UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 1-9813
GENENTECH, INC.
A Delaware Corporation 94-2347624
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1 DNA Way, South San Francisco, California 94080-4990
(Address of principal executive offices and zip code)
(650) 225-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $0.02 par value New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The approximate aggregate market value of voting stock held by nonaffiliates
of the registrant is $11,769,690,559 as of December 31, 1999. (A)
Number of shares of Common Stock outstanding as of December 31, 1999:
258,110,279
Documents incorporated by reference:
PARTS INCORPORATED
DOCUMENT BY REFERENCE
(1) Annual Report to stockholders for the year ended II
December 31, 1999 (specified portions)
(2) Definitive Proxy Statement with respect to the 2000 III
Annual Meeting of Stockholders to be filed by Genentech,
Inc. with the Securities and Exchange Commission
(hereinafter referred to as "Proxy Statement")
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(A) Excludes 87,506,993 shares of Common Stock held by Directors, Officers
and stockholders whose ownership exceeds five percent of the Common Stock
outstanding at December 31, 1999 and Roche Holdings, Inc. which was
calculated based on their filings as of December 31, 1999, with the
Securities and Exchange Commission pursuant to Section 13(g) of the
Securities Exchange Act of 1934. As of February 7, 2000, it is
unconfirmed whether any other person or entity holds greater than five
percent of the registrant's Common Stock. Exclusion of shares held by
any person should not be construed to indicate that such person possesses
the power, direct or indirect, to direct or cause the direction of the
management or policies of the registrant, or that such person is
controlled by or under common control with the registrant.
In this Form 10-K, "Genentech," "we," "us" and "our" refer to Genentech,
Inc., "Common Stock" refers to Genentech's Common Stock, par value $0.02
per share, and "Special Common Stock" refers to Genentech's callable
putable Common Stock, par value $0.02 per share. In addition, all
numbers relating to the number of shares and price per share of Common
Stock and Special Common Stock give effect to the two-for-one split of
our Common Stock on November 2, 1999.
PART I
ITEM 1. BUSINESS
Genentech is a leading biotechnology company that uses human genetic
information to discover, develop, manufacture and market human
pharmaceuticals for significant unmet medical needs. Thirteen of the
approved products of biotechnology stem from our science. Of these products,
we manufacture and market seven products directly in the United States and we
are preparing to begin manufacturing and marketing our eighth product. See
the "Products" section below for further information.
REDEMPTION OF OUR SPECIAL COMMON STOCK
On June 30, 1999, we redeemed all of our outstanding Special Common Stock
held by stockholders other than Roche Holdings, Inc., known as Roche, at a
price of $41.25 per share in cash with funds deposited by Roche for that
purpose. We refer to this event as the "Redemption." As a result of the
Redemption, Roche's percentage ownership of our outstanding Common Stock
increased from 65% to 100%. Consequently, push-down accounting was required
under U.S. generally accepted accounting principles to reflect in our
financial statements the amounts paid for our stock in excess of our net book
value. Push-down accounting required us to record goodwill and other
intangible assets of $1,706.0 million and $1,499.0 million, respectively,
onto our balance sheet in the second quarter of 1999. Also, as a result of
push-down accounting, we recorded special charges related to the Redemption
of $1,207.7 million in 1999. For more information about special charges and
push-down accounting, you should read the "Forward-Looking Information and
Cautionary Factors that May Affect Future Results" below and the "Redemption
of Our Special Common Stock" note in the Notes to Consolidated Financial
Statements. Roche subsequently made public offerings of our Common Stock as
described below.
PUBLIC OFFERINGS
On July 23, 1999 and October 26, 1999, Roche completed public offerings of
our Common Stock. As a result, Roche's percentage ownership of our
outstanding Common Stock was reduced to approximately 66.1% at December 31,
1999. We did not receive any of the net proceeds from the offerings. Our
Common Stock began trading on the New York Stock Exchange under the symbol
DNA on July 20, 1999.
As a result of the Redemption and the subsequent public offerings, changes
occurred with respect to our stock options as discussed below in "Stock
Options Changes." In addition, we amended our certificate of incorporation
and bylaws, amended our licensing and marketing agreement with Hoffmann-La
Roche, and entered into or amended certain agreements with Roche, which are
discussed below in "Relationship with Roche."
Stock Split
On November 2, 1999, we effected a two-for-one stock split of our Common Stock
in the form of a dividend of one share of Genentech Common Stock for each
share held at the close of business on October 29, 1999. Our stock began
trading on a split-adjusted basis on November 3, 1999. In addition, all
numbers relating to the number of shares and price per share of Common Stock
and Special Common Stock give effect to the two-for-one split of our Common
Stock on November 2, 1999. We currently intend to retain all future income
for use in the operation of our business and to fund future growth and,
therefore we do not intend to declare or pay any cash dividends on our Common
Stock in the foreseeable future.
Products
Of the following eight products, we manufacture and market seven directly in
the United States, and we are preparing to begin manufacturing and marketing
the eighth product:
- - Herceptin, registered trademark, (trastuzumab) antibody for the treatment
of certain patients with metastatic breast cancer whose tumors overexpress
the human epidermal growth factor receptor2, or HER2, protein;
- - Rituxan, registered trademark, (rituximab) antibody for the treatment of
patients with relapsed or refractory low-grade or follicular, CD20-
positive B-cell non-Hodgkins lymphoma;
- - Activase, registered trademark, (alteplase) 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, registered trademark, (somatrem for injection) growth hormone
for the treatment of inadequate endogenous growth hormone secretion, or
growth hormone deficiency, in children;
- - Nutropin, registered trademark, (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, registered trademark, (somatropin (rDNA origin) injection)
liquid formulation growth hormone for the same indications as Nutropin;
- - Pulmozyme, registered trademark, (dornase alfa, recombinant) inhalation
solution for the management of cystic fibrosis; and
- - Nutropin Depot, trademark, (somatropin (rDNA origin) for
injectable suspension) encapsulated sustained-release growth hormone for
the treatment of pediatric growth hormone deficiency. We have received
regulatory approval from the U.S. Food and Drug Administration, commonly
known as the FDA, to market Nutropin Depot, and we expect to launch the
product in the first half of 2000.
We receive royalties on sales of rituximab outside of the United States
(excluding Japan), on sales of Pulmozyme and Herceptin outside of the United
States and on sales of certain products in Canada from F. Hoffmann-La Roche
Ltd, an affiliate of Roche that is referred as Hoffmann-La Roche. See
"Relationship with Roche" below for further information regarding our
licensing agreement with Hoffmann-La Roche. We receive royalties on sales of
rituximab in Japan from another licensee. 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 seven
additional licensed products that are marketed by other companies. Six of
these products originated from our technology.
Herceptin
In September 1998, we received FDA approval to market Herceptin in the United
States for use as a first line therapy in combination with Taxol, registered
trademark, (paclitaxel), a product made by Bristol-Myers Squibb Company, or
Bristol-Myers, 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. We
have granted Hoffmann-La Roche exclusive marketing rights to Herceptin
outside of the United States.
In September 1999, Hoffmann-La Roche announced it had obtained
authorization to sell Herceptin in Switzerland as a treatment for breast
cancer. This is the product's first European approval and comes shortly
after authorization of the product in Canada for treatment of metastatic or
advanced breast cancer, alone, and in combination with Taxol.
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. We co-developed Rituxan with IDEC
Pharmaceuticals, Inc., or IDEC, from whom we license Rituxan. In November
1997, Rituxan was cleared for marketing in the United States by the FDA.
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 until recently, we shared responsibility with IDEC for
manufacturing the product. By the end of the third quarter of 1999, IDEC had
transferred all bulk manufacturing responsibilities for rituximab to us.
Hoffmann-La Roche is responsible for marketing MabThera, registered
trademark, (rituximab) in the rest of the world, excluding Japan. In 1999,
Genentech and IDEC, in consultation with the FDA, updated the warning section
of the package insert for Rituxan to include information on infusion-related
reactions and cardiovascular events. IDEC filed a supplemental Biologics
License Application, or BLA, in October 1999 relating to use of Rituxan in
expanded dosing, including retreatment, times 8 and bulky disease for the
treatment of B-cell non-Hodgkin's lymphoma.
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. 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. Activase is also approved for the
treatment of acute ischemic stroke 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,
registered trademark, and GRTPA, registered trademark, 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,
GmbH. We have also licensed certain rights to Boehringer Ingelheim regarding
future sales of a second generation t-PA, TNKase, trademark. On July 30,
1999, we submitted U.S. regulatory filings seeking marketing approval for
TNKase, and we are currently awaiting regulatory clearance. Boehringer
Ingelheim, which markets a recombinant t-PA under the trademark Actilyse,
registered trademark, filed a marketing application for TNKase with European
regulatory authorities in September 1999.
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 manufacture and
market recombinant growth hormone to Pharmacia & Upjohn, Inc., which
manufactures and markets recombinant growth hormone under the trademarks
Somatonorm, trademark, and Genotropin, trademark.
Nutropin
Nutropin is a human growth hormone similar to Protropin; however, it does not
have the additional N-terminal amino acid, methionine, found in the Protropin
chemical structure. Nutropin was approved in November 1993 and launched in
January 1994 for marketing in the United States for the treatment of growth
failure in children associated with chronic renal insufficiency up to the
time of renal transplantation. Nutropin has been designated as a U.S. Orphan
Drug for treatment of growth failure in children with chronic renal
insufficiency. This status will terminate in November 2000. Nutropin was
approved by the FDA in March 1994 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 up 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.
Nutropin Depot
In December 1999, we received regulatory approval to market Nutropin Depot
(somatropin (rDNA origin) for depot suspension), the first long-acting dosage
form of recombinant growth hormone. We expect to launch this product during
the first half of 2000. Nutropin Depot is a long-acting form of our
recombinant human growth hormone using ProLease, registered trademark, an
injectable extended-release drug delivery system, which was developed by our
partner Alkermes Controlled Therapeutics, Inc., or Alkermes. This new
formulation was designed to reduce the frequency of injections by
encapsulating the drug in biodegradable microspheres.
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 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, we will
manufacture these products for sale by Schwarz Pharma. The agreement also
entitles us to receive additional benchmark payments upon achievement of
certain product development milestones. As part of a strategic alliance with
Sumitomo Pharmaceuticals Co., Ltd., or Sumitomo, we have agreed to provide
Sumitomo exclusive rights to develop, import and distribute in Japan,
Nutropin Depot.
Pulmozyme
Pulmozyme is marketed in the United States for the management of cystic
fibrosis, for which it has U.S. Orphan Drug designation. This status will
terminate in December 2000. It 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. In 1998, we licensed certain
U.S. marketing and development rights to interferon gamma, including
Actimmune to Connetics Corporation in return for a royalty on net sales.
Thereafter, Connetics sublicensed all of its rights to InterMune
Pharmaceuticals, Inc., or InterMune. After a transition period, as of
January 1999, we no longer sell Actimmune directly in the United States. We
have agreed to supply bulk materials to InterMune at cost plus a mark-up. We
receive royalty payments from Boehringer Ingelheim from the sale of
interferon gamma in certain countries outside of the United States, Canada
and Japan and The People's Republic of China.
Licensed Products
In addition to the royalties mentioned above, we also receive royalties on
the following products:
<TABLE>
<CAPTION>
Product Trademark Company
- ---------------------------- ---------- -----------------------------------
<S> <C> <C>
Human growth hormone Humatrope Eli Lilly and Company
Recombinant interferon alpha Roferon-A Hoffmann-La Roche
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B SmithKline Beecham Biologicals S.A.
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Company
Interferon gamma-1b Actimmune InterMune Pharmaceuticals, Inc.
Rheumatoid Arthritis Enbrel Immunex Corporation
</TABLE>
In May 1999, we entered into a license agreement with Immunex Corporation.
We granted to Immunex a worldwide, co-exclusive license under our
immunoadhesin patents to make, use and sell Enbrel, registered trademark,
Immunex's product to treat moderately to severely active rheumatoid
arthritis. Immunex paid us an initial license fee and has agreed to pay
royalties on sales of Enbrel from November 6, 1998, the date of product
launch, through the life of our patents.
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
- ----------------------------
TNKase second generation t-PA A second generation t-PA that is a
selectively mutated version of a wild-type
t-PA. This t-PA version may be faster
acting and easier to administer and may
restore blood flow faster. On July 30,
1999, we submitted U.S. regulatory filings
seeking marketing approval for TNKase. We
are currently awaiting regulatory
clearance. This product is being developed
in collaboration with Boehringer Ingelheim,
which filed a marketing application with
European regulatory authorities in
September 1999.
Preparing BLA
- -------------
Anti-IgE (rhuMab E25) 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 Novartis
Pharmaceuticals Corporation, or Novartis,
and Tanox, Inc. Phase III clinical trials
have been completed in patients with
allergic asthma and in patients with
seasonal allergic rhinitis.
Phase III
- ---------
Anti-CD11a (hu1124) antibody An antibody designed to block certain
immune cells as a potential treatment for
psoriasis. We are currently conducting a
Phase III trial in psoriasis, which we
are developing in collaboration with Xoma
Corporation.
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 have
initiated Phase III trials of this product
for intravenous catheter clearance.
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. We are 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.
Thrombopoietin (TPO) A protein that is being studied for
treatment of thrombocytopenia, a reduction
in platelets, in cancer patients treated
with chemotherapy. This molecule has been
exclusively licensed to Pharmacia & Upjohn.
Preparing for Phase III trials
- ------------------------------
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.
We are preparing for Phase III trials in
non-small cell lung cancer and colorectal
cancer. Phase II studies are ongoing in
breast and renal cell carcinoma.
Herceptin antibody An antibody that is an approved treatment
for metastatic breast cancer. In
collaboration with Hoffmann-La Roche and
U.S. national cooperative groups, we are
preparing for Phase III trials for adjuvant
treatment of early-stage breast cancer in
patients who overexpress the HER2 protein.
Phase II
- --------
Anti-CD18 antibody An antibody designed to block certain
immune cells that may impact blood flow.
We are conducting a Phase II clinical trial
aimed at increasing blood flow in patients
with acute myocardial infarction.
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.
Dornase alfa inhalation A recombinant human protein used for the
solution with Aradigm's management of cystic fibrosis. Aradigm
delivery system Corporation filed an Investigational New
Drug Application, or IND, in December, 1999
and recently began a Phase IIa clinical
trial of dornase alfa delivery via
Aradigm's AERx, trademark, delivery system.
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., or
LeukoSite. LeukoSite recently initiated
Phase II clinical trials in Canada in
patients with Crohn's disease.
INS365 A second generation P2Y2 agonist, for the
potential treatment of patients with
chronic bronchitis. We are currently
initiating a Phase IIa study in
collaboration with Inspire Pharmaceuticals,
Inc.
Phase I
- -------
AMD Fab A customized fragment of an anti-VEGF
antibody for the potential treatment of
age-related macular degeneration, or AMD.
In this condition, excessive blood vessel
growth in the retina of the eye can lead to
blindness. On October 6, 1999, we filed an
IND and we recently initiated Phase I
clinical trials.
Preparing for Phase I trials
- ----------------------------
Apo2 Ligand/TRAIL A protein, also known as tumor necrosis
factor-related apoptosis-inducing ligand,
for the potential treatment of cancer. We
are currently preparing for Phase I
clinical trials for this product, which we
are developing in collaboration with
Immunex.
Anti-CD11a Antibody An antibody designed to block certain
immune cells as a potential treatment to
prevent solid organ transplant rejection.
Our collaborator, Xoma, has filed an IND
for this indication and is preparing to
initiate Phase I trials.
</TABLE>
In conjunction with our amended licensing and marketing agreement with
Hoffmann-La Roche in July, 1999, Hoffmann-La Roche was granted an option
until at least 2015 for licenses to use and sell certain of our products in
non-U.S. markets (the License Agreement). See "Relationship with Roche"
below for further information.
In general, with respect to our products, Hoffmann-La Roche pays us a royalty
on aggregate sales outside of the United States. Hoffmann-La Roche has
rights to, and pays us royalties for, Canadian sales of Activase, Protropin,
Nutropin, Nutropin AQ, Pulmozyme, Actimmune and Rituxan, and outside of
United States, excluding Japan, sales of Pulmozyme, Herceptin and Rituxan.
We supply the products to Hoffmann-La Roche, and have agreed to supply the
products for which Hoffmann-La Roche has exercised its option, for sales
outside of the United States.
In addition to the products described above, we are working on additional
products and new indications for currently marketed products. Also, we
retain certain rights to gp120, a recombinant form of the gp120 envelope
glycoprotein of human immunodeficiency virus, which may serve as the basis
for the development of a prophylactic HIV/AIDS vaccine. Under a license
agreement entered into with VaxGen, Inc. we are responsible for supplying
specified amounts of clinical quantities of gp120 and we have an option to
supply additional clinical supplies. VaxGen is responsible for conducting
all clinical trials necessary for worldwide product approvals. Currently,
VaxGen is conducting Phase III trials with gp120. We have separate options
for worldwide marketing rights and commercial supply of gp120 in the event
that gp120 is approved as an AIDS vaccine.
In May 1999, we entered into a license and collaboration agreement with
Aradigm Corporation to develop an advanced pulmonary delivery system for our
Pulmozyme product in the United States. As part of the agreement, we agreed
to provide Aradigm a loan of up to $10.4 million for development costs. As
of December 31, 1999, Aradigm's outstanding loan was $2.3 million.
In November 1997, we entered into a research collaboration agreement with
CuraGen Corporation, whereby we made a $5.0 million equity investment in
CuraGen and agreed to provide a convertible equity loan to CuraGen of up to
$26.0 million. In October 1999, CuraGen exercised its right to borrow $16.0
million. Simultaneously, with this draw down, CuraGen repaid the loan by
issuing 977,636 shares of CuraGen stock valued at $16.37 per share at such
issuance, or an aggregate of $16.0 million. At December 31, 1999, there were
no outstanding loans to CuraGen.
In December 1997, we entered into a collaboration agreement with Alteon Inc.
to develop and market pimagedine, an advanced glycosylation end-product
formation inhibitor to treat kidney disease in diabetic patients, and
invested $37.5 million in Alteon stock. In 1998, as a result of the decline
in Alteon's stock value and the unsuccessful clinical trials with pimagedine,
we wrote down $24.2 million of our investment in Alteon. In 1999, due to the
continued decline of Alteon's stock value and unsuccessful negotiations with
Alteon, we wrote-off our remaining $10.8 million investment in Alteon.
In December 1997, we entered into a collaboration agreement with LeukoSite,
Inc. 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 have 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 December 31, 1999, there were no outstanding loans
to LeukoSite.
On August 6, 1999, Hoffmann-La Roche announced that the preliminary results
from its Phase III trial of Xubix, trademark, had not shown that Xubix was
better than aspirin in preventing recurrent ischemic events in patients
suffering from acute coronary syndrome. Hoffmann-La Roche has terminated its
development of Xubix based on these unsuccessful results.
Distribution
We have a U.S.-based pharmaceutical marketing, sales and distribution
organization. Our sales efforts are focused on specialist physicians 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 to assist cystic fibrosis patients in
the United States with obtaining Pulmozyme.
During 1999, 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.
As discussed in the Notes to Consolidated Financial Statements of our 1999
Annual Report to Stockholders (Part II, Item 8 of this Form 10-K), we had
four major customers, including Hoffmann-La Roche, who provided over 10% of
our total revenues in at least one of the last three years. Also discussed
in the note are material foreign sources of revenues in 1999, 1998 and 1997.
Raw Materials
Raw materials and supplies required for the production of our principal
products are generally available in quantities adequate to meet our needs.
Proprietary Technology - Patents and Trade Secrets
We seek patents on inventions originating from our ongoing research and
development activities. Patents issued or applied for cover inventions
ranging from basic recombinant DNA techniques to processes relating to
specific products and to the products themselves. We have either been
granted patents or have patent applications pending that relate to a number
of current and potential products including products licensed to others. We
consider that in the aggregate our patent applications, patents and licenses
under patents owned by third-parties are of material importance to our
operations. Important legal issues remain to be resolved as to the extent
and scope of available patent protection for biotechnology products and
processes in the United States and other important markets outside of the
United States. We expect that litigation will likely be necessary to
determine the validity and scope of certain of our proprietary rights. We
are currently involved in a number of patent lawsuits, as either a plaintiff
or defendant, and administrative proceedings relating to the scope of
protection of our patents and those of others. These lawsuits and
proceedings may result in a significant commitment of our resources in the
future. We cannot assure you that the patents we obtain or the unpatented
proprietary technology we hold will afford us significant commercial
protection.
In general, we have obtained licenses from various parties that we deem to be
necessary or desirable for the manufacture, use or sale of our products.
These licenses (both exclusive and non-exclusive) generally require us to pay
royalties to the parties on product sales.
Our trademarks, Actimmune, Activase, Herceptin, Nutropin, Nutropin AQ,
Nutropin Depot, Protropin, Pulmozyme, Rituxan and TNKase (licensed by
Boehringer Ingelheim), in the aggregate are considered to be of material
importance. All are registered in the U.S. Patent and Trademark Office and
in other countries, other than Nutropin Depot and TNKase, for which
applications are pending with the U.S. Patent and Trademark Office.
Our royalty income for patent licenses, know-how and other related rights
amounted to $189.3 million in 1999, $229.6 million in 1998 and $241.1 million
in 1997. Royalty expenses were $88.8 million in 1999, $66.3 million in 1998
and $58.9 million in 1997.
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 us. Many of these companies have commercial
arrangements with other companies in the biotechnology industry to supplement
their own research capabilities.
The introduction of new products or the development of new processes by
competitors or new information about existing products may result in price
reductions or product replacements, even for products protected by patents.
However, we believe our competitive position is enhanced by our commitment to
research leading to the discovery and development of new products and
manufacturing methods. Other factors that should help us meet competition
include ancillary services provided to support our products, customer
service, and dissemination of technical information to prescribers of our
products and to the health care community, including payers.
Over the longer term, our and our collaborators' ability to successfully
market current products, expand their usage and bring new products to the
marketplace will depend on many factors, including but not limited to the
effectiveness and safety of the products, FDA and foreign regulatory
agencies' approvals for new indications, the degree of patent protection
afforded to particular products, and the effect of managed care as an
important purchaser of pharmaceutical products.
Herceptin
Herceptin is the first humanized monoclonal antibody for the treatment of
HER2 overexpressing metastatic breast cancer and the second United States
approval in this new class of monoclonal antibody biotherapeutic cancer
drugs. The first was Rituxan. We are aware of other potentially competitive
biologic therapies in development.
Rituxan
Rituxan received designation as a U.S. Orphan Drug by the FDA in 1994 for the
treatment of relapsed or refractory low grade or follicular, CD20-positive B-
cell non-Hodgkin's lymphoma. We are aware of other potentially competitive
biologic therapies in development. Coulter Pharmaceuticals, Inc., or
Coulter, is expected to file a Biologics License Application, or BLA, in
2001, for a product that may compete with our product Rituxan. We are also
aware of other potentially competitive biologic therapies for non-Hodgkin's
lymphoma in development.
Activase
We continue to face competition in the thrombolytic market. Activase has
lost market share and could lose additional market share to Centocor Inc.'s
Retavase, registered trademark, either alone or in combination with the use
of another Centocor product, ReoPro, registered trademark; the resulting
adverse effect on sales could be material. Retavase received approval from
the FDA in October 1996 for the treatment of acute myocardial infarction. In
addition, 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 July 1999, we submitted
U.S. regulatory filings seeking marketing approval for our second generation
t-PA, TNKase, to be used in treating heart attack patients, and we are
currently waiting for regulatory clearance.
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-
Bio-Technology General Corporation, Novo Nordisk A/S, or Novo, and Pharmacia
& Upjohn-received FDA approval in 1995 to market their growth hormone
products in the United States. Bio-Technology General was preliminarily
enjoined from selling its product, but it is now free to enter the market. A
fifth competitor, Serono Laboratories, Inc., or Serono, received FDA approval
in October 1996 to market its growth hormone product. In the first quarter
of 1997, Serono, Novo and Pharmacia & Upjohn began selling their growth
hormone products in the United States. On July 12, 1999, Novo announced the
filing of a NDA, for Norditropin, registered trademark, SimpleXx, trademark,
a liquid form of its recombinant somatropin product, seeking approval for the
long-term treatment of children who have growth hormone failure due to
inadequate secretion of endogenous growth hormone. In addition, three of our
competitors have received approval to market their existing human growth
hormone products in the United States for additional indications.
In December 1999, we received FDA approval for Nutropin Depot, the first
long-acting dosage form of recombinant growth hormone for pediatric growth
hormone deficiency. We expect to launch the product in the first half of
2000. We are not aware of any competing sustained-release formulations of
human growth hormone in clinical development.
Pulmozyme
Pulmozyme is used for the management of cystic fibrosis, including cystic
fibrosis in children under the age of five. We are not aware of any directly
competing products in development.
Stock Options Changes
In connection with the Redemption of our Special Common Stock, the following
changes occurred with respect to our stock options that were outstanding as
of June 30, 1999:
- - Options for the purchase of approximately 13.6 million shares of Special
Common Stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $41.25 per share, less the exercise price;
- - Options for the purchase of approximately 8.0 million shares of Special
Common Stock were converted into options to purchase a like number of
shares of Common Stock at the same exercise price; and
- - Options for the purchase of approximately 9.8 million shares of Special
Common Stock were canceled in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan (the "1996 Plan"). With certain exceptions,
we granted new options for the purchase of 2.666 times the number of
shares under the previous options with an exercise price of $48.50 per
share, which was the July 23, 1999 public offering price of the common
stock. The number of shares that were the subject of these new options,
which were issued under our 1999 Stock Plan (the "1999 Plan"), was
approximately 10.0 million. Alternative arrangements were provided for
certain holders of some of the unvested options under the 1996 Plan.
Of the approximately 8.0 million shares of converted options, options with
respect to approximately 4.8 million shares were outstanding at December 31,
1999, all of which are currently exercisable except for options with respect
to approximately 356,000 shares. These outstanding options are held by 1,850
employees; no non-employee directors hold these options.
Our board of directors and Roche, then our sole stockholder, approved the
1999 Plan on July 16, 1999. Under the 1999 Plan, we granted new options to
purchase approximately 13.0 million shares (including the 10.0 million shares
referred to above) of Common Stock to approximately 2,400 employees at an
exercise price of $48.50 per share, with the grant of such options made
effective as of July 16, 1999. Of the options to purchase these 13.0 million
shares, options to purchase approximately 12.0 million shares were
outstanding at December 31, 1999, of which options to purchase approximately
1.3 million shares are currently exercisable.
In connection with these stock option transactions, we recorded:
- - (1) cash compensation expense of approximately $284.5 million associated
with the cash-out of such stock options and (2) non-cash compensation
expense of approximately $160.1 million associated with the remeasurement,
for accounting purposes, of the converted options, which non-cash amount
represents the difference between each applicable option exercise price
and the redemption price of the Special Common Stock; and
- - Over a two-year period beginning July 1, 1999, an aggregate of
approximately $27.4 million of deferred cash compensation available to be
earned by a limited number of employees who elected the alternative
arrangements described above. As of December 31, 1999, $7.3 million of
compensation expense has been recorded related to these alternative
arrangements.
RELATIONSHIP WITH ROCHE
As a result of the Redemption of our Special Common Stock, the then-existing
governance agreement between us and Roche terminated, except for provisions
relating to indemnification and stock options, warrants and convertible
securities. In July 1999, we entered into certain affiliation arrangements
with Roche, amended our licensing and marketing agreement with Hoffmann-La
Roche, and entered into a tax sharing agreement with Roche as follows:
Affiliation Arrangements
Our board of directors consists of two Roche directors, three independent
directors nominated by a nominating committee currently controlled by Roche,
and one Genentech employee. However, under the affiliation agreement, Roche
has the right to obtain proportional representation on our board at any time.
Roche intends to continue to allow our current management to conduct our
business and operations as we have done in the past. However, we cannot
ensure that Roche will not implement a new business plan in the future.
Except as follows, the affiliation arrangements do not limit Roche's ability
to buy or sell our Common Stock. If Roche and its affiliates sell their
majority ownership of shares of our Common Stock to a successor, Roche has
agreed that it will cause the successor to purchase all shares of our Common
Stock not held by Roche as follows:
- - with consideration, if that consideration is composed entirely of either
cash or equity traded on a U.S. national securities exchange, in the same
form and amounts per share as received by Roche and its affiliates; and
- - in all other cases, with consideration that has a value per share not less
than the weighted average value per share received by Roche and its
affiliates as determined by a nationally recognized investment bank.
If Roche owns more than 90% of our Common Stock for more than two months,
Roche has agreed that it will, as soon as reasonably practicable, effect a
merger of Genentech with Roche or an affiliate of Roche.
Roche has agreed, as a condition to any merger of Genentech with Roche or the
sale of our assets to Roche, that either:
- - the merger or sale must be authorized by the favorable vote of a majority
of non-Roche stockholders, provided no person will be entitled to cast
more than 5% of the votes at the meeting; or
- - in the event such a favorable vote is not obtained, the value of the
consideration to be received by non-Roche stockholders would be equal to
or greater than the average of the means of the ranges of fair values for
the Common Stock as determined by two nationally recognized investment
banks.
We have agreed not to approve, without the prior approval of the directors
designated by Roche:
- - any acquisition, sale or other disposal of all or a portion of our
business representing 10% or more of our assets, net income or revenues;
- - any issuance of capital stock except under certain circumstances; or
- - any repurchase or redemption of our capital stock other than a redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
Licensing Agreement
In 1995, we entered into a licensing and marketing agreement with Hoffmann-La
Roche and its affiliates granting it a ten-year option to license to use and
sell products in non-U.S. markets. In July 1999, we amended that agreement,
the major provisions of which include:
- - extending Hoffmann-La Roche's option until at least 2015;
- - Hoffmann-La Roche may exercise its option to license our products upon the
occurrence of any of the following: (1) our decision to file a IND for a
product, (2) completion of a Phase II trial for a product or (3) if
Hoffmann-La Roche previously paid us a fee of $10 million to extend its
option on a product, completion of a Phase III trial for that product;
- - we agreed, in general, to manufacture for and supply to Hoffmann-La Roche
its clinical requirements of our products at cost, and its commercial
requirements at cost plus a margin of 20%; however, Hoffmann-La Roche will
have the right to manufacture our products under certain circumstances;
- - Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-
La Roche exercises its option upon either a decision to file a 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 our last
relevant patent or 25 years from the first commercial introduction of that
product; and
- - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction of that product; however, $5 million of any option extension
fee paid by Hoffmann-La Roche will be credited against royalties payable
to us in the first calendar year of sales by Hoffmann-La Roche in which
aggregate sales of that product exceed $100 million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, and until Roche completed
its public offering of our Common Stock in October 1999, we were included in
Roche's U.S. federal consolidated income tax group. Accordingly, we entered
into a tax sharing agreement with Roche, pursuant which, we and Roche are to
make payments such that the net amount paid by us on account of consolidated
or combined income taxes is determined as if we had filed separate, stand-
alone federal, state and local income tax returns as the common parent of an
affiliated group of corporations filing consolidated or combined federal,
state and local returns.
Effective with the consummation of the second public offering on October
26, 1999, we ceased to be a member of the consolidated federal income tax
group (and certain consolidated or combined state and local income tax
groups) of which Roche is the common parent. Accordingly, our tax sharing
agreement with Roche now pertains only to the state and local tax returns in
which we will be consolidated or combined with Roche. We will continue to
calculate our tax liability or refund with Roche for these state and local
jurisdictions as if we were a stand-alone entity.
Roche's Right to Maintain its Percentage Ownership Interest in Our Stock
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. The affiliation agreement requires us
to, among other things, establish a stock repurchase program designed to
maintain Roche's percentage ownership interest in our common stock. In
addition, Roche will have a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest. To
ensure that, with respect to any issuance of common stock by us in the
future, the percentage of our common stock owned by Roche immediately after
such issuance will be no lower than Roche's lowest percentage ownership of
our common stock at any time after the offering of common stock occurring in
July 1999 and prior to the time of such issuance, except that we may issue
shares up to an amount that would cause Roche's lowest percentage ownership
to be no more than 2% below the "Minimum Percentage." The Minimum Percentage
equals the lowest number of shares of our common stock owned by Roche since
the July 1999 offering (to be adjusted in the future for dispositions of
shares of our common stock by Roche) divided by 254,597,176 (to be adjusted
in the future for stock splits or stock combinations), which is the number of
shares of our Common Stock outstanding at the time of the July 1999 offering
adjusted for the two-for-one split of our common stock in November 1999. As
long as Roche's percentage ownership is greater than 50%, prior to issuing
any shares, we must repurchase a sufficient number of shares of our common
stock to ensure that, immediately after our issuance of shares, Roche's
percentage ownership will be greater than 50%. We have also agreed, upon
Roche's request, to repurchase shares of our common stock to increase Roche's
ownership to the Minimum Percentage. In addition, Roche has a continuing
option to buy stock from us at prevailing market prices to maintain its
percentage ownership interest. Roche owned approximately 66.1% of our common
stock at December 31, 1999.
FORWARD-LOOKING INFORMATION AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE
RESULTS
The following section contains forward-looking information based on our
current expectations. Because our actual results may differ materially from
this and any other forward-looking statements made by or on behalf of
Genentech, this section also includes a discussion of important factors that
could affect our actual future results, including our product sales,
royalties, contract revenues, expenses and net income.
Our Operating Results May Fluctuate
Our operating results may vary from period to period for several reasons
including, but not limited to:
- - the overall competitive environment for our products;
- - the amount and timing of sales to customers in the United States;
- - the amount and timing of our sales to Hoffmann-La Roche and the amount and
timing of its sales to its customers;
- - the timing and volume of bulk shipments to licensees;
- - the availability of third-party reimbursements for the cost of therapy;
- - the effectiveness and safety of our products;
- - the rate of adoption and use of our products for approved indications and
additional indications;
- - the potential introduction of new products and additional indications for
existing products in 2000 and beyond; and
- - the ability to manufacture sufficient quantities of any particular
marketed product.
The Results of Our Research and Development Are Unpredictable
Successful pharmaceutical product development is highly uncertain and is
dependent on numerous factors, many of which are beyond our control.
Products that appear promising in the early phases of development may fail to
reach the market for numerous reasons, including, but not limited to:
- - they may be found to be ineffective or to have harmful side effects in
preclinical or clinical testing;
- - they may fail to receive necessary regulatory approvals;
- - they may turn out to be uneconomical because of manufacturing costs or
other factors; or
- - they may be precluded from commercialization by the proprietary rights of
others or by competing products or technologies for the same indication.
Success in preclinical and early clinical trials does not ensure that large-
scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical
trials and to submit an application for marketing approval for a final
decision by a regulatory authority varies significantly and may be difficult
to predict.
Factors affecting our research and development expenses include, but are not
limited to:
- - the number of and the outcome of clinical trials currently being conducted
by us and/or our collaborators;
- - the number of products entering into development from late-stage research;
- - Hoffmann-La Roche's decisions whether to exercise its options to develop
and sell our future products in non-U.S. markets and the timing and amount
of any related development cost reimbursement;
- - in-licensing activities, including the timing and amount of related
development funding or milestone payments; and
- - future levels of revenues.
Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to
Other Stockholders
As our majority stockholder, Roche controls the outcome of actions requiring
the approval of our stockholders. Our bylaws provide, among other things,
that the composition of our board of directors shall consist of two Roche
directors, three independent directors nominated by a nominating committee
and one Genentech employee nominated by the nominating committee. As long as
Roche owns in excess of 50% of our Common Stock, Roche directors will
comprise two of the three members of the nominating committee. However, at
any time until Roche owns less than 5% of our stock, Roche will have the
right to obtain proportional representation on our board. Roche intends to
continue to allow our current management to conduct our business and
operations as we have done in the past. However, we cannot assure you that
Roche will not institute a new business plan in the future. The interests of
Roche may conflict with the interests of other holders of Common Stock. You
should also read "Relationship with Roche" above for further information.
The affiliation agreement between us and Roche requires the approval of the
directors designated by Roche to make any acquisition or any sale or disposal
of all or a portion of our business representing 10% or more of our assets,
net income or revenues. Moreover, the affiliation agreement also contains
provisions that are designed to enable Roche to maintain a certain percentage
ownership interest in our Common Stock. These provisions may have the effect
of limiting our ability to make acquisitions. The affiliation agreement
requires us to, among other things, establish a stock repurchase program
designed to maintain Roche's percentage ownership interest in our Common
Stock. While the dollar amounts associated with these future purchases
cannot currently be estimated, such stock repurchases could have a material
adverse impact on our liquidity. For more information, see above
"Relationship with Roche - Roche's Right to Maintain its Percentage Ownership
Interest in Our Stock."
Our certificate of incorporation includes provisions relating to competition
by Roche with us, allocations of corporate opportunities, transactions with
interested parties and intercompany agreements and provisions limiting the
liability of certain people. Our certificate of incorporation provides that
any person purchasing or acquiring an interest in shares of our capital stock
shall be deemed to have consented to the provisions in the certificate of
incorporation relating to competition with Roche, conflicts of interest,
corporate opportunities and intercompany agreements, and such consent may
restrict such person's ability to challenge transactions carried out in
compliance with such provisions. Persons who are directors and/or officers
of ours and who are also directors and/or officers of Roche may choose to
take action in reliance on such provisions rather than act in a manner that
might be favorable to us but adverse to Roche. Two of our directors
currently serve as directors, officers and employees of Roche Holding Ltd and
its affiliates.
We Depend on Skilled Personnel and Key Relationships
The success of our business depends, in large part, on our continued ability
to attract and retain highly qualified management, scientific, manufacturing
and sales and marketing personnel, and on our ability to develop and maintain
important relationships with leading research institutions and key
distributors. Competition for such personnel and relationships is intense.
In connection with the redemption of our Special Common Stock, two of our
existing employee stock option plans terminated and a number of employee
options, including many of those held by senior management, were canceled.
We have issued new employee stock options to attract and retain employees.
However, certain provisions of our affiliation agreement with Roche are
designed to enable Roche to maintain its percentage ownership interest in our
Common Stock, which may limit our flexibility as to the number of shares we
are able to grant under our stock option plans. We cannot assure you that we
will be able to attract or retain such personnel or maintain such
relationships. You should read "Roche's Right to Maintain its Percentage
Ownership Interest on our Stock" above.
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's
Retavase, either alone or in combination with the use of another Centocor
product, ReoPro, (abciximab); 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. 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 four other companies with growth hormone products. One
additional company had been preliminarily enjoined from selling its product,
but it is now free to enter the market. As a result of this competition, we
have experienced a loss in new patient market share. The four 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 has filed a BLA, for a
product that may compete with our product Rituxan. We are also aware of
other potentially competitive biologic therapies for non-Hodgkin's lymphoma
in development.
Other Competitive Factors Could Affect Our Product Sales
Other competitive factors that could affect our product sales include, but
are not limited to:
- - the timing of FDA approval, if any, of competitive products;
- - our pricing decisions and the pricing decisions of our competitors;
- - the degree of patent protection afforded to particular products;
- - the outcome of litigation involving our patents and patents of other
companies for products and processes related to production and formulation
of those products;
- - the increasing use and development of alternate therapies; and
- - the rate of market penetration by competing products.
In Connection with the Redemption of Our Special Common Stock We Recorded
Substantial Goodwill and Other Intangibles, the Amortization of Which Will
Adversely Affect Our Earnings
As a result of the redemption of our Special Common Stock, Roche owned all of
our outstanding stock. Consequently, push-down accounting under generally
accepted accounting principles was required. Push-down accounting required
us to establish a new accounting basis for our assets and liabilities, based
on Roche's cost in acquiring all of our stock. In other words, Roche's cost
of acquiring Genentech was "pushed down" to us and reflected in our financial
statements. Push-down accounting required us to record goodwill and other
intangible assets of approximately $1,706.0 million and $1,499.0 million,
respectively, during the second quarter of 1999. The amortization of this
goodwill and other intangible assets will have a significant negative impact
on our financial results in future years. In addition, we will continuously
evaluate whether events and circumstances have occurred that indicate the
remaining balance of this and other intangible assets may not be recoverable.
When factors indicate that assets should be evaluated for possible
impairment, we may be required to reduce the carrying value of our intangible
assets, which could have a material adverse effect on our financial condition
and results of operations during the periods in which such a reduction is
recognized. For more information about push-down accounting, see the
"Redemption of Our Special Common Stock" note in the Notes to 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 and option
extensions to develop and sell our future products in non-U.S. markets and
the timing and amount of any related development cost reimbursements;
- - variations in Hoffmann-La Roche's sales and other licensees' sales of
licensed products;
- - the conclusion of existing arrangements with other companies and Hoffmann-
La Roche;
- - the timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees;
- - fluctuations in foreign currency exchange rates;
- - the initiation of new contractual arrangements with other companies;
- - whether and when contract benchmarks are achieved;
- - the failure of or refusal of a licensee to pay royalties; and
- - the expiration or invalidation of patents or other licensed intellectual
property.
Protecting Our Proprietary Rights is Difficult and Costly
The patent positions of pharmaceutical and biotechnology companies can be
highly uncertain and involve complex legal and factual questions.
Accordingly, the breadth of claims allowed in these companies' patents cannot
be predicted. Patent disputes are frequent and can preclude
commercialization of products. We have in the past been, are currently, and
may in the future be involved in material patent litigation. Patent
litigation is costly in its own right and could subject us to significant
liabilities to third-parties and, if decided adversely, we may need to obtain
third-party licenses at a material cost or cease using the technology or
product in dispute. The presence of patents or other proprietary rights
belonging to other parties may lead to the termination of the research and
development of a particular product. We believe that we have strong patent
protection or the potential for strong patent protection for a number of our
products that generate sales and royalty revenue or that we are developing.
However, the courts will determine the ultimate strength of patent protection
of our products and those on which we earn royalties. You should read the
"Legal Proceedings" note below and the "Leases, Commitments and
Contingencies" note in the Notes to Consolidated Financial Statements.
We May Incur Material Litigation Costs
We are subject to legal proceedings, including those matters described in the
"Legal Proceedings" note below and the "Leases, Commitments and
Contingencies" note in the Notes to Consolidated Financial Statements.
Litigation to which we are currently or have been subject 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 litigations, including special charges of $230.0 million in 1999.
We May Incur Material Product Liability Costs
The testing and marketing of medical products entail an inherent risk of
product liability. We maintain limited product liability insurance coverage.
Our business may be materially and adversely affected by a successful product
liability claim in excess of our insurance coverage. We cannot assure you
that product liability insurance coverage will continue to be available to us
in the future on reasonable terms or at all.
Our Products Are Subject to Governmental Regulations and Approvals
The pharmaceutical industry is subject to stringent regulation with respect
to product safety and efficacy by various federal, state and local
authorities. Of particular significance are the FDA's requirements covering
research and development, testing, manufacturing, quality control, labeling
and promotion of drugs for human use. A pharmaceutical product cannot be
marketed in the United States until it has been approved by the FDA, and then
can only be marketed for the indications and claims approved by the FDA. As
a result of these requirements, the length of time, the level of expenditures
and the laboratory and clinical information required for approval of a New
Drug Application, or NDA, or a BLA, are substantial and can require a number
of years. We cannot be sure that we can obtain necessary regulatory
approvals on a timely basis, if at all, for any of the products we are
developing, and all of the following could have a material adverse effect on
our business:
- - significant delays in obtaining or failing to obtain required approvals;
- - loss of or changes to previously obtained approvals; and
- - failing to comply with existing or future regulatory requirements.
Moreover, it is possible that the current regulatory framework could change
or additional regulations could arise at any stage during our product
development, which may affect our ability to obtain approval of our products.
A Variety of Factors Could Affect Our Liquidity
We believe that our cash, cash equivalents and short-term investments,
together with funds provided by operations and leasing arrangements, will be
sufficient to meet our foreseeable operating cash requirements. In addition,
we believe we could access additional funds from the debt and, under certain
circumstances, capital markets. Factors that could negatively affect our
cash position include, but are not limited to, future levels of our product
sales, royalty and contract revenues, expenses, in-licensing activities,
including the timing and amount of related development funding or milestone
payments, acquisitions, capital expenditures and the amount of any stock
repurchased under any stock repurchase program. The affiliation agreement
with Roche requires us to, among other things, establish a stock repurchase
program designed to maintain Roche's percentage ownership interest in our
Common Stock. While the dollar amounts associated with these future
purchases cannot currently be estimated, such stock repurchases could have a
material adverse impact on our liquidity. You should read "Roche's Right to
Maintain its Percentage Ownership Interest in our Stock" above.
We Are Subject to a Tax Sharing Agreement with Roche, and a Variety of
Factors Could Affect Our Income Tax Rate
Since the redemption of our Special Common Stock, and until Roche completed
its public offering of our Common Stock in October 1999, we were included in
Roche's U.S. federal consolidated income tax group. Accordingly, we entered
into a tax sharing agreement with Roche, pursuant which, we and Roche are to
make payments such that the net amount paid by us on account of consolidated
or combined income taxes is determined as if we had filed separate, stand-
alone federal, state and local income tax returns as the common parent of an
affiliated group of corporations filing consolidated or combined federal,
state and local returns.
Effective with the consummation of the second public offering on October
26, 1999, we ceased to be a member of the consolidated federal income tax
group (and certain consolidated or combined state and local income tax
groups) of which Roche is the common parent. Accordingly, our tax sharing
agreement with Roche now pertains only to the state and local tax returns in
which we will be consolidated or combined with Roche. We will continue to
calculate our tax liability or refund with Roche for these state and local
jurisdictions as if we were a stand-alone entity.
Our effective tax rate increased in 1999 from 1998 as a result of non-
deductible goodwill amortization, a charge for in-process research and
development and legal settlements. Beyond 1999, the current effective tax
rate will increase due to goodwill amortization. In addition, our effective
tax rate is dependent upon several other factors including, but not limited
to, changes in tax laws and rates, interpretation of existing tax laws,
future levels of research and development spending, the outcome of clinical
trials of certain development products, our success in commercializing such
products, and potential competition regarding the products and non-deductible
items.
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 were
unable to distinguish between the year 1900 and the year 2000, potentially
causing those software programs and equipment to misinterpret dates after
January 1, 2000.
We have had a Year 2000 Project in place to address potential problems with
our business critical systems and equipment resulting from this issue and, as
of December 31, 1999, all phases of this project were essentially complete.
To date, we have not experienced any significant Year 2000 related problems.
It is possible that we may experience Year 2000 related problems in the
future, particularly with our non-business critical systems, which may result
in failures or miscalculations resulting in inaccuracies in computer output
or disruptions of operations. However, we believe that the Year 2000 issue
will not pose significant operational problems for our business critical
computer systems and equipment.
The financial impact of future remediation activities that may become
necessary, if any, cannot be known precisely at this time, but it is not
expected to be material.
We Are Exposed to Market Risk
We are exposed to market risk, including changes to interest rates, foreign
currency exchange rates and equity investment prices. To reduce the
volatility relating to these exposures, we enter into various derivative
investment transactions pursuant to our investment and risk management
policies and procedures in areas such as hedging and counterparty exposure
practices. We do not use derivatives for speculative purposes.
We maintain risk management control systems to monitor the risks associated
with interest rates, foreign currency exchange rates and equity investment
price changes, and our derivative and financial instrument positions. The
risk management control systems use analytical techniques, including
sensitivity analysis and market values. Though we intend for our risk
management control systems to be comprehensive, there are inherent risks that
may only be partially offset by our hedging programs should there be
unfavorable movements in interest rates, foreign currency exchange rates or
equity investment prices.
The estimated exposures discussed below are intended to measure the maximum
amount we could lose from adverse market movements in interest rates, foreign
currency exchange rates and equity investment prices, given a specified
confidence level, over a given period of time. Loss is defined in the value
at risk estimation as fair market value loss. The exposures to interest
rate, foreign currency exchange rate and equity investment price changes are
calculated based on proprietary modeling techniques from a Monte Carlo
simulation value at risk model using a 30-day holding period and a 95%
confidence level. The value at risk model assumes non-linear financial
returns and generates potential paths various market prices could take and
tracks the hypothetical performance of a portfolio under each scenario to
approximate its financial return. The value at risk model takes into account
correlations and diversification across market factors, including interest
rates, foreign currencies and equity prices. Market volatilities and
correlations are based on J.P. Morgan Riskmetrics, trademark, dataset as of
December 31, 1999.
Our Interest Income is Subject to Fluctuations in Interest Rates
Our interest income is sensitive to changes in the general level of interest
rates, primarily U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on our cash equivalents, short-term
investments, convertible preferred stock investments, convertible loans and
long-term investments. To mitigate the impact of fluctuations in U.S.
interest rates, we may enter into swap transactions, which involve the
receipt of fixed rate interest and the payment of floating rate interest
without the exchange of the underlying principal.
Based on our overall interest rate exposure at December 31, 1999, and 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.
We Are Exposed to Risks Relating to Foreign Currency Exchange Rates and
Foreign Economic Conditions
We receive royalty revenues from licensees selling products in countries
throughout the world. As a result, our financial results could be
significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in which
our licensed products are sold. We are exposed to changes in exchange rates
in Europe, Asia (primarily Japan) and Canada. Our exposure to foreign
exchange rates primarily exists with the Euro. When the U.S. dollar
strengthens against the currencies in these countries, the U.S. dollar value
of non-U.S. dollar-based revenue decreases; when the U.S. dollar weakens, the
U.S. dollar value of the non-U.S. dollar-based revenues increases.
Accordingly, changes in exchange rates, and in particular a strengthening of
the U.S. dollar, may adversely affect our royalty revenues as expressed in
U.S. dollars. In addition, as part of our overall investment strategy, a
portion of our portfolio is primarily in non-dollar denominated investments.
As a result, we are exposed to changes in the exchange rates of the countries
in which these non-dollar denominated investments are made.
To mitigate this risk, we hedge certain of our anticipated revenues by
purchasing option contracts with expiration dates and amounts of currency
that are based on 25% to 90% of probable future revenues so that the
potential adverse impact of movements in currency exchange rates on the non-
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 three years. We may also enter into foreign
currency forward contracts to lock in the dollar value of a portion of these
anticipated revenues. To hedge the non-dollar denominated investments in the
portfolio, we enter into forward contracts.
Based on our overall currency rate exposure at December 31, 1999, and 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.
Our Investments in Equity Securities Are Subject to Market Risks
As part of our strategic alliance efforts, we invest in equity instruments of
biotechnology companies. These investments are subject to fluctuations from
market value changes in stock prices. To mitigate this risk, certain equity
securities are hedged with costless collars. A costless collar is a
purchased put option and a written call option in which the cost of the
purchased put and the proceeds of the written call offset each other;
therefore, there is no initial cost or cash outflow for these instruments at
the time of purchase. The purchased put protects us from a decline in the
market value of the security below a certain minimum level (the put "strike"
level); while the call effectively limits our potential to benefit from an
increase in the market value of the security above a certain maximum level
(the call "strike" level). In addition, as part of our strategic alliance
efforts, we hold dividend-bearing convertible preferred stock and have made
interest-bearing loans that are convertible into the equity securities of the
debtor.
Based on our overall exposure to fluctuations from market value changes in
marketable equity prices at December 31, 1999, 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 $43.2 million. However, the change in 1999 has resulted in a material
benefit to our consolidated financial statements. On December 31, 1998, we
estimated that the potential loss in fair value of the equity securities
portfolio was $10.6 million.
New Accounting Standards Could Impact Our Financial Position and Results of
Operations
In July 1999, the Financial Accounting Standards Board announced the delay of
the effective date of Statement of Financial Accounting Standards 133, or FAS
133, "Accounting for Derivative Instruments and Hedging Activities," for one
year, to the first quarter of 2001.
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and
measure those instruments at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting
under FAS 133. The impact of FAS 133 on our financial position and results
of operations is not expected to be material.
We Are Exposed to Credit Risk of Counterparties
We could be exposed to losses related to the financial instruments described
above under "We are Exposed to Market Risk" should one of our counterparties
default. We attempt to mitigate this risk through credit monitoring
procedures.
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 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 a BLA, for approval to
commence commercial sales. In responding to a NDA or a BLA, the FDA may
grant marketing approval, request additional information or deny the
application if it determines that the application does not provide an
adequate basis for approval. We can not assure you that any approval
required by the FDA will be obtained on a timely basis, if at all.
Among the conditions for a NDA or a BLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures
conform on an ongoing basis with Good Manufacturing Practices, or GMP.
Before approval of the BLA, the FDA will perform a prelicensing inspection of
the facility to determine its compliance with GMP and other rules and
regulations. In complying with GMP, manufacturers must continue to expend
time, money and effort in the area of production and quality control to
ensure full compliance. After the establishment is licensed for the
manufacture of any product, manufacturers are subject to periodic inspections
by the FDA.
The requirements that we must satisfy to obtain regulatory approval by
governmental agencies in other countries prior to commercialization of our
products in such countries can be as rigorous, costly and uncertain.
We are also subject to various laws and regulations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents,
used in connection with our research. We believe we are currently in
compliance with all these laws and regulations. The extent of governmental
regulation that might result from any legislative or administrative action
cannot be accurately predicted.
The levels of revenues and profitability of biopharmaceutical companies may
be affected by the continuing efforts of government and third party payers to
contain or reduce the costs of health care through various means. For
example, in certain foreign markets pricing or profitability of therapeutic
and other pharmaceutical products is subject to governmental control. In the
United States there have been, and we expect that there will continue to be,
a number of federal and state proposals to implement similar governmental
control. While we cannot predict whether any such legislative or regulatory
proposals will be adopted, the adoption of such proposals could have a
material adverse effect on our business, financial condition and
profitability. In addition, in 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 are related to the research
and development of products either on our own behalf or under contracts.
During 1999, 1998 and 1997, our research and development expenses were $367.3
million, $396.2 million and $470.9 million, respectively.
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 December 31, 1999, we had 3,883 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.
ITEM 2. 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-five buildings for our research and development, manufacturing,
marketing and administrative activities. Fourteen of the buildings are owned
property and eleven are leased. We have made and continue to make
improvements to these properties to accommodate our growth. In addition, we
own approximately seventeen acres adjacent to our current facilities that may
be used for future expansion. In 1995, we began development of a new
manufacturing facility of approximately 300,000 square feet in Vacaville,
California under an operating lease arrangement. The facility is operational
and we expect to gain licensure by the second quarter of 2000. 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
awaiting FDA licensure), are adequate for all present and near term uses.
Additional manufacturing capacity may be added in the South San Francisco or
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.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various legal proceedings, including patent infringement
litigation relating to our human growth hormone products and antibody
products, licensing and contract disputes, and other matters.
In 1990 and 1997, the Regents of the University of California, or UC, filed
patent infringement lawsuits against Genentech, alleging that the
manufacture, use, and sale of our Protropin and Nutropin human growth hormone
products infringe a patent known as the "Goodman patent" that is owned by UC.
On November 19, 1999, we and UC announced a proposed settlement of those
lawsuits, and on or about December 17, 1999, the parties entered into a
definitive written agreement on the terms of the settlement. Under the terms
of the settlement, Genentech agreed to pay UC $150 million and agreed to make
a contribution in the amount of $50 million toward construction of the first
biological sciences research building at the University of California, San
Francisco Mission Bay campus, and Genentech and UC granted certain releases
to one another and dismissed with prejudice the 1990 and 1997 patent
infringement lawsuits and related appeals. Such amounts were included in
other liabilities at December 31, 1999. The settlement resolves all
outstanding litigation between Genentech and UC relating to our growth
hormone products.
On May 28, 1999, Glaxo Wellcome Inc. filed a patent infringement lawsuit
against us in the U.S. District Court in Delaware. The suit asserts that we
infringe four U.S. patents owned by Glaxo Wellcome. Two of the patents
relate to the use of specific kinds of monoclonal antibodies for the
treatment of human disease, including cancer. The other two patents asserted
against us relate to preparations of specific kinds of monoclonal antibodies
which are made more stable and the methods by which such preparations are
made. We have been served with the complaint. The complaint fails to
specify which of our products or methods of manufacture are allegedly
infringing the four patents at issue. However, we believe that the suit
relates to the manufacture, use and sale of our Herceptin and Rituxan
antibody products. On July 19, 1999, we filed our answer to Glaxo Wellcome's
complaint, and in our answer we also stated counterclaims against Glaxo
Wellcome. The judge has scheduled the trial of this suit to begin January
29, 2001. On or about January 10, 2000, Glaxo filed a request with the Court
to add additional patent infringement claims to the suit under Glaxo's U.S.
Patent No. 5,633,162. We intend to oppose that request; the Court has not
yet made a decision whether to grant Glaxo's request.
We and the City of Hope Medical Center are parties to a 1976 agreement
relating to work conducted by two City of Hope employees, Arthur Riggs and
Keiichi Itakura, and patents that resulted from that work, which are referred
to as the "Riggs/Itakura Patents." Since that time, Genentech has entered
into license agreements with various companies to make, use and sell the
products covered by the Riggs/Itakura Patents. On August 13, 1999 the City
of Hope filed a complaint against us in the Superior Court in Los Angeles
County, California alleging that we owe royalties to the City of Hope in
connection with these license agreements, as well as product license
agreements that involve the grant of licenses under the Riggs/Itakura
Patents. The complaint states claims for declaratory relief, breach of
contract, breach of implied covenant of good faith and fair dealing, and
breach of fiduciary duty. On December 15, 1999, we filed our answer to the
City of Hope's complaint. The judge has scheduled the trial of this suit to
begin February 5, 2001.
On December 1, 1994, Genentech filed suit against Bio-Technology General
Corporation, or BTG, in the United States District Court in Delaware charging
BTG with infringement of two Genentech patents applicable to its human growth
hormone product. On February 28, 1995, Genentech filed an Amended Complaint
against BTG alleging infringement of an additional Genentech patent. On
January 6, 1995, BTG filed suit against Genentech in the United States
District Court for the Southern District of New York seeking declaratory
judgements that those patents and another Genentech patent are invalid and
not infringed by BTG. Genentech's suit in Delaware was then transferred to
New York and consolidated with BTG's suit there.
At the time of filing its suit and thereafter, BTG alleged various
antitrust, abuse of process, civil rights, malicious prosecution, and unfair
competition claims against Genentech. All of those claims were dismissed by
the District Court.
On August 10, 1995, the District Court issued a preliminary injunction
which prohibited BTG, pending the Court's final determination of the action,
from importing, making, using, selling, offering for sale or distributing in
the United States BTG's human growth hormone products except for certain
ongoing FDA approved clinical trials. BTG filed an appeal from the District
Court's issuance of the preliminary injunction to the United States Court of
Appeals for the Federal Circuit. On April 8, 1996, the Federal Circuit
affirmed the preliminary injunction granted by the District Court. On May
20, 1996, the Federal Circuit denied BTG's petition for rehearing, and on
October 7, 1996, the United States Supreme Court declined to review the case.
In 1999, the case was transferred to a different judge of the District
Court for further proceedings. A jury trial of BTG's patent invalidity claim
began on January 10, 2000. On January 18, 2000, the jury returned a verdict
in Genentech's favor on a certain factual issue underlying BTG's invalidity
claim, but the judge nevertheless entered judgement in favor of BTG and
lifted the preliminary injunction that had been in effect against BTG since
1995. Genentech intends to promptly file a request with the Federal Circuit
for the injunction to be reinstated pending appeal and for an expedited
appeal. In the event that the injunction is not reinstated or if Genentech's
appeal is not successful, BTG could enter the United States market with its
human growth hormone product.
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 pay $50 million to
settle a federal investigation relating to our past clinical, sales and
marketing activities associated with human growth hormone.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
GENENTECH, INC.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages (ages as of
December 31, 1999) and positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------- --- -----------------------------------------
<S> <C> <C>
Arthur D. Levinson, Ph.D. 49 Chairman and Chief Executive Officer
Louis J. Lavigne, Jr. 51 Executive Vice President and
Chief Financial Officer
Susan D. Desmond-Hellmann, M.D., M.P.H. 42 Executive Vice President-Development and
Product Operations, Chief Medical Officer
Dennis J. Henner, Ph.D. 48 Senior Vice President-Research
Judith A. Heyboer 50 Senior Vice President-Human Resources
Stephen G. Juelsgaard 51 Senior Vice President-General Counsel and
Secretary
James P. Panek 46 Senior Vice President-Product Operations
W. Robert Arathoon, Ph.D. 47 Vice President-Process Sciences
Joffre B. Baker, Ph.D. 52 Vice President-Research Discovery
J. Joseph Barta 52 Vice President-Quality
Stephen G. Dilly, M.D., Ph.D. 40 Vice President-Medical Affairs
David Ebersman 30 Vice President-Product Development
Robert L. Garnick, Ph.D. 50 Vice President-Regulatory Affairs
Paula M. Jardieu, Ph.D. 49 Vice President-Pharmacological Sciences
Sean A. Johnston, Ph.D. 41 Vice President-Intellectual Property
Cynthia J. Ladd 44 Vice President-Corporate Law and
Assistant Secretary
Laura Leber 37 Vice President-Corporate Communications
Walter K. Moore 48 Vice President-Government Affairs
Diane L. Parks 47 Vice President-Marketing
Kimberly J. Popovits 41 Vice President-Sales
Nicholas J. Simon 45 Vice President-Business and
Corporate Development
Daniel S. Sulzbach, Ph.D. 50 Vice President-Information Resources
John M. Whiting 44 Controller and Chief Accounting Officer
</TABLE>
All officers are elected annually by the Board of Directors. There is no
family relationship between or among any of the officers or directors.
Business Experience
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
previously served as Senior Vice President of Genentech from January 1993.
Dr. Levinson has held various 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.
Louis J. Lavigne, Jr. was appointed Executive Vice President of Genentech in
March 1997 and Chief Financial Officer in August 1988. He previously served
as Senior Vice President from July 1994 to March 1997 and as Vice President
from July 1986 to July 1994. Mr. Lavigne joined Genentech in July 1982 from
Pennwalt Corporation and became Controller in May 1983 and an officer of
Genentech in February 1984.
Susan D. Desmond-Hellmann, M.D., M.P.H. was appointed Executive Vice
President, Development and Product Operations in September 1999. She has
served as Chief Medical Officer since December 1996. She previously served
as Senior Vice President, Development from December 1997 until September
1999, among other positions, since joining Genentech in March 1995 as a
Clinical Scientist. 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 previously 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
and was Director and Senior Scientist, Cell Genetics Department from May 1990
to December 1990. He joined Genentech in 1981, as a Scientist in Research
from 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 Senior Vice President at Acuson Corporation
from October 1983 to July 1996.
Stephen G. Juelsgaard was appointed Senior Vice President in April 1998, Vice
President and General Counsel in July 1994 and Secretary in April 1997. He
joined Genentech in July 1985 as Corporate Counsel and subsequently served as
Senior Corporate Counsel from 1988 to 1990, Chief Corporate Counsel from 1990
to 1993, Vice President, Corporate Law from 1993 to 1994, and Assistant
Secretary from 1994 to 1997.
James P. Panek was appointed Senior Vice President, Product Operations in
August 1999. He previously served as Vice President, Manufacturing,
Engineering and Facilities from July 1997 to August 1999, Vice President,
Engineering and Facilities from July 1993 to July 1997 and Senior Director,
Engineering and Facilities from July 1991 to July 1993.
W. Robert Arathoon, Ph.D. was appointed Vice President, Process Sciences in
April 1996. He previously served as Senior Director, Process Sciences from
November 1994 to April 1996, among other positions, since joining Genentech
in 1983 from The Wellcome Foundation.
Joffre B. Baker, Ph.D. was appointed Vice President, Research Discovery in
February 1997. He previously served as Senior Director, Process Science from
November 1994 to April 1996 among other positions since joining Genentech in
1983 from The Wellcome Foundation.
J. Joseph Barta was appointed Vice President, Quality in October 1998. He
previously served as 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.
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 served as Manager, Business Development from February 1995
to February 1996, Director, Business Development from February 1996 to March
1998 and Senior Director, Product Development from March 1998 to February
1999. Prior to joining Genentech, he held the position of Research Analyst
at Oppenheimer & Company, Inc. beginning in 1991.
Robert L. Garnick, Ph.D. was appointed Vice President, Regulatory Affairs in
February 1998. He previously served as Vice President, Quality from April
1994, Senior Director, Quality Control from 1990 to 1994 and Director,
Quality Control from 1988 to 1990. He joined Genentech in August 1984 from
Armour Pharmaceutical, where he worked from 1980.
Paula M. Jardieu, Ph.D. was appointed Vice President, Pharmacological
Sciences in February 1997. She previously served as 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.
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 served as 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 served as Senior Corporate Counsel from
November 1990 to June 1993 and Chief Corporate Counsel from June 1993 to
February 1996.
Laura Leber was appointed Vice President, Corporate Communications in August
1999. She joined Genentech in 1992 as Director of Corporate Communications,
and previously served as Senior Director of Corporate Communications from
January 1996 to August 1999. Prior to joining Genentech, Ms. Leber was an
Associate Director of Corporate Communications at G.D. Searle and Co., a
division of Monsanto Company.
Walter K. Moore was appointed Vice President, Government Affairs in May 1998.
He joined Genentech in September 1993 as Senior Director of Government
Affairs. Prior to joining Genentech, Mr. Moore served as Manager of
Governmental Relations at Eli Lilly and Company.
Diane L. Parks joined Genentech as Vice President, Marketing in June 1999.
Prior to joining Genentech, she held various positions with Marion
Laboratories (formerly, Marion Merrell Dow and Hoeschst Marion Roussel) from
1982, 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 appointed Vice President, Sales in October 1994.
She previously served as Director, Field Sales from January 1993 to October
1994 and Regional Manager, Northeast Region from October 1989 to January
1993. Prior to joining Genentech in November 1987, she served as Division
Manager, Southeast Region for American Critical Care, a Division of American
Hospital Supply.
Nicholas J. Simon was appointed Vice President of Business and Corporate
Development in December 1995. He previously served as 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.
Daniel S. Sulzbach, Ph.D. was appointed Vice President, Information Resources
in September 1999. He joined Genentech in March 1994 as Director of
Scientific Computing and subsequently served as Head and Senior Director of
Information Resources from March 1998 to September 1999. Prior to joining
Genentech, he served as Executive Director of the San Diego Supercomputer
Center from August 1985 to March 1994.
John M. Whiting was appointed Controller and Chief Accounting Officer in
October 1997. He previously served as 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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The section labeled "Redemption of our Special Common Stock," Stock
Split," and footnotes labeled "Relationship with Roche Holdings, Inc.,"
"Roche's Right to Maintain its Percentage Ownership Interest in Our Stock"
and "Capital Stock" in the Notes to Consolidated Financial Statements of our
1999 Annual Report to Stockholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "11-Year Financial Summary" of our 1999 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The section labeled "Financial Review" of our 1999 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements, the Report of Ernst & Young LLP, Independent Auditors
and the section labeled "Quarterly Financial Data (unaudited)" of our 1999
Annual Report to Stockholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The sections labeled "Nominees" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of our Proxy Statement in connection with the
2000 Annual Meeting of Stockholders are incorporated herein by reference.
(b) Information concerning our Executive Officers is set forth in Part I
of the Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation," "Compensation of
Directors," "Compensation of Executive Officers," "Summary of Compensation,"
"Summary Compensation Table," "Stock Option Grants and Exercises," "Option
Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values," "Long-Term Incentive Plans," "Long-Term Incentive
Plans - Awards in Last Fiscal Year," "Loans and Other Compensation,"
"Compensation Committee Report," and "Compensation Committee Interlocks and
Insider Participation" of our Proxy Statement in connection with the 2000
Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Relationship with Roche Holdings, Inc.," "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" of our Proxy Statement in connection with the 2000 Annual Meeting
of Stockholders are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Relationships and Related Transactions" of
our Proxy Statement in connection with the 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
The following Financial Statements and supplementary data are included
in our 1999 Annual Report to Stockholders and are incorporated herein by
reference pursuant to Item 8 of this Form 10-K.
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1999
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Quarterly Financial Data (unaudited)
2. Financial Statement Schedule
The following schedule is filed as part of this Form 10-K:
Schedule II- Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 1999.
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
3. Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Restated By-Laws.(2)
4.1 Indenture, dated March 27, 1987 ("Indenture") for U.S.
$150,000,000 5% Convertible Subordinated Debentures due
2002.(3)
4.2 First Supplemental to Indenture, dated August 17, 1990.(4)
4.3 Second Supplemental to Indenture, dated October 18, 1995.(5)
4.4 Form of Common Stock Certificate.(2)
10.1 Patent License Agreement with Columbia University dated October
12, 1988.(6)
10.2 Amended and Restated Contract for the Sale and Distribution of
Protropin dated as of March 1, 1991.(7)
10.3 Agreement and Plan of Merger, dated as of May 23, 1995, as
amended and restated, among Genentech, Roche Holdings, Inc. and
Hoffmann-La Roche (U.S.) II, Inc. with exhibits.(8)
10.4 Form of Affiliation Agreement, dated as of July 22, 1999,
between Genentech and Roche Holdings, Inc.(2)
10.5 Amendment No. 1, dated October 22, 1999, to Affiliation
Agreement between Genentech and Roche Holdings, Inc.(16)
10.6 Form of Amended and Restated Agreement, dated as of October 25,
1995, between Genentech, Inc. and F. Hoffmann-La Roche Ltd
regarding Commercialization of Genentech's Products outside the
United States.(2)
10.7 Tax Sharing Agreement, dated as of July 22, 1999, between
Genentech, Inc. and Roche Holdings, Inc.(2)
10.8 Guaranty Agreement between Genentech and Roche Holding, Ltd
dated as of October 25, 1995.(8)
10.9 Amended and Restated Lease Agreement, dated December 8, 1995,
between Genentech and BNP Leasing Corporation.(5)
10.10 Amended and Restated Purchase Agreement, dated December 8,
1995, between Genentech and BNP Leasing Corporation.(5)
10.11 Guiding Principles for the Genentech/Roche Relationship.(9)
13.1 A portion of the 1999 Annual Report to Stockholders.(16)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(16)
27.1 Financial Data Schedule.(16)
28.1 Description of the Company's capital stock.(10)
99.1* Restated Relocation Loan Program.(7)
99.2* Genentech, Inc. Tax Reduction Investment Plan.(11)
99.3* Amendment No. 1 to the Genentech, Inc. Tax Reduction Investment
Plan.(12)
99.4* Amendment No. 2 to the Genentech, Inc. Tax Reduction Investment
Plan.(12)
99.5* Amendment No. 3 to the Genentech, Inc. Tax Reduction Investment
Plan.(12)
99.6* Trust Agreement.(12)
99.7* Amendment No. 1 to Trust Agreement.(12)
99.8* Amendment No. 2 to Trust Agreement.(12)
99.9* Amendment No. 3 to Trust Agreement.(12)
99.10* Amendment No. 4 to Trust Agreement.(12)
99.11* Amendment No. 5 to Trust Agreement.(12)
99.12* Amendment No. 6 to Trust Agreement.(12)
99.13* Amendment No. 7 to Trust Agreement.(12)
99.14* Supplemental Plan to the 401(k) Plan.(7)
99.15* 1990 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(13)
99.16* 1994 Stock Option Plan, as amended and restated as of October
16, 1996.(13)
99.17* 1996 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(13)
99.18* 1999 Stock Plan, dated as of July 1999.(15)
99.19* 1991 Employee Stock Plan, as amended April 10, 1997.(14)
99.20* Long-Term Key Employee Incentive Program, effective as of
July 1, 1999.(16)
99.21 UC Settlement Agreement, dated as of December 17, 1999.(16)
* As required by Item 14(a)(3) of Form 10-K, Genentech identifies this
Exhibit as a management contract or compensatory plan or arrangement of
Genentech.
- ----------------
(1) Filed as an exhibit to our current report on Form 8-K filed with the
Commission on July 28, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to Amendment No. 3 to our Registration Statement
(No. 333-80601) on Form S-3 filed with the Commission on July 16, 1999
and incorporated herein by reference.
(3) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1987 filed with the Commission and incorporated
herein by reference.
(4) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1990 filed with the Commission and incorporated
herein by reference.
(5) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1995 filed with the Commission and incorporated
herein by reference.
(6) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1988 filed with the Commission and incorporated
herein by reference.
(7) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1991 filed with the Commission and incorporated
herein by reference.
(8) Filed as an exhibit to our Registration Statement (No. 33-59949) on
Form S-4 dated October 25, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 1996 filed with the Commission and incorporated
herein by reference.
(10) Incorporated by reference to the description under the heading
"Description of Capital Stock" relating to our Common Stock in the
prospectus included in our Amendment No. 2 to the Registration
Statement on Form S-3 (No. 333-88651) filed with the Commission on
October 20, 1999, and the description under the heading "Description of
Capital Stock" relating to the Common Stock in the our final prospectus
filed with the Commission on October 21, 1999 pursuant to Rule 424(b)
under the Securities Act of 1933, as amended, including any amendment
or report filed for the purpose of updating that description.
(11) Filed as an exhibit to our Registration Statement (No. 333-08055) on
Form S-8 filed with the Commission on July 12, 1996 and incorporated
herein by reference.
(12) Filed as an exhibit to our Registration Statement (No. 333-94749) on
Form S-8 filed with the Commission on January 14, 2000 and incorporated
herein by reference.
(13) Filed as an exhibit to our Registration Statement (No. 333-83157) on
Form S-8 filed with the Commission on July 19, 1999 and incorporated
herein by reference.
(14) Filed as an exhibit to our Post-Effective Amendment No. 1 to our
Registration Statement on Form S-8 (No. 333-83989) filed with the
Commission on November 2, 1999.
(15) Filed as an exhibit to our Registration Statement on Form S-8 (No. 333-
83989) filed with the Commission on July 29, 1999.
(16) Filed with this document.
(b) Reports on Form 8-K
On November 3, 1999, Genentech filed a current report on Form 8-K dated
November 2, 1999 and on January 14, 2000, Genentech filed a current
report on Form 8-K dated November 19, 1999. There were no other reports
filed for the quarter ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GENENTECH, INC.
Registrant
Date: February 7, 2000
By: /s/JOHN M. WHITING
---------------------------------
John M. Whiting
Controller and
Chief Accounting Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Louis J. Lavigne, Jr., Executive Vice
President and Chief Financial Officer, and John M. Whiting, Controller and
Chief Accounting Officer, and each of them, his true and lawful attorneys-in-
fact and agents, with the full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any
amendments to this report, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or either of them,
or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- ---------------------------- --------------------------- ----------------
Principal Executive Officer:
/s/ARTHUR D. LEVINSON Chairman, Chief Executive February 7, 2000
- --------------------------- Officer and Director
Arthur D. Levinson
Principal Financial Officer:
/s/LOUIS J. LAVIGNE, JR. Executive Vice President February 7, 2000
- --------------------------- and Chief Financial Officer
Louis J. Lavigne, Jr.
Director:
/s/HERBERT W. BOYER Director February 7, 2000
- ---------------------------
Herbert W. Boyer
/s/JONATHAN K.C. KNOWLES Director February 7, 2000
- ---------------------------
Jonathan K.C. Knowles
/s/FRANZ B. HUMER Director February 7, 2000
- ---------------------------
Franz B. Humer
/s/MARK RICHMOND Director February 7, 2000
- ---------------------------
Mark Richmond
/s/CHARLES A. SANDERS Director February 7, 2000
- ---------------------------
Charles A. Sanders
<TABLE>
<CAPTION>
SCHEDULE II
GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions(1) Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
and returns:
Year Ended December 31, 1999: $ 17,418 $ 8,303 $ (6,770) $ 18,951
========== ========== ========== ==========
Year Ended December 31, 1998: $ 14,535 $ 11,389 $ (8,506) $ 17,418
========== ========== ========== ==========
Year Ended December 31, 1997: $ 7,869 $ 13,976 $ (7,310) $ 14,535
========== ========== ========== ==========
Inventory reserves:
Year Ended December 31, 1999: $ 14,904 $ 13,283 $ (11,803) $ 16,384
========== ========== ========== ==========
Year Ended December 31, 1998: $ 12,055 $ 5,405 $ (2,556) $ 14,904
========== ========== ========== ==========
Year Ended December 31, 1997: $ 9,279 $ 5,901 $ (3,125) $ 12,055
========== ========== ========== ==========
Reserve for nonmarketable
equity securities and
convertible equity loans:
Year Ended December 31, 1999: $ 12,143 $ 16,902 $ - $ 29,045
========== ========== ========== ==========
Year Ended December 31, 1998: $ 5,490 $ 7,958 $ (1,305) $ 12,143
========== ========== ========== ==========
Year Ended December 31, 1997: $ 4,990 $ 500 $ - $ 5,490
========== ========== ========== ==========
<FN>
(1) Represents amounts written off or returned against the allowance or reserves.
</FN>
</TABLE>
INDEX OF EXHIBITS FILED WITH FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
Exhibit No. Description
- ----------- -----------
10.5 Amendment No. 1, dated October 22, 1999, to Affiliation
Agreement between Genentech and Roche Holdings, Inc.
13.1 1999 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
99.19 Long-Term Key Employee Incentive Program, effective as of
July 1, 1999
99.21 UC Settlement Agreement, dated as of December 17, 1999
Exhibit 10.5
AMENDMENT NO. 1 TO AFFILIATION AGREEMENT
AMENDMENT NO. 1 dated as of October 22, 1999 to the Affiliation
Agreement dated as of July 22, 1999 between Genentech, Inc. and Roche
Holdings, Inc. (the "AFFILIATION AGREEMENT").
The Affiliation Agreement is hereby amended as follows:
1. DEFINITIONS. Section 1.01 of the Affiliation Agreement is amended as
follows:
(1) The definitions of "Applicable Stock", "Repurchased Shares" and
"Value" are deleted.
(2) The definition of "Ownership Percentage" is amended and restated
to read in its entirety as follows:
(i) "OWNERSHIP PERCENTAGE" means, at any time, the
fraction, expressed as a percentage and rounded to the next
highest thousandth of a percent, whose numerator is the number
of shares of Common Stock owned by Roche and its affiliates and
whose denominator is the number of shares of Common Stock
outstanding (excluding any shares repurchased by the Company
after the Offering that have not been re-issued by the Company).
2. COMMON STOCK REPURCHASE PROGRAM. Section 4.04(g) of the Affiliation
Agreement is amended and restated in its entirety as follows:
(g) (1) The Company will adopt, implement as soon as
practicable (but in any event prior to the time necessary to
comply with its obligations set forth in this Section 4.04(g))
and maintain a comprehensive, long-term common stock repurchase
program (the "COMMON STOCK REPURCHASE PROGRAM") for general
corporate purposes.
(2) The Company agrees that, pursuant to the Common Stock
Repurchase Program, prior to any issuance or sale of shares of
Common Stock by the Company or any of its subsidiaries, it shall
have repurchased a number of shares of Common Stock such that,
immediately after such issuance, Roche's Ownership Percentage is
at least equal to Roche's lowest Ownership Percentage at any
time after the Offering but prior to such issuance; except that
the Company and its subsidiaries may issue or sell shares of
Common Stock up to an amount that would cause Roche's Ownership
Percentage to be no more than two percentage points below
Roche's Minimum Percentage.
(3) As long as Roche's Ownership Percentage is greater
than 50%, the Company agrees that, pursuant to the Common Stock
Repurchase Program, prior to the issuance or sale of shares of
Common Stock by the Company or any of the subsidiaries, it shall
have repurchased a number of shares of Common Stock such that,
immediately after such issuance, Roche's Ownership Percentage is
greater than 50%.
(4) Pursuant to the Common Stock Repurchase Program, upon
Roche's written request, the Company will promptly (but in any
event (i) if Roche's Ownership Percentage is less than or equal
to 61% within 60 days and (ii) if Roche's Ownership Percentage
is more than 61% within 6 months) repurchase the amount of
shares of Common Stock specified by Roche in such written
request, provided such amount shall be no greater than the
amount required to cause Roche's Ownership Percentage to be not
less than Roche's Minimum Percentage.
(5) Notwithstanding the foregoing, nothing in this
Section 4.04(g) shall require the Company to take any action
that would, in the Company's reasonable determination, adversely
affect the Company's accounting for its stock option and
employee stock purchase plans, and the parties shall cooperate
to effect repurchases in a manner that will not have a
substantial adverse economic impact on the Company. It is
understood that any reduction in the Company's cash position as
a result of such repurchases is not a "substantial adverse
economic impact."
(6) Roche's Minimum Percentage means, at any time, the
fraction, expressed as a percentage and rounded to the next
highest thousandth of a percent, whose numerator is the lowest
number of shares of Common Stock owned by Roche and its
affiliates since the Offering and whose denominator is
127,298,588 (each of the numerator and the denominator to be
adjusted for any share subdivision, share combination, share
dividend, share exchange, reclassification, merger,
consolidation or similar transaction or event).
3. NOTICE REQUIREMENTS. Section 4.04(h) of the Affiliation Agreement is
amended and restated in its entirety as follows:
(h) The Company shall:
(i) provide to Roche at the end of each month, and
at such other times as Roche may request, information as
to (A) the total number of shares of Common Stock
repurchased by the Company in the last month and on a
year-to-date basis, (B) the total number of shares of
Common Stock previously issued to date, (C) the Company's
current forecasts as to future issuances, (D) the
calculation of Roche's Ownership Percentage and Roche's
Minimum Percentage and (E) such other information as
Roche may request in connection with Roche's ownership
and tax consolidation objectives; and
(ii) notify Roche within one business day after the
date in any month in which the total number of shares of
Common Stock issued by the Company in such month equals
or exceeds 500,000.
4. DEFINED TERMS. Capitalized terms used but not defined herein shall have
the meanings given to them in the Affiliation Agreement. References in the
Affiliation Agreement to the Affiliation Agreement or "this Agreement" and
other similar references shall be deemed to refer to the Affiliation
Agreement as amended hereby.
5. GOVERNING LAW; AMENDMENT; COUNTERPARTS. This Amendment shall be
construed in accordance with and governed by the law of the State of
Delaware. Except as expressly amended, modified and supplemented hereby, the
provisions of the Affiliation Agreement are and shall remain in full force
and effect. This Amendment may be signed in any number of counterparts, each
of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the date first
above written.
GENENTECH, INC.
By /s/ STEPHEN G. JUELSGAARD
-------------------------
Name: Stephen G. Juelsgaard
Title: Senior Vice President,
General Counsel and Secretary
ROCHE HOLDINGS, INC.
By /s/ FRANZ B. HUMER
-------------------------
Name: Franz B. Humer
FINANCIAL REVIEW
(dollars in millions, except per share amounts)
In this Annual Report, "Genentech," "we," "us" and "our" refer to Genentech,
Inc., "Common Stock" refers to Genentech's Common Stock, par value $0.02 per
share, "Special Common Stock" refers to Genentech's callable putable common
stock, par value $0.02 per share and "Redeemable Common Stock" refers to
Genentech's redeemable common stock, par value $0.02 per share. In addition,
all numbers relating to the number of shares, price per share and per share
amounts of Common Stock, Special Common Stock and Redeemable Common Stock
give effect to the two-for-one split of our Common Stock on November 2, 1999.
OVERVIEW OF OUR BUSINESS
Genentech is a leading biotechnology company that uses human genetic
information to discover, develop, manufacture and market human
pharmaceuticals for significant unmet medical needs. Thirteen of the
approved products of biotechnology stem from our science. Of these products,
we manufacture and market seven directly in the United States and we are
preparing to begin manufacturing and marketing the eighth:
- - Herceptin, registered trademark, (trastuzumab) antibody for the treatment
of certain patients with metastatic breast cancer whose tumors overexpress
the human epidermal growth factor receptor2, or HER2, protein;
- - Rituxan, registered trademark, (rituximab) antibody for the treatment of
patients with relapsed or refractory low-grade or follicular, CD20-
positive B-cell non-Hodgkin's lymphoma;
- - Activase, registered trademark, (alteplase) 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, registered trademark, (somatrem for injection) growth hormone
for the treatment of inadequate endogenous growth hormone secretion, or
growth hormone deficiency, in children;
- - Nutropin, registered trademark, [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, registered trademark, [somatropin (rDNA origin) injection]
liquid formulation growth hormone for the same indications as Nutropin;
- - Pulmozyme, registered trademark, (dornase alfa, recombinant) inhalation
solution for the management of cystic fibrosis; and
- - Nutropin Depot, trademark, [somatropin (rDNA origin) for
injectable suspension] encapsulated sustained-release growth hormone for
the treatment of pediatric growth hormone deficiency. We have received
regulatory approval from the U.S. Food and Drug Administration, commonly
known as the FDA, to market Nutropin Depot, and we expect to launch the
product in the first half of 2000.
We receive royalties on sales of rituximab outside of the United States
(excluding Japan), on sales of Pulmozyme and Herceptin outside of the United
States and on sales of certain products in Canada from F. Hoffmann-La Roche
Ltd, an affiliate of Roche Holdings, Inc., that is commonly known as
Hoffmann-La Roche. We receive royalties on sales of growth hormone products
and t-PA outside of the United States and Canada, and on sales of rituximab
in Japan through other licensees. We also receive worldwide royalties on
seven additional licensed products that are marketed by other companies. Six
of these products originated from our technology.
REDEMPTION OF OUR SPECIAL COMMON STOCK
On June 30, 1999, we redeemed all of our outstanding Special Common Stock
held by stockholders other than Roche Holdings, Inc., commonly known as
Roche, at a price of $41.25 per share in cash with funds deposited by Roche
for that purpose. We refer to this event as the "Redemption." As a result
of the Redemption, Roche's percentage ownership of our outstanding Common
Stock increased from 65% to 100%. Consequently, under U.S. generally
accepted accounting principles, we were required to use push-down accounting
to reflect in our financial statements the amounts paid for our stock in
excess of our net book value. Push-down accounting required us to record
$1,706.0 million of goodwill and $1,499.0 million of other intangible assets
onto our balance sheet in the second quarter of 1999. Also, as a result of
push-down accounting, we recorded special charges related to the Redemption
of $1,207.7 million in 1999. For more information about special charges and
push-down accounting, you should read "Special Charges" below and the
"Redemption of Our Special Common Stock" note in the Notes to Consolidated
Financial Statements. Roche subsequently made public offerings of our Common
Stock as described below.
PUBLIC OFFERINGS
On July 23, 1999, and October 26, 1999, Roche completed public offerings of
our Common Stock. As a result, Roche's percentage ownership of our
outstanding Common Stock was reduced to approximately 66.1% at December 31,
1999. We did not receive any of the net proceeds from the offerings. Our
Common Stock began trading on the New York Stock Exchange under the symbol
DNA on July 20, 1999.
As a result of the Redemption and subsequent public offerings, changes
occurred with respect to our stock options as discussed below in "Stock
Options Changes." In addition, we amended our certificate of incorporation
and bylaws, amended our licensing and marketing agreement with Hoffmann-La
Roche, and entered into or amended certain agreements with Roche. You should
read the "Relationship with Roche" note in the Notes to Consolidated
Financial Statements below for more information.
STOCK SPLIT
On November 2, 1999, we effected a two-for-one stock split of our Common
Stock in the form of a dividend of one share of Genentech Common Stock for
each share held at the close of business on October 29, 1999. Our stock
began trading on a split-adjusted basis on November 3, 1999. All information
in this annual report relating to the number of shares, price per share and
per share amounts of Common Stock and Special Common Stock gives effect to
the split.
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
Pro forma results exclude special charges related to the Redemption and legal
settlements, and recurring charges related to the Redemption, and their
related tax effects. These charges are further discussed below in "Special
Charges" and "Recurring Charges Related to Redemption."
<TABLE>
<CAPTION>
1999 Annual % Change
------------------- Pro Forma
Actual Pro Forma 1998 1997 99/98 98/97
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,421.4 $1,401.0 $1,150.9 $1,016.7 22% 13%
</TABLE>
Total Revenues: Total revenues for 1999 reached $1,421.4 million, a 24%
increase from 1998 primarily due to higher product sales.
Pro forma revenues for 1999 were $1,401.0 million, reflecting an
increase of 22% from 1998 driven by higher product sales. Revenues for 1998
increased 13% from 1997. This increase was also attributable to higher
product sales. These increases are further discussed below.
<TABLE>
<CAPTION>
1999 Annual % Change
------------------- Pro Forma
Product Sales Actual Pro Forma 1998 1997 99/98 98/97
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herceptin $ 188.4 $ 188.4 $ 30.5 - 518% -
Rituxan 279.4 279.4 162.6 $ 5.5 72 2,856%
Activase 236.0 236.0 213.0 260.7 11 (18)
Protropin, Nutropin
and Nutropin AQ 221.2 221.2 214.0 223.6 3 (4)
Pulmozyme 111.4 111.4 93.8 91.6 19 2
Actimmune 2.7 2.7 3.9 3.5 (31) 11
---------------------------------------------------------
Total product sales $1,039.1 $1,039.1 $717.8 $584.9 45% 23%
% of revenues 73% 74% 62% 58%
</TABLE>
Total Product Sales: Total product sales were $1,039.1 million in 1999, an
increase of 45% from 1998 reflecting the effect of strong Rituxan sales, a
full year of Herceptin sales and higher Activase sales. Product sales
increased 23% in 1998 from 1997 as a result of a full year of Rituxan sales
and initial Herceptin sales in the fourth quarter of 1998. This increase was
partly offset by lower Activase and growth hormone sales in 1998. Product
sales in connection with our licensing agreement with Hoffmann-La Roche were
$41.3 million in 1999, $28.7 million in 1998 and $17.4 million in 1997. See
"Relationship with Roche" below for further information about our licensing
agreement with Hoffmann-La Roche.
Herceptin: Sales of Herceptin were $188.4 million in 1999. We recorded
$30.5 million of initial sales of Herceptin in the fourth quarter of 1998.
An increase in physician acceptance of Herceptin has contributed to a
positive sales trend and successful penetration into the breast cancer
market. Herceptin was first marketed in September 1998 and is the first
humanized monoclonal antibody for the treatment of HER2 overexpressing
metastatic breast cancer. We have granted Hoffmann-La Roche exclusive
marketing rights to Herceptin outside of the United States.
Rituxan: Sales of Rituxan were $279.4 million in 1999, an increase of 72%
from 1998. This increase was primarily due to increased market penetration
for the treatment of B-cell non-Hodgkin's lymphoma. Sales of Rituxan were
$162.6 million in 1998, its first full year of sales. Rituxan was approved
for marketing by the FDA in late November 1997 and we launched Rituxan in
December 1997. We co-developed Rituxan with IDEC Pharmaceuticals
Corporation, commonly known as IDEC, from which we license Rituxan. IDEC and
Genentech are jointly promoting Rituxan in the U.S. We shared responsibility
with IDEC for manufacturing the product until the end of the third quarter of
1999, when IDEC finished transferring all bulk manufacturing responsibilities
for Rituxan to us. Our partner Hoffmann-La Roche received permission from
the European Commission to market rituximab under the tradename MabThera,
registered trademark, in the European Union. Hoffmann-La Roche holds
marketing rights for MabThera outside of the U.S., excluding Japan, and has
agreed to pay us royalties and a mark-up on MabThera supplied to Hoffmann-La
Roche.
In December 1998, a letter was sent to physicians advising them of some
deaths associated with administration of Rituxan. As a result, Genentech and
IDEC updated the warning section of the package insert to include information
on infusion-related reactions and cardiovascular events.
Activase: Sales of Activase t-PA were $236.0 million in 1999, an increase of
11% from 1998. This increase was largely due to the usage of Activase in
peripheral vascular occlusive disease in lieu of another company's
thrombolytic that was unavailable. This increase was offset in part by a
continued decline in the overall size of the thrombolytic therapy market due
to increasing use of mechanical reperfusion and continued competition from
Centocor, Inc.'s Retavase, registered trademark, (reteplase). Sales of
Activase in 1998 decreased 18% from 1997 primarily due to competition from
Retavase. The decrease in 1998 also resulted, to a lesser extent, from a
decline in the size of the thrombolytic market and from a temporary decrease
in the available commercial market due to patients receiving therapy through
large Phase III clinical trials completed in 1998.
Protropin, Nutropin and Nutropin AQ: Sales of our three growth hormone
products - Protropin, Nutropin, and Nutropin AQ, - were $221.2 million in
1999, a slight increase from 1998. This increase primarily reflects
fluctuations in distributor ordering patterns. Sales of our growth hormone
products decreased slightly in 1998 from 1997. A small loss of market share
was seen in 1998 due to increased competition. We continue to face increased
competition from four other companies with growth hormone products. An
additional company was previously preliminarily enjoined from selling its
product, but it is now free to enter the market.
In December 1999, we received FDA approval for Nutropin Depot, the first
long-acting dosage form of recombinant growth hormone for pediatric growth
hormone deficiency. We expect to launch the product in the first half of
2000.
Pulmozyme: Sales of Pulmozyme were $111.4 million in 1999, an increase of
19% from 1998. This increase was due to our continued market penetration for
the management of cystic fibrosis in the early and mild patient populations.
Sales of Pulmozyme were slightly higher in 1998 compared to 1997 primarily as
a result of new patients in the mild to moderate cystic fibrosis patient
population and new cystic fibrosis patients under the age of five due to a
1998 FDA approval for a label extension.
Actimmune, registered trademark, (interferon gamma-lb): 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 Pharmaceuticals, Inc., or InterMune. After a
transition period, as of January 1999, we no longer sell Actimmune directly
in the United States. We have agreed to supply bulk materials to InterMune
at cost plus a mark-up.
<TABLE>
<CAPTION>
1999 Annual % Change
Royalties, Contract and Other, ----------------- Pro Forma
and Interest Income Actual Pro Forma 1998 1997 99/98 98/97
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Royalties $189.3 $189.3 $229.6 $241.1 (18)% (5)%
Contract and other 103.6 83.2 114.8 121.6 (28) (6)
Interest income 89.4 89.4 88.7 69.1 1 28
</TABLE>
Royalties: Royalty income was $189.3 million in 1999, a decrease of 18% from
1998. Royalties in 1998 decreased 5% from 1997. These decreases primarily
relate to the expiration of royalties from Eli Lilly and Company in August
1998. Under a 1994 settlement agreement and a prior license agreement with
Eli Lilly, we received royalties for sales of Humulin, registered trademark,
(human insulin) which expired in August 1998. The decrease in 1999 was
partly offset by higher royalties from various licensees, and new royalties
from Immunex Corporation under a licensing agreement for Enbrel, registered
trademark, (etanercept) biologic response modifier. Cash flows from royalty
income include revenues denominated in foreign currency. We currently
purchase simple foreign currency put option contracts (options) to hedge
these royalty cash flows. All options expire within the next three years.
See "Forward-Looking Information and Cautionary Factors that May Affect
Future Results" below for discussion of market risks related to these
financial instruments.
Contract and Other Revenues: Contract and other revenues were $103.6 million
in 1999, a decrease of 10% from 1998. This decrease which is further
explained below, was partly offset by an adjustment of $20.3 million related
to the write-up of certain marketable securities on June 30, 1999 as a result
of push-down accounting. See the "Redemption of Our Special Common Stock"
note in the Notes to Consolidated Financial Statements for further
information on push-down accounting.
Pro forma contract and other revenues in 1999, which exclude the effect
of push-down accounting, were $83.2 million, a decrease of 28% from 1998.
This decrease resulted primarily from higher revenues in 1998 related to
payments from Hoffmann-La Roche for Herceptin marketing rights and from Novo
Nordisk A/S, commonly known as Novo, for the patent infringement litigation
settlement, as discussed below. These decreases were offset in part by
higher revenues in 1999 from our strategic alliances, including initial
license fees from Immunex Corporation for Enbrel and from Schwarz Pharma AG
for Nutropin AQ and Nutropin Depot sustained-release growth hormone, and
higher gains from the sale of biotechnology equity securities. Contract and
other revenues in 1998 decreased 6% from 1997 as a result of lower contract
revenues from our strategic alliances and lower gains from the sale of
biotechnology equity securities. In addition, contract revenues from
Hoffmann-La Roche in 1998 decreased significantly from 1997 primarily due to
the discontinuation of several projects or indications in development.
In July 1998, we settled a lawsuit brought by us against Novo relating
to our patents for human growth hormone and insulin and a lawsuit brought by
Novo alleging infringement of a patent held by Novo relating to our
manufacture, use and sale of our 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.
We recorded nonrecurring contract revenues from Hoffmann-La Roche of
$40.0 million in 1998 for Herceptin marketing rights outside of the U.S. All
other contract revenue from Hoffmann-La Roche, including reimbursement for
ongoing development expenses after the option exercise date, totaled $17.2
million in 1999, $21.6 million in 1998 and $67.6 million in 1997.
Interest Income: Interest income in 1999 was comparable to 1998. Although
our cash, short-term and long-term investment portfolio, excluding marketable
equity securities, at December 31, 1999 decreased from December 31, 1998, the
average portfolio balance for the year was higher than the previous year.
This resulted in an increase in interest income, which was offset by lower
portfolio yields. Interest income increased in 1998 from 1997 primarily due
to an increase in the investment portfolio and, to a lesser extent, a higher
average yield on the investment portfolio.
<TABLE>
<CAPTION>
1999 Annual % Change
------------------- Pro Forma
Costs and Expenses Actual Pro Forma 1998 1997 99/98 98/97
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales $ 285.6 $ 192.2 $138.6 $102.5 39% 35%
Research and
development 367.3 367.3 396.2 470.9 (7) (16)
Marketing, general and
administrative 467.9 467.9 358.9 269.9 30 33
Special charges:
Legal settlements 230.0 - - - - -
Related to redemption 1,207.7 - - - - -
Recurring charges related
to redemption 198.4 - - - - -
Interest expense 5.4 5.4 4.6 3.6 17 28
----------------------------------------------------------
Total costs and expenses $2,762.3 $1,032.8 $898.3 $846.9 15% 6%
% of revenues 194% 74% 78% 83%
COS as a % of product sales 18 19 18
R&D as % of revenues 26 34 46
MG&A as % of revenues 33 31 27
</TABLE>
Cost of Sales: Cost of sales, or COS, was $285.6 million in 1999, an
increase of 106% from 1998. This increase reflects the costs related to the
sale of inventory that was written up at the Redemption due to push-down
accounting. The remaining inventory that was written up is expected to be
sold in 2000.
Pro forma cost of sales in 1999, exclusive of the expense related to the
sale of the inventory written up at the Redemption due to push-down
accounting, was $192.2 million, a 39% increase from 1998. Cost of sales as a
percent of net sales, exclusive of the expense related to the sale of the
inventory written up, decreased to 18% in 1999 from 1998. This decrease was
primarily driven by efficiencies in production and a more favorable product
mix. Cost of sales as a percent of product sales increased to 19% in 1998
from 1997. 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. The economic
benefits from sales to Hoffmann-La Roche are reflected in product sales and
royalties.
Research and Development: Research and development, or R&D, expenses in 1999
were $367.3 million, down 7% from 1998 as a result of reduced spending as
products progressed through late-stage clinical trials. R&D expenses in 1998
decreased 16% from 1997 primarily due to the wind-down of certain large late-
stage clinical trials and lower expenses for licensing technology from third
parties. The decrease in 1998 was partly offset by higher costs related to
large scale development collaborations. R&D as a percentage of pro forma
revenues was 26% in 1999, 34% in 1998 and 46% in 1997. The lower ratios from
year to year reflect growing revenues and more recently in 1999 and 1998 a
decrease in R&D spending.
To gain additional access to potential new products and technologies,
and to utilize other companies to help develop potential new products, we
establish strategic alliances with various companies. These companies are
developing technologies that may fall outside our research focus and through
technology exchanges and investments with these companies we may have the
potential to generate new products. As part of these strategic alliances, we
have acquired equity and convertible debt securities 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, or MG&A, expenses in 1999 increased 30% from 1998 and such
expenses in 1998 increased 33% from 1997. The increase in 1999 was driven
mainly by support of the growth of our oncology products including the
profit-sharing with IDEC related to Rituxan sales, and competitive conditions
with other marketed products. Additional increases came from higher royalty,
legal and corporate expenses. The 33% increase in 1998 was due to the
introduction of Rituxan and related profit sharing with IDEC, the launch of
Herceptin and a new indication for Nutropin and Nutropin AQ, competitive
conditions with other marketed products and the write-down of certain
biotechnology equity securities.
Special Charges: During 1999, we had special charges of $1,437.7 million
related to the Redemption and the application of push-down accounting, and
legal settlements. The Redemption related charge of $1,207.7 million
primarily included: (1) a non-cash charge of $752.5 million for in-process
research and development, (2) $284.5 million of compensation expense related
to early cash settlement of certain employee stock options and (3) an
aggregate of approximately $160.1 million as a non-cash charge for the
remeasurement of the value of continuing employee stock options. The legal
settlements charge included: (1) a $50.0 million settlement related to a
federal investigation of our past clinical, sales and marketing activities
associated with human growth hormone; and (2) a $180.0 million settlement on
the patent infringement lawsuits brought by the University of California
relating to our human growth hormone products. See "In-Process Research and
Development" below and "Redemption of Our Special Common Stock" and "Leases,
Commitments and Contingencies" notes in the Notes to Consolidated Financial
Statements for further information regarding these special charges.
Recurring Charges Related to Redemption: We began recording recurring
charges related to the Redemption and push-down accounting in the third
quarter of 1999. These charges were $198.4 million in 1999 and were
comprised of $191.1 million related to the amortization of other intangible
assets and goodwill, and $7.3 million of compensation expense related to
alternative arrangements provided at the time of the Redemption for certain
holders of some of the unvested options.
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.
<TABLE>
<CAPTION>
1999
--------------------
Income Before Taxes and Income Taxes Actual Pro Forma 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before taxes $(1,340.9) $368.2 $252.6 $169.8
Income tax (benefit) provision (196.4) 121.5 70.7 40.8
Effective tax rate 15% 33% 28% 24%
</TABLE>
Income Tax: The tax benefit of $196.4 million for 1999 consists of tax
expense of $121.5 million on pretax income excluding the income and
deductions attributable to push-down accounting and legal settlements, and
tax benefits of $317.9 million related to income and deductions attributable
to push-down accounting and legal settlements. Our effective tax rate for
1999 was approximately 15%. The tax rate on pretax income excluding non-
recurring special charges was 50% for 1999, which reflects the impact of non-
deductible goodwill amortization related to push-down accounting.
The pro forma 1999 effective tax rate of 33% is higher than the 1998
effective tax rate of 28% primarily due to reduced research credits and
realization of foreign losses. The 1998 effective tax rate increased from
the 24% rate in 1997 primarily due to reduced research credits.
We expect our effective tax rate on pro forma income to increase to
approximately 34% in 2000. Our effective tax rate on pre-tax income,
including recurring Redemption related charges, will be adversely affected
due to a full year of non-deductible goodwill amortization.
<TABLE>
<CAPTION>
1999 Annual % Change
-------------------- Pro Forma
Net Income (Loss) Actual Pro Forma 1998 1997 99/98 98/97
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(1,144.5) $246.7 $181.9 $129.0 36% 41%
Earnings (loss) per share:
Basic $ (4.46) $ 0.96 $ 0.72 $ 0.52
Diluted $ (4.46) $ 0.93 $ 0.70 $ 0.51
</TABLE>
Net Income (Loss): The net loss in 1999 of $1,144.5 million, or a loss of
$4.46 per share, is attributable to the Redemption and related push-down
accounting, legal settlements, and their related tax effects.
Pro forma net income in 1999 was $246.7 million, or $0.93 per share, a
36% increase in pro forma net income from 1998. This increase was due to
higher Herceptin, Rituxan and Activase sales and lower R&D spending. The
increase was partly offset by higher MG&A expenses, higher cost of sales,
higher income taxes and lower royalty and contract and other revenues. The
41% increase in net income in 1998 from 1997 was driven primarily by sales of
Rituxan and Herceptin, lower R&D expenses and higher interest income. These
revenue increases and lower expenses were partly offset by higher MG&A
expenses, a decrease in Activase sales, higher cost of sales and higher
income taxes.
In-Process Research and Development: At June 30, 1999, the Redemption date,
we determined that the acquired in-process technology was not technologically
feasible and that the in-process technology had no future alternative uses.
As a result, $500.5 million of in-process research and development related to
Roche's 1990 through 1997 purchases of our Common Stock was charged to
retained earnings, and $752.5 million of in-process research and development
related to the Redemption was charged to operations at June 30, 1999.
The amounts of in-process research and development were determined based
on an analysis using the risk-adjusted cash flows expected to be generated by
the products that result from the in-process projects. The analysis included
forecasted future cash flows that were 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 from sales of the first generation of each in-
process product. A portion of the gross in-process product revenues was then
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 determine a forecast of net in-process
research and development revenues attributable to projects completed prior to
the purchase dates. Appropriate operating expenses, cash flow adjustments
and contributory asset returns were deducted from the forecast to establish 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 us) as well as the product-specific
risk associated with the purchased in-process research and development
products. The product specific risk factors included each product 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 ranged from 16% to 19% for the 1999 valuation and
20% to 28% for the 1990 purchase valuation, all of which represent a
significant risk premium to our weighted average cost of capital.
The forecast data in the analysis was based on internal product level
forecast information maintained by our management in the ordinary course of
managing the business. The inputs used by us in analyzing in-process
research and development were based on assumptions, which we believed to be
reasonable but which were inherently uncertain and unpredictable. These
assumptions may be incomplete or inaccurate, and no assurance can be given
that unanticipated events and circumstances will not occur.
A brief description of projects that were included in the in-process
research and development charge is set forth below, including an estimated
percentage of completion as of the Redemption date. Projects subsequently
added to the research and development pipeline are not included. Except as
otherwise noted below, there have been no significant changes to the projects
since the Redemption date. We do not track all costs associated with
research and development on a project-by-project basis. Therefore, we
believe a calculation of cost incurred as a percentage of total incurred
project cost as of FDA approval is not possible. We estimated, however, that
the research and development expenditures that will be required to complete
the in-process projects will total at least $750.0 million, as compared to
$700.0 million as of the Redemption date. This estimate reflects an increase
in certain cost estimates related to early stage projects partially offset by
decreases in cost to complete estimates for other projects.
The foregoing discussion of our in-process research and development
projects, and in particular the following table and subsequent paragraphs
regarding the future of these projects, our additional product programs and
our process technology program include forward-looking statements that
involve risks and uncertainties, and actual results may vary materially. For
a discussion of risk factors that may affect projected completion dates and
the progress of research and development, see "Forward-Looking Information
and Cautionary Factors that May Affect Future Results - The Results of Our
Research and Development Are Unpredictable," "- Protecting Our Proprietary
Rights Is Difficult and Costly" and "- Our Products Are Subject to
Governmental Regulations and Approvals."
At the Redemption date, we estimated percentage complete data for each
project based on weighting of three indicators, as follows:
PTS: Probability of technical success ("PTS") is a project level
statistic maintained by us on an ongoing basis, which is intended to
represent the current likelihood of project success, i.e., FDA approval.
This is a quantitative calculation based on the stage of development and the
complexity of the project, and it is highly correlated with the project's
phase of development. PTS is periodically adjusted to reflect actual
experiences over a reasonable period of time.
Status compared to Baseline Model: We developed a baseline model which
allocated percentages of a standard development project to each major phase
of the project based on our experience. We then overlaid the time-based
status of each project to this baseline model, in order to calculate a
percentage complete for each project.
Management's Estimate of Percentage Complete: Below is a list of the
projects and their estimated percentage complete included in the in-process
research and development charge related to the Redemption:
<TABLE>
<CAPTION>
As of the Redemption Date, June 30, 1999
--------------------------------------------
PHASE OF SUBSTANTIAL
PROJECT DESCRIPTION/INDICATION DEVELOPMENT COMPLETION DATE % COMPLETE
- -------------------------------- ---------------------------------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
Nutropin Depot long-acting dosage form of Awaiting 2000 85%
recombinant growth hormone Regulatory
Approval
TNKase, trademark, second acute myocardial infarction Awaiting 2000 90%
generation t-PA Regulatory
Approval
Anti-IgE antibody allergic asthma, seasonal Phase III 2001 75%
allergic rhinitis
Pulmozyme early-stage cystic fibrosis Phase III 2003 75%
Dornase alfa AERx, trademark, cystic fibrosis Preparing for 2003 45%
Delivery System clinical
testing
Rituxan antibody intermediate- and high-grade Phase III 2004 60%
non-Hodgkin's lymphoma
Xubix, trademark, (sibrafiban) orally administered inhibitor of Phase III 2000 65%
oral IIb/IIIa antagonist platelet aggregation
Activase t-PA intravenous catheter clearance Preparing 1999 90%
for Phase III
Anti-CD11a antibody (hull24) psoriasis Phase III 2003 50%
Herceptin antibody adjuvant therapy for breast Preparing 2007 45%
cancer for Phase III
Thrombopoietin (TPO) thrombocytopenia related to Phase II 2002 55%
cancer treatment
Anti-CD18 antibody acute myocardial infarction Phase II 2004 55%
Anti-VEGF antibody colorectal and lung cancer Phase II 2003 35-40%
Herceptin antibody other tumors Preparing 2004 40-45%
for Phase II
AMD Fab age-related macular degeneration Phase I 2004 20%
LDP-02 inflammatory bowel disease Phase Ib/IIa 2005 30%
</TABLE>
We also identified five additional product programs that were at
different stages of in-process research and development. As of June 30,
1999, the Redemption date, we estimated that these projects would be
substantially complete in years 1999 through 2004. The percent completion
for each of these additional programs ranged 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 at the Redemption
date included a process technology program. The process technology program
included the research and development of ideas and techniques that could
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 estimated
that the process technology program was approximately 50% complete at the
Redemption date.
The significant changes to the projects in the in-process R&D charge
since the Redemption date as of December 31, 1999, include:
- - Nutropin Depot sustained-release growth hormone - project was
substantially completed in 1999.
- - Anti-IgE antibody - project has moved from Phase III studies to preparing
FDA filing.
- - Xubix (sibrafiban) oral IIb/IIIa antagonist - project has been
discontinued.
- - Anti-VEGF antibody - project has moved from Phase II studies to preparing
for Phase III studies.
- - Dornase alfa AERx - project has moved to Phase IIa studies.
STOCK OPTION CHANGES
In connection with the Redemption of our Special Common Stock, the following
changes occurred with respect to our stock options that were outstanding as
of June 30, 1999:
- - Options for the purchase of approximately 13.6 million shares of Special
Common Stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $41.25 per share, less the exercise price;
- - Options for the purchase of approximately 8.0 million shares of Special
Common Stock were converted into options to purchase a like number of
shares of Common Stock at the same exercise price; and
- - Options for the purchase of approximately 9.8 million shares of Special
Common Stock were canceled in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan (the "1996 Plan"). With certain exceptions,
we granted new options for the purchase of 2.666 times the number of
shares under the previous options with an exercise price of $48.50 per
share, which was the July 23, 1999 public offering price of the Common
Stock. The number of shares that were the subject of these new options,
which were issued under our 1999 Stock Plan (the "1999 Plan"), was
approximately 10.0 million. Alternative arrangements were provided for
certain holders of some of the unvested options under the 1996 Plan.
Of the approximately 8.0 million shares of converted options, options
with respect to approximately 4.8 million shares were outstanding at December
31, 1999, all of which are currently exercisable except for options with
respect to approximately 356,000 shares. These outstanding options are held
by 1,850 employees; no non-employee directors hold these options.
Our board of directors and Roche, then our sole stockholder, approved
the 1999 Plan on July 16, 1999. Under the 1999 Plan, we granted new options
to purchase approximately 13.0 million shares (including the 10.0 million
shares referred to above) of Common Stock to approximately 2,400 employees at
an exercise price of $48.50 per share, with the grant of such options made
effective as of July 16, 1999. Of the options to purchase these 13.0 million
shares, options to purchase approximately 12.0 million shares were
outstanding at December 31, 1999, of which options to purchase approximately
1.3 million shares are currently exercisable.
In connection with these stock option transactions, we recorded:
- - (1) cash compensation expense of approximately $284.5 million associated
with the cash-out of such stock options and (2) non-cash compensation
expense of approximately $160.1 million associated with the remeasurement,
for accounting purposes, of the converted options, which non-cash amount
represents the difference between each applicable option exercise price
and the redemption price of the Special Common Stock; and
- - Over a two-year period beginning July 1, 1999, an aggregate of
approximately $27.4 million of deferred cash compensation available to be
earned by a limited number of employees who elected the alternative
arrangements described above. As of December 31, 1999, $7.3 million of
compensation expense has been recorded related to these alternative
arrangements.
RELATIONSHIP WITH ROCHE
As a result of the Redemption of our Special Common Stock, the then-existing
governance agreement between us and Roche terminated, except for provisions
relating to indemnification and stock options, warrants and convertible
securities. In July 1999, we entered into certain affiliation arrangements
with Roche, amended our licensing and marketing agreement with Hoffmann-La
Roche, and entered into a tax sharing agreement with Roche as follows:
Affiliation Arrangements
Our board of directors consists of two Roche directors, three independent
directors nominated by a nominating committee currently controlled by Roche,
and one Genentech employee. However, under the affiliation agreement, Roche
has the right to obtain proportional representation on our board at any time.
Roche intends to continue to allow our current management to conduct our
business and operations as we have done in the past. However, we cannot
ensure that Roche will not implement a new business plan in the future.
Except as follows, the affiliation arrangements do not limit Roche's
ability to buy or sell our Common Stock. If Roche and its affiliates sell
their majority ownership of shares of our Common Stock to a successor, Roche
has agreed that it will cause the successor to purchase all shares of our
Common Stock not held by Roche as follows:
- - with consideration, if that consideration is composed entirely of either
cash or equity traded on a U.S. national securities exchange, in the same
form and amounts per share as received by Roche and its affiliates; and
- - in all other cases, with consideration that has a value per share not less
than the weighted average value per share received by Roche and its
affiliates as determined by a nationally recognized investment bank.
If Roche owns more than 90% of our Common Stock for more than two
months, Roche has agreed that it will, as soon as reasonably practicable,
effect a merger of Genentech with Roche or an affiliate of Roche.
Roche has agreed, as a condition to any merger of Genentech with Roche
or the sale of our assets to Roche, that either:
- - the merger or sale must be authorized by the favorable vote of a majority
of non-Roche stockholders, provided no person will be entitled to cast
more than 5% of the votes at the meeting; or
- - in the event such a favorable vote is not obtained, the value of the
consideration to be received by non-Roche stockholders would be equal to
or greater than the average of the means of the ranges of fair values for
the Common Stock as determined by two nationally recognized investment
banks.
We have agreed not to approve, without the prior approval of the
directors designated by Roche:
- - any acquisition, sale or other disposal of all or a portion of our
business representing 10% or more of our assets, net income or revenues;
- - any issuance of capital stock except under certain circumstances; or
- - any repurchase or redemption of our capital stock other than a redemption
required by the terms of any security and purchases made at fair market
value in connection with any of our deferred compensation plans.
Licensing Agreement
In 1995, we entered into a licensing and marketing agreement with
Hoffmann-La Roche and its affiliates granting it a ten-year option to license
to use and sell products in non-U.S. markets. In July 1999, we amended that
agreement, the major provisions of which include:
- - extending Hoffmann-La Roche's option until at least 2015;
- - Hoffmann-La Roche may exercise its option to license our products upon the
occurrence of any of the following: (1) our decision to file an
Investigational New Drug exemption application, or IND, for a product, (2)
completion of a Phase II trial for a product or (3) if Hoffmann-La Roche
previously paid us a fee of $10 million to extend its option on a product,
completion of a Phase III trial for that product;
- - we 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 FDA or completion of the Phase II trials, a royalty of 12.5% on the
first $100 million on its aggregate sales of that product and thereafter
a royalty of 15% on its aggregate sales of that product in excess of $100
million until the later in each country of the expiration of our last
relevant patent or 25 years from the first commercial introduction of that
product; and
- - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction of that product; however, $5 million of any option extension
fee paid by Hoffmann-La Roche will be credited against royalties payable
to us in the first calendar year of sales by Hoffmann-La Roche in which
aggregate sales of that product exceed $100 million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, and until Roche completed
its public offering of our Common Stock in October 1999, we were included in
Roche's U.S. federal consolidated income tax group. Accordingly, we entered
into a tax sharing agreement with Roche. Pursuant to the tax sharing
agreement, we and Roche are to make payments such that the net amount paid by
us on account of consolidated or combined income taxes is determined as if we
had filed separate, stand-alone federal, state and local income tax returns
as the common parent of an affiliated group of corporations filing
consolidated or combined federal, state and local returns.
Effective with the consummation of the second public offering on October
26, 1999, we ceased to be a member of the consolidated federal income tax
group (and certain consolidated or combined state and local income tax
groups) of which Roche is the common parent. Accordingly, our tax sharing
agreement with Roche now pertains only to the state and local tax returns in
which we will be consolidated or combined with Roche. We will continue to
calculate our tax liability or refund with Roche for these state and local
jurisdictions as if we were a stand-alone entity.
Roche's Right to Maintain its Percentage Ownership Interest in Our Stock:
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. The affiliation agreement requires us
to, among other things, establish a stock repurchase program designed to
maintain Roche's percentage ownership interest in our common stock. In
addition, Roche will have a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest. To
ensure that, with respect to any issuance of common stock by Genentech in the
future, the percentage of Genentech common stock owned by Roche immediately
after such issuance will be no lower than Roche's lowest percentage ownership
of Genentech common stock at any time after the offering of common stock
occurring in July 1999 and prior to the time of such issuance, except that
Genentech may issue shares up to an amount that would cause Roche's lowest
percentage ownership to be no more than 2% below the "Minimum Percentage."
The Minimum Percentage equals the lowest number of shares of Genentech common
stock owned by Roche since the July 1999 offering (to be adjusted in the
future for dispositions of shares of Genentech common stock by Roche) divided
by 254,597,176 (to be adjusted in the future for stock splits or stock
combinations), which is the number of shares of Genentech common stock
outstanding at the time of the July 1999 offering adjusted for the two-for-
one split of our common stock in November 1999. As long as Roche's
percentage ownership is greater than 50%, prior to issuing any shares,
Genentech must repurchase a sufficient number of shares of its common stock
to ensure that, immediately after its issuance of shares, Roche's percentage
ownership will be greater than 50%. We have also agreed, upon Roche's
request, to repurchase shares of our common stock to increase Roche's
ownership to the Minimum Percentage. Roche owned approximately 66.1% of our
common stock at December 31, 1999.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES 1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash, cash equivalents, short-term
investments and long-term marketable
debt and equity securities $1,957.4 $1,604.6 $1,286.5
Working capital 842.4 950.6 904.4
Cash provided by (used in):
Operating activities (7.4) 349.9 118.3
Investing activities (96.2) (421.1) (168.4)
Financing activities 160.2 107.9 87.3
Capital expenditures
(included in investing activities above) (95.0) (88.1) (154.9)
Current ratio 2.7:1 4.3:1 4.1:1
</TABLE>
Cash generated from operations, income from investments and proceeds from
stock issuances were used to pay for the cash-out of stock options related to
the Redemption in 1999, to purchase marketable securities and to make capital
and equity investments.
Capital expenditures in 1999 primarily consisted of equipment purchases and
improvements to existing manufacturing and service facilities. Capital
expenditures in 1998 included improvements to existing office and laboratory
facilities and equipment purchases. In 1997, capital expenditures primarily
included building improvements to existing manufacturing and office
facilities and production systems.
We believe that our cash, cash equivalents and short-term investments,
together with funds provided by operations and leasing arrangements, will be
sufficient to meet our foreseeable operating cash requirements. In addition,
we believe we could access additional funds from the debt and, under certain
circumstances, capital markets. See also "A Variety of Factors Could Affect
Our Liquidity" below for factors that could negatively affect our cash
position.
Our long-term debt consists of $149.7 million of convertible subordinated
debentures, with interest payable at 5%, due in 2002. As a result of the
redemption of our Special Common Stock, upon conversion, the holder receives,
for each $74 in principal amount of debenture converted, $59.25 in cash, of
which $18 will be reimbursed to us by Roche. Generally, we may redeem the
debentures until maturity.
FORWARD-LOOKING INFORMATION AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE
RESULTS
The following section contains forward-looking information based on our
current expectations. Because our actual results may differ materially from
this and any other forward-looking statements made by or on behalf of
Genentech, this section also includes a discussion of important factors that
could affect our actual future results, including our product sales,
royalties, contract revenues, expenses and net income.
Our Operating Results May Fluctuate
Our operating results may vary from period to period for several reasons
including, but not limited to:
- - the overall competitive environment for our products;
- - the amount and timing of sales to customers in the United States;
- - the amount and timing of our sales to Hoffmann-La Roche and the amount and
timing of its sales to its customers;
- - the timing and volume of bulk shipments to licensees;
- - the availability of third-party reimbursements for the cost of therapy;
- - the effectiveness and safety of our products;
- - the rate of adoption and use of our products for approved indications and
additional indications;
- - the potential introduction of new products and additional indications for
existing products in 2000 and beyond; and
- - the ability to manufacture sufficient quantities of any particular
marketed product.
The Results of Our Research and Development Are Unpredictable
Successful pharmaceutical product development is highly uncertain and is
dependent on numerous factors, many of which are beyond our control.
Products that appear promising in the early phases of development may fail to
reach the market for numerous reasons, including, but not limited to:
- - they may be found to be ineffective or to have harmful side effects in
preclinical or clinical testing;
- - they may fail to receive necessary regulatory approvals;
- - they may turn out to be uneconomical because of manufacturing costs or
other factors; or
- - they may be precluded from commercialization by the proprietary rights of
others or by competing products or technologies for the same indication.
Success in preclinical and early clinical trials does not ensure that large-
scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical
trials and to submit an application for marketing approval for a final
decision by a regulatory authority varies significantly and may be difficult
to predict.
Factors affecting our research and development expenses include, but are not
limited to:
- - the number of and the outcome of clinical trials currently being conducted
by us and/or our collaborators;
- - the number of products entering into development from late-stage research;
- - Hoffmann-La Roche's decisions whether to exercise its options to develop
and sell our future products in non-U.S. markets and the timing and amount
of any related development cost reimbursement;
- - in-licensing activities, including the timing and amount of related
development funding or milestone payments; and
- - future levels of revenues.
Roche, Our Controlling Stockholder, May Have Interests That Are Adverse to
Other Stockholders
As our majority stockholder, Roche controls the outcome of actions requiring
the approval of our stockholders. Our bylaws provide, among other things,
that the composition of our board of directors shall consist of two Roche
directors, three independent directors nominated by a nominating committee
and one Genentech employee nominated by the nominating committee. As long as
Roche owns in excess of 50% of our Common Stock, Roche directors will
comprise two of the three members of the nominating committee. However, at
any time until Roche owns less than 5% of our stock, Roche will have the
right to obtain proportional representation on our board. Roche intends to
continue to allow our current management to conduct our business and
operations as we have done in the past. However, we cannot assure you that
Roche will not institute a new business plan in the future. The interests of
Roche may conflict with the interests of other holders of Common Stock. You
should also read "Relationship with Roche" above for further information.
The affiliation agreement between us and Roche requires the approval of
the directors designated by Roche to make any acquisition or any sale or
disposal of all or a portion of our business representing 10% or more of our
assets, net income or revenues. Moreover, the affiliation agreement also
contains provisions that are designed to enable Roche to maintain a certain
percentage ownership interest in our Common Stock. These provisions may have
the effect of limiting our ability to make acquisitions. The affiliation
agreement requires us to, among other things, establish a stock repurchase
program designed to maintain Roche's percentage ownership interest in our
Common Stock. While the dollar amounts associated with these future
purchases cannot currently be estimated, such stock repurchases could have a
material adverse impact on our liquidity. For more information, see above
"Relationship with Roche - Roche's Right to Maintain its Percentage Ownership
Interest in Our Stock."
Our certificate of incorporation includes provisions relating to
competition by Roche with us, allocations of corporate opportunities,
transactions with interested parties and intercompany agreements and
provisions limiting the liability of certain people. Our certificate of
incorporation provides that any person purchasing or acquiring an interest in
shares of our capital stock shall be deemed to have consented to the
provisions in the certificate of incorporation relating to competition with
Roche, conflicts of interest, corporate opportunities and intercompany
agreements, and such consent may restrict such person's ability to challenge
transactions carried out in compliance with such provisions. Persons who are
directors and/or officers of ours and who are also directors and/or officers
of Roche may choose to take action in reliance on such provisions rather than
act in a manner that might be favorable to us but adverse to Roche. Two of
our directors currently serve as directors, officers and employees of Roche
Holding Ltd and its affiliates.
We Depend on Skilled Personnel and Key Relationships
The success of our business depends, in large part, on our continued ability
to attract and retain highly qualified management, scientific, manufacturing
and sales and marketing personnel, and on our ability to develop and maintain
important relationships with leading research institutions and key
distributors. Competition for such personnel and relationships is intense.
In connection with the redemption of our Special Common Stock, two of our
existing employee stock option plans terminated and a number of employee
options, including many of those held by senior management, were canceled.
We have issued new employee stock options to attract and retain employees.
However, certain provisions of our affiliation agreement with Roche are
designed to enable Roche to maintain its percentage ownership interest in our
Common Stock, which may limit our flexibility as to the number of shares we
are able to grant under our stock option plans. We cannot assure you that we
will be able to attract or retain such personnel or maintain such
relationships.
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's
Retavase, registered trademark, either alone or in combination with the use
of another Centocor product, ReoPro, registered trademark, (abciximab); 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. 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 four other companies with growth hormone products. One
additional company had been preliminarily enjoined from selling its product,
but it is now free to enter the market. As a result of this competition, we
have experienced a loss in new patient market share. The four competitors
have also received approval to market their existing human growth hormone
products for additional indications. As a result of this competition, our
sales of Protropin, Nutropin and Nutropin AQ may decline, perhaps
significantly.
Third, in the non-Hodgkin's lymphoma market, Coulter Pharmaceuticals
Inc., or Coulter, has filed a Biologics License Application, or BLA, for a
product that may compete with our product Rituxan. We are also aware of
other potentially competitive biologic therapies for non-Hodgkin's lymphoma
in development.
Other Competitive Factors Could Affect Our Product Sales
Other competitive factors that could affect our product sales include, but
are not limited to:
- - the timing of FDA approval, if any, of competitive products;
- - our pricing decisions and the pricing decisions of our competitors;
- - the degree of patent protection afforded to particular products;
- - the outcome of litigation involving our patents and patents of other
companies for products and processes related to production and formulation
of those products;
- - the increasing use and development of alternate therapies; and
- - the rate of market penetration by competing products.
In Connection with the Redemption of Our Special Common Stock We Recorded
Substantial Goodwill and Other Intangibles, the Amortization of Which Will
Adversely Affect Our Earnings
As a result of the redemption of our Special Common Stock, Roche owned all of
our outstanding stock. Consequently, push-down accounting under generally
accepted accounting principles was required. Push-down accounting required
us to establish a new accounting basis for our assets and liabilities, based
on Roche's cost in acquiring all of our stock. In other words, Roche's cost
of acquiring Genentech was "pushed down" to us and reflected in our financial
statements. Push-down accounting required us to record goodwill and other
intangible assets of approximately $1,706.0 million and $1,499.0 million,
respectively, during the second quarter of 1999. The amortization of this
goodwill and other intangible assets will have a significant negative impact
on our financial results in future years. In addition, we will continuously
evaluate whether events and circumstances have occurred that indicate the
remaining balance of this and other intangible assets may not be recoverable.
When factors indicate that assets should be evaluated for possible
impairment, we may be required to reduce the carrying value of our intangible
assets, which could have a material adverse effect on our financial condition
and results of operations during the periods in which such a reduction is
recognized. For more information about push-down accounting, see the
"Redemption of Our Special Common Stock" note in the Notes to 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 and option
extensions to develop and sell our future products in non-U.S. markets and
the timing and amount of any related development cost reimbursements;
- - variations in Hoffmann-La Roche's sales and other licensees' sales of
licensed products;
- - the conclusion of existing arrangements with other companies and Hoffmann-
La Roche;
- - the timing of non-U.S. approvals, if any, for products licensed to
Hoffmann-La Roche and other licensees;
- - fluctuations in foreign currency exchange rates;
- - the initiation of new contractual arrangements with other companies;
- - whether and when contract benchmarks are achieved;
- - the failure of or refusal of a licensee to pay royalties; and
- - the expiration or invalidation of patents or other licensed intellectual
property.
Protecting Our Proprietary Rights is Difficult and Costly
The patent positions of pharmaceutical and biotechnology companies can be
highly uncertain and involve complex legal and factual questions.
Accordingly, the breadth of claims allowed in these companies' patents
cannot be predicted. Patent disputes are frequent and can preclude
commercialization of products. We have in the past been, are currently, and
may in the future be involved in material patent litigation. Patent
litigation is costly in its own right and could subject us to significant
liabilities to third-parties and, if decided adversely, we may need to obtain
third-party licenses at a material cost or cease using the technology or
product in dispute. The presence of patents or other proprietary rights
belonging to other parties may lead to the termination of the research and
development of a particular product. We believe that we have strong patent
protection or the potential for strong patent protection for a number of our
products that generate sales and royalty revenue or that we are developing.
However, the courts will determine the ultimate strength of patent protection
of our products and those on which we earn royalties. You should read the
"Leases, Commitments and Contingencies" note in the Notes to Consolidated
Financial Statements.
We May Incur Material Litigation Costs
We are subject to legal proceedings, including those matters described in the
"Leases, Commitments and Contingencies" note in the Notes to Consolidated
Financial Statements. Litigation which we are currently or have been subject
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 litigations, including special charges of $230.0
million in 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 Biologics License Application, or BLA, are
substantial and can require a number of years. We cannot be sure that we can
obtain necessary regulatory approvals on a timely basis, if at all, for any
of the products we are developing, and all of the following could have a
material adverse effect on our business:
- - significant delays in obtaining or failing to obtain required approvals;
- - loss of or changes to previously obtained approvals; and
- - failing to comply with existing or future regulatory requirements.
Moreover, it is possible that the current regulatory framework could
change or additional regulations could arise at any stage during our product
development, which may affect our ability to obtain approval of our products.
A Variety of Factors Could Affect Our Liquidity
We believe that our cash, cash equivalents and short-term investments,
together with funds provided by operations and leasing arrangements, will be
sufficient to meet our foreseeable operating cash requirements. In addition,
we believe we could access additional funds from the debt and, under certain
circumstances, capital markets. Factors that could negatively affect our
cash position include, but are not limited to, future levels of our product
sales, royalty and contract revenues, expenses, in-licensing activities,
including the timing and amount of related development funding or milestone
payments, acquisitions, capital expenditures and the amount of any stock
repurchased under any stock repurchase program. The affiliation agreement
with Roche requires us to, among other things, establish a stock repurchase
program designed to maintain Roche's percentage ownership interest in our
Common Stock. While the dollar amounts associated with these future
purchases cannot currently be estimated, such stock repurchases could have a
material adverse impact on our liquidity.
We Are Subject to a Tax Sharing Agreement with Roche, and a Variety of
Factors Could Affect Our Income Tax Rate
Since the redemption of our Special Common Stock, and until Roche completed
its public offering of our Common Stock in October 1999, we were included in
Roche's U.S. federal consolidated income tax group. Accordingly, we entered
into a tax sharing agreement with Roche. Pursuant to the tax sharing
agreement, we and Roche are to make payments such that the net amount paid by
us on account of consolidated or combined income taxes is determined as if we
had filed separate, stand-alone federal, state and local income tax returns
as the common parent of an affiliated group of corporations filing
consolidated or combined federal, state and local returns.
Effective with the consummation of the second public offering on October
26, 1999, Genentech ceased to be a member of the consolidated federal income
tax group (and certain consolidated or combined state and local income tax
groups) of which Roche is the common parent. Accordingly, our tax sharing
agreement with Roche now pertains only to the state and local tax returns in
which we will be consolidated or combined with Roche. We will continue to
calculate our tax liability or refund with Roche for these state and local
jurisdictions as if we were a stand-alone entity.
Our effective tax rate increased in 1999 from 1998 as a result of non-
deductible goodwill amortization, a charge for in-process research and
development and legal settlements. Beyond 1999, the current effective tax
rate will increase due to goodwill amortization. In addition, our effective
tax rate is dependent upon several other factors including, but not limited
to, changes in tax laws and rates, interpretation of existing tax laws,
future levels of research and development spending, the outcome of clinical
trials of certain development products, our success in commercializing such
products, potential competition regarding the products and non-deductible
items.
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 were
unable to distinguish between the year 1900 and the year 2000, potentially
causing those software programs and equipment to misinterpret dates after
January 1, 2000.
We have had a Year 2000 Project in place to address potential problems
with our business critical systems and equipment resulting from this issue
and, as of December 31, 1999, all phases of this project were essentially
complete. To date, we have not experienced any significant Year 2000 related
problems.
It is possible that we may experience Year 2000 related problems in the
future, particularly with our non-business critical systems, which may result
in failures or miscalculations resulting in inaccuracies in computer output
or disruptions of operations. However, we believe that the Year 2000 issue
will not pose significant operational problems for our business critical
computer systems and equipment.
The financial impact of future remediation activities that may become
necessary, if any, cannot be known precisely at this time, but it is not
expected to be material.
We Are Exposed to Market Risk
We are exposed to market risk, including changes to interest rates, foreign
currency exchange rates and equity investment prices. To reduce the
volatility relating to these exposures, we enter into various derivative
investment transactions pursuant to our investment and risk management
policies and procedures in areas such as hedging and counterparty exposure
practices. We do not use derivatives for speculative purposes.
We maintain risk management control systems to monitor the risks
associated with interest rates, foreign currency exchange rates and equity
investment price changes, and our derivative and financial instrument
positions. The risk management control systems use analytical techniques,
including sensitivity analysis and market values. Though we intend for our
risk management control systems to be comprehensive, there are inherent risks
that may only be partially offset by our hedging programs should there be
unfavorable movements in interest rates, foreign currency exchange rates or
equity investment prices.
The estimated exposures discussed below are intended to measure the
maximum amount we could lose from adverse market movements in interest rates,
foreign currency exchange rates and equity investment prices, given a
specified confidence level, over a given period of time. Loss is defined in
the value at risk estimation as fair market value loss. The exposures to
interest rate, foreign currency exchange rate and equity investment price
changes are calculated based on proprietary modeling techniques from a Monte
Carlo simulation value at risk model using a 30-day holding period and a 95%
confidence level. The value at risk model assumes non-linear financial
returns and generates potential paths various market prices could take and
tracks the hypothetical performance of a portfolio under each scenario to
approximate its financial return. The value at risk model takes into account
correlations and diversification across market factors, including interest
rates, foreign currencies and equity prices. Market volatilities and
correlations are based on J.P. Morgan Riskmetrics, trademark, dataset as of
December 31, 1999.
Our Interest Income is Subject to Fluctuations in Interest Rates
Our interest income is sensitive to changes in the general level of interest
rates, primarily U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on our cash equivalents, short-term
investments, convertible preferred stock investments, convertible loans and
long-term investments. To mitigate the impact of fluctuations in U.S.
interest rates, we may enter into swap transactions, which involve the
receipt of fixed rate interest and the payment of floating rate interest
without the exchange of the underlying principal.
Based on our overall interest rate exposure at December 31, 1999, and 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.
We Are Exposed to Risks Relating to Foreign Currency Exchange Rates and
Foreign Economic Conditions
We receive royalty revenues from licensees selling products in countries
throughout the world. As a result, our financial results could be
significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in which
our licensed products are sold. We are exposed to changes in exchange rates
in Europe, Asia (primarily Japan) and Canada. Our exposure to foreign
exchange rates primarily exists with the Euro. When the U.S. dollar
strengthens against the currencies in these countries, the U.S. dollar value
of non-U.S. dollar-based revenue decreases; when the U.S. dollar weakens, the
U.S. dollar value of the non-U.S. dollar-based revenues increases.
Accordingly, changes in exchange rates, and in particular a strengthening of
the U.S. dollar, may adversely affect our royalty revenues as expressed in
U.S. dollars. In addition, as part of our overall investment strategy, a
portion of our portfolio is primarily in non-dollar denominated investments.
As a result, we are exposed to changes in the exchange rates of the countries
in which these non-dollar denominated investments are made.
To mitigate this risk, we hedge certain of our anticipated revenues by
purchasing option contracts with expiration dates and amounts of currency
that are based on 25% to 90% of probable future revenues so that the
potential adverse impact of movements in currency exchange rates on the non-
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 three years. We may also enter into foreign
currency forward contracts to lock in the dollar value of a portion of these
anticipated revenues. To hedge the non-dollar denominated investments in the
portfolio, we enter into forward contracts.
Based on our overall currency rate exposure at December 31, 1999, and 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.
Our Investments in Equity Securities Are Subject to Market Risks
As part of our strategic alliance efforts, we invest in equity instruments of
biotechnology companies. These investments are subject to fluctuations from
market value changes in stock prices. To mitigate this risk, certain equity
securities are hedged with costless collars. A costless collar is a
purchased put option and a written call option in which the cost of the
purchased put and the proceeds of the written call offset each other;
therefore, there is no initial cost or cash outflow for these instruments at
the time of purchase. The purchased put protects us from a decline in the
market value of the security below a certain minimum level (the put "strike"
level); while the call effectively limits our potential to benefit from an
increase in the market value of the security above a certain maximum level
(the call "strike" level). In addition, as part of our strategic alliance
efforts, we hold dividend-bearing convertible preferred stock and have made
interest-bearing loans that are convertible into the equity securities of the
debtor.
Based on our overall exposure to fluctuations from market value changes
in marketable equity prices at December 31, 1999, 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 $43.2 million. However, the change in 1999 has resulted in a
material benefit to our consolidated financial statements. On December 31,
1998, we estimated that the potential loss in fair value of the equity
securities portfolio was $10.6 million.
New Accounting Standards Could Impact Our Financial Position and Results of
Operations
In July 1999, the Financial Accounting Standards Board announced the delay of
the effective date of Statement of Financial Accounting Standards 133, or FAS
133, "Accounting for Derivative Instruments and Hedging Activities," for one
year, to the first quarter of 2001.
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and
measure those instruments at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting
under FAS 133. The impact of FAS 133 on our financial position and results
of operations is not expected to be material.
We Are Exposed to Credit Risk of Counterparties
We could be exposed to losses related to the financial instruments described
above under "We are Exposed to Market Risk" should one of our counterparties
default. We attempt to mitigate this risk through credit monitoring
procedures.
REPORT OF MANAGEMENT
Genentech, Inc. is responsible for the preparation, integrity and fair
presentation of its published financial statements. We have prepared the
financial statements in accordance with generally accepted accounting
principles. As such, the statements include amounts based on judgments and
estimates made by management. We also prepared the other information
included in the annual report and are responsible for its accuracy and
consistency with the financial statements.
The financial statements have been audited by the independent auditing firm,
Ernst & Young LLP, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders,
the Board of Directors and committees of the Board. We believe that all
representations made to the independent auditors during their audit were
valid and appropriate. Ernst & Young LLP's audit report is included in this
Annual Report.
Systems of internal accounting controls, applied by operating and financial
management, are designed to provide reasonable assurance as to the integrity
and reliability of the financial statements and reasonable, but not absolute,
assurance that assets are safeguarded from unauthorized use or disposition,
and that transactions are recorded according to management's policies and
procedures. We continually review and modify these systems, where
appropriate, to maintain such assurance. Through our general audit
activities, the adequacy and effectiveness of the systems and controls are
reviewed and the resultant findings are communicated to management and the
Audit Committee of the Board of Directors.
The selection of Ernst & Young LLP as our independent auditors has been
approved by our Board of Directors and ratified by the stockholders. The
Audit Committee of the Board of Directors is composed of three non-management
directors who meet regularly with management, the independent auditors and
the general auditor, jointly and separately, to review the adequacy of
internal accounting controls and auditing and financial reporting matters to
ascertain that each is properly discharging its responsibilities.
<TABLE>
<S> <C> <C>
Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr. John M. Whiting
Chairman and Executive Vice President Controller and
Chief Executive Officer and Chief Financial Officer Chief Accounting Officer
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands, except per share amounts)
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Product sales (including amounts from
related parties: 1999-$41,324;
1998-$28,738; 1997-$17,396) $ 1,039,095 $ 717,795 $ 584,889
Royalties (including amounts
from related parties: 1999-$42,528;
1998-$35,028; 1997-$25,362) 189,270 229,589 241,112
Contract and other (including amounts
from related parties: 1999-$17,170;
1998-$61,583; 1997-$67,596) 103,579 114,795 121,587
Interest 89,434 88,764 69,160
---------------------------------------
Total revenues 1,421,378 1,150,943 1,016,748
Costs and expenses
Cost of sales (including amounts from
related parties: 1999-$36,267;
1998-$23,155; 1997-$14,348) 285,549 138,623 102,536
Research and development (including
contract related: 1999-$18,366;
1998-$27,660; 1997-$67,596) 367,338 396,186 470,923
Marketing, general and administrative 467,929 358,931 269,852
Special charges:
Related to redemption 1,207,700 - -
Legal settlements 230,008 - -
Recurring charges related to redemption 198,420 - -
Interest 5,360 4,552 3,642
---------------------------------------
Total costs and expenses 2,762,304 898,292 846,953
Income (loss) before taxes (1,340,926) 252,651 169,795
Income tax (benefit) provision (196,398) 70,742 40,751
---------------------------------------
Net income (loss) $(1,144,528) $ 181,909 $ 129,044
=======================================
Earnings (loss) per share:
Basic $ (4.46) $ 0.72 $ 0.52
Diluted $ (4.46) $ 0.70 $ 0.51
=======================================
Weighted average shares used to compute
diluted earnings (loss) per share: 256,430 259,744 252,795
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
<CAPTION>
Increase (decrease) in Cash and
Cash Equivalents
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,144,528) $ 181,909 $ 129,044
Adjustments to reconcile net income (loss) to
net cash (used) provided by operating activities:
Depreciation and amortization 281,360 78,101 65,533
In-process research and development 752,500 - -
Non-cash compensation related to stock options,
net of tax 119,153 - -
Deferred income taxes (144,295) 29,792 19,660
Gain on sales of and write-up of securities
available-for-sale (39,712) (9,542) (13,203)
Loss on sales of securities available-for-sale 1,805 1,809 2,096
Write-down of nonmarketable securities 432 16,689 -
Write-down of securities available-for-sale 13,422 20,249 4,000
Loss on fixed asset dispositions 886 1,015 318
Changes in assets and liabilities:
Net cash flow from trading securities (10,159) 12,725 (109,132)
Receivables and other current assets (67,943) 33,767 11,194
Inventories 59,561 (32,600) (24,083)
Accounts payable, other current
liabilities and other long-term liabilities 170,072 15,937 32,897
-----------------------------------
Net cash (used) provided by operating activities (7,446) 349,851 118,324
Cash flows from investing activities:
Purchases of securities held-to-maturity (186,612) (327,690) (304,932)
Proceeds from maturities of securities
held-to-maturity 286,497 410,729 455,317
Purchases of securities available-for-sale (595,068) (800,788) (512,727)
Proceeds from sales of securities
available-for-sale 627,063 430,936 410,395
Purchases of nonmarketable equity securities (52,958) (29,044) -
Capital expenditures (95,008) (88,088) (154,902)
Change in other assets (23,551) (17,151) (61,529)
Transfer to restricted cash included in other assets (56,600) - -
-----------------------------------
Net cash used in investing activities (96,237) (421,096) (168,378)
Cash flows from financing activities:
Stock issuances 160,203 107,938 87,259
-----------------------------------
Net cash provided by financing activities 160,203 107,938 87,259
-----------------------------------
Increase in cash and cash equivalents 56,520 36,693 37,205
Cash and cash equivalents at beginning of year 281,162 244,469 207,264
-----------------------------------
Cash and cash equivalents at end of year $ 337,682 $ 281,162 $ 244,469
===================================
Supplemental cash flow data:
Cash paid during the year for:
Interest, net of portion capitalized $ 5,360 $ 4,552 $ 3,642
Income taxes 18,740 26,189 15,474
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value)
<CAPTION>
DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 337,682 $ 281,162
Short-term investments 405,003 606,544
Accounts receivable - trade (net of
allowances of: 1999-$15,767; 1998-$14,661) 120,497 79,411
Accounts receivable - other (net of
allowances of: 1999-$3,184; 1998-$2,757) 61,054 47,480
Accounts receivable - related party 33,234 22,850
Inventories 275,245 148,626
Deferred tax assets 81,922 38,849
Prepaid expenses and other current assets 11,870 17,036
----------------------------
Total current assets 1,326,507 1,241,958
Long-term marketable securities 1,214,757 716,888
Property, plant and equipment, net 730,086 700,249
Goodwill (net of accumulated amortization of:
1999-$690,887; 1998-none) 1,628,722 -
Other intangible assets (net of accumulated
amortization of: 1999-$1,062,181; 1998-$28,614) 1,453,268 65,033
Other long-term assets 201,101 131,274
----------------------------
Total assets $ 6,554,441 $ 2,855,402
============================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 33,123 $ 40,895
Accrued liabilities - related party 14,960 10,945
Other accrued liabilities 436,044 239,487
----------------------------
Total current liabilities 484,127 291,327
Long-term debt 149,708 149,990
Deferred tax liabilities 626,466 43,782
Other long-term liabilities 11,335 26,458
----------------------------
Total liabilities 1,271,636 511,557
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;
outstanding: 1999-none; 1998-100,987,262 - 1,010
Common stock, $0.02 par value; authorized:
300,000,000 shares; outstanding:
1999-258,110,279 and 1998-153,242,018 5,162 1,532
Additional paid-in capital 7,191,766 1,588,990
Retained earnings (accumulated deficit) (2,173,622) 693,050
Accumulated other comprehensive income 259,499 59,263
----------------------------
Total stockholders' equity 5,282,805 2,343,845
----------------------------
Total liabilities and stockholders' equity $ 6,554,441 $ 2,855,402
============================
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(thousands)
Shares Accumulated
---------------- Retained Other
Special Special Additional Earnings Comprehensive
Common Common Common Common Paid-in (Accumulated Income
Stock Stock Stock Stock Capital Deficit) (Loss) Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 89,611 153,242 $1,792 $3,065 $1,360,156 $ 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 4,700 94 68,299 68,393
Issuance of stock under
employee stock plan 902 18 18,848 18,866
Income tax benefits
realized from employee
stock option exercises 13,980 13,980
------------------------------------------------------------------------------------------
Balance December 31, 1997 95,213 153,242 $1,904 $3,065 $1,461,283 $ 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 4,920 98 86,786 86,884
Issuance of stock under
employee stock plan 854 18 21,046 21,064
Income tax benefits
realized from employee
stock option exercises 17,332 17,332
------------------------------------------------------------------------------------------
Balance December 31, 1998 100,987 153,242 $2,020 $3,065 $1,586,447 $ 693,050 $ 59,263 $2,343,845
------------------------------------------------------------------------------------------
Comprehensive income (loss)
Net income (loss) (1,144,528) (1,144,528)
Net unrealized gain
on securities
available-for-sale 200,236 200,236
----------
Comprehensive income (loss) (944,292)
----------
Issuance of stock
upon exercise of
options 2,544 3,275 51 66 141,785 141,902
Issuance of stock under
employee stock plan 507 238 10 4 18,629 18,643
Redemption of Special
Common Stock and related
issuance of Common Stock (104,038) 101,355 (2,081) 2,027 5,361,918 (1,722,144) 3,639,720
Income tax benefits
realized from employee
stock option exercises 82,987 82,987
------------------------------------------------------------------------------------------
Balance December 31, 1999 - 258,110 $ - $5,162 $7,191,766 $(2,173,622) $259,499 $5,282,805
==========================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In this Annual Report, "Genentech," "we," "us" and "our" refer to Genentech,
Inc., "Common Stock" refers to Genentech's Common Stock, par value $0.02 per
share, "Special Common Stock" refers to Genentech's callable putable common
stock, par value $0.02 per share and "Redeemable Common Stock" refers to
Genentech's redeemable common stock, par value $0.02 per share. In addition,
all numbers relating to the number of shares, price per share and per share
amounts of Common Stock, Special Common Stock and Redeemable Common Stock
give effect to the two-for-one split of our Common Stock on November 2, 1999.
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Genentech is a leading biotechnology company that uses human genetic
information to discover, develop, manufacture and market human
pharmaceuticals for significant unmet medical needs. Thirteen of the
approved products of biotechnology stem from our science. Of these products,
we manufacture and market seven directly in the United States, and we are
preparing to begin manufacturing and marketing the eighth.
On June 30, 1999, we redeemed all of our outstanding Special Common Stock
held by stockholders other than Roche Holdings, Inc., commonly known as
Roche, at a price of $41.25 per share in cash with funds deposited by Roche
for that purpose. We refer to this event as the "Redemption." As a result,
Roche's percentage ownership of our outstanding Common Stock increased from
65% to 100%. Consequently, push-down accounting was required under U.S.
generally accepted accounting principles to reflect in our financial
statements the amounts paid for our stock in excess of our net book value.
See "Redemption of our Special Common Stock" note below for further
discussion.
We receive royalties on sales of rituximab, outside of the U.S. (excluding
Japan), on sales of Pulmozyme and Herceptin outside of the U.S. and on sales
of certain of our products in Canada from F. Hoffmann-La Roche Ltd, a
subsidiary of Roche that is commonly known as Hoffmann-La Roche. See
"Relationship with Roche" note below for further discussion.
We receive royalties on sales of growth hormone products and tissue-
plasminogen activator outside of the U.S. and Canada, and on sales of
rituximab in Japan through other licensees. We also receive worldwide
royalties on seven additional licensed products that are marketed by other
companies. Six of these products originated from our technology.
Principles of Consolidation: The consolidated financial statements include
the accounts of Genentech and all 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: We consider 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: We invest our
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 our strategic alliance
efforts, we also invest 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. We had investments of
$53.3 million at December 31, 1999, and $55.8 million at December 31, 1998,
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 we have the positive intent and ability to hold the securities
to maturity. 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.
Long-Lived Assets: The carrying value of our long-lived assets is reviewed
for impairment whenever events or changes in circumstances indicate that the
asset may not be recoverable. An impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount. Long-lived assets
include property, plant and equipment, goodwill and other intangible assets.
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:
<TABLE>
<CAPTION>
Useful Lives
- -----------------------------------------------------------------------------
<S> <C>
Buildings 25 years
Certain manufacturing equipment 15 years
Other equipment 4 or 8 years
Leasehold improvements length of applicable lease
</TABLE>
The costs of repairs and maintenance are expensed as incurred. Capitalized
interest on construction-in-progress is included in property, plant and
equipment. The repairs and maintenance expenses and capitalized interest
were as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Repairs and maintenance expenses $39.9 $35.9 $32.9
Capitalized interest 2.1 3.0 3.9
</TABLE>
Property, plant and equipment balances at December 31 are summarized below
(in thousands):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
At cost:
Land $ 89,983 $ 69,437
Buildings 380,236 378,133
Equipment 667,884 607,369
Leasehold improvements 4,655 3,565
Construction in progress 106,824 86,960
--------------------------
1,249,582 1,145,464
Less: accumulated depreciation 519,496 445,215
--------------------------
Net property, plant and equipment $ 730,086 $ 700,249
==========================
</TABLE>
Goodwill: Goodwill represents the difference between the purchase price and
the fair value of the net assets when accounted for by the purchase method of
accounting. Goodwill is amortized on a straight-line basis over 15 years.
Other Intangible Assets: Other intangible assets arising from Roche's
purchases of our Special Common Stock and push-down accounting are amortized
over their estimated useful lives ranging from five to 15 years. Costs of
patents and patent applications related to products and processes of
significant importance to us are capitalized and amortized on a straight-line
basis over their estimated useful lives of approximately 12 years. Other
intangible assets are generally amortized on a straight-line basis over their
estimated useful lives.
Other Assets: Under certain lease agreements, we may be required from time
to time to set aside cash as collateral. At December 31, 1999, other assets
included $56.6 million of restricted cash related to such a lease agreement.
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 $39.0 million in 1999, $38.3 million in 1998 and $39.8
million in 1997 and are classified in marketing, general and administrative
expenses.
Advertising Expenses: We expense the costs of advertising, which also
includes promotional expenses, as incurred. Advertising expenses for the
years ended December 31, 1999, 1998 and 1997, were $80.0 million in 1999,
$47.7 million in 1998 and $41.8 million in 1997.
Income Taxes: We account for income taxes by the asset and liability
approach for financial accounting and reporting of income taxes.
Earnings (Loss) Per Share: Basic earnings (loss) per share is computed based
on the weighted average number of shares of our Common Stock and Special
Common Stock outstanding. Diluted earnings (loss) per share is computed
based on the weighted average number of shares of our Common Stock, Special
Common Stock and other dilutive securities. See also "Earnings (Loss) Per
Share" note below. All numbers relating to the number of shares, price per
share and per share amounts of Common Stock, Special Common Stock and
Redeemable Common Stock give effect to the two-for-one split of our Common
Stock on November 2, 1999.
Financial Instruments: As part of our overall portfolio, we use two external
money managers to manage our 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, or forward
contracts, which are recorded at fair value with the related gain or loss
recorded in interest income.
We purchase simple foreign currency put options, or 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 rates on the nondollar denominated revenues will be at
least partially offset by an associated increase in the value of the options.
See "Financial Instruments" note below for further information on these
options. 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.
We may also enter into 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 may be used in the future to adjust the duration of the
investment portfolio in order to meet duration targets.
Our marketable equity securities 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, we
occasionally enter into costless collar instruments to hedge equity
securities against changes in market value. See "Financial Instruments" note
below 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 component would be recognized through
earnings and the intrinsic value component would adjust the cost basis of the
underlying security.
401(k) Plan: Our 401(k) Plan, or the Plan, covers substantially all of our
employees. Under the Plan, eligible employees may contribute up to 15% of
their eligible compensation, subject to certain Internal Revenue Service
restrictions. We match 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. We provided $8.5
million in 1999, $7.3 million in 1998 and $6.7 million in 1997, for our match
under the Plan.
Comprehensive Income: Comprehensive income is comprised of net income and
other comprehensive income. Other comprehensive income includes certain
changes in equity that are excluded from net income. Specifically,
unrealized holding gains and losses on our available-for-sale securities,
which were reported separately in stockholders' equity, are included in
accumulated other comprehensive income. Comprehensive income for years ended
December 31, 1999, 1998 and 1997 has been reflected in the Consolidated
Statements of Stockholders' Equity.
New Accounting Standards: In July 1999, the Financial Accounting Standards
Board announced the delay of the effective date of Statement of Financial
Accounting Standards 133, or FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," for one year, to the first quarter of 2001. FAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires companies to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting under FAS 133.
The impact of FAS 133 on our financial position and results of operations is
not expected to be material.
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 in 1999 increased from 1998 primarily due to
the Redemption and push-down accounting, which is further discussed below.
As a result of push-down accounting, we recorded $186.2 million related to
the write-up of inventory, of which $93.4 million of expense was recognized
through the sale of inventory in 1999. The remaining $92.8 million of
inventory that was written up is expected to be sold in 2000. Inventories at
December 31, 1999 and 1998 are summarized below (in thousands):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 19,903 $ 21,414
Work in process 228,092 106,383
Finished goods 27,250 20,829
--------------------
Total $275,245 $148,626
====================
</TABLE>
Reclassifications: Certain reclassifications of prior year amounts have been
made to conform with the current year presentation.
Redemption of Our Special Common Stock
Basis of Presentation
Roche accounted for the Redemption as a purchase of a business. As a result,
we were required to push down the effect of the Redemption and Roche's 1990
through 1997 purchases of our Common and Special Common Stock into our
consolidated financial statements at the date of the Redemption. Under this
method of accounting, our assets and liabilities, including other intangible
assets, were recorded at their fair values not to exceed the aggregate
purchase price plus Roche's transaction costs at June 30, 1999. In 1990 and
1991 through 1997 Roche purchased 60% and 5%, respectively, of the
outstanding stock of Genentech. In June 1999, we redeemed all of our Special
Common Stock held by stockholders other than Roche resulting in Roche owning
100% of our Common Stock. The push-down effect of Roche's aggregate purchase
price and the Redemption price in our consolidated balance sheet as of June
30, 1999 was allocated based on Roche's ownership percentages as if the
purchases occurred at the original purchase dates for the 1990 and 1991
through 1997 purchases, and at June 30, 1999 for the Redemption. Management
of Genentech determined the values of tangible and intangible assets,
including in-process research and development, used in allocating the
purchase prices. The aggregate purchase prices for the acquisition of all of
Genentech's outstanding shares, including Roche's estimated transaction costs
of $10.0 million, was $6,604.9 million, consisting of approximately $2,843.5
million for the 1990 and 1991 through 1997 purchases and approximately
$3,761.4 million for the Redemption.
The following table shows details of the excess of purchase price over net
book value (in millions):
<TABLE>
<CAPTION>
Purchase Period
--------------------
1990-1997 1999 Total
--------- --------- ---------
<S> <C> <C> <C>
Total purchase price $ 2,843.5 $ 3,761.4 $ 6,604.9
Less portion of net book value purchased 566.6 836.4 1,403.0
--------- --------- ---------
Excess of purchase price over net book value $ 2,276.9 $ 2,925.0 $ 5,201.9
========= ========= =========
</TABLE>
The following table shows the allocation of the excess of the purchase price
over net book value (in millions):
<TABLE>
<CAPTION>
Purchase Period
--------------------
1990-1997 1999 Total
--------- --------- ---------
<S> <C> <C> <C>
Inventories $ 102.0 $ 186.2 $ 288.2
Land - 16.6 16.6
In-process research and development 500.5 752.5 1,253.0
Developed product technology 429.0 765.0 1,194.0
Core technology 240.5 203.0 443.5
Developed license technology 292.5 175.0 467.5
Trained and assembled workforce 32.5 49.0 81.5
Tradenames 39.0 105.0 144.0
Key distributor relationships 6.5 73.5 80.0
Goodwill 1,091.2 1,228.4 2,319.6
Deferred tax liability (456.8) (629.2) (1,086.0)
--------- --------- ---------
Total $ 2,276.9 $ 2,925.0 $ 5,201.9
========= ========= =========
</TABLE>
Push-Down Accounting Adjustments
The following is a description of accounting adjustments and related useful
lives that reflect push-down accounting in our financial statements. These
adjustments were based on management's estimates of the value of the tangible
and intangible assets acquired:
- - We recorded charges of $1,207.7 million in 1999. These charges primarily
include: a non-cash charge of $752.5 million for in-process research and
development; $284.5 million of compensation expense related to early cash
settlement of certain employee stock options; and an aggregate of
approximately $160.1 million of non-cash compensation expense in
connection with the modification and remeasurement, for accounting
purposes, of continuing employee stock options, which represents the
difference between each applicable option exercise price and the
redemption price of the Special Common Stock. (You should read the
"Capital Stock" note below for further information on these charges.) In
addition, we recorded an adjustment of $20.3 million in other income
related to the write-up of certain marketable securities as a result of
push-down accounting.
- - We recorded an income tax benefit of $177.8 million related to the above
early cash settlement and non-cash compensation related to certain
employee stock options. The income tax benefit reduced the current tax
payable in other accrued liabilities by $56.9 million and reduced long-
term deferred income taxes by $120.9 million.
- - The estimated useful life of the inventory adjustment to fair value
resulting from the Redemption is approximately one year based upon the
expected time to sell inventories on hand at June 30, 1999. In 1999, we
recognized $93.4 million of expense related to the inventory adjustment.
The entire inventory adjustment related to Roche's 1990 through 1997
purchases was reflected as a charge to retained earnings.
- - An adjustment was made to record the fair value of land as a result of the
Redemption. There were no such adjustments for the purchase periods from
1990 through 1997.
- - $1,091.2 million of goodwill, which reflects Roche's 1990 through 1997
purchases, less related accumulated amortization of $613.6 million
through June 30, 1999, was recorded as a charge to retained earnings.
Included in goodwill was $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 was amortized over 15 years.
- - $1,228.4 million of goodwill was recorded as a result of the Redemption.
Included in goodwill was $629.2 million related to the recording of
deferred tax liabilities. Deferred taxes were recorded for the adjustment
to fair value for other intangible assets, inventories and land. The
deferred tax liability was calculated based on a marginal tax rate of 40%
and was allocated between short- and long-term classifications to match
the asset classifications. The goodwill related to the Redemption is
being amortized over 15 years.
- - In 1999, we recorded amortization expense of $77.3 million related to
goodwill and $113.8 million related to other intangible assets.
- - The existing deferred tax asset valuation allowance of $62.8 million
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 was eliminated at June
30, 1999.
- - The redemption of our Special Common Stock and the issuance of new shares
of Common Stock to Roche resulted in substantially the same number of
total shares outstanding as prior to the Redemption.
- - The excess of purchase price over net book value of $2,276.9 million for
1990 through 1997 and $2,925.0 million in 1999, and $160.1 million for
the remeasurement of continuing employee stock options at the
remeasurement date was recorded in paid-in capital.
- - The following adjustments were made to retained earnings for the 1990
through 1997 purchase period (in millions):
1990-1997
Purchases
----------
In-process research and development $ (500.5)
Amortization of goodwill, intangibles and fair
value adjustment to inventories, net of tax (1,221.6)
----------
Total adjustment to retained earnings $ (1,722.1)
==========
- - The tax provision benefit of $196.4 million for 1999 consists of tax
expense of $121.5 million on pretax income excluding the income and
deductions attributable to push-down accounting and legal settlements, and
tax benefits of $317.9 million for 1999 related to the income and
deductions attributable to push-down accounting and legal settlements.
- - $1,040.0 million of other intangible assets, which reflects Roche's 1990
through 1997 purchases, less related accumulated amortization of $911.5
million of those assets through June 30, 1999, was recorded as a charge to
retained earnings. The components of other intangible assets related to
these purchases and their estimated lives are as follows (in millions):
Fair Accumulated Estimated
Value Amortization Life
-------- ------------ ----------
Developed product technology $ 429.0 $ 361.8 10
Core technology 240.5 202.9 10
Developed license technology 292.5 286.9 6
Trained and assembled workforce 32.5 31.6 7
Tradenames 39.0 21.9 15
Key distributor relationships 6.5 6.4 5
-------- --------
$1,040.0 $ 911.5
======== ========
- - $1,370.5 million of other intangible assets was recorded as a result of
the Redemption. The components of other intangible assets related to the
Redemption and their estimated lives are as follows (in millions):
Fair Estimated
Value Life
-------- -----------
Developed product technology $ 765.0 10
Core technology 203.0 10
Developed license technology 175.0 6
Trained and assembled workforce 49.0 7
Tradenames 105.0 15
Key distributor relationships 73.5 5
--------
$1,370.5
========
- - $500.5 million and $752.5 million of in-process research and
development was recorded as a result of Roche's 1990 through 1997
purchases and the Redemption, respectively. At the date of each purchase,
Genentech concluded that technological feasibility of the acquired in-
process technology was not established and that the in-process technology
had no future alternative uses. The amount related to the 1990 through
1997 purchases was charged to retained earnings at June 30, 1999. The
amount related to the Redemption was charged to operations at June 30,
1999.
The amounts of in-process research and development were determined based
on an analysis using the risk-adjusted cash flows expected to be generated
by the products that result from the in-process projects. The analysis
included forecasting future cash flows that were 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 from sales of the first
generation of each in-process product. A portion of the gross in-process
product revenues was then 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 determine a
forecast of net in-process research and development revenues attributable
to projects completed prior to the purchase dates. Appropriate operating
expenses, cash flow adjustments and contributory asset returns were
deducted from the forecast to establish 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 us) as well as the product-specific risk associated
with the purchased in-process research and development products. The
product specific risk factors included 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 ranged from 16% to 19% for the 1999 valuation and 20%
to 28% for the 1990 purchase valuation, all of which represent a
significant risk premium to our weighted average cost of capital.
The forecast data employed in the analysis was based on internal product
level forecast information maintained by our management in the ordinary
course of managing the business. The inputs used by us in analyzing in-
process research and development were based on assumptions, which
we believed 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.
SEGMENT, SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
Our operations are treated as one operating segment as we only report profit
and loss information on an aggregate basis to our chief operating decision
makers. Information about our product sales, major customers and material
foreign source of revenues are as follows (in millions):
<TABLE>
<CAPTION>
Product Sales 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Herceptin $ 188.4 $ 30.5 -
Rituxan 279.4 162.6 $ 5.5
Activase 236.0 213.0 260.7
Growth hormone (Protropin,
Nutropin and Nutropin AQ) 221.2 214.0 223.6
Pulmozyme 111.4 93.8 91.6
Actimmune 2.7 3.9 3.5
------------------------------
Total product sales $1,039.1 $717.8 $584.9
</TABLE>
Hoffmann-La Roche contributed approximately 7% of our total revenues in 1999,
11% in 1998 and 11% in 1997. 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
our total revenues in at least one of the last three years. Although
Caremark, a national distributor, did not contribute over 10% of our total
revenues in 1999, it accounted for 10% in 1998 and 14% in 1997 of our total
revenues. Caremark distributes primarily our growth hormone products 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 14% in 1999, 11% in 1998 and 10% in 1997 of our total
revenues. Cardinal Distribution, a national wholesaler distributor of all
our products, contributed 13% in 1999 and 11% in 1998 of our total revenues,
but it did not contribute over 10% of total revenues in 1997.
Net revenues from Europe were as follows, $133.6 million in 1999, $171.0
million in 1998 and $139.5 million in 1997.
We currently sell primarily to distributors and health care companies
throughout the U.S., perform ongoing credit evaluations of our customers'
financial condition and extend credit generally without collateral. In 1999,
1998 and 1997, we did not record any material additions to, or losses
against, our 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 our potential new products, we establish
strategic alliances with various companies. These strategic alliances
include the acquisition of marketable and nonmarketable equity investments
and convertible debt of companies developing technologies that fall outside
our 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. We also entered into
product-specific collaborations to acquire development and marketing rights
for products.
In December 1997, we entered into a collaboration agreement with Alteon
Inc. to develop and market pimagedine, an advanced glycosylation end-product
formation inhibitor to treat kidney disease in diabetic patients, and
invested $37.5 million in Alteon stock. In 1998, as a result of the decline
in Alteon's stock value and the unsuccessful clinical trials with pimagedine,
we wrote down $24.2 million of our investment in Alteon. In 1999, due to the
continued decline of Alteon's stock value and unsuccessful negotiations with
Alteon, we wrote-off our remaining $10.8 million investment in Alteon.
INCOME TAXES
The income tax provision consists of the following amounts (in thousands):
1999 1998 1997
- -------------------------------------------------------------
Current:
Federal $ (28,478) $ 39,945 $ 30,617
State (3,782) 1,004 432
Foreign - - 2
--------------------------------
Total current (32,260) 40,949 31,051
--------------------------------
Deferred:
Federal (136,021) 29,006 23,799
State (28,117) 787 (14,099)
--------------------------------
Total deferred (164,138) 29,793 9,700
--------------------------------
Total income tax provision $(196,398) $ 70,742 $ 40,751
================================
Tax benefits of $83.0 million in 1999, $17.3 million in 1998, and $14.0
million in 1997 related to employee stock options and stock purchase plans
were credited to stockholders' equity.
A reconciliation between our effective tax rate and the U.S. statutory rate
follows:
<TABLE>
<CAPTION>
Tax Rate
1999 Amount ---------------------------
(thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at U.S. statutory rate $(469,324) 35.0% 35.0% 35.0%
Research credit (11,605) 0.8 (4.7) (11.4)
Tax benefit of certain realized gains
on securities available-for-sale (3,005) 0.2 (1.2) (3.8)
Foreign losses realized (2,727) 0.2 (4.2) -
State taxes (16,536) 1.2 3.0 2.3
Goodwill amortization 27,062 (2.0) - -
Legal settlements 12,250 (0.9) - -
In-Process R&D 263,375 (19.6) - -
Other 4,112 (0.3) 0.1 1.9
-----------------------------------------
Income tax provision $(196,398) 14.6% 28.0% 24.0%
=========================================
</TABLE>
The components of deferred taxes consist of the following at December 31
(in thousands):
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ (85,036) $ (66,471)
Unrealized gain on securities
available-for-sale (181,233) (30,617)
Adjustment to fair value of inventories (38,272) -
Adjustment to fair value of intangibles (560,699) -
Other (16,893) (20,016)
----------------------
Total deferred tax liabilities (882,133) (117,104)
Deferred tax assets:
Capitalized R&D costs 45,436 42,317
Federal credit carryforwards 111,711 86,725
Expenses not currently deductible 93,121 56,699
State credit carryforwards 44,109 30,632
Net operating losses 41,619 -
Other 1,593 4,992
----------------------
Total deferred tax assets 337,589 221,365
Valuation allowance - (62,844)
----------------------
Total net deferred tax assets 337,589 158,521
----------------------
Total net deferred taxes $(544,544) $ 41,417
======================
</TABLE>
Total tax credit carryforwards of $179.6 million expire in the years 2005
through 2010, except for $43.0 million of alternative minimum tax credits
which have no expiration date.
Federal net operating loss carryfowards of $107.4 million expire in 2019.
State net operating loss carryforwards of $80.6 million expire in 2004.
The valuation allowance decreased by $62.8 million in 1999 and increased by
$14.3 million in 1998 and $12.7 million in 1997. All valuation allowance
activity relates to the benefits of stock option deductions which were
credited to paid-in-capital when realized.
EARNINGS (LOSS) PER SHARE
The following is a reconciliation of the numerator and denominators of the
basic and diluted earnings (loss) per share computations for the years ended
December 31, 1999, 1998 and 1997 (in thousands).
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Numerator:
Net (loss) income - numerator
for basic and diluted earnings
(loss) per share: $(1,144,528) $181,909 $129,044
-----------------------------------
Denominator:
Denominator for basic earnings
(loss) per share - weighted-
average shares 256,430 251,534 246,084
Effect of dilutive securities:
Stock options - 8,210 6,711
-----------------------------------
Denominator for diluted earnings
(loss) per share - adjusted
weighted-average shares and
assumed conversions 256,430 259,744 252,795
===================================
</TABLE>
Options to purchase 20,775,805 shares of our Common Stock ranging from
$24.06 to $85.88 per share were outstanding during 1999, but were not
included in the computation of diluted earnings per share. Options to
purchase 357,150 shares of our Special Common Stock ranging from $35.25 to
$35.57 per share and 207,400 shares of Special Common Stock at $29.50 per
share were outstanding during 1998 and 1997, 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 Common Stock
and Special Common Stock and therefore, the effect would be anti-dilutive.
See "Capital Stock" note for information on option expiration dates.
During 1998 and 1997, we had convertible subordinated debentures which
were convertible to 2,026,894 and 2,027,028 shares, respectively, of Special
Common Stock, but were not included in the computation of diluted earnings
per share because they were anti-dilutive. As a result of the Redemption,
the convertible subordinated debentures are no longer convertible to Special
Common Stock. For additional information, you should read the "Long-Term
Debt" note below.
INVESTMENT SECURITIES
Securities classified as trading, available-for-sale and held-to-maturity at
December 31, 1999 and 1998 are summarized below. Estimated fair value is
based on quoted market prices for these or similar investments.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
- -------------------------------------------------------------------------------
(thousands)
<S> <C> <C> <C> <C>
TOTAL TRADING SECURITIES
(carried at estimated
fair value) $ 252,608 $ 101 $ (2,649) $ 250,060
===============================================
SECURITIES AVAILABLE-FOR-SALE
(carried at estimated
fair value):
Equity securities $ 97,818 $ 499,800 $ (17,780) $ 579,838
U.S. Treasury securities
and obligations of other
U.S. government agencies
maturing:
between 5-10 years 41,385 - (2,432) 38,953
Corporate debt securities
maturing:
within 1 year 144,996 7 (165) 144,838
between 1-5 years 350,652 151 (5,623) 345,180
between 5-10 years 137,366 - (7,550) 129,816
Other debt securities
maturing:
within 1 year 8,044 2,122 (61) 10,105
between 1-5 years 85,022 - (1,816) 83,206
between 5-10 years 39,342 - (1,578) 37,764
-----------------------------------------------
TOTAL AVAILABLE-FOR-SALE $ 904,625 $ 502,080 $ (37,005) $1,369,700
===============================================
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- ------------------------------------------------------------------------------
(thousands)
<S> <C> <C> <C> <C>
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
U.S. Treasury securities
and obligations of other
U.S. 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 77,848 201 (2,509) 75,540
between 5-10 years 21,789 287 - 22,076
----------------------------------------------
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>
The carrying value of all investment securities held at December 31, 1999 and
1998 is summarized below (in thousands):
<TABLE>
<CAPTION>
Security 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Trading securities $ 250,060 $ 239,901
Securities available-for-sale maturing within one year 154,943 250,956
Securities held-to-maturity maturing within one year - 115,687
---------------------
Total short-term investments $ 405,003 $ 606,544
=====================
Securities available-for-sale maturing between 1-10 years,
including equity securities $1,214,757 $ 716,888
---------------------
Total long-term marketable securities $1,214,757 $ 716,888
=====================
</TABLE>
In 1999, proceeds from the sales of available-for-sale securities totaled
$627.1 million; gross realized gains totaled $19.4 million and gross realized
losses totaled $1.8 million. 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. We recorded charges
of $13.4 million in 1999, $20.2 million in 1998 and $4.0 million in 1997, to
write down certain available-for-sale biotechnology equity securities for
which the decline in fair value below cost was other than temporary.
Net change in unrealized holding gains (losses) on trading securities
included in net income totaled ($6.1) million in 1999, $7.4 million in 1998
and ($3.8) million in 1997.
The marketable debt securities we hold are issued by a diversified selection
of corporate and financial institutions with strong credit ratings. Our
investment policy limits the amount of credit exposure with any one
institution. Other than asset-backed securities, these debt securities are
generally not collateralized. We have not experienced any material losses
due to credit impairment on our investments in marketable debt securities in
the years 1999, 1998 and 1997.
FINANCIAL INSTRUMENTS
Foreign Currency Instruments: Certain of our revenues are earned outside of
the U.S. Moreover, our foreign currency denominated revenues exceed our
foreign currency denominated expenses; therefore, risk exists that net income
may be impacted by changes in the exchange rates between the U.S. dollar and
foreign currencies. To hedge a portion of anticipated nondollar denominated
net revenues, we currently purchase options and may enter into forward
contracts. At December 31, 1999, we hedged approximately 50% of probable net
foreign revenues anticipated within 12 months and 25% of probable net foreign
revenues through the year 2001. The notional amounts of the options totaled
$51.9 million at December 31, 1999, and $75.0 million at December 31, 1998.
The notional amounts consisted of the following currencies: Australian
dollars, Euro, British pounds, Canadian dollars, Japanese yen and Swedish
krona. All option contracts mature within the next three years. The fair
value of the options was based on exchange rates and market conditions at
December 31, 1999 and 1998. No forward contracts were entered into in 1999
and 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. We have not experienced any material losses due to credit
impairment of our foreign currency instruments.
Interest Rate Swaps: Interest income is subject to fluctuations as interest
rates change, primarily U.S. interest rates. To manage this risk, we may
enter into swaps as part of our overall strategy of managing the duration of
our investment portfolio. For each swap, we receive interest based on fixed
rates and pay interest to counterparties based on floating rates on a
notional principal amount. Our swap counterparties have strong credit
ratings which minimize the risk of non-performance on the swaps. In 1999, as
a result of eliminating the interest rate swap portfolio, we recognized a
$5.0 million gain which was recorded in interest income. We have not
experienced any material losses due to credit impairment. At December 31,
1998, we had three swap contracts outstanding with notional amounts totaling
$150.0 million. Our credit exposure on swaps and the net carrying amounts of
swaps held at December 31, 1998, were not material. Net interest income from
swaps in 1998 was also immaterial.
Equity Collar Instruments: To hedge against fluctuations in the market value
of a portion of the marketable equity portfolio, we entered into costless
collar instruments, a form of equity collar instrument, that expire in 2000
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, 1999, the notional amount of the put options was $7.1 million
and the call options was $9.7 million. At December 31, 1998, the notional
amount of the put options was $32.0 million and the call options was $46.0
million.
Financial Instruments Held for Trading Purposes: As part of our 1999 overall
investment strategy, we have contracted with two external money managers to
manage part of our investment portfolio. These portfolios at December 31,
1999, consisted of U.S. 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,
1999 and 1998, were $146.2 million and $211.6 million, respectively. The
fair value at December 31, 1999 and 1998, of the forward contracts, totaled
$3.1 million and $0.4 million, respectively. The average fair value during
1999 and 1998 totaled $2.5 million and ($0.9) million, respectively. Net
realized and unrealized trading gains (loss) on the portfolio totaled
approximately ($2.5) million in 1999 and $2.8 million in 1998 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, 1999 and 1998, of our 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>
1999 1998
----------------------- -----------------------
Carrying Fair Carrying Fair
Financial Instrument Value Value Value Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investment securities
(including accrued interest
and traded forward contracts) $1,619,760 $1,619,760 $1,323,432 $1,323,353
Convertible equity loans 53,295 53,295 55,800 55,800
Purchased foreign exchange put
options 1,547 1,957 1,441 5,741
Equity collars - - 563 558
Outstanding interest rate swaps - - 5,742 167,535
Liabilities:
Long-term debt 149,708 148,938 149,990 148,000
Equity collars 33,499 33,602 5,420 12,158
Outstanding interest rate swaps - - 3,587 153,587
</TABLE>
OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Accrued legal settlement $200,000 -
Accrued compensation 52,005 $ 47,057
Accrued royalties 37,692 23,392
Hedge payable 33,499 5,420
Accrued clinical and other studies 18,012 35,535
Accrued marketing and promotion costs 17,897 9,417
Taxes payable - 46,447
Other 76,939 72,219
------------------------
Total other accrued liabilities $436,044 $239,487
========================
</TABLE>
LONG-TERM DEBT
Our long-term debt consists of $149.7 million of convertible subordinated
debentures, with interest payable at 5%, due in 2002. As a result of the
redemption of our Special Common Stock, upon conversion, the holder receives,
for each $74 in principal amount of debenture converted, $59.25 in cash, of
which $18 will be reimbursed to us by Roche. Generally, we 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, 1999 are as follows (in thousands):
2000 2001 2002 2003 2004 Thereafter Total
- -------------------------------------------------------------------------
$33,090 31,873 28,493 27,497 24,611 23,830 $169,394
We lease various real property under operating leases that generally require
us to pay taxes, insurance and maintenance. Rent expense was approximately
$13.9 million in 1999, $12.7 million in 1998 and $11.7 million in 1997.
Sublease income was not material in any of the three years presented.
Under several lease agreements, we have the option to purchase the properties
at an amount that does not constitute a bargain. Alternatively, we can cause
the property to be sold to a third party. We are contingently liable, under
residual value guarantees, for approximately $459.0 million. We are also
required to maintain certain financial ratios and are limited to the amount
of additional debt we can assume.
Commitments: In May 1999, we entered into a license and collaboration
agreement with Aradigm Corporation to develop an advanced pulmonary delivery
system for our Pulmozyme product in the U.S. As part of the agreement, we
agreed to provide Aradigm a loan of up to $10.4 million for development
costs. As of December 31, 1999, Aradigm's outstanding loan was $2.3 million.
We entered into a research collaboration agreement with CuraGen Corporation
in November 1997, whereby we made a $5.0 million equity investment in CuraGen
and agreed to provide a convertible equity loan to CuraGen of up to $26.0
million. In October 1999, CuraGen exercised its right to borrow $16.0
million. Simultaneously, with this draw down, CuraGen repaid the loan by
issuing 977,636 shares of CuraGen stock valued at $16.37 per share at such
issuance, or an aggregate of $16.0 million. At December 31, 1999, there were
no outstanding loans to CuraGen.
Also, in December 1997, we entered into a collaboration agreement with
LeukoSite, Inc. 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 have 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 December 31, 1999, there were no outstanding loans
to LeukoSite.
In addition, we entered into research collaborations with companies whereby
potential future payments may be due to selective collaboration partners
achieving certain benchmarks as defined in the collaboration agreements. We
may also, from time-to-time, lend additional funds to these companies,
subject to approval.
We are a limited partner in the Vector Later-Stage Equity Fund II, L.P.,
which is referred to as the Vector Fund. The General Partner is Vector Fund
Management II, L.L.C., 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, we contribute to the capital of
the Vector Fund through installments in cash as called by the General
Partner. Our total commitment to the Vector Fund through September 2003 is
$25.0 million, of which $12.9 million was contributed as of December 31,
1999. The Vector Fund will terminate and be dissolved in September 2007.
Contingencies: We are a party to various legal proceedings, including patent
infringement litigation relating to our human growth hormone products and
antibody products, licensing and contract disputes, and other matters.
In 1990 and 1997, the Regents of the University of California, or UC, filed
patent infringement lawsuits against Genentech, alleging that the
manufacture, use, and sale of our Protropin and Nutropin human growth hormone
products infringe a patent known as the "Goodman patent" that is owned by UC.
On November 19, 1999, we and UC announced a proposed settlement of those
lawsuits, and on or about December 17, 1999, the parties entered into a
definitive written agreement on the terms of the settlement. Under the terms
of the settlement, Genentech agreed to pay UC $150 million and agreed to make
a contribution in the amount of $50 million toward construction of the first
biological sciences research building at the University of California, San
Francisco Mission Bay campus, and Genentech and UC granted certain releases
to one another and dismissed with prejudice the 1990 and 1997 patent
infringement lawsuits and related appeals. Such amounts were included in
other accrued liabilities at December 31, 1999. The settlement resolves all
outstanding litigation between Genentech and UC relating to our growth
hormone products.
On May 28, 1999, Glaxo Wellcome Inc. filed a patent infringement lawsuit
against us in the U.S. District Court in Delaware. The suit asserts that we
infringe four U.S. patents owned by Glaxo Wellcome. Two of the patents
relate to the use of specific kinds of monoclonal antibodies for the
treatment of human disease, including cancer. The other two patents asserted
against us relate to preparations of specific kinds of monoclonal antibodies
which are made more stable and the methods by which such preparations are
made. We have been served with the complaint. The complaint fails to
specify which of our products or methods of manufacture are allegedly
infringing the four patents at issue. However, we believe that the suit
relates to the manufacture, use and sale of our Herceptin and Rituxan
antibody products. On July 19, 1999, we filed our answer to Glaxo Wellcome's
complaint, and in our answer we also stated counterclaims against Glaxo
Wellcome. The judge has scheduled the trial of this suit to begin January
29, 2001. On or about January 10, 2000, Glaxo filed a request with the Court
to add additional patent infringement claims to the suit under Glaxo's U.S.
Patent No. 5,633,162. We intend to oppose that request; the Court has not
yet made a decision whether to grant Glaxo's request.
We and the City of Hope Medical Center are parties to a 1976 agreement
relating to work conducted by two City of Hope employees, Arthur Riggs and
Keiichi Itakura, and patents that resulted from that work, which are referred
to as the "Riggs/Itakura Patents." Since that time, Genentech has entered
into license agreements with various companies to make, use and sell the
products covered by the Riggs/Itakura Patents. On August 13, 1999 the City
of Hope filed a complaint against us in the Superior Court in Los Angeles
County, California alleging that we owe royalties to the City of Hope in
connection with these license agreements, as well as product license
agreements that involve the grant of licenses under the Riggs/Itakura
Patents. The complaint states claims for declaratory relief, breach of
contract, breach of implied covenant of good faith and fair dealing, and
breach of fiduciary duty. On December 15, 1999, we filed our answer to the
City of Hope's complaint. The judge has scheduled the trial of this suit to
begin February 5, 2001.
On December 1, 1994, Genentech filed suit against Bio-Technology General
Corporation, or BTG, in the United States District Court in Delaware charging
BTG with infringement of two Genentech patents applicable to its human growth
hormone product. On February 28, 1995, Genentech filed an Amended Complaint
against BTG alleging infringement of an additional Genentech patent. On
January 6, 1995, BTG filed suit against Genentech in the United States
District Court for the Southern District of New York seeking declaratory
judgements that those patents and another Genentech patent are invalid and
not infringed by BTG. Genentech's suit in Delaware was then transferred to
New York and consolidated with BTG's suit there.
At the time of filing its suit and thereafter, BTG alleged various
antitrust, abuse of process, civil rights, malicious prosecution, and unfair
competition claims against Genentech. All of those claims were dismissed by
the District Court.
On August 10, 1995, the District Court issued a preliminary injunction
which prohibited BTG, pending the Court's final determination of the action,
from importing, making, using, selling, offering for sale or distributing in
the United States BTG's human growth hormone products except for certain
ongoing FDA approved clinical trials. BTG filed an appeal from the District
Court's issuance of the preliminary injunction to the United States Court of
Appeals for the Federal Circuit. On April 8, 1996, the Federal Circuit
affirmed the preliminary injunction granted by the District Court. On May
20, 1996, the Federal Circuit denied BTG's petition for rehearing, and on
October 7, 1996, the United States Supreme Court declined to review the case.
In 1999, the case was transferred to a different judge of the District
Court for further proceedings. A jury trial of BTG's patent invalidity claim
began on January 10, 2000. On January 18, 2000, the jury returned a verdict
in Genentech's favor on a certain factual issue underlying BTG's invalidity
claim, but the judge nevertheless entered judgement in favor of BTG and
lifted the preliminary injunction that had been in effect against BTG since
1995. Genentech intends to promptly file a request with the Federal Circuit
for the injunction to be reinstated pending appeal and for an expedited
appeal. In the event that the injunction is not reinstated or if Genentech's
appeal is not successful, BTG could enter the United States market with its
human growth hormone product.
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 pay $50 million to
settle a federal investigation relating to our past clinical, sales and
marketing activities associated with human growth hormone.
RELATIONSHIP WITH ROCHE
On June 30, 1999, Roche exercised its option to cause us to redeem all of our
Special Common Stock held by stockholders, other than Roche, at $41.25 per
share in cash with funds deposited by Roche for such purpose and we retired
all of the shares of Special Common Stock including those held by Roche. As
a result, Roche owned 100% of our outstanding Common Stock. On July 23,
1999, Roche completed a public offering of 44,000,000 shares of our Common
Stock. On October 26, 1999, Roche completed a second public offering of
40,000,000 shares of our Common Stock. Roche received the proceeds from both
offerings. As a result, Roche's percentage ownership of our outstanding
Common Stock was reduced to approximately 66.1% at December 31, 1999.
In July 1999, we entered into certain affiliation arrangements with Roche,
amended our licensing and marketing agreement with F. Hoffmann-La Roche Ltd,
an affiliate of Roche commonly known as Hoffmann-La Roche, and entered into a
tax sharing agreement with Roche.
Affiliation Arrangements
In July 1999, we amended our certificate of incorporation and bylaws and
entered into an affiliation agreement with Roche. As a result, our board
changed to consist of two Roche directors, three independent directors
nominated by a nominating committee currently controlled by Roche, and one
Genentech employee. However, under the affiliation agreement, Roche has the
right to obtain proportional representation on our board at any time. Roche
intends to continue to allow our current management to conduct our business
and operations as we have done in the past. However, we cannot ensure that
Roche will not implement a new business plan in the future.
Licensing Agreement
In 1995, we entered into a licensing and marketing agreement with Hoffmann-La
Roche and its affiliates granting it a ten-year option to license to use and
sell products in non-U.S. markets. In July 1999, we amended that agreement,
the major provisions of which include:
- - extended Hoffmann-La Roche's option until at least 2015;
- - Hoffmann-La Roche may exercise its option to license our products upon the
occurrence of any of the following: (1) our decision to file an
Investigational New Drug exemption application, or IND, for a product, (2)
completion of a Phase II trial for a product or (3) if Hoffmann-La Roche
previously paid us a fee of $10 million to extend its option on a
product, completion of a Phase III trial for that product;
- - we have agreed, in general, to manufacture for and supply to Hoffmann-La
Roche its clinical requirements of our products at cost, and its
commercial requirements at cost plus a margin of 20%; however, Hoffmann-La
Roche will have the right to manufacture our products under certain
circumstances;
- - Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-
La Roche exercises its option upon either a decision to file an IND with
the U.S. Food and Drug Administration, or FDA, or completion of the Phase
II trials, a royalty of 12.5% on the first $100 million on its aggregate
sales of that product and thereafter a royalty of 15% on its aggregate
sales of that product in excess of $100 million until the later in each
country of the expiration of our last relevant patent or 25 years from the
first commercial introduction of that product; and
- - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche
exercises its option after completion of the Phase III trials, a royalty
of 15% on its sales of that product until the later in each country of the
expiration of our relevant patent or 25 years from the first commercial
introduction of that product; however, $5 million of any option extension
fee paid by Hoffmann-La Roche will be credited against royalties payable
to us in the first calendar year of sales by Hoffmann-La Roche in which
aggregate sales of that product exceed $100 million.
Tax Sharing Agreement
Since the redemption of our Special Common Stock, and until Roche completed
its public offering of our Common Stock in October 1999, we were included in
Roche's U.S. federal consolidated income tax group. Accordingly, we entered
into a tax sharing agreement with Roche. Pursuant to the tax sharing
agreement, we and Roche are to make payments such that the net amount paid by
us on account of consolidated or combined income taxes is determined as if we
had filed separate, stand-alone federal, state and local income tax returns
as the common parent of an affiliated group of corporations filing
consolidated or combined federal, state and local returns.
Effective with the consummation of the second public offering on October
26, 1999, Genentech ceased to be a member of the consolidated federal income
tax group (and certain consolidated or combined state and local income tax
groups) of which Roche is the common parent. Accordingly, our tax sharing
agreement with Roche now pertains only to the state and local tax returns in
which we will be consolidated or combined with Roche. We will continue to
calculate our tax liability or refund with Roche for these state and local
jurisdictions as if we were a stand-alone entity.
Roche's Right to Maintain Its Percentage Ownership Interest in Our Stock
We expect from time to time to issue additional shares of common stock in
connection with our stock option and stock purchase plans, and we may issue
additional shares for other purposes. The affiliation agreement requires us
to, among other things, establish a stock repurchase program designed to
maintain Roche's percentage ownership interest in our common stock. In
addition, Roche will have a continuing option to buy stock from us at
prevailing market prices to maintain its percentage ownership interest. To
ensure that, with respect to any issuance of common stock by Genentech in the
future, the percentage of Genentech common stock owned by Roche immediately
after such issuance will be no lower than Roche's lowest percentage ownership
of Genentech common stock at any time after the offering of common stock
occurring in July 1999 and prior to the time of such issuance, except that
Genentech may issue shares up to an amount that would cause Roche's lowest
percentage ownership to be no more than 2% below the "Minimum Percentage."
The Minimum Percentage equals the lowest number of shares of Genentech common
stock owned by Roche since the July 1999 offering (to be adjusted in the
future for dispositions of shares of Genentech common stock by Roche) divided
by 254,597,176 (to be adjusted in the future for stock splits or stock
combinations), which is the number of shares of Genentech common stock
outstanding at the time of the July 1999 offering adjusted for the two-for-
one split of Genentech common stock in November 1999. As long as Roche's
percentage ownership is greater than 50%, prior to issuing any shares,
Genentech must repurchase a sufficient number of shares of its common stock
to ensure that, immediately after its issuance of shares, Roche's percentage
ownership will be greater than 50%. Genentech has also agreed, upon Roche's
request, to repurchase shares of its common stock to increase Roche's
ownership to the Minimum Percentage. In addition, Roche has a continuing
option to buy stock from Genentech at prevailing market prices to maintain
its percentage ownership interest. Roche's percentage ownership interest at
December 31, 1999 was approximately 66.1%.
RELATED PARTY TRANSACTIONS
We enter into transactions with Roche, Hoffmann-La Roche and its affiliates
in the ordinary course of business. We recorded nonrecurring contract
revenues from Hoffmann-La Roche of $40.0 million for Herceptin, marketing
rights outside of the U.S. in 1998 (see below). All other contract revenue
from Hoffmann-La Roche, including reimbursement for ongoing development
expenses after the option exercise date, totaled $17.2 million in 1999, $21.6
million in 1998 and $67.6 million in 1997. All other revenue from Roche,
Hoffmann-La Roche and their affiliates, principally royalties and product
sales, totaled $83.9 million in 1999, $63.8 million in 1998 and $42.8 million
in 1997.
In the second quarter of 1999, we entered into a license agreement with
Immunex Corporation that grants rights under our immunoadhesin patent
portfolio to Immunex for its product Enbrel, registered trademark,
(etanercept) biologic response modifier. In exchange for a worldwide, co-
exclusive license covering fusion proteins such as Enbrel, Immunex paid us an
initial non-refundable license fee which was recorded in contract revenues
net of a portion paid to Roche pursuant to an agreement between Roche and us.
In July 1998, we entered into an agreement with Hoffmann-La Roche to provide
them with exclusive marketing rights outside of the U.S. for Herceptin.
Under the agreement, Hoffmann-La Roche paid us $40.0 million and has agreed
to pay us cash milestones tied to future product development activities, to
share equally global development costs up to a maximum of $40.0 million and
to make royalty payments on product sales. As of December 31, 1999,
Hoffmann-La Roche paid an additional $10.0 million toward global development
costs.
CAPITAL STOCK
Common Stock and Special Common Stock: On June 30, 1999, we redeemed all of
our outstanding Special Common Stock held by stockholders other than Roche.
Subsequently, in July and October 1999, Roche consummated public offerings of
our Common Stock. See "Redemption of Our Special Common Stock" and
"Relationship with Roche" notes above for a discussion of these transactions.
On November 2, 1999, we effected a two-for-one stock split of our Common
Stock in the form of a dividend of one share of Genentech Common Stock for
each share held at the close of business on October 29, 1999. Our stock
began trading on a split-adjusted basis on November 3, 1999.
Stock Award Plans: In connection with the redemption of our Special Common
Stock, the following changes occurred with respect to our stock options that
were outstanding as of June 30, 1999:
- - Options for the purchase of approximately 13.6 million shares of Special
Common Stock were canceled in accordance with the terms of the applicable
stock option plans, and the holders received cash payments in the amount
of $41.25 per share, less the exercise price;
- - Options for the purchase of approximately 8.0 million shares of Special
Common Stock were converted into options to purchase a like number of
shares of Common Stock at the same exercise price; and
- - Options for the purchase of approximately 9.8 million shares of Special
Common Stock were canceled, in accordance with the terms of our 1996 Stock
Option/Stock Incentive Plan (the "1996 Plan"). With certain exceptions,
we granted new options for the purchase of 2.666 times the number of
shares under the previous options with an exercise price of $48.50 per
share, which was the public offering price of the Common Stock. The
number of shares that were the subject of these new options, which were
issued under our 1999 Stock Plan (the "1999 Plan"), was approximately 10.0
million. Alternative arrangements were provided for certain holders of
some of the unvested options under the 1996 Plan.
Of the approximately 8.0 million shares of converted options, options
with respect to approximately 4.8 million shares were outstanding at December
31, 1999, all of which are currently exercisable except for options with
respect to approximately 356,000 shares. These outstanding options are held
by 1,850 employees; no non-employee directors hold these options.
Our board of directors and Roche, then our sole stockholder, approved
the 1999 Plan on July 16, 1999. Under the 1999 Plan, we granted new options
to purchase approximately 13.0 million shares (including the 10.0 million
shares referred to above) of Common Stock to approximately 2,400 employees at
an exercise price of $48.50 per share, with the grant of such options made
effective as of July 16, 1999. Of the options to purchase these 13.0 million
shares, options to purchase approximately 12.0 million shares were
outstanding at December 31, 1999, of which options to purchase approximately
1.3 million shares are currently exercisable.
In connection with these stock option transactions, we recorded:
- - (1) cash compensation expense of approximately $284.5 million associated
with the cash-out of such stock options and (2) non-cash compensation
expense of approximately $160.1 million associated with the remeasurement,
for accounting purposes, of the converted options, which non-cash amount
represents the difference between each applicable option exercise price
and the redemption price of the Special Common Stock; and
- - Over a two-year period beginning July 1, 1999, an aggregate of
approximately $27.4 million of deferred cash compensation available to be
earned by a limited number of employees who elected the alternative
arrangements described above. As of December 31, 1999, $7.3 million of
compensation expense has been recorded related to these alternative
arrangements.
We have a stock option plan adopted in 1999, which variously allows for the
granting of non-qualified stock options, stock awards and stock appreciation
rights to employees, non-employee directors and consultants of Genentech.
Incentive stock options may only be granted to employees under this plan.
Generally, non-qualified options have a maximum 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 we may grant
options with different vesting terms from time-to-time. No stock
appreciation rights have been granted to date.
We adopted the 1991 Employee Stock Plan, or the 1991 Plan, on December 4,
1990, and amended it during 1993, 1995, 1997 and 1999. The 1991 Plan allows
eligible employees to purchase Common Stock at 85% of the lower of the fair
market value of the 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
Genentech are eligible to participate in the 1991 Plan. Of the 10.6 million
shares of Common Stock reserved for issuance under the 1991 Plan, 8,232,320
shares have been issued as of December 31, 1999. During 1999, 3,108 of the
eligible employees participated in the 1991 Plan.
We have elected to continue to follow Accounting Principles Board (APB) 25 to
account for 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 our employee stock options equals the market price of the underlying
stock on the date of grant.
The information regarding net income and earnings per share with FAS 123
has been determined as if we had accounted for our 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 net income
and earnings per share with FAS 123 disclosed is not likely to be
representative of the effects on net income and earnings per share with FAS
123 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 1999, 1998 and 1997, respectively: risk-
free interest rates of 5.8%, 5.5% and 6.2%; dividend yields of 0%; volatility
factors of the expected market price of our Common Stock of 45.0%, 11.9% and
9.2%; 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 our 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 disclosures with FAS 123, the estimated fair value of
options is amortized to expense over the options' vesting period.
Information with FAS 123 for the years ending December 31 follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Net (loss) income - as reported $(1,144.5) $181,909 $129,044
Net (loss) income - with FAS 123 (1,178.1) 140,995 111,441
Earnings (loss) per share - as reported:
Basic (4.46) 0.72 0.52
Diluted (4.46) 0.70 0.51
Earnings (loss) per share - with FAS 123:
Basic (4.63) 0.56 0.45
Diluted (4.63) 0.54 0.44
</TABLE>
A summary of our stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Price
---------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1996 39,205,018 21.45
Grants 659,010 29.11
Exercises (4,887,392) 15.04
Cancellations (2,497,418) 26.18
----------
Options outstanding at December 31, 1997 32,479,218 22.21
Grants 9,189,850 33.91
Exercises (4,921,814) 17.66
Cancellations (2,496,042) 27.32
----------
Options outstanding at December 31, 1998 34,251,212 $ 25.64
Grants 17,046,168 57.07
Exercises (5,819,189) 24.37
Cancellations (24,702,389) 26.06
----------
Options outstanding at December 31, 1999 20,775,802 $ 51.30
==========
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Average
Years Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$24.063 - $35.563 4,674,650 9.29 $ 29.56 4,416,182 $ 29.39
$40.000 - $48.500 12,117,860 9.63 48.44 1,262,218 48.47
$64.188 - $85.875 3,983,292 10.03 85.49 5,400 85.88
---------- ---------
20,775,802 5,683,800
========== =========
</TABLE>
Using the Black-Scholes option valuation model, the weighted average
fair value of options granted was $27.32 in 1999, $8.62 in 1998 and $7.69 in
1997. Shares of Common Stock available for future grants under all stock
option plans were 7,917,941 at December 31, 1999.
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of Genentech, Inc.'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, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
January 18, 2000
<TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(thousands, except per share amounts)
<CAPTION>
1999 Quarter Ended
------------------------------------------------------
December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 358,456 $345,328 $ 395,242(3) $322,352
Product sales 268,703 266,968 269,355 234,069
Gross margin from product sales 174,308(1) 174,218(1) 216,674 188,346
Net income (loss) (172,906)(2) (62,845)(2) (923,192)(3) 14,415(4)
Earnings (loss) per share (5):
Basic (0.67) (0.25) (3.59) 0.06
Diluted (0.67) (0.25) (3.59) 0.05
<CAPTION>
Pro Forma (6) 1999 Quarter Ended
------------------------------------------------------
December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 358,456 $345,328 $ 374,905(7) $322,352
Product sales 268,703 266,968 269,355 234,069
Gross margin from product sales 220,852 221,032 216,674 188,346
Net income 48,099 66,882 73,221 58,508
Earnings per share:
Basic 0.19 0.26 0.28 0.23
Diluted 0.18 0.26 0.27 0.22
<CAPTION>
1998 Quarter Ended
------------------------------------------------------
December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $304,301 $313,930 $268,012 $264,700
Product sales 213,713 163,100 176,263 164,719
Gross margin from product sales 181,212 127,749 139,113 131,098
Net income 37,140 63,378 40,374 41,017
Earnings per share (5):
Basic 0.15 0.25 0.16 0.16
Diluted 0.14 0.24 0.16 0.16
</TABLE>
(1) Reflects expense of $46.5 million in the fourth quarter and $46.8 million
in the third quarter related to the sale of inventory that was written
up to fair value as a result of the Redemption on June 30, 1999, and
related push-down accounting.
(2) Primarily reflects the impact of the Redemption and push-down accounting,
including: the sale of inventory that was written up to fair value, see
note (1) above; the amortization of goodwill and other intangible assets
of $95.6 million in both the third and fourth quarters; and $57.8 million
for the remeasurement of the value of continuing employee stock options
in the third quarter. This also reflects the $180.0 million charge in
the fourth quarter related to the legal settlement with the Regents of
the University of California.
(3) Primarily reflects a $1,147.3 million special charge related to the
Redemption and push-down accounting. Included in this charge is $752.5
million for in-process research and development, $284.5 million for early
cash settlement of certain employee stock options and $102.3 million for
the remeasurement of the value of continuing employee stock options. In
addition, we recorded an adjustment of $20.3 million in other income
related to the write-up of certain marketable equity securities as a
result of push-down accounting.
(4) Primarily reflects the legal settlement of $50.0 million with the Office
of the U.S. Attorney for the Northern District of California.
(5) Restated to reflect the two-for-one stock split in 1999.
(6) Pro Forma financial data excludes the impact of the Redemption and
related push-down accounting and legal settlements, and their related tax
effects. See also notes (1) through (4) above for more information on
these transactions.
(7) Includes initial license fee from Immunex Corporation for Enbrel,
registered trademark, and from Schwarz Pharma AG for Nutropin AQ and
Nutropin Depot sustained-release growth hormone. In addition, we
received a milestone payment from F. Hoffmann-La Roche for Herceptin.
<TABLE>
11-YEAR FINANCIAL SUMMARY (UNAUDITED)
(millions, except per share and employee data)
<CAPTION>
1999
---------------------
Actual Pro Forma(7) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 1,421.4 $1,401.0 $1,150.9 $1,016.7 $ 968.7
Product sales 1,039.1 1,039.1 717.8 584.9 582.8
Royalties 189.3 189.3 229.6 241.1 214.7
Contract & other 103.6 83.2 114.8 121.6 107.0
Interest 89.4 89.4 88.7 69.1 64.2
- --------------------------------------------------------------------------------------------
Total costs and expenses $ 2,762.3 $1,032.8 $ 898.3 $ 846.9 $ 820.8
Cost of sales 285.6 192.2 138.6 102.5 104.5
Research & development 367.3 367.3 396.2 470.9 471.1
Marketing, general & administrative 467.9 467.9 358.9 269.9 240.1
Special charges 1,437.7(5) - - - -
Recurring charges related to
redemption 198.4(6) - - - -
Interest 5.4 5.4 4.6 3.6 5.1
- --------------------------------------------------------------------------------------------
Income (loss) data
Income (loss) before taxes $(1,340.9) $ 368.2 $ 252.6 $ 169.8 $ 147.9
Income tax (benefit) provision (196.4) 121.5 70.7 40.8 29.6
Net income (loss) (1,144.5) 246.7 181.9 129.0 118.3
Tax rate 15% 33% 28% 24% 20%
- --------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic $ (4.46) $ 0.96 $ 0.72 $ 0.52 $ 0.49
Diluted (4.46) 0.93 0.70 0.51 0.48
- --------------------------------------------------------------------------------------------
Selected balance sheet data
Cash, short-term investments
& long-term marketable securities $ 1,957.4 $1,604.6 $1,286.5 $1,159.1
Accounts receivable 214.8 149.7 189.2 197.6
Inventories 275.2 148.6 116.0 91.9
Property, plant & equipment, net 730.1 700.2 683.3 586.2
Goodwill 1,628.7 - - -
Other intangible assets 1,453.3 65.0 54.7 40.1
Other long-term assets 201.1 131.3 122.5 109.1
Total assets 6,554.4 2,855.4 2,507.6 2,226.4
Total current liabilities 484.1 291.3 289.6 250.0
Long-term debt 149.7 150.0 150.0 150.0
Total liabilities 1,271.6 511.6 476.4 425.3
Total stockholders' equity 5,282.8(8) 2,343.8 2,031.2 1,801.1
- --------------------------------------------------------------------------------------------
Other data
Depreciation & amortization expense $ 281.4 $ 78.1 $ 65.5 $ 62.1
Capital expenditures 95.0 88.1 154.9 141.8
- --------------------------------------------------------------------------------------------
Share information
Shares used to compute EPS:
Basic 256.4 256.4 251.6 246.1 241.2
Diluted 256.4 264.7 259.7 252.8 247.9
Actual year-end 258.1 258.1 254.2 248.5 242.9
- --------------------------------------------------------------------------------------------
Per share data
Market price: High $ 45.00 - $ 39.88 $ 30.31 $ 27.69
$ 143.00***
Low $ 37.25 - $ 29.63 $ 26.63 $ 25.69
$ 48.50***
Book value $ 20.47 - $ 9.22 $ 8.18 $ 7.42
- --------------------------------------------------------------------------------------------
Number of employees 3,883 3,389 3,242 3,071
- --------------------------------------------------------------------------------------------
<FN>
We have paid no dividends.
The Financial Summary above reflects adoption of FAS 130 and 131 in 1998, FAS
128 and 129 in 1997, FAS 121 in 1996, FAS 115 in 1994 and FAS 109 in 1992.
All share and per share amounts reflect a two-for-one split in 1999.
*Special Common Stock began trading October 26, 1995. On October 25, 1995,
pursuant to the 1995 Agreement with Roche, each share of our Common Stock not
held by Roche or its affiliates automatically converted to one share of
Special Common Stock.
**Redeemable Common Stock began trading September 10, 1990; prior to that
date all shares were Common Stock. Pursuant to the merger agreement with
Roche, all shareholders as of effective date September 7, 1990, received for
each common share owned, $18 in cash from Roche and one share of newly issued
Redeemable Common Stock from Genentech.
***Common Stock began trading July 20, 1999; prior to that date shares were
Special Common Stock. On June 30, 1999, we redeemed all of our outstanding
Special Common Stock held by stockholders other than Roche Holdings, Inc.
Roche's percentage ownership of our outstanding equity increased from 65% to
100%. On July 23, 1999 and October 26, 1999, Roche completed public
offerings of our Common Stock and its percentage ownership was 66.1% at
December 31, 1999.
(1) Charges related to 1995 merger and the 1995 Agreement with Roche ($21
million) and resignation of our former CEO ($4 million).
(2) Charges primarily related to 1990 Roche merger.
(3) Primarily inventory-related charge.
(4) Information was not available to restate these amounts pursuant to FAS
128. Reflect amounts previously reported adjusted for the stock split in
1999.
(5) Charges related to 1999 Redemption ($1,207.7 million) and legal
settlements ($230.0 million).
(6) Primarily reflects amortization of other intangible assets and goodwill
related to the Redemption.
(7) Pro forma excludes special charges related to the Redemption and legal
settlements, recurring charges related to the Redemption, the impact of
the sale of inventory that was written up as a result of the Redemption,
the adjustment to other income related to the write-up of certain
marketable securities as a result of the Redemption, and their related
tax effects.
(8) Reflects the impact of the Redemption and related push-down accounting of
$5,201.9 million of excess purchase price over net book value, net of
charges and accumulated amortization of goodwill and other intangible
assets.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 917.8 $ 795.4 $ 649.7 $ 544.3 $ 515.9 $ 476.1 $ 400.5
635.3 601.0 457.4 391.0 383.3 367.2 319.1
190.8 126.0 112.9 91.7 63.4 47.6 36.7
31.2 25.6 37.9 16.7 20.4 31.9 27.5
60.5 42.8 41.5 44.9 48.8 29.4 17.2
- -----------------------------------------------------------------------------
$ 745.6 $ 665.8 $ 590.8 $ 522.3 $ 469.8 $ 572.7 $ 352.9
97.9 95.8 70.5 66.8 68.4 68.3 60.6
363.0 314.3 299.4 278.6 221.3 173.1 156.9
251.7 248.6 214.4 172.5 175.3 158.1 127.9
25.0(1) - - - - 167.7(2) -
- - - - - - -
8.0 7.1 6.5 4.4 4.8 5.5 7.5
- -----------------------------------------------------------------------------
$ 172.2 $ 129.6 $ 58.9 $ 22.0 $ 46.1 $ (96.6) $ 47.6
25.8 5.2 - 1.1 1.8 1.5 3.6
146.4 124.4 58.9 20.9 44.3 (98.0) 44.0
15% 4% - 5% 4% - 8%
- -----------------------------------------------------------------------------
$ 0.62 $ 0.54 $ 0.26 $ 0.09 $ 0.20 - -(4)
0.60 0.52 0.25 0.09 0.20 (0.53)(4) 0.25(4)
- -----------------------------------------------------------------------------
$1,096.8 $ 920.9 $ 719.8 $ 646.9 $ 711.4 $ 691.3 $ 205.0
172.2 146.3 130.5 93.9 69.0 58.8 66.8
93.6 103.2 84.7 65.3 56.2 39.6 49.3
503.7 485.3 456.7 432.5 342.5 300.2 299.1
- - - - - - -
42.2 16.0 13.8 12.7 25.9 42.7 59.1
63.3 45.0 50.3 24.4 16.8 19.0 25.9
2,011.0 1,745.1 1,468.8 1,305.1 1,231.4 1,157.7 711.2
233.4 220.5 190.7 133.5 118.6 101.4 75.9
150.0 150.4 151.2 152.0 152.9 153.5 154.4
408.9 396.3 352.0 297.8 281.7 264.5 242.2
1,602.0 1,348.8 1,116.8 1,007.3 949.7 893.2 469.0
- -----------------------------------------------------------------------------
$ 58.4 $ 53.5 $ 44.0 $ 52.2 $ 46.9 $ 47.6 $ 44.6
70.2 82.8 87.5 126.0 71.3 36.0 37.2
- -----------------------------------------------------------------------------
236.5 232.0 227.8 223.9 222.1 - -
243.5 240.4 237.5 230.0 226.5 186.0(4) 172.0(4)
238.5 234.5 229.6 225.8 222.6 221.2 168.5
- -----------------------------------------------------------------------------
$ 26.50* $ 26.75 $ 25.25 $ 19.75 $ 18.13 $ 15.44 $ 11.69
$ 13.75**
$ 22.25* $ 20.88 $ 15.63 $ 12.94 $ 10.38 $ 10.06 $ 8.00
$ 10.88**
$ 6.72 $ 5.75 $ 4.86 $ 4.46 $ 4.27 $ 4.04 $ 2.78
- -----------------------------------------------------------------------------
2,842 2,738 2,510 2,331 2,202 1,923 1,790
- -----------------------------------------------------------------------------
</TABLE>
COMMON STOCK, SPECIAL COMMON STOCK AND REDEEMABLE COMMON STOCK INFORMATION
Stock Trading Symbol DNA
Stock Exchange Listings
Our Common Stock began trading on the New York Stock Exchange under the
symbol "DNA" on July 20, 1999. On June 30, 1999, we redeemed all of our
outstanding Callable Putable Common Stock, or Special Common Stock, held by
stockholders other than Roche Holdings, Inc. Our Special Common Stock had
traded on the New York Stock Exchange and the Pacific Exchange under the
symbol GNE from October 26, 1995 through June 16, 1999. On October 25, 1995,
our non-Roche stockholders approved an agreement (the Agreement) with Roche
Holdings, Inc. (Roche). Pursuant to the Agreement, each share of our Common
Stock not held by Roche or its affiliates automatically converted to one
share of Special Common Stock. From July 3, 1995 through October 25, 1995,
our Common Stock was traded on the New York Stock Exchange under the symbol
GNE. After the close of business on June 30, 1995, each share of our
Redeemable Common Stock automatically converted to one share of Common Stock.
The conversion was in accordance with the terms of the Redeemable Common
Stock put in place at the time of its issuance on September 7, 1990, when our
merger with a wholly owned subsidiary of Roche was consummated. Our
Redeemable Common Stock traded on the New York Stock Exchange under the
symbol GNE from September 10, 1990 to June 30, 1995. Our Common Stock was
traded on the New York Stock Exchange under the symbol GNE from March 2,
1988, until September 7, 1990, and on the Pacific Exchange under the symbol
GNE from April 12, 1988, until September 7, 1990. Our Common Stock was
previously traded in the NASDAQ National Market System under the symbol GENE.
No dividends have been paid on the Common Stock, Special Common Stock or
Redeemable Common Stock. We currently intend to retain all future income for
use in the operation of our business and, therefore, do not anticipate paying
any cash dividends in the foreseeable future. On November 2, 1999, we
effected a two-for-one stock split of our Common Stock in the form of a
dividend of one share of Genentech Common Stock for each share held at the
close of business on October 29, 1999. Our stock began trading on a split-
adjusted basis on November 3, 1999.
Common Stockholders
As of December 31, 1999, there were approximately 717 stockholders of record
of our Common Stock.
<TABLE>
Stock Prices
<CAPTION>
Common/Special Common Stock
--------------------------------------------------
1999 1998
--------------------------------------------------
High Low High Low
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4th Quarter $143 $66 7/8 $39 7/8 $34 1/16
3rd Quarter 89 3/4 48 1/2 36 11/32 31 25/32
2nd Quarter 45 40 31/32 36 7/8 32 7/8
1st Quarter 44 15/32 37 1/4 36 1/4 29 5/8
</TABLE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-
K) of Genentech, Inc. of our report dated January 18, 2000, included in the
1999 Annual Report to Stockholders of Genentech, Inc.
Our audits also included the financial statement schedule of Genentech, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the 1991 Employee Stock Plan, the 1999 Stock Plan,
the 1996 Stock Option/Stock Incentive Plan, the 1994 Stock Option Plan, the
1990 Stock Option/Stock Incentive Plan, and the Genentech, Inc. Tax Reduction
Investment Plan, and in the related Prospectuses, of our report dated January
18, 2000 with respect to the consolidated financial statements incorporated
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report
(Form 10-K) for the year ended December 31, 1999.
Ernst & Young LLP
San Jose, California
February 4, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED
STATEMENTS OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 337,682
<SECURITIES> 1,619,760
<RECEIVABLES> 233,736
<ALLOWANCES> 18,951
<INVENTORY> 275,245
<CURRENT-ASSETS> 1,326,507
<PP&E> 1,249,582
<DEPRECIATION> 519,496
<TOTAL-ASSETS> 6,554,441
<CURRENT-LIABILITIES> 484,127
<BONDS> 149,708
0
0
<COMMON> 5,162
<OTHER-SE> 5,277,643
<TOTAL-LIABILITY-AND-EQUITY> 6,554,441
<SALES> 1,039,095
<TOTAL-REVENUES> 1,421,378
<CGS> 285,549
<TOTAL-COSTS> 285,549
<OTHER-EXPENSES> 367,338
<LOSS-PROVISION> 35,245
<INTEREST-EXPENSE> 5,360
<INCOME-PRETAX> (1,340,926)
<INCOME-TAX> (196,398)
<INCOME-CONTINUING> (1,144,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,144,528)
<EPS-BASIC> (4.46)
<EPS-DILUTED> (4.46)
</TABLE>
Exhibit 99.19
GENENTECH, INC.
LONG-TERM KEY EMPLOYEE INCENTIVE PROGRAM
GENENTECH, INC., a Delaware corporation, hereby adopts the Genentech,
Inc. Long-Term Employee Incentive Program (the "Program"), effective July 1,
1999.
SECTION 1
DEFINITIONS
The following words and phrases shall have the following meanings unless
a different meaning is plainly required by the context;
1.1 "BENEFICIARY" means the person or persons entitled (under
Section 5.4) to receive any vested portion of a Participant's Incentive Award
upon the Participant's death.
1.2 "BOARD OF DIRECTORS" means the Board of Directors of the
Company, as constituted from time to time.
1.3 "COMMITTEE" shall have the same meaning as assigned from time to
time to the identical term under the Stock Option Plan.
1.4 "COMPANY" means Genentech, Inc., a Delaware corporation.
1.5 "DISABILITY" or "DISABLED" means permanent and total disability
as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended, including any valid regulation promulgated thereunder, and any
comparable provision of any future legislation or regulation amending,
supplementing or superseding such Section or regulation.
1.6 "EFFECTIVE DATE" means July 1, 1999.
1.7 "ELIGIBLE EMPLOYEE" means an Employee who is designated by
management as eligible to participate in the Program. For this purpose,
"designated by management" shall mean a nomination by the Employee's
department Vice President with oversight from the Vice President of Human
Resources and subject to approval by the Company's Chief Executive Officer.
1.8 "EMPLOYEE" means an employee of the Company.
1.9 "INCENTIVE AMOUNT" means the cash bonus amount to which a
Participant may become entitled pursuant to this Program.
1.10 "PARTICIPANT" means an Employee who (a) becomes a Participant in
the Program pursuant to Section 2.1 and (b) does not cease to be a
Participant pursuant to Section 2.2.
1.11 "PROGRAM" means the Genentech, Inc. Long-Term Key Employee
Incentive Program, as set forth in this instrument and as hereafter amended
from time to time.
1.12 "STOCK OPTION PLAN" means the Genentech, Inc. 1996 Stock
Option/Stock Incentive Plan, as hereafter amended from time to time.
SECTION 2
PARTICIPATION
2.1 PARTICIPATION. Each Eligible Employee shall become a
Participant in the Program on the Effective Date.
2.2 TERMINATION OF PARTICIPATION. An individual who has become a
Participant shall remain a Participant until his or her entire Incentive
Award is forfeited and/or distributed in its entirety.
SECTION 3
INCENTIVE AWARD
3.1 INITIAL AMOUNT. On the Effective Date, the Company shall
designate an Incentive Award for each Participant. A Participant's Incentive
Award shall be (a) subject to vesting in accordance with Section 3.2, (b)
adjusted for deemed interest in accordance with Section 3.3, and (c) paid out
in accordance with Section 5.
3.2 VESTING. A Participant shall vest as to one twenty-fourth of
his or her Incentive Award cumulatively on the last day of each of the 24
months beginning on or after the Effective Date, subject to the Participant's
continued employment with the Company and subject further to the Participant
performing competently as determined by the Participant's direct manager's
assessment of performance against goals and expectations for the
Participant's position.
3.3 DEEMED INTEREST ON ACCOUNTS. Each Incentive Award shall be
adjusted to reflect deemed interest as of the end of each calendar quarter.
The annual rate for crediting deemed interest during any quarter (which rate
shall be adjusted quarterly) shall be the rate paid by two-year U.S. Treasury
notes (at issuance) that are last issued during such quarter. Deemed
interest under this Section 3.3 shall be calculated using a 360-day year and
shall be compounded on a quarterly basis.
3.4 FORM AND TIMING OF PAYMENT. On or prior to the Effective Date,
each Participant shall elect the form and timing of payment for the vested
portion (if any) of his or her Incentive Award. A Participant may elect (a)
payment as of each March 31, June 30, September 30 and December 31 (of all
amounts that are then vested), (b) payment as of each anniversary of the
Effective Date (of all amounts that are then vested) or (c) payment of all
vested amounts as soon as administratively practicable after the second
anniversary of the Effective Date. A Participant later may not change his or
her election as to the form and timing of payment. An election under this
Section 3.4 shall be made in such manner as the Committee may specify.
SECTION 4
ACCOUNTING
4.1 PARTICIPANTS REMAIN UNINSURED CREDITORS. Incentive Awards shall
for all purposes remain part of the Company's general assets unless and until
such Awards are distributed. Each Participant's interest in the Program
shall make him or her only a general, unsecured creditor of the Company.
4.2 ACCOUNTING METHODS. The methods or formulas to be used under
the Program for the purpose of determining the Participants' Incentive
Awards, including the calculation and crediting of any deemed interest shall
be determined by the Committee in its sole discretion. The methods or
formulas selected by the Committee may be revised from time to time.
4.3 REPORTS. Each Participant shall be furnished with a statement
of his or her Incentive Award, reflecting the status of his or her interest
in the Program, at the end of each calendar quarter during his or her
participation in the Program.
SECTION 5
DISTRIBUTIONS
5.1 NORMAL DISTRIBUTION TIMING AND RULES. Subject to Sections 5.2
and 5.3, distribution of the vested portion of a Participant's Incentive
Award shall be made as soon as administratively practicable after the date or
dates elected by the Participant under Section 3.4. Subject to the
provisions of this Section 5, payment shall be made to the Participant, or in
the event of the Participant's death, to the Participant's Beneficiary (or
estate, as provided in Section 5.4).
5.2 SPECIAL RULE FOR DEATH OR DISABILITY. If a Participant dies,
the vested portion of the Participant's Incentive Award shall be immediately
distributed to the Participant's Beneficiary as soon as administratively
practicable after the date of death. If a Participant becomes Disabled, the
vested portion of the Participant's Incentive Award shall be distributed to
the Participant at the time and in the form elected by the Participant
pursuant to Section 3.4; provided, however, that the Committee, in its sole
discretion, may elect to distribute the vested portion of the Participant's
Incentive Award in a lump sum as of any date after the date of Disability.
The unvested portion of the Participant's Incentive Award, if any, shall be
forfeited.
5.3 SPECIAL RULE FOR TERMINATION OF EMPLOYMENT. If a Participant
terminates his or her employment with the Company for a reason other than
death or Disability, the vested portion of the Participant's Incentive Award
shall be distributed to him or her in a lump sum as soon as administratively
practicable after such termination. The unvested portion of the
Participant's Incentive Award, if any, shall be forfeited.
5.4 BENEFICIARY DESIGNATIONS. Each Participant may, pursuant to
such procedures as the Committee may specify, designate one or more
Beneficiaries.
5.4.1 SPOUSAL CONSENT. If a Participant does not designate his
or her spouse as sole primary Beneficiary, the beneficiary designation shall
be ineffective unless such spouse consents to the designation. Any spousal
consent required under this Section 5.4 shall be ineffective unless it is set
forth in writing and signed by the spouse. Notwithstanding the preceding, if
the Participant establishes to the satisfaction of the Company that written
spousal consent may not be obtained because the spouse cannot be located, his
or her designation shall be effective without a spousal consent. Any spousal
consent required under this Section 5.4 shall be valid only with respect to
the spouse who signs the consent.
5.4.2 CHANGES AND FAILED DESIGNATIONS. A Participant may
change or revoke Beneficiary designations by delivering a new designation (or
revocation) in the manner described in Section 5.4.1. Any designation or
revocation shall be effective only if it is received by the Company.
However, when so received, the designation or revocation shall be effective
as of the date the notice is executed (whether or not the Participant still
is living), but without prejudice to the Company on account of any payment
made before the change is recorded. The last effective designation received
by the Company shall supersede all prior designations. If a Participant dies
without having effectively designated a Beneficiary, or if no Beneficiary
survives the Participant, the vested portion of the Participant's Incentive
Award shall be payable (a) to his or her surviving spouse (if any), or (b) if
the Participant is not survived by a spouse, to the Participant's estate.
5.5 PAYMENTS TO INCOMPETENTS. If any individual to whom a benefit
is payable under the Program is a minor or legally incompetent, the Committee
shall determine whether payment shall be made directly to the individual, any
person acting as his or her custodian or legal guardian under the California
Uniform Transfers to Minors Act, his or her legal representative or a near
relative, or directly for his or her support, maintenance or education.
5.6 PAYMENT IN CASH OR ITS EQUIVALENT. All payments from the
Program shall be made in cash or its equivalent.
5.7 TAX WITHHOLDING. The Company shall withhold and/or collect all
applicable taxes payable in connection with Incentive Awards, including but
not limited to, any federal, FICA, state, and local income and employment
taxes,
5.8 COMMITTEE DISCRETION. Within the specific time periods
described in this Section 5, the Committee shall have sole discretion to
determine the specific timing of the payment of any Incentive Award under the
Program.
SECTION 6
ADMINISTRATION OF THE PROGRAM
6.1 COMMITTEE. The Program shall be administered by the Committee.
The Committee shall have the authority to control and manage the operation
and administration of the Program.
6.2 ACTIONS BY COMMITTEE. Each decision of a majority of the
members of the Committee then in office shall constitute the final and
binding act of the Committee. The Committee may act with or without a
meeting being called or held and shall keep minutes of all meetings held and
a record of all actions taken by written consent.
6.3 POWERS OF COMMITTEE. The Committee shall have all powers and
discretion necessary or appropriate to supervise the administration of the
Program and to control its operation in accordance with its terms, including,
but not by way of limitation, the following powers:
(a) To interpret and determine the meaning and validity of
the provisions of the Program and to determine any question arising under, or
in connection with, the administration, operation or validity of the Program
or any amendment thereto;
(b) To determine any and all considerations affecting the
eligibility of any Employee to become a Participant or remain a Participant
in the Program;
(c) To determine the status and rights of Participants and
their spouses, Beneficiaries or estates;
(d) To employ such counsel, agents and advisers, and to
obtain such legal, clerical and other services, as it may deem necessary or
appropriate in carrying out the provisions of the Program;
(e) To establish, from time to time, rules for the
performance of its powers and duties and for the administration of the
Program;
(f) To delegate to any one or more of its members or to
any other person, severally or jointly, the authority to perform for and on
behalf of the Committee one or more of the functions of the Committee under
the Program; and
(g) To decide all issues and questions regarding Incentive
Award, vesting therein, and the time, form, manner, and amount of
distributions to Participants.
6.4 DECISIONS OF COMMITTEE. All actions, interpretations, and
decisions of the Committee shall be conclusive and binding on all persons,
and shall be given the maximum deference permitted by law.
6.5 ADMINISTRATIVE EXPENSES. All expenses incurred in the
administration of the Program, including legal fees and expenses, shall be
paid and borne by the Company.
6.6 ELIGIBILITY TO PARTICIPATE. No member of the Committee who also
is a Participant shall be excluded from participating in the Program, but as
a member of the Committee, he or she shall not be entitled to act or pass
upon any matters pertaining specifically to his or her own Incentive Award.
6.7 INDEMNIFICATION. The Company shall, and hereby does, indemnify
and hold harmless the members of the Committee, from and against any and all
losses, claims, damages or liabilities (including attorneys' fees and amounts
paid, with the approval of the Board, in settlement of any claim) arising out
of or resulting from the implementation of a duty, act or decision with
respect to the Program, so long as such duty, act or decision does not
involve gross negligence or willful misconduct on the part of any such
individual.
SECTION 7
FUNDING
7.1 UNFUNDED PROGRAM. Participants' Incentive Awards under the
Program shall be paid solely from the Company's general assets. The interest
of the Participant in his or her Incentive Award, including his or her right
to distribution thereof, shall be an unsecured claim against the general
assets of the Company. Nothing contained in the Program shall give any
Participant or Beneficiary any interest in or claim against any specific
assets of the Company.
SECTION 8
MODIFICATION OR TERMINATION OF PROGRAM
8.1 COMPANY'S OBLIGATION IS LIMITED. The Company intends to
continue the Program indefinitely, and to maintain each Participant's
Incentive Award until it is scheduled to be paid to him or her in accordance
with the provisions of the Program. However, the Program is voluntary on the
part of the Company, and the Company does not guarantee to continue the
Program. The Company at any time may amend the Program, with or without
cause.
8.2 RIGHT TO AMEND OR TERMINATE. The Board of Directors reserves the
right to amend or terminate the Program for any reason, provided that (a) no
amendment or termination of the Program, without the consent of the
Participant, reduces the Participant's vested Incentive Award, or (b) the
Program shall not be terminated until all vested amounts (and amounts that
possibly still may vest) have been distributed to the Participants (or
Beneficiaries).
SECTION 9
GENERAL PROVISIONS
9.1 INALIENABILITY. In no event may either a Participant, a former
Participant or his or her Beneficiary, spouse or estate sell, transfer,
anticipate, assign, hypothecate, or otherwise dispose of any right or
interest under the Program; and such rights and interests shall not at any
time be subject to the claims of creditors nor be liable to attachment,
execution or other legal process. Accordingly, for example, a Participant's
interest in the Program is not transferable pursuant to a domestic relations
order.
9.2 RIGHTS AND DUTIES. Neither the Company nor the Committee shall
be subject to any liability or duty under the Program except as expressly
provided in the Program, or for any action taken, omitted or suffered in good
faith.
9.3 NO EFFECT ON EMPLOYMENT. Neither the establishment or
maintenance of the Program, nor any action of the Company or the Committee,
shall be held or construed to confer upon any individual any right to be
continued as an employee, or upon dismissal, any right or interest in any
specific assets of the Company other than as provided in the Program. The
Company expressly reserves the right to discharge any employee at any time,
with or without cause.
9.4 APPLICABLE LAW. The provisions of the Program shall be
construed, administered and enforced in accordance with the laws of the state
of California (other than its conflict of laws provisions).
9.5 SEVERABILITY. If any provision of the Program is held invalid
or unenforceable, its invalidity or unenforceability shall not affect any
other provisions of the Program, and in lieu of each provision that is held
invalid or unenforceable, there shall be added as part of the Program a
provision that shall be as similar in terms to such invalid or unenforceable
provision as may be possible and be valid, legal, and enforceable.
9.6 CAPTIONS. The captions contained in the Program are inserted
only as a matter of convenience and for reference and in no way define,
limit, enlarge or describe the scope or intent of the Program nor in any way
shall affect the construction of any provision of the Program.
Exhibit 99.21
SETTLEMENT AGREEMENT
This Settlement Agreement ("Settlement Agreement") is made by,
between, and among The Regents of the University of California, a
Constitutional Corporation under Art. IX, Sec. 9 of the California
Constitution, having an address at 1111 Franklin Street, Oakland, California
94607, ("The Regents") and Genentech, Inc., a Delaware Corporation, having an
address at 1 DNA Way, South San Francisco, California 94080 ("Genentech")
RECITALS
WHEREAS, Genentech and the Regents have commenced the following
civil actions (hereafter collectively "the Litigation") against each other:
on August 6, 1990, Genentech commenced a civil action in the United States
District Court for the Southern District of Indiana (No. IP 90 1679 C)
seeking, inter alia, a declaratory judgment of the invalidity and
noninfringement of U.S. Patent No. 4,363,877 ("the '877 Patent"), issued to
inventors Howard M. Goodman, John Shine and Peter H. Seeburg, and assigned to
The Regents; on August 7, 1990, The Regents commenced a civil action in the
United States District Court for the Northern District of California (No. C-
90-2232) alleging that Genentech's manufacture and sale of its Protropin,
registered trademark, recombinant human growth hormone product infringed the
'877 patent; on July 10, 1997, The Regents commenced a civil action in the
United States District Court for the Northern District of California (No. C-
97-2563) alleging that Genentech's manufacture and sale of its Nutropin,
registered trademark, recombinant human growth hormone product infringed the
'877 patent; (the latter two actions are collectively referred to hereafter
as "the California Actions")
WHEREAS, during the course of the Litigation, The Regents became
aware that in the marketing of Genentech's human growth hormone products that
Genentech may have injured The Regents under causes of action in antitrust
and unfair competition law and sought to commence actions ("Antitrust
Actions") in state and/or federal courts, and the right of The Regents to
bring the Antitrust Actions is the subject of a currently pending appeal
before the U.S. Court of Appeals for the Federal Circuit;
WHEREAS, The Regents and Genentech entered a Settlement Agreement
in 1980 (" '80 Settlement Agreement") regarding the transfer of biological
materials from the University of California at San Francisco in 1978, and
Genentech has claimed that The Regents breached this '80 Settlement
Agreement; and
WHEREAS, the parties deny all allegations against them and desire
to enter into this Settlement Agreement to avoid the further expense,
inconvenience, and distraction of litigation, and to put to rest all claims
as between and among them and their respective employees, agents, directors,
and representatives, that were or might have been alleged in the Litigation
or the Antitrust Action and all claims relating to the '80 Settlement
Agreement.
Now, therefore, for good and valuable consideration, including the
mutual covenants herein contained, the parties agree as follows:
TERMS
I. DISMISSAL OF ACTIONS. Genentech and The Regents agree to seek prompt
dismissal of all pending actions in the Litigation, with prejudice,
and all pending appeals relating to the Litigation and to the
Antitrust Actions, with prejudice. The parties shall direct their
attorneys to execute and file with the respective courts stipulations
for dismissal and order/approval in the forms attached hereto as
Exhibits A-C and shall submit these forms to the courts within five
(5) business days of the last date of signature indicated below.
II. CONSIDERATION. Genentech agrees to pay to The Regents one hundred and
fifty million dollars ($150,000,000) within ten days of dismissal of
all of the pending actions in the Litigation and the pending appeals
in the Litigation and the Antitrust Actions.
III. CONTRIBUTION. Genentech agrees to contribute to The Regents fifty
million dollars ($50,000,000) within ten days of dismissal of all of
the pending actions in the Litigation and the pending appeals in the
Litigation and the Antitrust Actions, which contribution shall be
applied by The Regents toward the cost of construction of the first
biological sciences research building at the University of California,
San Francisco Mission Bay Campus. The building will bear a name
proposed by Genentech and acceptable to The Regents. Genentech shall
suggest a name for the building within thirty (30) days of paying the
contribution to The Regents, and The Regents shall approve or
disapprove such name within thirty (30) days thereafter. In the event
there is no mutual agreement on a name, the process shall repeat with
thirty (30) days response times for each party until there is
agreement on a name.
IV. MUTUAL RELEASE. Genentech and The Regents each release the other and
the other party's directors, present and former employees, agents, and
representatives, including legal counsel, from all past and future
claims, known and unknown, that were or could have been asserted, or
arising out of, or in any way connected with, the Litigation, the
Antitrust Actions, the '80 Settlement Agreement, the '877 patent, and
any United States or foreign patent that claims priority to a patent
application which gave rise to the '877 patent.
V. SECTION 1542 ACKNOWLEDGEMENT. Genentech and The Regents each
acknowledge that they have been advised by legal counsel and are
familiar with Section 1542 of the California Civil Code, which
provides:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
The parties acknowledge that they may have sustained damage, loss,
cost or expense that is presently unknown and unsuspected, and that
such damage, loss, cost, or expense as may have been sustained may
give rise to additional damage, loss, cost, or expense in the future.
Nevertheless, the parties acknowledge that this Settlement Agreement
has been negotiated and agreed upon in light of this situation and
expressly waive any and all rights which they may have under Section
1542 of the California Civil Code, or any other state or federal
statute or common law principle of similar effect.
VI. PUBLICITY. Genentech appoints its CEO and Chairman, Arthur Levinson,
as its point of contact for public comment on the Litigation and this
Settlement Agreement. The Regents appoint Vice Chancellor Zach Hall
of University of California, San Francisco, as its point of contact
for public comment on the Litigation and this Settlement Agreement.
These representatives shall authorize a joint press release to
announce the terms of this Settlement Agreement and shall serve in the
point of contact role for six months from the date of entry of the
orders dismissing the California Actions. In their point of contact
role, these representatives may be assisted by others of their
choosing within their respective organizations as necessary.
VII. NON DISPARAGEMENT. Each party will request its directors, present and
former employees, agents, and representatives to not engage in
disparaging remarks regarding the other party in connection with the
Litigation, the '80 Settlement Agreement, and the Antitrust Actions.
Consistent with ethical requirements of the practice of law such
as California Rule of Professional Conduct Rule 1-500, each party will
instruct its outside counsel to not engage in disparaging remarks
regarding the other party in connection with the Litigation, the '80
Settlement Agreement, and the Antitrust Actions.
This Article is not intended to limit factual statements
concerning these matters.
VIII. EFFECTIVE DATE. This Settlement Agreement shall become effective when
it has been executed by each party.
IX. COSTS. Each party shall be solely responsible for its own attorneys'
fees and costs in connection with the Litigation, the Antitrust
Actions, and the alleged breach of the '80 Settlement Agreement,
including the negotiation, execution, and performance of this
Settlement Agreement.
X. SETTLEMENT AGREEMENT ENTERED INTO WITH ADVICE OF COUNSEL. Each party
represents that it has received legal advice from attorneys with
respect to the advisability of making the Settlement provided for
herein and with respect to the advisability of executing this
Settlement Agreement, and warrants that it has, or its representatives
have, read this Settlement Agreement and discussed its provisions with
its attorneys. The parties have voluntarily entered into each and
every provision of this Settlement Agreement, and no party has
conditioned the grant of any right herein upon the undertaking of any
obligation which the other party considers unreasonable, the result of
any form of coercion or otherwise unlawful in any respect.
XI. AUTHORIZATION. Each party represents to the other that it is fully
authorized to enter into this Settlement Agreement and to carry out
the obligations provided herein.
XII. COUNTERPARTS. This Settlement Agreement may be executed in
counterparts with the same force and effect as if all signatures were
set forth in a single document.
XIII. INTERPRETATION AND ENFORCEMENT OF SETTLEMENT AGREEMENT.
A. This Settlement Agreement is to be interpreted and construed
under the laws of the State of California.
B. Nothing in this Settlement Agreement or in the Exhibits hereto
shall be construed as an acknowledgement, admission, concession,
or stipulation by either party regarding (i) the infringement,
validity, or enforceability of any patent, or (ii) the liability
or wrongdoing by either party or the truth or falsity of any
allegation made by either party in or relating to the
Litigation, the Antitrust Actions, or the '80 Settlement
Agreement.
C. In the event it is necessary for any party to this Settlement
Agreement, or its authorized representative, successor or
assign, to institute suit to compel performance of any of the
obligations contained in this Settlement Agreement or to
preclude a violation of the terms of this Settlement Agreement,
the prevailing party in such suit shall be entitled to
reasonable costs, expenses and attorneys' fees incurred by it or
him in the suit.
D. Each of the parties agree that any suit arising out of, or
relating to, this Settlement Agreement, shall be filed in the
Northern District of California if in Federal Court, or the
County of Alameda, California, if in State Court.
XIV. SEVERABILITY. If any provision of this Settlement Agreement or the
application hereof to any party or circumstance is held invalid or
unenforceable, the remaining provisions of this Settlement Agreement
shall not be affected thereby, the provisions of this Settlement
Agreement being severable in any such instance.
XV. OTHER AGREEMENTS. This Settlement Agreement and the stipulations for
dismissal and order/approval called for by it constitute the entire
agreement between the parties relating to the subject matter hereto
with the exception only of the protective order previously entered
into in the Litigation. There are no other understandings,
representations, or warranties of any kind. The protective order in
the Litigation will remain in full force according to its terms after
dismissal of the pending actions in the Litigation and the pending
appeals relating to the Litigation and to the Antitrust Actions. This
Settlement Agreement may not be waived, altered, extended, or modified
except by written agreement of the parties.
XVI. HEADINGS. Headings are used in this Settlement Agreement for
convenience only. The headings should play no part in the
interpretation of this Settlement Agreement.
XVII. NOTICES. Any notice or other communication concerning the
interpretation or performance of this Settlement Agreement shall be
sent to the parties at their respective address shown below or at such
other address either party may hereafter designate in writing:
TO THE REGENTS
Attn: General Counsel
The Regents of the University of California
1111 Franklin Street, 8th Floor
Oakland, CA 94607
TO GENENTECH
Attn: Corporate Secretary
Genentech, Inc.
1 DNA Way
South San Francisco, CA 94080
IN WITNESS HEREOF, the parties have caused this Settlement
Agreement to be executed by each of their respective representatives
thereunto duly authorized on the dates written below.
Dated: December 17, 1999
THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA
By: /s/ JOHN F. LUNDBERG
----------------------------
John F. Lundberg
Its: Deputy General Counsel
Dated: December 17, 1999
GENENTECH, INC.
By: /s/ STEPHEN G. JUELSGAARD
----------------------------
Stephen G. Juelsgaard
Its: Senior Vice President-
General Counsel and
Secretary
Attachments: Exhibit A - STIPULATION OF DISMISSAL WITH PREJUDICE
Exhibit B - STIPULATED DISMISSAL (No. 96-1361)
Exhibit C - STIPULATED DISMISSAL (No. 97-1099)
EXHIBIT A
Gerald P. Dodson, State Bar No. 139602
Emily A. Evans, State Bar. No. 164147
Kenneth A. Kuwayti, State Bar No. 145384
Eric S. Walters, State Bar No. 151933
Erica D. Wilson, State Bar No. 161386
MORRISON & FOERSTER LLP
425 Market Street
San Francisco, CA 94105-2482
Telephone: (415) 268-7000
James E. Holst, State Bar No. 34654
John F. Lundberg, State Bar No. 42956
P. Martin Simpson, Jr., State Bar No. 122867
UNIVERSITY OF CALIFORNIA
OFFICE OF THE PRESIDENT
Office of General Counsel
1111 Franklin Street, 8th Floor
Oakland, CA 94607-5200
Telephone: (510) 987-9800
Attorneys for Plaintiff
THE REGENTS OF THE
UNIVERSITY OF CALIFORNIA
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
THE REGENTS OF THE UNIVERSITY OF Case Nos. C-90-2232-CAL and C-97-2563
CALIFORNIA, CAL
Plaintiff, STIPULATION OF DISMISSAL
WITH PREJUDICE
V.
GENENTECH, INC.,
Defendant.
- ------------------------------------
THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA,
Plaintiff,
V.
GENENTECH, INC.,
Defendant.
====================================
Plaintiff The Regents of the University of California ("UC"), and
defendant Genentech, Inc. hereby stipulate as follows:
1. Pursuant to Fed. R. Civ. P. 41(a)(1)(ii), UC and Genentech hereby
dismiss with prejudice the claims, counterclaims and cross-claims brought
against each other in the above-entitled actions, each party to bear its or
his own costs and attorneys fees, and
2. Pursuant to Fed R. Civ. P. 41 (a)(1)(ii), the above-captioned
actions are hereby dismissed with prejudice, each party to bear its or his
own costs and attorneys fees.
IT IS SO STIPULATED.
Dated: December 23, 1999
MORRISON & FOERSTER LLP
By: /s/ GERALD P. DODSON
---------------------------------------
Gerald P. Dodson
Attorneys for Plaintiff
The Regents of the
University of California
ROGERS & WELLS LLP
By: /s/ JOSEPH FERRARO
---------------------------------------
Joseph Ferraro
Attorneys for Defendant
Genentech, Inc.
IT IS SO ORDERED.
Dated: December 23, 1999
/s/ CHARLES A. LEGGE
---------------------------------------
Charles A. Legge
United States District Court Judge
EXHIBIT B
------------------
No. 96-1361
------------------
UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT
------------------
GENENTECH, INC.
Plaintiff-Appellee,
V.
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA,
Defendant-Appellant,
and
ELI LILLY AND COMPANY,
Defendant.
------------------
Appeal From a Decision of the United States District Court
For the Southern District of Indiana in 90-1679-C
Entered April 12, 1996, Judge S. Hugh Dillin
------------------
STIPULATED DISMISSAL
------------------
Of counsel:
P. Martin Simpson, Jr. Charles A. Miller
Office of the General Counsel Attorney of Record
University of California Covington & Burling
1111 Franklin Street, 8th Floor 1201 Pennsylvania Ave., N.W.
Oakland, California 94607-5200 Washington, D.C. 20044
(510) 987-9800 (202) 662-6000
Richard L. Stanley Gerald P. Dodson
Arnold, White & Durkee Morrison & Foerster LLP
750 Bering Drive, Suite 400 755 Page Mill Road
Houston, Texas 77057 Palo Alto, California 94304-1018
(713) 787-1400 (650) 813-5600
Locke, Reynolds, Boyd & Weisell John E. Kidd
1000 Capital Center South Leora Ben-Ami
201 North Illinois Street Joseph Ferraro
Indianapolis, Indiana 46204 Rogers & Wells LLP
(317) 237-3800 200 Park Avenue
New York, New York 10166
(212) 878-8000
Plaintiff-Appellee Genentech, Inc. ("Genentech") and Defendant-Appellant
The Regents of the University of California ("UC"), hereby stipulate and
agree as follows:
1. Pursuant to Fed. R. App. P. 42(b), Genentech and UC hereby
dismiss with prejudice the claims, counterclaims and/or cross claims against
one another, and UC dismisses with prejudice the appeal against Genentech in
the above-captioned action, and
2. Pursuant to Fed R. App. P. 42(b), the above-captioned action is
hereby dismissed with prejudice, each party to bear its or his own costs and
attorneys fees.
IT IS SO STIPULATED.
Dated: ___________, _____
MORRISON & FOERSTER LLP
By: _______________________________________
Gerald P. Dodson
Attorneys for Defendant-Appellant
The Regents of the
University of California
Dated: ___________, ______
ROGERS & WELLS LLP
By: _______________________________________
Joseph Ferraro
Attorneys for Plaintiff-Appellee
Genentech, Inc.
DISMISSAL APPROVED.
___________________________________
Judge/Clerk of the Federal Circuit
EXHIBIT C
------------------
No. 97-1099
------------------
UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT
------------------
GENENTECH, INC.
Plaintiff-Appellant,
V.
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA,
Defendant-Appellee,
and
ELI LILLY AND COMPANY,
Defendant.
and
UNITED STATES,
Intervenor.
------------------
Appeal From a Decision of the United States District Court For the
Southern District of Indiana in 90-1679
Entered September 27, 1996, Senior Judge S. Hugh Dillin and on
Remand from the United States Supreme Court on an Order Entered June 24, 1999
------------------
STIPULATED DISMISSAL
------------------
Of counsel.
P. Martin Simpson, Jr. Charles A. Miller
Office of the General Counsel Attorney of Record
University of California Covington & Burling
1111 Franklin Street, 8th Floor 1201 Pennsylvania Ave., N.W.
Oakland, California 94607-5200 Washington, D.C. 20044
(510) 987-9800 (202) 662-6000
Richard L. Stanley Gerald P. Dodson
Arnold, White & Durkee Morrison & Foerster LLP
750 Bering Drive, Suite 400 755 Page Mill Road
Houston, Texas 77057 Palo Alto, California 94304-1018
(713) 787-1400 (650) 813-5600
Locke, Reynolds, Boyd & Weisell John E. Kidd
1000 Capital Center South Leora Ben-Ami
201 North Illinois Street Joseph Ferraro
Indianapolis, Indiana 46204 Rogers & Wells LLP
(317) 237-3800 200 Park Avenue
New York, New York 10166
(212) 878-8000
Plaintiff-Appellant Genentech, Inc. ("Genentech") and Defendant-Appellee
The Regents of the University of California ("UC"), hereby stipulate and
agree as follows:
1. Pursuant to Fed. R. App. P. 42(b), UC and Genentech hereby
dismiss with prejudice the claims, counterclaims and/or cross-claims brought
against each other, and Genentech dismisses with prejudice its appeal in the
above-captioned action, and
2. Pursuant to Fed R. App. P. 42(b), the above-captioned action is
hereby dismissed with prejudice, each party to bear its own costs and
attorneys fees.
IT IS SO STIPULATED.
Dated: ___________, _____
MORRISON & FOERSTER LLP
By: _______________________________________
Gerald P. Dodson
Attorneys for Defendant-Appellee
The Regents of the
University of California
Dated: ___________, ______
ROGERS & WELLS LLP
By: _______________________________________
Joseph Ferraro
Attorneys for Plaintiff-Appellant
Genentech, Inc.
DISMISSAL APPROVED.
___________________________________
Judge/Clerk of the Federal Circuit
