<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended March 31, 2000.
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.
(Exact name of registrant as specified in its charter)
Delaware 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)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Number of Shares Outstanding
- ----- -----------------------------
Common Stock $0.02 par value 260,397,250
Outstanding at March 31, 2000
<PAGE>
GENENTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Condensed Consolidated Statements of Operations -
for the three months ended March 31, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows -
for the three months ended March 31, 2000 and 1999 4
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 5
Notes to Condensed Consolidated Financial Statements 6-13
Independent Accountants' Review Report 14
Financial Review 15-31
PART II. OTHER INFORMATION 32
SIGNATURES 33
In this report, "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. All numbers related to the number of
shares, price per share and per share amounts of Common and Special Common
Stock give effect to the two-for-one split of our Common Stock in November
1999.
We own or have rights to various copyrights, trademarks and trade names used
in our business including the following: Actimmune, registered trademark,
interferon gamma-1b; Activase, registered trademark, (alteplase, recombinant)
tissue plasminogen activator; Herceptin, registered trademark, (trastuzumab)
anti-HER2 antibody; Nutropin, registered trademark, (somatropin (rDNA origin)
for injection) growth hormone; Nutropin AQ, registered trademark, (somatropin
(rDNA origin) injection) liquid formulation growth hormone; Nutropin Depot,
trademark, (somatropin (rDNA origin) for injectable suspension) encapsulated
sustained-release growth hormone; Protropin, registered trademark, (somatrem
for injection) growth hormone; Pulmozyme, registered trademark, (dornase
alfa, recombinant) inhalation solution; Rituxan, registered trademark,
(rituximab) antibody; TNKase, trademark, (tenecteplase) second generation
tissue plasminogen activator; and Xubix, trademark, (sibrafiban) oral
IIb/IIIa antagonist. This report also includes trademarks, service marks and
trade names of other companies.
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues:
Product sales (including amounts from related parties:
2000-$24,127; 1999-$13,624) $ 283,178 $ 234,069
Royalties (including amounts from related parties:
2000-$10,805; 1999-$11,241) 47,344 46,618
Contract and other (including amounts from
related parties: 2000-$0; 1999-$4,269) 33,696 19,266
Interest 21,474 22,399
--------- ---------
Total revenues 385,692 322,352
Costs and expenses:
Cost of sales (including amounts from related parties:
2000-$19,890; 1999-$10,786) 106,135 45,723
Research and development (including contract related:
2000-$4,557; 1999-$7,860) 111,406 90,740
Marketing, general and administrative 101,946 97,201
Special charge:
Legal settlement - 50,000
Recurring charges related to redemption 98,548 -
Interest 1,287 1,363
--------- ---------
Total costs and expenses 419,322 285,027
Income (loss) before taxes (33,630) 37,325
Income tax (benefit) provision (7,725) 22,910
--------- ---------
Net income (loss) $ (25,905) $ 14,415
========= =========
Earnings (loss) per share:
Basic $ (0.10) $ 0.06
========= =========
Diluted $ (0.10) $ 0.05
========= =========
Weighted average shares used to
compute earnings (loss) per share:
Basic 259,565 255,408
========= =========
Diluted 259,565 265,045
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (25,905) $ 14,415
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 118,595 21,912
Amortization of inventory write-up 43,278 -
Deferred income taxes (46,876) (924)
Gain on sales of securities available-for-sale (26,572) (12,259)
Loss on sales of securities available-for-sale 2,502 30
Write down of securities available-for-sale - 914
Write down of non-marketable equity securities - 432
Changes in assets and liabilities:
Investments in trading securities (3,656) (2,772)
Receivables and other current assets 1,477 (10,503)
Inventories (22,954) 1,914
Accounts payable, other current liabilities
and other long-term liabilities (155,336) 40,466
--------- ---------
Net cash (used) provided by operating activities (115,447) 53,625
Cash flows from investing activities:
Purchases of securities held-to-maturity - (126,981)
Proceeds from maturities of securities held-to-maturity - 112,357
Purchases of securities available-for-sale (98,152) (220,652)
Proceeds from sales of securities available-for-sale 146,224 113,533
Purchases of non-marketable equity securities (1,450) (2,317)
Capital expenditures (28,243) (18,209)
Change in other assets (5,214) (14,148)
--------- ---------
Net cash provided (used) in investing activities 13,165 (156,417)
Cash flows from financing activities:
Stock issuances 71,589 35,190
--------- ---------
Net cash provided by financing activities 71,589 35,190
--------- ---------
Net (decrease) increase in cash and cash equivalents (30,693) (67,602)
Cash and cash equivalents at beginning of period 337,682 281,162
--------- ---------
Cash and cash equivalents at end of period $ 306,989 $ 213,560
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 4
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 306,989 $ 337,682
Short-term investments 324,501 405,003
Accounts receivable, net (including amounts
from related party: 2000-$50,091; 1999-$33,234) 242,034 214,785
Inventories 254,922 275,245
Deferred tax assets 99,233 81,922
Prepaid expenses and other current assets 18,197 11,870
------------ ------------
Total current assets 1,245,876 1,326,507
Long-term marketable securities 1,280,274 1,214,757
Property, plant and equipment (net of accumulated
depreciation: 2000-$540,905; 1999-$519,496) 736,920 730,086
Goodwill (net of accumulated amortization:
2000-$729,547; 1999-$690,887) 1,590,062 1,628,722
Other intangible assets (net of accumulated
amortization: 2000-$1,120,443; 1999-$1,062,181) 1,397,269 1,453,268
Other long-term assets 204,237 201,101
------------ ------------
Total assets $ 6,454,638 $ 6,554,441
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 43,994 $ 33,123
Accrued liabilities - related party 16,495 14,960
Other accrued liabilities 178,483 436,044
------------ ------------
Total current liabilities 238,972 484,127
Long-term debt 149,692 149,708
Deferred tax liabilities 633,059 626,466
Other long-term liabilities 11,545 11,335
------------ ------------
Total liabilities 1,033,268 1,271,636
Commitments and contingencies
Stockholders' equity:
Preferred stock - -
Common stock 5,208 5,162
Additional paid-in capital 7,319,433 7,191,766
Retained earnings (accumulated deficit) (2,199,526) (2,173,622)
Accumulated other comprehensive income 296,255 259,499
------------ ------------
Total stockholders' equity 5,421,370 5,282,805
------------ ------------
Total liabilities and stockholders' equity $ 6,454,638 $ 6,554,441
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Statement of Accounting Presentation and Significant Accounting
Policies
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only
of adjustments of a normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the three-month
periods ended March 31, 2000 and 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. The
condensed consolidated balance sheet as of December 31, 1999 has been derived
from the audited financial statements as of that date. For further
information, refer to the consolidated financial statements and notes thereto
included in our Annual Report to Stockholders for the year ended December 31,
1999.
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.
Recent Pronouncements: In July 1999, the Financial Accounting Standards
Board, or FASB, 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.
On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation," which provides guidance
on several implementation issues related to Accounting Principles Board
Opinion No. 25. The most significant are clarification of the definition of
employee for purposes of applying Opinion 25 and the accounting for options
that have been repriced. Under the interpretation, the employer-employee
relationship would be based on case law and Internal Revenue Service
regulations. The FASB granted an exception to this definition for outside
directors. Under the interpretation, repriced options effectively changed
the terms of the plan, which would make it a variable plan subject to
compensation expense. We currently do not have any options that have been
repriced. The impact of the interpretation on our financial position and
results of operations is not expected to be material.
Page 6
<PAGE>
In March 2000, the Securities and Exchange Commission delayed the
implementation date of Staff Accounting Bulletin No. 101, or SAB 101,
"Revenue Recognition in Financial Statements," for companies with fiscal
years that begin between December 16, 1999 and March 15, 2000, to the second
quarter of 2000. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
We will adopt SAB 101 as required in the second quarter of 2000 and we are
currently evaluating the effect that such adoption may have on our financial
position and results of operations.
Note 2. Redemption of Our Special Common Stock
Basis of Presentation
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%. Roche accounted for the Redemption as a purchase of a business.
Consequently, push-down accounting was required under generally accepted
accounting principles to reflect in our consolidated financial statements the
amounts paid for our stock in excess of our net book value 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 our 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):
Page 7
<PAGE>
Purchase Period
--------------------
1990-1997 1999 Total
--------- --------- ---------
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
========= ========= =========
Push-Down Accounting Adjustments
The following is a description of accounting adjustments 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:
- - 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 the first
quarter of 2000, we recorded amortization expense of $43.2 million 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.
- - We recorded $1,091.2 million of goodwill less accumulated amortization of
$613.6 million through June 30, 1999, as a result of Roche's 1990 through
1997 purchases. The accumulated amortization was charged to retained
earnings at June 30, 1999. We also recorded $1,228.4 million of goodwill
as a result of the Redemption. In the first quarter of 2000, we recorded
$95.3 million of amortization expense related to goodwill and other
intangible assets.
- - We recorded $1,040.0 million of other intangible assets less accumulated
amortization of $911.5 million through June 30, 1999, as a result of
Roche's 1990 through 1997 purchases. The accumulated amortization was
charged to retained earnings at June 30, 1999. We also recorded $1,370.5
million of other intangible assets as a result of the Redemption.
- - We recorded $500.5 million of in-process research and development, or
IPR&D, as a result of Roche's 1990 through 1997 purchases as a charge to
retained earnings at June 30, 1999. An additional $752.5 million of IPR&D
as a result of the Redemption was charged to operations at June 30, 1999.
At the date of each purchase, we concluded that technological feasibility
of the acquired IPR&D was not established and that it had no future
alternative uses.
- - In connection with the Redemption, options under the 1996 Stock
Option/Stock Incentive Plan, or the Plan, were cancelled. Alternative
Page 8
<PAGE>
arrangements were provided for certain holders of some of the unvested
options under the Plan. In the first quarter of 2000, $3.3 million of
compensation expense was recorded related to these alternative
arrangements.
Note 3. 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 a price of
$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 million shares of our
Common Stock. On October 26, 1999, Roche completed a public offering of 40
million shares of our Common Stock. On January 19, 2000, Roche completed an
offering of zero-coupon notes which are exchangeable for an aggregate of
6,517,309 shares of our Common Stock held by Roche. On March 29, 2000, Roche
completed a public offering of 17.3 million shares of our Common Stock.
Roche's percentage ownership of our Common Stock was 58.9% at March 31, 2000.
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. Our 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. 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.
Note 4. Earnings (Loss) Per Share
The following is a reconciliation of the numerator and denominators of the
basic and diluted earnings per share (EPS) computations for the quarter ended
March 31, 2000 and 1999 (in thousands).
Page 9
<PAGE>
2000 1999
-------- --------
Numerator:
Net (loss) income - numerator
For basic and diluted EPS: $(25,905) $ 14,415
-------- --------
Denominator:
Denominator for basic EPS--
weighted-average shares 259,565 255,408
Effect of dilutive securities:
Stock options - 9,637
-------- -------
Denominator for diluted EPS
--adjusted weighted-average
shares and assumed conversions 259,565 265,045
======== ========
Options to purchase 18,624,119 shares of our Common Stock ranging from
$24.06 to $159.44 per share were outstanding at the three-month period ended
March 31, 2000, but were not included in the computation of diluted earnings
per share. All options outstanding at the three-month period ended March
31, 1999 were dilutive.
In the three-month period ended March 31, 1999, we had convertible
subordinated debentures that were convertible to 2,026,894 shares of Special
Common Stock. These were not included in the computation of diluted
earnings per share because they were anti-dilutive. As a result of the
redemption of our Special Common Stock, the convertible subordinated
debentures are now convertible into cash.
Note 5. 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 and its components for the quarter ended March
31, 2000 and March 31, 1999 are as follows (in thousands):
Three Months Ended
March 31,
------------------------
2000 1999
-------- --------
Net income (loss) $(25,905) $ 14,415
Unrealized gain (loss) on
securities available-for-sale 36,756 (9,909)
-------- --------
Comprehensive income $ 10,851 $ 4,506
======== ========
Note 6. Legal Proceedings
We are a party to various legal proceedings, including patent infringement
Page 10
<PAGE>
litigation relating to our human growth hormone products and antibody
products, licensing and contract disputes, and other matters.
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. On March 15, 2000, the Court denied that 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 U.S. Food and Drug Administration, or FDA, approved clinical trials.
Page 11
<PAGE>
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. On February 23, 2000, we filed a motion with the Federal Circuit
requesting that the injunction against BTG be reinstated pending appeal and
for an expedited appeal. On May 8, 2000, the Federal Circuit denied our
motion.
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.
Note 7. Inventories
In the first quarter of 2000, we recognized $43.2 million of expense related
to the sale of inventory that was written up as a result of the Redemption
and push-down accounting. Inventories are summarized below (in thousands):
March 31, December 31,
2000 1999
------------- ------------
Raw materials and supplies $ 23,907 $ 19,903
Work in process 199,391 228,092
Finished goods 31,624 27,250
----------- ---------
Total $ 254,922 $ 275,245
=========== =========
Note 8. Subsequent Event
On May 4, 2000, ImmunoGen Inc. and Genentech, Inc. announced that Genentech
has exclusively licensed ImmunoGen's maytansinoid Tumor-Activated Prodrug, or
TAP, technology for use with antibodies such as Herceptin. Under the terms
of the agreement, Genentech will receive exclusive worldwide rights to
commercialize anti-Her2 targeting products using ImmunoGen's maytansinoid TAP
platform. Genentech will be responsible for manufacturing, product
development and marketing of products resulting from the license. ImmunoGen
will be reimbursed for any preclinical and clinical materials that it makes
Page 12
<PAGE>
under the agreement. ImmunoGen will receive an up-front payment of $2.0
million. In addition to royalties on net sales, the terms of the agreement
include milestone payments, assuming all benchmarks are met, for potentially
up to $40.0 million.
Page 13
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of March 31, 2000, and the related condensed consolidated
statements of operations for the three-month periods ended March 31, 2000 and
1999 and the condensed consolidated statements of cash flows for the three-
month periods ended March 31, 2000 and 1999. These financial statements are
the responsibility of Genentech's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States, which will be performed for the full year with the objective
of expressing an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements referred to above for them to be in conformity with accounting
principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Genentech,
Inc. as of December 31, 1999, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated January 18, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1999, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
ERNST & YOUNG LLP
San Jose, California
April 10, 2000
Page 14
<PAGE>
GENENTECH, INC.
FINANCIAL REVIEW
Overview
Genentech is a leading biotechnology company that uses human genetic
information to discover, develop, manufacture and market human
pharmaceuticals for significant unmet medical needs. Thirteen of the
approved products of biotechnology stem from our science. We co-developed
Rituxan with IDEC Pharmaceuticals Corporation from whom we license Rituxan.
We manufacture and market seven products directly in the United States and we
are preparing to begin manufacturing and marketing the eighth as follows:
- - Herceptin (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 (rituximab) antibody for the treatment of patients with relapsed
or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's
lymphoma;
- - Activase (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 (somatrem for injection) growth hormone for the treatment of
inadequate endogenous growth hormone secretion, or growth hormone
deficiency, in children;
- - Nutropin [somatropin (rDNA origin) for injection] growth hormone for the
treatment of growth hormone deficiency in children and adults, growth
failure associated with chronic renal insufficiency prior to kidney
transplantation and short stature associated with Turner syndrome;
- - Nutropin AQ [somatropin (rDNA origin) injection] liquid formulation growth
hormone for the same indications as Nutropin;
- - Pulmozyme (dornase alfa, recombinant) inhalation solution for the
management of cystic fibrosis; and
- - Nutropin Depot [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 by mid-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.
Page 15
<PAGE>
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. For more information
about push-down accounting, you should read the "Redemption of Our Special
Common Stock" note in the Notes to Condensed Consolidated Financial
Statements.
Relationship with Roche
On July 23, 1999, October 26, 1999, and March 29, 2000, Roche completed
public offerings of our Common Stock. On January 19, 2000, Roche completed
an offering of zero-coupon notes which are exchangeable for an aggregate of
6,517,309 shares of our Common Stock held by Roche. As a result of the
public offerings, Roche's percentage ownership of our outstanding Common
Stock was reduced to approximately 58.9% at March 31, 2000. We did not
receive any of the net proceeds from the offerings.
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.
Page 16
<PAGE>
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
2000 1999
------------------ ------------------ Pro Forma
REVENUES Actual Pro Forma Actual Pro Forma % Change
- ----------------------------------- ------ --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $385.7 $ 385.7 $322.3 $ 322.3 20%
====== ========= ====== ========= =========
PRODUCT SALES
- -----------------------------------
Herceptin $ 68.7 $ 68.7 $ 39.9 $ 39.9 72%
Rituxan 85.1 85.1 57.1 57.1 49
Activase 47.5 47.5 52.0 52.0 (9)
Protropin, Nutropin and Nutropin AQ 55.1 55.1 56.2 56.2 (2)
Pulmozyme 26.8 26.8 28.2 28.2 (5)
Actimmune - - 0.7 0.7 (100)
------ --------- ------ --------- ---------
Total product sales $283.2 $ 283.2 $234.1 $ 234.1 21%
====== ========= ====== ========= =========
</TABLE>
Revenues in the first quarter of 2000 increased 20% from the comparable
period in 1999 as a result of higher product sales and contract and other
revenues. These increases are further discussed below.
Total product sales in the first quarter of 2000 increased 21% from the
comparable period in 1999 primarily as a result of higher sales from our bio-
oncology products, Herceptin and Rituxan.
Herceptin: Net sales of Herceptin in the first quarter of 2000 were $68.7
million, a 72% increase from the first quarter of 1999. An increase in
physician acceptance of Herceptin has contributed to a positive sales trend
and a successful penetration into the breast cancer market.
On May 3, 2000, we sent a letter to physicians advising them of some
serious adverse events that have been reported related to the use of
Herceptin and that have occurred subsequent to its approval. In 15 patients
who experienced such serious adverse events following Herceptin therapy,
death ensued. Nine of these patients died within 24 hours after Herceptin
administration. Most of these patients had significant pre-existing
pulmonary compromise as a consequence of lung disease or malignancies which
had spread to the lung. We are amending the package insert for Herceptin to
include this information.
Rituxan: Net sales of Rituxan increased 49% in the first quarter of 2000
from the comparable period in 1999. The increase was primarily due to
increased market penetration for the treatment of B-cell non-Hodgkin's
lymphoma.
Activase: Net sales of Activase decreased 9% in the first quarter of 2000
from the comparable period in 1999. The decrease was due to a continued
decline in the overall size of the thrombolytic therapy market as a result of
mechanical reperfusion and continued competition from Centocor, Inc.'s
Retavase, registered trademark. This decrease was partially offset by an
increase in sales from increased use of Activase in peripheral blood vessel
occlusions.
Page 17
<PAGE>
Protropin, Nutropin and Nutropin AQ: Net sales of our three growth hormone
products - Protropin, Nutropin, and Nutropin AQ, - were slightly lower in the
first quarter of 2000 from the comparable period in 1999. The decrease
primarily reflects fluctuations in distributor ordering patterns.
Pulmozyme: Net sales of Pulmozyme decreased in the first quarter of 2000
from the comparable period in 1999. The decrease primarily reflects
fluctuations in the timing of orders and the impact of recording a provision
against sales related to a defect in packaging the product.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
2000 1999
ROYALTIES, CONTRACT, AND OTHER, ------------------ ------------------ Pro Forma
AND INTEREST INCOME Actual Pro Forma Actual Pro Forma % Change
- ------------------------------- ------ --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Royalties $ 47.3 $ 47.3 $ 46.6 $ 46.6 2%
Contract and other 33.7 33.7 19.2 19.2 76
Interest income 21.5 21.5 22.4 22.4 (4)
</TABLE>
Royalty Income: Royalty income in the first quarter of 2000 was comparable
to the first quarter of 1999.
Contract and Other Revenues: Contract and other revenues increased 76% in
the first quarter of 2000 from the comparable period in 1999. This increase
was primarily due to a greater amount of gains from sales of biotechnology
equity securities.
Interest Income: Interest income was slightly lower in the first quarter of
2000 from the comparable period in 1999. The decrease was due to a lower
portfolio balance, excluding marketable equity securities, partly offset by
an increase in interest rates. The total investment portfolio, consisting of
cash and cash equivalents, and short- and long-term marketable securities,
increased to $1,911.8 million at March 31, 2000, from $1,662.4 million at
March 31, 1999, and decreased from $1,957.4 million at December 31, 1999.
The increase in the investment portfolio from the first quarter of 1999 was
largely attributable to market value growth of our marketable equity
securities.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
2000 1999
------------------ ------------------ Pro Forma
COST AND EXPENSES Actual Pro Forma Actual Pro Forma % Change
- ------------------------- ------ --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Cost of sales $106.1 $ 62.9 $ 45.7 $ 45.7 38%
Research and development 111.4 111.4 90.7 90.7 23
Marketing, general and
administrative 101.9 101.9 97.2 97.2 5
Special charge:
Legal settlement - - 50.0 - -
Recurring charges related
to redemption 98.6 - - - -
Interest expense 1.3 1.3 1.4 1.4 (7)
------ --------- ------ --------- ---------
Total costs and expenses $419.3 $ 277.5 $285.0 $ 235.0 18%
====== ========= ====== ========= =========
</TABLE>
Page 18
<PAGE>
Cost of Sales: Cost of sales increased 132% in the first quarter of 2000
from the comparable period in 1999. This increase largely 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 this year.
Pro forma cost of sales, exclusive of the expense related to the sale of
the inventory written up at the Redemption, increased 38% in the first
quarter from the comparable period in 1999. Pro forma cost of sales as a
percent of net sales was 22% in the first quarter of this year compared to
20% in the prior year. The increases reflect higher sales volume, including
higher sales to Hoffmann-La Roche.
Research and Development: Research and development, or R&D, expenses in the
first quarter of 2000 increased from the comparable period in 1999. For the
first quarter of 2000, we invested 29% of revenues into R&D compared to 28%
from a year ago. The increase in expenses primarily reflect a $15 million
upfront payment for the purchase of in-process research and development, or
IPR&D, under an in-licensing agreement with Actelion, Ltd., for the rights to
develop and co-promote tezosentan in the United States for the potential
treatment of acute heart failure. We determined that the acquired IPR&D was
not yet technologically feasible and that it had no future alternative uses.
Actelion is leading the development effort of tezosentan and the project is
currently in Phase III clinical trials. R&D expenses as a percent of
revenues are expected to vary over the next several periods dependent on
possible in-licensing agreements and as products progress through late-stage
clinical trials.
Marketing, General and Administrative: Marketing, general and administrative
expenses increased in the first quarter of 2000 from the comparable period in
1999 due to an increase in marketing and selling expenses in support of our
bio-oncology products, including the Rituxan profit-sharing expense. This
increase is partially offset by a decrease in general and administrative
expenses related to royalties and the write-down of certain biotechnology
investments.
Special Charge: The first quarter of 1999 included a $50.0 million legal
settlement related to a federal investigation of our past clinical, sales and
marketing activities associated with human growth hormone.
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 approximately $98.6 million in the first
quarter of 2000 and were comprised of $95.3 million for the amortization of
intangibles and goodwill, and $3.3 million of compensation expense related to
alternative arrangements provided at the time of the Redemption for certain
holders of some of the unvested options under the 1996 Stock Option/Stock
Incentive Plan.
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.
Page 19
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
2000 1999
------------------ ------------------ Pro Forma
INCOME TAX Actual Pro Forma Actual Pro Forma % Change
- ------------------------------ ------ --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Income tax (benefit) provision $ (7.7) $ 33.5 $ 22.9 $ 28.8 16%
</TABLE>
Income Tax: The tax provision benefit of $7.7 million for the first quarter
of 2000 consists of tax expense of $33.5 million on pretax income excluding
the impact of push-down accounting, and tax benefits of $41.2 million related
to push-down accounting. The tax provision of $22.9 million for the first
quarter of 1999 consists of tax expense of $28.8 million on pretax income
excluding the legal settlement charge, and tax benefits of $5.9 million on
such charge.
Our effective tax rate was 23% for the first quarter of 2000 and
reflects the non-deductibility of goodwill amortization. The 23% tax rate is
lower than the 61% tax rate for the comparable period in 1999. The tax rate
for the first quarter of 1999 reflects the non-deductibility of certain legal
settlement charges.
The pro forma effective tax rate of 31% in the first quarter of 2000 is
lower than the tax rate of 33% in the first quarter of 1999. The decrease in
the rate is primarily due to increased R&D tax credits.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
2000 1999
------------------ ------------------ Pro Forma
NET INCOME (LOSS) Actual Pro Forma Actual Pro Forma % Change
- -------------------------- ------ --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss) $(25.9) $ 74.7 $ 14.4 $ 58.5 28%
Earnings (loss) per share:
Basic $(0.10) $ 0.29 $ 0.06 $ 0.23 26%
Diluted $(0.10) $ 0.28 $ 0.05 $ 0.22 27%
</TABLE>
Net Income (Loss): The net loss for the first quarter of 2000 primarily
reflects recurring charges for the amortization of goodwill and other
intangible assets related to the Redemption and push-down accounting, and
costs related to the sale of inventory that was written up at the Redemption.
The earnings per share decrease in the first quarter of 2000 compared to the
first quarter of 1999 was a result of these charges and costs, partly offset
by lower earnings in the first quarter of 1999 related to the legal
settlement.
Pro forma net income, which excludes charges related to the Redemption
and push-down accounting, for the first quarter of 2000 was $74.7 million, a
28% increase from the comparable period in 1999. The increase in 2000,
represents revenue growth primarily driven by sales of our bio-oncology
products, Herceptin and Rituxan, higher contract and other revenues, and
lower general and administrative expenses. The revenue growth and lower
general and administrative expenses were offset in part by higher cost of
sales, R&D expenses and marketing and sales expenses.
In-Process Research and Development: At June 30, 1999, the Redemption date,
we determined that the acquired in-process technology was not technologically
Page 20
<PAGE>
feasible and that the in-process technology had no future alternative uses.
As a result, $500.5 million of in-process research and development, or IPR&D,
related to Roche's 1990 through 1997 purchases of our Common Stock was
charged to retained earnings, and $752.5 million of IPR&D related to the
Redemption was charged to operations at June 30, 1999.
The amounts of IPR&D 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 forecast data used 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 IPR&D 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 IPR&D charge
is set forth below, including an estimated percentage of completion as of
June 30, 1999, 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 the FDA approval is not possible. We estimate, 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 IPR&D 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."
<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 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
Page 21
<PAGE>
Rituxan antibody intermediate- and high-grade Phase III 2004 60%
non-Hodgkin's lymphoma
Xubix (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 Preparing 2003 50%
For Phase III
Herceptin antibody adjuvant therapy for breast Preparing 2007 45%
cancer for Phase III
Thrombopoietin (TPO) thrombocytopenia related to Preparing 2002 55%
cancer treatment for Phase III
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 Phase II 2004 40-45%
AMD Fab age-related macular degeneration Preparing 2004 20%
for Phase I
LDP-02 inflammatory bowel disease Phase Ib/IIa 2005 30%
</TABLE>
Our IPR&D 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 IPR&D charge since the
Redemption date through March 31, 2000, 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.
- - Activase t-PA - project has moved to Phase III.
- - Anti-CD11a antibody - project has moved to Phase III.
- - Herceptin antibody for adjuvant therapy for breast cancer - project has
moved to Phase III.
- - Thrombopoietin (TPO) - project has moved to Phase III.
- - LDP-02 - project has moved to Phase II studies.
LIQUIDITY AND CAPITAL RESOURCES March 31, 2000 December 31, 1999
- -------------------------------------- -------------- -----------------
Cash and cash equivalents, short-term
investments and long-term marketable
securities $ 1,911.8 $ 1,957.4
Working capital $ 1,006.9 842.4
Page 22
<PAGE>
We used cash generated from operations, income from investments and proceeds
from stock issuances to fund operations, purchase marketable securities and
make capital and equity investments.
Cash and cash equivalents, short-term investments and long-term marketable
securities at March 31, 2000, decreased from December 31, 1999. The decrease
was primarily used to fund operations. Working capital increased by $164.5
million in the first quarter of 2000 from December 31, 1999.
Capital expenditures totaled $28.2 million in the first quarter of 2000
compared to $18.2 million in the comparable period of 1999. The increase in
2000 compared to 1999 was primarily due to an increase in equipment purchases
and an initial payment for an additional manufacturing facility.
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 Cash Position" below for factors that could negatively affect our cash
position.
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 various products as determined both in
clinical testing and by the accumulation of additional information on each
product after it is approved for sale;
- - 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
Page 23
- - 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 reimbursements;
- - 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
Page 24
<PAGE>
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.
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 Genentech 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
Page 25
<PAGE>
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 currently selling growth hormone and an
additional company which may enter the market in the near future. As a
result of that 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, is expected to file a revised Biologics License
Application, or BLA, in 2000 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
Page 26
<PAGE>
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 Condensed
Consolidated Financial Statements.
Our Royalty and Contract Revenues Could Decline
Royalty and contract revenues in future periods could vary significantly.
Major factors affecting these revenues include, but are not limited to:
- - Hoffmann-La Roche's decisions whether to exercise its options 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
Page 27
<PAGE>
of our products and those on which we earn royalties. You should read the
"Legal Proceedings" note in the Notes to Condensed Consolidated Financial
Statements.
We May Incur Material Litigation Costs
We are subject to legal proceedings, including those matters described in the
"Legal Proceedings" note in the Notes to Condensed Consolidated Financial
Statements. Litigation to which we are currently or have been subjected
relates to, among other things, our patent and intellectual property rights,
licensing arrangements with other persons, product liability and financing
activities. We cannot predict with certainty the eventual outcome of pending
litigation, and we could be required to incur substantial expense in
defending these lawsuits. We have in the past taken substantial special
charges relating to certain 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. In addition, after any of our products receive regulatory
approval, it is subject to ongoing FDA regulation, including, for example,
changes to its label and product recall. 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 or that we can maintain necessary
regulatory approvals for our existing products, 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.
Difficulties or Delays in Product Manufacturing Could Harm Our Business
Page 28
<PAGE>
We currently produce all of our products at our manufacturing facility
located in South San Francisco, California or through various contract
manufacturing arrangements. We expect to gain licensure of a new
manufacturing facility in Vacaville, California in the second quarter of
2000. Problems with any of our or our contractor's manufacturing processes
could result in product defects, which could require us to delay shipment of
products or recall products previously shipped. In addition, any prolonged
interruption in the operations of our or our contractor's manufacturing
facilities could result in cancellations of shipments. A number of factors
could cause interruptions, including equipment malfunctions or failures, or
damage to a facility due to natural disasters or otherwise. Because
Genentech's and our contractor's manufacturing processes are highly complex
and are subject to a lengthy FDA approval process, we cannot assure you that
alternative qualified production capacity would be available on a timely
basis or at all. Difficulties or delays in our and our contractor's
manufacturing could increase our costs, cause us to lose revenue or market
share and damage our reputation.
A Variety of Factors Could Affect Our Cash Position
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 effect on our cash position and may have the effect of
limiting our ability to use our capital stock as consideration for
acquisitions. For more information you should read "Relationship with Roche
- - Right to Maintain its Percentage Ownership Interest in Our Stock."
We Are Subject to a Variety of Factors Could Affect Our Income Tax Rate
Our annual effective tax rate will be higher than the statutory rate
primarily as a result of nondeductible 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 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.
Page 29
<PAGE>
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.
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.
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 investment
portfolio, we enter into forward contracts.
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
Page 30
<PAGE>
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.
Recent Pronouncement Could Impact Our Financial Position and Results of
Operations
In July 1999, the Financial Accounting Standards Board, or FASB, 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.
On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation," which provides guidance
on several implementation issues related to Accounting Principles Board
Opinion No. 25. The most significant are clarification of the definition of
employee for purposes of applying Opinion 25 and the accounting for options
that have been repriced. Under the interpretation, the employer-employee
relationship would be based on case law and Internal Revenue Service
regulations. The FASB granted an exception to this definition for outside
directors. Under the interpretation, repriced options effectively changed
the terms of the plan, which would make it a variable plan subject to
compensation expense. We currently do not have any options that have been
repriced. The impact of the interpretation on our financial position and
results of operations is not expected to be material.
In March 2000, the Securities and Exchange Commission delayed the
implementation date of Staff Accounting Bulletin No. 101, or SAB 101,
"Revenue Recognition in Financial Statements," for companies with fiscal
years that begin between December 16, 1999 and March 15, 2000, to the second
quarter of 2000. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
We will adopt SAB 101 as required in the second quarter of 2000 and we are
currently evaluating the effect that such adoption may have on our financial
position and results of operations.
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.
Page 31
<PAGE>
GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with our patent infringement litigation with Glaxo Wellcome, 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. On March 15, 2000, the Court denied that request.
In connection with our patent infringement litigation with Bio-Technology
General Corporation, or BTG, 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. On February 23, 2000, we filed a motion with the Federal Circuit
requesting that the injunction against BTG be reinstated pending appeal and
for an expedited appeal. On May 8, 2000, the Federal Circuit denied our
motion.
See also Item 3 of the Company's report on Form 10-K for the period ended
December 31, 1999.
See also the Legal Proceedings note in the Notes to Condensed Consolidated
Financial Statements of Part I.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15.1 Letter re: Unaudited Interim Financial Information
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no other reports on Form 8-K filed during the
quarter ended March 31, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Genentech's market risk disclosures set forth in the 1999 Annual Report to
Stockholders have not changed significantly.
Page 32
<PAGE>
GENENTECH, INC.
SIGNATURES
Pursuant to the requirements 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.
Date: May 10, 2000 GENENTECH, INC.
/s/ARTHUR D. LEVINSON /s/LOUIS J. LAVIGNE, JR.
------------------------------------- ----------------------------
Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr.
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
/s/JOHN M. WHITING
----------------------------
John M. Whiting
Controller and
Chief Accounting Officer
Page 33
EXHIBIT 15.1
May 10, 2000
The Board of Directors and Stockholders of Genentech, Inc.
We are aware of the incorporation by reference in the Registration Statements
pertaining to the Genentech, Inc. Tax Reduction Investment 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 1991 Employee Stock
Plan and in the related prospectuses, as applicable, contained in such
Registration Statements of our report dated April 10, 2000 relating to the
unaudited condensed consolidated interim financial statements of Genentech,
Inc. which are included in its Form 10-Q for the quarter ended March 31,
2000.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a
part of the registration statement prepared or certified by accountants
within the meaning of section 7 or 11 of the Securities Act of 1933.
Very truly yours,
/s/ERNST & YOUNG LLP
- --------------------------
Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM
10-Q FOR THE PERIOD ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. AMOUNTS IN
THOUSANDS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 306,989
<SECURITIES> 1,604,775
<RECEIVABLES> 242,034<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 254,922
<CURRENT-ASSETS> 1,245,876
<PP&E> 1,277,825
<DEPRECIATION> 540,905
<TOTAL-ASSETS> 6,454,638
<CURRENT-LIABILITIES> 238,972
<BONDS> 149,692
0
0
<COMMON> 5,208
<OTHER-SE> 5,416,162
<TOTAL-LIABILITY-AND-EQUITY> 6,454,638
<SALES> 283,178
<TOTAL-REVENUES> 385,692
<CGS> 106,135
<TOTAL-COSTS> 106,135
<OTHER-EXPENSES> 111,406
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 1,287
<INCOME-PRETAX> (33,630)
<INCOME-TAX> (7,725)
<INCOME-CONTINUING> (25,905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,905)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
<FN>
<F1>ACCOUNTS RECEIVABLE ARE PRESENTED NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS IN
THE CONDENSED CONSOLIDATED BALANCE SHEET. THE PROVISION FOR LOSSES ON DOUBTFUL
ACCOUNTS IS NOT REPORTED AS A SEPARATE LINE IN THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME OR STATEMENT OF CASH FLOWS.
</FN>
</TABLE>