the common stock to selected dealers at such price less a concession not
to exceed $ per share. The underwriters may allow, and such dealers may
reallow, a concession to other dealers not to exceed $ per share. After the
initial public offering of the common stock, the public offering price and other
selling terms may be changed by the representatives.
The selling stockholder has granted the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to 2,000,000 additional
shares of common stock at the same price per share to be paid by the
underwriters for the other shares offered hereby. If the underwriters purchase
any such additional shares pursuant to the option, each of the underwriters will
be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The underwriters may exercise the
option only to cover over-allotments, if any, made in connection with the
distribution of the common stock offered hereby.
The following table shows the per share and total underwriting discounts to be
paid to the underwriters by the selling stockholder, assuming both no exercise
and full exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................. $ $
Total..................................................... $ $
</TABLE>
We and the selling stockholder have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be $3 million. We are responsible for all expenses except that
Roche has agreed to pay the registration and filing fees payable under any
federal or state securities or Blue Sky laws in addition to certain expenses to
be directly incurred by Roche, including underwriting, discounts and its counsel
fees.
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot this offering, creating a syndicate
short position. In
75
<PAGE> 79
addition, the underwriters may bid for, and purchase, shares of common stock in
the open market to cover syndicate shorts or to stabilize the price of the
common stock. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing shares of common stock in this offering, if
the syndicate repurchases previously distributed common stock in syndicate
covering transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the shares of common
stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
We and our directors and our management executive committee members and the
selling stockholder have agreed, with limited exceptions, that, during the
period beginning from the date of this prospectus and continuing and including
the date 90 days after the date of this prospectus, none of us will, directly or
indirectly, offer, sell, offer to sell, contract to sell or otherwise dispose of
any shares of common stock or any of our securities which are substantially
similar to the common stock, including but not limited to any securities that
are convertible into or exchangeable for, or that represent the right to
receive, common stock or any such substantially similar securities or enter into
any swap, option, future, forward or other agreement that transfers, in whole or
in part, the economic consequences of ownership of common stock or any
securities substantially similar to the common stock, other than pursuant to
employee stock option and restricted stock plans existing on the date of this
prospectus, without the prior written consent of J.P. Morgan Securities Inc.
At our request, the underwriters have reserved shares of common stock for sale
to employees, including officers, and former non-institutional stockholders of
Genentech who have expressed an interest in participating in this offering. We
expect these persons to purchase no more than % of the common stock offered in
this offering. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares.
It is expected that delivery of the shares will be made to investors on or about
, 1999.
Immediately prior to this offering, there was no public market for the common
stock. The selling stockholder and the underwriters will negotiate the initial
public offering price. In determining the price, the selling stockholder and the
underwriters expect to consider a number of factors in addition to prevailing
market conditions, including:
- the history of and prospects for the biotechnology industry;
- an assessment of our management;
- our present operations;
- our historical results of operations; and
- our earnings prospects.
The selling stockholder and the underwriters will consider these and other
relevant factors in relation to the price of similar securities of generally
comparable companies. Neither we, the selling stockholder nor the underwriters
can assure investors that an active trading market will develop for the common
stock, or that the common stock will trade in the public market at or above the
initial public offering price.
We intend to list the common stock for trading on the New York Stock Exchange
under the symbol "DNA".
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.
76
<PAGE> 80
LEGAL MATTERS
Certain legal matters relating to the shares of common stock offered hereby will
be passed upon for Roche and Genentech by Davis Polk & Wardwell, New York, New
York. Legal matters in connection with this offering will be passed upon for the
underwriters by Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York.
EXPERTS
The consolidated financial statements of Genentech as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
included in this prospectus and in the registration statement have been audited
by Ernst & Young LLP, independent auditors, as stated in their report appearing
herein and in the registration statement, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. We have also filed with the SEC a registration
statement on Form S-3 to register the shares of common stock being offered in
this prospectus. This prospectus, which forms part of the registration
statement, does not contain all of the information included in the registration
statement. For further information about us and the shares of common stock
offered in this prospectus, you should refer to the registration statement and
its exhibits and our other SEC filings.
You may read and copy any document we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the Public
Reference Room. We file our SEC materials electronically with the SEC, so you
can also review our filings by accessing the website maintained by the SEC at
http://www.sec.gov. This website contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC.
The SEC allows us to "incorporate by reference" the information we file with it,
which means we can disclose important information to you by referring you to
those documents. The information included in the following documents is
incorporated by reference and is considered to be a part of this prospectus. The
most recent information that we file with the SEC automatically updates and
supersedes more dated information. We have previously filed the following
documents with the SEC and incorporate them by reference into this prospectus:
1. Our annual report on Form 10-K for the year ended December 31, 1998;
2. Our quarterly report on Form 10-Q for the quarter ended March 31, 1999;
and
3. Our current report on Form 8-K dated June 28, 1999.
We also incorporate by reference all documents subsequently filed by us pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act until all of the shares
being offered in this prospectus are sold.
We will provide without charge to each person to whom a prospectus is delivered,
including any beneficial owner, a copy of any or all of the information that has
been incorporated by reference in this prospectus. If you would like to obtain
this information from us, please direct your request, either in writing or by
telephone, to Genentech, Inc., 1 DNA Way, South San Francisco, California 94080,
Attention Investor Relations (650) 225-1260.
77
<PAGE> 81
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-3
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.............. F-6
Notes to Consolidated Financial Statements.................. F-7
Independent Accountants' Review Report...................... F-24
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended March 31, 1999 and 1998............ F-25
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998........ F-26
Unaudited Condensed Consolidated Balance Sheets as of March
31, 1999 and December 31, 1998............................ F-27
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-28
</TABLE>
F-1
<PAGE> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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 Company renewed its request for a non-jury trial to decide whether
the Company's claim that UC defrauded the U.S. Patent and Trademark Office when
it obtained the patent. A ruling in favor of the Company would render UC's
patent unenforceable. A ruling against the Company would allow UC to have a
retrial of its infringement claim. UC advised the court that it wishes to have
such a retrial. In addition, UC has made a motion for entry of judgment as a
matter of law of infringement notwithstanding the lack of unanimous jury verdict
on that issue.
Redemption of Special Common Stock
On June 30, 1999, the Company redeemed all of its special common stock by paying
$82.50 per share in cash to holders of special common stock other than Roche.
The funds for the redemption of the special common stock were deposited by
Roche. As a result, Roche currently owns 100% of the Company's common stock.
Consequently, push-down accounting is required under generally accepted
accounting principles which will require the Company to record goodwill and
other intangible assets of approximately $1.7 billion and $1.5 billion,
respectively, on its balance sheet during the second quarter of 1999. Also as a
result of push down accounting, the Company expects to record $0.8 billion
charge related to in-process research and development in the second quarter of
1999.
Stock Options
In connection with the redemption of the Company's special common stock, the
following changes with respect to stock options outstanding have occurred:
- Options for the purchase of approximately 6.7 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;
F-22
<PAGE> 103
GENENTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- Options for the purchase of approximately 4.1 million shares of special
common stock are being converted into options to purchase a like number
of shares of common stock at the same exercise price; and
- Options for the purchase of approximately 4.9 million shares of special
common stock have been canceled, in accordance with the terms of the
Company's 1996 Stock Option/Stock Incentive Plan (the "1996 Plan"). With
certain exceptions, the Company expects to grant new options for the
purchase of 1.333 times the number of shares under the previous options
with an exercise price equal to the public offering price of the shares
offered in this offering. The number of shares that will be the subject
of these new options, which are expected to be issued under our 1999
Stock Option Plan, will be approximately 5.1 million. Alternative
arrangements were provided for certain holders of some of the unvested
options under the 1996 Plan.
The Company expects to record, in the quarter ending June 30, 1999, cash
compensation expense, before tax effect, of approximately $277.0 million
primarily associated with the cash out of stock options and non-cash
compensation expense, before tax effect, of approximately $102.3 million
associated with the remeasurement, for accounting purposes, of the converted
options. Additional non-cash compensation expense in an amount equal to the
difference between the redemption price and the public offering price per share
will be recorded for these converted options in the quarter ending September 30,
1999. Such estimated non-cash compensation amounts are based on an assumed
public offering price per share. A limited number of employees will also have
the alternative to participate in a cash based deferred compensation plan, with
an aggregate of $27.8 million available to be earned over a two year period.
Amended Agreement with Hoffmann-La Roche and Tax Sharing Agreement
In connection with this offering, Genentech and Roche have amended their
licensing and marketing agreement, the major provisions of which include:
- the extension of Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license the Company's
products upon the occurrence of any of the following: (1) the Company's
decision to file an Investigational New Drug exemption application, or
IND, for a product, (2) completion of a Phase II trial for a product or
(3) if Hoffmann-La Roche previously paid a fee of $10 million to extend
its option on a product, completion of a Phase III trial for that
product;
- Genentech agreed, in general, to manufacture for and supply to
Hoffmann-La Roche its clinical requirements of the Company's products at
cost, and its commercial requirements at cost plus a margin of 20%;
however, Hoffmann-La Roche will have the right to manufacture the
Company's products under certain circumstances;
- Hoffmann-La Roche has agreed to pay, for each product for which
Hoffmann-La Roche exercises its option upon either a decision to file an
IND with the FDA or completion of the Phase II trials, a royalty of 12.5%
on the first $100 million on its aggregate sales of that product and
thereafter a royalty of 15% on its aggregate sales of that product in
excess of $100 million until the later in each country of the expiration
of the Company's last relevant patent or 25 years from first commercial
introduction of that product; and
- Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of
the expiration of the Company's relevant patent or 25 years from the
first commercial introduction of that product; however, $5 million of any
option extension fee paid by Hoffmann-La Roche shall be credited against
royalties payable to Genentech in the first calendar year of sales by
Hoffmann-La Roche in which aggregate sales of that product exceed $100
million.
After the redemption of the Company's special common stock, Genentech will be
included in Roche Holdings, Inc. federal (and certain states and local
jurisdictions) consolidated (or combined) income tax group. As a result the
Company's tax liability will be included in the consolidated or combined tax
liability for federal and certain states and local purposes. The Company has
entered into a tax sharing agreement with Roche Holdings, Inc. which provides
that Genentech will make payments to Roche Holdings, Inc. on the basis as though
the Company filed separate, stand-alone federal, state and local income tax
returns rather than being treated as part of Roche Holdings, Inc.'s
consolidated/combined tax return.
F-23
<PAGE> 104
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of March 31, 1999, and the related condensed consolidated
statements of income and cash flows for the three-month periods ended March 31,
1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Genentech, Inc. as of December 31,
1998 and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended (included elsewhere herein) and in our
report dated January 20, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1998,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
ERNST & YOUNG LLP
San Jose, California
April 9, 1999
F-24
<PAGE> 105
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
--------------------
THREE MONTHS
ENDED MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
In thousands, except per share data
Revenues
Product sales (including amounts from related parties
1999--$13,624; 1998--$6,607)........................... $234,069 $164,719
Royalties (including amounts from related parties:
1999--$11,241; 1998--$7,129)........................... 46,618 64,493
Contract and other (including amounts from related
parties:
1999--$4,269; 1998--$7,798)............................ 19,266 14,865
Interest.................................................. 22,399 20,623
-------- --------
Total revenues.................................... 322,352 264,700
Costs and expenses
Cost of sales (including amounts from related parties:
1999--$10,786; 1998--$6,025)........................... 45,723 33,621
Research and development (including contract related:
1999--$7,860; 1998--$8,562)............................ 90,740 98,202
Marketing, general and administrative..................... 97,201 74,950
Legal settlement.......................................... 50,000 --
Interest.................................................. 1,363 959
-------- --------
Total costs and expenses.......................... 285,027 207,732
Income before taxes......................................... 37,325 56,968
Income tax provision........................................ 22,910 15,951
-------- --------
Net income.................................................. $ 14,415 $ 41,017
======== ========
Earnings per share
Basic..................................................... $ 0.11 $ 0.33
======== ========
Diluted................................................... $ 0.11 $ 0.32
======== ========
Weighted average shares used to compute diluted earnings per
share..................................................... 132,522 128,807
======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-25
<PAGE> 106
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------
THREE MONTHS
ENDED MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 14,415 $ 41,017
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 21,912 17,936
Deferred income taxes.................................. (924) 4,386
Gain on sales of securities available-for-sale......... (12,259) (5,835)
Loss on sales of securities available-for-sale......... 30 376
Write-down of securities available-for-sale............ 914 2,555
Write-down of nonmarketable securities................. 432 --
Changes in assets and liabilities:
Investments in trading securities...................... (2,772) 25,290
Receivables and other current assets................... (10,503) 15,071
Inventories............................................ 1,914 (1,685)
Accounts payable, other current liabilities and other
long-term liabilities................................. 40,466 (30,252)
--------- ---------
Net cash provided by operating activities................... 53,625 68,859
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held-to-maturity.................. (126,981) (128,731)
Proceeds from maturities of securities held-to-maturity... 112,357 102,874
Purchases of securities available-for-sale................ (220,652) (177,731)
Proceeds from sales of securities available-for-sale...... 113,533 96,636
Purchases of non-marketable equity securities............. (2,317) --
Capital expenditures...................................... (18,209) (21,002)
Change in other assets.................................... (14,148) 1,336
--------- ---------
Net cash used in investing activities..................... (156,417) (126,618)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issuances........................................... 35,190 34,578
--------- ---------
Net cash provided by financing activities................. 35,190 34,578
--------- ---------
Net decrease in cash and cash equivalents................... (67,602) (23,181)
--------- ---------
Cash and cash equivalents at beginning of period.......... 281,162 244,469
--------- ---------
Cash and cash equivalents at end of period................ $ 213,560 $ 221,288
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-26
<PAGE> 107
GENENTECH, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
In thousands
ASSETS
Current assets
Cash and cash equivalents................................. $ 213,560 $ 281,162
Short-term investments.................................... 681,410 606,544
Accounts receivable, net (including amounts from related
party: 1999--$32,522; 1998--$22,850)................... 168,816 149,741
Inventories............................................... 146,712 148,626
Prepaid expenses and other current assets................. 51,940 55,885
---------- ----------
Total current assets.............................. 1,262,438 1,241,958
Long-term marketable securities............................. 767,450 716,888
Property, plant and equipment, less accumulated depreciation
(1999--$464,749; 1998--$445,215).......................... 698,887 700,249
Other assets................................................ 197,333 196,307
---------- ----------
Total assets...................................... $2,926,108 $2,855,402
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 31,576 $ 40,895
Accrued liabilities--related party........................ 12,778 10,945
Other accrued liabilities................................. 275,422 239,487
---------- ----------
Total current liabilities......................... 319,776 291,327
Long-term debt.............................................. 149,990 149,990
Other long-term liabilities................................. 66,638 70,240
---------- ----------
Total liabilities................................. 536,404 511,557
COMMITMENTS AND CONTINGENCIES
Stockholders' equity
Preferred stock........................................... -- --
Special Common Stock...................................... 1,027 1,010
Common Stock.............................................. 1,532 1,532
Additional paid-in capital................................ 1,630,326 1,588,990
Retained earnings......................................... 707,465 693,050
Accumulated other comprehensive income.................... 49,354 59,263
---------- ----------
Total stockholders' equity........................ 2,389,704 2,343,845
---------- ----------
Total liabilities and stockholders' equity........ $2,926,108 $2,855,402
========== ==========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-27
<PAGE> 108
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--STATEMENT OF ACCOUNTING PRESENTATION
In the opinion of Genentech, Inc. ("the Company"), the accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of adjustments of
a normal recurring nature) considered necessary for a fair presentation have
been included. Operating results for the three-month periods ended March 31,
1999 and 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. The condensed consolidated balance sheet
as of December 31, 1998 has been derived from the audited financial statements
as of that date. For further information, refer to the annual consolidated
financial statements and notes thereto included elsewhere herein.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE 2--NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting under FAS 133. The
Company is currently evaluating the impact of FAS 133 on its financial position
and results of operations.
NOTE 3--EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators of the basic
and diluted earnings per share (EPS) computations for the quarters ended March
31, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Numerator:
Net income--numerator for basic and diluted EPS........... $ 14,415 $ 41,017
======== ========
Denominator:
Denominator for basic EPS--weighted-average shares........ 127,704 124,758
Effect of dilutive securities:
Stock options............................................. 4,818 4,049
-------- --------
Denominator for diluted EPS--adjusted weighted-average
shares and assumed conversions............................ 132,522 128,807
======== ========
</TABLE>
In the first quarter of 1999, all options outstanding were dilutive. In the
first quarter of 1998, options to purchase 2,850,050 shares of Special Common
Stock at $67.31 per share were outstanding, but were not included in the
computation of diluted EPS. These options' exercise price was greater than the
average market price of the Special Common Stock and therefore, the effect would
be anti-dilutive.
The Company had convertible subordinated debentures that were convertible to
1,013,447 shares of Special Common Stock in the first quarter of 1999 and had
convertible subordinated debentures that were convertible to 1,013,514 shares of
Special Common Stock in the comparable period in 1998, but were not included in
the computation of diluted EPS because they were anti-dilutive.
NOTE 4--COMPREHENSIVE INCOME
The Company adopted FAS 130, "Reporting Comprehensive Income," in 1998.
Comprehensive income is comprised of net income and other comprehensive income.
The Company's other comprehensive income includes unrealized holding gains and
F-28
<PAGE> 109
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses on its available-for-sale securities, which were reported separately in
stockholders' equity, and included in accumulated other comprehensive income.
Comprehensive income was $4.5 million for the quarter ended March 31, 1999 and
$46.1 million for the comparable period in 1998.
NOTE 5--RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On June 30, 1999, Roche Holdings, Inc.'s ("Roche") option to cause the Company
to redeem (the "call") the outstanding Callable Putable Common Stock ("Special
Common Stock") of the Company at $82.50 will expire. This arrangement was the
result of the October 1995 agreement (the "Agreement") between the Company and
Roche. If Roche does not cause the redemption as of June 30, 1999, within thirty
business days commencing July 1, 1999, the Company's stockholders will have the
option (the "put") to cause the Company to redeem none, some, or all of their
shares of Special Common Stock at $60.00 per share (and Roche will concurrently
provide the necessary redemption funds to the Company by purchasing a like
number of shares of Common Stock at $60.00 per share). Roche Holding Ltd, a
Swiss corporation, has guaranteed Roche's obligation under the put.
In the event that sufficient shares of the Company's Special Common Stock are
tendered pursuant to the put to result in Roche owning at least 85% of the total
outstanding shares of the Company's outstanding equity, the Company has in place
an Incentive Units Program (the "Program") that would result in amounts becoming
payable to eligible employees if specified performance benchmarks are achieved
by the Company during the term of the Program. In event of the put, at March 31,
1999, $14.7 million is contingently payable under the Program.
Under the Agreement, independent of its right to cause the Company to redeem the
Special Common Stock, Roche may increase its ownership of the Company up to
79.9% by making purchases on the open market. Roche held approximately 64.9% of
the outstanding common equity of the Company as of March 31, 1999.
In conjunction with the Agreement, the Company and F. Hoffmann-La Roche Ltd
(Hoffmann-La Roche) entered into an agreement (the License Agreement), pursuant
to which Hoffmann-La Roche was granted an option for ten years for licenses to
use and sell certain of the Company's products in non-U.S. markets. In the
second quarter of 1997 and the second and fourth quarters of 1998, the Company
and Hoffmann-La Roche agreed in principle to changes to the License Agreement.
As so revised under the License Agreement, Hoffmann-La Roche may exercise its
option to license any such future product of the Company either when the Company
determines to move such product into development or at the end of Phase II
clinical trials. The License Agreement provides that the Company and Hoffmann-La
Roche will share the United States and European development costs regardless of
the location or purpose of studies. Also, as part of this Agreement, the Company
receives royalties on sales of certain of its products in Canada, on sales of
Pulmozyme(R) outside of the United States and on sales of rituximab outside of
the United States, excluding Japan.
Contract revenue from Hoffmann-La Roche for the reimbursement of ongoing
development expenses was $4.3 million for the first quarter of 1999 and $7.8
million for the comparable period in 1998.
In addition, on July 6, 1998, the Company entered into an agreement with
Hoffmann-La Roche to provide Hoffmann-La Roche exclusive marketing rights
outside of the United States for Herceptin(R) (trastuzumab). Under the
agreement, Hoffmann-La Roche paid $40.0 million and has agreed to pay cash
milestones tied to future product development activities, to contribute equally
with the Company up to a maximum of $40.0 million on global development costs
and to make royalty payments on product sales. As of March 31, 1999, no
additional amounts have been paid.
NOTE 6--LEGAL PROCEEDINGS
The Company is a party to various legal proceedings, including patent
infringement cases involving human growth hormone products and Activase, product
liability cases and other matters.
In July 1997, an action was filed in the United States District Court for the
Northern District of California alleging that the Company's manufacture, use and
sale of its Nutropin(R) human growth hormone products infringed a patent (the
"Goodman Patent") owned by the Regents of the University of California ("UC").
This action is substantially the same as a previous action filed in 1990 against
the Company by UC alleging that the Company's manufacture, use and sale of its
Protropin(R)
F-29
<PAGE> 110
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
human growth hormone products infringed the Goodman Patent. The 1997 case has
been stayed pending the conclusion of the 1990 case, which is now in trial. UC
has publicly stated that it is seeking $400 million in damages from the Company
pursuant to the 1990 case.
In the 1990 case, UC contends that the Protropin production plasmid, developed
and used by the Company, infringes the claims of the Goodman Patent under the
doctrine of equivalents. UC contends that UC human growth hormone cDNA brought
to Genentech by an ex-employee of UC, Peter Seeburg, was used in the
construction of the Company's Protropin production plasmid, and that such use,
if it occurred, constitutes some evidence of infringement under the doctrine of
equivalents. The Company vigorously and emphatically denies that the UC human
growth hormone cDNA brought to Genentech by Mr. Seeburg was used in the
construction of Genentech's human growth hormone production plasmid. Rather, the
Company's records demonstrate that the plasmid was developed internally by Dr.
David Goeddel without any use of the UC cDNA. In addition, the Company believes
the evidence in the case strongly supports its position that there is no
infringement of the Goodman Patent under the doctrine of equivalents. The
Company also believes that UC committed fraud upon the United States Patent and
Trademark Office in obtaining the Goodman Patent when it was originally issued
to UC in 1982, and that the Goodman Patent is therefore invalid because of UC's
inequitable conduct.
Based upon the nature of the claims made and the information available to date
to the Company and its counsel through investigations and otherwise, the Company
believes the outcome of these actions is not likely to have a material adverse
effect on the financial position, results of operations or cash flows of the
Company. However, were an unfavorable ruling to occur in any quarterly period,
there exists the possibility of a material impact on the net income of that
period.
The Company has entered into a settlement agreement with the United States
Department of Justice and the United States Attorney for the Northern District
of California concerning an investigation, ongoing since 1995, into the
Company's past promotional practices with respect to human growth hormone. As
part of the settlement agreement, the Company will pay a criminal fine and
restitution in the amount of $50 million and will plead guilty to a felony of
promoting Protropin for medical uses for which it was not approved. The Company
recorded a $50 million charge in the first quarter of 1999 related to the
settlement.
NOTE 7--INVENTORIES
Inventories are summarized below:
<TABLE>
<CAPTION>
-------------------------
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
In thousands
Raw materials and supplies.................................. $ 21,700 $ 21,414
Work in process............................................. 102,520 106,383
Finished goods.............................................. 22,492 20,829
-------- --------
Total............................................. $146,712 $148,626
======== ========
</TABLE>
NOTE 8--SUBSEQUENT EVENTS
Contingencies
In May 1999, the 1990 case brought by UC referred to in "Note 6 -- Legal
Proceedings" above was submitted to a jury, and on June 2, 1999 the jury
announced it was deadlocked. Because the jury could not reach a unanimous
decision, no finding of infringement was made, and there is no current legal
basis for the Company to be held liable to UC for any claim of damages. On June
22, 1999, the Company renewed its request for a non-jury trial to decide on the
Company's claim that UC defrauded the U.S. Patent and Trademark Office when it
obtained the patent. A ruling in favor of the Company would render UC's patent
unenforceable. A ruling against the Company would allow UC to have a retrial of
its infringement claim. UC advised the court that it wishes to have such a
retrial. In addition, UC has made a motion for entry of judgment as a matter of
law of infringement notwithstanding the lack of unanimous jury verdict on that
issue.
F-30
<PAGE> 111
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Redemption of Special Common Stock
On June 30, 1999, the Company redeemed all of its special common stock by paying
$82.50 per share in cash to holders of special common stock other than Roche.
The funds for the redemption of the special common stock were deposited by
Roche. As a result, Roche currently owns 100% of the Company's common stock.
Consequently, push-down accounting is required under generally accepted
accounting principles which will require the Company to record goodwill and
other intangible assets of approximately $1.7 billion and $1.5 billion,
respectively, on its balance sheet during the second quarter of 1999. Also as a
result of push down accounting, the Company expects to record $0.8 billion
charge related to in-process research and development in the second quarter of
1999.
Stock Options
In connection with the redemption of the Company's special common stock, the
following changes with respect to stock options outstanding have occurred:
- Options for the purchase of approximately 6.7 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 4.1 million shares of special
common stock are being converted into options to purchase a like number
of shares of common stock at the same exercise price; and
- Options for the purchase of approximately 4.9 million shares of special
common stock have been canceled, in accordance with the terms of the
Company's 1996 Stock Option/Stock Incentive Plan (the "1996 Plan"). With
certain exceptions, the Company expects to grant new options for the
purchase of 1.333 times the number of shares under the previous options
with an exercise price equal to the public offering price of the shares
offered in this offering. The number of shares that will be the subject
of these new options, which are expected to be issued under our 1999
Stock Option Plan, will be approximately 5.1 million. Alternative
arrangements were provided for certain holders of some of the unvested
options under the 1996 Plan.
The Company expects to record, in the quarter ending June 30, 1999, cash
compensation expense, before tax effect, of approximately $277.0 million
primarily associated with the cash out of stock options and non-cash
compensation expense, before tax effect, of approximately $102.3 million
associated with the remeasurement, for accounting purposes, of the converted
options. Additional non-cash compensation expense in an amount equal to the
difference between the redemption price and the public offering price per share
will be recorded for these converted options in the quarter ending September 30,
1999. Such estimated non-cash compensation amounts are based on an assumed
public offering price per share. A limited number of employees will also have
the alternative to participate in a cash based deferred compensation plan, with
an aggregate of $27.8 million available to be earned over a two year period.
Amended Agreement with Hoffmann-La Roche
In connection with this offering, Genentech and Roche have amended their
licensing and marketing agreement, the major provisions of which include:
- the extension of Hoffmann-La Roche's option until at least 2015;
- Hoffmann-La Roche may exercise its option to license the Company's
products upon the occurrence of any of the following: (1) the Company's
decision to file an Investigational New Drug exemption application, or
IND, for a product, (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;
F-31
<PAGE> 112
GENENTECH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- Hoffmann-La Roche has agreed to pay, for each product for which
Hoffmann-La Roche exercises its option upon either a decision to file an
IND with the FDA or completion of the Phase II trials, a royalty of 12.5%
on the first $100 million on its aggregate sales of that product and
thereafter a royalty of 15% on its aggregate sales of that product in
excess of $100 million until the later in each country of the expiration
of the Company's last relevant patent or 25 years from first commercial
introduction of that product; and
- Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of
the expiration of the Company's relevant patent or 25 years from the
first commercial introduction of that product; however, $5 million of any
option extension fee paid by Hoffmann-La Roche shall be credited against
royalties payable to Genentech in the first calendar year of sales by
Hoffmann-La Roche in which aggregate sales of that product exceed $100
million.
Tax Sharing Agreement
After the redemption of the Company's special common stock, Genentech will be
included in Roche Holdings, Inc. federal (and certain states and local
jurisdictions) consolidated (or combined) income tax group. As a result the
Company's tax liability will be included in the consolidated or combined tax
liability for federal and certain states and local purposes. The Company has
entered into a tax sharing agreement with Roche Holdings, Inc. which provides
that Genentech will make payments to Roche Holdings, Inc. on the basis as though
the Company filed separate, stand-alone federal, state and local income tax
returns rather than being treated as part of Roche Holdings, Inc.'s
consolidated/combined tax return.
F-32
<PAGE> 113
APPENDIX - DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
Graphic: Illustration of the Company's product "pipeline."
Caption: Pipeline as Lifeline -- With 17 projects in development, all for
treating serious medical conditions, Genentech's product pipeline
offers hope to waiting patients.
Phase I:
o AMD Fab, age-related macular degeneration. Currently preparing
for Phase I trial
o LDP-02 Antibody, inflammatory bowel disease
o Pulmezyme AERx(TM) delivery system, cystic fibrosis. Currently
preparing for Phase I clinical trial
Phase II:
o Anti-CD18 Antibody, acute myocardial infarction
o Anti-VEGF Antibody, several types of solid-tumor cancers
o Herceptin Antibody, other tumors
o VEGF, coronary artery disease. A recently completed Phase II
clinical trial did not meet its primary objectives. Genentech is
currently deciding on next steps for this program.
<PAGE> 114
Preparing for Phase III:
o Activase, catheter clearance
o Anti-CD11a Antibody (hu1124), psoriasis
o Herceptin Antibody, adjuvant therapy breast cancer
o Thrombopoietin, thrombocytopenia related to cancer treatment. Pharmacia
+ Upjohn has exclusive worldwide rights for thrombopoietin.
Preparing for Phase III
o Anti-IgE Antibody, allergic asthma and seasonal allergic rhinitis
o Pulmozyme, early-stage cystic fibrosis
o Rituxan Antibody, intermediate- and high-grade non-Hodgkin's Lymphoma
o Xubix, acute coronary syndrome. Under clinical development by Hoffmann-La
Roche, Genentech retains certain opt-in rights with respect to the United
States
Preparing Regulatory Filing
o TNK, acute myocardial infarcation
Awaiting Regulatory Clearance
o Nutropin Depot (TM), growth hormone deficiency in children
(The 17 projects are differentiated as either cardiovascular, endocrinology,
oncology or opportunistic.)
<PAGE> 115
GATEFOLD
Graphic: Photograph of ten patients representing Genentech's approved
indications.
Caption: In Business For Life. Genentech manufactures and markets seven
pharmaceutical products for ten serious medical conditions.
Celebrating life are ten patients who have found new hope with these
medicines, each patient representing one of the ten approved
indications.
Sandra Jones: Activase, Acute ischemic stroke
Dustin Watney: Protropin, Growth hormone deficiency in children
Mary Ann Noriux: Activase, Acute massive pulmonary embolism
Paul Workman: Ritoxan, Relapsed or refractory low-grade or
follicular, CD20 positive, B-cell non-Hodgkin's
lymphoma
Martha Lopez: Nutropin, short stature associated with Turner
Syndrome. Nutropin and Nutropin AQ
Amy Applebaum: Herceptin, Metastic breast cancer
Jenna Lismowski: Nutropin, Growth failure associated with chronic
renal insufficiency. Nutropin and Nutropin AQ.
Allen Strohmeier: Activase, Acute myocardial infarction
Lindsay Longcor: Nutropin, Growth hormone deficiency in adults.
Nutropin and Nutropin AQ.
Abigail Robinson: Pulmozyme, Cystic fibrosis
<PAGE> 116
[Genentech]
<PAGE> 117
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
----------
AMOUNT
TO BE PAID
----------
<S> <C>
Registration fee............................................ $ 581,020
NASD Filing fee............................................. 30,500
New York Stock Exchange Listing Fee.........................
Transfer agent's fees.......................................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Miscellaneous...............................................
----------
Total............................................. $3,000,000
==========
</TABLE>
Each of the amounts set forth above, other than the Registration fee and the
NASD filing fee, is an estimate. Genentech is responsible for all expenses
except that Roche Holdings, Inc. has agreed to pay the registration and filing
fees payable under any federal or state securities or Blue Sky laws in addition
to certain expenses to be directly incurred by Roche, including underwriting,
discounts and its counsel fees.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation limits, to the fullest extent permitted by
Delaware corporate law, the personal liability of directors for monetary damages
for breach of their fiduciary duties.
Section 145 of the General Corporation Law of the State of Delaware (the "DGCL")
provides, in summary, that directors and officers of Delaware corporations are
entitled, under certain circumstances, to be indemnified against all expenses
and liabilities (including attorneys' fees) incurred by them as a result of
suits brought against them in their capacity as a director or officer, if they
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful; provided, that no indemnification may be made against
expenses in respect of any claim, issue or matter as to which they shall have
been adjudged to be liable to the corporation, unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, they are fairly and reasonably entitled to indemnity
for such expenses which the court shall deem proper. Any such indemnification
may be made by the corporation only as authorized in each specific case upon a
determination by the stockholders or disinterested directors that
indemnification is proper because the indemnitee has met the applicable standard
of conduct.
Our board of directors may provide similar indemnification to our officers,
employees and agents as they deem appropriate and as authorized by Delaware law.
We may purchase insurance on behalf of any director, officer, employee or agent
against any expense incurred by such person in his or her capacity.
Our certificate of incorporation also provides that Roche and the officers or
directors of Roche will not be presumed liable to us or our stockholders for
breach of any fiduciary duty or duty of loyalty, failure to act in the best
interests of Genentech, or receipt of any improper personal benefit, simply
because Roche or any director or officer of Roche, in good faith, takes any
action, exercises any right or gives or withholds any consent with respect to
any agreement or contract between Roche and Genentech.
In addition, Roche will not be liable to us or our stockholders for breach of
any fiduciary duty if Roche pursues or acquires a potential corporate
opportunity of ours or does not inform us of a potential corporate opportunity.
If a director, officer or employee of Genentech who is also a director, officer
or employee of Roche knows of a potential transaction or matter that may be a
corporate opportunity both for Genentech and Roche, the director, officer or
employee is entitled to offer the corporate
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<PAGE> 118
opportunity to us or Roche as the director, officer or employee deems
appropriate under the circumstances in his sole discretion, and no such
director, officer or employee will be liable to us or our stockholders for
breach of any fiduciary duty or duty of loyalty or failure to act in our best
interests or the derivation of any improper personal benefit by reason of the
fact that such director, officer or employee offered such corporate opportunity
to Roche (rather than to us) or did not communicate information regarding such
corporate opportunity to us, or Roche pursues or acquires such corporate
opportunity for itself or directs such corporate opportunity to another person
or does not communicate the corporate opportunity to us.
Neither Roche nor any officer or director thereof shall be liable to us or our
stockholders for breach of any fiduciary duty or duty of loyalty or failure to
act in (or not opposed to) our best interests or the derivation of any improper
personal benefit by reason of the fact that Roche or an officer of director
thereof in good faith takes any action or exercises any rights or gives or
withholds any consent in connection with any agreement or contract between Roche
and Genentech. No vote cast or other action taken by any person who is an
officer, director or other representative of Roche, which vote is cast or action
is taken by such person in his capacity as a director of Genentech, shall
constitute an action of or the exercise of a right by or a consent of Roche for
the purpose of any such agreement or contract.
ITEM 16. EXHIBITS
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1 -- Form of Underwriting Agreement*
3.1 -- Certificate of Incorporation*
3.2 -- By-Laws*
4.1 -- Form of Common Stock Certificate*
5 -- Opinion of Davis Polk & Wardwell*
10.1 -- Form of Affiliation Agreement between Genentech, Inc. and
Roche Holdings, Inc.*
10.2 -- Form of Amended and Restated Agreement between Genentech,
Inc. and F. Hoffmann-La Roche Ltd regarding
commercialization of Genentech's Products outside the United
States*
10.3 -- Form of Tax Sharing Agreement between Genentech, Inc. and
Roche Holdings, Inc.*
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.
** Previously filed.
(b) The financial statement schedule included in the company's Annual Report on
Form 10-K for the year ended December 31, 1998 has been incorporated by
reference.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referenced in Item 15 of this Registration
Statement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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<PAGE> 119
(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.
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<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 2 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on the 1st day of July, 1999.
GENENTECH, INC.
By: /s/ ARTHUR D. LEVINSON
---------------------------------------
Name: Arthur D. Levinson
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ARTHUR D. LEVINSON Principal Executive Officer and Director July 1, 1999
- -----------------------------------------------------
Arthur D. Levinson
* Principal Financial Officer July 1, 1999
- -----------------------------------------------------
Louis J. Lavigne, Jr.
* Principal Accounting Officer July 1, 1999
- -----------------------------------------------------
John M. Whiting
* Director July 1, 1999
- -----------------------------------------------------
Franz B. Humer
* Director July 1, 1999
- -----------------------------------------------------
Jonathan K.C. Knowles
*By: /s/ ARTHUR D. LEVINSON
-------------------------------------------------
Arthur D. Levinson
Attorney-in-Fact
</TABLE>
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<PAGE> 121
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1 -- Form of Underwriting Agreement*
3.1 -- Certificate of Incorporation*
3.2 -- By-Laws*
4.1 -- Form of Common Stock Certificate*
5 -- Opinion of Davis Polk & Wardwell*
10.1 -- Form of Affiliation Agreement between Genentech, Inc. and
Roche Holdings, Inc.*
10.2 -- Form of Amended and Restated Agreement between Genentech,
Inc. and F. Hoffmann-La Roche Ltd regarding
commercialization of Genentech's Products outside the United
States*
10.3 -- Form of Tax Sharing Agreement between Genentech, Inc. and
Roche Holdings, Inc.*
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.
** Previously filed.
<PAGE> 1
EXHIBIT 15.1
June 29, 1999
The Board of Directors and Stockholders
Genentech, Inc.
We are aware of the inclusion in Amendment No. 2 to the Registration Statement
(Form S-3 No. 333-80601) of Genentech, Inc. for the registration of shares of
its common stock of our report dated April 9, 1999 relating to the unaudited
condensed consolidated interim financial statements of Genentech, Inc. for the
quarter ended March 31, 1999.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Very truly yours,
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 20, 1999, in Amendment No. 2 to the Registration
Statement (Form S-3 No. 333-80601) of Genentech, Inc. for the registration of
shares of its common stock.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Jose, California
June 29, 1999
